10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2007
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 1-16455

Reliant Energy, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware	76-0655566
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
1000 Main Street	(713) 497-3000
Houston, Texas 77002 (Address and Zip Code of Principal Executive Offices)	(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $.001 per share, and associated	New York Stock Exchange
rights to purchase Series A Preferred Stock

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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 Act).  Yes o     No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $9,169,562,460 (computed by reference to the closing sale price of the registrant’s common stock on the New York Stock Exchange on June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter).

As of February 15, 2008, the registrant had 345,358,284 shares of common stock outstanding and no shares of common stock were held by the registrant as treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2008 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2007, are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

Forward-Looking Information			iii
Glossary of Technical Terms			iv
PART I
	Item 1.	Business	1
		General	1
		Retail Energy	1
		Wholesale Energy	3
		Regulation	5
		Competition and Seasonality	6
		Environmental Matters	6
		Employees	8
		Executive Officers	9
		Available Information	10
		Certifications	11
	Item 1A.	Risk Factors	11
		Risks Related to the Retail and Wholesale Energy Businesses	11
		Risks Relating to Our Retail Business	13
		Risks Related to Our Company	15
		Other Risks	16
	Item 1B.	Unresolved Staff Comments	16
	Item 2.	Properties	16
	Item 3.	Legal Proceedings	16
	Item 4.	Submission of Matters to a Vote of Security Holders	16
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
	Item 6.	Selected Financial Data	18
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
		Business Overview	19
		Consolidated Results of Operations	21
		Liquidity and Capital Resources	31
		Off-Balance Sheet Arrangements	33
		Historical Cash Flows	34
		New Accounting Pronouncements, Significant Accounting Policies and Critical     Accounting Estimates	36
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
		Market Risks and Risk Management	39
		Non-trading Market Risks	39
		Trading Market Risks	40
	Item 8.	Financial Statements and Supplementary Data	42
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42
	Item 9A.	Controls and Procedures	42
	Item 9B.	Other Information	42

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PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	43
	Item 11.	Executive Compensation	43
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	43
	Item 14.	Principal Accountant Fees and Services	43
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	44
Form of Change in Control Agreement
Form for Change in Control Agreement
Form of 2002 Long-Term Incentive Plan
Form of 2002 Long-Term Incentive Plan
2002 Long-Term Incentive Plan / Long-Term Incentive Award Agmt
2002 Long-Term Incentive Plan / Long-Term Incentive Award Agmt
Annual Base Salaries of Named Executive Officers
Asset Purchase Agreement
Ratio of Earnings from Continuing Operations to Fixed Charges
Subsidiaries
Consent of KPMG LLP
Consent of Deloitte & Touche LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO & CFO Pursuant to Section 1350

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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, collateral postings and 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 and interest rates;

•  Our ability to attract and retain retail customers and to adequately forecast their energy needs and usage; and

•  Financial 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 Item 1A of this report. 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.

iii

GLOSSARY OF TECHNICAL TERMS

Cal ISO	California Independent System Operator.
capacity	Energy that could have been generated at continuous full-power operation during the period.
capacity factor	The ratio of actual net electricity generated to capacity.
CenterPoint	CenterPoint Energy, Inc. and its subsidiaries, on and after August 31, 2002, and Reliant Energy, Incorporated and its subsidiaries, prior to August 31, 2002.
Channelview	Reliant Energy Channelview LP, Reliant Energy Channelview (Texas) LLC, Reliant Energy Channelview (Delaware) LLC and Reliant Energy Services Channelview LLC.
CO2	Carbon dioxide.
commercial capacity factor	Generation divided by economic generation.
contribution margin	Revenues less (a) cost of sales, (b) operation and maintenance, (c) selling and marketing and (d) bad debt expense.
EBITDA	Earnings (loss) before interest expense, interest income, income taxes, depreciation and amortization expense.
economic generation	Estimated generation at 100% plant availability based on an hourly analysis of when it is economical to generate based on the price of power, fuel, emission allowances and variable operating costs.
EITF	Emerging Issues Task Force.
EPA	United States Environmental Protection Agency.
ERCOT	Electric Reliability Council of Texas.
ERCOT ISO	ERCOT Independent System Operator.
ERCOT Region	The electric market operated by ERCOT.
FASB	Financial Accounting Standards Board.
FERC	Federal Energy Regulatory Commission.
GAAP	Accounting principles generally accepted in the United States of America.
gross margin	Revenues less cost of sales. Gross margin excludes depreciation, amortization, labor and other product costs.
GWh	Gigawatt hour.
ISO	Independent system operator.
LIBOR	London Inter Bank Offering Rate.
market usage adjustments	The revenues and the related energy supply costs in our retail energy segment include our estimates of customer usage based on initial usage information provided by the independent system operators and the distribution companies. We revise these estimates and record any changes in the period as additional settlement information becomes available (collectively referred to as “market usage adjustments”).

iv

MISO	Midwest Independent Transmission System Operator, which is an RTO.
MW	Megawatt.
MWh	Megawatt hour.
net generating capacity	The average of a facility’s summer and winter generating capacities, net of auxiliary power.
NOx	Nitrogen oxides.
NYMEX	New York Mercantile Exchange.
Orion Power	Orion Power Holdings, Inc. and its subsidiaries.
PEDFA	Pennsylvania Economic Development Financing Authority.
PJM	PJM Interconnection, LLC, which is an RTO.
PJM Market	The wholesale and retail electric market operated by PJM primarily in Delaware, the District of Columbia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia.
PUCT	Public Utility Commission of Texas.
REMA	Reliant Energy Mid-Atlantic Power Holdings, LLC and its subsidiaries.
RERH Holdings	RERH Holdings, LLC and its subsidiaries.
RPM	Model utilized by the PJM Interconnection, LLC to meet load serving entities’ forecasted capacity obligations via a forward-looking commitment of capacity resources.
RTO	Regional transmission organization.
SEC	United States Securities and Exchange Commission.
SO2	Sulfur dioxide.

v

PART I

Item 1.   Business

General

We provide electricity and energy services to retail and wholesale customers through two business segments.

•  Retail energy—provides electricity and energy services to more than 1.8 million retail electricity customers in Texas, including residential and small business customers and commercial, industrial and governmental/institutional customers. Our next largest market is the PJM Market, where we serve commercial, industrial and governmental/institutional customers. We regularly evaluate entering additional markets.

•  Wholesale energy—provides electricity and energy services in the competitive wholesale energy markets in the United States through our ownership and operation of or contracting for power generation capacity. As of December 31, 2007, we had approximately 16,000 MW of power generation capacity.

For information about our corporate history, business segments and disposition activities, see notes 1, 18, 20, 21 and 22 to our consolidated financial statements and “Selected Financial Data” in Item 6 of this Form 10-K.

Retail Energy

As a retail electricity provider, we arrange for the transmission and delivery of electricity to our customers, bill customers and collect payment for electricity sold, and maintain call centers to provide customer service. We purchase the electricity we sell to customers from generation companies, utilities, power marketers and other retail energy companies in the wholesale market. We obtain our transmission and distribution services in Texas from entities regulated by the PUCT.

Our retail business for residential and small business customers is primarily concentrated in Texas. Based on metered locations, as of December 31, 2007, we had approximately 1.6 million residential and 147,000 small business customers, making us the second largest mass market electricity provider in Texas. Approximately 65% of our Texas customers are in the Houston area. We also have customers in other Texas cities, including Dallas, Ft. Worth and Corpus Christi.

In Texas and the PJM Market, we market electricity and energy services to commercial, industrial and governmental/institutional customers. These customers include refineries, chemical plants, manufacturing facilities, hospitals, universities, governmental agencies, restaurants and other facilities. Based on metered locations, as of December 31, 2007, we had approximately 93,000 commercial, industrial and governmental/institutional customers.

During 2007, we began to pilot residential and small business products and services in Texas that use advanced technology to help reduce customer consumption during peak usage periods. “Smart Energy” products are expected to lower our supply and operating costs, moderate consumer bills, reduce emissions and enhance our position as a retail market leader.

Under our supply strategy for our retail business, we structure our supply portfolio to match our load demands by procuring sufficient power prior to or concurrent with entering into retail sales commitments. Because of our credit-enhanced retail structure with a third party credit provider, we are not required to post collateral for our retail supply purchases.

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Operations Data

See discussion of our retail energy strategy in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview” in Item 7 of this Form 10-K. See discussion of “—Competition and Seasonality” below and in “Risk Factors” in Item 1A of this Form 10-K.

	2007			2006		2005
	(gigawatt hours)
Electricity Sales to End-Use Retail Customers:
Mass:
Residential:
Houston		13,516			15,447		18,029
Non-Houston		8,361			7,955		6,504
Small Business:
Houston		3,035			3,587		3,640
Non-Houston		1,433			1,375		891
Total Mass		26,345			28,364		29,064
Commercial and Industrial:
ERCOT(1)		36,926			33,393		32,309
Non-ERCOT		4,680			5,572		6,152
Total Commercial and Industrial		41,606			38,965		38,461
Market usage adjustments		(67	)		8		(250	)
Total		67,884			67,337		67,275

(1) These volumes include customers of the Texas General Land Office for whom we provide services.

	2007		2006		2005
	(in thousands, metered locations)
Weighted Average Retail Customer Count:
Mass:
Residential:
Houston		1,056		1,164		1,256
Non-Houston		563		504		390
Small Business:
Houston		116		132		139
Non-Houston		36		29		17
Total Mass		1,771		1,829		1,802
Commercial and Industrial:
ERCOT(1)		87		74		70
Non-ERCOT		2		1		2
Total Commercial and Industrial		89		75		72
Total		1,860		1,904		1,874

(1) Includes customers of the Texas General Land Office for whom we provide services.

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	December 31,
	2007		2006
	(in thousands, metered locations)
Retail Customers:
Mass:
Residential:
Houston		1,016		1,095
Non-Houston		555		547
Small Business:
Houston		109		124
Non-Houston		38		33
Total Mass		1,718		1,799
Commercial and Industrial:
ERCOT(1)		91		75
Non-ERCOT		2		1
Total Commercial and Industrial		93		76
Total		1,811		1,875

(1) Includes customers of the Texas General Land Office for whom we provide services.

Wholesale Energy

As of December 31, 2007, we owned, had an interest in or leased 38 operating electric power generation facilities with an aggregate net generating capacity of 16,337 MW in five regions of the United States. The net generating capacity of these facilities consists of approximately 42% base-load, 34% intermediate and 24% peaking capacity.

We sell electricity and energy services from our generation portfolio in hour-ahead, day-ahead and forward markets in bilateral and ISO markets. We sell these products to investor-owned utilities, municipalities, cooperatives and other companies that serve end users or purchase power at wholesale for resale. We obtain transmission and distribution services for our power generation from ERCOT, various RTOs, utilities and municipalities. Because our facilities are not subject to traditional cost-based regulation, we can generally sell electricity at market-determined prices. The following table identifies the principal markets where we own, lease or have under contract wholesale generation assets:

Region	Principal Markets
PJM	Illinois, New Jersey and Pennsylvania
MISO	Illinois, western Pennsylvania and Ohio
Southeast	Florida, Mississippi and Texas (non-ERCOT)
West	California and Nevada
ERCOT	Texas (ERCOT)

Through the PJM Market’s reliability pricing model auctions, we have committed approximately 6,400 MW of capacity through the planning year ending May 2011. We expect that a substantial portion of our capacity that clears a PJM auction will continue to be committed to the PJM Market up to three years in advance. Revenue from these capacity sales is determined by market rules designed to ensure regional reliability, encourage competition and reduce price volatility. The California Public Utility Commission and Cal ISO are considering possible enhancements to existing resource adequacy requirements, including alternatives similar to capacity markets designed in New England and PJM.

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To ensure adequate fuel supplies, we contract for natural gas, coal and fuel oil for our generation facilities. For our natural gas-fired plants, we also arrange for, schedule and balance natural gas from our suppliers and through transporting pipelines. To perform these functions, we lease natural gas transportation and storage capacity.

In February 2006, we completed an evaluation of our wholesale energy segment’s hedging strategy and use of capital. As a result of our evaluation, we substantially reduced hedging activity.

The following table describes our electric power generation facilities as of December 31, 2007:

	Number of			Net Generating
	Generation			Capacity
Region	Facilities			(MW)			Fuel Type	Dispatch Type
PJM(1)		22			7,298		Coal/Gas/Oil/Dual	Base-load/Intermediate/Peaking
MISO		4			1,678		Coal/Gas/Oil	Base-load/Intermediate/Peaking
Southeast(2)(3)		5			2,541		Gas/Dual	Base-load/Intermediate/Peaking
West		6			3,990		Gas/Dual	Base-load/Intermediate/Peaking
ERCOT		1	(4)		830	(4)	Gas	Base-load
Total		38			16,337

(1)	We lease a 100%, 16.67% and 16.45% interest in three Pennsylvania facilities having 572 MW, 1,711 MW and 1,712 MW of net generating capacity, respectively, through facility lease agreements expiring in 2026, 2034 and 2034, respectively. The table includes our net share of the capacity of these facilities.
(2)	We own a 50% interest in one of these facilities having a net generating capacity of 108 MW. An unaffiliated party owns the other 50%. The table includes our net share of the capacity of this facility.
(3)	We are party to a tolling agreement entitling us to 100% of the capacity of a Florida facility having 630 MW of net generating capacity. This tolling agreement expires in 2012 and is treated as an operating lease for accounting purposes.
(4)	Represents Channelview, which we deconsolidated on August 20, 2007 due to its bankruptcy filings. See notes 1 and 21 to our consolidated financial statements.

Operations Data

See discussion of our wholesale energy strategy in “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Business Overview” in Item 7 of this Form 10-K.

	2007					2006					2005
	GWh		% Economic(1)			GWh		% Economic(1)			GWh		% Economic(1)
Economic Generation(2):
PJM Coal		23,886.2		82	%		23,541.9		81	%		23,152.2		81	%
MISO Coal		7,998.3		73	%		6,525.1		59	%		7,047.2		63	%
PJM/MISO Gas		1,584.2		5	%		1,011.1		4	%		1,562.9		6	%
West		3,711.8		13	%		2,833.3		11	%		2,032.0		9	%
Other		3,802.2		48	%		5,731.1		86	%		6,005.9		56	%
Total		40,982.7		39	%		39,642.5		39	%		39,800.2		39	%

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Commercial Capacity Factor:
PJM Coal		82.4	%		82.9	%		78.9	%
MISO Coal		69.0	%		85.5	%		83.3	%
PJM/MISO Gas		91.2	%		91.9	%		77.1	%
West		95.5	%		86.1	%		95.9	%
Other		91.9	%		91.9	%		91.1	%
Total		82.2	%		85.1	%		82.3	%
Generation(2):
PJM Coal		19,677.1			19,522.3			18,259.3
MISO Coal		5,518.0			5,577.7			5,871.4
PJM/MISO Gas		1,444.0			929.3			1,205.5
West		3,543.9			2,439.0			1,948.5
Other		3,493.6			5,268.8			5,474.3
Total		33,676.6			33,737.1			32,759.0
Open Energy Unit Margin ($/MWh)(3):
PJM Coal	$	30.95		$	27.15		$	35.11
MISO Coal		29.18			21.69			33.89
PJM/MISO Gas		34.63			47.35			50.60
West		5.64			4.92			NM	(4)
Other		6.87			0.76			4.93
Total weighted average	$	25.66		$	21.07		$	28.02

(1)	Represents economic generation (hours) divided by maximum generation hours (maximum plant capacity multiplied by 8,760 hours).
(2)	Excludes generation related to power purchase agreements, including tolling agreements.
(3)	Represents open energy gross margin divided by generation volume. Open energy gross margin is a non-GAAP measure as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.
(4)	NM is not meaningful.

Regulation

Texas

We are certified by the PUCT to provide retail electric service in Texas. We sell electricity in the competitive areas of ERCOT to customers at unregulated prices. Our activities in Texas are subject to standards and regulations adopted by ERCOT. See “Risk Factors” in Item 1A of this Form 10-K.

Until January 1, 2007, we were required to make electricity available to Houston area residential and small business customers at the PUCT-approved “price-to-beat.” Any residential “price-to-beat” customers who did not select an alternative product by December 31, 2006 continued being served under our residential services plan.

Other States

We are certified in Delaware and Illinois to supply retail electric service to commercial and industrial customers in those states. Our retail activities in Delaware and Illinois are subject to standards and regulations adopted by PJM and each state’s utility commission.

We operate electric generation facilities in regions administered by PJM, Cal ISO and MISO. These ISOs operate under FERC-approved market rules. The market rules include price limits or caps applicable to all

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generators and numerous other FERC-approved requirements relative to the manner in which we must operate our generating facilities.

Federal Energy Regulatory Commission

A number of our subsidiaries are public utilities under the Federal Power Act and are subject to FERC rules and oversight regulations. As public utilities, these subsidiaries sell power at either market-based rates (if FERC has granted market-based rate authority) or cost-based rates. Each of these subsidiaries has been granted market-based rate authority, although a limited number of services sold by some of them are sold at cost-based rates.

Competition and Seasonality

The retail and wholesale energy industries are intensely competitive. Our competitors include merchant energy companies, utilities, retail electric service providers and other companies, including in recent years companies owned by investment banking firms, hedge funds and private equity funds. Our principal competitors in the retail electricity markets outside of Houston are typically incumbent retail electric providers, which have the advantage of long-standing relationships with customers. In general, competition in the retail and wholesale energy markets is on the basis of price, service, brand image and product offerings, as well as market perceptions of creditworthiness. For additional information on the effect of competition and for a discussion of how seasonality impacts our business, see “Risk Factors” in Item 1A of this Form 10-K and note 17 to our consolidated financial statements.

Environmental Matters

We are subject to numerous federal, state and local requirements relating to the protection of the environment and the safety and health of personnel and the public. These requirements relate to a broad range of our activities, including the discharge of compounds into the air, water and soil; the proper handling of solid, hazardous and toxic materials and waste; noise and safety and health standards applicable to the workplace.

Based on existing regulations, our market outlook, and our current assessment of the costs of labor and materials and the state of evolving technologies, we estimate that we will invest approximately $261 million in 2008, $115 million in 2009 and $33 million to $338 million in 2010 through 2014 on projects to reduce our emission levels and lessen the environmental impact of our operations. These amounts include $39 million for future ash landfill expansions from 2008 through 2014. As described below, a significant amount of these expenditures relate to our election to upgrade the SO₂ emissions controls at some of our facilities.

In some cases, which are described below, environmental laws and regulations are pending, are under consideration, are in dispute or could be revised. Unless otherwise noted, we cannot predict the ultimate effect of these matters on our business. For additional information on how environmental matters may impact our business, see “Risk Factors” in Item 1A of this Form 10-K and note 13(b) to our consolidated financial statements.

Air Quality

Under the Clean Air Act, the EPA has implemented a number of emission control programs that affect industrial sources, including power plants, by limiting emissions of NOx and SO₂. NOx and SO₂ are precursors to the formation of acid rain, fine particulate matter and regional haze. NOx is also a precursor to the formation of ozone.

NO_x and SO₂ Emissions

In March 2005, the EPA finalized a regulation, referred to as the Clean Air Interstate Rule, to further reduce emissions of NOx and SO₂ in the Eastern United States in two phases. The first phase, which takes

6

effect in 2009 for NOx and 2010 for SO₂, requires overall reductions within the area of approximately 50% in NOx and SO₂ emissions on an annual basis. The second phase, which takes effect in 2015, requires additional reductions of approximately 10% for a 60% total reduction in NOx and approximately 15% for a 65% reduction in SO₂. The EPA regulations include the use of cap-and-trade programs to achieve these reductions.

These regulations require us to provide an allowance for each ton of NOx and SO₂ that we emit under a cap-and-trade program. We maintain emission allowances that at a minimum correspond with forward power sales. In general, we do not have emission allowances for all of our generation. We purchase emission allowances, as needed, to correspond with our generation of electricity.

We have undertaken studies to evaluate possible impacts of the Clean Air Interstate Rule and similar legislative and regulatory proposals, which will primarily affect our coal-fired facilities in the Eastern United States. Based on an economic analysis that includes plant operability, changes in the emission allowances market, potential impact of state-imposed regulations and our estimates at this time of capital expenditures, we have elected to invest $217 million in 2008, $51 million in 2009 and an estimated $26 million to $304 million in 2010 through 2013 to principally reduce our emissions of SO₂.

Mercury Emissions

In March 2005, the EPA finalized the Clean Air Mercury Rule (CAMR), a national rule designed to reduce mercury emissions from coal plants in two phases through a cap-and-trade system. CAMR targets phase I reductions of approximately 30% in 2010 and phase II reductions of approximately 70% in 2018.

States are permitted to adopt regulations that conform to CAMR or adopt their own mercury regulations that are stricter than CAMR. Ohio has adopted regulations implementing CAMR. Pennsylvania has finalized stricter regulations for mercury emissions. Pennsylvania’s program generally requires mercury reductions on a facility basis in two phases, with 80% reductions in 2010 and 90% reductions in 2015.

Several states initiated litigation targeting CAMR, in particular to require mercury control on a facility basis, instead of through a cap-and-trade system. In February 2008, a federal appeals court struck down CAMR as unlawful. The outcome of this ruling on Ohio and some other state regulations is uncertain, but it may impact our ultimate requirements to control mercury. Pennsylvania is expected to continue implementation of its program.

Our preliminary estimate of capital expenditures to comply primarily with the first phase of Pennsylvania’s mercury control program is $88 million to $103 million for 2008 through 2010. Our analysis and evaluation of alternatives for compliance with the second phase of Pennsylvania’s program, including potential capital expenditures for controls, is underway.

Air Particulates

In September 2006, the EPA issued revised national ambient air quality standards for fine particulate matter with an aerodynamic diameter less than or equal to 2.5 microns, or PM2.5. Individual states must identify the sources of emissions in noncompliant areas and develop emission reduction plans. These plans may be state-specific or regional in scope. If our generating assets are located in areas that are not in compliance, we could be required to take additional or accelerated steps to reduce our NOx and SO₂ emissions.

Greenhouse Gas Emissions

There is increasing focus within the United States over the direction of domestic climate change policy. Several states in the northeastern, midwestern and western United States, are increasingly active in developing state-specific or regional regulatory initiatives to stimulate CO₂ emission reductions in the electric power generation industry and other industries. The United States Congress is considering numerous bills that would impose mandatory limitation of CO₂ and other greenhouse gas emissions for the domestic power generation sector. The specific impact on our business will depend upon the form of emissions-related legislation or regulations ultimately adopted by the federal government or states in which our facilities are located. Ten

7

northeastern states, including New Jersey and Maryland, have formed the Regional Greenhouse Gas Initiative, or RGGI, which requires power generators to reduce CO₂ emissions by ten percent by 2019, beginning in 2009. California adopted legislation designed to reduce greenhouse gas emissions to 25% below 1990 levels by 2020, beginning in 2012.

In addition, the EPA has announced plans to consider regulations to address CO₂ emissions as part of the Clean Air Act’s New Source Review program. Individual states may also begin to take into account CO₂ emissions when considering permits to construct or modify significant sources of emissions.

In September 2007, we joined the Chicago Climate Exchange, a voluntary greenhouse gas registry, reduction and trading system. By joining the exchange, we have committed to reduce our greenhouse gas emissions to six percent below the average of our 1998-2001 levels by 2010. We expect to satisfy our reduction targets through previously implemented unit retirements and capacity factor reductions and ongoing heat rate improvement efforts and transacting on the exchange.

Water Quality

In July 2007, the EPA suspended its 2004 regulations relating to cooling water intake structures at large existing power plants pending further rulemaking. This action was in response to the Second Circuit Court of Appeals’ January 2007 remand of the 2004 regulations. The EPA retained interim requirements that associated intakes employ best technology available controls as determined on a plant-by-plant, best professional judgment basis.

Other

As a result of their age, many of our facilities contain significant amounts of asbestos insulation, other asbestos containing materials, as well as lead-based paint. Existing state and federal rules require the proper management and disposal of these potentially toxic materials. We believe we properly manage and dispose of such materials in compliance with these state and federal rules. See note 13(b) to our consolidated financial statements.

We do not believe we have any material liabilities or obligations under the Comprehensive Environmental Response Corporation and Liability Act of 1980 or similar state laws. These laws impose clean up and restoration liability on owners and operators of facilities from or at which there has been a release or threatened release of hazardous substances, together with those who have transported or arranged for the disposal of those substances.

Employees

As of December 31, 2007, we had 3,698 full-time and part-time employees. Of these employees, 1,085 are covered by collective bargaining agreements, which expire on various dates from April 30, 2008 through April 30, 2012. The following table sets forth the number of our employees as of December 31, 2007:

Segment
Retail energy	1,161
Wholesale energy	1,976
Other operations	561
Total	3,698

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Executive Officers

Name	Age(1)		Present Position
Mark M. Jacobs		45	President and Chief Executive Officer
Brian Landrum		45	Executive Vice President and Chief Operating Officer
Rick J. Dobson		49	Executive Vice President and Chief Financial Officer
Charles S. Griffey		48	Senior Vice President, Market Design and Regulatory Affairs
D. Rogers Herndon		42	Senior Vice President, Strategic Planning and Business Development
Michael L. Jines		49	Senior Vice President, General Counsel and Corporate Secretary
Suzanne L. Kupiec		41	Senior Vice President, Risk and Structuring and Corporate Compliance Officer
Thomas C. Livengood		52	Senior Vice President and Controller
Albert H. Myres		44	Senior Vice President, Government and Public Affairs
Karen D. Taylor		50	Senior Vice President, Human Resources and Chief Diversity Officer

(1) Age is as of February 1, 2008.

Mark M. Jacobs has served as our President and Chief Executive Officer since May 2007. Prior to that, he served as our Executive Vice President and Chief Financial Officer from July 2002 to October 2007.

Brian Landrum has served as our Executive Vice President and Chief Operating Officer since May 2007. Prior to that, he served as our Executive Vice President, Operations from February 2006 to May 2007. He was Senior Vice President, Commercial and Retail Operations, IT from February 2005 to February 2006; Senior Vice President, Customer Operations and Information Technology from January 2004 to February 2005; President, Reliant Energy Retail Services from June 2003 to January 2004 and Senior Vice President, Retail Operations from August 2001 to May 2003.

Rick J. Dobson has served as our Executive Vice President and Chief Financial Officer since October 2007. Prior to that, he served as Senior Vice President and Chief Financial Officer of Novelis Inc., an international aluminum rolling and recycling company, from July 2006 to August 2007 and Senior Vice President and Chief Financial Officer of Aquila, Inc., an electric and natural gas distribution company that also owns and operates generation assets, from October 2002 to July 2006.

Charles S. Griffey has served as our Senior Vice President, Market Design and Regulatory Affairs since December 2007. Prior to that, he was Senior Vice President, Regulatory Affairs from February 2003 to December 2007 and Vice President, Regulatory Planning and Analysis from December 1998 to February 2003.

D. Rogers Herndon has served as our Senior Vice President, Strategic Planning and Business Development since November 2007. He was Senior Vice President, Commercial Operations and Origination from May 2006 to November 2007. Prior to that, he was a Managing Director for PSEG Energy Resources and Trade and from March 2002 to March 2003, he was Managing Director—Global Derivatives for Bank of America.

Michael L. Jines has served as our Senior Vice President, General Counsel and Corporate Secretary since May 2003. He was our Deputy General Counsel and Senior Vice President and General Counsel, Wholesale Group from March 2002 to May 2003.

Suzanne L. Kupiec has served as our Senior Vice President, Risk and Structuring since January 2004. In July 2007, she also began serving as our Corporate Compliance Officer. She was our Vice President and Chief Risk and Corporate Compliance Officer from June 2003 to January 2004. From 2000 until the time she joined

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us, she was a partner at Ernst & Young LLP, where she led its Energy Trading and Risk Management Practice serving both audit and advisory service clients.

Thomas C. Livengood has served as our Senior Vice President and Controller since May 2005. Prior to that, he served as our Vice President and Controller from August 2002 to May 2005.

Albert H. Myres has served as our Senior Vice President, Government and Public Affairs since December 2007. He served as Shell Oil Corporation’s Chief of Staff and Senior Advisor to the President and Country Chairman from August 2005 to December 2007 and Senior Advisor, Government Affairs from June 2002 to August 2005.

Karen D. Taylor has served as our Senior Vice President, Human Resources since December 2003. In November 2005, she was appointed as our Chief Diversity Officer. Ms. Taylor was Vice President, Human Resources from February 2003 to December 2003 and Vice President, Administration, Wholesale Group from October 1998 to February 2003.

Available Information

Our principal offices are at 1000 Main, Houston, Texas 77002 (713-497-7000). The following information is available free of charge on our website (http://www.reliant.com):

•  Our corporate governance guidelines and board committee charters;

•  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports; and

•  Our business ethics policy.

You can request a free copy of these documents by contacting our investor relations department. It is our intention to disclose amendments to, or waivers from, our business ethics policy on our website. No information on our website is incorporated by reference into this Form 10-K. In addition, certain of these materials are available on the SEC’s website at (http://www.sec.gov) or at its public reference room: 100 F Street, NE, Room 1580, Washington, D.C. 20549 (1-800-SEC-0330).

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Certifications

We will timely provide the annual certification of our Chief Executive Officer to the New York Stock Exchange. We filed last year’s certification in June 2007. In addition, our Chief Executive Officer and Chief Financial Officer each have signed and filed the certifications under Section 302 of the Sarbanes-Oxley Act of 2002 with this Form 10-K.

Item 1A.   Risk Factors.

Risks Related to the Retail and Wholesale Energy Businesses

The financial results of our wholesale and retail energy segments are subject to market risks beyond our control.

Our results of operations, financial condition and cash flows are significantly impacted by the prevailing demand and market prices for electricity, purchased power, fuel and emission allowances over which we have no control. Market prices can fluctuate dramatically in response to many factors, including weather conditions; changes in the prices of related commodities; changes in law and regulation; regulatory intervention (including the imposition of price limitations, bidding rules or similar mechanisms); market illiquidity; transmission constraints; environmental limitations; generation unit outages; fuel supply issues; national and world-wide economic activity; and other events.

The markets in which we operate are relatively immature markets that are characterized by elements of both deregulated and regulated markets. Changes in the regulatory environment in which we operate could adversely affect our ability to set rates, or the cost, manner or feasibility of conducting our business.

We operate in a regulatory environment that is undergoing varying restructuring initiatives. In many instances, the regulatory structures governing the electricity markets are still evolving, creating gaps in the regulatory framework and associated uncertainty. In addition, existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to our facilities or our commercial activities. We cannot predict the future direction of these initiatives or the ultimate effect that this changing regulatory environment will have on our business. Consequently, future regulatory restrictions, regulatory or political intervention or changes in laws and regulations, may constrain our ability to set rates at market prices or otherwise have an adverse effect on our business. See “Business—Regulation” in Item 1 of this Form 10-K.

The tightening of the supply and demand balance for electricity may result in significant long- and short-term price volatility in both our wholesale and retail businesses. Price volatility may result in legislative, regulatory or judicial initiatives intended to mitigate the impact of such volatility.

The permitting and construction of new generation facilities is a lengthy process. Additionally, the progressive tightening of environmental regulatory requirements and their reflection in permits and regulations may result in generation facilities being removed from service prior to their end of useful life or derated permanently or temporarily. As a result, there may be periods when the supply of electricity is reduced or constrained relative to the demand for electricity. During these periods the wholesale price and retail price of electricity may increase significantly. In response to this, legislators, regulators, consumers and others may seek legislative, regulatory or judicial relief in an attempt to control or limit the wholesale price and/or the retail price of electricity.

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We depend on sources, facilities and systems that we do not own or control for our fuel and fuel supply and to deliver electricity to and bill our customers. Any disruption in these sources, facilities or systems could have an adverse effect on our business.

We depend on fuel sources and fuel supply facilities owned and operated by third parties to supply our generation plants. We depend on power transmission and distribution facilities and metering systems owned and operated by third parties to deliver electricity to our customers and provide energy usage data. If these sources, facilities or systems fail, are disrupted or become unavailable to us, we may be unable to generate and/or provide electricity, our cost of doing so may significantly increase and/or we may be subject to contractual or other penalties. In addition, inaccurate or untimely information from third parties could hinder our ability to bill customers and collect amounts owed. We also participate in regional power pools, reliability councils and transmission organizations and changes in the rules governing such groups and/or in the composition of such groups may have an adverse effect on our business. Participation in RTOs is voluntary, and transmission owning companies may exit an RTO so long as they do so in compliance with the applicable FERC tariffs and agreements and FERC approval.

The operation of generation facilities involves significant risks that could interrupt operations and increase our costs.

Ownership of generation assets exposes us to risks relating to the breakdown of equipment or processes; fuel supply or transportation interruptions; construction delays or cost overruns; shortages of or delays in obtaining equipment, material and labor; operational restrictions resulting from environmental limitations and governmental interventions; as well as other risks. In addition, many of our facilities are old and require significant maintenance expenditures. We are party to collective bargaining agreements with labor unions at several of our plants. If our workers were to engage in a strike, work stoppage or other slowdown, other employees were to become unionized or the terms and conditions in future labor agreements were renegotiated, we could experience a significant disruption in our operations and higher ongoing labor costs. Similarly, we have an aging workforce at a number of our plants creating potential knowledge and expertise gaps as those workers retire. If we are unable to secure fuel, we will not be able to run our generation units. Construction delays could cause extended and/or unplanned outages of our generation facilities. If a generation unit fails or is unavailable, we may have to purchase replacement power from third parties at higher prices. We have insurance, subject to limits and deductibles, covering some types of physical damage and business interruption related to our generation units. However, this insurance may not always be available on commercially reasonable terms. In addition, there is no assurance that insurance proceeds will be sufficient to cover all losses, insurance payments will be timely made or the policies themselves will be free of substantial deductibles.

Our business operations expose us to the risk of loss if third parties fail to perform their contractual obligations.

We may incur losses if third parties default on their contractual obligations, such as obligations to pay us money; buy or sell electricity, fuel, emission allowances and other commodities; or provide us with fuel transportation services, power transmission or distribution services. For additional information about third party default risk, including our efforts to mitigate against this risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Risk” in Item 7 of this Form 10-K and note 2(e) to our consolidated financial statements.

Our costs of compliance with environmental laws are significant and can affect our future financial results.

Our wholesale energy business is subject to extensive and evolving environmental regulations, particularly our coal- and oil-fired generation facilities. We incur significant costs in complying with these regulations and, if we fail to comply, could incur significant penalties. Our cost estimates for compliance with environmental regulations are based on our current assessment of the cost of labor and materials and the state of evolving technologies. Changes to the preceding factors, revisions of environmental regulations, litigation and new

12

legislation and/or regulations (including new climate change legislation and regulations), as well as other factors, could cause our actual costs to vary outside the range of our estimates. In addition, failure to comply with environmental requirements could require us to shut down or reduce production on our generation facilities or create liability exposure. New environmental laws or regulations may be adopted that would further constrain our operations or increase our environmental compliance costs. We also may be responsible for the environmental liabilities associated with generation facilities even if a prior owner caused the liabilities. We are required to purchase emission allowances to operate some of our facilities. Such allowances may be unavailable or only available at costs that would make it uneconomical to operate our generating assets. See “Business—Environmental Matters” in Item 1 of this Form 10-K and note 13(b) to our consolidated financial statements.

Failure to obtain or maintain any required permits or approvals could prevent or limit us from operating our business.

To operate our generating facilities and retail electric business, we must obtain and maintain various permits, licenses, approvals and certificates from governmental agencies. In some jurisdictions, we must also meet minimum requirements for customer service and comply with local consumer protection and other laws. Our failure to obtain or maintain any necessary governmental permits or licenses or to satisfy these legal requirements, including environmental compliance provisions, could limit our ability to operate our business or create liability exposure.

We could be liable for a share of the payment defaults of other market participants.

If a market participant defaults on its payment obligations to an ISO, we, together with other market participants, are liable for a portion of the default obligation that is not otherwise covered by the defaulting market participant. Each ISO establishes credit requirements applicable to market participants and the basis for allocating payment default amounts to market participants. In ERCOT, the allocation is based on share of the total load. As of December 31, 2007, we would have been liable for approximately 20% of any defaulted amount in ERCOT. In PJM, MISO and Cal ISO, the methods of allocating the share of defaults differ, and our exposure from these markets is currently relatively small.

Significant events beyond our control, such as hurricanes and other weather-related problems or acts of terrorism, could have a material adverse effect on our business.

The uncertainty associated with events beyond our control, such as significant weather events and the risk of future terrorist activity, may affect our results of operations and financial condition in unpredictable ways. These events could result in adverse changes in the insurance markets and disruptions of power and fuel markets. In addition, terrorist actions could damage or shut down our generation facilities or the fuel and fuel supply facilities or the power transmission and distribution facilities upon which our generation and retail businesses are dependent. These events could also adversely affect the United States economy, create instability in the financial markets and, as a result, have an adverse effect on our ability to access capital on terms and conditions acceptable to us.

Risks Relating to Our Retail Business

Merrill Lynch provides credit support for our retail business.

Under the terms of our credit-enhanced retail structure, Merrill Lynch & Co., Inc. and an affiliate (Merrill Lynch) provide guarantees and post collateral for the supply purchases and related transactions of our Texas and PJM retail energy business. If we do not comply with the material terms of our agreement, Merrill Lynch could terminate its future obligations to provide guarantees and collateral postings on our behalf. There are a number of events, including non-payments of obligations and a non-investment-grade credit rating that could cause Merrill Lynch to default. If Merrill Lynch experiences downgrades in its credit rating or credit outlook, our suppliers may require other credit support or cease doing business with us pursuant to the credit-enhanced

13

retail structure. In these events, our ability to operate our Texas and PJM retail business could be impaired, which would adversely affect our liquidity, cash flows and results of operations.

We depend on third parties to provide electricity to supply our retail customers.

We purchase substantially all of our supply requirements from third parties. As a result, our financial performance depends on our ability to obtain adequate supplies of electric generation from third parties at prices below the prices we charge our customers.

Rising power supply costs could adversely affect the financial performance of our retail electric operations.

Our earnings and cash flows could be adversely affected in any period in which our power supply costs rise at a greater rate than our rates charged to customers. The price of our power supply purchases associated with our energy commitments can be different than that reflected in the rates charged to customers due to, among other factors:

•  varying supply procurement contracts used and the timing of entering into related contracts;

•  subsequent changes in the overall price of natural gas;

•  daily, monthly or seasonal fluctuations in the price of natural gas relative to the 12-month forward prices; and

•  changes in market heat rate (i.e., the relationship between power and natural gas prices).

We may lose further market share in the Houston retail electricity market, which is a significant contributor of income to our consolidated results.

In recent years, we have experienced declines in our share of the Houston retail electricity market, which represents approximately 65% of our residential customer base. This trend could continue. The new competitive market has attracted a number of new participants. Competitors are putting downward pressure on our Houston sales volumes and may put downward pressure on our margins over time. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview” in Item 7 of this Form 10-K.

Violations of market power standards may negatively impact the wholesale cost of power.

In 2006, the PUCT implemented a new rule on resource adequacy and market power in the ERCOT Region. In this rule, the PUCT increased the current price cap applicable to generation offers into the ERCOT energy market, eliminated current market power mitigation measures and adopted new market power standards. If a market participant violates the market power standards and it is not adequately mitigated, such violation could have the impact of increasing the wholesale cost of power, which could adversely impact our gross margins in the Texas retail market.

We depend on the ISOs to communicate operating and system information in a timely and accurate manner. Information that is not accurate or timely can have an impact on our future reported financial results.

Each ISO communicates information relating to a customer’s choice of retail electric provider and other data needed for servicing of customer accounts to utilities and retail electric providers. Any failure to perform these tasks will result in delays and other problems in enrolling, switching and billing customers. Some of the ISOs are also responsible for settling all electricity supply volumes in their region. Information that is not accurate or timely may result in incorrect estimates of our settled volumes and supply costs that would need to be corrected when such information is received. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—New Accounting Pronouncements, Significant Accounting Policies and Critical Accounting Estimates—Critical Accounting Estimates” in Item 7 of this Form 10-K.

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Risks Related to Our Company

Our borrowing levels, debt service obligations and restrictive covenants may adversely affect our business. We may be vulnerable to reductions in our cash flow.

As of December 31, 2007, we had total gross debt of $3.0 billion:

•  We must dedicate a portion of our cash flows to pay debt service requirements, which reduces the amount of cash available for other business purposes;

•  The covenants in our debt agreements and in our agreement with Merrill Lynch restrict our ability to, among other things, obtain additional financing, make investments or acquisitions, create additional liens on our assets and take other actions to react to changes or opportunities in our business;

•  If we do not comply with the payment and other material covenants under our debt agreements, our debt holders could require us to repay our debt immediately and, in the case of our revolving credit facilities, terminate their commitment to lend us money; and

•  Our debt levels and credit ratings may affect the evaluation of our creditworthiness by customers, which could put us at a competitive disadvantage to competitors with less debt or investment grade credit ratings.

If we were unable to generate sufficient cash flows, access funds from operations or raise cash from other sources, we would not be able to meet our debt service and other obligations. These situations could result from adverse developments in the energy, fuel or capital markets, a disruption in our operations or those of third parties or other events adversely affecting our cash flows and financial performance.

Our hedging and other risk management activities may not work as planned.

Our hedges may not be effective as a result of basis price differences, transmission issues, price correlation, volume variations or other factors. See “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of this Form 10-K.

Changes in the wholesale energy market or changes in our evaluation of generation assets could result in impairments.

If our outlook for the wholesale energy market changes negatively, or if our ongoing evaluation of our wholesale energy segment results in decisions to mothball, retire or dispose of generation assets, we could have impairment charges related to goodwill or our fixed assets. See notes 2(g) and 2(h) to our consolidated financial statements.

Lawsuits, regulatory proceedings and tax proceedings could adversely affect our future financial results.

From time to time, we are named as a party to, or our property is the subject of, lawsuits, regulatory proceedings or tax proceedings. These proceedings involve highly subjective matters with complex factual and legal questions. Their outcome is uncertain. Any claim that is successfully asserted against us could result in significant damage claims and other losses. Even if we prevail, any proceedings could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could adversely affect our financial condition, results of operations or cash flows. See notes 11, 13 and 14 to our consolidated financial statements.

We have entered into outsourcing arrangements with third party service providers. In addition, our operations are highly dependent on computer and other operating systems, including telecommunications systems. Any interruptions in these arrangements or systems could significantly disrupt our business operations.

In recent years, we have entered into outsourcing arrangements, such as information technology production software, infrastructure and development and certain functions within customer operations, with

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third party service providers. If these service providers do not perform their obligations, we may incur significant costs and experience interruptions in our business operations in connection with switching to other service providers or assuming these obligations ourselves. We are also highly dependent on our specialized computer and communications systems, the operation of which could be interrupted by fire, flood, power loss, computer viruses or similar disruptions. There is no guarantee that our backup systems and disaster recovery plans will be effective.

If we acquire or develop additional generation assets, or dispose of existing generation assets, we may incur additional costs and risks.

We may seek to purchase or develop additional generation facilities or dispose of existing generation facilities. There is no assurance that these efforts will be successful. In any sale, we may be required to indemnify a purchaser against liabilities. To finance future acquisitions, we may be required to issue additional equity securities or incur additional debt.

Other Risks

For other Company risks, see “Business” in Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

Item 1B.   Unresolved Staff Comments.

None.

Item 2.   Properties.

Our principal executive offices are leased through 2018, subject to two five-year renewal options. Our principal generation facilities are described under “Business—Wholesale Energy” in Item 1 of this Form 10-K. We believe that our properties are adequate for our present needs. We have satisfactory title, rights and possession to our owned facilities, subject to exceptions, which, in our opinion, would not have a material adverse effect on the use or value of the facilities.

Item 3.   Legal Proceedings.

For a description of our material pending legal and regulatory proceedings and settlements, see notes 13 and 14 to our consolidated financial statements.

Item 4.   Submission of Matters to a Vote of Security Holders.

None.

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock trades on the New York Stock Exchange under the ticker symbol “RRI.” On February 15, 2008, we had 36,142 stockholders of record.

The closing price of our common stock on December 31, 2007 was $26.24.

	Market Price
	High		Low
2007:
First Quarter	$	21.70	$	13.52
Second Quarter	$	27.79	$	20.37
Third Quarter	$	30.69	$	22.72
Fourth Quarter	$	28.74	$	24.11
2006:
First Quarter	$	10.74	$	9.57
Second Quarter	$	12.55	$	10.51
Third Quarter	$	13.58	$	11.64
Fourth Quarter	$	14.40	$	12.02

We have never paid dividends. Some of our debt agreements restrict the payment of dividends. See note 6 to our consolidated financial statements.

Sales of Unregistered Securities.  In the fourth quarter of 2007, we issued 42,818 shares of unregistered common stock pursuant to cashless warrant exercises under an exemption pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Stock Price Performance Graph.  The following line graph compares the yearly percentage change in our cumulative total stockholder return on common stock with the cumulative total return of a broad equity market index (Standard & Poor’s 500 Stock Index) and the cumulative total return of a group of our peer companies comprised of Calpine Corporation, Constellation Energy Group, Inc., Dominion Resources, Inc., Dynegy Inc., Exelon Corporation, Mirant Corporation, NRG Energy, Inc., Sempra Energy and TXU Corp. TXU Corp. has been excluded from the graph for 2007 because it was acquired and is no longer a publicly-traded company.

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This stock price performance graph is furnished in this Form 10-K and is not filed, as permitted by 17 CFR 229.201(e).

Item 6.   Selected Financial Data.

	2007		2006			2005			2004			2003
	(1)(2)(3)(4)		(1)(5)(6)(7)			(1)(7)(8)			(1)			(1)(9)(10)(11)
	(in millions)
Statements of Operations Data:
Revenues	$	11,209	$	10,877		$	9,712		$	8,098		$	10,097
Operating income (loss)		876		(24	)		(321	)		(13	)		(476	)
Income (loss) from continuing operations		358		(327	)		(441	)		(276	)		(916	)
Cumulative effect of accounting changes, net of tax		—		1			(1	)		7			(24	)
Net income (loss)		365		(328	)		(331	)		(29	)		(1,342	)

	2007		2006			2005			2004			2003
	(1)(2)(3)(4)		(1)(5)(6)(7)			(1)(7)(8)			(1)			(1)(9)(10)(11)
Diluted Earnings (Loss) per Share: Income (loss) from continuing operations	$	1.01	$	(1.06	)	$	(1.46	)	$	(0.93	)	$	(3.12	)

	2007			2006			2005			2004			2003
	(1)(2)(3)(4)(6)			(1)(5)(8)			(1)			(1)(10)			(1)
	(in millions)
Statements of Cash Flow Data:
Cash flows from operating activities	$	762		$	1,276		$	(917	)	$	106		$	994
Cash flows from investing activities		(179	)		1,057			306			900			917
Cash flows from financing activities		(292	)		(1,957	)		594			(1,047	)		(2,889	)

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	December 31,
	2007		2006		2005		2004		2003
	(1)(2)(12)		(1)		(1)		(1)		(1)
	(in millions)
Balance Sheet Data:
Net margin deposits	$	140	$	436	$	1,700	$	487	$	36
Total assets		9,457		10,567		13,569		12,194		13,297
Current portion of long-term debt and short-term borrowings		52		355		789		619		129
Long-term debt		2,903		3,178		4,317		3,939		4,276
Stockholders’ equity		4,477		3,950		3,864		4,386		4,372

(1)	We sold or transferred the following operations, which have been classified as discontinued operations: Desert Basin, European energy, Orion Power’s hydropower plants, Liberty, Ceredo and Orion Power’s New York plants. We sold the following operations, which are included in continuing operations: REMA hydropower plants in April 2005, landfill-gas fueled power plants in July 2005 and our El Dorado investment in July 2005. See notes 20 and 22 to our consolidated financial statements.
(2)	We deconsolidated Channelview on August 20, 2007. See notes 1 and 21 to our consolidated financial statements.
(3)	During 2007, we recorded and paid a $22 million charge related to resolution of a 2004 indictment for alleged violations of the Commodity Exchange Act, wire fraud and conspiracy charges. See note 14(a) to our consolidated financial statements.
(4)	During 2007, we incurred $73 million in debt extinguishments expenses and expensed $41 million of deferred financing costs related to accelerated amortization for refinancings and extinguishments. See notes 2(q) and 6 to our consolidated financial statements.
(5)	During 2006, we incurred $37 million in debt conversion expense. See note 6 to our consolidated financial statements.
(6)	During 2006, we recorded a $35 million charge (paid in 2007) related to a settlement of certain class action natural gas cases relating to the Western states energy crisis. See note 14(a) to our consolidated financial statements.
(7)	During 2006 and 2005, we had gains on sales of emission allowances of $159 million and $160 million, respectively.
(8)	During 2005, we recorded charges of $359 million relating to various settlements associated with the Western states energy crisis, which were paid during 2006. See note 14(a) to our consolidated financial statements.
(9)	Effective October 1, 2003, we adopted EITF No. 03-11 and began prospectively reporting the settlement of sales and purchases of fuel and purchased power related to our non-trading commodity derivative activities that were not physically delivered on a net basis in our results of operations in the same line as the item hedged. We did not reclassify amounts for periods prior to October 1, 2003.
(10)	During 2004, 2003 and 2002, we recorded charges of $2 million, $47 million and $128 million, respectively, relating to a payment made to CenterPoint in 2004 of $177 million.
(11)	During 2003, we recorded a goodwill impairment charge of $985 million.
(12)	See note 13 to our consolidated financial statements for discussion of our contingencies.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview

Our objective is to be a leader in delivering the benefits of competitive electricity markets to customers. Our business focuses on the competitive retail and wholesale electricity markets.

Our strategy is based on our core beliefs about the power industry and the retail and wholesale electricity markets. We are committed to delivering superior returns from competitive markets through insights into the fundamentals of our core markets and a commitment to risk-weighted investments whose return on invested capital exceeds our weighted-average cost of capital.

Retail Energy.  The retail energy segment is a low capital investment electricity resale business with relatively stable earnings (excluding unrealized gains/losses on energy derivatives). The key earnings drivers in the retail energy segment are the volume of electricity we sell to customers, the unit margins received on those sales and the cost of acquiring and serving those customers. We earn a margin by selling electricity to end-use customers and simultaneously acquiring supply. While short-term earnings in this business are impacted by local weather patterns and the competitive tactics of other retailers in the market, the longer-term earnings drivers of the business are delivering a superior customer experience, retaining and growing market share in our existing markets through innovative product offerings and expanding into new competitive markets.

Our core beliefs about the retail market are:

•  We are a leader in delivering the benefits of competitive electricity markets to retail customers, which results in a business that has a high return on invested capital and relatively stable earnings;

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•  Retail competition provides opportunities to add value through customer segmentation, product and service innovation and brand;

•  Increases in wholesale supply costs will provide conservation and load management opportunities that will dramatically alter load; and

•  Continued success in markets currently open to retail competition will drive new competitive market openings.

These core beliefs set the stage for our strategic direction. We will focus on the following value-creation levers:

•  Strengthening our competitive position by improving our operating cost and effectiveness, using customer segmentation to identify and provide innovative products and services, providing superior customer service and continuing to build our brand;

•  Leading the development of “Smart Energy” to encourage more efficient power consumption and provide a superior customer experience, including increasing transparency of customer bills, providing time of use signals, disaggregating customer usage and providing enhanced control over power consumption; and

•  Entering and developing new competitive markets.

Wholesale Energy.  The wholesale energy segment is a capital-intensive, cyclical business. Earnings are significantly impacted by spark spreads and capacity prices. Spark spreads are driven by a number of factors, including the prices of natural gas, coal and fuel oil, the cost of emissions, transmission, weather and global macro-economic factors, none of which we control. The key earnings drivers are the amount of electricity we generate, the margin we earn for each unit of electricity sold and the availability of our generating assets to meet demand. The factor that we have the most control over is the percentage of time that our generating assets are available to run when it is economical for them to do so. Longer-term earnings are driven by regional supply and demand fundamentals, the level of commodity prices and capacity markets.

Our core beliefs about the wholesale market are:

•  Capital intensive, cyclical industries generally earn returns below their cost of capital over a full cycle;

•  New build investment typically under earns its cost of capital unless there is a significant cost advantage; and

•  Over the next several years, we anticipate significant tightening of supply/demand.

These core beliefs set the stage for our strategic direction. We will focus on the following value-creation levers:

•  Realizing the value from anticipated improving supply and demand fundamentals in the wholesale markets from our existing portfolio of assets;

•  Achieving operating and commercial excellence in order to reliably and economically meet customer needs; and

•  Optimizing and growing our portfolio of assets by utilizing a highly-disciplined capital investment process with a return on invested capital focus.

Company-wide.  We will focus on the following value-creation levers:

•  Establishing and maintaining a strong, flexible capital structure that ensures a competitive cost of capital with an ability to invest in value creating opportunities throughout the cycle, including returning capital to shareholders;

•  Building a highly disciplined return on invested capital focus; and

•  Continuing to develop innovative structures and transactions that improve returns and reduce risk.

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We also believe that stockholder value is enhanced through the development of a highly motivated and customer-focused work force. We continue to focus on:

•  communicating openly with our employees;

•  fostering company pride among our employees;

•  providing a satisfying and safe work environment;

•  recognizing and rewarding employee contributions and capabilities; and

•  motivating our employees to be collaborative leaders committed to our future.

Our ability to achieve these strategic objectives and execute these actions is subject to a number of factors, some of which we may not be able to control. See “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors” in Item 1A of this Form 10-K.

Recent Events.  In February 2008, we entered into an agreement to sell our interests in Channelview, subject to approval of the court overseeing Channelview’s bankruptcy proceedings and other closing conditions. Sale proceeds will be used to settle creditors’ claims and a cash sharing agreement. Residual proceeds will be retained by us and will affect the amount of any gain or loss on the sale. It is possible an impairment could be recognized if the net proceeds and remaining assets (including cash and working capital) do not exceed our net investment in and receivables from Channelview. See note 21 to our consolidated financial statements.

Consolidated Results of Operations

The following discussion includes non-GAAP financial measures, which are not standardized; therefore it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not rely on any single financial measure.

2007 Compared to 2006 and 2006 Compared to 2005

We reported $365 million consolidated net income, or $1.04 diluted income per share, for 2007 compared to $328 million consolidated net loss, or $1.07 loss per share, for 2006 and $331 million consolidated net loss, or $1.09 loss per share, for 2005.

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										Change			Change
										from 2006			from 2005
	2007			2006			2005			to 2007			to 2006
	(in millions)
Retail energy contribution margin, including unrealized gains/losses on energy derivatives	$	942		$	250		$	342		$	692		$	(92	)
Wholesale energy contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives		524			146			110			378			36
Other contribution margin		1			1			4			—			(3	)
Other general and administrative		(171	)		(172	)		(140	)		1			(32	)
Western states and similar settlements		(22	)		(35	)		(359	)		13			324
Gains on sales of assets and emission allowances, net		26			159			168			(133	)		(9	)
Depreciation and amortization		(424	)		(373	)		(446	)		(51	)		73
Income of equity investments, net		5			6			26			(1	)		(20	)
Debt extinguishments and conversions		(73	)		(37	)		—			(36	)		(37	)
Other, net		—			—			(23	)		—			23
Interest expense		(349	)		(428	)		(399	)		79			(29	)
Interest income		34			34			23			—			11
Income tax (expense) benefit		(135	)		122			253			(257	)		(131	)
Income (loss) from continuing operations		358			(327	)		(441	)		685			114
Income (loss) from discontinued operations		7			(2	)		111			9			(113	)
Cumulative effect of accounting changes, net of tax		—			1			(1	)		(1	)		2
Net income (loss)	$	365		$	(328	)	$	(331	)	$	693		$	3

Retail Energy Segment

In analyzing the results of our retail energy segment, we use the non-GAAP financial measures “retail gross margin” and “retail contribution margin,” which exclude the item described below, as well as our retail energy segment profit and loss measure, “contribution margin, including unrealized gains/losses on energy derivatives.” Retail gross margin and retail contribution margin should not be relied upon without considering the GAAP financial measures. The item that is excluded from these non-GAAP financial measures has a recurring effect on our earnings and reflects aspects of our business that are not taken into account by this measure.

Unrealized Gains/Losses on Energy Derivatives.  We use derivative instruments to manage operational or market constraints and to execute our retail energy segment’s supply procurement strategy. We are required to record in our consolidated statement of operations non-cash gains/losses related to future periods based on current changes in forward commodity prices for derivative instruments receiving mark-to-market accounting treatment. We refer to these gains and losses prior to settlement, as well as ineffectiveness on cash flow hedges, as “unrealized gains/losses on energy derivatives.” In substantially all cases, the underlying transactions being hedged receive accrual accounting treatment, resulting in a mismatch of accounting treatments. Since the application of mark-to-market accounting has the effect of pulling forward into current periods non-cash gains/losses relating to and reversing in future delivery periods, analysis of results of operations from one period to another can be difficult. We believe that excluding these unrealized gains/losses on energy derivatives provides a more meaningful representation of our economic performance in the reporting period and is therefore useful to us, investors, analysts and others in facilitating the analysis of our results of operations from one period to another.

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Our retail energy segment’s contribution margin, including unrealized gains/losses on energy derivatives was $942 million in 2007 compared to $250 million in 2006. The $692 million increase was primarily due to the net change in unrealized gains/losses on energy derivatives of $725 million, partially offset by a $32 million decrease in retail gross margin. Our retail energy segment’s contribution margin, including unrealized gains/losses on energy derivatives was $250 million in 2006 compared to $342 million in 2005. The $92 million decrease was primarily due to the increase in unrealized losses on energy derivatives of $218 million. In addition, contribution margin was impacted by a $232 million increase in retail gross margin and a $106 million increase in operation and maintenance, selling and marketing and bad debt expense. See “—Retail Energy Margins” below for explanations.

Retail Energy Revenues.

									Change			Change
									from 2006			from 2005
	2007			2006		2005			to 2007			to 2006
	(in millions)
Retail energy revenues from end-use retail customers:
Mass:
Residential:
Houston	$	2,057		$	2,466	$	2,357		$	(409	)(1)	$	109	(2)
Non-Houston		1,175			1,109		708			66	(3)		401	(4)
Small Business:
Houston		493			593		476			(100	)(5)		117	(6)
Non-Houston		203			189		100			14			89	(7)
Total Mass		3,928			4,357		3,641			(429	)		716
Commercial and Industrial:
ERCOT		3,334			2,964		2,549			370	(8)		415	(9)
Non-ERCOT		375			381		404			(6	)		(23	)(10)
Total Commercial and Industrial		3,709			3,345		2,953			364			392
Total		7,637			7,702		6,594			(65	)		1,108
Retail energy revenues from resales of purchased power and other hedging activities		540			488		474			52	(11)		14
Market usage adjustments		(4	)		7		(23	)		(11	)		30
Total retail energy revenues		8,173		$	8,197	$	7,045		$	(24	)	$	1,152

(1)	Decrease primarily due to (a) lower volumes driven by (i) fewer number of customers and (ii) a change in customer usage and mix and (b) lower unit sales prices.
(2)	Increase primarily due to increases in unit sales prices, partially offset by lower volumes due to (a) fewer number of customers, (b) a change in customer usage and mix and (c) milder weather.
(3)	Increase primarily due to increased number of customers, partially offset by lower volumes due to a change in customer usage and mix.
(4)	Increase primarily due to (a) higher volumes due to increased number of customers and (b) higher unit sales prices.
(5)	Decrease primarily due to lower volumes primarily driven by (a) fewer number of customers and (b) a change in customer usage and mix.
(6)	Increase primarily due to higher unit sales prices.
(7)	Increase primarily due to (a) higher volumes due to increased number of customers and (b) higher unit sales prices. These increases were partially offset by lower volumes due to a change in customer usage and mix.
(8)	Increase primarily due to (a) higher volumes due to increased number of customers and (b) higher unit sales prices. These increases were partially offset by lower volumes due to a change in customer usage and mix.
(9)	Increase primarily due to (a) fixed price contracts renewed at higher market rates due to higher prices of electricity when the contracts were executed, (b) variable rate contracts, which are tied to the market price of natural gas and (c) higher volumes.
(10)	Decrease primarily due to lower volumes due to fewer number of customers. This decrease was partially offset by increases primarily due to (a) fixed price contracts renewed at higher market rates due to higher prices of electricity when the contracts were executed and (b) variable rate contracts, which are tied to the market price of natural gas.
(11)	Increase primarily due to our supply management activities in various markets in Texas.

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Retail Energy Cost of Sales.

									Change			Change
									from 2006			from 2005
	2007			2006		2005			to 2007			to 2006
	(in millions)
Costs of sales	$	6,820		$	6,635	$	5,676		$	185		$	959
Retail energy intersegment costs		394			571		625			(177	)		(54	)
Subtotal		7,214			7,206		6,301			8	(1)		905	(2)
Market usage adjustments		7			7		(8	)		—			15
Unrealized (gains) losses on energy derivatives		(438	)		287		69			(725	)(3)		218	(4)
Total retail energy cost of sales	$	6,783		$	7,500	$	6,362		$	(717	)	$	1,138

(1)	Increase primarily due to higher costs of purchased power at the time of procurement, partially offset by lower volumes due to a change in customer usage and mix.
(2)	Increase primarily due to higher costs of purchased power at the time of procurement.
(3)	See footnote 7 under “Retail Energy Margins.”
(4)	See footnote 8 under “Retail Energy Margins.”

Retail Energy Margins.

										Change			Change
										from 2006			from 2005
	2007			2006			2005			to 2007			to 2006
	(in millions)
Mass gross margin	$	719		$	776		$	689		$	(57	)(1)	$	87	(2)
Commercial and industrial gross margin		244			208			78			36	(2)		130	(2)
Market usage adjustments		(11	)		—			(15	)		(11	)		15
Retail gross margin		952			984			752			(32	)		232
Operation and maintenance		(245	)		(234	)		(190	)		(11	)(3)		(44	)(4)
Selling and marketing expense		(124	)		(124	)		(95	)		—			(29	)(5)
Bad debt expense		(79	)		(89	)		(56	)		10			(33	)(6)
Retail contribution margin		504			537			411			(33	)		126
Unrealized gains (losses) on energy derivatives		438			(287	)		(69	)		725	(7)		(218	)(8)
Total retail energy contribution margin, including unrealized gains/losses on energy derivatives(9)	$	942		$	250		$	342		$	692		$	(92	)

(1)	Decrease primarily due to lower volumes driven by (a) a change in customer usage and mix and (b) fewer number of customers.
(2)	Increase primarily due to higher unit margins (higher unit sales prices, partially offset by higher unit prices of purchased power at the time procurement).
(3)	Increase primarily due to (a) $18 million increase in salaries, contract services and professional fees and (b) $4 million for a technology licensing settlement. These increases were partially offset by (a) $4 million decrease in corporate allocations and (b) $4 million decrease in gross receipt tax.
(4)	Increase primarily due to (a) $26 million increase in gross receipts tax and (b) $12 million increase in contract services and professional fees.
(5)	Increase primarily due to additional marketing campaigns.
(6)	Increase primarily due to higher customer defaults in 2006 primarily due to increases in unit sales prices.
(7)	Increase primarily due to (a) $187 million of increased gains on energy derivatives which settled during the period, (b) $71 million of decreased losses from cash flow hedge ineffectiveness, (c) $372 million of decreased losses due to changes in prices on our derivatives marked to market and (d) $51 million of decreased losses resulting from the termination of commodity contracts with a counterparty.
(8)	Decrease primarily due to (a) $139 million loss due to cash flow hedge ineffectiveness and (b) $102 million loss due to the reversal of previously recognized unrealized gains resulting from the termination of commodity contracts with a counterparty. These decreases were partially offset by $85 million gain due to settlements.
(9)	Retail energy segment profit and loss measure.

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Wholesale Energy Segment

In analyzing the results of our wholesale energy segment, we use the non-GAAP financial measures “open energy gross margin,” “open wholesale gross margin” and “open wholesale contribution margin,” which exclude the items described below, as well as our wholesale energy segment profit and loss measure, “contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives.” Open energy gross margin, open wholesale gross margin and open wholesale contribution margin should not be relied upon without considering the GAAP financial measures. The items that are excluded from these non-GAAP financial measures have or have had a recurring effect on our earnings and reflect aspects of our business that are not taken into account by these measures.

Historical and Operational Wholesale Hedges.  We exclude the effect of certain historical, although recurring until the contracts terminate, wholesale hedges that were entered into in order to hedge the economics of a portion of our wholesale operations. These amounts primarily relate to settlements of forward power hedges, long-term tolling purchases, long-term natural gas transportation contracts not serving our generation assets and our legacy energy trading. We also exclude the effect of certain on-going operational wholesale hedges that were entered into primarily to mitigate certain operational risks at our generation assets. These amounts primarily relate to settlements of fuel hedges, long-term natural gas transportation contracts and storage contracts. Operational wholesale hedges are derived based on methodology consistent with the calculation of open energy gross margin. We believe that it is useful to us, investors, analysts and others to show our results in the absence of both historical and operational hedges. The impact of these hedges on our financial results is not a function of the operating performance of our generation assets, and excluding the impact better reflects the operating performance of our generation assets based on prevailing market conditions.

Unrealized Gains/Losses on Energy Derivatives.  We use derivative instruments to manage operational or market constraints and to increase the return on our generation assets. We are required to record in our consolidated statement of operations non-cash gains/losses related to future periods based on current changes in forward commodity prices for derivative instruments receiving mark-to-market accounting treatment. We refer to these gains and losses prior to settlement, as well as ineffectiveness on cash flow hedges, as “unrealized gains/losses on energy derivatives.” In some cases, the underlying transactions being hedged receive accrual accounting treatment, resulting in a mismatch of accounting treatments. Since the application of mark-to-market accounting has the effect of pulling forward into current periods non-cash gains/losses relating to and reversing in future delivery periods, analysis of results of operations from one period to another can be difficult. We believe that excluding these unrealized gains/losses on energy derivatives provides a more meaningful representation of our economic performance in the reporting period and is therefore useful to us, investors, analysts and others in facilitating the analysis of our results of operations from one period to another. These gains/losses are also not a function of the operating performance of our generation assets, and excluding their impact helps isolate the operating performance of our generation assets under prevailing market conditions.

Changes in California-Related Receivables and Reserves.  In 2005, we excluded the impact of changes in receivables and reserves relating to energy sales in California from October 2000 through June 2001. We reached a settlement concerning these receivables during the third quarter of 2005. Because of the market conditions and regulatory events that underlie the changes in these receivables and reserves, we believe that excluding this item provides a more meaningful representation of our results of operations on an ongoing basis and is therefore useful to us, investors, analysts and others in facilitating the analysis of our results of operations from one period to another. For additional information, see note 14(a) to our consolidated financial statements.

Our wholesale energy segment’s contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives was $524 million in 2007 compared to $146 million in 2006. The $378 million increase was primarily due to (a) reduced negative effect of historical and operational wholesale hedges of $284 million and (b) $184 million increase in open wholesale gross margin. These increases were partially offset by (a) net change in unrealized gains/losses on energy derivatives of

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$49 million and (b) $40 million increase in operation and maintenance expense. Our wholesale energy segment’s contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives was $146 million in 2006 compared to $110 million in 2005. The $36 million increase was primarily due to (a) net change in unrealized gains/losses on energy derivatives of $179 million and (b) reduced negative effect of historical and operational wholesale hedges of $108 million. These increases were partially offset by (a) $199 million decrease in open wholesale gross margin and (b) $55 million increase in operation and maintenance expense. See “—Wholesale Energy Margins” below for explanations.

Wholesale Energy Revenues.

								Change			Change
								from 2006			from 2005
	2007		2006		2005			to 2007			to 2006
	(in millions)
Wholesale energy third-party revenues	$	2,877	$	2,487	$	2,879		$	390	(1)	$	(392	)(2)
Wholesale energy intersegment revenues		394		571		625			(177	)(3)		(54	)
Subtotal		3,271		3,058		3,504			213			(446	)
Revenues—affiliates		127		—		—			127	(4)		—
Unrealized gains (losses) on energy derivatives		32		192		(218	)		(160	)(5)		410	(6)
Total wholesale energy revenues	$	3,430	$	3,250	$	3,286		$	180		$	(36	)

(1)	Increase primarily due to (a) higher power sales prices and (b) higher power sales volumes. These increases were partially offset by lower natural gas sales volumes.
(2)	Decrease primarily due (a) lower natural gas sales prices (related to gas transportation contracts) and (b) lower power sales prices. These decreases were partially offset by higher natural gas and power sales volumes.
(3)	Decrease primarily due to lower power sales volumes. This decrease was partially offset by (a) higher power sales prices and (b) higher natural gas sales volumes related to a tolling agreement.
(4)	We deconsolidated Channelview on August 20, 2007. These revenues represent sales of fuel to Channelview.
(5)	See footnote 23 under “Wholesale Energy Margins.”
(6)	See footnote 24 under “Wholesale Energy Margins.”

Wholesale Energy Cost of Sales.

								Change			Change
								from 2006			from 2005
	2007		2006		2005			to 2007			to 2006
	(in millions)
Wholesale energy third-party costs	$	2,138	$	2,371	$	2,725		$	(233	)(1)	$	(354	)(2)
Cost of sales—affiliates		105		—		—			105	(3)		—
Unrealized (gains) losses on energy derivatives		25		136		(95	)		(111	)(4)		231	(5)
Total wholesale energy cost of sales	$	2,268	$	2,507	$	2,630		$	(239	)	$	(123	)

(1)	Decrease primarily due to (a) lower purchased natural gas and power volumes and (b) lower purchased capacity.
(2)	Decrease primarily due to (a) lower prices paid for natural gas and purchased power and (b) lower oil volumes. These decreases were partially offset by (a) higher purchased natural gas volumes and (b) higher prices of coal.
(3)	We deconsolidated Channelview on August 20, 2007. These cost of sales represent purchases of power from Channelview.
(4)	See footnote 23 under “Wholesale Energy Margins.”
(5)	See footnote 24 under “Wholesale Energy Margins.”

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Wholesale Energy Margins.

										Change			Change
										from 2006			from 2005
	2007			2006			2005			to 2007			to 2006
	(in millions)
Open energy gross margin(1):
PJM Coal	$	609		$	530		$	641		$	79	(2)	$	(111	)(3)
MISO Coal		161			121			199			40	(4)		(78	)(5)
PJM/MISO Gas		50			44			61			6			(17	)
West		20			12			(10	)		8			22	(6)
Other		24			4			27			20	(7)		(23	)(8)
Total		864			711			918			153			(207	)
Other margin:(9) PJM Coal		56			29			40			27	(10)		(11	)
MISO Coal		14			8			7			6			1
PJM/MISO Gas		109			49			19			60	(11)		30	(12)
West		141			155			187			(14	)(13)		(32	)(14)
Other		63			111			91			(48	)(15)		20	(16)
Total		383			352			344			31			8
Open wholesale gross margin		1,247			1,063			1,262			184	(17)		(199	)(18)
Operation and maintenance		(639	)		(599	)		(544	)		(40	)(19)		(55	)(20)
Bad debt expense		1			2			(2	)		(1	)		4
Open wholesale contribution margin		609			466			716			143			(250	)
Historical and operational wholesale hedges		(92	)		(376	)		(484	)		284	(21)		108	(22)
Unrealized gains (losses) on energy derivatives		7			56			(123	)		(49	)(23)		179	(24)
Changes in California-related receivables and reserves		—			—			1			—			(1	)
Total wholesale energy contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives(25)	$	524		$	146		$	110		$	378		$	36

(1)	Open energy gross margin is calculated using the power sales prices received by the plants less delivered spot fuel prices. This figure excludes the effects of other margin, our historical and operational wholesale hedges and unrealized gains/losses on energy derivatives.
(2)	Increase primarily due to (a) higher open energy unit margins (higher power prices partially offset by higher fuel costs) and (b) higher economic generation.
(3)	Decrease primarily due to lower open energy unit margins (lower power prices partially offset by lower fuel costs). This decrease was partially offset by higher commercial capacity factor.
(4)	Increase primarily due to (a) higher open energy unit margins (higher power prices) and (b) higher economic generation. These increases were partially offset by lower commercial capacity factor primarily due to higher planned outages in 2007.
(5)	Decrease primarily due to lower open energy unit margins (lower power prices partially offset by lower fuel costs).
(6)	Increase primarily due to higher open energy unit margins (lower fuel costs partially offset by lower power prices) and increased economic generation. These increases were partially offset by lower commercial capacity factor.
(7)	Increase primarily due to higher open energy unit margins (higher power prices partially offset by higher fuel costs). This increase was partially offset by lower economic generation due primarily to the deconsolidation of Channelview on August 20, 2007.
(8)	Decrease primarily due to lower open energy unit margins (lower power prices partially offset by lower fuel costs).
(9)	Other margin represents power purchase agreements, capacity payments, ancillary services revenues and selective commercial hedge strategies.
(10)	Increase primarily due to (a) RPM capacity payments and (b) ancillary services revenues.
(11)	Increase primarily due to RPM capacity payments.
(12)	Increase primarily due to (a) higher capacity payments and (b) ancillary services revenues.

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(13)	Decrease primarily due to (a) fewer selective commercial hedge activities and (b) lower revenue from power purchase agreements. These decreases were partially offset by higher capacity payments.
(14)	Decrease primarily due to lower gains on selective commercial hedge activities.
(15)	Decrease primarily due to (a) the deconsolidation of Channelview on August 20, 2007 and (b) lower revenue from power purchase agreements.
(16)	Increase primarily due to higher revenue from power purchase agreements.
(17)	Increase primarily due to (a) higher open energy unit margins, (b) higher capacity payments and (c) higher economic generation. These increases were partially offset by lower commercial capacity factor due to higher planned outages in 2007.
(18)	Decrease primarily due to (a) lower open energy unit margins and (b) lower economic generation. These decreases were partially offset with higher commercial capacity factor in the PJM and MISO regions.
(19)	Increase primarily due to (a) $21 million increase in planned outages and maintenance spending and (b) $19 million increase in services and support primarily due to strategic initiatives for improving plant performance ($16 million). These increases were partially offset by decreases due to the deconsolidation of Channelview on August 20, 2007.
(20)	Increase primarily due to $46 million increase in planned outages and maintenance spending primarily at our coal plants.
(21)	Increase primarily due to (a) $134 million in higher margins on natural gas transportation and storage contracts, (b) $120 million decrease in losses on closed power hedges and (c) $23 million in higher margins on operational hedges.
(22)	Increase primarily due to a $387 million decrease in losses from power sales, resulting from a 41% decrease in hedged volumes and 55% decrease in the average loss on hedges, reduced by $187 million of losses on 2006 power hedges closed in the third quarter of 2005. This increase was partially offset by $98 million due to a decrease of coal market prices combined with an increase in coal contract prices.
(23)	Decrease primarily due to $75 million reduction in gains on energy derivatives which settled during the period, partially offset by $14 million gain due to change in prices on our derivatives marked to market.
(24)	Increase primarily due to (a) $113 million gain due to settlements and (b) $74 million gain due to changes in prices on our derivatives marked to market.
(25)	Wholesale energy segment profit and loss measure.

Other General and Administrative.

							Change			Change
							from 2006			from 2005
	2007		2006		2005		to 2007			to 2006
	(in millions)
Salaries and benefits	$	87	$	90	$	66	$	(3	)	$	24	(1)
Professional fees, contract services and information systems maintenance		38		29		22		9			7
Rent and utilities		21		20		20		1			—
Credit-enhanced retail structure fee		1		13		—		(12	)(2)		13	(2)
Legal costs		11		11		17		—			(6	)
Settlement of shareholder class action lawsuits		—		—		8		—			(8	)
Costs in connection with Channelview’s reorganization		3		—		—		3			—
Other, net		10		9		7		1			2
Other general and administrative	$	171	$	172	$	140	$	(1	)	$	32

(1)	Increase primarily due to impact of increased stock price on stock-based incentive plan expense.
(2)	See note 7 to our consolidated financial statements.

Western States and Similar Settlements. See note 14 to our consolidated financial statements.

28

Gains on Sales of Assets and Emission Allowances, Net.

								Change			Change
								from 2006			from 2005
	2007		2006		2005			to 2007			to 2006
	(in millions)
Equipment held in storage	$	24	$	—	$	—		$	24		$	—
Emission allowances		1		159		160			(158	)(1)		(1	)
REMA hydropower plants		—		—		12			—			(12	)
Landfill-gas fueled power plants		—		—		(4	)		—			4
Other, net		1		—		—			1			—
Gains on sales of assets and emission allowances, net	$	26	$	159	$	168		$	(133	)	$	(9	)

(1) Decrease primarily relates to our fundamental view compared to current to market prices. In the past few years, we sold some excess emission allowances. See “Business—Environmental Matters” in Item 1 of this Form 10-K.

Depreciation and Amortization.

							Change			Change
							from 2006			from 2005
	2007		2006		2005		to 2007			to 2006
	(in millions)
Depreciation on plants	$	269	$	247	$	264	$	22	(1)	$	(17	)(2)
Depreciation on information systems		35		50		76		(15	)(3)		(26	)(4)
Other, net—depreciation		5		6		11		(1	)		(5	)
Depreciation		309		303		351		6			(48	)
Amortization of emission allowances		110		65		90		45	(5)		(25	)(6)
Other, net—amortization		5		5		5		—			—
Amortization		115		70		95		45			(25	)
Depreciation and amortization	$	424	$	373	$	446	$	51		$	(73	)

(1)	Increase primarily due to early retirements of plant components when replacement components are installed for upgrades (from $9 million in 2006 to $29 million in 2007). This increase was partially offset by $5 million decrease related to Channelview, which was deconsolidated on August 20, 2007.
(2)	Decrease primarily due to early retirements of plant components when replacement components are installed for upgrades (from $23 million in 2005 to $9 million in 2006).
(3)	Decrease primarily due to assets becoming fully depreciated. This decrease was partially offset by depreciation on assets placed into service during 2007.
(4)	Decrease primarily due to assets becoming fully depreciated.
(5)	Increase primarily due to higher average cost of SO2 allowances purchased and used.
(6)	Decrease primarily due to lower average cost of SO2 and NOx allowances purchased and used.

Income of Equity Investments, Net.

								Change			Change
								from 2006			from 2005
	2007		2006		2005			to 2007			to 2006
	(in millions)
El Dorado Energy, LLC	$	—	$	—	$	20	(1)	$	—		$	(20	)
Sabine Cogen, LP		5		6		6			(1	)		—
Income of equity investments, net	$	5	$	6	$	26		$	(1	)	$	(20	)

(1) We sold this investment in 2005. See note 20 to our consolidated financial statements.

Debt Extinguishments and Conversions. See note 6 to our consolidated financial statements.

29

Other, Net.

									Change			Change
									from 2006			from 2005
	2007			2006		2005			to 2007			to 2006
	(in millions)
Impairment of investments	$	(3	)	$	—	$	(23	)(1)	$	(3	)	$	23
Other, net		3			—		—			3			—
Other, net	$	—		$	—	$	(23	)	$	—		$	23

(1) See note 19 to our consolidated financial statements.

Interest Expense.

										Change			Change
										from 2006			from 2005
	2007			2006			2005			to 2007			to 2006
	(in millions)
Fixed-rate debt	$	235		$	249		$	249		$	(14	)(1)	$	—
Deferred financing costs		51			32			15			19	(2)		17	(2)
Fees for MWh’s delivered under credit-enhanced retail structure		26			2			—			24	(3)		2	(3)
Channelview		16			25			25			(9	)(4)		—
Variable-rate debt		14			88			67			(74	)(5)		21	(6)
Financing fees expensed		12			27			30			(15	)		(3	)
Unrealized losses on derivatives		5			11			16			(6	)		(5	)
Capitalized interest		(4	)		—			—			(4	)		—
Amortization of fair value adjustment of acquired debt		(11	)		(9	)		(9	)		(2	)		—
Other, net		5			3			6			2			(3	)
Interest expense	$	349		$	428		$	399		$	(79	)	$	29

(1)	Decrease primarily due to decrease in outstanding debt principal balances.
(2)	See notes 2(p) and 6 to our consolidated financial statements.
(3)	See note 7 to our consolidated financial statements.
(4)	Decrease primarily due to the deconsolidation of Channelview on August 20, 2007.
(5)	Decrease primarily due to $76 million due to decrease in outstanding debt principal balances.
(6)	Increase primarily due to $16 million due to increase in rates and $5 million due to increase in outstanding debt principal balances.

Interest Income.

							Change			Change
							from 2006			from 2005
	2007		2006		2005		to 2007			to 2006
	(in millions)
Interest on temporary cash investments	$	25	$	6	$	3	$	19	(1)	$	3
Net margin deposits		8		27		13		(19	)(2)		14
Interest on California net receivables		—		—		6		—			(6	)
Other, net		1		1		1		—			—
Interest income	$	34	$	34	$	23	$	—		$	11

(1)	Increase primarily due to increase in cash equivalents due to (a) the return of net margin deposits as a result of the credit-enhanced retail structure that became effective on December 1, 2006 and (b) cash flows from operations. See note 7.
(2)	Decrease primarily due to the credit-enhanced retail structure that became effective on December 1, 2006.

Income Tax Expense (Benefit). See note 11 to our consolidated financial statements.

Income (Loss) from Discontinued Operations. See note 22 to our consolidated financial statements.

30

Liquidity and Capital Resources

Sources of Liquidity and Capital Resources

Our principal sources of liquidity and capital resources are cash flows from operations, borrowings, net proceeds from asset sales and securities offerings. For a description of factors that could affect our liquidity and capital resources, see “Risk Factors” in Item 1A of this Form 10-K and the discussion of restrictive covenants in notes 6 and 7 to our consolidated financial statements.

During 2007, we generated $755 million in operating cash flows from continuing operations, including the changes in margin deposits of $297 million (cash inflow) and $57 million in payments relating to the Western states and similar settlements (cash outflow). We expect to continue to have positive operating cash flow into 2008 and 2009. See “—Historical Cash Flows” for further detail of our cash flows from operating activities and explanation around our $179 million use of cash from investing activities and $292 million use of cash from financing activities.

As of February 15, 2008, we had total available liquidity of $1.6 billion, comprised of unused borrowing capacity, letters of credit capacity and cash and cash equivalents. Of this amount, $300 million is only available to our retail business through our working capital facility agreement with Merrill Lynch. In addition, Merrill Lynch provides financial support that significantly reduces the liquidity requirements and substantially eliminates collateral postings for our retail business. See note 7 to our consolidated financial statements.

Liquidity and Capital Requirements

Our liquidity and capital requirements primarily reflect our working capital needs, capital expenditures, discretionary debt extinguishments, debt service and collateral requirements. Examples of working capital needs include purchases of fuel and electricity, purchases of emission allowances, plant maintenance costs (including environmental expenditures) and payroll costs. Settlement costs associated with litigation and regulatory proceedings can also have a significant impact on our liquidity and cash requirements. For settlements, see note 14 to our consolidated financial statements.

In June 2007, we refinanced a significant portion of our senior secured debt as an initial step towards creating a capital structure that gives us increased flexibility to direct cash flow and additional capital to alternatives that we believe will create the greatest stockholder value. We are evaluating various alternatives to address restrictions remaining in our 6.75% senior secured notes and our tax-exempt PEDFA bonds. See note 6 to our consolidated financial statements.

Capital Requirements.  The following table provides information about our actual and estimated future capital requirements:

	2007		2008			2009			2010
	(in millions)
Maintenance capital expenditures:
Retail energy	$	14	$	19	(1)	$	14	(1)	$	14	(1)
Wholesale energy(2)		55		56			67			54
Other operations		16		3			7			6
		85		78			88			74
Environmental		100		261			115			26	(3)
Capitalized interest		4		22			37			13
Total capital expenditures	$	189	$	361		$	240		$	113

(1)	We are currently evaluating investing in our “Smart Energy” initiative, which could result in capital expenditures. However, no estimate for this potential investment is included in the table as the amounts are not yet reasonably estimatable.
(2)	Excludes $8 million for 2008 through 2014 for pre-existing environmental conditions and remediation, which have been accrued for in our consolidated balance sheet as of December 31, 2007.

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(3) We have estimated environmental capital expenditures of $26 million to $53 million for 2010 and have included the low end of the range in the table.

Contractual Obligations.  The following table includes our obligations and commitments to make future payments under contracts as of December 31, 2007:

			Less than		One to		Three to		More than
Contractual Obligations	Total		One Year		Three Years		Five Years		Five Years
	(in millions)
Debt, including credit facilities(1)	$	5,177	$	271	$	836	$	362	$	3,708
Other commodity commitments(2)		1,543		255		359		233		696
Derivative liabilities		623		436		132		49		6
REMA operating lease payments		1,059		62		115		119		763
Maintenance agreements obligations		704		14		37		68		585
Other operating lease payments		467		76		154		100		137
Plant and equipment commitments(3)		296		240		56		—		—
Other(4)		435		46		77		64		248
Total contractual cash obligations	$	10,304	$	1,400	$	1,766	$	995	$	6,143

(1)	Includes interest payments.
(2)	Includes commitments with both fixed and variable pricing components. See note 12(c) to our consolidated financial statements.
(3)	These amounts are included in the capital requirements table above under either maintenance capital expenditures for wholesale energy or environmental.
(4)	Includes stadium naming rights, credit-enhanced retail structure fee on sales commitments, estimated pension and post retirement benefit payments and other contractual obligations.

As of December 31, 2007, we have estimated minimum sales commitments over the next five years, which are not classified as derivative assets and liabilities, of (in millions):

2008	$	3,269
2009		2,551
2010		1,634
2011		1,049
2012		758
Total(1)	$	9,261

(1) Includes sales commitments with both fixed and variable pricing components. See note 12(c) to our consolidated financial statements.

Contingencies and Guarantees.  We are involved in a number of legal, environmental and other proceedings before courts and are subject to ongoing investigations by certain governmental agencies that could negatively impact our liquidity. See notes 13 and 14 to our consolidated financial statements.

We also enter into guarantee and indemnification arrangements in the normal course of business, none of which is expected to materially impact our liquidity. See note 12(b) to our consolidated financial statements.

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Credit Risk

By extending credit to our counterparties, we are exposed to credit risk. For a discussion of our credit risk and policy, see note 2(e) to our consolidated financial statements.

As of December 31, 2007, our derivative assets and accounts receivable from our wholesale energy and retail energy power supply counterparties, after taking into consideration netting within each contract and any master netting contracts with counterparties, are:

	Exposure		Credit			Exposure		Number of		Net Exposure of
	Before		Collateral			Net of		Counterparties		Counterparties
Credit Rating Equivalent	Collateral(1)		Held(2)			Collateral		>10%(3)		>10%(3)
	(Dollars in millions)
Investment grade	$	142	$	(17	)	$	125		—	$	—
Non-investment grade		233		—			233		2		206
No external ratings:(4)
Internally rated—Investment grade		45		—			45		—		—
Internally rated—Non-investment grade		13		(3	)		10		—		—
Total	$	433	$	(20	)	$	413		2	$	206

(1)	The table excludes amounts related to contracts classified as normal purchase/normal sale and non-derivative contractual commitments that are not recorded in our consolidated balance sheets, except for any related accounts receivable. Such contractual commitments contain credit and economic risk if a counterparty does not perform. Nonperformance could have a material adverse impact on our future results of operations, financial condition and cash flows.
(2)	Collateral consists of cash, standby letters of credit and other forms approved by management.
(3)	See note 2(e) to our consolidated financial statements.
(4)	For unrated counterparties, we perform credit analyses including review of financial statements, contractual rights and restrictions and credit support such as parent company guarantees to create an internal credit rating.

Off-Balance Sheet Arrangements

As of December 31, 2007, we have no off-balance sheet arrangements. For information regarding our principles of consolidation, see note 2(b) to our consolidated financial statements.

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Historical Cash Flows

Cash Flows—Operating Activities

2007 Compared to 2006 and 2006 Compared to 2005.

										Change			Change
										From 2006			From 2005
	2007			2006			2005			to 2007			to 2006
	(in millions)
Operating income (loss)	$	876		$	(24	)	$	(321	)	$	900		$	297
Depreciation and amortization		424			373			446			51			(73	)
Gains on sales of assets and emission allowances, net		(26	)		(159	)		(168	)		133			9
Net changes in energy derivatives		(393	)(1)		317	(2)		192	(3)		(710	)		125
Western states and similar settlements		—			35			359			(35	)		(324	)
Western states and similar settlements payments		(35	)		(160	)		—			125			(160	)
Margin deposits, net		297			1,264	(4)		(1,214	)(5)		(967	)		2,478
Settlements of exchange transactions prior to contractual period(6)		(9	)		22			(8	)		(31	)		30
Net option premiums sold (purchased)		(23	)		(53	)		3			30			(56	)
Interest payments		(345	)		(385	)		(347	)		40			(38	)
Change in accounts and notes receivable and accounts payable, net		20			32			35			(12	)		(3	)
Income tax payments, net of refunds		(28	)		(29	)		(22	)		1			(7	)
Other, net		(3	)		97			(65	)		(100	)		162
Net cash provided by (used in) continuing operations from operating activities		755			1,330			(1,110	)		(575	)		2,440
Net cash provided by (used in) discontinued operations from operating activities		7			(54	)		193			61			(247	)
Net cash provided by (used in) operating activities	$	762		$	1,276		$	(917	)	$	(514	)	$	2,193

(1)	Includes unrealized gains on energy derivatives of $445 million.
(2)	Includes unrealized losses on energy derivatives of $231 million.
(3)	Includes unrealized losses on energy derivatives of $192 million.
(4)	Change primarily due to our credit-enhanced retail structure and the expiration of certain hedges.
(5)	Change primarily due to both a decrease in net unrealized value of our broker accounts and increased counterparty obligations.
(6)	Represents exchange transactions financially settled in three business days prior to the contractual delivery month.

34

Cash Flows—Investing Activities

2007 Compared to 2006 and 2006 Compared to 2005.

										Change			Change
										from 2006			from 2005
	2007			2006			2005			to 2007			to 2006
	(in millions)
Capital expenditures	$	(189	)	$	(97	)	$	(82	)	$	(92	)(1)	$	(15	)
Proceeds from sales of assets, net(2)		82			1			149	(3)		81			(148	)
Proceeds from sales of emission allowances(2)(4)		7			205			234			(198	)		(29	)
Purchases of emission allowances(4)		(92	)		(23	)		(146	)		(69	)		123
Restricted cash		7			2			14			5			(12	)
Other, net		6			1			6			5			(5	)
Net cash provided by (used in) continuing operations from investing activities		(179	)		89			175			(268	)		(86	)
Net cash provided by discontinued operations from investing activities		—			968	(5)		131	(6)		(968	)		837
Net cash provided by (used in) investing activities	$	(179	)	$	1,057		$	306		$	(1,236	)	$	751

(1)	Increase primarily due to environmental capital expenditures for NOx and SO2 emission reductions at two of our facilities beginning in 2007.
(2)	See note 20 to our consolidated financial statements.
(3)	Includes $76 million, $42 million and $28 million related to sales of El Dorado, REMA hydropower plants and landfill-gas fueled power plants, respectively.
(4)	See “Business—Environmental Matters” in Item 1 of this Form 10-K.
(5)	Includes $952 million of net cash proceeds from the sale of New York plants.
(6)	Includes $100 million of net cash proceeds from the sale of Ceredo.

35

Cash Flows—Financing Activities

2007 Compared to 2006 and 2006 Compared to 2005.

										Change			Change
										from 2006			from 2005
	2007			2006			2005			to 2007			to 2006
	(in millions)
Proceeds from issuance of senior unsecured notes	$	1,300		$	—		$	—		$	1,300		$	—
Payments of senior secured notes		(1,126	)		—			—			(1,126	)		—
Net proceeds from (payments on) senior secured term loans		(400	)		(452	)		190			52			(642	)
Net borrowings under (payments on) receivables facility		—			(450	)		223			450			(673	)
Net borrowings under (payments on) senior secured revolver		—			(383	)		184			383			(567	)
Payments under REMA’s term loans		—			—			(28	)		—			28
Proceeds from issuances of stock		41			25			37			16			(12	)
Payments of debt extinguishments and conversions expenses		(73	)		(36	)		—			(37	)		(36	)
Payments of financing costs		(31	)		(17	)		(1	)		(14	)		(16	)
Other, net		(3	)		(6	)		(11	)		3			5
Net cash provided by (used in) continuing operations from financing activities		(292	)		(1,319	)		594			1,027			(1,913	)
Net cash used in discontinued operations from financing activities		—			(638	)		—			638			(638	)
Net cash provided by (used in) financing activities	$	(292	)	$	(1,957	)	$	594		$	1,665		$	(2,551	)

New Accounting Pronouncements, Significant Accounting Policies and Critical Accounting Estimates

New Accounting Pronouncements

See notes 2 and 11 to our consolidated financial statements.

Significant Accounting Policies

See note 2 to our consolidated financial statements.

Critical Accounting Estimates

We make a number of estimates and judgments in preparing our consolidated financial statements. These estimates can differ from actual results and have a significant impact on our recorded assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We consider an estimate to be a critical accounting estimate if it requires a high level of subjectivity or judgment and a significant change in the estimate would have a material impact on our financial condition or results of operations. Each critical accounting estimate affects both our retail energy and wholesale energy segments, unless indicated otherwise. The Audit Committee of our Board of Directors reviews each critical accounting estimate with our senior management. Further discussion of these accounting policies and estimates is in the notes to our consolidated financial statements.

36

Fair Value.

Goodwill.  We consider the estimate of fair value to be a critical accounting estimate for our wholesale energy segment because (a) a goodwill impairment could have a material impact on our financial position and results of operations and (b) the estimate is based on a number of highly subjective judgments and assumptions. See notes 2(h) and 4 to our consolidated financial statements.

Property, Plant and Equipment.  We consider the fair value estimate used to calculate impairment of property, plant and equipment a critical accounting estimate. This estimate primarily affects our wholesale energy segment, which holds approximately 98% of our total net property, plant and equipment. See note 2(g) to our consolidated financial statements. In determining the existence of an impairment in carrying value, we make a number of subjective assumptions as to:

•  whether there is an indication of impairment;

•  the grouping of assets;

•  the intention of “holding” versus “selling” an asset;

•  the forecast of undiscounted expected future cash flow over the asset’s estimated useful life; and

•  if an impairment exists, the fair value of the asset or asset group.

Derivative Assets and Liabilities.  We report our derivative assets and liabilities, for which the normal purchase/normal sale exception has not been made, at fair value and consider it to be a critical accounting estimate because they are highly susceptible to change from period to period and are dependent on many subjective factors, including:

•  estimated forward market price curves;

•  valuation adjustments relating to time value;

•  liquidity valuation adjustments;

•  costs of administering future obligations under existing contracts; and

•  credit adjustments, based on estimated defaults by counterparties.

To determine the fair value for energy derivatives where there are no market quotes or external valuation services, we rely on various modeling techniques. We use a variety of valuation models, which vary in complexity depending on the contractual terms of, and inherent risks in, the instrument being valued. We use both industry-standard models as well as internally developed proprietary valuation models that consider various assumptions such as market prices for power and fuel, market implied heat rates, load and price shapes, ancillary services, volatilities and correlations as well as other relevant factors as may be deemed appropriate. There is inherent risk in valuation modeling given the complexity and volatility of energy markets. Therefore, it is possible that results in future periods may be materially different as contracts are ultimately settled.

For additional information regarding our derivative assets and liabilities, see notes 2(d) and 5 to our consolidated financial statements and “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this Form 10-K.

Retail Energy Segment Estimated Revenues and Energy Supply Costs.

Accrued Unbilled Revenues.  Accrued unbilled revenues of $435 million as of December 31, 2007 represented 4% of our consolidated revenues and 5% of our retail energy segment’s revenues for 2007. Accrued unbilled revenues of $416 million as of December 31, 2006 represented 4% of our consolidated revenues and 5% of our retail energy segment’s revenues for 2006.

Accrued unbilled revenues are critical accounting estimates as volumes are not precisely known at the end of each reporting period and the revenue amounts are material. If our estimate of electricity usage were to

37

increase or decrease by 3%, our accrued unbilled revenues as of December 31, 2007 would have increased or decreased by approximately $13 million.

Estimated Energy Supply Costs.  We record energy supply costs for electricity sales and services to retail customers based on estimated supply volumes for the applicable reporting period. This is a critical accounting estimate as volumes are not known at the end of each reporting period and the purchased power amounts are material.

A portion of our energy supply costs ($74 million and $61 million as of December 31, 2007 and 2006, respectively) consisted of estimated transmission and distribution charges not yet billed by the transmission and distribution utilities.

In estimating supply volumes, we consider the effects of historical customer volumes, weather factors and usage by customer class. We estimate our transmission and distribution delivery fees using the same method that we use for electricity sales and services to retail customers. In addition, we estimate ERCOT ISO fees based on historical trends, estimated supply volumes and initial ERCOT ISO settlements. Volume estimates are then multiplied by the supply rate and recorded as purchased power in the applicable reporting period. If our estimate of electricity usage volumes increased or decreased by 3%, our energy supply costs would have increased or decreased by approximately $12 million as of December 31, 2007. Changes in our volume usage would have resulted in a similar offsetting change in billed volumes, thus partially mitigating our energy supply costs.

Dependence on ERCOT ISO Settlement Procedures.  Preliminary settlement information is due from the ERCOT ISO within two months after electricity is delivered. Final settlement information is due from the ERCOT ISO within six months after electricity is delivered. The six month settlement received from ERCOT is considered final as ERCOT will only resettle if there are data errors greater than 2% of that day’s transaction dollars or if alternate dispute resolutions are granted. We record our estimated supply costs and related fees using estimated supply volumes, as discussed above, and adjust those costs upon receipt of the ERCOT ISO information. Delays in settlements could materially affect the accuracy of our recorded energy supply costs and related fees.

Loss Contingencies.

We record loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. We consider loss contingency estimates to be critical accounting estimates because they entail significant judgment regarding probabilities and ranges of exposure, and the ultimate outcome of the proceedings is unknown and could have a material adverse effect on our results of operations, financial condition and cash flows. See notes 13 and 14 to our consolidated financial statements.

Deferred Tax Assets, Valuation Allowances and Tax Liabilities.

We estimate (a) income taxes in the jurisdictions in which we operate, (b) net deferred tax assets and liabilities based on expected future taxes in the jurisdictions in which we operate, (c) valuation allowances for deferred tax assets and (d) uncertain income tax positions. These estimates are considered critical accounting estimates because they require projecting future operating results (which is inherently imprecise) and judgments related to the ultimate determination of tax positions by taxing authorities. Also, these estimates depend on assumptions regarding our ability to generate future taxable income during the periods in which temporary differences are deductible. See note 11 to our consolidated financial statements for additional information.

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.

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Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

Market Risks and Risk Management

Our primary market risk exposure relates to fluctuations in commodity prices. We also have market risk exposure related to changes in interest rates. As described in notes 2(d) and 2(e) to our consolidated financial statements, we have a risk control framework to manage our risk exposure. However, the effectiveness of this framework can never be completely estimated or fully assured. For example, we could experience volatility in earnings from basis price differences, transmission issues, price correlation issues, volume variation or other factors. In addition, a reduction in market liquidity may impair the effectiveness of our risk management practices and resulting hedge strategies. These and other factors could have a material adverse effect on our results of operations, financial condition and cash flows.

Non-trading Market Risks

Commodity Price Risk

Changes in commodity prices prior to the energy delivery period are inherent in our wholesale and retail energy businesses. We use derivative instruments such as futures, forwards, swaps and options to execute our wholesale hedge strategy and retail supply procurement strategy.

As of December 31, 2007, the fair values of the contracts related to our net non-trading derivative assets and liabilities are:

																2013 and			Total
Source of Fair Value	2008			2009			2010			2011			2012			Thereafter			Fair Value
	(in millions)
Prices actively quoted(1)	$	1		$	—		$	—		$	(1	)	$	13		$	—		$	13
Prices provided by other external sources(2)		(114	)		21			(14	)		—			—			—			(107	)
Prices based on models and other valuation methods(3)		(63	)		(13	)		24			1			(3	)		(6	)		(60	)
Total mark-to-market non-trading derivatives		(176	)		8			10			—			10			(6	)		(154	)
Cash flow hedges(4)		(63	)		(35	)		(35	)		(32	)		(19	)		—			(184	)
Total	$	(239	)	$	(27	)	$	(25	)	$	(32	)	$	(9	)	$	(6	)	$	(338	)

(1)	Represents our NYMEX futures positions in natural gas, crude oil and power, which have quoted prices for the next 72, 30 and 36 months, respectively.
(2)	Represents our forward positions in natural gas, coal and crude oil and power at points for which over-the-counter market broker quotes are available, which on average, extend 24 or 36 months into the future. Positions are valued against internally developed forward market price curves that are validated and recalibrated against over-the-counter broker quotes. This category includes some transactions whose prices are obtained from external sources and then modeled to hourly, daily or monthly prices, as appropriate.
(3)	Represents the value of (a) our valuation adjustments for liquidity, credit and administrative costs, (b) options or structured transactions not quoted by an exchange or over-the-counter broker, but for which the prices of the underlying position are available and (c) transactions for which an internally developed price curve was constructed as a result of the long-dated nature of the transaction or the illiquidity of the market point.
(4)	As of December 31, 2007, all previously designated cash flows hedges have been de-designated. See notes 2(d) and 5 to our consolidated financial statements.

The fair values shown in the table above are subject to significant changes due to fluctuating commodity forward market prices, volatility and credit risk. Market prices assume a functioning market with an adequate number of buyers and sellers to provide liquidity. Insufficient market liquidity could significantly affect the values that could be obtained for these contracts, as well as the costs at which these contracts could be hedged.

39

A hypothetical 10% movement in the underlying energy prices would have the following potential gain (loss) impacts on our non-trading derivatives:

		Fair Value of
		Cash Flow		Earnings Impact of			Total Potential
As of December 31,	Market Prices	Hedges		Other Derivatives			Loss in Fair Value
2007	10% decrease	$	—	$	(353	)	$	(353	)
2006	10% decrease		33		(328	)		(295	)

This risk analysis does not include the favorable impact that the same hypothetical price movements would have on our physical purchases and sales of fuel and power to which the hedges relate. The adverse impact of changes in commodity prices on our portfolio of non-trading energy derivatives would be offset (although not necessarily in the same period) by a favorable impact on the underlying physical transactions, assuming:

•  the derivatives are not closed out in advance of their expected term;

•  the derivatives continue to function effectively as hedges of the underlying risk; and

•  as applicable, anticipated underlying transactions settle as expected.

If any of these assumptions cease to be true, we may experience a benefit or loss relative to the underlying exposure. See notes 2(d) and 5 to our consolidated financial statements.

Interest Rate Risk

We remain subject to the benefits or losses associated with movements in market interest rates related to certain variable rate debt, cash, cash equivalents and margin deposits, which are most vulnerable to changes in the federal funds rate. As we deconsolidated Channelview on August 20, 2007 and have no borrowings under our senior secured revolver or retail working capital facility, we have no variable rate debt outstanding as of December 31, 2007.

We assess interest rate risks using a sensitivity analysis that measures the potential change in our interest expense/income based on a hypothetical one percentage point movement in the underlying variable interest rate indices. If interest rates increased/decreased by one percentage point, our annual interest expense would have increased/decreased for 2007 by $4 million and our annual interest income, net of interest expense would have increased/decreased by $2 million. If interest rates increased/decreased by one percentage point, our annual interest expense would have increased/decreased for 2006 by $15 million and our annual interest expense, net of interest income, would have increased/decreased by $8 million.

We estimated these amounts by considering the impact of hypothetical changes in interest rates on our variable-rate debt, cash and cash equivalents and net margin deposits based on average balances throughout the respective year.

If interest rates decreased by one percentage point from their December 31, 2007 and 2006 levels, the fair market values of our fixed-rate debt would have increased by $201 million and $189 million, respectively.

Trading Market Risks

Prior to March 2003, we engaged in proprietary trading activities as discussed in note 5 to our consolidated financial statements. 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.

40

As of December 31, 2007, the fair values of the contracts related to our legacy trading positions and recorded as net derivative assets and liabilities are:

													2013 and		Total
Source of Fair Value	2008			2009			2010		2011		2012		Thereafter		Fair Value
	(in millions)
Prices actively quoted	$	(31	)	$	(12	)	$	—	$	—	$	—	$	—	$	(43	)
Prices provided by other external sources		48			14			—		—		—		—		62
Prices based on models and other valuation methods		—			—			—		—		—		—		—
Total	$	17		$	2		$	—	$	—	$	—	$	—	$	19

The fair values in the above table are subject to significant changes based on fluctuating market prices and conditions. For further discussion of items that impact our portfolio of trading contracts and an explanation of the sources of fair value, see the discussion related to non-trading derivative assets and liabilities.

Our consolidated realized and unrealized amounts relating to these positions are (income (loss)):

	2007		2006
	(in millions)
Realized	$	8	$	(3	)
Unrealized		11		30
Total	$	19	$	27

An analysis of these net derivative assets and liabilities is:

	2007			2006
	(in millions)
Fair value of contracts outstanding, beginning of period	$	9		$	(20	)
Contracts realized or settled		(10	)(1)		(2	)(2)
Changes in valuation techniques		—			(8	)
Changes in fair values attributable to market price and other market changes		20			39
Fair value of contracts outstanding, end of period Total	$	19		$	9

(1)	Amount includes realized gain of $8 million and deferred settlements of $2 million.
(2)	Amount includes realized loss of $3 million offset by deferred settlements of $5 million.

We primarily assess the risk of our legacy trading positions using a value-at-risk method to maintain our total exposure within limits set by the Audit Committee. Value-at-risk is the potential loss in value of trading positions due to adverse market movements over a defined time period within a specified confidence level. We use the parametric variance/covariance method with delta/gamma approximation to calculate value-at-risk.

Our value-at-risk model utilizes four major parameters:

•  Confidence level—95% for natural gas and petroleum products and 99% for power products;

•  Volatility—calculated daily from historical forward prices using the exponentially weighted moving average method;

•  Correlation— calculated daily from daily volatilities and historical forward prices using the exponentially weighted moving average method; and

•  Holding period—natural gas and petroleum products generally have two day-holding periods. Power products have holding periods of five to 20 days based on the risk profile of the portfolio and the liquidation period.

While we believe that our value-at-risk assumptions and approximations are reasonable, different assumptions and/or approximations could produce materially different estimates. An inherent limitation of

41

value-at-risk is that past market risk may not produce accurate predictions of future market risk. In addition, value-at-risk calculated for a specified holding period does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within that specified period. Future transactions, market volatility, reduction of market liquidity, failure of counterparties to satisfy their contractual obligations and/or a failure of risk controls could result in material losses from our legacy trading positions.

The daily value-at-risk for our legacy trading positions is:

	2007		2006
	(in millions)
As of December 31	$	1	$	2
Year Ended December 31:
Average		3		3
High		5		7
Low		1		1

Item 8.   Financial Statements and Supplementary Data.

The information required by this Item is incorporated by reference from the consolidated financial statements beginning on page F-1.

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.   Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, these officers have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

Management’s Annual Report on Internal Control Over Financial Reporting

The information required by this Item is incorporated by reference from “Reliant Energy, Inc.’s Report on Internal Control Over Financial Reporting” on page F-1.

Changes in Internal Control Over Financial Reporting

In connection with the evaluation described above, we identified no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during our fiscal quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information.

None.

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PART III

Item 10.   Directors, Executive Officers and Corporate Governance.

See “Business—Executive Officers” in Item 1 of this Form 10-K. Pursuant to General Instruction G to Form 10-K, we incorporate by reference the information to be disclosed in our definitive proxy statement for the annual stockholder meeting at which we will elect directors (Proxy Statement).

Item 11.   Executive Compensation.

Pursuant to General Instruction G to Form 10-K, we incorporate by reference into this Item 11 the information to be disclosed in our Proxy Statement.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Equity Compensation Plan Information

The following table provides information as of December 31, 2007 regarding our equity compensation plans.

	(a)			(b)		(c)
						Number of Securities
						Remaining Available for
	Number of			Weighted-Average		Future Issuance Under
	Securities to Be Issued			Exercise Price of		Equity Compensation Plans
	Upon Exercise of			Outstanding		(Excluding Securities
	Outstanding Options,			Options, Warrants		Reflected
	Warrants and Rights			and Rights(1)		in Column (a))
Equity compensation plans approved by security holders(2)		8,360,073	(3)	$	13.56		24,747,036	(4)
Equity compensation plans not approved by security holders(5)		1,404,979	(6)	$	8.28		3,659,039
Total		9,765,052		$	13.07		28,406,075

(1)	The weighted average exercise prices exclude shares issuable under outstanding time-based restricted stock units (which do not have an exercise price).
(2)	Plans approved by stockholders include the Reliant Energy, Inc. Employee Stock Purchase Plan, the 2002 Long-Term Incentive Plan, the Long-Term Incentive Plan of Reliant Energy, Inc. and the Reliant Energy, Inc. Transition Stock Plan.
(3)	This amount includes 7,990,551 shares issuable upon the exercise of outstanding stock options and 369,322 shares issuable pursuant to outstanding restricted stock units granted under the 2002 Long-Term Incentive Plan.
(4)	Includes stockholder approved reserves of 9,899,115 shares as of December 31, 2007 that may be issued under the Employee Stock Purchase Plan and 14,847,921 shares that may be issued under the 2002 Long-Term Incentive Plan. Under the 2002 Long-Term Incentive Plan, no more than 25% of the shares available for future issuance are available for grant as awards of restricted stock and non-restricted awards of common stock or units denominated in common stock. No additional shares may be issued under the Long-Term Incentive Plan of Reliant Energy, Inc. or the Reliant Energy, Inc. Transition Stock Plan.
(5)	The Reliant Energy Inc. 2002 Stock Plan permits grants of stock options, stock appreciation rights, performance based stock awards, time-based stock awards and cash awards to all employees other than the executive officers subject to the reporting requirements of Section 16(a) of the Exchange Act. The Board authorized 6,000,000 shares for grant upon adoption of the 2002 Stock Plan. To the extent these 6,000,000 shares were not granted in 2002, the excess shares were cancelled. In January 2003, an additional 6,000,000 shares were authorized for the plan, with no more than 25% of these shares available for grant as awards of restricted stock and non-restricted awards of common stock or units denominated in common stock. The total number of shares available for future issuance is adjusted for new grants, exercises, forfeitures, cancellations and terminations of outstanding awards.
(6)	This amount includes 817,328 shares issuable upon the exercise of outstanding stock options and 587,651 shares issuable pursuant to outstanding restricted stock units.

Pursuant to General Instruction G to Form 10-K, we incorporate by reference into this Item 12 the information to be disclosed in our Proxy Statement under the captions “Stock Ownership of Certain Beneficial Owners and Management—Directors and Executive Officers, and—Principal Stockholders.”

Item 13.   Certain Relationships and Related Transactions, and Director Independence.

Item 14.   Principal Accountant Fees and Services.

Pursuant to General Instruction G to Form 10-K, we incorporate by reference into each of these Items 13 and 14 the information to be disclosed in our Proxy Statement.

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PART IV

Item 15.   Exhibits and Financial Statement Schedules.

(a) List of Documents Filed as Part of this Report

(1)   Index to Consolidated Financial Statements of Reliant Energy, Inc. and Subsidiaries.

Reliant Energy, Inc.’s Report on Internal Control Over Financial Reporting	F-1
Report of Independent Registered Public Accounting Firm	F-2
Report of Independent Registered Public Accounting Firm	F-3
Report of Independent Registered Public Accounting Firm	F-4
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005	F-5
Consolidated Balance Sheets as of December 31, 2007 and 2006	F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	F-7
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2007, 2006 and 2005	F-8
Notes to Consolidated Financial Statements	F-9

(2)   Financial Statement Schedule.

Schedule II—Reliant Energy, Inc. and Subsidiaries—Valuation and Qualifying Accounts for 2007, 2006 and 2005 F-66

The following schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements: III, IV and V.

The following financial statements are included in this report pursuant to Item 3-16 of Regulation S-X:

Consolidated Financial Statements of RERH Holdings, LLC and Subsidiaries.
Report of Independent Registered Public Accounting Firm	F-67
Consolidated Statement of Operations for the Years Ended December 31, 2007 and 2006	F-68
Consolidated Balance Sheets as of December 31, 2007 and 2006	F-69
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006	F-70
Consolidated Statements of Members’ Equity and Comprehensive Income for the Years Ended December 31, 2007 and 2006	F-71
Notes to Consolidated Financial Statements	F-72
Consolidated Financial Statements of Reliant Energy Retail Holdings, LLC and Subsidiaries.
Report of Independent Registered Public Accounting Firm	F-85
Consolidated Statement of Operations for the Years Ended December 31, 2005	F-86
Consolidated Statement of Cash Flows for the Year Ended December 31, 2005	F-87
Consolidated Statement of Member’s Equity and Comprehensive Income for the Year Ended December 31, 2005	F-88
Notes to Consolidated Financial Statements	F-89
Consolidated Financial Statements of Reliant Energy Mid-Atlantic Power Holdings, LLC and Subsidiaries.
Report of Independent Registered Public Accounting Firm	F-101
Report of Independent Registered Public Accounting Firm	F-102
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005	F-103
Consolidated Balance Sheets as of December 31, 2007 and 2006	F-104
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	F-105

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Consolidated Statements of Member’s Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2007, 2006 and 2005	F-106
Notes to Consolidated Financial Statements	F-107
Consolidated Financial Statements of Orion Power Holdings, Inc. and Subsidiaries.
Report of Independent Registered Public Accounting Firm	F-125
Report of Independent Registered Public Accounting Firm	F-126
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005	F-127
Consolidated Balance Sheets as of December 31, 2007 and 2006	F-128
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	F-129
Consolidated Statements of Stockholder’s Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2007, 2006 and 2005	F-130
Notes to Consolidated Financial Statements	F-131

45

(3)   Index to Exhibits.

The exhibits with the cross symbol (+) are filed with the Form 10-K. The exhibits with the asterisk symbol (*) are compensatory arrangements filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	3	.1	Third Restated Certificate of Incorporation	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2007	1-16455		3.1
	3	.2	Third Amended and Restated Bylaws	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2007	1-16455		3.3
	4	.1	Specimen Stock Certificate	Reliant Energy, Inc.’s Amendment No. 5 to Registration Statement on Form S-1, filed March 23, 2001	333-48038		4.1
	4	.2	Rights Agreement between Reliant Resources, Inc. and The Chase Manhattan Bank, as Rights Agent, including a form of Rights Certificate, dated as of January 15, 2001	Reliant Energy, Inc.’s Amendment No. 8 to Registration Statement on Form S-1, filed April 27, 2001	333-48038		4.2
	4	.3	Common Stock Warrant Agreement by Reliant Resources, Inc. for the benefit of the holders from time to time, dated as of March 28, 2003	Reliant Energy, Inc.’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2002	1-16455		4.3
	4	.4	Indenture relating to the 5.00% Convertible Senior Subordinated Notes due 2010, between Reliant Resources, Inc. and Wilmington Trust Company, as Trustee, dated as of June 24, 2003	Reliant Energy, Inc.’s Registration Statement on Form S-3, filed July 24, 2003	333-107295		4.5
	4	.5	Registration Rights Agreement relating to the 5.00% Convertible Senior Subordinated Notes due 2010, among Reliant Resources, Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co. and Banc of America Securities LLC, dated as of June 24, 2003	Reliant Energy, Inc.’s Registration Statement of Form S-3, filed July 24, 2003	333-107295		4.7
	4	.6	Indenture relating to the 9.50% Senior Secured Notes due 2013, among Reliant Resources, Inc., the Guarantors listed in Schedule I thereto and Wilmington Trust Company, as Trustee, dated as of July 1, 2003	Reliant Energy, Inc.’s Registration Statement on Form S-4, filed July 24, 2003	333-107297		4.7
	4	.7	Supplemental Indenture relating to the 9.50% Senior Secured Notes due 2013, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of November 19, 2004	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		4.11

46

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	4	.8	Second Supplemental Indenture relating to the 9.50% Senior Secured Notes due 2013, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of September 21, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		4.12
	4	.9	Third Supplemental Indenture relating to the 9.50% Senior Secured Notes due 2013, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		4.2
	4	.10	Form of Senior Indenture to be issued under universal shelf	Reliant Energy, Inc.’s Amendment No. 1 to Registration Statement on Form S-3, filed December 10, 2003	333-107296		4.5
	4	.11	Form of Subordinated Indenture to be issued under universal shelf	Reliant Energy, Inc.’s Amendment No. 1 to Registration Statement on Form S-3, filed December 10, 2003	333-107296		4.6
	4	.12	Senior Indenture relating to the 6.75% Senior Secured Notes due 2014, among Reliant Energy, Inc. and Wilmington Trust Company, dated as of December 22, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 27, 2004	1-16455		4.1
	4	.13	First Supplemental Indenture relating to the 6.75% Senior Secured Notes due 2014, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of December 22, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 27, 2004	1-16455		4.2
	4	.14	Second Supplemental Indenture relating to the 6.75% Senior Secured Notes due 2014, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of September 21, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		4.18
	4	.15	Third Supplemental Indenture relating to the 6.75% Senior Secured Notes due 2014, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		4.3
	4	.16	Indenture between Orion Power Holdings, Inc. and Wilmington Trust Company, dated as of April 27, 2000	Orion Power Holdings, Inc.’s Registration Statement on Form S-1, filed August 18, 2000	333-44118		4.1

47

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	4	.17	Fourth Supplemental Indenture relating to the 9.50% Senior Secured Notes due 2013, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of June 5, 2007	Reliant Energy, Inc.’s Current Report on Form 8-K, filed June 6, 2007	1-16455		4.2
	4	.18	Fourth Supplemental Indenture relating to the 7.625% Senior Notes due 2014, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of June 13, 2007	Reliant Energy, Inc.’s Current Report on Form 8-K, filed June 15, 2007	1-16455		4.1
	4	.19	Fifth Supplemental Indenture relating to the 7.875% Senior Notes due 2017, among Reliant Energy, Inc., the Guarantors listed therein and Wilmington Trust Company, dated as of June 13, 2007	Reliant Energy, Inc.’s Current Report on Form 8-K, filed June 15, 2007	1-16455		4.2
	10	.1	Master Separation Agreement between Reliant Resources, Inc. and Reliant Energy, Incorporated, dated as of December 31, 2000	CenterPoint Energy Houston Electric, LLC’s (formerly known as Reliant Energy, Incorporated) Quarterly Report on Form 10-Q for the period ended March 31, 2001	1-3187		10.1
	10	.2	Tax Allocation Agreement between Reliant Resources, Inc. and Reliant Energy, Incorporated, dated as of December 31, 2000	CenterPoint Energy Houston Electric, LLC’s (formerly known as Reliant Energy, Incorporated) Quarterly Report on Form 10-Q for the period ended March 31, 2001	1-3187		10.8
	10	.3	Third Amended and Restated Credit and Guaranty Agreement among (i) Reliant Energy, Inc., as Borrower; (ii) the Other Loan Parties referred to therein, as Guarantors; (iii) the Lenders party thereto; (iv) Bank of America, N.A., as Administrative Agent and Collateral Agent; (v) Barclays Bank PLC and Deutsche Bank Securities Inc., as Syndication Agents; and (vi) Goldman Sachs Credit Partners L.P. and Merrill Lynch Capital Corporation, as Documentation Agents, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		10.6

48

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.4	Credit Sleeve and Reimbursement Agreement among Reliant Energy Power Supply, LLC, the Guarantors listed therein, Merrill Lynch Commodities, Inc., and Merrill Lynch & Co., Inc., dated as of September 24, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed September 25, 2006	1-16455		10.1
	10	.5	Schedules and Exhibits to the Credit Sleeve and Reimbursement Agreement dated as of September 24, 2006 (Portions of this Exhibit have been omitted pursuant to a request for confidential treatment)	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2006	1-16455		10.7B
	10	.6A	Amended and Restated Credit Sleeve and Reimbursement Agreement among Reliant Energy Power Supply, LLC, the Guarantors listed therein, Merrill Lynch Commodities, Inc., and Merrill Lynch & Co., Inc., dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		99.2
	10	.6B	Schedules and Exhibits to the Amended and Restated Credit Sleeve and Reimbursement Agreement dated as of December 1, 2006 (Portions of this Exhibit have been omitted pursuant to a request for confidential treatment)	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		10.6B
	10	.7A	Amended and Restated Credit Sleeve and Reimbursement Agreement among Reliant Energy Power Supply, LLC, the Guarantors listed therein, Merrill Lynch Commodities, Inc. and Merrill Lynch & Co., Inc., dated as of August 1, 2007	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2007	1-16455		10.1A
	10	.7B	Schedules and Exhibits to the Amended and Restated Credit Sleeve and Reimbursement Agreement dated as of August 1, 2007 (Portions of this Exhibit have been omitted pursuant to a request for confidential treatment)	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2007	1-16455		10.1B
	10	.8	Working Capital Facility among Reliant Energy Power Supply, LLC, the Guarantors listed therein and Merrill Lynch Capital Corporation, dated as of September 24, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed September 25, 2006	1-16455		10.2

49

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.9	Amended and Restated Working Capital Facility Agreement among Reliant Energy Power Supply, LLC, the Guarantors listed therein and Merrill Lynch Capital Corporation, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		99.1
	10	.10	Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2001A between Reliant Energy, Inc., as Guarantor, and J.P. Morgan Trust Company, National Association, as Trustee, dated as of December 22, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 27, 2004	1-16455		10.2
	10	.11	Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2002A between Reliant Energy, Inc., as Guarantor, and J.P. Morgan Trust Company, National Association, as Trustee, dated as of December 22, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 27, 2004	1-16455		10.3
	10	.12	Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2002B between Reliant Energy, Inc., as Guarantor, and J.P. Morgan Trust Company, National Association, as Trustee, dated as of December 22, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 27, 2004	1-16455		10.4
	10	.13	Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2003A between Reliant Energy, Inc., as Guarantor, and J.P. Morgan Trust Company, National Association, as Trustee, dated as of December 22, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 27, 2004	1-16455		10.5

50

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.14	Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2004A between Reliant Energy, Inc., as Guarantor, and J.P. Morgan Trust Company, National Association, as Trustee, dated as of December 22, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 27, 2004	1-16455		10.6
	10	.15	Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2001A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of September 21, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		10.14
	10	.16	Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2002A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of September 21, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		10.15
	10	.17	Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2002B among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of September 21, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		10.16

51

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.18	Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2003A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of September 21, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		10.17
	10	.19	Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2004A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of September 21, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006	1-16455		10.18
	10	.20	Second Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2001A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		10.1
	10	.21	Second Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2002A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		10.2

52

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.22	Second Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2002B among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		10.3
	10	.23	Second Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2003A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		10.4
	10	.24	Third Supplemental Guarantee Agreement relating to Pennsylvania Economic Development Financing Authority’s outstanding Exempt Facilities Revenue Bonds (Reliant Energy Seward, LLC Project) Series 2004A among Reliant Energy, Inc., the Guarantors listed therein and The Bank of New York Trust Company, N.A., as trustee, dated as of December 1, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed December 7, 2006	1-16455		10.5

53

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.25	Credit and Guaranty Agreement among Reliant Energy, Inc., as Borrower, the Other Loan Parties referred to therein as guarantors, the lenders party thereto, Deutsche Bank AG New York Branch, as Administrative Agent and Collateral Agent, Deutsche Bank Securities Inc. and J.P. Morgan Securities Inc., as Joint Lead Arrangers, Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Goldman Sachs Credit Partners L.P., Merrill Lynch Capital Corporation, and ABN AMRO Bank N.V., as Joint Bookrunners with respect to the Revolving Credit Facility and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Goldman Sachs Credit Partners L.P., Merrill Lynch Capital Corporation and Bear, Sterns & Co. Inc., as Joint Bookrunners with respect to the Pre-Funded L/C Facility, dated as of June 12, 2007	Reliant Energy, Inc.’s Current Report on Form 8-K, filed June 15, 2007	1-16455		1.1
	10	.26	Facility Lease Agreement between Conemaugh Lessor Genco LLC and Reliant Energy Mid-Atlantic Power Holdings, LLC, dated as of August 24, 2000	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.6a
	10	.27	Schedule identifying substantially identical agreements to Facility Lease Agreement constituting Exhibit 10.26	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.6b
	10	.28	Pass Through Trust Agreement between Reliant Energy Mid-Atlantic Power Holdings, LLC and Bankers Trust Company, made with respect to the formation of the Series A Pass Through Trust and the issuance of 8.554% Series A Pass Through Certificates, dated as of August 24, 2000	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.4a
	10	.29	Schedule identifying substantially identical agreements to Pass Through Trust Agreement constituting Exhibit 10.28	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.4b

54

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.30	Participation Agreement among (i) Conemaugh Lessor Genco LLC, as Owner Lessor; (ii) Reliant Energy Mid-Atlantic Power Holdings, LLC, as Facility Lessee; (iii) Wilmington Trust Company, as Lessor Manager; (iv) PSEGR Conemaugh Generation, LLC, as Owner Participant; (v) Bankers Trust Company, as Lease Indenture Trustee; and (vi) Bankers Trust Company, as Pass Through Trustee, dated as of August 24, 2000	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.5a
	10	.31	Schedule identifying substantially identical agreements to Participation Agreement constituting Exhibit 10.30	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.5b
	10	.32	First Amendment to Participation Agreement, dated as of November 15, 2001	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005	1-16455		10.20
	10	.33	Schedule identifying substantially identical agreements to First Amendment to Participation Agreement constituting Exhibit 10.32	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005	1-16455		10.21
	10	.34	Second Amendment to Participation Agreement, dated as of June 18, 2003	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005	1-16455		10.22
	10	.35	Schedule identifying substantially identical agreements to Second Amendment to Participation Agreement constituting Exhibit 10.34	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005	1-16455		10.23
	10	.36	Lease Indenture of Trust, Mortgage and Security Agreement between Conemaugh Lessor Genco LLC, as Owner Lessor, and Bankers Trust Company, as Lease Indenture Trustee, dated as of August 24, 2000	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.8a
	10	.37	Schedule identifying substantially identical agreements to Lease Indenture of Trust constituting Exhibit 10.36	Reliant Energy Mid-Atlantic Power Holdings, LLC’s Registration Statement on Form S-4, filed December 8, 2000	333-51464		4.8b
	10	.38	Purchase and Sale Agreement by and between Orion Power Holdings, Inc., Reliant Energy, Inc., Great Lakes Power Inc. and Brascan Corporation, dated as of May 18, 2004	Reliant Energy, Inc.’s Current Report on Form 8-K, filed May 21, 2004	1-16455		99.2

55

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	10	.39	Purchase and Sale Agreement between Orion Power Holdings, Inc., as Seller, Reliant Energy, Inc., as Guarantor, and Astoria Generating Company Acquisitions, L.L.C., as Buyer, dated as of September 30, 2005	Reliant Energy, Inc.’s Current Report on Form 10-K, filed October 6, 2005	1-16455		10.1
	10	.40	Settlement and Release of Claims Agreement among each of the Reliant Parties, OMOI, each of the California Parties, each of the Additional Claimants, each of the Class Action Parties and each of the Local Governmental Parties (each as defined therein), dated as of October 12, 2005	Reliant Energy, Inc.’s Current Report on Form 8-K, filed October 20, 2005	1-16455		10.1
	10	.41	Settlement Agreement between Reliant Energy, Inc. and Seneca Capital, L.P. dated April 18, 2006	Reliant Energy, Inc.’s Current Report on Form 8-K, filed April 18, 2006	1-16455		10.1
	*10	.42	Executive Life Insurance Plan, effective as of January 1, 1994, including the first and second amendments thereto (Reliant Energy, Inc. has adopted certain obligations under this plan with respect to the following individuals: James A. Ajello and Brian Landrum)	Reliant Energy, Inc.’s Amendment No. 8 to Registration Statement on Form S-1, filed April 27, 2001	333-48038		10.30
	*10	.43	Transition Stock Plan, effective as of May 4, 2001	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001	1-16455		10.37
	*10	.44	2002 Stock Plan, effective as of March 1, 2002	Reliant Energy, Inc.’s Registration Statement on Form S-8, filed April 19, 2002	333-86610		4.5
	*10	.45	Annual Incentive Compensation Plan, effective as of January 1, 2001	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001	1-16455		10.9
	*10	.46	2002 Annual Incentive Compensation Plan for Executive Officers, effective as of March 1, 2002	Reliant Energy, Inc.’s 2002 Proxy Statement on Schedule 14A	1-16455		Appendix I
	*10	.47	Long-Term Incentive Plan, effective as of January 1, 2001	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001	1-16455		10.10
	*10	.48	2002 Long-Term Incentive Plan, effective as of June 6, 2002	Reliant Energy, Inc.’s Registration Statement on Form S-8, filed April 19, 2002	333-86612		4.5
	*10	.49	Deferral Plan, effective as of January 1, 2002	Reliant Energy, Inc.’s Registration Statement on Form S-8, filed December 7, 2001	333-74790		4.1

56

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	*10	.50	First Amendment to Deferral Plan, effective as of January 14, 2003	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003	1-16455		10.5
	*10	.51	Successor Deferral Plan, effective as of January 1, 2002	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004	1-16455		10.30
	*10	.52	Deferred Compensation Plan, effective as of September 1, 1985, including the first nine amendments thereto (This is now a part of the plan listed as Exhibit 10.51)	Reliant Energy, Inc.’s Amendment No. 8 to Registration Statement on Form S-1, filed April 27, 2001	333-48038		10.25
	*10	.53	Deferred Compensation Plan, as amended and restated effective as of January 1, 1989, including the first nine amendments thereto (This is now a part of the plan listed as Exhibit 10.51)	Reliant Energy, Inc.’s Amendment No. 8 to Registration Statement on Form S-1, filed April 27, 2001	333-48038		10.26
	*10	.54	Deferred Compensation Plan, as amended and restated effective as of January 1, 1991, including the first ten amendments thereto (This is now a part of the plan listed as Exhibit 10.51)	Reliant Energy, Inc.’s Amendment No. 8 to Registration Statement on Form S-1, filed April 27, 2001	333-48038		10.27
	*10	.55	Benefit Restoration Plan, as amended and restated effective as of July 1, 1991, including the first amendment thereto (This is now a part of the plan listed as Exhibit 10.51)	Reliant Energy, Inc.’s Amendment No. 8 to Registration Statement on Form S-1, filed April 27, 2001	333-48038		10.12
	*10	.56	Key Employee Award Program 2004-2006 of the 2002 Long-Term Incentive Plan and the Form of Agreement for Key Employee Award Program, effective as of February 13, 2004	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2004	1-16455		10.1
	*10	.57	First Amendment to the Key Employee Award Program, effective as of August 10, 2005	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005	1-16455		10.44
	*10	.58	Form of 2002 Stock Plan Nonqualified Stock Option Award Agreement, 2003 Grants	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004	1-16455		10.39
	+*10	.59	Form of Change in Control Agreement for CEO, CFO and COO
	+*10	.60	Form for Change in Control Agreement for persons other than CEO, CFO and COO
	*10	.61	Reliant Energy, Inc. Executive Severance Plan, effective as of January 1, 2006	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005	1-16455		10.57

57

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	*10	.62	Form of 2002 Long-Term Incentive Plan Nonqualified Stock Option Award Agreement for Directors	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004	1-16455		10.53
	*10	.63	Form of 2002 Long-Term Incentive Plan Restricted Stock Award Agreement for Directors	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004	1-16455		10.54
	*10	.64	Form of 2002 Long-Term Incentive Plan Quarterly Restricted and Premium Restricted Stock Units Award Agreement for Directors	Reliant Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004	1-16455		10.55
	+*10	.65	Form of 2002 Long-Term Incentive Plan Quarterly Common Stock and Premium Restricted Stock Award Agreement for Directors
	+*10	.66	Form of 2002 Long-Term Incentive Plan Restricted Stock Award Agreement for Directors
	*10	.67	Form of Long-Term Incentive Plan Restricted Stock Award Agreement for Directors’ initial grant	Reliant Energy, Inc.’s Current Report on Form 8-K, filed August 24, 2006	1-16455		10.1
	*10	.68	Reliant Energy, Inc. Non-Employee Directors’ Compensation Program, effective as of May 16, 2007	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2007	1-16455		10.1
	*10	.69	2002 Long-Term Incentive Plan 2007 Long-Term Incentive Award Program for Officers	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended March 30, 2007	1-16455		10.1
	*10	.70	Form of 2002 Long-Term Incentive Plan 2007 Long-Term Incentive Award Agreement for Officers	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended March 30, 2007	1-16455		10.2
	*10	.71	2002 Long-Term Incentive Plan 2007 Long-Term Incentive Award Agreement for Mark Jacobs	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2007	1-16455		10.3
	*10	.72	2002 Long-Term Incentive Plan Amendment to Nonqualified Stock Option Award Agreement by and between Reliant Energy, Inc. and Joel V. Staff dated as of May 16, 2007—March 12, 2003 grant	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2007	1-16455		10.4
	*10	.73	2002 Long-Term Incentive Plan Amendment to Nonqualified Stock Option Award Agreement by and between Reliant Energy, Inc. and Joel V. Staff dated as of May 16, 2007—May 8, 2003 grant	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2007	1-16455		10.5

58

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	*10	.74	2002 Long-Term Incentive Plan Amendment to Nonqualified Stock Option Award Agreement by and between Reliant Energy, Inc. and Joel V. Staff dated as of May 16, 2007—August 23, 2003 grant	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2007	1-16455		10.6
	*10	.75	2002 Long-Term Incentive Plan Amendment to Key Employee Award Program 2004-2006 Agreement by and between Reliant Energy, Inc. and Joel V. Staff dated as of May 16, 2007—February 13, 2004 grant	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2007	1-16455		10.7
	*10	.76	2002 Long-Term Incentive Plan Long-Term Incentive Award Agreement for Rick J. Dobson	Reliant Energy, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2007	1-16544		10.2
	+*10	.77	2002 Long-Term Incentive Plan Long-Term Incentive Award Agreement for Albert H. Myres, Sr.
	+*10	.78	2002 Long-Term Incentive Plan Long-Term Incentive Award Agreement for Charles Griffey
	+*10	.79	Annual Base Salaries of Named Executive Officers
	+10	.80	Asset Purchase Agreement by and among Reliant Energy Channelview LP, Reliant Energy Services Channelview LLC and Kelson Energy IV LLC entered into February 24, 2008 and dated as of February 25, 2008
	+12	.1	Reliant Energy, Inc. and Subsidiaries Ratio of Earnings from Continuing Operations to Fixed Charges
	+21	.1	Subsidiaries of Reliant Energy, Inc.
	+23	.1	Consent of KPMG LLP, independent registered public accounting firm of Reliant Energy, Inc.
	+23	.2	Consent of Deloitte & Touche LLP, former independent registered public accounting firm of Reliant Energy, Inc.
	+31	.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

59

					SEC File or
Exhibit				Reporter or Registration	Registration	Exhibit
Number			Document Description	Statement	Number	Reference
	+31	.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	+32	.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

60

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Reliant Energy, Inc.

(Registrant)

By: /s/  Mark M. Jacobs

Mark M. Jacobs

President and Chief Executive Officer

February 26, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 26, 2008.

Signature	Title
/s/  Mark M. Jacobs Mark M. Jacobs	President and Chief Executive Officer
/s/  Rick J. Dobson Rick J. Dobson	Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/s/  Thomas C. Livengood Thomas C. Livengood	Senior Vice President and Controller (Principal Accounting Officer)
/s/  E. William Barnett E. William Barnett	Director
/s/  Sarah M. Barpoulis Sarah M. Barpoulis	Director
/s/  Donald J. Breeding Donald J. Breeding	Director
/s/  Kirbyjon H. Caldwell Kirbyjon H. Caldwell	Director
/s/  Steven L. Miller Steven L. Miller	Director
/s/  Laree E. Perez Laree E. Perez	Director
/s/  Evan J. Silverstein Evan J. Silverstein	Director

61

Signature	Title
/s/  Joel V. Staff Joel V. Staff	Director
/s/  William L. Transier William L. Transier	Director

62

RELIANT ENERGY, INC.’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

The management of Reliant Energy, Inc. and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment we believe that, as of December 31, 2007, our internal control over financial reporting is effective based on those criteria.

Our independent auditors have issued an audit report on our internal control over financial reporting. This report appears on page F-2.

/s/  Mark M. Jacobs
Mark M. Jacobs
President and
Chief Executive Officer /s/  Rick J. Dobson
Rick J. Dobson
Executive Vice President and
Chief Financial Officer

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Reliant Energy, Inc.:

We have audited Reliant Energy, Inc. and subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Internal Control Over Financial Reporting on Page F-1. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Reliant Energy, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the years then ended, and our report dated February 25, 2008, expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Houston, Texas

February 25, 2008

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Reliant Energy, Inc.:

We have audited the accompanying consolidated balance sheets of Reliant Energy, Inc. and subsidiaries (the Company), as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II—Valuation and Qualifying Accounts for 2007 and 2006. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reliant Energy, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the 2007 and 2006 information set forth therein.

As discussed in notes 11, 10(a), and 10(b) to the consolidated financial statements, the Company changed its accounting for income tax uncertainties in 2007, and share-based payment transactions and defined benefit pension and other postretirement plans in 2006, respectively.

We also have audited the adjustments to the financial information in note 16 to the 2005 consolidated financial statements to retrospectively reflect the change in subsidiary guarantors of the Company’s senior secured notes as described in that note. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2005 consolidated financial statements of the Company other than with respect to these adjustments and, accordingly we do not express an opinion or any other form of assurance on the 2005 consolidated financial statements taken as a whole.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2008, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP

Houston, Texas

February 25, 2008

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Reliant Energy, Inc. and Subsidiaries

Houston, Texas

We have audited, before the effects of the adjustments to retrospectively account for the change in subsidiary guarantors as described in note 16, the accompanying consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows of Reliant Energy, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2005 (the 2005 consolidated financial statements before the effects of the adjustments discussed in note 16 are not presented herein). Our audit also included the financial statement schedule (Schedule II—Valuation And Qualifying Accounts) listed in the Index at Item 15(a)(2) for the year ended December 31, 2005. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements, before the effects of the adjustments to retrospectively account for the change in subsidiary guarantors as described in note 16, present fairly, in all material respects, the results of operations and cash flows of Reliant Energy, Inc. and subsidiaries for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively account for the change in subsidiary guarantors as described in note 16 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.

DELOITTE & TOUCHE LLP

Houston, Texas

March 14, 2006

F-4

RELIANT ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	2007			2006			2005
	(thousands of dollars, except per share amounts)
Revenues:
Revenues (including $31,592, $191,405 and $(218,081) unrealized gains (losses)) (including $127,083, $0 and $0 from affiliates)	$	11,208,724		$	10,877,385		$	9,711,995
Expenses:
Cost of sales (including $413,028, $(422,325) and $25,846 unrealized gains (losses)) (including $105,118, $0 and $0 from affiliates)		8,656,827			9,435,892			8,365,921
Operation and maintenance		883,083			833,094			736,954
Selling, general and administrative		372,528			383,977			292,486
Western states and similar settlements		22,000			35,000			359,436
Gains on sales of assets and emission allowances, net		(25,699	)		(159,386	)		(168,114	)
Depreciation and amortization		424,432			372,616			445,871
Total operating expense		10,333,171			10,901,193			10,032,554
Operating Income (Loss)		875,553			(23,808	)		(320,559	)
Other Income (Expense):
Income of equity investments, net		4,686			5,791			25,458
Debt extinguishments and conversions		(72,779	)		(37,257	)		—
Other, net		4			203			(22,672	)
Interest expense		(349,199	)		(427,867	)		(399,281	)
Interest income		34,833			34,317			23,227
Total other expense		(382,455	)		(424,813	)		(373,268	)
Income (Loss) from Continuing Operations Before Income Taxes		493,098			(448,621	)		(693,827	)
Income tax expense (benefit)		135,115			(121,929	)		(253,080	)
Income (Loss) from Continuing Operations		357,983			(326,692	)		(440,747	)
Income (loss) from discontinued operations		7,124			(2,088	)		110,799
Income (Loss) Before Cumulative Effect of Accounting Changes		365,107			(328,780	)		(329,948	)
Cumulative effect of accounting changes, net of tax		—			968			(608	)
Net Income (Loss)	$	365,107		$	(327,812	)	$	(330,556	)
Basic Earnings (Loss) per Share:
Income (loss) from continuing operations	$	1.05		$	(1.06	)	$	(1.46	)
Income (loss) from discontinued operations		0.02			(0.01	)		0.37
Income (loss) before cumulative effect of accounting changes		1.07			(1.07	)		(1.09	)
Cumulative effect of accounting changes, net of tax		—			—			—
Net income (loss)	$	1.07		$	(1.07	)	$	(1.09	)
Diluted Earnings (Loss) per Share:
Income (loss) from continuing operations	$	1.01		$	(1.06	)	$	(1.46	)
Income (loss) from discontinued operations		0.03			(0.01	)		0.37
Income (loss) before cumulative effect of accounting changes		1.04			(1.07	)		(1.09	)
Cumulative effect of accounting changes, net of tax		—			—			—
Net income (loss)	$	1.04		$	(1.07	)	$	(1.09	)

See Notes to our Consolidated Financial Statements

F-5

RELIANT ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007			2006
	(thousands of dollars, except per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents	$	754,962		$	463,909
Restricted cash		3,251			24,980
Accounts and notes receivable, principally customer, net of allowance of $36,724 and $33,332		1,082,746			1,043,637
Inventory		285,408			275,437
Derivative assets		214,207			489,726
Margin deposits		139,834			452,605
Accumulated deferred income taxes		114,559			279,479
Investment in and receivables from Channelview, net		83,253			—
Prepayments and other current assets		104,314			141,016
Current assets of discontinued operations		2,133			2,460
Total current assets		2,784,667			3,173,249
Property, Plant and Equipment, net		5,222,217			5,741,995
Other Assets:
Goodwill, net		379,644			381,594
Other intangibles, net		405,338			423,745
Derivative assets		90,107			203,857
Accumulated deferred income taxes		70,410			87,858
Prepaid lease		270,133			264,328
Other		234,014			290,507
Total other assets		1,449,646			1,651,889
Total Assets	$	9,456,530		$	10,567,133
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt and short-term borrowings	$	52,546		$	355,264
Accounts payable, principally trade		687,046			664,630
Derivative liabilities		436,503			1,164,809
Margin deposits		250			16,490
Other		426,839			488,764
Current liabilities of discontinued operations		—			3,286
Total current liabilities		1,603,184			2,693,243
Other Liabilities:
Derivative liabilities		187,089			420,534
Other		278,641			324,145
Long-term liabilities of discontinued operations		3,542			—
Total other liabilities		469,272			744,679
Long-term Debt		2,902,346			3,177,691
Commitments and Contingencies
Temporary Equity Stock-based Compensation		4,694			1,647
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; 344,579,508 and 337,623,392 issued)		106			99
Additional paid-in capital		6,215,512			6,174,665
Accumulated deficit		(1,635,526	)		(2,026,316	)
Accumulated other comprehensive loss		(103,058	)		(198,575	)
Total stockholders’ equity		4,477,034			3,949,873
Total Liabilities and Stockholders’ Equity	$	9,456,530		$	10,567,133

See Notes to our Consolidated Financial Statements

F-6

RELIANT ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2007			2006			2005
	(thousands of dollars)
Cash Flows from Operating Activities:
Net income (loss)	$	365,107		$	(327,812	)	$	(330,556	)
(Income) loss from discontinued operations		(7,124	)		2,088			(110,799	)
Net income (loss) from continuing operations and cumulative effect of accounting changes		357,983			(325,724	)		(441,355	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Cumulative effect of accounting changes		—			(968	)		608
Depreciation and amortization		424,432			372,616			445,871
Deferred income taxes		118,631			(152,431	)		(278,992	)
Net changes in energy derivatives		(393,453	)		316,742			192,235
Amortization of deferred financing costs		50,294			31,508			15,110
Debt extinguishments and conversions expenses		72,779			37,257			—
Gains on sales of assets and emission allowances, net		(25,699	)		(159,386	)		(168,114	)
Western states and similar settlements		—			35,000			359,436
Income of equity investments, net		(4,686	)		(5,791	)		(25,458	)
Other, net		12,703			12,590			27,498
Changes in other assets and liabilities:
Accounts and notes receivable, net		(25,731	)		129,161			(109,736	)
Changes in notes, receivables and payables with affiliates, net		(13,078	)		—			—
Inventory		(21,863	)		18,157			(42,253	)
Margin deposits, net		296,531			1,264,332			(1,213,940	)
Net derivative assets and liabilities		(31,088	)		(30,313	)		10,978
Western states and similar settlements payments		(35,000	)		(159,885	)		—
Accounts payable		46,194			(97,117	)		144,466
Other current assets		12,306			17,284			33,071
Other assets		(17,953	)		(35,373	)		(32,605	)
Taxes payable/receivable		(10,975	)		1,302			3,053
Other current liabilities		(45,713	)		64,046			(34,479	)
Other liabilities		(11,597	)		(2,963	)		4,495
Net cash provided by (used in) continuing operations from operating activities		755,017			1,330,044			(1,110,111	)
Net cash provided by (used in) discontinued operations from operating activities		6,726			(54,171	)		192,948
Net cash provided by (used in) operating activities		761,743			1,275,873			(917,163	)
Cash Flows from Investing Activities:
Capital expenditures		(188,856	)		(96,793	)		(82,296	)
Proceeds from sales of assets, net		82,075			1,417			149,345
Proceeds from sales of emission allowances		6,815			205,510			234,421
Purchases of emission allowances		(91,923	)		(22,575	)		(145,769	)
Restricted cash		6,674			1,926			14,251
Other, net		6,045			—			5,500
Net cash provided by (used in) continuing operations from investing activities		(179,170	)		89,485			175,452
Net cash provided by discontinued operations from investing activities		520			967,566			130,700
Net cash provided by (used in) investing activities		(178,650	)		1,057,051			306,152
Cash Flows from Financing Activities:
Proceeds from long-term debt		1,300,000			400,000			299,000
Payments of long-term debt		(1,535,887	)		(865,870	)		(148,333	)
Increase (decrease) in short-term borrowings and revolving credit facilities, net		6,554			(825,554	)		407,000
Payments of financing costs		(31,245	)		(16,673	)		(1,198	)
Payments of debt extinguishments and conversions expenses		(72,779	)		(36,157	)		—
Proceeds from issuances of stock		41,317			24,842			37,885
Net cash provided by (used in) continuing operations from financing activities		(292,040	)		(1,319,412	)		594,354
Net cash used in discontinued operations from financing activities		—			(638,000	)		—
Net cash provided by (used in) financing activities		(292,040	)		(1,957,412	)		594,354
Net Change in Cash and Cash Equivalents		291,053			375,512			(16,657	)
Cash and Cash Equivalents at Beginning of Period		463,909			88,397			105,054
Cash and Cash Equivalents at End of Period	$	754,962		$	463,909		$	88,397
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid (net of amounts capitalized) for continuing operations	$	344,701		$	385,055		$	347,249
Income taxes paid (net of income tax refunds received) for continuing operations	$	27,884		$	28,649		$	21,812

See Notes to our Consolidated Financial Statements

F-7

RELIANT ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

												Accumulated Other Comprehensive Income(Loss)
												Unrealized
												Gain (Loss)																		Discontinued
												on						Benefits			Benefits						Total			Operations
												Available			Deferred			Actuarial			Net			Additional			Accumulated			Accumulated
			Additional									For			Derivative			Net			Prior			Minimum			Other			Other			Total
	Common		Paid			Treasury			Accumulated			Sale			Gains			Gain			Service			Benefits			Comprehensive			Comprehensive			Stockholders’			Comprehensive
	Stock		In Capital			Stock			Deficit			Securities			(Losses)			(Loss)			Costs			Liability			Income (Loss)			Income (Loss)			Equity			Income (Loss)
	(thousands of dollars)
Balance December 31, 2004	$	61	$	5,790,007		$	(2,209	)	$	(1,367,948	)	$	8		$	(29,211	)	$	—		$	—		$	(148	)	$	(29,351	)	$	(4,206	)	$	4,386,354
Net loss										(330,556	)																							(330,556	)	$	(330,556	)
Contributions from CenterPoint Energy, Inc.				7,079																														7,079
Warrants				1,411																														1,411
Transactions under stock plans		5		48,250			2,209																											50,464
Other comprehensive income (loss):
Deferred gain (loss) from cash flow hedges, net of tax of $160 million and $1 million																(233,234	)											(233,234	)		2,378			(230,856	)		(233,234	)
Reclassification of net deferred (gain) loss from cash flow hedges into net loss, net of tax of $9 million and $1 million																(21,688	)											(21,688	)		1,493			(20,195	)		(21,688	)
Unrealized loss on available-for-sale securities, net of tax of $0													(8	)														(8	)					(8	)		(8	)
Other comprehensive income from discontinued operations																																					3,871
Comprehensive loss																																				$	(581,615	)
Balance December 31, 2005	$	66	$	5,846,747		$	—		$	(1,698,504	)	$	—		$	(284,133	)	$	—		$	—		$	(148	)	$	(284,281	)	$	(335	)	$	3,863,693
Adjustment to initially apply FASB Statement No. 123R				18,099																														18,099
Balance after initial adjustment to apply FASB Statement No. 123R		66		5,864,846			—			(1,698,504	)		—			(284,133	)		—			—			(148	)		(284,281	)		(335	)		3,881,792
Net loss										(327,812	)																							(327,812	)	$	(327,812	)
Distribution to CenterPoint Energy, Inc.				(3,774	)																													(3,774	)
Warrants				970																														970
Transactions under stock plans		3		45,201																														45,204
Conversion of convertible senior subordinated notes to common stock		30		267,422																														267,452
Other comprehensive income (loss):
Changes in minimum pension liability, net of tax of $1 million																									(2,121	)		(2,121	)					(2,121	)		(2,121	)
Deferred loss from cash flow hedges, net of tax of $79 million																(129,081	)											(129,081	)					(129,081	)		(129,081	)
Reclassification of net deferred loss from cash flow hedges into net loss, net of tax of $150 million and $0																240,971												240,971			335			241,306			240,971
Other comprehensive income from discontinued operations																																					335
Adjustment to initially apply FASB Statement No. 158, net of tax of $0, $0 and $2 million																			(15,463	)		(10,869	)		2,269			(24,063	)					(24,063	)
Comprehensive loss																																				$	(217,708	)
Balance December 31, 2006	$	99	$	6,174,665		$	—		$	(2,026,316	)	$	—		$	(172,243	)	$	(15,463	)	$	(10,869	)	$	—		$	(198,575	)	$	—		$	3,949,873
Adjustment to initially apply FIN 48				(468	)					25,683																								25,215
Balance after initial adjustment to apply FIN 48		99		6,174,197			—			(2,000,633	)		—			(172,243	)		(15,463	)		(10,869	)		—			(198,575	)		—			3,975,088
Net income										365,107																								365,107		$	365,107
Distribution to CenterPoint Energy, Inc.				(2,487	)																													(2,487	)
Warrants		1		43																														44
Transactions under stock plans		6		43,659																														43,665
Conversion of convertible senior subordinated notes to common stock				100																														100
Other comprehensive income (loss):
Deferred gain from cash flow hedges, net of tax of $3 million																3,225												3,225						3,225			3,225
Reclassification of net deferred loss from cash flow hedges into net income, net of tax of $58 million																88,903												88,903						88,903			88,903
Reclassification of benefits net prior service costs into net income, net of tax of $0																						1,308						1,308						1,308			1,308
Reclassification of benefits actuarial net loss into net income, net of tax of $0																			356									356						356			356
Deferred benefits actuarial net gain, net of tax of $0																			1,725									1,725						1,725			1,725
Comprehensive income																																				$	460,624
Balance December 31, 2007	$	106	$	6,215,512		$	—		$	(1,635,526	)	$	—		$	(80,115	)	$	(13,382	)	$	(9,561	)	$	—		$	(103,058	)	$	—		$	4,477,034

See Notes to our Consolidated Financial Statements

F-8

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Background and Basis of Presentation

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 18.

Reliant Energy, a Delaware corporation, was formed in August 2000 by CenterPoint Energy, Inc. (CenterPoint) (known as Reliant Energy, Incorporated at the time) in connection with the planned separation of its regulated and unregulated operations. CenterPoint transferred substantially all of its unregulated businesses to us. In May 2001, Reliant Energy became a publicly traded company and in September 2002, CenterPoint distributed its remaining ownership of our common stock to its shareholders.

Basis of Presentation.  All significant intercompany transactions have been eliminated.

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.

Since Channelview’s results are no longer consolidated, any adjustments reflected in Channelview’s financial statements subsequent to August 19, 2007 (relating to the recoverability and classification of recorded asset amounts and classification of liabilities or the effects on existing equity, as well as adjustments made to Channelview’s financial information for loss contingencies and other matters), are not expected to directly impact our consolidated financial results.

We will reevaluate the accounting treatment of our investment in Channelview (as a cost method investment) when Channelview’s bankruptcies are resolved or other factors, if any, indicate a change in control of Channelview.

See note 21 for further discussion of Channelview and the related bankruptcy filings.

(2)   Summary of Significant Accounting Policies

(a)   Use of Estimates and Market Risk and Uncertainties.

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.

Our critical accounting estimates include:  (a) fair value of our reporting units’ recorded goodwill, property, plant and equipment and derivative assets and liabilities; (b) retail energy segment estimated revenues and energy supply costs; (c) loss contingencies and (d) deferred tax assets, valuation allowances and tax liabilities. Actual results could differ from our estimates.

We are subject to various risks inherent in doing business. See notes 2(c), 2(d), 2(e), 2(g), 2(h), 2(n), 2(o), 2(p), 3(b), 4, 5, 6, 7, 10, 11, 12, 13, 14 and 21.

F-9

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(b)   Principles of Consolidation.

We include our accounts and those of our wholly-owned and majority-owned subsidiaries in our consolidated financial statements, excluding Channelview since its deconsolidation on August 20, 2007. We do not consolidate three power generating facilities (see note 12(a)), which are under operating leases, or a 50% equity investment in a cogeneration plant.

(c)   Revenues.

Power Generation and Capacity Revenues.  We record gross revenues from the sale of electricity and other energy services under the accrual method. Electric power and other energy services are sold at market-based prices through existing power exchanges, related party affiliates or third party contracts. Energy sales and services that have been delivered but not billed by period-end are estimated.

Natural Gas Sales Revenues.  We record gross revenues from the sales of natural gas under the accrual method. These sales are sold at market-based prices through third party contracts. Sales that have been delivered but not billed by period-end are estimated.

Retail Energy Revenues.  Gross revenues for energy sales and services to residential and small business customers and to commercial, industrial and governmental/institutional customers are recognized upon delivery under the accrual method. Energy sales and services that have been delivered but not billed by period-end are estimated.

As of December 31, 2007 and 2006, we recorded unbilled revenues of $435 million and $416 million, respectively, for retail energy sales and services. Accrued unbilled revenues are based on our estimates of customer usage since the date of the last meter reading provided by the independent system operators or electric distribution companies. Volume estimates are based on daily forecasted volumes and estimated customer usage by class. Unbilled revenues are calculated by multiplying volume estimates by the applicable rate by customer class. Estimated amounts are adjusted when actual usage is known and billed.

(d)   Derivatives and Hedging Activities.

We account for our derivatives instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” as amended (SFAS No. 133).

In the fourth quarter of 2005, we commenced an evaluation of our wholesale energy segment’s hedging strategy (which included both designated and non-designated hedging derivative instruments) and use of capital. In early 2006, we concluded that the benefits of hedging our generation do not justify the costs, including collateral postings. As a result, we decided to substantially reduce new hedges of our generation. We may enter into selective hedges, including originated transactions, based on (a) our assessment of market fundamentals to increase the return from our generation assets and (b) operational and market limitations requiring us to enter into fuel, capacity and emissions transactions to manage our generation assets. We believe that this strategy significantly reduces our wholesale energy segment’s use of capital; however, our earnings are subject to increased volatility based on market price changes.

We purchase substantially all of our Texas supply requirements from third parties. For our retail energy segment, we continue to focus our supply procurement strategy on (a) matching supply costs and supply timing with sales commitments, (b) managing periodic adjustments of physical supply to manage ongoing operational and customer usage changes and (c) managing procurement needs within available market liquidity.

We may also enter into derivatives to manage our exposure to (a) changes in prices of emission allowances and (b) changes in interest rates.

F-10

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For our risk management activities, we use both derivative and non-derivative contracts that provide for settlement in cash or by delivery of a commodity. The primary types of derivative instruments we use are forwards, futures, swaps and options. 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.

A derivative is recognized at fair value in the balance sheet whether or not it is designated as a 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.

If certain conditions are met, a derivative instrument may be designated as a cash flow hedge. Derivatives designated as cash flow hedges must have a high correlation between price movements in the derivative and the hedged item. The changes in fair value of cash flow hedges are deferred in accumulated other comprehensive income (loss), net of tax, to the extent the contracts are, or 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. We record the ineffective portion of changes in fair value of cash flow hedges immediately into earnings. For all other derivatives, changes in fair value are recorded as unrealized gains or losses in our results of operations.

If and when an acceptable level of correlation no longer exists, hedge accounting ceases and changes in fair value are recognized in our results of operations. If it becomes probable that a forecasted transaction will not occur, we immediately recognize the related deferred gains or losses in our results of operations. The associated hedging instrument is then marked to market through our results of operations for the remainder of the contract term unless a new hedging relationship is redesignated.

Realized gains and losses on derivatives contracts 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

F-11

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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:

	Purpose for Holding or	Transactions that	Transactions that
Instrument	Issuing Instrument(1)	Physically Flow/Settle	Financially Settle(2)
Power futures, forward, swap and option contracts	Power sales to end-use retail customers	Revenues	N/A(3)
	Power sales from wholesale operations	Revenues	Revenues
	Supply management revenues	Revenues	Cost of sales
	Power purchases related to our retail operations	Cost of sales	Cost of sales
	Power purchases related to wholesale operations	Cost of sales	Revenues
	Power purchases/sales related to our legacy trading positions	Revenues	Revenues
Natural gas and fuel futures, forward, swap and option contracts	Natural gas and fuel purchases/sales related to our retail operations	N/A(3)	Cost of sales
	Natural gas and fuel sales related to wholesale operations	Revenues	Cost of sales
	Natural gas and fuel purchases related to wholesale operations	Cost of sales	Cost of sales
	Natural gas and fuel purchases/sales related to our legacy trading positions	Cost of sales	Cost of sales
Interest rate swaps and caps	Interest rate risk associated with floating-rate debt	N/A(3)	Interest expense
Emission allowances futures(4)	Price risk associated with purchases/sales of emission allowances	N/A(3)	Revenues/Cost of sales

(1)	The purpose for holding or issuing is not impacted by the accounting method elected for each instrument.
(2)	Includes classification for mark-to-market derivatives and amounts reclassified from accumulated other comprehensive income (loss) related to cash flow hedges.
(3)	N/A is not applicable.
(4)	Includes emission allowances futures for sulfur dioxide (SO2), nitrogen oxide (NOX) and carbon dioxide (CO2).

In addition to market 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 2(e) for further discussion of our credit policy.

Earnings Volatility from Derivative Instruments.  We purchase most of the generation capacity necessary to supply our retail energy business in Texas from third parties. Our primary objective is to satisfy the

F-12

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

forecasted retail load and maintain adequate capacity reserves to manage operational and market constraints. We routinely enter into derivative contracts to manage our fixed purchase and sale commitments. Some types of transactions may cause us to experience volatility in our earnings due to the revenue receiving accrual treatment while a portion of the related supply is marked to market.

We procure natural gas, coal, oil, natural gas transportation and storage capacity and other energy-related commodities to support our wholesale energy business. Some types of transactions may cause us to experience volatility in our earnings due to natural gas inventory related to transportation and storage generally receiving accrual treatment while the related derivative instruments are marked to market through earnings.

Over the past several years, we have substantially decreased derivatives accounted for as cash flow hedges, in favor of utilizing the mark-to-market method of accounting or the normal purchase/normal sale exception for these derivatives. Effective September 1, 2005, we began marking to market through earnings a portion of our previously designated cash flow hedge portfolio related to our PJM Interconnection, LLC (PJM) coal plants for October 2005 through December 2007 due to ineffectiveness. The ineffectiveness resulted from transmission constraints, hotter than average weather and higher natural gas prices.

Effective September 1, 2006, we de-designated certain cash flow hedges of our coal contracts in the PJM and MISO regions and either began utilizing the mark-to-market method of accounting or elected the normal purchase/normal sale exception. During the fourth quarter of 2006, in connection with the credit-enhanced retail structure, we (a) de-designated cash flow hedges of natural gas futures and swap transactions used to hedge our retail energy business and began utilizing the mark-to-market method of accounting and (b) closed out a majority of our remaining generation hedges in the PJM region.

During the first quarter of 2007, we de-designated our remaining cash flow hedges; therefore, as of December 31, 2007, we have no cash flow hedges.

Set-off of Derivative Assets and Liabilities.  Where derivative instruments are subject to a master netting agreement and the accounting criteria to offset are met, we present our derivative assets and liabilities on a net basis. Derivative assets/liabilities and accounts receivable/payable are presented and set-off separately in our consolidated balance sheets although in most cases contracts permit the set-off of derivative assets/liabilities and accounts receivable/payable with a given counterparty. However, we do not offset collateral (net margin deposits) related to these derivatives.

New Accounting Pronouncement Not Yet Adopted—Offsetting of Amounts.  The FASB issued FSP FIN 39-1, an amendment of FASB Interpretation No. 39 (FIN 39), which was applicable for us beginning January 1, 2008. This interpretation allows either (a) offsetting assets and liabilities for derivative instruments under a common 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 plan to discontinue netting our derivative assets and liabilities and present them on a gross basis. Cash collateral amounts will remain presented on a gross basis. This change will significantly increase our derivative assets and liabilities retrospectively for all financial statements presented.

(e)   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.

F-13

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our credit exposure is based on our derivative assets and accounts receivable from our wholesale energy and retail energy power supply counterparties, after taking into consideration netting within each contract and any master netting contracts with counterparties. We provide reserves for non-investment grade counterparties representing a significant portion of our credit exposure. As of December 31, 2007, two non-investment grade counterparties represented 47% ($206 million) of our credit exposure. As of December 31, 2006, two non-investment grade counterparties represented 53% ($359 million) of our credit exposure. As of December 31, 2007 and 2006, we held no collateral from these counterparties. There were no other counterparties representing greater than 10% of our credit exposure.

(f)   Selling, General and Administrative Expenses.

Selling, general and administrative expenses include (a) selling and marketing, (b) bad debt expense and (c) other general and administrative expenses. Other general and administrative expenses include, among other items, (a) financial services, (b) legal costs, (c) regulatory costs and (d) certain benefit costs.

(g)   Property, Plant and Equipment and Depreciation Expense.

We compute depreciation using the straight-line method based on estimated useful lives. Depreciation expense was $309 million, $303 million and $351 million during 2007, 2006 and 2005, respectively.

	Estimated Useful		December 31,
	Lives (Years)		2007			2006
			(in millions)
Electric generation facilities		10 - 35	$	5,868		$	6,311
Building and building improvements		5 - 15		31			30
Land improvements		20 - 35		235			238
Other		3 - 10		470			451
Land				92			95
Assets under construction				157			67
Total				6,853			7,192
Accumulated depreciation				(1,630	)		(1,450	)
Property, plant and equipment, net			$	5,223		$	5,742

We periodically evaluate property, plant and equipment for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. The evaluation is highly dependent on the underlying assumptions of related cash flows. We recorded no material property, plant and equipment impairments during 2007, 2006 and 2005.

In the future, we could recognize impairments if our wholesale energy market outlook changes negatively. In addition, our ongoing evaluation of our wholesale energy business could result in decisions to mothball, retire or dispose of additional generation assets, any of which could result in impairment charges.

(h)   Intangible Assets and Amortization Expense.

Goodwill.  We perform our goodwill impairment test annually on April 1 and when events or changes in circumstances indicate that the carrying value may not be recoverable.

Other Intangibles.  We recognize specifically identifiable intangible assets, including emission allowances, contractual rights, power generation site permits and water rights, when specific rights and contracts are acquired. We have no intangible assets with indefinite lives recorded as of December 31, 2007 and 2006.

F-14

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(i)   Capitalization of Interest Expense.

During 2007, 2006 and 2005, we capitalized $4 million, $0 and $0 of interest expense, respectively.

(j)   Cash and Cash Equivalents.

We record all highly liquid short-term investments with maturities of three months or less as cash equivalents.

(k)   Restricted Cash.

Restricted cash includes cash at certain subsidiaries, the distribution or transfer of which is restricted by financing and other agreements.

(l)   Allowance for Doubtful Accounts.

We accrue an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing counterparty credit ratings, historical collections, accounts receivable agings and other factors. We write-off accounts receivable balances against the allowance for doubtful accounts when we determine a receivable is uncollectible.

(m)   Inventory.

We value fuel inventories at the lower of average cost or market. We remove these inventories as they are used in the production of electricity or sold. We value materials and supplies at average cost. We remove these inventories when they are used for repairs, maintenance or capital projects. Sales of fuel inventory are classified as operating activities in the consolidated statement of cash flows.

	December 31,
	2007		2006
	(in millions)
Materials and supplies, including spare parts	$	151	$	155
Coal		55		51
Natural gas		29		20
Heating oil		50		49
Total inventory	$	285	$	275

(n)   Environmental Costs.

We expense environmental expenditures related to existing conditions that do not have future economic benefit. We capitalize environmental expenditures for which there is a future economic benefit. We record liabilities for expected future costs, on an undiscounted basis, related to environmental assessments and/or remediation when they are probable and can be reasonably estimated. See note 13(b).

(o)   Asset Retirement Obligations.

Our asset retirement obligations relate to future costs primarily associated with dismantling power plants and ash disposal site closures. Our asset retirement obligations are $21 million as of December 31, 2007 and 2006. As of December 31, 2007 and 2006, we have $16 million and $15 million, respectively (classified in other long-term assets) on deposit with the state of Pennsylvania to guarantee our obligation related to future closures of ash disposal sites. See note 13(b).

F-15

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2005, we adopted an accounting interpretation relating to asset retirement obligations. This interpretation clarifies that an asset retirement obligation is unconditional even though uncertainty exists about the timing and/or method of settlement and requires that a liability be recognized if it can be reasonably estimated. Based on this, we (a) recorded a cumulative effect of an accounting change, net of tax, of $1 million ($0.00 per share), (b) increased other long-term liabilities by $2 million and (c) increased property, plant and equipment by $1 million.

(p)   Repair and Maintenance Costs for Power Generation Assets.

We recognize repair and maintenance costs as incurred.

(q)   Deferred Financing Costs.

We incur costs, which are deferred and amortized over the life of the debt, in connection with obtaining financings. See note 6. Changes in deferred financing costs, classified in other long-term assets are:

	2007			2006			2005
	(in millions)
Beginning of year	$	92		$	112		$	126
Capitalized		31			17			1
Amortized		(10	)		(16	)		(15	)
Accelerated amortization/write-offs(1)		(41	)		(21	)(2)		—
Channelview deconsolidation(3)		(5	)		—			—
End of year	$	67		$	92		$	112

(1)	See note 6.
(2)	Of this amount, $5 million was recorded to additional-paid-in capital in connection with converting our debt to equity. See note 6.
(3)	Channelview was deconsolidated on August 20, 2007. See notes 1 and 21.

(r)   Gross Receipts Taxes.

We record gross receipts taxes for our retail energy segment on a gross basis in revenues and operations and maintenance expense in our consolidated statements of operations. During 2007, 2006 and 2005, our retail energy segment’s revenues and operation and maintenance expense include gross receipts taxes of $98 million, $102 million and $76 million, respectively.

(s)   Sales Taxes.

We record sales taxes collected from our taxable retail energy segment customers and remitted to the various governmental entities on a net basis, thus there is no impact on our consolidated statements of operations.

(t)   New Accounting Pronouncement Not Yet Adopted—Fair Value.

The FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS No. 157 is to be applied prospectively, except for aspects that do not apply to us. We adopted SFAS No. 157 on January 1, 2008. In connection with the adoption, (a) no cumulative effect of an accounting change will be recognized and (b) we expect to decrease our derivative liabilities and increase our income from continuing operations before income taxes relating to

F-16

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

discounting these liabilities using our own credit ratings. For non-financial assets and liabilities, the adoption of SFAS No. 157 has been deferred until January 1, 2009.

(3)   Related Party Transactions

(a)   Equity Contributions/Distributions.

During 2005, we recorded non-cash contributions of $7 million from CenterPoint in settlement of certain tax matters. See note 11(d).

(b)   Indemnities and Releases.

As part of our separation from CenterPoint, we agreed to indemnify our former parent company for liabilities associated with the business we acquired and relating to our initial public offering. See notes 11(d) and 12(b).

(4)   Intangible Assets

(a)   Goodwill.

The following table shows goodwill by segment and the changes:

	Retail		Wholesale
	Energy		Energy			Total
	(in millions)
As of January 1, 2006	$	53	$	334		$	387
Changes		—		(5	)		(5	)
As of December 31, 2006		53		329			382
Changes		—		(2	)		(2	)
As of December 31, 2007	$	53	$	327		$	380

As of December 31, 2007 and 2006, we had $72 million and $82 million, respectively, of goodwill that is deductible for United States income tax purposes in future periods.

Goodwill Impairment Tests.  We performed impairment tests at the following dates: January 2005, March 2005, April 2005, August 2005, September 2005, April 2006 and April 2007 due to either asset sales or our annual impairment tests. No impairments were indicated in these tests.

Estimation of our Wholesale Energy Reporting Unit’s Fair Value.  We estimate the fair value of our wholesale energy reporting unit based on a number of subjective factors, 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 our estimated cash flows, (f) selection of peer group companies for the public company approach, (g) required level of working capital, (h) assumed EBITDA multiple for terminal values and (i) time horizon of cash flow forecasts.

In determining the fair value of our wholesale energy reporting unit, we made the following key assumptions: (a) the markets in which we operate will continue to be deregulated; (b) there will be a recovery in electricity margins over time such that companies building new generation facilities can earn a reasonable rate of return on their investment and (c) the long-term returns on future construction of new generation facilities will likely be driven by integrated utilities, which we expect will have a lower cost of capital than merchant generators. As part of our process, we modeled all of our power generation facilities and those of

F-17

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

others in the regions in which we operate. Our assumptions for each of our goodwill impairment tests during 2005, 2006 and 2007 were:

Number of years used in internal cash flow analysis	15
EBITDA(1) multiple for terminal values (through August 2005 test and for April 2006 test)	7.5
EBITDA multiple for terminal values (for September 2005 test and April 2007 test)	8.0	(2)
Risk-adjusted discount rate for our estimated cash flows (through April 2006 test)	9.0	%
Risk-adjusted discount rate for our estimated cash flows (April 2007 test)	9.5	%(3)
Approximate average anticipated growth rate for demand in power	2.0	%
Long-term after-tax return on investment for new investment	7.5	%

(1)	Defined as earnings (loss) before interest expense, interest income, income taxes, depreciation and amortization expenses.
(2)	Changed primarily due to market factors affecting peer company comparisons.
(3)	Changed primarily due to capital structure of peer company comparisons.

(b) Other Intangibles.

	Remaining
	Weighted			December 31,
	Average			2007					2006
	Amortization			Carrying		Accumulated			Carrying		Accumulated
	Period (Years)			Amount		Amortization			Amount		Amortization
				(in millions)
SO2 emission allowances(1)(2)		—	(1)	$	444	$	(307	)	$	357	$	(222	)
NOx emission allowances(1)(3)		—	(1)		335		(188	)		339		(170	)
Contractual rights(4)		—			—		—			4		(4	)
Power generation site permits(5)		27			73		(12	)		73		(10	)
Water rights(5)		27			68		(16	)		67		(14	)
Other(5)		—			8		—			4		—
Total				$	928	$	(523	)	$	844	$	(420	)

(1)	Amortized to amortization expense on a units-of-production basis. As of December 31, 2007, we have recorded (a) SO2 emission allowances through the 2039 vintage year (most of which relate to 2010 and beyond) and (b) NOx emission allowances through the 2039 vintage year (most of which relate to 2009 and beyond).
(2)	During 2007, 2006 and 2005, we purchased $89 million, $22 million and $130 million, respectively, of SO2 emission allowances.
(3)	During 2007, 2006 and 2005, we purchased $3 million, $1 million and $16 million, respectively, of NOx emission allowances.
(4)	Amortized to revenues and cost of sales, as applicable, based on the estimated realization of the fair value established on the acquisition date over the contractual lives. As of December 31, 2007, we have no contractual rights recorded on our consolidated balance sheet.
(5)	Amortized to amortization expense on a straight-line basis over the estimated lives.

Amortization expense consists of:

	2007		2006			2005
	(in millions)
Other intangibles, excluding contractual rights and obligations(1)(2)	$	115	$	70		$	95
Contractual rights(3)	$	—	$	(1	)	$	(1	)
Contractual obligations(1)(3)		—		3			9
Net	$	—	$	2		$	8

F-18

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1)	Contractual obligations are in other long-term liabilities.
(2)	Includes amortization of emission allowances of $110 million, $65 million and $90 million during 2007, 2006 and 2005, respectively.
(3)	Amortized to revenues and cost of sales, as applicable, based on the estimated realization of the fair value established on the acquisition date over the contractual lives.

Estimated amortization expense based on our intangibles as of December 31, 2007 for the next five years is (in millions):

2008	$	16	(1)
2009		13	(1)
2010		16	(1)
2011		16	(1)
2012		16	(1)

(1) These amounts do not include expected amortization expense of emission allowances, which have not been purchased as of December 31, 2007.

(5)   Derivatives and Hedging Activities

We use derivative instruments to manage operational or market constraints, to increase return on our generation assets and to execute our retail energy segment’s supply procurement strategy. The instruments used are fixed-price derivative contracts to hedge the variability in future cash flows from forecasted sales of power and purchases of fuel and power. Our objective in entering into these fixed-price derivatives is to fix the price for a portion of these transactions. See note 2(d).

As of December 31, 2006, the maximum length of time we were hedging our exposure to the variability in future cash flows that may result from changes in commodity prices was six years. During the first quarter of 2007, we de-designated our remaining cash flow hedges; therefore, as of December 31, 2007, we have no cash flow hedges.

Amounts included in accumulated other comprehensive loss:

	December 31, 2007
			Expected to be
			Reclassified into
	At the End of		Results of Operations
	the Period		in Next 12 Months
	(in millions)
Designated cash flow hedges	$	—	$	—
De-designated cash flow hedges		80		31
	$	80	$	31

Although we discontinued our proprietary trading business in March 2003, we have legacy positions, which will be closed as economically feasible or in accordance with their terms. The income (loss) associated with these transactions are:

	2007		2006		2005
	(in millions)
Revenues	$	1	$	1	$	(15	)
Cost of sales		18		26		(30	)
Total	$	19	$	27	$	(45	)

F-19

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The income (loss) of our energy and interest rate derivative instruments is:

	2007			2006			2005
	(in millions)
Energy derivatives:
Hedge ineffectiveness gains (losses)	$	6	(1)	$	(69	)	$	71
Other net unrealized gains (losses)		439			(162	)		(263	)
Interest rate derivatives:
Other net unrealized losses		(5	)		(11	)		(16	)
Total(2)(3)	$	440		$	(242	)	$	(208	)

(1)	As discussed above, during 2007, we de-designated our remaining cash flow hedges; the amount reflected here subsequent to that time relates to previously measured ineffectiveness reversing due to settlement of the derivative contracts.
(2)	No component of the derivatives’ gain or loss was excluded from the assessment of effectiveness.
(3)	Includes $0, $3 million loss and $0 for 2007, 2006 and 2005, respectively, recognized in our results of continuing operations as a result of the discontinuance of cash flow hedges for forecasted transactions that we determined were probable of not occurring.

For a discussion of our interest rate derivatives, see note 6(e).

During the second quarter of 2006, we refined our methodology for estimating fair value of derivative instruments cleared and settled through brokers by modifying our discounting assumptions to be consistent with discounting assumptions used in estimating fair value of exchange-traded futures contracts. This change in accounting estimate had an impact during 2006 as follows (income (loss)):

	2006
	Income/Loss from
	Continuing Operations
	before Income Taxes			Net Loss
	(in millions)
Cash flow hedges(1)	$	—		$	—
Mark-to-market derivatives		(32	)(2)		(20	)
Total	$	(32	)	$	(20	)

(1)	The impact relating to cash flow hedges was an increase in our net derivative liabilities of $9 million and a $5 million increase in accumulated other comprehensive loss, net of income taxes.
(2)	This amount represented an increase in our net derivative liabilities and an increase in net unrealized losses on energy derivatives, which were recorded $(1) million in revenues and $(31) million in cost of sales.
(3)	This represents a $0.07 impact on loss per share for 2006.

F-20

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(6)   Debt

(a)   Overview.

Our outstanding debt:

	December 31,
	2007								2006
	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		6.45	%	$	—	$	—			—	%	$	—	$	—
Senior secured term loans(B)					—		—			7.73			397		3
Senior unsecured notes due 2010(2)					—		—			9.25			550		—
Senior unsecured notes due 2013(3)		9.50			13		—			9.50			550		—
Senior secured notes due 2014		6.75			671		41	(4)		6.75			750		—
Senior unsecured notes due 2014		7.625			575		—			—			—		—
Senior unsecured notes due 2017		7.875			725		—			—			—		—
Convertible senior subordinated notes due 2010 (unsecured)		5.00			2		—			5.00			2		—
Subsidiary Obligations:
Orion Power Holdings 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		—
Channelview LP(6):
Term loans and revolving working capital facility:
Floating rate debt due 2008 to 2024					—		—			6.95			—		267
Fixed rate debt due 2014 to 2024					—		—			9.55			—		75
Reliant Energy Power Supply, LLC working capital facility due 2012		5.30			—		—			5.80			—		—
Total facilities, bonds and notes					2,886		41						3,149		345
Other:
Adjustment to fair value of debt(7)					17		11						29		10
Total other debt					17		11						29		10
Total debt				$	2,903	$	52					$	3,178	$	355

(1)	The weighted average stated interest rates are as of December 31, 2007 or 2006.
(2)	These notes became unsecured in June 2007 and we called the remaining balance in July 2007. See below.
(3)	These notes became unsecured in June 2007. See below.
(4)	As of February 15, 2008, we repurchased $41 million subsequent to December 31, 2007.
(5)	PEDFA is the Pennsylvania Economic Development Financing Authority.

F-21

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(6)	Channelview was deconsolidated on August 20, 2007. See notes 1 and 21.
(7)	Debt acquired in the Orion Power acquisition was adjusted to fair market value as of the acquisition date. Included in interest expense is amortization of $11 million, $9 million and $9 million for valuation adjustments for debt for 2007, 2006 and 2005, respectively.

Amounts borrowed and available for borrowing under our revolving credit agreements as of December 31, 2007 are:

	Total Committed		Drawn		Letters		Unused
	Credit		Amount		of Credit		Amount
	(in millions)
Reliant Energy senior secured revolver due 2012	$	500	$	—	$	109	$	391
Reliant Energy letter of credit facility due 2014		250		—		247		3
Retail working capital facility due 2012		300		—		—		300
	$	1,050	$	—	$	356	$	694

Debt maturities as of December 31, 2007 are:

				Reliant Energy
	Reliant Energy			Consolidated
	(in millions)
2008	$	41	(1)	$	41
2009		—			—
2010		2			402
2011		—			—
2012		—			—
2013 and thereafter		1,984			2,484
	$	2,027		$	2,927	(2)

(1)	As of February 15, 2008, we repurchased $41 million subsequent to December 31, 2007.
(2)	Excludes Channelview LP’s debt of $338 million.

(b)   Financing Activity.

2007 Financing Activity.  We completed a refinancing in June 2007, the components of which included:

•  Downsize of:

•  $700 million to $500 million senior secured revolver and extension of maturity from 2009 to 2012, and

•  $300 million to $250 million senior secured letter of credit facility and extension of maturity from 2010 to 2014;

•  Issuance of:

•  $575 million 7.625% senior unsecured notes due 2014, and

•  $725 million 7.875% senior unsecured notes due 2017;

•  Repayment of:

•  $521 million 9.25% senior secured notes due 2010,

•  $537 million 9.50% senior secured notes due 2013, and

•  $400 million senior secured term loan due 2010.

F-22

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In July 2007, we called the remaining $29 million of our senior unsecured notes due 2010. In December 2007, we repurchased $38 million of our 6.75% notes.

2006 Financing Activity.  In connection with the credit-enhanced retail structure (see note 7), we completed a refinancing in December 2006, the components of which included:

•  Amendment and downsize of:

•  $1.7 billion to $700 million senior secured revolver, and

•  $530 million to $400 million senior secured term loans;

•  Issuance of:

•  $300 million letter of credit facility, and

•  $300 million retail working capital facility; and

•  Repayment of $450 million retail receivables facility.

We also amended our senior secured revolver and term loans, senior secured notes and the guarantee of our PEDFA bonds to allow us to grant liens to Merrill Lynch & Co., Inc. and affiliates (Merrill Lynch) in connection with the credit-enhanced retail structure and the retail working capital facility.

(c)   Credit Facilities and Debt.

Senior Secured Revolver and Letter of Credit Facility (the June 2007 credit facilities).  We entered into the June 2007 credit facilities, which replaced the December 2006 credit facilities. The senior secured revolver bears interest at the London Inter Bank Offering Rate (LIBOR) plus 1.75% or a base rate plus 0.75%. Our revolving credit facility and letter of credit facility provide for the issuance of up to $500 million and $250 million of letters of credit, respectively.

The June 2007 credit facilities restrict our ability to, among other actions, (a) encumber our assets, (b) enter into business combinations or divest our assets, (c) incur additional debt or engage in sale and leaseback transactions, (d) pay dividends or pay subordinated debt, (e) make investments or acquisitions, (f) enter into transactions with affiliates, (g) materially change our business, (h) repurchase capital stock or (i) utilize proceeds from asset sales. When there are any revolving loans or revolving letters of credit outstanding under our June 2007 credit facilities, we are required to achieve specified levels for the ratio of consolidated secured debt to adjusted net earnings (loss) before interest expense, interest income, income taxes, depreciation and amortization (consolidated secured leverage ratio).

The June 2007 credit facilities are guaranteed by and secured by the assets and stock of some of our subsidiaries. See note 16.

Senior Unsecured 7.625% and 7.875% Notes.  In June 2007, we issued $575 million of 7.625% senior unsecured notes due 2014 and $725 million of 7.875% senior unsecured notes due 2017. These notes are unsecured obligations and not guaranteed. The unsecured notes restrict our ability to encumber our assets. Upon a change of control, the notes require that an offer to purchase the notes be made at a purchase price of 101% of the principal amount. The proceeds of this issuance were used to repay the tendered 9.25% and 9.50% senior secured notes and a portion of the senior secured term loan.

Senior Unsecured 9.25% and 9.50% Notes.  In June 2007, we completed a tender offer to purchase for cash any and all of the outstanding 9.25% senior secured notes due 2010 and 9.50% senior secured notes due 2013. We also solicited consents to (a) amend the applicable indentures governing the notes to eliminate substantially all of the restrictive covenants, (b) amend certain events of default, (c) modify other provisions contained in the indentures and (d) release the collateral securing the notes. Approximately 94.81% of the

F-23

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2010 note holders and 97.73% of the 2013 note holders accepted the tender offer and agreed to the consents. We paid a cash premium of $50 million and a consent solicitation fee of $21 million to the note holders who tendered during the second quarter of 2007.

In July 2007, we called the remaining $29 million of our 2010 notes that were outstanding as of June 30, 2007. We used cash on hand to pay the $29 million and a $1 million call premium.

Senior Secured 6.75% Notes.  The senior secured notes are guaranteed by and secured by the assets and stock of some of our subsidiaries. See note 16. If our June 2007 credit facilities become unsecured and certain credit ratios are achieved for two consecutive quarters, the senior secured notes will become unsecured. Upon a change of control, the notes require that an offer to purchase the notes be made at a purchase price of 101% of the principal amount. The senior secured notes have negative covenants similar to the negative covenants in our June 2007 credit facilities.

Convertible Senior Subordinated Notes.  On December 21, 2006, we completed an exchange offer for our 5.00% convertible senior subordinated notes. Approximately 99.2% of the holders accepted the offer, resulting in $2 million outstanding as of December 31, 2007 and 2006. We (a) issued an aggregate of 28.6 million shares of our common stock (104.8108 shares per $1,000 principal) and paid an aggregate cash premium of $41 million ($150 per $1,000 principal) to the holders who exchanged their notes and (b) recognized a charge of $37 million for the debt conversion expense during 2006. This represented a non-cash conversion of debt to equity of $273 million.

Orion Power Holdings Senior Notes.  These notes were recorded at a fair value of $479 million upon the acquisition of Orion Power. The $79 million premium is being amortized to interest expense over the life of the notes. The senior notes are senior unsecured obligations of Orion Power Holdings, are not guaranteed by any of Orion Power Holdings’ subsidiaries and are non-recourse to Reliant Energy. The senior notes have covenants that restrict the ability of Orion Power Holdings and its subsidiaries to, among other actions, (a) pay dividends or pay subordinated debt, (b) incur indebtedness or issue preferred stock, (c) make investments, (d) divest assets, (e) encumber its assets, (f) enter into transactions with affiliates, (g) engage in unrelated businesses and (h) engage in sale and leaseback transactions. As of December 31, 2007, conditions under these covenants were not met that allow the payment of dividends by Orion Power Holdings. As of December 31, 2007, the adjusted net assets of Orion Power that are restricted to Reliant Energy are $1.3 billion.

Reliant Energy Seward, LLC PEDFA Bonds.  Reliant Energy Seward, LLC (Seward) partially financed the construction of its power plant with proceeds from the issuance of tax-exempt revenue bonds by PEDFA. These bonds are guaranteed by Reliant Energy and each guarantee is secured by the same collateral as and has covenants similar to our senior secured notes. If our June 2007 credit facilities become unsecured and certain ratios are achieved for two consecutive quarters, the PEDFA bonds will become secured by only certain assets of our Seward power plant. Upon a change of control, the guarantees require that an offer to purchase the bonds be made at a purchase price of 101% of the principal amount.

REMA Term Loans.  Reliant Energy Mid-Atlantic Power Holdings, LLC (REMA LLC) and its subsidiaries (REMA) have sale-leaseback agreements with respect to three of their generating facilities. During 2005, term loans (which provided required credit support) were paid in full and replaced with letters of credit. See note 12(a).

Channelview LP.  Channelview LP was deconsolidated on August 20, 2007. See notes 1 and 21. Channelview LP entered into a credit agreement that financed the construction of a power plant. The credit agreement consisted of (a) $369 million in term loans and (b) $14 million revolving working capital facility that matured in 2007.

F-24

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Retail Working Capital Facility.  In connection with the credit-enhanced retail structure, on December 1, 2006, we entered into a $300 million working capital facility agreement with Merrill Lynch. Loans bear interest at LIBOR plus 0.45% or a base rate. Borrowings under this facility will mature on the 90th day after the termination of the credit sleeve and reimbursement agreement with Merrill Lynch. The working capital facility includes a $150 million minimum adjusted EBITDA requirement for RERH Holdings, LLC and its subsidiaries (RERH Holdings) for each trailing four-quarter period. The covenants under the credit sleeve and reimbursement agreement with Merrill Lynch also apply to the working capital facility. See note 7 for discussion on security for the retail working capital facility. The obligations of RERH Holdings are non-recourse to Reliant Energy.

(d)   Warrants.

In March 2003, we issued 7.8 million common stock warrants with an exercise price of $5.09 per share in connection with a credit facility. As of December 31, 2007 and 2006, 5,149,656 and 6,920,122 warrants, respectively, were outstanding and expire in August 2008. We recorded the fair value of the warrants ($15 million) as a discount to debt and an increase to additional paid-in capital. We amortize the debt discount to interest expense over the life of the related debt. During 2007, 2006 and 2005, the amortization was insignificant.

(e)   Interest Rate Derivative Instruments.

Historically, we have used interest rate swaps and caps to hedge a portion of the floating interest rate risk associated with our floating rate long-term debt. Some swaps used to hedge our exposure were designated as cash flow hedges, with the effective portion of gains and losses, net of tax, recorded in accumulated other comprehensive loss. The interest rate derivatives not designated as cash flow hedges were marked to market. We reclassify gains and losses on the designated hedges from accumulated other comprehensive loss into interest expense during the periods in which the interest payments being hedged occurred. See notes 2(d) and 5 for information regarding our derivatives.

Expirations.  As of December 31, 2005, the LIBOR interest rate caps associated with Reliant Energy’s credit facilities and the interest rate swaps related to the Channelview credit facilities expired. During 2005, we recorded $9 million in interest expense related to these instruments.

Terminations.  In 2002, we liquidated forward-starting interest rate swaps having a notional value of $1.0 billion. As of December 31, 2007 and 2006, we have $1 million and $4 million, respectively, of deferred losses in accumulated other comprehensive loss related to these interest rate swaps. We are amortizing these losses into interest expense through 2012 for the forward-starting interest rate swaps. As of December 31, 2007, an insignificant amount of accumulated other comprehensive loss is expected to be reclassified into interest expense during the next 12 months.

(7)   Credit-Enhanced Retail Structure

The credit sleeve and reimbursement agreement (the agreement) and a working capital facility agreement, providing for revolving credit loans, each with Merrill Lynch became effective on December 1, 2006, which substantially eliminated collateral postings for our retail energy business.

Under the agreement, Merrill Lynch provides guarantees and the posting of collateral to our counterparties in supply transactions for our retail energy business. Cash flow activity in connection with these contracts and related collateral is classified as operating cash flow. During 2006, we recorded an unrealized loss on energy derivatives of $18 million due to the differences in quantity between our contracts with Merrill Lynch and its contracts with the exchange relating to existing financially settled supply contracts.

F-25

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We paid Merrill Lynch one-time structuring fees of $14 million ($13 million in 2006 and $1 million in 2007), which were expensed as general and administrative costs. We also pay a fee to Merrill Lynch of $0.40 for each megawatt hour (MWh) of power that we deliver to our retail customers. This fee ($26 million and $2 million during 2007 and 2006, respectively) is classified as interest expense. We are obligated to reimburse Merrill Lynch to the extent that any guarantees are called upon or any collateral posted by Merrill Lynch is foreclosed upon.

The initial term of the agreement was five years; effective December 31, 2007, the term was extended by an additional year. We are permitted to terminate at any time, subject to a make-whole payment during the first two years of the agreement. Merrill Lynch does not have an early termination option.

In connection with the agreement, we implemented a structure so that the entities comprising our retail energy business became subsidiaries of RERH Holdings, LLC. The agreement (a) restricts the ability of RERH Holdings to, among other actions, (i) encumber its assets, (ii) sell certain assets, (iii) incur additional debt, (iv) pay dividends or pay subordinated debt, (v) make investments or acquisitions or (vi) enter into certain transactions with affiliates and (b) requires us to manage our risks related to commodity prices. Our obligations under the agreement with Merrill Lynch and the retail working capital facility are secured by first liens on the assets of RERH Holdings. RERH Holdings, as well as our subsidiaries Reliant Energy Trademark Trust and Reliant Energy IT Trust that provide trademark assets and information technology services to our retail energy business, are designed to maintain the separate nature of their assets, avoid consolidation of such assets with the bankruptcy estate of Reliant Energy in the event Reliant Energy ever becomes subject to such a proceeding, and ensure that such assets are available first and foremost to satisfy their creditors’ claims. The obligations of RERH Holdings under the agreement and the retail working capital facility are non-recourse to Reliant Energy. See note 6(c) for discussion of the retail working capital facility.

(8)   Stockholders’ Equity

The following describes our capital stock activity:

	Common		Treasury
	Stock		Stock
	(Shares in thousands)
As of January 1, 2005		299,684		128
Issued to benefit plans		4,877		(128	)
Issued for warrants		339		—
As of December 31, 2005		304,900		—
Issued to benefit plans		3,732		—
Issued for warrants		390		—
Issued for converted debt		28,601
As of December 31, 2006		337,623		—
Issued to benefit plans		5,562		—
Issued for warrants		1,384		—
Issued for converted debt		11		—
As of December 31, 2007		344,580		—

F-26

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(9)   Earnings Per Share

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

	2007			2006			2005
	(in millions)
Income (loss) from continuing operations (basic)	$	358		$	(327	)	$	(441	)
Plus: Interest expense on 5.00% convertible senior subordinated notes, net of tax		—	(1)		—	(2)		—	(2)
Income (loss) from continuing operations (diluted)	$	358		$	(327	)	$	(441	)

(1)	In December 2006, we converted 99.2% of our convertible senior subordinated notes to common stock.
(2)	As we incurred a loss from continuing operations for this period, diluted loss per share is calculated the same as basic loss per share.

	2007			2006			2005
	(Shares in thousands)
Diluted Weighted Average Shares Calculation:
Weighted average shares outstanding (basic)		342,467			307,705			302,409
Plus: Incremental shares from assumed conversions:
Stock options		4,885			—	(1)		—	(1)
Restricted stock		505			—	(1)		—	(1)
Employee stock purchase plan		47			—	(1)		—	(1)
5.00% convertible senior subordinated notes		213	(2)		—	(1)		—	(1)
Warrants		4,674			—	(1)		—	(1)
Weighted average shares outstanding assuming conversion (diluted)		352,791			307,705			302,409

(1)	See footnote 2 above regarding diluted loss per share.
(2)	See footnote 1 above.

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

	2007			2006			2005
	(Shares in thousands, dollars in millions)
Shares excluded from the calculation of diluted earnings/loss per share		N/A	(1)		35,951	(2)(3)		36,538	(3)
Shares excluded from the calculation of diluted earnings/loss per share because the exercise price exceeded the average market price		2,005	(4)		2,536	(4)		4,471	(4)
Interest expense (after-tax) that would be added to income if 5.00% convertible senior subordinated notes were dilutive		N/A	(1)	$	9	(2)	$	9

(1)	Not applicable as we included the item in the calculation of diluted earnings/loss per share.
(2)	On December 21, 2006, we converted 99.2% of our convertible senior subordinated notes to common stock. See note 6.
(3)	Potential shares excluded consist of convertible senior subordinated notes, warrants, stock options, restricted stock, performance-based shares and shares related to the employee stock purchase plan.
(4)	Includes stock options.

F-27

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(10)   Stock-Based Incentive Plans and Benefit Plans

(a)   Stock-Based Incentive Plans.

Overview of Plans.  The Compensation Committee of the Board of Directors administers our stock-based incentive plans. The Reliant Energy, Inc. 2002 Long-Term Incentive Plan and the Reliant Energy, Inc. 2002 Stock Plan permit us to grant various stock-based incentive awards to officers, key employees and directors. Awards may include stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, cash awards and stock awards.

As of December 31, 2007, 37 million shares are authorized for issuance under our stock-based incentive plans. No more than 25% of these shares can be granted as stock-based awards other than options. We have generally issued new shares when stock options are exercised and for other equity-based awards.

Summary.  Prior to January 1, 2006, we applied the intrinsic value method of accounting for employee stock-based incentive plans (APB No. 25). Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R) (using the modified prospective method). SFAS No. 123R requires compensation costs related to share-based transactions to be recognized in the financial statements based on estimated fair values at the grant dates. Our financial statements for 2007 and 2006 reflect the impact of SFAS No. 123R; however, our financial statements for 2005 have not been restated to reflect, and do not include, the impact of the new standard. Our compensation expense for our stock-based incentive plans was:

	2007			2006			2005
	(in millions)
Stock-based incentive plans compensation expense (pre-tax)	$	26		$	30		$	8
Income tax impact (before impact of the valuation allowances)	$	(9	)	$	(9	)	$	(3	)

We did not capitalize any stock-based compensation costs as an asset during 2007, 2006 and 2005.

We recorded a cumulative effect of an accounting change of $2 million ($1 million, net of tax) during the first quarter of 2006 for the estimated future forfeitures for the unvested awards outstanding as of January 1, 2006. During the fourth quarter of 2006, we adopted the alternative transition method to calculate excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption. This resulted in zero excess tax benefits.

Valuation Data.  Below is the description of the methods used during the indicated periods to estimate the fair value of our various awards.

F-28

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	After January 1, 2006	Prior to January 1, 2006
	(SFAS No. 123R)	(APB No. 25)
Award:
Time-based stock options(1)	Black-Scholes option-pricing model value on the grant date	Intrinsic value on the grant date
Time-based restricted stock(2)	No change	Market price of our common stock on the grant date
Time-based cash(3)	No change	Market price of our common stock on each reporting measurement date
Performance-based stock(4)	Market price of our common stock on each reporting measurement date until accounting grant date	Market price of our common stock on each reporting measurement date
Performance-based options(4)	Black-Scholes option-pricing model value on each reporting measurement date until accounting grant date	Intrinsic value of option on each reporting measurement date
Performance-based cash(1)(3)	No change	Market price of our common stock on each reporting measurement date
Employee stock purchase plan	Black-Scholes option-pricing model value on the first day of the offering period	No compensation expense recorded

(1)	No awards were granted during 2006.
(2)	Restricted stock and restricted stock units are referred to as “restricted stock.”
(3)	These are liability-classified awards under SFAS No. 123R.
(4)	No awards were granted in 2007 and 2006.

Time-Based Stock Options.  We grant time-based stock options to officers, key employees and directors at an exercise price equal to the market value of our common stock on the grant date. Generally, options vest 33.33% per year for three years and have a term of 10 years. Beginning January 1, 2006, compensation expense is measured at fair value on the grant date, net of estimated forfeitures, and expensed on a straight-line basis over the requisite service period for the entire award.

Summarized time-based option activity is:

	2007
				Weighted		Weighted
				Average		Average Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Options			Price		Term (Years)		Value
								(in millions)
Beginning of period		7,864,352		$	13.98		5	$	37
Granted		541,907			18.36
Exercised		(2,196,713	)(1)		9.43
Forfeited		(49,930	)		16.26
Expired		(413,862	)		26.54
End of period		5,745,754	(2)(3)		15.21		4		71
Exercisable at end of period		5,243,775			14.90		4		67

F-29

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1)	Received proceeds of $21 million. Intrinsic value was $26 million on the exercise dates. No tax benefits were realized in 2007 due to our net operating loss carryforwards.
(2)	We estimate that 115,798 of these will be forfeited.
(3)	As of December 31, 2007, the total compensation cost related to nonvested time-based stock options not yet recognized and the weighted-average period over which it is expected to be recognized is $2 million and 2 years, respectively.

	2006			2005
	(in millions, except per unit amounts)
Weighted average grant date fair value of the time-based options granted	$	—		$	7.18
Proceeds from exercise of time-based options		16			29
Intrinsic value of exercised time-based options		8			17
Tax benefits realized		—	(1)		—	(1)

(1) None realized due to our net operating loss carryforwards.

Our time-based stock option awards are based on the following weighted average assumptions and resulting fair value. No time-based stock options awards were granted during 2006.

	2007
Expected term in years(1)		6
Estimated volatility(2)		31.04	%
Risk free interest rate		4.63	%
Dividend yield		0	%
Weighted-average fair value	$	7.32

(1)	The expected term is based on a binomial lattice model.
(2)	We estimate volatility based on historical and implied volatility of our common stock.

Time-Based Restricted Stock Awards.  We grant time-based restricted stock awards to officers, key employees and directors. In general, these awards vest, subject to the participant’s continued employment, three years from the grant date. Beginning January 1, 2006, compensation expense is measured at fair value on the grant date, net of estimated forfeitures, and expensed on a straight-line basis over the requisite service period.

F-30

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summarized restricted stock award activity is:

	2007
				Weighted
				Average Grant
	Shares			Date Fair Value
Beginning of period		1,095,469		$	9.95
Granted		456,776			18.91
Vested		(429,779	)(1)		8.85
Forfeited		(75,063	)		13.71
End of period		1,047,403	(2)		14.04
December 31, 2007 total compensation cost related to nonvested time-based restricted stock awards not yet recognized	$	6 million
Weighted average period over which the nonvested time-based restricted stock is expected to be recognized		2 years

(1)	Based on the market price of our common stock on the vesting date, $9 million in fair value vested.
(2)	We estimate that 133,415 of these will be forfeited.

	2006		2005
	(in millions, except per unit amounts)
Fair value of time-based restricted stock that vested based on market price of our common stock on the vesting date	$	11	$	9
Weighted-average grant date fair value of time-based restricted stock granted		11.64		12.65

Time-Based Cash Awards.  We grant time-based cash awards (cash units with each cash unit having an equivalent fair market value of one share of our common stock on the vesting date) to officers and key employees. In general, these awards vest, subject to the participant’s continued employment, three years from the grant date. Compensation expense is measured at fair value on each financial reporting measurement date, net of estimated forfeitures, and expensed on a straight-line basis over the requisite service period. As of December 31, 2007 and 2006, we had $8 million liability and $7 million liability, respectively, recorded for these awards.

During 2007, 392,126 time-based cash awards vested and were paid in the amount of $8 million. During 2006 and 2005, no time-based cash awards vested and we did not pay cash for any stock-based liabilities. As of December 31, 2007, the total compensation cost related to nonvested time-based cash awards not yet recognized is $6 million and the weighted-average period over which it is expected to be recognized is two years.

Performance-Based and Market-Based Awards.  We grant performance-based and market-based awards to officers and key employees. The number of performance-based awards earned is determined at the end of each performance period. As of December 31, 2007, there were no outstanding performance-based or market-based awards. Beginning January 1, 2006, compensation expense is measured at fair value, net of estimated forfeitures, at each reporting measurement date preceding the grant date for accounting purposes. We have broadly interpreted the criteria for determining if the service inception date precedes the grant date for our performance-based awards under SFAS No. 123R. As of December 31, 2007 and 2006, we had $0 and $15 million liability, respectively, recorded for these awards.

During February 2007, 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

F-31

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

committee granted 345,358 market-based cash units, 429,221 time-based stock options (included in the time-based stock options disclosures above) and 200,314 time-based restricted stock units (included in the time-based restricted stock award disclosures above). Our common stock closed at $23 or higher for 20 consecutive trading days on June 1, 2007. Accordingly, all of the outstanding market-based cash units (326,048) vested according to their terms and we recognized expense and paid in cash of $8 million during 2007 related to these units.

The Compensation Committee granted the 2004-2006 performance-based awards through the Key Employee Award Program (the Key Employee Program) established under the Reliant Energy, Inc. 2002 Long-Term Incentive Plan. Under the Key Employee Program, each performance-based award represented a targeted award of (a) 16,000 shares of performance-based stock, (b) 68,000 performance-based stock options and (c) 16,000 cash units with each cash unit having an equivalent fair market value of one share of our common stock on the vesting date. The three-year performance period ended on December 31, 2006. On January 26, 2007, the Compensation Committee determined the payout percentage was 80%.

Summarized performance-based stock award activity of the Key Employee Program based on the 80% achievement is:

	2007
				Reporting
				Measurement
	Shares			Date Fair Value
Beginning of period		1,004,800	(1)	$	14.48
Vested		(1,004,800	)		14.48
End of period		—			N/A

(1) Based on the market price of our common stock on the vesting date, $15 million in fair value vested.

Summarized performance-based option activity of the Key Employee Program is:

	2007
						Weighted
						Average
				Weighted		Remaining
				Average		Contractual		Aggregate
				Exercise		Term		Intrinsic
	Options			Price		(Years)		Value
								(in millions)
Beginning of period		4,270,400		$	8.36		7	$	25
Exercised		(1,366,600	)(1)		8.40
End of period		2,903,800			8.33		6		52
Exercisable at end of period		2,903,800			8.33		6		52
Weighted average grant date fair value		N/A

(1) Received proceeds of $11 million, intrinsic value was $19 million on the exercise dates. No tax benefits were realized in 2007 due to our net operating loss carryforwards.

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RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our option awards under the Key Employee Program are based on the following weighted average assumptions and resulting fair values for 2007 and 2006:

Expected term in years(1)		3
Estimated volatility(2)		31.21	%
Risk-free interest rate		4.9	%
Dividend yield		0	%
Weighted-average fair value	$	7.52

(1)	The expected term is based on a projection of exercise behavior considering the contractual terms and the participants of the option awards.
(2)	We estimated volatility based on historical and implied volatility of our common stock.

The performance-based cash units under the Key Employee Program (1,004,800) vested and we paid $15 million in cash during 2007 related to these units.

Other than the performance-based and market-based awards that vested in 2007, there were no other material performance-based or market-based awards that vested in 2007, 2006 and 2005.

Employee Stock Purchase Plan.  We have 18 million shares of authorized common stock reserved and approved for issuance under the Reliant Energy, Inc. Employee Stock Purchase Plan (ESPP). Under the ESPP, substantially all employees can purchase our common stock through payroll deductions of up to 15% of eligible compensation during semiannual offering periods commencing on January 1 and July 1 of each year. The share price paid by participants equals 85% of the lesser of the average market price on the first or last business day of each offering period.

The estimated fair value of the discounted share price element in our ESPP is based on the following weighted average assumptions:

	2007			2006			2005(1)
Expected term in years		0.5			0.5			0.5
Estimated volatility(2)		21.32	%		42.96	%		32.97	%
Risk-free interest rate		5.07	%		4.74	%		2.94	%
Dividend yield		0	%		0	%		0	%
Weighted-average fair value	$	3.87		$	3.02		$	3.25

(1)	Because we applied APB No. 25 during 2005, this was only used for pro-forma data.
(2)	We estimated volatility based on the historical volatility of our common stock.

During 2007, 2006 and 2005, we issued 786,458 shares, 859,549 shares and 838,120 shares, respectively, under the ESPP and received $9 million, $8 million and $8 million, respectively, from the sale of shares to employees. Approximately 10 million reserved unissued shares were available under the ESPP as of December 31, 2007.

F-33

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pro-forma Data for 2005.  If employee stock-based compensation costs had been expensed based on the fair value (determined using the Black-Scholes model and market price of our common stock) method of accounting applied to all stock-based awards, our pro forma results would be:

	2005
	(in millions, except
	per-share amounts)
Net loss, as reported	$	(331	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		5
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(17	)
Pro forma net loss	$	(343	)
Loss per share:
Basic and diluted, as reported	$	(1.09	)
Basic and diluted, pro forma	$	(1.13	)

We used the Black-Scholes option-pricing model with the following weighted average assumptions and resulting fair values:

	Options
	2005
Expected term in years		5
Estimated volatility(1)		45.75	%
Risk-free interest rate		4.18	%
Dividend yield		0	%
Weighted-average fair value	$	5.72

(1) We estimated volatility based on an equal weighting of historical and implied volatility of our common stock.

Classification.  Through December 31, 2005, our accruals for our stock-based incentive awards were recorded as liabilities. Beginning January 1, 2006, for stock-based equity awards, we reclassified our accrual of $23 million to equity, of which $5 million was classified as temporary equity stock-based compensation based on the redemption amount of the award as of the grant date, and the remainder was classified as additional paid-in capital in stockholders’ equity. Some of our stock-based equity awards provide for the settlement of the award in cash by us pursuant to change of control provisions and we do not believe it is probable these awards will become redeemable.

Other.  We did not use cash to settle equity instruments granted under stock-based compensation plans during 2007, 2006 or 2005. During 2007, 2006 and 2005, there were no significant modifications to our outstanding stock-based awards.

(b)   Pension and Postretirement Benefits.

Benefit Plans.  We sponsor multiple defined benefit pension plans. We provide subsidized postretirement benefits to some bargaining employees but generally do not provide them to non-bargaining employees.

Effective December 31, 2006, we adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement requires recognition of the funded status of plans, measured as of year end. We already use the required measurement date. The adoption did not have a material effect on any individual line item of our consolidated balance sheet

F-34

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

as of December 31, 2006. As of December 31, 2007, $0 and $2 million of net actuarial loss and net prior service costs, respectively, in accumulated other comprehensive loss are expected to be recognized in net periodic benefit cost during the next 12 months.

Our benefit obligations and funded status are:

	Pension						Postretirement Benefits
	2007			2006			2007			2006
	(in millions)
Change in Benefit Obligation
Beginning of year	$	90		$	82		$	73		$	67
Service cost		6			6			2			2
Interest cost		5			5			4			4
Benefits paid		(2	)		(2	)		—			—
Actuarial gain		(1	)		(1	)		(1	)		—
End of year	$	98		$	90		$	78		$	73
Change in Plan Assets
Beginning of year	$	59		$	50		$	—		$	—
Employer contributions		14			4			—			—
Benefits paid		(3	)		(2	)		—			—
Actual investment return		5			7			—			—
End of year	$	75		$	59		$	—		$	—
Funded status	$	(23	)	$	(31	)	$	(78	)	$	(73	)

Amounts recognized in the consolidated balance sheets are:

	Pension						Postretirement Benefits
	December 31,						December 31,
	2007			2006			2007			2006
	(in millions)
Current liabilities	$	—		$	—		$	(2	)	$	(1	)
Noncurrent liabilities		(23	)		(31	)		(76	)		(72	)
Net amount recognized	$	(23	)	$	(31	)	$	(78	)	$	(73	)

The accumulated benefit obligation for all pension plans was $87 million and $81 million as of December 31, 2007 and 2006, respectively. All pension plans have accumulated benefit obligations in excess of plan assets.

F-35

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net benefit costs are:

	Pension									Postretirement Benefits
	2007			2006			2005			2007		2006		2005
	(in millions)
Service cost	$	6		$	6		$	6		$	2	$	2	$	2
Interest cost		5			5			4			4		4		4
Expected return on plan assets		(4	)		(4	)		(3	)		—		—		—
Net amortization		1			1			1			—		—		2
Net benefit cost	$	8		$	8		$	8		$	6	$	6	$	8

Assumptions.  The significant weighted average assumptions used to determine the benefit obligations are:

	Pension						Postretirement Benefits
	December 31,						December 31,
	2007			2006			2007			2006
Discount rate		5.75	%		5.75	%		5.75	%		5.75	%
Rate of compensation increase		3.0	%		3.0	%		3.0	%		3.0	%

The significant weighted average assumptions used to determine the net benefit costs are:

	Pension									Postretirement Benefits
	2007			2006			2005			2007			2006			2005
Discount rate		5.75	%		5.75	%		5.75	%		5.75	%		5.75	%		5.75	%
Rate of compensation increase		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Expected long-term rate of return on assets		7.5	%		7.5	%		7.5	%		N/A			N/A			N/A

As of December 31, 2007 and 2006, we developed our expected long-term rate of return on pension plan assets based on third party models. These models consider expected inflation, current dividend yields, expected corporate earnings growth and risk premiums based on the expected volatility of each asset category. We weight the expected long-term rates of return for each asset category to determine our overall expected long-term rate of return on pension plan assets. In addition, we review peer data and historical returns.

Our assumed health care cost trend rates used to measure the expected cost of benefits covered by our postretirement plans are:

	2007			2006			2005
Health care cost trend rate assumed for next year		8.3	%		9.0	%		9.0	%
Rate to which the cost trend rate is assumed to gradually decline (ultimate trend rate)		5.5	%		5.5	%		5.5	%
Year that the rate reaches the ultimate trend rate		2015			2015			2011

Assumed health care cost trend rates can have a significant effect on the amounts reported for our health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 2007:

	One-Percentage Point
	Increase		Decrease
	(in millions)
Effect on service and interest cost	$	1	$	(1	)
Effect on accumulated postretirement benefit obligation		10		(9	)

F-36

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Plan Assets.  Our pension weighted average asset allocations and target allocation by asset category are:

	Percentage of Plan Assets						Target
	as of December 31,						Allocation
	2007			2006			2008
Domestic equity securities		49	%		50	%		50	%
International equity securities		10			11			10
Global equity securities		10			11			10
Debt securities		31			28			30
Total		100	%		100	%		100	%

In managing the investments associated with the pension plans, our objective is to exceed, on a net-of-fee basis, the rate of return of a performance benchmark composed of the following indices:

Asset Class	Index	Weight
Domestic equity securities	Wilshire 5000 Index		50	%
International equity securities	MSCI All Country World Ex-U.S. Index		10
Global equity securities	MSCI All Country World Index		10
Debt securities	Lehman Brothers Aggregate Bond Index		30
			100	%

As a secondary measure, we compare asset performance to the returns of a universe of comparable funds, where applicable, over a full market cycle. Our Benefits Committee reviews plan asset performance each quarter by comparing the actual quarterly returns of each asset class to its related benchmark. Our plan assets have generally performed in accordance with the benchmarks.

Cash Obligations.  We expect pension cash contributions to approximate $2 million during 2008. Expected benefit payments for the next ten years, which reflect future service as appropriate, are:

			Postretirement
	Pension		Benefits
	(in millions)
2008	$	3	$	2
2009		3		3
2010		4		3
2011		4		4
2012		5		5
2013-2017		39		33

(c)   Savings Plan.

We have employee savings plans under Sections 401(a) and 401(k) of the Internal Revenue Code. Our savings plans benefit expense, including the matching contributions of generally up to 6% and discretionary contributions, was $24 million, $19 million and $19 million during 2007, 2006 and 2005, respectively.

We sponsor non-qualified deferred compensation plans for key and highly compensated employees. Our obligations under these plans were $41 million and $39 million and related rabbi trust investments were $29 million and $28 million as of December 31, 2007 and 2006, respectively.

F-37

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(d)   Other Employee Matters.

As of December 31, 2007, approximately 29% of our employees are subject to collective bargaining arrangements. Approximately 4% of our employees are subject to collective bargaining arrangements that will expire in 2008.

(11)   Income Taxes

(a)   Summary.

Our income tax expense (benefit) is:

	2007			2006			2005
	(in millions)
Current:
Federal	$	—		$	—		$	7
State		16			30			19
Total current		16			30			26
Deferred:
Federal		121			(19	)		(305	)
State		(2	)		(133	)		26
Total deferred		119			(152	)		(279	)
Income tax expense (benefit) from continuing operations	$	135		$	(122	)	$	(253	)
Income tax expense (benefit) from discontinued operations	$	—		$	(5	)	$	(68	)

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

	2007			2006			2005
Federal statutory rate		35	%		(35	)%		(35	)%
Additions (reductions) resulting from:
Federal tax uncertainties		(1	)		3			1
Federal valuation allowance(1)		(7	)		15	(2)		—
State income taxes, net of federal income taxes		2	(3)		(12	)(4)		4
Capital loss valuation allowances		—			—			(12	)
Debt conversion expense		—			3			—
Changes in estimates of deferred tax assets and liabilities		—			—			4
Other, net		(2	)		(1	)		2
Effective rate		27	%		(27	)%		(36	)%

(1)	Our changes to the federal valuation allowance are recorded at Reliant Energy, Inc.
(2)	Of this percentage, $18 million (4%) relates to the reduction of net deferred tax assets.
(3)	Of this percentage, $18 million (4%) relates to a decrease in our state valuation allowances.
(4)	Of this percentage, $40 million (9%) relates to Pennsylvania state law changes, which effectively decreased all limitations to use net operating losses in that state.

F-38

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31,
	2007			2006
	(in millions)
Deferred tax assets:
Current:
Derivative liabilities, net	$	86		$	275
Western states settlement		—			13
Allowance for doubtful accounts		13			13
Employee benefits		7			4
Federal valuation allowance		—			(10	)
State valuation allowances		—			(15	)
Other		9			4
Total current deferred tax assets		115			284
Non-current:
Employee benefits		68			73
Net operating loss carryforwards		629			620
Capital loss carryforwards		9			—
Environmental reserves		11			11
Derivative liabilities, net		42			92
Other		62			44
Federal valuation allowance		(14	)		(50	)
State valuation allowances		(67	)		(70	)
Other valuation allowances		(22	)		(18	)
Total non-current deferred tax assets		718			702
Total deferred tax assets	$	833		$	986
Deferred tax liabilities:
Current:
Other	$	—		$	9
Total current deferred tax liabilities		—			9
Non-current:
Depreciation and amortization		653			622
Other		12			6
Total non-current deferred tax liabilities		665			628
Total deferred tax liabilities	$	665		$	637
Accumulated deferred income taxes, net	$	168		$	349

F-39

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(b)   Tax Attribute Carryovers.

			Statutory
	December 31,		Carryforward		Expiration
	2007		Period		Year(s)
	(in millions)		(in years)
Net Operating Loss Carryforwards:
Federal	$	1,284		20		2022 through 2027
State		3,257		5 to 20		2008 through 2027
Foreign		64		7 to 10		2008 through 2014
Capital Loss Carryforwards		26		5		2012
Charitable Contribution Carryforwards		4		5		2009 through 2012
State Tax Credit Carryforwards		6		1 to 20		2008 through 2027

(c)   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 January 1, 2005	$	—		$	96		$	138
Changes in valuation allowance		—			(1	)		(117	)(1)
As of December 31, 2005		—			95			21
Changes in valuation allowance		50	(2)		(14	)		(3	)
Changes in valuation allowance included in accumulated other comprehensive loss		10			—			—
Other, net		—			4			—
As of December 31, 2006		60			85			18
Changes in valuation allowance		(37	)(3)(4)		(18	)(4)		4
Changes in valuation allowance included in accumulated other comprehensive loss		4			—			—
Channelview deconsolidation		(13	)(5)		—			—
As of December 31, 2007	$	14		$	67		$	22

(1)	Net decrease is primarily due to net capital gains recorded during the year and the identification of various tax planning strategies with respect to the sale of assets. Of the capital loss carryforward impact of $120 million, $82 million is recorded in continuing operations and $38 million is recorded in discontinued operations.
(2)	Net increase is primarily due to our recent history of losses and the change in our net federal deferred tax assets.
(3)	During 2007, we submitted a revision to taxable income to the Internal Revenue Service filed in our 2003 federal income tax return, which resulted in an increase in our net deferred tax assets related to our net operating losses, which was offset by an increase in our valuation allowance of $19 million.
(4)	Net decrease is primarily due to 2007 pre-tax income.
(5)	Channelview was deconsolidated on August 20, 2007. See notes 1 and 21.

F-40

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(d)   Adoption of FIN 48 and Tax Uncertainties.

Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48). 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.

In connection with the adoption, we recognized the following in our consolidated financial statements:

	Adoption Effect on
	January 1, 2007
	Increase (Decrease)
	(in millions)
Goodwill	$	(2	)
Other long-term liabilities		(27	)
Retained deficit		(25	)

Our unrecognized tax benefits changed as follows:

	2007
	(in millions)
Beginning of year (immediately after adoption)	$	4
Increases related to prior years		11
Decreases related to prior years		(11	)
Increases related to current year		—
Settlements		(3	)
Lapses in the statute of limitations		—
End of year	$	1

We have the following in our consolidated balance sheet (included in other long-term liabilities):

	January 1, 2007
	(Immediately After Adoption)		December 31, 2007
	(in millions)
Interest and penalties(1)	$	3	$	—

(1) The activity during 2007 was insignificant.

During 2007, 2006 and 2005, we recognized $(2) million, $6 million and $1 million, respectively, of income tax expense (benefit) due to changes in interest and penalties for federal and state income taxes.

We have the following years that remain subject to examination or are currently under audit for our major tax jurisdictions:

	Subject to Examination		Currently Under Audit
Federal		1997 to 2007	1997 to 2005
Texas		2000 to 2007	2000 to 2005
Pennsylvania		2004 to 2007	2006
California		2003 to 2007	2003 to 2006

F-41

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 during 2008; 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)); and

•  the timing of tax deductions as a result of negotiations with respect to California-related revenue, depreciation, emission allowances and certain employee benefits.

Agreement with CenterPoint.  We ceased being a member of the CenterPoint consolidated tax group as of September 30, 2002 and could be limited in our ability to use tax attributes related to periods through that date. CenterPoint’s income tax returns for the 1997 to 2002 tax reporting periods are under audit by federal and state taxing authorities. We have a tax allocation agreement that addresses the allocation of taxes pertaining to our separation from CenterPoint. This agreement provides that we may carry back net operating losses generated subsequent to September 30, 2002 to tax years when we were part of CenterPoint’s consolidated tax group. Any such carryback is subject to CenterPoint’s consent and any existing statutory carryback limitations. For items relating to periods prior to September 30, 2002, we will (a) recognize any net costs incurred by CenterPoint for temporary differences up to $15 million (of which $0 has been recognized through December 31, 2007) as an equity contribution and (b) recognize any net benefits realized by CenterPoint for temporary differences up to $1 million as an equity distribution. Generally, amounts for temporary differences in excess of the $15 million and $1 million thresholds will be settled in cash between us and CenterPoint. Pursuant to this agreement, generally, taxes related to permanent differences are the responsibility of CenterPoint. As of December 31, 2007, we cannot predict the amount of any contingent liabilities or assets that we may incur or realize under this agreement.

(12)   Commitments

(a)   Lease Commitments.

REMA Leases.  One of our subsidiaries, REMA, entered into sale-leaseback transactions, under operating leases that are non-recourse to us. We lease 16.45% and 16.67% interests in the Conemaugh and Keystone facilities, respectively. The leases expire in 2034 and we expect to make payments through 2029. We also lease a 100% interest in the Shawville facility. This lease expires in 2026 and we expect to make payments through that date. At the expiration of these leases, there are several renewal options related to fair market value. REMA LLC’s subsidiaries guarantee the lease obligations and we have pledged the equity interests in these subsidiaries as collateral. We provide credit support for REMA’s lease obligations in the form of letters of credit under the June 2007 credit facilities. See note 6. During 2007, 2006 and 2005, we made lease payments under these leases of $65 million, $64 million and $75 million, respectively. As of December 31, 2007 and 2006, we have recorded a prepaid lease of $59 million in other current assets and $270 million and $264 million, respectively, in noncurrent assets. REMA operates the Conemaugh and Keystone facilities under agreements that could terminate annually with one year’s notice and received fees of $10 million, $9 million and $9 million during 2007, 2006 and 2005, respectively. These fees, which are recorded in operation and maintenance expense, are primarily to cover REMA’s administrative support costs of providing these services.

REMA’s ability to pay dividends or pay subordinated obligations is restricted by conditions within the lease documents. As of December 31, 2007, REMA was not limited by these restrictions.

Tolling Agreements.  As of December 31, 2007, we have a tolling arrangement that extends through 2012. This arrangement, which qualifies as an operating lease, entitles us to purchase and dispatch electric

F-42

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

generating capacity. We paid $39 million, $63 million and $64 million in tolling payments during 2007, 2006 and 2005, respectively, related to this tolling arrangement and one that expired in 2007.

Office Space Lease.  In 2003, we entered into a long-term operating lease for our corporate headquarters. The lease expires in 2018 and is subject to two five-year renewal options.

Cash Obligations Under Operating Leases.  Our projected cash obligations under non-cancelable long-term operating leases as of December 31, 2007 are:

	REMA Leases		Other(1)(2)		Total
	(in millions)
2008	$	62	$	76	$	138
2009		63		78		141
2010		52		76		128
2011		63		66		129
2012		56		34		90
2013 and thereafter		763		137		900
Total	$	1,059	$	467	$	1,526

(1)	Includes tolling arrangement, rental agreements for office space and capacity commitments accounted for as leases.
(2)	Excludes projected sublease income on office space of $48 million.

Operating Lease Expense.  Total lease expense for all operating leases was $135 million, $156 million and $152 million during 2007, 2006 and 2005, respectively.

(b)   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 $55 million as of December 31, 2007 and no liability is recorded in our consolidated balance sheets for this item.

In addition, we are also required to indemnify CenterPoint for certain liabilities relating to the initial public offering of our common stock.

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 December 31, 2007 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.

F-43

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Reliant Energy has issued guarantees in conjunction with certain performance agreements and commodity and derivative contracts and other contracts that provide financial assurance to third parties on behalf of a subsidiary or an unconsolidated third party. The guarantees on behalf of subsidiaries are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the relevant subsidiary’s intended commercial purposes.

The following table details Reliant Energy’s various guarantees:

	December 31, 2007
	Stated
	Maximum						Carrying Amount
	Potential						of Liability
	Amount of				Assets Held		Recorded on
Type of Guarantee	Future Payments		Amount Utilized(1)		As Collateral		Balance Sheet
	(in millions)
Commodity obligations(2)	$	3,173	$	196	$	—	$	—
Standby letters of credit(3)		302		302		—		—
Payment and performance obligations under service contracts and leases(4)		35		—		—		—
Non-qualified benefits of CenterPoint’s retirees(5)		55		55		—		—
Total guarantees	$	3,565	$	553	$	—	$	—

(1)	This represents the estimated portion of the maximum potential amount of future payments that is utilized as of December 31, 2007. For those guarantees related to obligations that are recorded as liabilities by our subsidiaries, this includes the recorded amount.
(2)	Reliant Energy has guaranteed the performance of certain of its wholly-owned subsidiaries’ commodity obligations. These guarantees were provided to counterparties in order to facilitate physical and financial agreements in electricity, gas, oil, transportation and related commodities and services. Some of these guarantees have varying expiration dates and some can be terminated by Reliant Energy upon notice.
(3)	Reliant Energy has outstanding standby letters of credit, which guarantee the performance of certain of its wholly-owned subsidiaries. As of December 31, 2007, these letters of credit expire on various dates through 2008.
(4)	Reliant Energy has guaranteed the payment obligations of certain wholly-owned subsidiaries arising under long-term service agreements and leases for certain facilities. As of December 31, 2007, these guarantees expire over varying years through 2018.
(5)	See above.

Unless otherwise noted, failure by the primary obligor to perform under the terms of the various agreements and contracts guaranteed may result in the beneficiary requesting immediate payment from Reliant Energy. To the extent liabilities exist under the various agreements and contracts that Reliant Energy guarantees, such liabilities are recorded in Reliant Energy’s subsidiaries’ balance sheets as of December 31, 2007. We do not expect Reliant Energy to make any material payments under these provisions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(c)   Other Commitments.

Property, Plant and Equipment Commitments.  As of December 31, 2007, we have contractual commitments to spend approximately $296 million on plant and equipment relating primarily to SO₂ emissions reductions.

Fuel Supply, Commodity Transportation, Purchased Power and Electric Capacity Commitments.  We are a party to fuel supply contracts, commodity transportation contracts and purchased power and electric capacity contracts of various quantities and durations that are not classified as derivative assets and liabilities. These contracts are not included in our consolidated balance sheet as of December 31, 2007. Minimum purchase commitment obligations under these agreements are as follows as of December 31, 2007:

							Purchased Power
	Fuel				Transportation		And Electric
	Commitments				Commitments		Capacity Commitments
	Fixed		Variable		Fixed		Fixed		Variable
	Pricing		Pricing(1)		Pricing		Pricing		Pricing(2)
	(in millions)
2008	$	81	$	7	$	87	$	67	$	13
2009		60		8		75		74		11
2010		37		8		73		13		—
2011		21		9		75		13		—
2012		22		9		71		13		—
2013 and thereafter		101		86		502		7		—
Total	$	322	$	127	$	883	$	187	$	24

(1)	For contracts with variable pricing components, we estimated prices based on assumptions on escalations per the contractual terms.
(2)	For contracts with variable pricing components, we estimated prices based on forward commodity curves as of December 31, 2007.

As of December 31, 2007, the maximum remaining terms under any individual fuel supply contract is 13 years, any transportation contract is 15 years and any purchased power and electric capacity contract is seven years.

Sales Commitments.  As of December 31, 2007, we have sales commitments, including electric energy and capacity sales contracts, which are not classified as derivative assets and liabilities. The estimated minimum sales commitments over the next five years under these contracts are as follows:

	Retail Energy				Wholesale Energy
	Fixed		Variable		Fixed
	Pricing(1)		Pricing(1)(2)		Pricing
	(in millions)
2008	$	854	$	2,071	$	344
2009		526		1,517		508
2010		213		1,130		291
2011		64		859		126
2012		27		573		158
Total	$	1,684	$	6,150	$	1,427

(1)	In connection with our credit-enhanced retail structure, we estimate the fees under these sales commitments to be $15 million, $10 million, $7 million, $5 million and $3 million during 2008, 2009, 2010, 2011 and 2012, respectively.
(2)	For contracts with variable pricing components, we estimated prices based on forward commodity curves as of December 31, 2007.

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RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Naming Rights to Houston Sports Complex.  We acquired the naming rights, including advertising and other benefits, for a football stadium and other convention and entertainment facilities included in the stadium complex. Pursuant to this agreement, we are required to pay $10 million per year from 2002 through 2032.

Long-term Power Generation Maintenance Agreements.  We have entered into long-term maintenance agreements that cover some periodic maintenance, including parts, on power generation turbines. The long-term maintenance agreements terminate from 2011 to 2036 based on turbine usage. During 2007, 2006 and 2005, we incurred expenses of $9 million, $17 million and $16 million, respectively. Estimated cash payments over the next five years for these agreements are as follows (in millions):

2008	$	14
2009		10
2010		27
2011		28
2012		40
2013 and thereafter		585
Total	$	704

(13)   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 Electricity and Natural Gas Litigation.

The following proceedings relate to alleged conduct in the electricity and 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.

Electricity Actions.  In February 2005, our one remaining lawsuit relating to our participation in alleged conduct to increase electricity prices in violation of antitrust laws, unfair competition laws and similar laws was dismissed in our favor from an order of the United States District Court. In January 2008, the United States Court of Appeals for the Ninth Circuit affirmed the decision to dismiss this case.

Natural Gas Actions.  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. In September 2007, the Ninth Circuit Court of Appeals issued decisions in a number of the 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 plaintiff’s 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.

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

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RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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).

(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. 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 allegations are based on projects occurring prior to our ownership of the facility and the suit 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.

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 Site Closures.  We are responsible for environmental costs related to the future closures of seven ash disposal sites. We recorded the estimated discounted costs associated with these environmental liabilities as part of our asset retirement obligations. See note 2(o).

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 liability for the remediation costs of $8 million and $7 million as of December 31, 2007 and 2006, respectively.

Conemaugh Actions.  In April 2007, the PADEP filed suit against us in the Court of Common Pleas of Indiana County, Pennsylvania. In addition, in April 2007, PennEnvironment and the Sierra Club filed a citizens’ suit against us in the United States District Court, Western District of Pennsylvania. Each suit alleges that the Conemaugh plant 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 jointly leased by us and seven other companies and is governed by a consent order agreement with the 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 PADEP or 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.

(c)   Other.

PUCT Cases.  There are various proceedings pending before the state district court in Travis County, Texas, seeking reviews of the Public Utility Commission of Texas (PUCT) orders relating to the fuel factor component used in our “price-to-beat” tariff. These proceedings pertain to the same issues affirmed by a district court in Travis County and later by the Travis County Court of Appeals in 2004 in a separate proceeding.

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RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CenterPoint Indemnity.  We have agreed to indemnify CenterPoint against certain losses relating to the lawsuits described in note 13(a) under “Pending Electricity and Natural Gas Litigation—Natural Gas Actions.” We have also agreed to indemnify CenterPoint against losses relating to an alleged breach of fiduciary duties in violation of the Employee Retirement Income Security Act in a class action lawsuit in the United States District Court for the Southern District of Texas. The lawsuit seeks monetary damages and restitution. In January 2006, the court granted CenterPoint’s motion for summary judgment and dismissed the case with prejudice. The court’s decision is on appeal to the United States Court of Appeals for the Fifth Circuit.

Texas Franchise Audit.  The state of Texas has issued preliminary audit findings indicating an estimated tax liability of approximately $75 million (excluding any interest and penalties) relating primarily to the sourcing of receipts for 2000 through 2005. We plan to contest any proposed audit assessment related to this issue.

Sales Tax Contingencies.  We have some estimated sales tax exposure related to tax-exempt customers. As of December 31, 2007 and 2006, we have $19 million and $28 million, respectively, accrued in current and noncurrent liabilities relating to these contingencies.

(14)   Settlements and Other Charges

(a)   Western States and Similar Settlements.

In August 2005, we entered into an agreement, which the FERC approved in December 2005, with the states of California, Oregon and Washington, California’s three largest investor-owned utilities and a number of other parties that resolves as to the settling parties a number of the regulatory and civil proceedings and claims related to the Western states energy crisis of 2000 and 2001.

Although the settlement resolves a number of the regulatory and civil proceedings relating to the Western states energy crisis of 2000 and 2001, it did not resolve the Western states electricity and natural gas proceedings described in note 13(a).

Additionally, in December 2005, we agreed in principle to settle the class action lawsuits filed in New York involving allegations of manipulation of NYMEX natural gas contracts (the Cornerstone settlement). The settlement was approved in May 2006.

During 2005, we recorded charges of $359 million, which include cash payments of $160 million during 2006. As part of the settlement, we waived claims to and transferred our interest in our receivables for power deliveries from January 1, 2000 to June 20, 2001, as well as the interest owed on those receivables. The components of the settlement charge are (in millions):

Accounts receivable related to the period from October 2000 through June 2001, excluding estimated refund obligation	$	268
Estimated refund obligation		(87	)
Discount		(14	)
Interest receivable		41
Cash payments		150
Cornerstone settlement		8
Other		(7	)
Total	$	359	(1)

(1) The settlement also included undertakings not involving the payment of cash or the waiver of rights to receivables.

F-48

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Prior to reaching a settlement in August 2005, we regularly adjusted our estimated refund obligation, credit reserve and receivables (netted in revenues) and interest income (recorded in interest income) related to these energy sales in California as new information was obtained or events occurred (income (loss)):

	2005
	(in millions)
Estimated refund obligation	$	2
Discount		(1	)
Interest receivable		6
Net impact	$	7

In December 2006, we reached a settlement of the 12 class action natural gas cases pending in state court in California. The settlement required us to pay $35 million, which we expensed during 2006 and paid during 2007. The settlement does not include similar cases filed by individual plaintiffs and cases filed in jurisdictions other than California, which we continue to vigorously defend.

Criminal Proceeding—Reliant Energy Services.  In March 2007, Reliant Energy Services, Inc. entered into a Deferred Prosecution Agreement in resolution of its April 2004 indictment for alleged violations of the Commodity Exchange Act, wire fraud and conspiracy charges. As part of the agreement, Reliant Energy Services, Inc. paid and expensed a $22 million penalty in March 2007. The agreement has a term of two years.

(b)   Nevada Power.

In August 2005, we entered into a settlement agreement with Nevada Power Company resolving (a) a complaint filed by Nevada Power Company with the FERC seeking to revise the prices of long-term forward power contracts and (b) an arbitration claim relating to our alleged participation in an unlawful conspiracy to increase the price of natural gas in Nevada from 2001 to 2002. We recognized a charge of $8 million during 2005.

(c)   Shareholder Class Action Lawsuits.

In July 2005, we reached a settlement agreement related to the class action lawsuits against us for claims alleging violations of securities laws. The settlement agreement provides for a total settlement payment by us of $68 million, of which $61.5 million is covered by director and officer insurance policies. In addition, Deloitte & Touche LLP, our independent auditor at the time and a defendant in the litigation, agreed to make a payment of $7 million. The settlement also includes releases to all claims asserted by the plaintiffs against some of our former officers. During 2005, we recognized a charge of $8 million related to the settlement and associated legal expenses.

F-49

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(15)   Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable and payable, margin deposits and derivative assets and liabilities approximate their carrying amounts. Values of our debt (see note 6) are:

	December 31,
	2007				2006
	Carrying				Carrying
	Value		Fair Value(1)		Value		Fair Value(1)
	(in millions)
Fixed rate debt	$	2,955	$	2,963	$	2,866	$	2,987
Variable rate debt		—		—		667		669
Total debt	$	2,955	$	2,963	$	3,533	$	3,656

(1) We based the fair values of our fixed rate and variable rate debt on (a) incremental borrowing rates for similar borrowing arrangements or (b) information from market participants.

(16)   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. The primary guarantors are: Reliant Energy California Holdings, LLC; Reliant Energy Northeast Holdings, Inc.; Reliant Energy Power Generation, Inc. and Reliant Energy Services, Inc. The primary non-guarantors are: Channelview (deconsolidated on August 20, 2007), Orion Power, REMA and RERH Holdings.

Some of Reliant Energy’s subsidiaries have effective restrictions on their ability to pay dividends or make intercompany loans and advances under their financing arrangements or other third party agreements. The amounts of restricted net assets of Reliant Energy’s consolidated and unconsolidated subsidiaries as of December 31, 2007 are approximately $1.5 billion and $83 million, respectively. These restrictions are on the net assets of Orion Power and RERH Holdings and our net investment in and receivables from Channelview.

During 2007, Reliant Energy received cash dividends from RERH Holdings for $437 million. During 2006 and 2005, Reliant Energy received cash dividends from Orion Power for $209 million and $340 million, respectively. During 2006, Reliant Energy received cash dividends from Reliant Energy Services, Inc. for $475 million.

F-50

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Operations.

	2007
	Reliant Energy			Guarantors			Non-Guarantors			Adjustments(1)			Consolidated
	(in millions)
Revenues	$	—		$	3,662		$	9,756		$	(2,209	)	$	11,209
Cost of sales		—			3,298			7,557			(2,198	)		8,657
Operation and maintenance		—			187			701			(5	)		883
Selling, general and administrative		—			24			355			(6	)		373
Western states and similar settlements		—			22			—			—			22
Gains on sales of assets and emission allowances, net		—			(17	)		(9	)		—			(26	)
Depreciation and amortization		—			157			267			—			424
Total		—			3,671			8,871			(2,209	)		10,333
Operating income (loss)		—			(9	)		885			—			876
Income of equity investment, net		—			5			—			—			5
Income (loss) of equity investments of consolidated subsidiaries		271			3			—			(274	)		—
Debt extinguishments		(73	)		—			—			—			(73	)
Interest expense		(234	)		(35	)		(80	)		—			(349	)
Interest income		11			7			16			—			34
Interest income (expense)—affiliated companies, net		340			(255	)		(85	)		—			—
Total other income (expense)		315			(275	)		(149	)		(274	)		(383	)
Income (loss) from continuing operations before income taxes		315			(284	)		736			(274	)		493
Income tax expense (benefit)		(50	)		(113	)		298			—			135
Income (loss) from continuing operations		365			(171	)		438			(274	)		358
Income from discontinued operations		—			—			7			—			7
Net income (loss)	$	365		$	(171	)	$	445		$	(274	)	$	365

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RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Reliant Energy			Guarantors			Non-Guarantors			Adjustments(1)			Consolidated
	(in millions)
Revenues	$	—		$	8,811		$	9,805		$	(7,739	)	$	10,877
Cost of sales		—			8,734			8,439			(7,737	)		9,436
Operation and maintenance		—			177			658			(2	)		833
Selling, general and administrative		1			9			373			—			383
(Gain) loss on sales of receivables		—			7			(7	)		—			—
Western states and similar settlements		—			35			—			—			35
Gains on sales of assets and emission allowances, net		—			(21	)		(138	)		—			(159	)
Depreciation and amortization		—			152			221			—			373
Total		1			9,093			9,546			(7,739	)		10,901
Operating income (loss)		(1	)		(282	)		259			—			(24	)
Income of equity investment, net		—			6			—			—			6
Income (loss) of equity investments of consolidated subsidiaries		(189	)		(9	)		4			194			—
Debt conversions		(37	)		—			—			—			(37	)
Interest expense		(299	)		(35	)		(94	)		—			(428	)
Interest income		2			27			5			—			34
Interest income (expense)—affiliated companies, net		267			(296	)		29			—			—
Total other expense		(256	)		(307	)		(56	)		194			(425	)
Income (loss) from continuing operations before income taxes		(257	)		(589	)		203			194			(449	)
Income tax expense (benefit)		66			(230	)		42			—			(122	)
Income (loss) from continuing operations		(323	)		(359	)		161			194			(327	)
Income (loss) from discontinued operations		(5	)		(2	)		5			—			(2	)
Income (loss) before cumulative effect of accounting change		(328	)		(361	)		166			194			(329	)
Cumulative effect of accounting change, net of tax		—			1			—			—			1
Net income (loss)	$	(328	)	$	(360	)	$	166		$	194		$	(328	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Reliant Energy			Guarantors			Non-Guarantors			Adjustments(1)			Consolidated
	(in millions)
Revenues	$	—		$	8,518		$	7,893		$	(6,699	)	$	9,712
Cost of sales		(1	)		8,754			6,311			(6,698	)		8,366
Operation and maintenance		—			171			565			1			737
Selling, general and administrative		—			9			291			(7	)		293
Loss on sales of receivables		—			8			(8	)		—			—
Western states and similar settlements		—			359			—			—			359
Gains on sales of assets and emission allowances, net		—			(7	)		(164	)		3			(168	)
Depreciation and amortization		—			165			274			7			446
Total		(1	)		9,459			7,269			(6,694	)		10,033
Operating income (loss)		1			(941	)		624			(5	)		(321	)
Income of equity investments, net		—			26			—			—			26
Income (loss) of equity investments of consolidated subsidiaries		(193	)		96			(3	)		100			—
Other, net		—			(23	)		—			—			(23	)
Interest expense		(278	)		(35	)		(86	)		—			(399	)
Interest income		1			20			2			—			23
Interest income (expense)—affiliated companies, net		144			(170	)		26			—			—
Total other expense		(326	)		(86	)		(61	)		100			(373	)
Income (loss) from continuing operations before income taxes		(325	)		(1,027	)		563			95			(694	)
Income tax expense (benefit)		12			(456	)		185			6			(253	)
Income (loss) from continuing operations		(337	)		(571	)		378			89			(441	)
Income (loss) from discontinued operations		6			130			(85	)		60			111
Income (loss) before cumulative effect of accounting change		(331	)		(441	)		293			149			(330	)
Cumulative effect of accounting change, net of tax		—			—			(1	)		—			(1	)
Net income (loss)	$	(331	)	$	(441	)	$	292		$	149		$	(331	)

(1) These amounts relate to either (a) eliminations and adjustments recorded in the normal consolidation process or (b) reclassifications recorded due to differences in classifications at the subsidiary levels compared to the consolidated level.

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RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheets.

	December 31, 2007
	Reliant Energy		Guarantors		Non-Guarantors		Adjustments(1)		Consolidated
	(in millions)
ASSETS
Current Assets:
Cash and cash equivalents	$	490	$	1	$	264	$	—	$	755
Restricted cash		—		1		2		—		3
Accounts and notes receivable, principally customer, net		11		252		831		(11)		1,083
Accounts and notes receivable—affiliated companies		2,009		368		328		(2,705)		—
Inventory		—		148		137		—		285
Derivative assets		—		73		141		—		214
Investment in and receivables from Channelview, net		1		82		—		—		83
Other current assets		19		160		197		(17)		359
Current assets of discontinued operations		—		—		2		—		2
Total current assets		2,530		1,085		1,902		(2,733)		2,784
Property, Plant and Equipment, net		—		2,870		2,353		—		5,223
Other Assets:
Goodwill and other intangibles, net		—		184		482		119		785
Notes receivable—affiliated companies		2,365		656		68		(3,089)		—
Equity investments of consolidated subsidiaries		2,212		304		—		(2,516)		—
Derivative assets		—		12		78		—		90
Other long-term assets		55		860		356		(696)		575
Total other assets		4,632		2,016		984		(6,182)		1,450
Total Assets	$	7,162	$	5,971	$	5,239	$	(8,915)	$	9,457
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt and short-term borrowings	$	41	$	—	$	11	$	—	$	52
Accounts payable, principally trade		—		68		624		(5)		687
Accounts and notes payable—affiliated companies		103		2,223		379		(2,705)		—
Derivative liabilities		—		62		375		—		437
Other current liabilities		11		182		256		(23)		426
Total current liabilities		155		2,535		1,645		(2,733)		1,602
Other Liabilities:
Notes payable—affiliated companies		—		2,213		876		(3,089)		—
Derivative liabilities		—		25		162		—		187
Other long-term liabilities		539		152		284		(696)		279
Long-term liabilities of discontinued operations		—		—		4		—		4
Total other liabilities		539		2,390		1,326		(3,785)		470
Long-term Debt		1,986		500		417		—		2,903
Commitments and Contingencies
Temporary Equity Stock-based Compensation		5		—		—		—		5
Total Stockholders’ Equity		4,477		546		1,851		(2,397)		4,477
Total Liabilities and Stockholders’ Equity	$	7,162	$	5,971	$	5,239	$	(8,915)	$	9,457

F-54

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31, 2006
	Reliant Energy		Guarantors		Non-Guarantors		Adjustments(1)		Consolidated
	(in millions)
ASSETS
Current Assets:
Cash and cash equivalents	$	286	$	24	$	154	$	—	$	464
Restricted cash		—		—		25		—		25
Accounts and notes receivable, principally customer, net		10		264		779		(9)		1,044
Accounts and notes receivable—affiliated companies		1,737		418		259		(2,414)		—
Inventory		—		144		131		—		275
Derivative assets		—		61		429		—		490
Other current assets		7		529		354		(17)		873
Current assets of discontinued operations		—		—		2		—		2
Total current assets		2,040		1,440		2,133		(2,440)		3,173
Property, Plant and Equipment, net		—		3,044		2,698		—		5,742
Other Assets:
Goodwill and other intangibles, net		—		182		505		119		806
Notes receivable—affiliated companies		3,249		789		94		(4,132)		—
Equity investments of consolidated subsidiaries		1,377		328		5		(1,710)		—
Derivative assets		—		77		127		—		204
Other long-term assets		76		730		400		(564)		642
Total other assets		4,702		2,106		1,131		(6,287)		1,652
Total Assets	$	6,742	$	6,590	$	5,962	$	(8,727)	$	10,567
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt and short-term borrowings	$	3	$	—	$	352	$	—	$	355
Accounts payable, principally trade		—		224		444		(3)		665
Accounts and notes payable—affiliated companies		—		2,021		393		(2,414)		—
Derivative liabilities		—		238		927		—		1,165
Other current liabilities		55		159		313		(23)		504
Current liabilities of discontinued operations		—		—		3		—		3
Total current liabilities		58		2,642		2,432		(2,440)		2,692
Other Liabilities:
Notes payable—affiliated companies		—		3,251		881		(4,132)		—
Derivative liabilities		—		77		344		—		421
Other long-term liabilities		484		167		237		(564)		324
Total other liabilities		484		3,495		1,462		(4,696)		745
Long-term Debt		2,248		501		429		—		3,178
Commitments and Contingencies
Temporary Equity Stock-based Compensation		2		—		—		—		2
Total Stockholders’ Equity		3,950		(48)		1,639		(1,591)		3,950
Total Liabilities and Stockholders’ Equity	$	6,742	$	6,590	$	5,962	$	(8,727)	$	10,567

(1) These amounts relate to either (a) eliminations and adjustments recorded in the normal consolidation process or (b) reclassifications recorded due to differences in classifications at the subsidiary levels compared to the consolidated level.

F-55

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Cash Flows.

	2007
	Reliant Energy			Guarantors			Non-Guarantors			Adjustments(1)			Consolidated
	(in millions)
Cash Flows from Operating Activities:
Net cash provided by (used in) continuing operations from operating activities	$	146		$	(114	)	$	613		$	110		$	755
Net cash provided by discontinued operations from operating activities		—			—			7			—			7
Net cash provided by (used in) operating activities		146			(114	)		620			110			762
Cash Flows from Investing Activities:
Capital expenditures		—			(27	)		(162	)		—			(189	)
Investments in, advances to and from and distributions from subsidiaries, net(2)		346			(6	)		(279	)		(61	)		—
Proceeds from sales of assets, net		—			82			—			—			82
Net purchases of emission allowances		—			(42	)		(43	)		—			(85	)
Restricted cash		—			(1	)		8			—			7
Other, net		—			6			—			—			6
Net cash provided by (used in) continuing operations from investing activities		346			12			(476	)		(61	)		(179	)
Net cash provided by discontinued operations from investing activities		—			—			—			—			—
Net cash provided by (used in) investing activities		346			12			(476	)		(61	)		(179	)
Cash Flows from Financing Activities:
Proceeds from long-term debt		1,300			—			—			—			1,300
Payments of long-term debt		(1,526	)		—			(10	)		—			(1,536	)
Increase in short-term borrowings and revolving credit facilities, net		—			—			7			—			7
Changes in notes with affiliated companies, net(3)(4)		—			80			(31	)		(49	)		—
Payments of debt extinguishment costs		(73	)		—			—			—			(73	)
Proceeds from issuances of stock		41			—			—			—			41
Payments of financing costs		(31	)		—			—			—			(31	)
Other, net		1			(1	)		—			—			—
Net cash provided by (used in) financing activities		(288	)		79			(34	)		(49	)		(292	)
Net Change in Cash and Cash Equivalents		204			(23	)		110			—			291
Cash and Cash Equivalents at Beginning of Period		286			24			154			—			464
Cash and Cash Equivalents at End of Period	$	490		$	1		$	264		$	—		$	755

F-56

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Reliant Energy			Guarantors			Non-Guarantors(5)			Adjustments(1)			Consolidated
	(in millions)
Cash Flows from Operating Activities:
Net cash provided by continuing operations from operating activities	$	10		$	414		$	906		$	—		$	1,330
Net cash provided by (used in) discontinued operations from operating activities		3			(7	)		(50	)		—			(54	)
Net cash provided by operating activities		13			407			856			—			1,276
Cash Flows from Investing Activities:
Capital expenditures		—			(24	)		(73	)		—			(97	)
Investments in, advances to and from and distributions from subsidiaries, net(2)		1,059			(468	)		(216	)		(375	)		—
Proceeds from sales of assets, net		—			—			1			—			1
Net proceeds from sale of emission allowances		—			88			94			—			182
Restricted cash		—			—			2			—			2
Other, net		—			1			—			—			1
Net cash provided by (used in) continuing operations from investing activities		1,059			(403	)		(192	)		(375	)		89
Net cash provided by discontinued operations from investing activities		712			—			968			(712	)		968
Net cash provided by (used in) investing activities		1,771			(403	)		776			(1,087	)		1,057
Cash Flows from Financing Activities:
Proceeds from long-term debt		400			—			—			—			400
Payments of long-term debt		(852	)		—			(14	)		—			(866	)
Increase (decrease) in short-term borrowings and revolving credit facilities, net		(383	)		—			(442	)		—			(825	)
Changes in notes with affiliated companies, net(3)		—			(16	)		(359	)		375			—
Premium paid for conversion of senior subordinated notes		(36	)		—			—			—			(36	)
Proceeds from issuances of stock		25			—			—			—			25
Payments of financing costs		(17	)		—			—			—			(17	)
Net cash used in continuing operations from financing activities		(863	)		(16	)		(815	)		375			(1,319	)
Net cash used in discontinued operations from financing activities		(638	)		—			(712	)		712			(638	)
Net cash used in financing activities		(1,501	)		(16	)		(1,527	)		1,087			(1,957	)
Net Change in Cash and Cash Equivalents		283			(12	)		105			—			376
Cash and Cash Equivalents at Beginning of Period		3			36			49			—			88
Cash and Cash Equivalents at End of Period	$	286		$	24		$	154		$	—		$	464

F-57

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Reliant Energy			Guarantors			Non-Guarantors			Adjustments(1)			Consolidated
	(in millions)
Cash Flows from Operating Activities:
Net cash provided by (used in) continuing operations from operating activities	$	(95	)	$	(1,989	)	$	974		$	—		$	(1,110	)
Net cash provided by discontinued operations from operating activities		13			8			172			—			193
Net cash provided by (used in) operating activities		(82	)		(1,981	)		1,146			—			(917	)
Cash Flows from Investing Activities:
Capital expenditures		—			(49	)		(33	)		—			(82	)
Investments in, advances to and from and distributions from subsidiaries, net(2)		(460	)		1			(341	)		800			—
Proceeds from sales of assets, net		—			77			72			—			149
Net sales (purchases) of emission allowances		—			(49	)		137			—			88
Restricted cash		—			—			14			—			14
Other, net		—			6			—			—			6
Net cash provided by (used in) continuing operations from investing activities		(460	)		(14	)		(151	)		800			175
Net cash provided by discontinued operations from investing activities		110			51			80			(110	)		131
Net cash provided by (used in) investing activities		(350	)		37			(71	)		690			306
Cash Flows from Financing Activities:
Proceeds from long-term debt		299			—			—			—			299
Payments of long-term debt		(109	)		(1	)		(38	)		—			(148	)
Increase in short-term borrowings and revolving credit facilities, net		184			—			223			—			407
Changes in notes with affiliated companies, net(3)		—			1,956			(1,156	)		(800	)		—
Proceeds from issuances of stock		37			—			—			—			37
Payments of financing costs		(1	)		—			—			—			(1	)
Net cash provided by (used in) continuing operations from financing activities		410			1,955			(971	)		(800	)		594
Net cash used in discontinued operations from financing activities		—			—			(110	)		110			—
Net cash provided by (used in) financing activities		410			1,955			(1,081	)		(690	)		594
Net Change in Cash and Cash Equivalents		(22	)		11			(6	)		—			(17	)
Cash and Cash Equivalents at Beginning of Period		25			25			55			—			105
Cash and Cash Equivalents at End of Period	$	3		$	36		$	49		$	—		$	88

F-58

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1)	These amounts relate to either (a) eliminations and adjustments recorded in the normal consolidation process or (b) reclassifications recorded due to differences in classifications at the subsidiary levels compared to the consolidated level.
(2)	Net investments in, advances to and from and distributions from subsidiaries are classified as investing activities.
(3)	Net changes in notes with affiliated companies are classified as financing activities for subsidiaries of Reliant Energy and as investing activities for Reliant Energy.
(4)	Reliant Energy converted intercompany notes payable of a guarantor subsidiary of $753 million to equity during 2007.
(5)	During 2006, Reliant Energy Retail Holdings, LLC, a non-guarantor, made a non-cash capital distribution (related to intercompany receivables) of $1.9 billion to Reliant Energy.

(17)   Unaudited Quarterly Information

	2007
	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
	(in millions, except per share amounts)
Revenues	$	2,362		$	2,650		$	3,544	$	2,653
Income (loss) from continuing operations		260			(281	)		160		219
Income (loss) from discontinued operations		(1	)		(2	)		2		8
Net income (loss)		259			(283	)		162		227
Basic Earnings (Loss) Per Share:
Income (loss) from continuing operations	$	0.77		$	(0.82	)	$	0.47	$	0.64
Income (loss) from discontinued operations		(0.01	)		(0.01	)		—		0.02
Net income (loss)	$	0.76		$	(0.83	)	$	0.47	$	0.66
Diluted Earnings (Loss) Per Share:
Income (loss) from continuing operations	$	0.75		$	(0.82	)	$	0.45	$	0.62
Income (loss) from discontinued operations		(0.01	)		(0.01	)		0.01		0.02
Net income (loss)	$	0.74		$	(0.83	)	$	0.46	$	0.64

F-59

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in millions, except per share amounts)
Revenues	$	2,453		$	2,775		$	3,305		$	2,344
Income (loss) from continuing operations		(139	)		23			(154	)		(57	)
Income (loss) from discontinued operations		5			(9	)		(1	)		3
Income (loss) before cumulative effect of accounting change		(134	)		14			(155	)		(54	)
Net income (loss)		(133	)		14			(155	)		(54	)
Basic Earnings (Loss) Per Share:
Income (loss) from continuing operations	$	(0.46	)	$	0.07		$	(0.50	)	$	(0.18	)
Income (loss) from discontinued operations		0.02			(0.02	)		—			0.01
Income (loss) before cumulative effect of accounting change		(0.44	)		0.05			(0.50	)		(0.17	)
Cumulative effect of accounting change, net of tax		—			—			—			—
Net income (loss)	$	(0.44	)	$	0.05		$	(0.50	)	$	(0.17	)
Diluted Earnings (Loss) Per Share:
Income (loss) from continuing operations	$	(0.46	)	$	0.07		$	(0.50	)	$	(0.18	)
Income (loss) from discontinued operations		0.02			(0.02	)		—			0.01
Income (loss) before cumulative effect of accounting change		(0.44	)		0.05			(0.50	)		(0.17	)
Cumulative effect of accounting change, net of tax		—			—			—			—
Net income (loss)	$	(0.44	)	$	0.05		$	(0.50	)	$	(0.17	)

Variances in revenues and gross margin from quarter to quarter were primarily due to (a) seasonal fluctuations in demand for electric energy and energy services and (b) changes in energy commodity prices, including unrealized gains/losses on energy derivatives. During 2007, we recognized $445 million in unrealized gains on energy derivatives ($522 million gain in the first quarter, $326 million loss in the second quarter, $28 million loss in the third quarter and $277 gain in the fourth quarter). During 2006, we incurred $231 million in unrealized losses on energy derivatives ($23 million gain in the first quarter, $52 million gain in the second quarter, $355 million loss in the third quarter and $49 million gain in the fourth quarter). On August 20, 2007, we deconsolidated Channelview. See notes 1 and 21.

Changes in net income (loss) from quarter to quarter were primarily due to:

•  seasonal fluctuations in demand for electric energy and energy services;

•  changes in energy commodity prices, including unrealized gains/losses on energy derivatives; and

•  timing of maintenance expenses.

F-60

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In addition, net income (loss) changed from quarter to quarter in 2007 by (amounts are pre-tax unless indicated otherwise):

•  $73 million of debt extinguishments expenses ($71 million in the second quarter and $1 million in each of the third and fourth quarters);

•  $41 million write-off of deferred financing costs ($39 million in the second quarter and $1 million in each of the third and fourth quarters);

•  $37 million change in income tax expense/benefit due to our federal valuation allowance ($1 million increase during the first quarter, $21 million increase during the second quarter, $22 million decrease during the third quarter and $37 million decrease during the fourth quarter);

•  $29 million charge for early retirements in depreciation expense ($15 million in the first quarter, $13 million in the second quarter and $1 million in the third quarter);

•  $24 million gain on sales of equipment ($18 million in the third quarter and $6 million in the fourth quarter); and

•  $22 million charge for Reliant Energy Services, Inc. resolution of criminal indictment in the first quarter.

Also, net income (loss) changed from quarter to quarter in 2006 by (amounts are pre-tax unless indicated otherwise):

•  $159 million gain on sales of emission allowances ($151 million gain in the first quarter, $5 million gain in the second quarter and $3 million gain in the third quarter);

•  $68 million change in income tax expense/benefit due to our federal valuation allowance ($70 million increase during the first quarter, $20 million increase during the second quarter, $30 million decrease during the third quarter and $8 million increase during the fourth quarter);

•  $40 million income tax benefit in the fourth quarter related to Pennsylvania state law changes;

•  $37 million charge for the debt conversion expense during the fourth quarter; and

•  $35 million charge related to the settlement of certain class action natural gas cases relating to the Western states energy crisis during the third quarter.

(18)   Reportable Segments

We have two principal business segments:

•  Retail energy—provides electricity and energy services to more than 1.8 million retail electricity customers in Texas, including residential and small business customers and commercial, industrial and governmental/institutional customers. Our next largest market is the PJM market, where we serve commercial, industrial and governmental/institutional customers. We regularly evaluate entering additional markets.

•  Wholesale energy—provides electricity and energy services in the competitive wholesale energy markets in the United States through our ownership and operation of or contracting for power generation capacity. As of December 31, 2007, we had approximately 16,000 MW of power generation capacity.

We also have unallocated corporate functions and other investments.

Our segments are the strategic operating units under which we manage our business, including the allocation of resources and assessment of performance. We use contribution margin, including historical and

F-61

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

operational wholesale hedges and unrealized gains/losses on energy derivatives to evaluate our business segments because we use that measure in organizing and managing our business. Our segment measure is defined as total revenues less (a) cost of sales, (b) operation and maintenance, (c) selling and marketing and (d) bad debt expense. We manage the costs not included in our segment measure (other general and administrative, depreciation, amortization, interest and income taxes) on a company-wide basis.

The accounting policies of our segments are described in note 2. We account for intersegment revenues at current market prices.

Financial data for our segments are as follows:

	Retail		Wholesale			Other
	Energy		Energy			Operations			Eliminations			Consolidated
	(in millions)
2007:
Revenues from external customers(1)	$	8,173	$	3,036	(2)	$	—		$	—		$	11,209
Intersegment revenues		—		394			13			(407	)		—
Contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives(3)(4)		942		524	(5)		7			(6	)		1,467
Expenditures for long-lived assets(6)		14		159			16			—			189
Equity investment as of December 31, 2007		—		25			—			—			25
Total assets as of December 31, 2007		1,778		7,492			1,081	(7)		(894	)		9,457
2006:
Revenues from external customers(1)	$	8,197	$	2,679	(8)	$	1		$	—		$	10,877
Intersegment revenues		—		571			1			(572	)		—
Contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives(3)(9)		250		146	(10)		1			—			397
Expenditures for long-lived assets(6)		9		78			10			—			97
Equity investment as of December 31, 2006		—		25			—			—			25
Total assets as of December 31, 2006		1,984		8,402			848	(7)		(667	)		10,567
2005:
Revenues from external customers(1)	$	7,045	$	2,661		$	6		$	—		$	9,712
Intersegment revenues		—		625			—			(625	)		—
Contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives(3)(11)		342		110	(12)		4			—			456
Expenditures for long-lived assets(6)		9		66			7			—			82
Equity investments as of December 31, 2005		—		30			—			—			30
Total assets as of December 31, 2005		2,762		9,871			1,691	(7)		(755	)		13,569

(1)	Substantially all revenues are in the United States.
(2)	Includes $127 million from affiliates.
(3)	Revenues less (a) cost of sales, (b) operation and maintenance, (c) selling and marketing and (d) bad debt expense.
(4)	Includes $438 million, $7 million and $445 million in retail energy, wholesale energy and consolidated, respectively, results relating to unrealized gains on energy derivatives, which is a non-cash item.
(5)	Includes $(92) million relating to historical and operational wholesale hedges.
(6)	Long-lived assets include net property, plant and equipment, net goodwill, net other intangibles and equity investments. All of our long-lived assets are in the United States.
(7)	Other operations include discontinued operations of $2 million, $2 million and $1,084 million as of December 31, 2007, 2006 and 2005, respectively.
(8)	Includes $1.2 billion in revenues from a single counterparty, which represented 11% of our consolidated revenues and 45% of our wholesale energy segment’s revenues. As of December 31, 2006, $16 million was outstanding from this counterparty.
(9)	Includes $(287) million, $56 million and $(231) million in retail energy, wholesale energy and consolidated, respectively, results relating to unrealized gains (losses) on energy derivatives, which is a non-cash item.

F-62

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(10)	Includes $(376) million relating to historical and operational wholesale hedges.
(11)	Includes $(69) million, $(123) million and $(192) million in retail energy, wholesale energy and consolidated, respectively, results relating to unrealized losses on energy derivatives, which is a non-cash item.
(12)	Includes $(484) million relating to historical and operational wholesale hedges.

	2007			2006			2005
	(in millions)
Contribution margin, including historical and operational wholesale hedges and unrealized gains/losses on energy derivatives	$	1,467		$	397		$	456
Other general and administrative		171			172			140
Western states and similar settlements		22			35			359
Gains on sales of assets and emission allowances, net		(26	)		(159	)		(168	)
Depreciation and amortization		424			373			446
Operating income (loss)		876			(24	)		(321	)
Income of equity investments, net		5			6			26
Debt extinguishments and conversions		(73	)		(37	)		—
Other, net		—			—			(23	)
Interest expense		(349	)		(428	)		(399	)
Interest income		34			34			23
Income (loss) from continuing operations before income taxes		493			(449	)		(694	)
Income tax expense (benefit)		135			(122	)		(253	)
Income (loss) from continuing operations		358			(327	)		(441	)
Income (loss) from discontinued operations		7			(2	)		111
Income (loss) before cumulative effect of accounting changes		365			(329	)		(330	)
Cumulative effect of accounting changes, net of tax		—			1			(1	)
Net income (loss)	$	365		$	(328	)	$	(331	)

(19)   Impairment of Cost Method Investment

During 2005, we recorded a non-cash charge of $23 million (recorded in other, net) for the impairment of our investment in a communications services company. The impairment charge was based on an internal valuation of projected future cash flows and earnings conducted in connection with the preparation of our interim financial statements. As of December 31, 2007, our remaining non-energy investments have a net book value of $2 million and are included in other long-term assets.

(20)   Sales of Assets and Emission Allowances

We included the following (all from our wholesale energy segment) in our results of operations through the date of sale.

Property, Plant and Equipment.  We sold some property, plant and equipment that was primarily held in storage for $82 million during 2007 for gains of $25 million.

Emission Allowances.  We sold emission allowances during 2007, 2006 and 2005 for gains of $1 million, $159 million and $160 million, respectively.

REMA Hydropower Plants.  Two hydropower plants sold for $42 million in April 2005 for a gain of $12 million.

Landfill-gas Fueled Power Plants.  Our landfill-gas fueled power plants sold for $28 million in July 2005 for a loss of $4 million.

F-63

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

El Dorado Investment.  Our 50% interest in El Dorado Energy, LLC sold for $132 million in July 2005 and we received $76 million after adjustment for net project debt. We recognized a gains on the disposal of $25 million (recorded in income of equity investments, net) during 2005.

(21)   Channelview’s Bankruptcy Filings

On August 20, 2007, Channelview filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware for reorganization under Chapter 11 of the Bankruptcy Code. The bankruptcy cases are being jointly administered, with Channelview managing its business in the ordinary course as debtors-in-possession subject to the supervision of the bankruptcy court.

Under Channelview LP’s credit agreement, the partnership was required to maintain a working capital requirement of $14 million. The covenant was previously met by a $14 million revolving working capital facility. That facility matured on August 15, 2007. Failure to meet the working capital requirement would eventually have constituted an event of default. Channelview LP filed for bankruptcy protection to prevent the lenders from exercising their remedies, including foreclosing on the project. During 2007, we incurred $3 million in selling, general and administrative expenses related to these bankruptcy filings and associated costs, which do not include the reorganization costs that Channelview incurred subsequent to August 19, 2007. Channelview LP’s debt is non-recourse to Reliant Energy and the bankruptcy filings did not cause a default under any of our other debt.

As a result of the bankruptcies, we deconsolidated Channelview’s financial results beginning August 20, 2007, and began reporting our investment in Channelview using the cost method. The following table contains certain combined financial information of Channelview:

	December 31,
	2007		2006
	(in millions)
Property, plant and equipment, net	$	356	$	368
Secured debt obligations, including accrued interest		340		343
Payables to Reliant Energy and its subsidiaries, net		96		72

In February 2008, we entered into an agreement to sell our Channelview cogeneration assets and assign related contracts for $468 million. The sale is subject to closing conditions, including the approval of the bankruptcy court. We expect to close in the second or third quarter of 2008.

The sale is expected to resolve the bankruptcy proceedings and provide value to us for our equity interest. Proceeds from the sale will be used to settle the claims of secured creditors (approximately $379 million of debt, accrued interest and make-whole payments as of January 31, 2008), the claims of unsecured creditors (approximately $29 million as of January 31, 2008), and a cash sharing agreement (amount subject to a bankruptcy court ruling). Residual proceeds will be retained by us.

Any gain or loss on the sale will depend on the net proceeds received. It is reasonably possible an impairment could be recognized if the net proceeds and remaining assets (including cash and working capital) do not exceed our net investment in and receivables from Channelview ($83 million as of December 31, 2007, classified as current assets).

(22)   Discontinued Operations

(a)   New York Plants.

General.  In February 2006, we closed on the sale of our three remaining New York plants with an aggregate net generating capacity of approximately 2,100 MW for $979 million. During the third quarter of 2005, we began to report the results of the New York plants as discontinued operations. These plants were a part of our wholesale energy segment.

F-64

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Use of Proceeds.  We applied $952 million of cash proceeds, which is net of estimated city, state and transfer taxes and transaction costs, to pay down our senior secured term loans.

Assumptions Related to Debt, Deferred Financing Costs and Interest Expense on Discontinued Operations.  Based on our contractual obligation (at the time the purchase and sale agreement was executed) to utilize a portion of the net proceeds from the sale to prepay debt, we classified $638 million of debt as discontinued operations. We have also classified as discontinued operations the related deferred financing costs and interest expense on this debt. We allocated $15 million and $39 million of related interest expense during 2006 and 2005, respectively, to discontinued operations. No interest was allocated to discontinued operations subsequent to the closing.

(b)   Ceredo Plant.

In 2005, we sold our 505 MW Ceredo power plant for $100 million. We used the net cash proceeds of $100 million to pay down a portion of our senior secured term loans. During the third quarter of 2005, we began to report results of Ceredo’s operations as discontinued operations effective January 1, 2005. The plant was a part of our wholesale energy segment.

(c)   European Energy.

In 2003, we sold our European energy operations, which formerly were a reportable segment. We have reported the results of our European energy operations as discontinued operations since the first quarter of 2003.

In addition to the initial cash proceeds, we are entitled to receive a significant portion of any cash distributions in excess of Euro 110 million received by the purchaser from the former coordinating body for the Dutch electricity sector as contingent consideration for the sale. We received payments of $52 million during 2005.

(d)   All Discontinued Operations.

The following summarizes certain financial information of the businesses reported as discontinued operations:

	New York			Ceredo			European
	Plants			Plant			Energy		Total
2006
Revenues	$	108		$	—		$	—	$	108
Loss before income tax expense/benefit		(7	)(1)		—			—		(7	)
2005
Revenues	$	996		$	—		$	—	$	996
Income (loss) before income tax expense/benefit		18	(2)		(27	)(3)		52		43

(1)	Includes an additional pre-tax loss on disposal of $16 million primarily due to changes in derivative assets not terminated as of the date of sale. The cumulative pre-tax loss on disposal through December 31, 2006 was $255 million.
(2)	Includes $239 million estimated loss on disposal.
(3)	Includes $27 million loss on disposal.

Subsequent to the sale of our New York plants in February 2006, we continue to have (a) insignificant settlements with the independent system operator and (b) property tax settlements. These amounts are classified as discontinued operations in our results of operations. We recognized $7 million of income before income taxes from discontinued operations during 2007. In addition, we have some amounts on our consolidated balance sheets classified as discontinued operations relating to these settlements and other insignificant items.

F-65

RELIANT ENERGY, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

2007, 2006 and 2005

Column A	Column B		Column C					Column D			Column E
			Additions
	Balance at		Charged			Charged		Deductions			Balance at
	Beginning		to			to Other		from			End
Description	of Period		Income			Accounts(1)		Reserves(2)			of Period
	(thousands of dollars)
2007
Allowance for doubtful accounts	$	33,332	$	78,588		$	—	$	(75,196	)	$	36,724
Reserves deducted from
derivative assets		126,710		(58,310	)		—		(159	)		68,241
2006
Allowance for doubtful accounts		34,054		86,961			—		(87,683	)		33,332
Reserves deducted from derivative assets		197,384		(68,240	)		—		(2,434	)		126,710
Reserves for severance		1,860		3,845			—		(5,705	)		—
2005
Allowance for doubtful accounts		41,636		57,817			—		(65,399	)		34,054
Reserves deducted from derivative assets		87,323		128,306			33		(18,278	)		197,384
Reserves for severance		1,325		8,664			—		(8,129	)		1,860

(1)	Represents charges to accumulated other comprehensive income/loss.
(2)	Deductions from reserves represent losses or expenses for which the respective reserves were created. In the case of the allowance for doubtful accounts, such deductions are net of recoveries of amounts previously written off.

F-66

Report of Independent Registered Public Accounting Firm

The Board of Directors and Members
RERH Holdings, LLC:

We have audited the accompanying consolidated balance sheets of RERH Holdings, LLC and subsidiaries (the Company), as of December 31, 2007 and 2006, and the related consolidated statements of operations, members’ equity and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RERH Holdings, LLC and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

As discussed in note 7 to the consolidated financial statements, the Company changed its accounting for income tax uncertainties in 2007.

KPMG LLP

Houston, Texas
February 25, 2008

F-67

RERH HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	2007			2006
	(thousands of dollars)
Revenues:
Electricity sales and services revenues (including $(70) and $227 unrealized gains(losses))	$	7,978,078		$	7,460,341
Expenses:
Cost of sales (including $443,218 and $(394,902) unrealized gains (losses))		6,368,557			2,790,009
Cost of sales—affiliates		236,762			3,937,469
Operation and maintenance		225,261			206,397
Operation and maintenance—affiliates		19,271			25,917
Selling, general and administrative		211,372			231,692
Selling, general and administrative—affiliates		68,876			70,060
Depreciation and amortization		23,947			29,490
Total operating expense		7,154,046			7,291,034
Operating Income		824,032			169,307
Other Income (Expense):
Other, net		699			22
Interest expense		(29,476	)		(28,198	)
Interest income		15,166			2,481
Interest income (expense), net—affiliates		(6,579	)		104,427
Total other income (expense)		(20,190	)		78,732
Income Before Income Taxes		803,842			248,039
Income tax expense		309,135			96,180
Net Income	$	494,707		$	151,859

See Notes to the Consolidated Financial Statements

F-68

RERH HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007		2006
	(thousands of dollars)
ASSETS
Current Assets:
Cash and cash equivalents	$	226,200	$	136,017
Restricted cash		—		13,000
Accounts receivable and unbilled revenue, principally customer, net of allowance of $34,947 and $29,386		776,115		732,975
Accumulated deferred income taxes		94,744		206,795
Derivative assets		128,935		422,098
Prepayments and other current assets		21,171		41,603
Total current assets		1,247,165		1,552,488
Property, Plant and Equipment, net		43,487		54,340
Other Assets:
Goodwill, net		31,631		31,631
Derivative assets		75,660		127,028
Other		22,969		47,434
Total other assets		130,260		206,093
Total Assets	$	1,420,912	$	1,812,921
LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities:
Accounts payable, principally trade	$	486,746	$	396,728
Payable to affiliates, net		40,437		38,970
Retail customer deposits		62,676		67,068
Other taxes payable		46,634		53,585
Taxes payable to Reliant Energy, Inc.		21,188		—
Accrual for transmission and distribution charges		74,393		60,654
Derivative liabilities		336,440		904,108
Other		90,569		75,497
Total current liabilities		1,159,083		1,596,610
Other Liabilities:
Derivative liabilities		38,011		225,997
Other		33,833		19,043
Total other liabilities		71,844		245,040
Commitments and Contingencies Members’ Equity:
Members’ equity		189,985		(28,729	)
Total members’ equity		189,985		(28,729	)
Total Liabilities and Members’ Equity	$	1,420,912	$	1,812,921

See Notes to the Consolidated Financial Statements

F-69

RERH HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2007			2006
	(thousands of dollars)
Cash Flows from Operating Activities:
Net income	$	494,707		$	151,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,947			29,490
Deferred income taxes		163,557			(108,547	)
Net changes in energy derivatives		(391,981	)		407,649
Non-cash federal income tax contributions from Reliant Energy, Inc., net		—			179,222
Other, net		3,301			1,118
Changes in other assets and liabilities:
Accounts receivable and unbilled revenue, net		12,315			196,846
Receivables/payables—affiliates		(41,891	)		(481,521	)
Margin deposits, net		10,890			(2,775	)
Net derivative assets and liabilities		(22,709	)		(76,112	)
Accounts payable		89,974			271,019
Other current assets		9,806			10,763
Other current liabilities		12,902			31,057
Other assets		(5,295	)		342
Retail customer deposits		(4,392	)		6,158
Taxes payable/receivable		(4,226	)		9,032
Other taxes payable		(9,057	)		14,311
Accrual for transmission and distribution charges		13,739			16,344
Taxes payable to Reliant Energy, Inc. and related accrued interest		21,188			—
Other liabilities		(2,687	)		(3,477	)
Net cash provided by operating activities		374,088			652,778
Cash Flows from Investing Activities:
Restricted cash		13,000			(13,000	)
Capital expenditures		(13,457	)		(9,424	)
Contribution to investment		(2,550	)		—
Contribution from Reliant Energy, Inc. of Reliant Energy Solutions East, LLC		2,530			—
Net cash used in investing activities		(477	)		(22,424	)
Cash Flows from Financing Activities:
Dividends to Reliant Energy, Inc.		(437,000	)		—
Decrease in short-term borrowings, net		—			(450,000	)
Contributions from (distributions to) Reliant Energy, Inc.		153,572			(2,944	)
Changes in note with Reliant Energy, Inc., net		—			(50,115	)
Net cash used in financing activities		(283,428	)		(503,059	)
Net Change in Cash and Cash Equivalents		90,183			127,295
Cash and Cash Equivalents at Beginning of Period		136,017			8,722
Cash and Cash Equivalents at End of Period	$	226,200		$	136,017
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid to affiliate	$	5,995		$	2,942
Interest paid to third parties		29,741			29,090
Income taxes paid (net of income tax refunds received)		25,012			16,472
Income taxes paid to affiliate		110,000			—
Non-cash Disclosure:
Contributions from Reliant Energy, Inc., net		995			171,629
Transfer of certain assets and liabilities from Reliant Energy Electric Solutions, LLC to Reliant Energy Power Supply, LLC, net		—			329,807
Transfer of certain assets and liabilities from Reliant Energy Services, Inc. to Reliant Energy Power Supply, LLC, net		(2,254	)		(329,773	)
Contributions from (distributions to) Reliant Energy, Inc. of Reliant Energy Solutions East, LLC		6,164			(2,058	)
Distribution to Reliant Energy, Inc. of note receivable		—			(1,943,943	)

See Notes to the Consolidated Financial Statements

F-70

RERH HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY AND COMPREHENSIVE INCOME

	Members’			Comprehensive
	Equity			Income
	(thousands of dollars)
Balance at December 31, 2005	$	1,596,694
Net income		151,859		$	151,859
Contributions from Reliant Energy, Inc., net		171,629
Distribution to Reliant Energy, Inc. of Reliant Energy Solutions East, LLC		(5,002	)
Distribution to Reliant Energy, Inc. of note receivable		(1,943,943	)
Transfer of certain assets and liabilities from Reliant Energy Electric Solutions, LLC to Reliant Energy Power Supply, LLC, net		329,807
Transfer of certain assets and liabilities from Reliant Energy Services, Inc. to Reliant Energy Power Supply, LLC, net		(329,773	)
Comprehensive income				$	151,859
Balance at December 31, 2006	$	(28,729	)
Net income		494,707			494,707
Contributions from Reliant Energy, Inc., net		154,567
Distribution to Reliant Energy, Inc. of cash dividend		(437,000	)
Contribution from Reliant Energy, Inc. of Reliant Energy Solutions East, LLC		8,694
Transfer of certain assets and liabilities from Reliant Energy Services, Inc. to Reliant Energy Power Supply, LLC, net		(2,254	)
Comprehensive income				$	494,707
Balance at December 31, 2007	$	189,985

See Notes to the Consolidated Financial Statements

F-71

RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Background and Basis of Presentation

Background.  “Retail Holdings” refers to RERH Holdings, LLC, a Delaware limited liability company, which is a wholly-owned subsidiary of Reliant Energy, Inc. and was formed in July 2006. However, no activity occurred until December 1, 2006. The transfer of Reliant Energy Retail Holdings, LLC and its subsidiaries by Reliant Energy, Inc. into Retail Holdings is a transfer of equity interests between entities under common control. Accordingly, the results of operations of RERH Holdings, LLC and its consolidated subsidiaries (RERH Holdings) reflect the transfer as if it occurred at the beginning of 2006. “Reliant Energy” refers to Reliant Energy, Inc. and its consolidated subsidiaries. Reliant Energy, Inc. is the sole Class A member and holds all 1,000 membership units of that class of Retail Holdings. In connection with the credit-enhanced retail structure, Merrill Lynch Commodities, Inc. owns one Class B membership unit, which is all of the issued and outstanding units of that class for Retail Holdings. The Class B member has only limited rights to vote on certain matters and no interest in profits and losses.

In preparation for and in connection with the credit-enhanced retail structure, RERH Holdings made ownership changes relating to entities, assets and liabilities during 2006. The following occurred (related amounts are included on the consolidated statements of members’ equity and comprehensive income):

•  Formed Reliant Energy Power Supply, LLC in April 2006 to procure the purchased power for RERH Holdings’ Texas retail customers. Reliant Energy Power Supply, LLC began procuring power in July 2006.

•  Reliant Energy Solutions East, LLC was distributed to Reliant Energy, Inc. on October 1, 2006 as this entity does business for retail customers outside of Texas. See below for 2007 activity.

•  Certain assets and liabilities were transferred from Reliant Energy Electric Solutions, LLC and Reliant Energy Services, Inc. (both of which are not subsidiaries of Retail Holdings) to Reliant Energy Power Supply, LLC in the third and fourth quarters of 2006 as these related to supply positions for the Texas retail customers.

During 2007, RERH Holdings completed the inclusion of its business outside of Texas in the credit-enhanced retail structure. The following occurred (related amounts are included on the consolidated statements of members’ equity and comprehensive income):

•  Reliant Energy, Inc. contributed Reliant Energy Solutions East, LLC to Reliant Energy Retail Services, LLC on August 1, 2007 and its operations are included in these consolidated financial statements from that point forward for 2007. See above for 2006 activity.

RERH Holdings provides electricity and energy services to retail electricity customers in Texas, including residential and small business customers and commercial, industrial and governmental/institutional customers. RERH Holdings’ next largest market is the market operated by PJM Interconnection, LLC, primarily in New Jersey, Maryland, the District of Columbia and Pennsylvania. Approximately 65% of RERH Holdings’ residential and small business customers are in the Houston area.

As of December 31, 2007, RERH Holdings’ subsidiaries include:

Subsidiary	Formation Date
Reliant Energy Retail Holdings, LLC (the predecessor parent)	September 2000
Reliant Energy Retail Services, LLC	September 2000
Reliant Energy Solutions East, LLC	February 2002
RE Retail Receivables, LLC	June 2002
Reliant Energy Power Supply, LLC	April 2006

F-72

RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Basis of Presentation.  These consolidated statements include all revenues and costs directly attributable to RERH Holdings including costs for facilities and costs for functions and services performed by Reliant Energy and charged to RERH Holdings. All significant intercompany transactions have been eliminated.

(2)   Summary of Significant Accounting Policies

(a)   Use of Estimates and Market Risk and Uncertainties.

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

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

RERH Holdings’ critical accounting estimates include: (a) fair value of derivative assets and liabilities; (b) estimated revenues and energy supply costs; and (c) deferred tax assets, valuation allowances and tax liabilities. Actual results could differ from the estimates.

RERH Holdings is subject to various risks inherent in doing business. See notes 2(c),2(d), 2(e), 2(g), 2(h), 4, 5, 6, 7, 8 and 9.

(b)   Principles of Consolidation.

Retail Holdings includes its accounts and those of its wholly-owned subsidiaries in its consolidated financial statements.

(c)   Revenues.

Gross revenues for energy sales and services to residential and small business customers and to commercial, industrial and governmental/institutional customers are recognized upon delivery under the accrual method. Energy sales and services that have been delivered but not billed by period-end are estimated.

As of December 31, 2007 and 2006, RERH Holdings recorded unbilled revenues of $435 million and $398 million, respectively, for energy sales and services. Accrued unbilled revenues are based on RERH Holdings’ estimates of customer usage since the date of the last meter reading provided by the independent system operators or electric distribution companies. Volume estimates are based on daily forecasted volumes and estimated customer usage by class. Unbilled revenues are calculated by multiplying volume estimates by the applicable rate by customer class. Estimated amounts are adjusted when actual usage is known and billed.

(d)   Derivatives and Hedging Activities.

RERH Holdings accounts for its derivatives instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” as amended (SFAS No. 133).

RERH Holdings uses derivative instruments to manage operational or market constraints and to execute its supply procurement strategy. The instruments used are fixed-price derivative contracts to hedge the variability in future cash flows from forecasted sales of power and purchases of fuel and power. RERH Holdings’ objective in entering into these fixed-price derivatives is to fix the price for a portion of these transactions.

For RERH Holdings’ risk management activities, it uses both derivative and non-derivative contracts that provide for settlement in cash or by delivery of a commodity. The primary types of derivative instruments RERH Holdings uses are forwards, futures, swaps and options. RERH Holdings accounts for its derivatives

F-73

RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

under one of two accounting methods (mark-to-market or accrual accounting (under the normal purchase/normal sale exception to fair value)) based on facts and circumstances. The fair values of 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.

Realized gains and losses on derivatives contracts 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 RERH Holdings’ derivative activities and classification in its results of operations is:

		Transactions that
	Purpose for Holding or	Physically	Transactions that
Instrument	Issuing Instrument(1)	Flow/Settle	Financially Settle(2)
Power futures, forward, swap and option contracts	Power sales to end-use retail customers	Revenues	N/A(3)
	Supply management revenues	Revenues	Cost of sales
	Power purchases	Cost of sales	Cost of sales
Natural gas futures, forward, swap and option contracts	Natural gas purchases/sales	N/A(3)	Cost of sales

(1)	The purpose for holding or issuing is not impacted by the accounting method elected for each instrument.
(2)	Includes classification for mark-to-market derivatives.
(3)	N/A is not applicable.

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.

In addition to market risk, RERH Holdings is exposed to credit and operational risk. Reliant Energy has a risk control framework, to which RERH Holdings is subject, 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. RERH Holdings uses mark-to-market valuation, value-at-risk and other metrics in monitoring and measuring risk. Reliant Energy’s risk control framework includes a variety of separate but complementary processes, which involve commercial and senior management and Reliant Energy’s Board of Directors. See note 2(e) for further discussion of RERH Holdings’ credit policy.

Set-off of Derivative Assets and Liabilities.  Where derivative instruments are subject to a master netting agreement and the accounting criteria to offset are met, RERH Holdings presents its derivative assets and liabilities on a net basis. Derivative assets/liabilities and accounts receivable/payable are presented and set-off separately in the consolidated balance sheets although in most cases contracts permit the set-off of derivative assets/liabilities and accounts receivable/payable with a given counterparty.

New Accounting Pronouncement Not Yet Adopted—Offsetting of Amounts.  The FASB issued FSP FIN 39-1, an amendment of FASB Interpretation No. 39 (FIN 39), which was applicable for RERH Holdings beginning January 1, 2008. This interpretation allows either (a) offsetting assets and liabilities for derivative instruments under a common 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, RERH Holdings plans to discontinue netting its derivative assets and liabilities and present them on a gross basis. Cash collateral amounts will remain presented on a gross basis. This

F-74

RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

change will significantly increase RERH Holdings’ derivative assets and liabilities retrospectively for all financial statements presented.

(e)   Credit Risk.

RERH Holdings has 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 counterparties is reviewed periodically. RERH Holdings tries to mitigate credit risk by entering into contracts that permit netting and allow it to terminate upon the occurrence of certain events of default. RERH Holdings measures credit risk as the replacement cost for its derivative positions plus amounts owed for settled transactions.

RERH Holdings’ credit exposure is based on its derivative assets and accounts receivable from its power supply counterparties, after taking into consideration netting within each contract and any master netting contracts with counterparties. RERH Holdings provides reserves for non-investment grade counterparties representing a significant portion of its credit exposure. As of December 31, 2007, one non-investment grade counterparty represented 95% ($144 million) of RERH Holdings’ credit exposure. As of December 31, 2006, one non-investment grade counterparty represented 99% ($261 million) of RERH Holdings’ credit exposure. As of December 31, 2007 and 2006, RERH Holdings held no collateral from these counterparties. There were no other counterparties representing greater than 10% of its credit exposure.

(f)   Selling, General and Administrative Expenses.

Selling, general and administrative expenses include, among other items, (a) selling and marketing, (b) bad debt expense, (c) financial services, (d) legal costs, (e) regulatory costs and (f) certain benefit costs. Some of the expenses are allocated from affiliates (see note 3).

(g)   Property, Plant and Equipment and Depreciation Expense.

RERH Holdings computes depreciation using the straight-line method based on estimated useful lives. Depreciation expense was $24 million and $29 million during 2007 and 2006, respectively.

	Estimated Useful		December 31,
	Lives (Years)		2007			2006
			(in millions)
Information technology		3 - 10	$	183		$	174
Furniture and leasehold improvements		3 - 10		6			6
Assets under construction				5			5
Total				194			185
Accumulated depreciation				(151	)		(131	)
Property, plant and equipment, net			$	43		$	54

RERH Holdings periodically evaluates property, plant and equipment for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. The evaluation is highly dependent on the underlying assumptions of related cash flows. RERH Holdings recorded no material property, plant and equipment impairments during 2007 and 2006.

(h)   Intangible Assets and Amortization Expense.

Goodwill.  RERH Holdings performs its goodwill impairment test annually on April 1 and when events or changes in circumstances indicate that the carrying value may not be recoverable. As of December 31,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2007 and 2006, RERH Holdings had $17 million and $19 million, respectively, of goodwill that is deductible for United States income tax purposes in future periods.

Other Intangibles.  RERH Holdings recognizes specifically identifiable intangible assets, including renewable energy credits, when specific rights and contracts are acquired. RERH Holdings has no intangible assets with indefinite lives recorded as of December 31, 2007 and 2006.

(i)   Income Taxes.

Federal.  RERH Holdings is included in the consolidated federal income tax returns of Reliant Energy and calculates its income tax provision on a separate return basis, whereby Reliant Energy pays all federal income taxes on RERH Holdings’ behalf and is entitled to any related tax savings. The difference between RERH Holdings’ current federal income tax expense or benefit, as calculated on a separate return basis, and related amounts paid to/received from Reliant Energy, if any, were recorded in RERH Holdings’ financial statements as adjustments to members’ equity. Reliant Energy changed its funding policy in January 2007 and these differences are recorded to (a) income taxes payable to Reliant Energy, Inc. if RERH Holdings has cumulative taxable income on a separate return basis or (b) deferred tax assets if RERH Holdings has cumulative taxable losses on a separate return basis. Deferred federal income taxes reflected on RERH Holdings’ consolidated balance sheet will ultimately be settled with Reliant Energy. See notes 3 and 7.

State.  RERH Holdings is included in the consolidated state income tax returns of Reliant Energy. It calculates its state provision, related payables or receivables and deferred state income taxes on a separate return basis and primarily settles the related assets and liabilities directly with the governmental entity. See note 7.

(j)   Cash and Cash Equivalents.

RERH Holdings records all highly liquid short-term investments with maturities of three months or less as cash equivalents.

(k)   Restricted Cash.

Restricted cash as of December 31, 2006 was comprised of funds received in error and subsequently returned.

(l)   Allowance for Doubtful Accounts.

RERH Holdings accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing counterparty credit ratings (for commercial and industrial customers), historical collections, accounts receivable agings and other factors. RERH Holdings writes-off accounts receivable balances against the allowance for doubtful accounts when it determines a receivable is uncollectible.

(m)   Gross Receipts Taxes.

RERH Holdings records gross receipts taxes on a gross basis in revenues and operations and maintenance expense in its consolidated statements of operations. During 2007 and 2006, RERH Holdings’ revenues and operation and maintenance expense include gross receipts taxes of $97 million and $102 million, respectively.

(n)   Sales Taxes.

RERH Holdings records sales taxes collected from its taxable customers and remitted to the various governmental entities on a net basis, thus there is no impact on its consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(o)   New Accounting Pronouncement Not Yet Adopted—Fair Value.

The FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS No. 157 is to be applied prospectively, except for aspects that do not apply to RERH Holdings. RERH Holdings adopted SFAS No. 157 on January 1, 2008. In connection with the adoption, (a) no cumulative effect of an accounting change will be recognized and (b) RERH Holdings expects to decrease its derivative liabilities and increase its income before income taxes relating to discounting these liabilities using its own credit ratings. For non-financial assets and liabilities, the adoption of SFAS No. 157 has been deferred until January 1, 2009.

(3)   Related Party Transactions

These financial statements include the impact of significant transactions between RERH Holdings and Reliant Energy. The majority of these transactions involve the purchase or sale of energy, capacity or related services from or to RERH Holdings and allocations of costs to RERH Holdings for support services.

Support and Technical Services.  Reliant Energy provides commercial support, technical services and other corporate services to RERH Holdings. Reliant Energy allocates certain support services costs to RERH Holdings based on RERH Holdings’ underlying planned operating expenses relative to the underlying planned operating expenses of other entities to which Reliant Energy provides similar services and also charges RERH Holdings for certain other services based on usage. Management believes this method of allocation is reasonable. These allocations and charges were not necessarily indicative of what would have been incurred had RERH Holdings been an unaffiliated entity. Effective with the credit-enhanced retail structure, beginning December 1, 2006, Reliant Energy charges a fee for these services calculated in the same manner and including a mark-up percentage of 1.5%, which was $1 million in 2007 and insignificant in 2006.

The following details the amounts recorded as operation and maintenance—affiliates and selling, general and administrative—affiliates:

	2007		2006
	(in millions)
Allocated or charged by Reliant Energy(1)	$	88	$	96

(1) Includes $2 million and $3 million for RERH Holdings’ share of allocated rent expense.

Services from Reliant Energy Electric Solutions, LLC and Reliant Energy Services, Inc.  Reliant Energy Retail Holdings, LLC transferred its interest in Reliant Energy Electric Solutions, LLC (REES) to Reliant Energy on January 1, 2005. During 2006 (through November 30, 2006), REES and Reliant Energy Services, Inc. (RES) primarily provided the energy supply services to RERH Holdings. The administrative costs for these services are included in the corporate support services allocations discussed above. Prior to December 1, 2006, REES and RES entered into contracts with third parties for the purposes of supplying RERH Holdings with some of the electricity necessary to serve its retail customers. RERH Holdings reimbursed REES and RES for the ultimate price of any electricity sold from REES/RES to RERH Holdings, including costs of derivative instruments, upon final delivery of that electricity. These supply contracts are subject to the provisions of the master commodity purchase and sale agreements, master netting arrangements and other contractual arrangements that REES and RES utilize with third-party customers and suppliers in connection with their supply portfolio management activities, including those activities undertaken for RERH Holdings. Effective December 1, 2006, RERH Holdings manages primarily all of its electricity supply portfolio directly with third parties.

	2007		2006
	(in millions)
Purchases from Reliant Energy under various commodity agreements(1)	$	237	$	3,937

(1) Recorded in cost of sales— affiliates.

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RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Notes Receivable—Reliant Energy, Inc.  Reliant Energy manages RERH Holdings’ daily cash balances. Prior to the credit-enhanced retail structure, excess cash was advanced to Reliant Energy, which provided a cash management function, and was recorded in notes receivable from Reliant Energy, Inc. RERH Holdings recorded interest income or expense, based on whether RERH Holdings invested excess funds, or borrowed funds from Reliant Energy. The amount of net interest income was $104 million during 2006. During 2006, this note receivable was distributed to Reliant Energy as a non-cash equity distribution in the amount of $1.9 billion.

Naming Rights to Houston Sports Complex.  In 2000, Reliant Energy acquired the naming rights, including advertising and other benefits, for a football stadium and other convention and entertainment facilities. Pursuant to this agreement, Reliant Energy is required to pay $10 million per year from 2002 through 2032. These costs are charged to RERH Holdings by Reliant Energy and are included in selling, general and administrative expense.

Income Taxes.  See discussion in note 2(i) regarding RERH Holdings’ policy with regards to income taxes.

	2007		2006
	(in millions)
Non-cash federal income tax contributions from Reliant Energy, Inc., net	$	—	$	179

As of December 31, 2007, RERH Holdings has $21 million recorded as taxes payable to Reliant Energy, Inc., which includes accrued interest payable of $2 million. RERH Holdings has incurred interest expense related to this payable of $7 million during 2007.

(4)   Debt

(a)   Working Capital Facility.

In connection with the credit-enhanced retail structure, on December 1, 2006, RERH Holdings entered into a $300 million working capital facility agreement with Merrill Lynch & Co., Inc. and affiliates (Merrill Lynch). As of December 31, 2007 and 2006, no amounts were outstanding under this facility. Loans bear interest at LIBOR plus 0.45% or a base rate. Borrowings under this facility will mature on the 90th day after the termination of the credit sleeve and reimbursement agreement with Merrill Lynch. The working capital facility includes a $150 million minimum adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) requirement for RERH Holdings for each trailing four-quarter period. The covenants under the credit sleeve and reimbursement agreement with Merrill Lynch also apply to the working capital facility. The obligations of RERH Holdings are non-recourse to Reliant Energy.

(b)   Receivables Facility.

RERH Holdings had a receivables facility arrangement to sell an undivided interest in accounts receivable from its business to financial institutions on an ongoing basis. In connection with the credit-enhanced retail structure, this agreement was terminated and RERH Holdings repaid $450 million on December 1, 2006.

The borrowings under the facility bore interest at floating rates that included fees based on the facility’s level of commitment and utilization. RERH Holdings serviced the receivables and received a fee of 0.4% of cash collected during 2006, which approximated the actual service costs.

(5)   Credit-Enhanced Retail Structure

The credit sleeve and reimbursement agreement (the agreement) and a working capital facility agreement, providing for revolving credit loans, each with Merrill Lynch became effective on December 1, 2006, which

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RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

substantially eliminated collateral postings for RERH Holdings’ business, although these collateral postings were made by Reliant Energy, not RERH Holdings.

Under the agreement, Merrill Lynch provides guarantees and the posting of collateral to RERH Holdings’ counterparties in supply transactions for its retail energy business. Cash flow activity in connection with these contracts and related collateral is classified as operating cash flow. During 2006, RERH Holdings recorded an unrealized loss on energy derivatives of $18 million due to the differences in quantity between contracts with Merrill Lynch and its contracts with the exchange relating to existing financially settled supply contracts.

RERH Holdings paid Merrill Lynch one-time structuring fees of $14 million ($13 million in 2006 and $1 million in 2007), which were expensed as general and administrative costs. RERH Holdings also pays a fee to Merrill Lynch of $0.40 for each megawatt hour (MWh) of power that it delivers to its retail customers. This fee ($26 million and $2 million during 2007 and 2006, respectively) is classified as interest expense. RERH Holdings is obligated to reimburse Merrill Lynch to the extent that any guarantees are called upon or any collateral posted by Merrill Lynch is foreclosed upon.

The initial term of the agreement was five years; effective December 31, 2007, the term was extended by an additional year. RERH Holdings is permitted to terminate at any time, subject to a make-whole payment during the first two years of the agreement. Merrill Lynch does not have an early termination option.

In connection with the agreement, Reliant Energy implemented a structure so that the entities comprising its retail energy business became subsidiaries of Retail Holdings. The agreement (a) restricts the ability of RERH Holdings to, among other actions, (i) encumber its assets, (ii) sell certain assets, (iii) incur additional debt, (iv) pay dividends or pay subordinated debt, (v) make investments or acquisitions or (vi) enter into certain transactions with affiliates and (b) requires RERH Holdings to manage its risks related to commodity prices. RERH Holdings’ obligations under the agreement with Merrill Lynch and the retail working capital facility are secured by first liens on the assets of RERH Holdings. Retail Holdings and its subsidiaries are designed to maintain the separate nature of their assets, avoid consolidation of such assets with the bankruptcy estate of Reliant Energy in the event Reliant Energy ever becomes subject to such a proceeding, and ensure that such assets are available first and foremost to satisfy their creditors’ claims. The obligations of RERH Holdings under the agreement and the retail working capital facility are non-recourse to Reliant Energy. See note 4(a) for discussion of the retail working capital facility.

(6)   Benefit Plans

RERH Holdings’ eligible employees participate in Reliant Energy’s stock-based incentive plans. During 2007 and 2006, RERH Holdings’ pre-tax stock-based incentive plans compensation expense was $6 million and $5 million, respectively.

RERH Holdings’ employees participate in Reliant Energy’s employee savings plans under Sections 401(a) and 401(k) of the Internal Revenue Code. RERH Holdings’ savings plan benefit expense, including matching and discretionary contributions, was $6 million and $4 million during 2007 and 2006, respectively.

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RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(7)   Income Taxes

(a)   Summary.

RERH Holdings’ income tax expense (benefit) is:

	2007		2006
	(in millions)
Current:
Federal	$	126	$	179
State		20		26
Total current		146		205
Deferred:
Federal		141		(95	)
State		22		(14	)
Total deferred		163		(109	)
Income tax expense	$	309	$	96

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

	2007			2006
Federal statutory rate		35	%		35	%
Additions (reductions) resulting from:
State income taxes, net of federal income taxes		3			4
Effective rate		38	%		39	%

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RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31,
	2007		2006
	(in millions)
Deferred tax assets:
Current:
Derivative liabilities, net	$	80	$	202
Allowance for doubtful accounts and credit provisions		12		11
Employee benefits		1		1
Other		3		—
Total current deferred tax assets		96		214
Non-current:
Derivative liabilities, net		—		39
Employee benefits		—		2
Total non-current deferred tax assets		—		41
Total deferred tax assets	$	96	$	255
Deferred tax liabilities:
Current:
Other	$	—	$	7
Total current deferred tax liabilities		—		7
Non-current:
Depreciation and amortization		9		17
Derivative assets, net		13		—
Other		—		1
Total non-current deferred tax liabilities		22		18
Total deferred tax liabilities	$	22	$	25
Accumulated deferred income taxes, net	$	74	$	230

(b)   Valuation Allowances.

RERH Holdings assesses its future ability to use deferred tax assets using the more-likely-than-not criteria. These assessments include an evaluation of its 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. Based on the analysis, RERH Holdings determined that no valuation allowance is needed for its deferred tax assets as of December 31, 2007 and 2006.

(c)   Adoption of FIN 48 and Tax Uncertainties.

Effective January 1, 2007, RERH Holdings adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48). This interpretation addresses whether (and when) tax benefits claimed in Reliant Energy’s federal and RERH Holdings’ state tax returns should be recorded in the financial statements. Pursuant to FIN 48, RERH Holdings 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

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RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. RERH Holdings classifies accrued interest and penalties related to uncertain income tax positions in income tax expense. Adoption of FIN 48 had no impact on RERH Holdings’ consolidated financial statements.

As of January 1, 2007 and December 31, 2007, RERH Holdings had no amounts accrued for unrecognized tax benefits, interest or penalties. During 2007 and 2006, RERH Holdings recognized $0 of income tax expense (benefit) due to changes in interest and penalties for federal and state income taxes.

RERH Holdings has the following years that remain subject to examination or are currently under audit for its major tax jurisdictions:

	Subject to	Currently Under
	Examination	Audit
Federal	1997 to 2007	1997 to 2005
Texas	2000 to 2007	2000 to 2005
Pennsylvania	2004 to 2007	2006

RERH Holdings, through Reliant Energy, expects 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 during 2008; however, it cannot estimate the range of changes that might occur:

•  $177 million payment to CenterPoint during 2004 related to residential customers; and

•  the timing of tax deductions could be changed as a result of negotiations with respect to depreciation.

(8)   Commitments

(a)   Lease Commitments.

Cash Obligations Under Operating Leases.  RERH Holdings’ projected cash obligations under non-cancelable long-term operating leases as of December 31, 2007 are (in millions):

2008	$	15
2009		16
2010		16
2011		7
2012		1
2013 and thereafter		—
Total	$	55

Operating Lease Expense.  Total lease expense for all operating leases was $12 million during 2007 and 2006.

(b)   Guarantees and Indemnifications.

Equity Pledged as Collateral for Reliant Energy.  Retail Holdings’ equity is pledged as collateral under certain of Reliant Energy’s credit and debt agreements, which have an outstanding balance of $1.2 billion as of December 31, 2007.

Other.  RERH Holdings enters into contracts that include indemnification and guarantee provisions. In general, RERH Holdings enters 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

F-82

RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

these contracts include asset sales agreements, retail supply agreements, service agreements and procurement agreements.

RERH Holdings is unable to estimate its maximum potential exposure under these agreements until an event triggering payment occurs. RERH Holdings does not expect to make any material payments under these agreements.

(c)   Other Commitments.

Purchased Power Commitments.  RERH Holdings is a party to purchased power contracts of various quantities and durations that are not classified as derivative assets and liabilities. These contracts are not included in the consolidated balance sheet as of December 31, 2007. Minimum purchase commitment obligations under these agreements are as follows as of December 31, 2007:

	Purchased Power Commitments
	Fixed Pricing		Variable Pricing(1)
	(in millions)
2008	$	67	$	13
2009		73		11
2010		13		—
2011		13		—
2012		13		—
2013 and thereafter		6		—
Total	$	185	$	24

(1) For contracts with variable pricing components, RERH Holdings estimated prices based on forward commodity curves as of December 31, 2007.

As of December 31, 2007, the maximum remaining term under any individual purchased power contract is seven years.

Sales Commitments.  As of December 31, 2007, RERH Holdings has sales commitments, including electric energy and capacity sales contracts, which are not classified as derivative assets and liabilities. The estimated minimum sales commitments over the next five years under these contracts are as follows:

	Fixed Pricing(1)		Variable Pricing(1)(2)
	(in millions)
2008	$	854	$	2,071
2009		526		1,517
2010		213		1,130
2011		64		859
2012		27		573
Total	$	1,684	$	6,150

(1)	In connection with the credit-enhanced retail structure, RERH Holdings estimates the fees under these sales commitments to be $15 million, $10 million, $7 million, $5 million and $3 million during 2008, 2009, 2010, 2011 and 2012, respectively.
(2)	For contracts with variable pricing components, RERH Holdings estimated prices based on forward commodity curves as of December 31, 2007.

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RERH HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(9)   Contingencies

RERH Holdings is involved in legal and other matters before courts and governmental agencies. Unless otherwise noted, RERH Holdings cannot predict the outcome of these matters.

PUCT Cases.  There are various proceedings pending before the state district court in Travis County, Texas, seeking reviews of the Public Utility Commission of Texas orders relating to the fuel factor component used in the “price-to-beat” tariff. These proceedings pertain to the same issues affirmed by a district court in Travis County and later by the Travis County Court of Appeals in 2004 in a separate proceeding.

(10)   Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable and payable and derivative assets and liabilities approximate their carrying amounts.

F-84

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Reliant Energy, Inc., Sole Member of Reliant Energy Retail Holdings, LLC
Houston, Texas

We have audited the accompanying consolidated statements of operations, member’s equity and comprehensive income, and cash flows of Reliant Energy Retail Holdings, LLC and subsidiaries (the “Company”) for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Reliant Energy Retail Holdings, LLC and subsidiaries for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas

March 14, 2006

F-85

RELIANT ENERGY RETAIL HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

	2005
	(thousands of dollars)
Revenues:
Electricity sales and services revenues	$	5,997,644
Expenses:
Purchased power		621,075
Purchased power—affiliates		4,629,342
Operation and maintenance		175,382
Operation and maintenance—affiliates		17,401
Selling, general and administrative		153,792
Selling, general and administrative—affiliates		49,568
Loss on sales of assets		4,329
Depreciation and amortization		48,656
Total operating expense		5,699,545
Operating Income		298,099
Other Income (Expense):
Other, net		275
Interest expense		(19,196	)
Interest income		300
Interest income, net—affiliates		102,244
Total other income		83,623
Income Before Income Taxes		381,722
Income tax expense		148,824
Net Income	$	232,898

See Notes to the Consolidated Financial Statements

F-86

RELIANT ENERGY RETAIL HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

	2005
	(thousands of dollars)
Cash Flows from Operating Activities:
Net income	$	232,898
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		48,656
Deferred income taxes		(6,203	)
Federal income tax contributions from Reliant Energy, Inc., net		136,564
Loss on sale of assets		4,329
Changes in other assets and liabilities:
Accounts and notes receivable and unbilled revenue, net		(201,964	)
Accounts receivable/payable—affiliates		122,966
Net derivative assets and liabilities		350
Accounts payable		14,123
Other current assets		2,564
Other current liabilities		5,384
Other assets		654
Retail customer deposits		163
State income taxes payable		4,244
Other taxes payable		5,327
Accrual for transmission and distribution charges		317
Other liabilities		2,707
Net cash provided by operating activities		373,079
Cash Flows from Investing Activities:
Capital expenditures		(9,239	)
Proceeds from sale of assets, net		27,303
Net cash provided by investing activities		18,064
Cash Flows from Financing Activities:
Increase in short-term borrowings, net		223,000
Changes in notes with Reliant Energy, Inc., net		(613,383	)
Net cash used in financing activities		(390,383	)
Net Change in Cash and Cash Equivalents		760
Cash and Cash Equivalents at Beginning of Period		7,962
Cash and Cash Equivalents at End of Period	$	8,722
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid to affiliate	$	6,920
Interest paid (net of amounts capitalized) to third party		19,355
Income taxes paid (net of income tax refunds received)		14,096
Non-cash Disclosure:
Contributions from Reliant Energy, Inc., net		133,564
Transfer of Reliant Energy Electric Solutions, LLC to Reliant Energy, Inc.		(273,476	)

See Notes to the Consolidated Financial Statements

F-87

RELIANT ENERGY RETAIL HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY AND COMPREHENSIVE INCOME

	Other			Accumulated Other			Total
	Member’s			Comprehensive			Member’s			Comprehensive
	Equity			Income (Loss)			Equity			Income
	(thousands of dollars)
Balance at December 31, 2004	$	1,503,710		$	(2	)	$	1,503,708
Net income		232,898						232,898		$	232,898
Contributions from member		133,564						133,564
Transfer of Reliant Energy Electric Solutions, LLC to Reliant Energy, Inc.		(273,478	)		2			(273,476	)
Comprehensive income										$	232,898
Balance at December 31, 2005	$	1,596,694		$	—		$	1,596,694

See Notes to the Consolidated Financial Statements

F-88

RELIANT ENERGY RETAIL HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Background and Basis of Presentation

Background.  “RERH LLC” refers to Reliant Energy Retail Holdings, LLC, a Delaware limited liability company. “RERH” refers to Reliant Energy Retail Holdings, LLC and its consolidated subsidiaries. “Reliant Energy” refers to Reliant Energy, Inc. and its consolidated subsidiaries. RERH LLC is a wholly-owned subsidiary of Reliant Energy and was formed in September 2000. Reliant Energy is the sole member and holds all 1,000 shares of RERH LLC.

RERH provides electricity products and related services to end-use customers ranging from residential and small business customers to large commercial, industrial and governmental/institutional customers. During 2003, RERH began providing retail energy products and services to commercial, industrial and governmental/institutional customers in New Jersey and Maryland. During 2004, RERH began marketing retail energy to this same class of customers in other areas of the wholesale and retail electric market operated by PJM Interconnection, LLC (PJM), primarily in the District of Columbia and Pennsylvania.

As of December 31, 2005, RERH’s subsidiaries include:

Subsidiary	Formation Date
Reliant Energy Retail Services, LLC (Retail Services)	September 2000
Reliant Energy Solutions East, LLC (Solutions East)	February 2002
RE Retail Receivables, LLC	June 2002

In January 2003, RERH purchased all the outstanding common stock in Reliant Energy Renewables, Inc. (Renewables) from Reliant Energy Power Generation, Inc., an affiliated company and a subsidiary of Reliant Energy for approximately $27,000 and assumed all notes payable to affiliated companies. The purchase price was based on Renewables’ book value. The acquisition was treated as a reorganization of entities under common control. In July 2005, RERH sold the common stock and all related assets and liabilities of Renewables. See note 11.

Effective September 28, 2004, RERH consolidated RE Retail Receivables, LLC (see note 5). Effective January 1, 2005, Reliant Energy Solutions, LLC was merged into Retail Services and RERH transferred its interest in Reliant Energy Electric Solutions, LLC (REES) to Reliant Energy.

Basis of Presentation.  These consolidated statements include all revenues and costs directly attributable to RERH including costs for facilities and costs for functions and services performed by Reliant Energy and charged to RERH. All significant intercompany transactions have been eliminated.

(2)   Summary of Significant Accounting Policies

(a)   Use of Estimates and Market Risk and Uncertainties.

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 and liabilities,

•  the reported amounts of revenues and expenses and

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

RERH’s critical accounting estimates include: (a) derivative assets and liabilities (prior to 2005); (b) estimated revenues and energy supply costs; and (c) deferred tax assets, valuation allowances and tax liabilities. Actual results could differ from the estimates.

RERH is subject to various risks inherent in doing business. See notes 2(c), 2(d), 2(e), 4, 5, 6, 7, 8 and 9.

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(b)   Principles of Consolidation.

RERH LLC includes the accounts and those of its wholly-owned and majority-owned subsidiaries in its consolidated financial statements. Since September 28, 2004, RERH has consolidated its receivables facility arrangement (see note 5).

(c)   Revenues.

Retail Revenues.  Gross revenues for energy sales and services to residential and small business customers and electric sales to large commercial, industrial and governmental/institutional customers under contracts executed after October 2002 are recognized upon delivery and include estimated energy and services delivered but not billed by the end of the period.

As of December 31, 2005, RERH recorded unbilled revenues of $363 million for retail energy sales. Accrued unbilled revenues are based on RERH’s estimates of customer usage since the date of the last meter reading provided by the independent system operators or electric distribution companies. Volume estimates are based on daily forecasted volumes, estimated customer usage by class and applicable customer rates. Unbilled revenues are calculated by multiplying volume estimates by estimated rates by customer class. Estimated amounts are adjusted when actual usage and rates are known and billed.

Changes in Estimates.  The revenues and the related energy supply costs include estimates of customer usage after consideration of initial usage information provided by the independent system operators and the distribution companies. RERH revises these estimates and records any changes in the period as information becomes available (collectively referred to as “market usage adjustments”). During 2005, RERH recognized in gross margin (revenues less purchased power) $13 million of expense related to market usage adjustments.

(d)   Derivatives and Hedging Activities.

RERH accounts for its derivatives instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” as amended (SFAS No. 133)

Prior to RERH transferring its interest in REES to Reliant Energy, for hedging activities, RERH used both derivative and non-derivative contracts that provided for settlement in cash or by delivery of a commodity. The primary types of derivative instruments used were forwards, futures, swaps and options. RERH elected one of three accounting methods (cash flow hedge, mark-to-market or accrual accounting) for derivatives based on facts and circumstances. The fair values of derivative activities were determined by (a) prices actively quoted, (b) prices provided by other external sources or (c) prices based on models and other valuation methods.

If certain conditions are met, a derivative instrument may be designated as a cash flow hedge. A derivative is recognized at fair value in the balance sheet whether or not it is designated as a hedge, except for derivative contracts designated as “normal purchases and sales exceptions,” which are not in its consolidated balance sheet or results of operations prior to settlement. As of December 31, 2005, RERH did not have any derivatives designated as cash flow hedges.

Derivatives designated as cash flow hedges must have a high correlation between price movements in the derivative and the hedged item. The changes in fair value of cash flow hedges were deferred in accumulated other comprehensive income (loss), net of tax, to the extent the contracts were effective as hedges, until the forecasted transactions affected earnings. At the time the forecasted transactions affected earnings, RERH reclassified the amounts in other comprehensive income (loss) into earnings. RERH recorded the ineffective portion of changes in fair value of cash flow hedges immediately into earnings. For all other derivatives, changes in fair value were recorded as unrealized gains or losses in its results of operations.

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If and when an acceptable level of correlation no longer exists, hedge accounting ceases and changes in fair value are recognized in its results of operations. If it becomes probable that a forecasted transaction will not occur, RERH immediately recognizes the related deferred gains or losses in its results of operations. The associated hedging instrument is then marked to market through its results of operations for the remainder of the contract term unless a new hedging relationship is redesignated.

In July 2003, the EITF issued EITF No. 03-11, which states that realized gains and losses on derivatives contracts not “held for trading purposes” should be reported either on a net or gross basis based on the relevant facts and circumstances. EITF No. 03-11 has no impact on margins or net income. Subsequent to October 1, 2003, due to the adoption of EITF No. 03-11, hedging transactions that do not physically flow are included in the same caption as the items being hedged. A summary of RERH’s derivative activities and classification in its results of operations is:

	Purpose for Holding or	Transactions that	Transactions that
Instrument	Issuing Instrument(1)	Physically Flow	Financially Settle(2)
Power futures, forward, swap and option contracts	Power sales to end-use retail customers Supply management revenues Power purchases	Revenues Revenues Purchased power	N/A Purchased power Purchased power
Natural gas and fuel futures, forward, swap and option contracts	Natural gas and fuel purchases/sales	N/A	Purchased power

(1)	The purpose for holding or issuing is not impacted by the accounting method elected for each instrument.
(2)	Includes classification for mark-to-market derivatives and amounts reclassified from accumulated other comprehensive income (loss) related to cash flow hedges.

In addition to market risk, RERH is exposed to credit and operational risk. Reliant Energy has a control framework, to which RERH is subject, 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. RERH uses mark-to-market valuation, value-at-risk and other metrics in monitoring and measuring risk. Reliant Energy’s risk control framework includes a variety of separate but complementary processes, which involve commercial and senior management and Reliant Energy’s Board of Directors. See note 2(e) for further discussion of RERH’s credit policy.

Set-off of Derivative Assets and Liabilities.  Where derivative instruments are subject to a master netting agreement and the accounting criteria to net are met, RERH presents its derivative assets and liabilities on a net basis. Derivative assets/liabilities and accounts receivable/payable are presented and set-off separately in the consolidated balance sheets although in most cases contracts permit the set-off of derivative assets/liabilities and accounts receivable/payable with a given counterparty.

(e)   Credit Risk.

RERH has a credit policy that governs the management of credit risk, including the establishment of counterparty credit limits and specific transition approvals. Credit risk is monitored and the financial condition of RERH’s counterparties are reviewed periodically. RERH tries to mitigate credit risk by entering into contracts that permit netting and allow RERH to terminate upon the occurrence of certain events of default. RERH measures credit risk as the replacement cost for its derivative positions (through December 31, 2004) plus amounts owed for settled transactions.

As of December 31, 2004, one non-investment grade counterparty represented 90% ($107 million) of RERH’s credit exposure, net of collateral, primarily related to its derivative assets and Electric Reliability Council of Texas (ERCOT) power supply counterparties. RERH did not have any credit exposure from this

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one counterparty as of December 31, 2005 as the transactions were with REES, which is no longer a subsidiary of RERH. REES has net credit exposure of $708 million as of December 31, 2005 to this non-investment grade counterparty. If the counterparty defaulted, RERH would experience increased purchased power costs going forward. There were no other counterparties representing greater than 10% of RERH’s credit exposure, net of collateral.

(f)   Selling, General and Administrative Expenses.

Selling, general and administrative expenses include (a) selling and marketing, (b) bad debt expense and (c) other general and administrative expenses. Other general and administrative expenses include, among other items, (a) financial services, (b) legal costs, (c) regulatory costs and (d) certain benefit costs. Some of the expenses are allocated from affiliates (see note 3).

(g)   Severance Costs.

During 2005, RERH incurred $2 million in severance costs (included in both operation and maintenance and selling, general and administrative expenses), which were substantially paid in each applicable period.

(h)   Property, Plant and Equipment and Depreciation Expense.

RERH computes depreciation using the straight-line method based on estimated useful lives. Depreciation expense was $48 million during 2005.

RERH periodically evaluates property, plant and equipment for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. The evaluation is highly dependent on the underlying assumptions of related cash flows. RERH recorded no material property, plant and equipment impairments during 2005.

(i)   Intangible Assets and Amortization Expense.

Goodwill.  RERH performs its goodwill impairment test annually and when events or changes in circumstances indicate that the carrying value may not be recoverable. RERH previously selected November 1 as its annual goodwill impairment testing date since Reliant Energy had historically completed its annual strategic planning process by that date. Reliant Energy has since modified its strategic planning process, which provides key information used in the analysis of RERH’s goodwill impairment test, and such information is no longer completed by November 1. In order to align RERH’s annual goodwill impairment test with Reliant Energy’s annual strategic planning process, to meet the accelerated reporting deadlines and to provide adequate time to complete the analysis each year, beginning in 2005, RERH changed the date on which it performs the annual goodwill impairment test to April 1. The change is not intended to delay, accelerate or avoid an impairment charge. RERH believes that this accounting change is to an alternative accounting principle that is preferable under the circumstances.

Other Intangibles.  RERH recognizes specifically identifiable intangible assets, including emission allowances, demand side management contracts and permanent seat licenses, when specific rights and contracts are acquired.

(j)   Stock-based Compensation.

RERH applies the intrinsic value method of accounting for employee stock-based compensation and expenses it ratably over the vesting period. On January 1, 2006, RERH began to recognize compensation cost for the unvested portion of pre-January 2006 awards and awards granted from that date based on the grant-date fair value of those awards. RERH expects the adoption of the fair value based method of accounting will not have a material impact on its financial position or results of operations. Under the intrinsic value method,

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RERH adjusts compensation cost for performance-based stock awards and options based on changes in Reliant Energy’s stock price; however, under the fair value based method, RERH recognizes compensation cost based on grant date fair value recognized over the service period. Under the intrinsic value method, RERH does not recognize compensation cost for time-based stock options or Reliant Energy’s employee stock purchase plan; however, under the fair value based method, RERH recognizes compensation cost. The fair value based method of accounting does not change RERH’s compensation cost for time-based restricted stock awards or performance-based cash awards.

Using the Black-Scholes model for determining fair values, RERH’s pro forma results are:

	2005
	(in millions)
Net income, as reported	$	233
Add: Stock-based compensation expense included in reported net income, net of tax		—
Deduct: Stock-based compensation expense determined under fair value based method for all awards, net of tax		(2	)
Pro forma net income	$	231

RERH uses the Black-Scholes option-pricing model with the following weighted average assumptions and resulting fair values.

				Reliant Energy
				Employee Stock
	Reliant Energy			Purchase Plan
	Stock Options			Rights
	2005			2005
Expected life in years		5			0.5
Estimated volatility(1)		45.75	%		32.97	%
Risk-free interest rate		4.18	%		2.94	%
Dividend yield		0	%		0	%
Weighted-average fair value	$	5.72		$	3.25

(1) For options, RERH estimated volatility based on an equal weighting of historical and implied volatility of Reliant Energy’s common stock. For employee stock purchase plan rights, RERH estimated volatility based on the historical volatility of Reliant Energy’s common stock.

(k)   Income Taxes.

RERH is included in the consolidated income tax returns of Reliant Energy and calculates its income tax provision on a separate return basis, whereby Reliant Energy pays all federal income taxes on RERH’s behalf and is entitled to any related tax savings. The difference between RERH’s current federal income tax expense or benefit, as calculated on a separate return basis, and related amounts paid or received to/from Reliant Energy, if any, are recorded in RERH’s financial statements as adjustments to member’s equity on its consolidated balance sheets. Deferred income taxes reflected on RERH’s consolidated balance sheet will ultimately be settled with Reliant Energy through member’s equity. See notes 3 and 7.

(l)   Cash and Cash Equivalents.

RERH records all highly liquid short-term investments with maturities of three months or less as cash equivalents.

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(m)   Allowance for Doubtful Accounts.

RERH accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing counterparty credit ratings, historical collections, accounts receivable agings and other factors. RERH writes-off accounts receivable balances against the allowance for doubtful accounts when it determines a receivable is uncollectible.

(3)   Related Party Transactions

These financial statements include significant transactions between RERH and Reliant Energy. The majority of these transactions involve the purchase or sale of power or related services by Reliant Energy from or to RERH and allocations of costs to RERH for certain support services. The following describes the impacts on the financial statements for the particular transactions:

Notes Receivable—Affiliate.  Reliant Energy manages RERH’s daily cash balances. Excess cash is advanced to Reliant Energy, which provides a cash management function, and is recorded in long-term notes receivable—affiliated company. As cash is required to fund operations, Reliant Energy funds RERH’s bank accounts. RERH records interest income or expense, based on whether RERH invested excess funds, or borrowed funds from Reliant Energy. The amount of net interest income is $102 million during 2005.

Support Services.  Reliant Energy provides RERH commercial support and other corporate support services. Effective January 2005, Reliant Energy began allocating certain support services costs to RERH based on RERH’s underlying planned operating expenses relative to the underlying planned operating expenses of other entities to which Reliant Energy provides similar services and also began charging RERH for certain services based on usage and based on number of employees. Management believes this method of allocation is reasonable. These allocations and charges were not necessarily indicative of what would have been incurred had RERH been an unaffiliated entity. Amounts charged and allocated to RERH for these services were $67 million during 2005 and are included in operation and maintenance—affiliates and selling, general and administrative expenses—affiliates. Included in these amounts are $6 million for 2005 for RERH’s share of allocated rent expense, which is included in selling, general and administrative expense—affiliates.

Naming Rights to Houston Sports Complex.  In 2000, Reliant Energy acquired the naming rights, including advertising and other benefits, for a football stadium and other convention and entertainment facilities. Pursuant to this agreement, Reliant Energy is required to pay $10 million per year from 2002 through 2032. These costs are charged to RERH by Reliant Energy and are included in selling, general and administrative expense.

Reliant Energy Services and REES Energy Supply Services.  Prior to 2003, Reliant Energy Services primarily provided RERH with its energy supply services. During 2003, certain supply contracts were transferred from Reliant Energy Services to RERH’s subsidiary at the time, REES. As discussed in note 1, RERH transferred its interest in REES to Reliant Energy on January 1, 2005. During 2005, REES and Reliant Energy Services primarily provided the energy supply services to RERH. During 2005, the administrative costs for these services were included in the corporate support services allocations.

As discussed above, Reliant Energy Services and REES enter into contracts with third parties for the purposes of supplying RERH with some of the electricity necessary to serve its retail customers. These supply contracts are subject to the provisions of the master commodity purchase and sale agreements, master netting arrangements and other contractual arrangements that Reliant Energy Services and REES utilize with third-party customers and suppliers in connection with their supply portfolio management activities, including those activities undertaken for RERH. Consequently, the cost associated with credit support for the supply portfolio managed by Reliant Energy Services and REES for RERH could differ significantly from those that RERH would experience if it managed all of its electricity supply portfolio directly with third parties.

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RERH reimburses Reliant Energy Services and REES for the ultimate price of any electricity sold from Reliant Energy Services/REES to RERH, including costs of derivative instruments, upon final delivery of that electricity. RERH does not account for the unrealized value associated with the derivative instruments executed by Reliant Energy Services/REES with third parties because the contracts are executed by Reliant Energy Services/REES.

Purchased power from REES was $4.6 billion during 2005. This amount was recorded as purchased power—affiliates.

Income Taxes.  During 2005, Reliant Energy made equity contributions to RERH for deemed distributions related to federal income taxes of $133 million. See note 7.

(4)   Derivatives and Hedging Activities

RERH, through REES and Reliant Energy Services, historically used derivative instruments to manage operational or market constraints and to execute its supply procurement strategy. The instruments used were fixed-price derivative contracts to hedge the variability in future cash flows from forecasted sales of power and purchases of power. RERH’s objective in entering into these fixed-price derivatives was to fix the price for a portion of these transactions. See note 2(d).

As a result of RERH transferring its interest in REES effective January 2005, RERH did not have any cash flow hedges or other derivatives during 2005.

(5)   Receivables Facility

RERH has a receivables facility arrangement to sell an undivided interest in accounts receivable from its business to financial institutions on an ongoing basis. RERH amended this arrangement in September 2005 to extend its maturity until September 2006, reduce the fees it is charged, increase the proportion of receivables against which it can borrow and increase the maximum capacity available from $350 million to $450 million.

The assets of the special purpose subsidiary that purchases the receivables and then resells receivables under the facility are available first and foremost to satisfy the claims of its creditors. The special purpose subsidiary is a separate entity.

Prior to September 28, 2004, these transactions were accounted for as sales of receivables; as a result, the related receivables and debt were excluded from the consolidated balance sheet. Effective with the September 28, 2004 amendment to this facility, the qualified special purpose entity (QSPE) ceased to be a QSPE and RERH began consolidating its results of operations and the proceeds from receivables sold to the financial institutions were treated as a financing. As a result, accounts receivable and short-term borrowings of $350 million were included in the consolidated balance sheet as of the amendment date. The borrowings under the facility bear interest at floating rates that include fees based on the facility’s level of commitment and utilization. RERH services the receivables and received a fee of 0.4% of cash collected during 2005, which approximates the actual service costs. Reliant Energy also guarantees the performance obligations of the originators of the receivables and the servicing of the receivables.

(6)   Benefit Plans

(a) Stock-Based Incentive Plans.

Overview.  RERH’s eligible employees participate in stock-based incentive plans described below. The Compensation Committee of Reliant Energy’s Board of Directors administers Reliant Energy’s stock-based incentive plans. The Reliant Energy, Inc. 2002 Long-Term Incentive Plan (the 2002 LTIP) and the Reliant Energy, Inc. 2002 Stock Plan (the 2002 Stock Plan) permit Reliant Energy to grant various stock-based

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incentive awards to officers, key employees and directors. Awards include stock options, stock appreciation rights, restricted stock, performance awards, cash awards and stock awards.

Prior to the adoption of the plans, participants received awards under the Long-Term Incentive Plan of Reliant Energy, Inc. (the 2001 LTIP) or the Reliant Energy, Inc. Transition Stock Plan (collectively the previous plans). Awards under the previous plans are no longer permitted.

RERH applies the intrinsic value method of accounting for employee stock-based incentive plans. Awards to RERH employees under Reliant Energy’s stock-based incentive plans resulted in expense of $0 during 2005. See note 2(j) for pro forma information.

Time-Based Stock Options.  Reliant Energy grants time-based stock options to RERH’s employees at an exercise price equal to or greater than the fair market value of Reliant Energy’s stock on the grant date without cost to participants. Generally, options vest 33.33% per year and have a term of ten years.

Summarized time-based option activity is:

	2005
			Weighted Average
	Options		Exercise Price
Granted		—	$	—
Outstanding at end of year		1,351,042		16.95
Exercisable at end of year		1,250,823		18.03

Time-Based Restricted Stock Awards.  Reliant Energy grants time-based restricted stock awards to RERH’s employees without cost to participants. In general, these awards vest, subject to the participant’s continued employment, three years from the grant date.

Summarized restricted stock award activity is:

	2005
Granted		80,235
Outstanding at end of year		334,904
Weighted average grant date fair value	$	12.63

Performance-Based Awards.  Reliant Energy grants performance-based awards to RERH’s employees without cost to participants. The number of performance-based awards earned is determined at the end of each performance period.

Reliant Energy’s Compensation Committee granted the 2004-2006 performance-based awards through the Key Employee Award Program (the Program) established under the 2002 LTIP. Under the Program, each performance-based award represents a targeted award of (a) 16,000 shares of performance-based stock, (b) 68,000 performance-based stock options and (c) 16,000 cash units with each cash unit having an equivalent fair market value of one share of Reliant Energy’s common stock on the vesting date. The Program provides for a payout ranging from 0% to 140% of the targeted award level, as determined by Reliant Energy’s Compensation Committee in its sole discretion after considering various qualitative and quantitative performance criteria. These criteria include (a) reducing Reliant Energy’s ratio of adjusted net debt to adjusted EBITDA to at least 3.5, (b) delivering superior customer value and (c) building a great company to work for, taking into consideration market conditions for each factor. EBITDA is defined as earnings (loss) before interest expense, interest income, income taxes, depreciation and amortization expense. Reliant Energy’s Compensation Committee has the discretion to weight the various performance objectives as it deems appropriate.

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Summarized performance-based stock award activity, including the Program and previous programs and assuming a 140% payout of the Program, is:

	2005
Granted		—
Outstanding at end of year		179,200
Weighted average grant date fair value		N/A

Summarized performance-based option activity of the Program, assuming a 140% payout, is:

	2005
			Weighted Average
	Options		Exercise Price
Granted		—	$	—
Outstanding at end of year		761,600		8.34
Exercisable at end of year		—		—

Employee Stock Purchase Plan.  Reliant Energy had 18 million shares of authorized common stock reserved and approved for issuance under the Reliant Energy, Inc. Employee Stock Purchase Plan (ESPP) as of December 31, 2005. Under the ESPP, substantially all regular RERH employees can purchase Reliant Energy common stock through payroll deductions of up to 15% of eligible compensation. The ESPP provides for semiannual offering periods commencing on January 1 and July 1 of each year. The share price paid by an employee equals the lesser of 85% of the average market price on the first or last business day of each offering period. Individual ESPP participants are restricted from purchasing more than $25,000 of common stock in a calendar year.

During January 2006 and during 2005, Reliant Energy issued 72,809 shares and 201,049 shares to RERH’s employees under the ESPP, respectively.

(b)   Savings Plan.

RERH’s employees participate in Reliant Energy’s employee savings plans under Sections 401(a) and 401(k) of the Internal Revenue Code. Under the plans, participating employees may contribute a portion of their compensation generally up to a maximum of 50% pre-tax and 16% after-tax during 2005. RERH’s savings plan benefit expense, including matching and discretionary contributions, was $5 million during 2005.

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(7)   Income Taxes

RERH’s income tax expense (benefit) is:

	2005
	(in millions)
Current:
Federal	$	137
State		18
Total current		155
Deferred:
Federal		(10	)
State		4
Total deferred		(6	)
Income tax expense	$	149

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

	2005
	(in millions)
Income before income taxes	$	382
Federal statutory rate		35	%
Income tax expense at statutory rate		134
Net addition (reduction) in taxes resulting from:
State income taxes, net of federal income taxes		14
Other, net		1
		—
Total		15
Income tax expense	$	149
Effective rate		39	%

Tax Contingencies.  Reliant Energy’s income tax returns, including years when it was included in CenterPoint’s consolidated tax group, for the 1997 to 2004 tax reporting periods are under audit by federal and state taxing authorities. These audits may result in additional taxes or revisions of the timing of tax payments. As RERH is a part of the consolidated income tax returns of Reliant Energy, it could be subject to additional taxes. RERH evaluates the need for contingent tax liabilities on a quarterly basis and records any estimable and probable tax exposures in its results of operations. In addition, RERH discloses any material tax contingencies as to which it believes there is a reasonable possibility of a future tax assessment.

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(8)   Commitments

(a)   Lease Commitments.

Cash Obligations Under Operating Leases.  RERH’s projected cash obligations under non-cancelable long-term operating leases as of December 31, 2005 are (in millions):

2006	$	4
2007		3
2008		2
2009		2
2010		2
2011 and thereafter		—
Total	$	13

Operating Lease Expense.  Total lease expense for all operating leases was $9 million during 2005.

(b)   Guarantees.

Guarantor.  Together with certain of Reliant Energy’s other subsidiaries, RERH, excluding RE Retail Receivables, LLC, is a guarantor of certain obligations under credit and debt agreements of Reliant Energy. As of December 31, 2005, RERH’s maximum potential amount of future payments under these guarantees is approximately $4.9 billion and $3.6 billion is outstanding for continuing operations. These obligations mature at various dates from 2009 through 2036.

Equity Pledged as Collateral to Reliant Energy.  RERH LLC’s equity is pledged as collateral under certain of Reliant Energy’s credit and debt agreements, which have an outstanding balance from continuing operations of $3.6 billion as of December 31, 2005.

Other.  RERH enters into contracts that include indemnification and guarantee provisions. In general, RERH enters 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.

RERH is unable to estimate its maximum potential exposure under these provisions until an event triggering payment under these provisions occurs. Based on current information, RERH considers the likelihood of making any material payments under these provisions to be remote.

(c)   Other Commitments.

Sales Commitments.  As of December 31, 2005, RERH has sales commitments, including electric energy and capacity sales contracts, which are not classified as derivative assets and liabilities. The estimated minimum sales commitments under these contracts are as follows (in millions):

2006	$	2,043
2007		924
2008		416
2009		144
2010		73
Total	$	3,600

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(9)   Contingencies

Legal Matters.

RERH is party to a number of legal and other proceedings before courts and governmental agencies. Unless otherwise noted, RERH cannot predict the outcome of these proceedings.

Texas Commercial Energy.  In July 2003, Texas Commercial Energy, LLP (TCE) sued RERH and several other ERCOT power market participants in the United States District Court for the Southern District of Texas. TCE claimed damages in excess of $535 million for alleged violations of state and federal antitrust laws, fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract and civil conspiracy. The trial court dismissed the lawsuit. The United States Court of Appeals for the Fifth Circuit affirmed the dismissal of the lawsuit and denied TCE’s request for a rehearing. In January 2006, the United States Supreme Court denied a petition to review the dismissal of the lawsuit.

Utility Choice Electric.  In February 2005, Utility Choice Electric filed a lawsuit that alleges similar claims to the TCE lawsuit and additional claims including, among others, wire fraud, mail fraud and violations of the Racketeer Influenced and Corrupt Organizations Act. In December 2005, the United States District Court for the Southern District of Texas granted RERH’s motion to dismiss all federal claims. The court also dismissed without prejudice the state law claims. Following the dismissal, RERH reached an agreement to settle the remaining state law claims for an immaterial amount.

PUCT Cases.  There are various proceedings pending before the state district court in Travis County, Texas, seeking reviews of the Public Utility Commission of Texas (PUCT) orders relating to the fuel factor component used in RERH’s “price-to-beat” tariff. These proceedings pertain to the same issues affirmed by a district court in Travis County and later by the Travis County Court of Appeals in 2004 in a separate proceeding.

(10)   Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable and payable and derivative assets and liabilities and third-party debt equal their carrying amounts.

(11)   Sales of Landfill-Gas Fueled Power Plants

RERH sold Renewables, which owned landfill-gas fueled power plants, for $28 million in July 2005 and recognized a loss of $4 million.

(12)   Subsequent Event (Unaudited)

In connection with a credit-enhanced retail structure, effective December 1, 2006, RERH was contributed to RERH Holdings, LLC (a wholly-owned subsidiary of Reliant Energy, Inc. that was formed in July 2006) by Reliant Energy, Inc. However, there is no impact to the consolidated financial statements for RERH for 2005 due to this transfer of entities under common control.

F-100

Report of Independent Registered Public Accounting Firm

The Board of Directors
Reliant Energy Northeast Generation, Inc., Sole Member of Reliant Energy Mid-Atlantic Power Holdings, LLC:

We have audited the accompanying consolidated balance sheets of Reliant Energy Mid-Atlantic Power Holdings, LLC and subsidiaries (the Company), as of December 31, 2007 and 2006, and the related consolidated statements of operations, member’s equity and comprehensive income (loss), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reliant Energy Mid-Atlantic Power Holdings, LLC and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

As discussed in notes 8 and 7 to the consolidated financial statements, the Company changed its accounting for income tax uncertainties in 2007 and defined benefit pension and other postretirement plans in 2006, respectively.

KPMG LLP

Houston, Texas

February 25, 2008

F-101

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Reliant Energy Northeast Generation, Inc., Sole Member of Reliant Energy Mid-Atlantic Power Holdings, LLC
Houston, Texas

We have audited the accompanying consolidated statements of operations, member’s equity and comprehensive income, and cash flows of Reliant Energy Mid-Atlantic Power Holdings, LLC and subsidiaries (the “Company”) for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Reliant Energy Mid-Atlantic Power Holdings, LLC and subsidiaries for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas

March 14, 2006

F-102

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	2007			2006			2005
	(thousands of dollars)
Revenues:
Revenues	$	(10,235	)	$	26,107		$	42,906
Revenues—affiliates		696,856			539,701			587,336
Total		686,621			565,808			630,242
Expenses:
Cost of sales		244,695			239,686			230,391
Cost of sales—affiliates		9,930			15,329			20,465
Operation and maintenance		104,600			91,915			72,712
Operation and maintenance—affiliates		57,831			48,155			45,997
Facilities leases		59,848			59,848			59,848
General and administrative—affiliates		44,029			43,017			44,956
Gains on sales of assets and emission allowances, net		(1,969	)		(71,323	)		(109,798	)
Depreciation and amortization		88,449			71,315			83,544
Total operating expense		607,413			497,942			448,115
Operating Income		79,208			67,866			182,127
Other Income (Expense):
Other, net		—			1			53
Interest expense		(1,230	)		(1,095	)		(1,418	)
Interest expense—affiliates		(70,485	)		(68,921	)		(64,746	)
Interest income		837			655			939
Total other expense		(70,878	)		(69,360	)		(65,172	)
Income (Loss) Before Income Taxes		8,330			(1,494	)		116,955
Income tax expense (benefit)		5,262			(9,842	)		14,579
Income Before Cumulative Effect of Accounting Change		3,068			8,348			102,376
Cumulative effect of accounting change, net of tax		—			—			(225	)
Net Income	$	3,068		$	8,348		$	102,151

See Notes to the Consolidated Financial Statements

F-103

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007			2006
	(thousands of dollars)
ASSETS
Current Assets:
Cash and cash equivalents	$	28,536		$	17,274
Restricted cash		1,663			—
Accounts receivable		4,875			4,595
Receivables from affiliates, net		59,180			11,466
Inventory		81,382			80,689
Prepaid lease		59,030			59,030
Derivative assets		12,374			1,744
Accumulated deferred income taxes		11,319			9,751
Prepayments and other current assets		7,227			7,558
Total current assets		265,586			192,107
Property, Plant and Equipment, net		681,675			679,319
Other Assets:
Goodwill, net		3,635			3,635
Other intangibles, net		98,732			105,642
Accumulated deferred income taxes		48,968			68,378
Prepaid lease		270,133			264,328
Other		43,646			41,098
Total other assets		465,114			483,081
Total Assets	$	1,412,375		$	1,354,507
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities:
Current portion of long-term debt	$	89		$	83
Accounts payable, principally trade		28,543			16,142
Subordinated accounts payable to affiliates, net		193,897			160,308
Subordinated interest payable to affiliates, net		29,800			63,587
Derivative liabilities		37,614			22,695
Other		18,389			17,168
Total current liabilities		308,332			279,983
Other Liabilities:
Derivative liabilities		123,794			117,269
Benefit obligations		39,289			42,021
Other		19,597			18,459
Total other liabilities		182,680			177,749
Subordinated Note Payable to Affiliate		618,658			618,658
Long-term Debt		642			731
Commitments and Contingencies Member’s Equity:
Common stock; no par value (1,000 shares authorized, issued and outstanding)		—			—
Additional paid-in capital		284,672			284,672
Retained earnings		82,455			79,387
Accumulated other comprehensive loss		(65,064	)		(86,673	)
Total member’s equity		302,063			277,386
Total Liabilities and Member’s Equity	$	1,412,375		$	1,354,507

See Notes to the Consolidated Financial Statements

F-104

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2007			2006			2005
	(thousands of dollars)
Cash Flows from Operating Activities:
Net income	$	3,068		$	8,348		$	102,151
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Cumulative effect of accounting changes		—			—			225
Depreciation and amortization		88,449			71,315			83,544
Deferred income taxes		4,341			(14,112	)		2,385
Non-cash federal income tax contributions from Reliant Energy, Inc., net		—			—			3,826
Net changes in energy derivatives		35,711			(5,422	)		5,885
Gains on sales of assets and emission allowances, net		(1,969	)		(71,323	)		(109,798	)
Other, net		(27	)		(59	)		(493	)
Changes in other assets and liabilities:
Accounts receivable		(280	)		(140	)		1,321
Accounts receivable from affiliates, net		(47,624	)		24,823			13,820
Inventory		(693	)		291			(9,216	)
Prepaid lease		(5,805	)		(4,916	)		(15,949	)
Accounts payable		3,976			272			(857	)
Other current assets		246			1,602			(8,536	)
Other current liabilities		199			4,328			(1,773	)
Other assets		337			(9,925	)		(1,218	)
Subordinated accounts payable to affiliates, net		42,531			30,393			(21,700	)
Subordinated interest payable to affiliates, net		(33,787	)		(41,172	)		(186,822	)
Income taxes payable/receivable		698			(17,051	)		17,279
Other liabilities		3,029			(1,737	)		9,160
Net cash provided by (used in) operating activities		92,400			(24,485	)		(116,766	)
Cash Flows from Investing Activities:
Capital expenditures		(33,172	)		(14,360	)		(7,785	)
Proceeds from sales of assets, net		124			1,238			42,560
Proceeds from sales of emission allowances		628			1,141			8,519
Proceeds from sales of emission allowances—affiliates		3,744			73,140			99,903
Purchases of emission allowances—affiliates		(50,799	)		(50,467	)		(34,834	)
Restricted cash		(1,663	)		—			28,652
Net cash provided by (used in) investing activities		(81,138	)		10,692			137,015
Cash Flows from Financing Activities:
Payments of long-term debt		—			—			(28,211	)
Net cash used in financing activities		—			—			(28,211	)
Net Change in Cash and Cash Equivalents		11,262			(13,793	)		(7,962	)
Cash and Cash Equivalents at Beginning of Period		17,274			31,067			39,029
Cash and Cash Equivalents at End of Period	$	28,536		$	17,274		$	31,067
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid to affiliate (net of amounts capitalized)	$	91,884		$	107,364		$	244,976
Interest paid to third parties		286			1,338			1,539
Income taxes paid (net of income tax refunds received)		221			21,322			(1,739	)
Non-cash Disclosure:
Contributions from Reliant Energy, Inc., net		—			33,152			17,826

See Notes to the Consolidated Financial Statements

F-105

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY AND COMPREHENSIVE INCOME (LOSS)

										Accumulated Other Comprehensive Income (Loss)
													Benefits						Total
										Deferred			Actuarial						Accumulated
					Additional		Retained			Derivative			Net			Benefits			Other			Total			Comprehensive
	Common Stock				Paid-In		Earnings			Gains			Gain			Net Prior			Comprehensive			Member’s			Income
	Shares		Amount		Capital		(Deficit)			(Losses)			(Loss)			Service Costs			Income (Loss)			Equity			(Loss)
	(thousands of dollars)
Balance, December 31, 2004		1,000		—		233,694		(31,112	)		(55,583	)		—			—			(55,583	)		146,999
Net income								102,151															102,151		$	102,151
Contributions from Reliant Energy, Inc., net						17,826																	17,826
Deferred loss from cash flow hedges, net of tax of $91 million											(128,132	)								(128,132	)		(128,132	)		(128,132	)
Reclassification of net deferred loss from cash flow hedges, net of tax of $37 million											52,836									52,836			52,836			52,836
Comprehensive income																									$	26,855
Balance, December 31, 2005		1,000	$	—	$	251,520	$	71,039		$	(130,879	)	$	—		$	—		$	(130,879	)	$	191,680
Net income								8,348															8,348		$	8,348
Contributions from Reliant Energy, Inc., net						33,152																	33,152
Deferred loss from cash flow hedges, net of tax of $13 million											18,061									18,061			18,061			18,061
Reclassification of net deferred loss from cash flow hedges, net of tax of $22 million											31,743									31,743			31,743			31,743
Comprehensive income																									$	58,152
Adjustment to initially apply FASB Statement No. 158, net of tax of $2 million and $2 million														(2,861	)		(2,737	)		(5,598	)		(5,598	)
Balance, December 31, 2006		1,000	$	—	$	284,672	$	79,387		$	(81,075	)	$	(2,861	)	$	(2,737	)	$	(86,673	)	$	277,386
Net income								3,068															3,068		$	3,068
Deferred gain from cash flow hedges, net of tax of $3 million											2,929									2,929			2,929			2,929
Reclassification of net deferred loss from cash flow hedges, net of tax of $9 million											12,802									12,802			12,802			12,802
Reclassification of net prior service costs into net loss, net of tax of $0																	593			593			593			593
Reclassification of actuarial net loss into net loss, net of tax of $0														40						40			40			40
Deferred benefits, net of tax of $1 million and $2 million														2,851			2,394			5,245			5,245			5,245
Comprehensive income																									$	24,677
Balance, December 31, 2007		1,000	$	—	$	284,672	$	82,455		$	(65,344	)	$	30		$	250		$	(65,064	)	$	302,063

See Notes to the Consolidated Financial Statements

F-106

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Background and Basis of Presentation

Background.  “REMA LLC” refers to Reliant Energy Mid-Atlantic Power Holdings, LLC, a Delaware limited liability company. “REMA” refers to REMA LLC and its consolidated subsidiaries. “Reliant Energy” refers to Reliant Energy, Inc. and its consolidated subsidiaries. REMA LLC was formed in December 1998 and is an indirect subsidiary of Reliant Energy Power Generation, Inc., a wholly-owned subsidiary of Reliant Energy.

REMA owns or leases interests in 16 operating electric generation plants in Pennsylvania, New Jersey and Maryland with an annual average net generating capacity of approximately 3,644 megawatts (MW).

Basis of Presentation.  These consolidated statements include all revenues and costs directly attributable to REMA including costs for facilities and costs for functions and services performed by Reliant Energy and charged to REMA. All significant intercompany transactions have been eliminated.

(2)   Summary of Significant Accounting Policies

(a)   Use of Estimates and Market Risk and Uncertainties.

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

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

REMA’s critical accounting estimates include: (a) fair value of property, plant and equipment and derivative assets and liabilities and (b) deferred tax assets, valuation allowances and tax liabilities. Actual results could differ from the estimates.

REMA is subject to various risks inherent in doing business. See notes 2(c), 2(d), 2(e), 2(g), 2(h), 2(m), 2(n), 2(o), 4, 5, 6, 7, 8, 9 and 10.

(b)   Principles of Consolidation.

REMA LLC includes its accounts and those of its wholly-owned subsidiaries in its consolidated financial statements. REMA does not consolidate three power generating facilities (see note 9(a)), which are under operating leases.

(c)   Power Generation and Capacity Revenues.

REMA records gross revenues from the sale of electricity and other energy services under the accrual method. Electric power and other energy services are sold at market-based prices through existing power exchanges, related party affiliates or third party contracts. Energy sales and services that have been delivered but not billed by period-end are estimated. During 2007, 2006 and 2005, REMA recognized $(46) million, $4 million and $5 million in unrealized gains (losses) on energy derivatives included in revenues from third parties. See notes 2(d) and 5.

(d)   Derivatives and Hedging Activities.

REMA accounts for its derivatives instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” as amended (SFAS No. 133).

F-107

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For REMA’s risk management activities, it uses both derivative and non-derivative contracts that provide for settlement in cash or by delivery of a commodity. The primary types of derivative instruments REMA uses are forwards, futures, swaps and options. REMA accounts for its derivatives under one of three accounting methods (mark-to-market, accrual (under the normal purchase/normal sale exception to fair value) or cash flow hedge accounting) based on facts and circumstances. The fair values of 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.

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

If certain conditions are met, a derivative instrument may be designated as a cash flow hedge. Derivatives designated as cash flow hedges must have a high correlation between price movements in the derivative and the hedged item. The changes in fair value of cash flow hedges are deferred in accumulated other comprehensive income (loss), net of tax, to the extent the contracts are, or have been, effective as hedges, until the forecasted transactions affect earnings. At the time the forecasted transactions affect earnings, REMA reclassifies the amounts in accumulated other comprehensive income (loss) into earnings. REMA records the ineffective portion of changes in fair value of cash flow hedges immediately into earnings. For all other derivatives, changes in fair value are recorded as unrealized gains or losses in its results of operations.

If and when an acceptable level of correlation no longer exists, hedge accounting ceases and changes in fair value are recognized in its results of operations. If it becomes probable that a forecasted transaction will not occur, REMA immediately recognizes the related deferred gains or losses in its results of operations. The associated hedging instrument is then marked to market through its results of operations for the remainder of the contract term unless a new hedging relationship is redesignated.

Realized gains and losses on derivatives contracts 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 REMA’s derivative activities and classification in its results of operations is:

	Purpose for Holding or	Transactions that	Transactions that
Instrument	Issuing Instrument(1)	Physically Flow/Settle	Financially Settle(2)
Power futures, forward, swap and option contracts	Power sales Power purchases	Revenues Cost of sales	Revenues Revenues
Natural gas and fuel futures, forward, swap and option contracts	Natural gas and fuel purchases	Cost of sales	Cost of sales

(1)	The purpose for holding or issuing is not impacted by the accounting method elected for each instrument.
(2)	Includes classification for mark-to-market derivatives and amounts reclassified from accumulated other comprehensive income (loss) related to cash flow hedges.

In addition to market risk, REMA is exposed to credit and operational risk. Reliant Energy has a risk control framework, to which REMA is subject, 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. REMA uses mark-to-market valuation, value-at-risk and other metrics in monitoring and measuring risk. Reliant Energy’s risk control framework includes a variety of separate but complementary processes, which involve commercial and senior management and Reliant Energy’s Board of Directors. See note 2(e) for further discussion of REMA’s credit policy.

F-108

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective September 1, 2006, REMA de-designated certain cash flow hedges of coal contracts and either began utilizing the mark-to-market method of accounting or elected the normal purchase/normal sale exception. During the first quarter of 2007, REMA de-designated its remaining cash flow hedges; therefore, REMA has no outstanding cash flow hedges as of December 31, 2007.

Set-off of Derivative Assets and Liabilities.  Where derivative instruments are subject to a master netting agreement and the accounting criteria to offset are met, REMA presents its derivative assets and liabilities on a net basis. Derivative assets/liabilities and accounts receivable/payable are presented and set-off separately in the consolidated balance sheets although in most cases contracts permit the set-off of derivative assets/liabilities and accounts receivable/payable with a given counterparty. However, REMA does not offset collateral (net margin deposits) related to these derivatives.

New Accounting Pronouncement Not Yet Adopted—Offsetting of Amounts.  The FASB issued FSP FIN 39-1, an amendment of FASB Interpretation No. 39 (FIN 39), which was applicable for REMA beginning January 1, 2008. This interpretation allows either (a) offsetting assets and liabilities for derivative instruments under a common 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, REMA plans to discontinue netting its derivative assets and liabilities and present them on a gross basis. Cash collateral amounts will remain presented on a gross basis. This change will significantly increase REMA’s derivative assets and liabilities retrospectively for all financial statements presented.

Effective January 1, 2008, REMA plans to discontinue netting its derivative assets and liabilities and present its derivative assets and liabilities on a gross basis. Cash collateral amounts will remain presented on a gross basis.

(e)   Credit Risk.

REMA has 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 counterparties is reviewed periodically. REMA tries to mitigate credit risk by entering into contracts that permit netting and allow it to terminate upon the occurrence of certain events of default. REMA measures credit risk as the replacement cost for its derivative positions plus amounts owed for settled transactions.

REMA’s credit exposure is based on its derivative assets and accounts receivable from counterparties, after taking into consideration netting within each contract and any master netting contracts with counterparties. REMA provides reserves for non-investment grade counterparties representing a significant portion of its credit exposure. As of December 31, 2007, one non-investment grade counterparty represented 100% ($10 million) of REMA’s credit exposure. As of December 31, 2006, REMA’s credit exposure to any individual counterparty was not significant.

(f)   General and Administrative Expenses—Affiliates.

General and administrative expenses from affiliates include, among other items, (a) selling and marketing, (b) bad debt expense, (c) financial services, (d) legal costs, (e) regulatory costs and (f) certain benefit costs. See note 3.

(g)   Property, Plant and Equipment and Depreciation Expense.

REMA computes depreciation using the straight-line method based on estimated useful lives. Depreciation expense was $33 million, $32 million and $33 million during 2007, 2006 and 2005, respectively.

F-109

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Estimated Useful		December 31,
	Lives (Years)		2007			2006
			(in millions)
Electric generation facilities		20 - 30	$	834		$	823
Other		3 - 26		11			11
Land				26			26
Assets under construction				38			15
Total				909			875
Accumulated depreciation				(227	)		(196	)
Property, plant and equipment, net			$	682		$	679

REMA periodically evaluates property, plant and equipment for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. The evaluation is highly dependent on the underlying assumptions of related cash flows. REMA recorded no material property, plant and equipment impairments during 2007, 2006 and 2005.

In the future, REMA could recognize impairments if its wholesale energy market outlook changes negatively. In addition, REMA’s ongoing evaluation of its business could result in decisions to mothball, retire or dispose of additional generation assets, any of which could result in impairment charges.

(h)   Intangible Assets and Amortization Expense.

Goodwill.  REMA performs its goodwill impairment test annually on April 1 and when events or changes in circumstances indicate that the carrying value may not be recoverable.

Other Intangibles.  REMA recognizes specifically identifiable intangible assets, including emission allowances, when specific rights and contracts are acquired. REMA has no intangible assets with indefinite lives recorded as of December 31, 2007 and 2006.

(i)   Income Taxes.

Federal.  REMA is included in the consolidated federal income tax returns of Reliant Energy and calculates its income tax provision on a separate return basis, whereby Reliant Energy pays all federal income taxes on REMA’s behalf and is entitled to any related tax savings. The difference between REMA’s current federal income tax expense or benefit, as calculated on a separate return basis, and related amounts paid to/received from Reliant Energy, if any, were recorded in REMA’s financial statements as adjustments to additional paid-in capital. Reliant Energy changed its funding policy in late December 2006 and these differences are recorded to (a) income taxes payable to Reliant Energy, Inc. if REMA has cumulative taxable income on a separate return basis or (b) deferred tax assets if REMA has cumulative taxable losses on a separate return basis. Deferred federal income taxes reflected on REMA’s consolidated balance sheet will ultimately be settled with Reliant Energy. See notes 3 and 8.

State.  REMA is included in the consolidated state income tax returns of Reliant Energy. It calculates its state provision, related payables or receivables and deferred state income taxes on a separate return basis and settles the related assets and liabilities with the governmental entity or Reliant Energy based on the tax status of the applicable entities. See note 8.

(j)   Cash and Cash Equivalents.

REMA records all highly liquid short-term investments with maturities of three months or less as cash equivalents.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(k)   Restricted Cash.

Restricted cash includes cash at certain subsidiaries, the distribution or transfer of which is restricted by financing and other agreements.

(l)   Inventory.

REMA values fuel inventories at the lower of average cost or market. REMA removes these inventories as they are used in the production of electricity. REMA values materials and supplies at average cost. REMA removes these inventories when they are used for repairs, maintenance or capital projects.

	December 31,
	2007		2006
	(in millions)
Materials and supplies, including spare parts	$	48	$	47
Coal		15		17
Heating oil		18		17
Total inventory	$	81	$	81

(m)   Environmental Costs.

REMA expenses environmental expenditures related to existing conditions that do not have future economic benefit. REMA capitalizes environmental expenditures for which there is a future economic benefit. REMA records liabilities for expected future costs, on an undiscounted basis, related to environmental assessments and/or remediation when they are probable and can be reasonably estimated. See note 10.

(n)   Asset Retirement Obligations.

REMA’s asset retirement obligations relate to future costs primarily associated with ash disposal site closures. REMA’s asset retirement obligations were $7 million as of December 31, 2007 and 2006. As of December 31, 2007 and 2006, REMA has $14 million and $12 million, respectively, (classified in other long-term assets) on deposit with the state of Pennsylvania to guarantee its obligation related to future closures of ash disposal sites. See note 10.

During 2005, REMA adopted an accounting interpretation relating to asset retirement obligations. This interpretation clarifies that an asset retirement obligation is unconditional even though uncertainty exists about the timing and/or method of settlement and requires that a liability be recognized if it can be reasonably estimated. Based on this, REMA (a) recorded a cumulative effect of an accounting change, net of tax, of $225,000, (b) increased other long-term liabilities by $447,000, (c) increased property, plant and equipment by $77,000 and (d) decreased deferred income tax liabilities by $145,000.

(o)   Repair and Maintenance Costs for Power Generation Assets.

REMA recognizes repair and maintenance costs as incurred.

(p)   Deferred Lease Costs.

REMA incurred costs in connection with its sale-leaseback transactions in 2000 (see note 9(a)). These costs are deferred and amortized, using the straight-line method, over the life of the individual sale-leaseback transactions. REMA amortized $1 million to facilities lease expense during 2007, 2006 and 2005. As of December 31, 2007 and 2006, REMA had $18 million and $19 million, respectively, of net deferred lease costs classified in other long-term assets in its consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(q)   New Accounting Pronouncement Net Yet Adopted—Fair Value.

The FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS No. 157 is to be applied prospectively, except for aspects that do not apply to REMA. REMA adopted SFAS No. 157 on January 1, 2008. In connection with the adoption, (a) no cumulative effect of an account change will be recognized and (b) REMA expects to decrease its derivative liabilities and increase its income from continuing operations before income taxes relating to discounting these liabilities using its own credit ratings. For non-financial assets and liabilities, the adoption of SFAS No. 157 has been deferred until January 1, 2009.

(3)   Related Party Transactions

These financial statements include the impact of significant transactions between REMA and Reliant Energy. The majority of these transactions involve the purchase or sale of energy, capacity, fuel, emission allowances or related services (including transportation, transmission and storage services) from or to REMA and allocations of costs to REMA for support services.

Support Services.  Reliant Energy provides commercial support, technical services and other corporate services to REMA. Reliant Energy allocates certain support services costs to REMA based on REMA’s underlying planned operating expenses relative to the underlying planned operating expenses of other entities to which Reliant Energy provides similar services and also charges REMA for certain other services based on usage. Management believes this method of allocation is reasonable. These allocations and charges were not necessarily indicative of what would have been incurred had REMA been an unaffiliated entity. Payments to Reliant Energy for services under the support services agreement are subordinated to certain obligations, including the lease obligations, pursuant to the lease documents.

The following details the amounts recorded as operation and maintenance—affiliates and general and administrative—affiliates:

	2007		2006		2005
	(in millions)
Allocated or charged by Reliant Energy	$	96	$	86	$	86

Procurement and Marketing.  REMA has sales to and purchases from Reliant Energy related to commodity procurement and marketing services.

	2007		2006		2005
	(in millions)
Sales to Reliant Energy under various commodity agreements(1)	$	697	$	540	$	587
Purchase from Reliant Energy under various commodity agreements(2)		8		13		18
Fees charged by Reliant Energy for these services and included in operation and maintenance—affiliates		5		5		5
Fees charged by Reliant Energy for these services and included in cost of sales—affiliates		2		2		2
Sales of emission allowances to Reliant Energy(3)		4		73		100
Gains on emission allowances sales to Reliant Energy(4)		1		70		92

(1)	Recorded in revenues—affiliates.
(2)	Recorded in cost of sales—affiliates.
(3)	Reflects price at which Reliant Energy sold the emission allowances to third parties.
(4)	Recorded in gains on sales of assets and emission allowances, net.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Subordinated Long-term Note Payable to Affiliate.  REMA has a note payable to Reliant Energy. The note is due January 1, 2029 and accrues interest at a fixed rate of 9.4% per year. As of December 31, 2007 and 2006, REMA classified the related accrued interest as a current liability since REMA intends to pay the entire amount within the next 12 months from the respective dates. As of December 31, 2007 and 2006, REMA had $619 million outstanding under the note. Payments under this indebtedness are subordinated to certain obligations, including the lease obligations, pursuant to the lease documents.

Working Capital Note.  REMA has a revolving note payable to Reliant Energy under which REMA may borrow, and Reliant Energy is committed to lend, up to $30 million for working capital needs. Borrowings under the note will be unsecured and will rank equal in priority with REMA’s lease obligations. REMA may replace this note with a working capital facility from an unaffiliated lender if then permitted under Reliant Energy’s debt agreements. As of December 31, 2007 and 2006, there were no borrowings outstanding under the note.

Subordinated Working Capital Facility.  REMA has an irrevocably committed subordinated working capital facility with Reliant Energy. REMA may borrow under this facility to pay operating expenditures, senior indebtedness and rent, but excluding capital expenditures and subordinated obligations. In addition, Reliant Energy must make advances to REMA and REMA must obtain such advances under such facility up to the maximum available commitment under such facility from time to time if REMA’s pro forma fixed charge coverage ratio does not equal or exceed 1.1 to 1.0, measured at the time rent under the leases is due. Subject to the maximum available commitment, drawings will be made in amounts necessary to permit REMA to achieve a pro forma fixed charge coverage ratio of at least 1.1 to 1.0. The amount available under the subordinated working capital facility was $120 million through January 1, 2007. Thereafter, the available amount decreased by $24 million on January 2, 2007 and decreases by $24 million each subsequent year through its expiration in 2011. As of December 31, 2007 and 2006, there were no borrowings outstanding under this facility.

Letters of Credit.  Reliant Energy has posted letters of credit on behalf of REMA related to its lease obligations. See notes 6 and 9(a).

Income Taxes. See discussion in note 2(i) regarding REMA’s policy with regards to income taxes.

	2007		2006		2005
	(in millions)
Non-cash federal income tax contributions from (distributions to) Reliant Energy, Inc., net	$	—	$	33	$	18

(4)   Intangible Assets

(a)   Goodwill.

As of December 31, 2007 and 2006, REMA had no goodwill that is deductible for United States income tax purposes in future periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(b)   Other Intangibles.

	Remaining			December 31,
	Weighted Average			2007					2006
	Amortization			Carrying		Accumulated			Carrying		Accumulated
	Period (Years)			Amount		Amortization			Amount		Amortization
						(in millions)
SO2 emission allowances(1)(2)		—	(1)	$	252	$	(187	)	$	204	$	(138	)
NOx emission allowances(1)(3)		—	(1)		90		(56	)		89		(49	)
Total				$	342	$	(243	)	$	293	$	(187	)

(1)	SO2 is sulfur dioxide and NOx is nitrogen oxides. Amortized to amortization expense on a units-of-production basis. As of December 31, 2007, REMA has recorded (a) SO2 emission allowances through the 2030 vintage year (most of which relate to 2011 and beyond) and (b) NOx emission allowances through the 2030 vintage year (most of which relate to 2009 and beyond).
(2)	During 2007, 2006 and 2005, we purchased $48 million, $29 million and $35 million, respectively, of SO2 emission allowances from affiliates.
(3)	During 2007, 2006 and 2005, we purchased $3 million, $2 million and $0, respectively, of NOx emission allowances from affiliates.

Amortization expense consists of:

	2007		2006		2005
	(in millions)
Emission allowances	$	56	$	39	$	51
Total	$	56	$	39	$	51

Estimated amortization expense based on REMA’s intangibles as of December 31, 2007 for the next five years is (in millions):

2008	$	—(1	)
2009		2(1	)
2010		4(1	)
2011		5(1	)
2012		5(1	)

(1) These amounts do not include estimated amortization expense of emission allowances, which have not been purchased as of December 31, 2007.

(5)   Derivatives and Hedging Activities

REMA uses derivative instruments to manage operational or market constraints and to increase return on its generation assets. The instruments used are fixed-price derivative contracts to hedge the variability in future cash flows from forecasted sales of power and purchases of fuel and power. REMA’s objective in entering into these fixed-price derivatives is to fix the price for a portion of these transactions. See note 2(d).

During 2007, 2006 and 2005, there was $2 million gain, an insignificant amount and $1 million gain, respectively, of hedge ineffectiveness recognized from derivatives that were designated and qualified as cash flow hedges. In addition, no component of the derivatives’ gain or loss was excluded from the assessment of effectiveness for these periods. If it becomes probable that an anticipated transaction will not occur, REMA realizes in net income (loss) the deferred gains and losses recognized in accumulated other comprehensive loss. During 2007, 2006 and 2005, there were no amounts recognized in the results of operations as a result of the discontinuance of cash flow hedges because it was probable that the forecasted transaction would not occur.

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RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2006, the maximum length of time REMA was hedging its exposure to the variability in future cash flows that may result from changes in commodity prices was six years. During the first quarter of 2007, REMA de-designated its remaining cash flow hedges; therefore, REMA has no outstanding cash flow hedges as of December 31, 2007.

Amounts included in accumulated other comprehensive loss:

	December 31, 2007
				Expected to be
				Reclassified into
				Results of Operations
	At the End of the Period			in Next 12 Months(1)
	(in millions)
Designated cash flow hedges	$	—		$	—
De-designated cash flow hedges		(65	)		(17	)
	$	(65	)	$	(17	)

(6)   Debt

REMA is obligated to provide credit support for its lease obligations (see note 9(a)) in the form of letters of credit and/or cash equal to an amount representing the greater of (a) the next six months’ scheduled rental payments under the related lease or (b) 50% of the scheduled rental payments due in the next 12 months under the related lease. Previously, REMA had term loans that were used to partially fulfill REMA’s requirement to provide credit support for its obligations under these leases. During 2005, the term loans were paid in full and replacement credit support was provided in the form of letters of credit issued under Reliant Energy’s credit facilities. The term loans bore interest at LIBOR plus 3%. The term loans were non-recourse to Reliant Energy. As of December 31, 2007 and 2006, the amount of credit support was $33 million and $32 million, receptively.

See note 3 for debt transactions with affiliates.

(7)   Benefit Plans

(a)   Pension and Postretirement Benefits.

Benefit Plans.  REMA sponsors a defined benefit pension plan and provides subsidized postretirement benefits to some bargaining employees but generally does not provide them to non-bargaining employees.

Effective December 31, 2006, REMA adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement requires recognition of the funded status of plans, measured as of year end. REMA already uses the required measurement date. The adoption did not have a material effect on any individual line item of REMA’s consolidated balance sheet as of December 31, 2006. As of December 31, 2007, $0.1 million and $0.4 million of net actuarial loss and net prior service costs, respectively, in accumulated other comprehensive loss are expected to be recognized in net periodic benefit cost during the next 12 months.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The benefit obligations and funded status are:

	Pension						Postretirement Benefits
	2007			2006			2007			2006
				(in millions)
Change in Benefit Obligation
Beginning of year	$	25		$	27		$	32		$	39
Transfer to affiliate		—			(5	)		—			(8	)
Service cost		3			3			1			1
Interest cost		1			1			2			2
Benefits paid		(1	)		—			—			—
Actuarial gain		(2	)		(1	)		(3	)		(2	)
End of year	$	26		$	25		$	32		$	32
Change in Plan Assets
Beginning of year	$	17		$	18		$	—		$	—
Transfer to affiliate		—			(3	)		—			—
Employer contributions		3			1			—			—
Actual investment return		—			1			—			—
End of year	$	20		$	17		$	—		$	—
Funded status	$	(6	)	$	(8	)	$	(32	)	$	(32	)

Amounts recognized in the consolidated balance sheets are:

	Pension						Postretirement Benefits
	December 31,						December 31,
	2007			2006			2007			2006
				(in millions)
Current liabilities	$	—		$	—		$	(1	)	$	—
Noncurrent liabilities		(6	)		(8	)		(31	)		(32	)
Net amount recognized	$	(6	)	$	(8	)	$	(32	)	$	(32	)

The accumulated benefit obligation for the pension plan was $23 million and $22 million as of December 31, 2007 and 2006, respectively. The pension plan has an accumulated benefit obligation in excess of plan assets.

Net benefit costs are:

	Pension									Postretirement Benefits
	2007			2006			2005			2007		2006		2005
							(in millions)
Service cost	$	3		$	3		$	4		$	1	$	1	$	2
Interest cost		1			1			1			1		2		3
Expected return on plan assets		(1	)		(1	)		(1	)		—		—		—
Net amortization		—			—			—			1		1		2
Net benefit cost	$	3		$	3		$	4		$	3	$	4	$	7

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RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assumptions.  The significant weighted average assumptions used to determine the benefit obligations are:

	Pension						Postretirement Benefits
	December 31,						December 31,
	2007			2006			2007			2006
Discount rate		5.75	%		5.75	%		5.75	%		5.75	%
Rate of compensation increase		3.0	%		3.0	%		N/A			N/A

The significant weighted average assumptions used to determine the net benefit costs are:

	Pension									Postretirement Benefits
	2007			2006			2005			2007			2006			2005
Discount rate		5.75	%		5.75	%		5.75	%		5.75	%		5.75	%		5.75	%
Rate of compensation increase		3.0	%		3.0	%		3.0	%		N/A			N/A			N/A
Expected long-term rate of return on assets		7.5	%		7.5	%		7.5	%		N/A			N/A			N/A

As of December 31, 2007 and 2006, REMA developed its expected long-term rate of return on pension plan assets based on third party models. These models consider expected inflation, current dividend yields, expected corporate earnings growth and risk premiums based on the expected volatility of each asset category. REMA weights the expected long-term rates of return for each asset category to determine its overall expected long-term rate of return on pension plan assets. In addition, REMA reviews peer data and historical returns.

REMA’s assumed health care cost trend rates used to measure the expected cost of benefits covered by its postretirement plan are:

	2007			2006			2005
Health care cost trend rate assumed for next year		8.3	%		9.0	%		9.0	%
Rate to which the cost trend rate is assumed to gradually decline (ultimate trend rate)		5.5	%		5.5	%		5.5	%
Year that the rate reaches the ultimate trend rate		2015			2015			2011

Assumed health care cost trend rates can have a significant effect on the amounts reported for REMA’s health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 2007:

	One-Percentage Point
	Increase		Decrease
	(in millions)
Effect on service and interest cost	$	—	$	—
Effect on accumulated postretirement benefit obligation		4		(3	)

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RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Plan Assets.  REMA’s pension weighted average asset allocations and target allocation by asset category are:

	Percentage of Plan Assets						Target
	as of December 31,						Allocation
	2007			2006			2008
Domestic equity securities		49	%		50	%		50	%
International equity securities		10			11			10
Global equity securities		10			11			10
Debt securities		31			28			30
Total		100	%		100	%		100	%

In managing the investments associated with the pension plan, REMA’s objective is to exceed, on a net-of-fee basis, the rate of return of a performance benchmark composed of the following indices:

Asset Class	Index	Weight
Domestic equity securities	Wilshire 5000 Index		50	%
International equity securities	MSCI All Country World Ex-U.S. Index		10
Global equity securities	MSCI All Country World Index		10
Debt securities	Lehman Brothers Aggregate Bond Index		30
			100	%

As a secondary measure, REMA compares asset performance to the returns of a universe of comparable funds, where applicable, over a full market cycle. Reliant Energy’s Benefits Committee reviews plan asset performance each quarter by comparing the actual quarterly returns of each asset class to its related benchmark. REMA’s plan assets have generally performed in accordance with the benchmarks.

Cash Obligations.  REMA expects pension cash contributions to approximate $1 million during 2008. Expected benefit payments for the next ten years, which reflect future service as appropriate, are:

			Postretirement
	Pension		Benefits
	(in millions)
2008	$	1	$	1
2009		1		1
2010		1		1
2011		1		2
2012		1		2
2013-2017		10		15

(b)   Savings Plan.

REMA’s employees participate in Reliant Energy’s employee savings plans under Sections 401(a) and 401(k) of the Internal Revenue Code. REMA’s savings plan benefit expense, including matching and discretionary contributions, was $3 million, $2 million and $2 million during 2007, 2006 and 2005, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(c)   Other Employee Matters.

As of December 31, 2007, approximately 73% of REMA’s employees are subject to collective bargaining arrangements. REMA’s collective bargaining arrangements expire at various intervals beginning in 2010.

(8)   Income Taxes

(a)   Summary.

REMA’s income tax expense (benefit) is:

	2007		2006			2005
	(in millions)
Current:
Federal	$	—	$	—		$	3
State		1		4			9
Total current		1		4			12
Deferred:
Federal		1		7			6
State		3		(21	)		(3	)
Total deferred		4		(14	)		3
Income tax expense (benefit)	$	5	$	(10	)	$	15

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

	2007			2006			2005
Federal statutory rate		35	%		(35	)%		35	%
Additions (reductions) resulting from:
State income taxes, net of federal income taxes		29			(555	)(1)		3
Federal valuation allowance		—			—			(25	)
Other, net		(1	)		(69	)		(1	)
Effective rate		63	%		(659	)%		12	%

(1) Of this percentage, $9 million (592%) relates to Pennsylvania state law changes, which effectively decreased REMA’s limitations to use net operating losses in that state.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31,
	2007		2006
	(in millions)
Deferred tax assets:
Current:
Derivative liabilities, net	$	10	$	9
Employee benefits		—		1
Total current deferred tax assets		10		10
Non-current:
Employee benefits		19		16
Net operating loss carryforwards		59		84
Environmental reserves		6		3
Derivative liabilities, net		50		49
Other		18		11
Total non-current deferred tax assets		152		163
Total deferred tax assets	$	162	$	173
Deferred tax liabilities:
Non-current:
Depreciation and amortization	$	106	$	99
Total non-current deferred tax liabilities		106		99
Total deferred tax liabilities	$	106	$	99
Accumulated deferred income taxes, net	$	56	$	74

(b)   Tax Attribute Carryovers.

			Statutory
	December 31,		Carryforward		Expiration
	2007		Period		Year(s)
	(in millions)		(in years)
Net Operating Loss Carryforwards:
Federal	$	128		20		2026 through 2027
State		257		5 to 20		2011 through 2027

(c)   Valuation Allowances.

REMA assesses its future ability to use federal and state net operating loss carryforwards and other deferred tax assets using the more-likely-than-not criteria. These assessments include an evaluation of REMA’s 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

REMA’s valuation allowances for deferred tax assets are:

	Federal			State
	(in millions)
As of January 1, 2005	$	30		$	5
Changes in valuation allowance		(30	)		(2	)
As of December 31, 2005		—			3
Changes in valuation allowance		—			(3	)
As of December 31, 2006 and 2007	$	—		$	—

(d)   Adoption of FIN 48 and Tax Uncertainties.

Effective January 1, 2007, REMA adopted Financial Accounting Standards and Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48). This interpretation addresses whether (and when) tax benefits claimed in Reliant Energy’s federal and REMA’s state tax returns should be recorded in the financial statements. Pursuant to FIN 48, REMA 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 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. REMA classifies accrued interest and penalties related to uncertain income tax positions in income tax expense/benefit. Adoption of FIN 48 had no impact on REMA’s consolidated financial statements.

As of January 1, 2007 and December 31, 2007, REMA had no amounts accrued for unrecognized tax benefits, interest or penalties. During 2007, 2006 and 2005, REMA recognized $0 of income tax expense (benefit) due to changes in interest and penalties for federal and state income taxes.

REMA has the following years that remain subject to examination or are currently under audit for its major tax jurisdictions:

	Subject to	Currently Under
	Examination	Audit
Federal	1997 to 2007	1997 to 2005
New Jersey	2004 to 2007	None
Pennsylvania	2004 to 2007	None

REMA, through Reliant Energy, expects 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 during 2008; however, it cannot estimate the range of changes that might occur:

•  the timing of tax deductions could be changed as a result of negotiations with respect to depreciation, emission allowances and certain employee benefits.

(9)   Commitments

(a)   Lease Commitments.

REMA entered into sale-leaseback transactions, under operating leases that are non-recourse to Reliant Energy. REMA leases 16.45% and 16.67% interests in the Conemaugh and Keystone facilities, respectively. The leases expire in 2034 and REMA expects to make payments through 2029. REMA also leases a 100% interest in the Shawville facility. This lease expires in 2026 and REMA expects to make payments through

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RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

that date. At the expiration of these leases, there are several renewal options related to fair market value. REMA LLC’s subsidiaries guarantee the lease obligations and REMA LLC has pledged the equity interests in these subsidiaries as collateral. Reliant Energy also provides credit support for these lease obligations in the form of letters of credit. See note 6. During 2007, 2006 and 2005, REMA made lease payments under these leases of $65 million, $64 million and $75 million, respectively. As of December 31, 2007 and 2006, REMA has recorded a prepaid lease of $59 million in current assets and $270 million and $264 million, respectively, in long-term assets. REMA operates the Conemaugh and Keystone facilities under agreements that could terminate annually with one year’s notice and received fees of $10 million, $9 million and $9 million during 2007, 2006 and 2005, respectively. These fees, which are recorded in operation and maintenance expense, are primarily to cover REMA’s administrative support costs of providing these services.

REMA’s ability to pay dividends or pay subordinated obligations is restricted by conditions within the lease documents. As of December 31, 2007, REMA was not limited by these restrictions.

Cash Obligations Under Operating Leases.  REMA’s projected cash obligations under non-cancelable long-term operating leases as of December 31, 2007 are (in thousands):

2008	$	62
2009		63
2010		52
2011		63
2012		56
2013 and thereafter		763
Total	$	1,059

Operating Lease Expense.  Operating lease expense, including the amortization of deferred lease costs, was $60 million during 2007, 2006 and 2005.

(b)   Guarantees and Indemnifications.

Equity Pledged as Collateral for Reliant Energy.  REMA LLC’s equity is pledged as collateral under certain of Reliant Energy’s credit and debt agreements, which have an outstanding balance of $1.2 billion as of December 31, 2007.

Other.  REMA enters into contracts that include indemnification and guarantee provisions. In general, REMA enters 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, service agreements and procurement agreements.

REMA is unable to estimate its maximum potential exposure under these agreements until an event triggering payment occurs. REMA does not expect to make any material payments under these agreements.

(c)   Other Commitments.

Property, Plant and Equipment Commitments.  As of December 31, 2007, REMA has contractual commitments to spend approximately $88 million on plant and equipment relating primarily to SO₂ emissions reductions.

Fuel Supply Commitments.  REMA is a party to fuel supply contracts of various quantities and durations that are not classified as derivative assets and liabilities. These contracts are not included in the consolidated

F-122

RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

balance sheet as of December 31, 2007. Minimum purchase commitment obligations under these agreements are as follows as of December 31, 2007 (in millions):

2008	$	88
2009		68
2010		45
2011		30
2012		31
2013 and thereafter		187
Total	$	449	(1)

(1) Of this amount, $127 million relates to contracts with variable pricing components for which the prices were determined based on assumptions on escalations per the contractual terms.

As of December 31, 2007, the maximum remaining term under any individual fuel supply contract is 13 years.

(10)   Contingencies

REMA is involved in a number of legal, environmental and other matters before courts and governmental agencies, some of which may involve substantial amounts. Unless otherwise noted, REMA cannot predict the outcome of these 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, REMA responded to the EPA’s information requests related to five of its stations, and in December 2007, REMA received supplemental requests for two of those 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 REMA in the United States District Court in Pennsylvania, alleging that New Source Review violations occurred at one of REMA’s power plants located in Pennsylvania. The suit seeks installation of “best available” control technologies for each pollutant, to enjoin REMA from operating the plant if it is not in compliance with the Clean Air Act and civil penalties. The allegations are based on projects occurring prior to REMA’s ownership of the facility and the suit names three past owners of the plant as defendants. REMA believes it is indemnified by or has the right to seek indemnification from the prior owners for losses and expenses that it may incur.

REMA is unable to predict the ultimate outcome of the EPA’s investigation or the NJDEP’s suit, but a final finding that REMA 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 Site Closures.  REMA is responsible for environmental costs related to the future closures of five ash disposal sites. REMA recorded the estimated discounted costs associated with these environmental liabilities as part of its asset retirement obligations. See note 2(n).

Remediation Obligations.  REMA is responsible for environmental costs related to site contamination investigations and remediation requirements at four power plants in New Jersey. REMA recorded the estimated liability for the remediation costs of $8 million and $7 million as of December 31, 2007 and 2006, respectively.

F-123

Conemaugh Actions.  In April 2007, the PADEP filed suit against Reliant Energy in the Court of Common Pleas of Indiana County, Pennsylvania. In addition, in April 2007, PennEnvironment and the Sierra Club filed a citizens’ suit against Reliant Energy in the United States District Court, Western District of Pennsylvania. Each suit alleges that the Conemaugh plant is in violation of its water discharge permit and related state and federal laws and seeks civil penalties, remediation and/or to enjoin violations. The Conemaugh plant is jointly leased by REMA and seven other companies and is governed by a consent order agreement with the PADEP. Reliant Energy is 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 PADEP or PennEnvironment and the Sierra Club are successful, REMA could incur significant capital expenditures associated with the implementation of discharge reductions on an accelerated basis and possible penalties.

(11)   Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable and payable and derivative assets and liabilities approximate their carrying amounts.

(12)   Sales of Assets and Emission Allowances

REMA included the following in its results of operations through the date of sale.

Emission Allowances.  REMA sold emission allowances during 2007, 2006 and 2005 for gains of $2 million, $71 million and $97 million, respectively.

Hydropower Plants.  Two hydropower plants sold for $42 million in April 2005 for a gain of $12 million.

F-124

Report of Independent Registered Public Accounting Firm

The Board of Directors

Orion Power Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Orion Power Holdings, Inc. and subsidiaries (the Company), as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholder’s equity and comprehensive income (loss), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orion Power Holdings, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

As discussed in notes 8 and 7 to the consolidated financial statements, the Company changed its accounting for income tax uncertainties in 2007 and defined benefit pension and other postretirement plans in 2006, respectively.

KPMG LLP

Houston, Texas

February 25, 2008

F-125

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Orion Power Holdings, Inc. and Subsidiaries

Houston, Texas

We have audited the accompanying consolidated statements of operations, stockholder’s equity and comprehensive loss, and cash flows of Orion Power Holdings, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Orion Power Holdings, Inc. and subsidiaries for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas

March 14, 2006

F-126

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	2007			2006			2005
	(thousands of dollars)
Revenues:
Revenues	$	22,317		$	22,861		$	91,919
Revenues—affiliates		542,568			474,851			548,533
Total		564,885			497,712			640,452
Expenses:
Cost of sales		227,240			222,358			186,912
Cost of sales—affiliates		(5,521	)		2,427			68,272
Operation and maintenance		161,713			143,786			115,924
Operation and maintenance—affiliates		37,696			35,924			43,500
Taxes other than income taxes		11,570			13,089			3,709
General and administrative—primarily affiliates		27,685			27,980			40,493
Gains on sales of assets and emission allowances, net—primarily affiliates		(7,480	)		(66,964	)		(58,189	)
Depreciation and amortization		137,602			100,107			126,416
Total operating expenses		590,505			478,707			527,037
Operating Income (Loss)		(25,620	)		19,005			113,415
Other Income (Expense):
Other, net		—			—			42
Interest expense		(34,314	)		(38,472	)		(39,949	)
Interest expense—affiliates		(9,293	)		(1,351	)		(908	)
Interest income—primarily affiliates		8,452			8,956			382
Total other expense		(35,155	)		(30,867	)		(40,433	)
Income (Loss) from Continuing Operations Before Income Taxes		(60,775	)		(11,862	)		72,982
Income tax expense (benefit)		(25,737	)		(31,135	)		24,385
Income (Loss) from Continuing Operations		(35,038	)		19,273			48,597
Income (loss) from discontinued operations		7,124			5,375			(86,096	)
Income (Loss) Before Cumulative Effect of Accounting Changes		(27,914	)		24,648			(37,499	)
Cumulative effect of accounting change, net of tax		—			—			(198	)
Net Income (Loss)	$	(27,914	)	$	24,648		$	(37,697	)

See Notes to the Consolidated Financial Statements

F-127

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007			2006
	(thousands of dollars, except per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents	$	259		$	81
Accounts receivable, principally customer, net of allowance of $0		102			1,664
Receivables from affiliates, net		19,968			33,046
State income taxes receivable		45,763			10,084
Inventory		57,233			50,289
Derivative assets		—			5,086
Accumulated deferred income taxes		6,713			7,359
Collateral posted under agreement with Reliant Energy, Inc.		2,000			3,278
Prepayments and other current assets		1,843			1,304
Current assets of discontinued operations		2,132			2,460
Total current assets		136,013			114,651
Property, Plant and Equipment, net		1,619,651			1,587,885
Other Assets:
Goodwill, net		173,570			175,520
Other intangibles, net		165,509			183,163
Long-term note receivable from Reliant Energy, Inc.		67,200			92,200
Long-term collateral posted under agreement with Reliant Energy, Inc.		14,392			12,326
Other		9,383			59,615
Total other assets		430,054			522,824
Total Assets	$	2,185,718		$	2,225,360
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Current portion of long-term debt	$	11,409		$	10,505
Accounts payable, principally trade		36,278			29,594
Accrued interest payable		7,999			7,996
Other taxes payable		12,496			10,910
Other		17,530			9,335
Current liabilities of discontinued operations		—			3,286
Total current liabilities		85,712			71,626
Other Liabilities:
Accumulated deferred income taxes		165,709			178,042
Benefit obligations		46,726			58,100
Taxes payable to Reliant Energy, Inc.		66,294			84,310
Long-term liabilities of discontinued operations		3,542			—
Other		10,602			11,043
Total other liabilities		292,873			331,495
Revolving Credit Facility with Reliant Energy, Inc.		37,299			12,683
Long-term Debt		416,934			428,343
Commitments and Contingencies
Stockholder’s Equity:
Common stock; par value $1.00 per share (1,000 shares authorized, issued and outstanding)		1			1
Additional paid-in capital		2,211,138			2,211,139
Accumulated deficit		(851,607	)		(823,693	)
Accumulated other comprehensive loss		(6,632	)		(6,234	)
Total stockholder’s equity		1,352,900			1,381,213
Total Liabilities and Stockholder’s Equity	$	2,185,718		$	2,225,360

See Notes to the Consolidated Financial Statements

F-128

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2007			2006			2005
	(thousands of dollars)
Cash Flows from Operating Activities:
Net income (loss)	$	(27,914	)	$	24,648		$	(37,697	)
(Income) loss from discontinued operations		(7,124	)		(5,375	)		86,096
Net income (loss) from continuing operations and cumulative effect of accounting changes		(35,038	)		19,273			48,399
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Cumulative effect of accounting change		—			—			198
Depreciation and amortization		137,602			100,107			126,416
Deferred income taxes		(21,422	)		(27,474	)		44,581
Non-cash equity contribution of operation and maintenance and general and administrative costs from Reliant Energy, Inc., net		—			—			56,890
Net changes in energy derivatives		1,108			(1,108	)		4,846
Net amortization of contractual rights and obligations		(302	)		(2,218	)		(8,177	)
Amortization of revaluation of acquired debt		(10,505	)		(9,721	)		(8,921	)
Gains on sales of assets and emission allowances, net—primarily affiliates		(7,480	)		(66,964	)		(58,189	)
Non-cash federal income tax distributions to Reliant Energy, Inc., net		—			—			(26,361	)
Other, net		366			(658	)		2,003
Changes in other assets and liabilities:
Accounts receivable, net		1,562			2,415			48,996
Inventory		(7,384	)		3,414			(1,853	)
Other current assets		(539	)		2,173			(2,603	)
Other assets		4,867			10,036			422
Accounts payable		(27	)		5,163			1,644
Payable to/receivable from affiliates, net		(14,840	)		7,188			(52,412	)
Collateral posted under agreement with Reliant Energy, Inc.		(788	)		(15,604	)		—
Income taxes payable/receivable		22,938			13,510			1,768
Accrued interest		3			(4	)		—
Long-term taxes payable to Reliant Energy, Inc. and related accrued interest		(18,015	)		—			—
Other current liabilities		184			1,735			(9,881	)
Other liabilities		(3,680	)		3,726			(5,014	)
Net cash provided by continuing operations from operating activities		48,610			44,989			162,752
Net cash provided by (used in) discontinued operations from operating activities		6,726			(49,689	)		171,800
Net cash provided by (used in) operating activities		55,336			(4,700	)		334,552
Cash Flows from Investing Activities:
Capital expenditures		(109,212	)		(45,566	)		(16,334	)
Proceeds from sales of assets, net		259			—			2,372
Proceeds from sales of emission allowances		624			1,134			8,554
Proceeds from sales of emission allowances—affiliates		12,678			69,320			56,519
Purchases of emission allowances—affiliates		(9,643	)		—			(1,998	)
Net cash provided by (used in) continuing operations from investing activities		(105,294	)		24,888			49,113
Net cash provided by discontinued operations from investing activities		520			967,566			79,101
Net cash provided by (used in) investing activities		(104,774	)		992,454			128,214
Cash Flows from Financing Activities:
Distributions to Reliant Energy, Inc.		—			(209,400	)		(340,000	)
Changes in revolving credit facility with Reliant Energy, Inc., net		24,616			12,683			(7,300	)
(Loan to) repayments from Reliant Energy, Inc.		25,000			(92,200	)		—
Payments of long-term debt		—			(191	)		—
Net cash provided by (used in) continuing operations from financing activities		49,616			(289,108	)		(347,300	)
Net cash used in discontinued operations from financing activities		—			(712,317	)		(110,183	)
Net cash provided by (used in) financing activities		49,616			(1,001,425	)		(457,483	)
Net Change in Cash and Cash Equivalents		178			(13,671	)		5,283
Cash and Cash Equivalents at Beginning of Period		81			13,752			8,469
Cash and Cash Equivalents at End of Period	$	259		$	81		$	13,752
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid (net of amounts capitalized) to third parties for continuing operations		44,756		$	48,360		$	48,686
Income taxes paid (net of income tax refunds received) for continuing operations		(2,858	)		(17,022	)		3,917
Non-cash Disclosure:
Contributions from (distributions to) Reliant Energy, Inc., net for continuing operations		—			(39,543	)		(51,471	)
Contributions from Reliant Energy, Inc., net for discontinued operations		—			—			30,468

See Notes to the Consolidated Financial Statements

F-129

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME (LOSS)

											Accumulated Other Comprehensive Income (Loss)
																										Discontinued
														Benefits			Benefits						Total			Operations
											Deferred			Actuarial			Net			Additional			Accumulated			Accumulated
					Additional						Derivative			Net			Prior			Minimum			Other			Other			Total
	Common Stock				Paid-In			Accumulated			Gains			Gain			Service			Benefits			Comprehensive			Comprehensive			Stockholder’s			Comprehensive
	Shares		Amount		Capital			Deficit			(Losses)			(Loss)			Costs			Liability			Income (Loss)			Loss			Equity			Income (Loss)
	(thousands of dollars)
Balance, December 31, 2004		1,000	$	1	$	2,821,552		$	(810,644	)	$	45,047		$	—		$	—		$	(147	)	$	44,900		$	(3,738	)	$	2,052,071
Net loss									(37,697	)																				(37,697	)	$	(37,697	)
Distributions to Reliant Energy, Inc., net						(361,001	)																							(361,001	)
Deferred gain from cash flow hedges, net of tax of $3 million												4,925												4,925						4,925			4,925
Reclassification of net deferred (gain) loss from cash flow hedges, net of tax of $22 million and $2 million												(31,125	)											(31,125	)		3,403			(27,722	)		(31,125	)
Other comprehensive income from discontinued operations																																	3,403
Comprehensive loss																																$	(60,494	)
Balance, December 31, 2005		1,000		1		2,460,551			(848,341	)		18,847			—			—			(147	)		18,700			(335	)		1,630,576
Net income									24,648																					24,648		$	24,648
Distributions to Reliant Energy, Inc., net						(249,412	)																							(249,412	)
Changes in minimum pension liability, net of tax of $1 million																					(2,029	)		(2,029	)					(2,029	)		(2,029	)
Deferred loss from cash flow hedges, net of tax of $3 million												(4,334	)											(4,334	)					(4,334	)		(4,334	)
Reclassification of net deferred (gain) loss from cash flow hedges, net of tax of $8 million $0												(11,802	)											(11,802	)		335			(11,467	)		(11,802	)
Other comprehensive income from discontinued operations																																	335
Adjustment to initially apply FASB Statement No. 158, net of tax of $4 million, $2 million and $1 million															(5,566	)		(3,379	)		2,176			(6,769	)					(6,769	)
Comprehensive income																																$	6,818
Balance, December 31, 2006		1,000	$	1	$	2,211,139		$	(823,693	)	$	2,711		$	(5,566	)	$	(3,379	)	$	—		$	(6,234	)	$	—		$	1,381,213
Net loss									(27,914	)																				(27,914	)	$	(27,914	)
Deferred gain from cash flow hedges, net of tax of $0												330												330						330			330
Reclassification of net deferred gain from cash flow hedges, net of tax of $2 million												(3,041	)											(3,041	)					(3,041	)		(3,041	)
Reclassification of benefits net prior service costs into net loss, net of tax of $0																		401						401						401			401
Reclassification of benefits actuarial net loss into net loss, net of tax of $0															170									170						170			170
Deferred benefits, net of tax of $1 million and $1 million															1,100			642						1,742						1,742			1,742
Comprehensive loss																																$	(28,312	)
Balance, December 31, 2007		1,000	$	1	$	2,211,139		$	(851,607	)	$	—		$	(4,296	)	$	(2,336	)	$	—		$	(6,632	)	$	—		$	1,352,901

See Notes to the Consolidated Financial Statements

F-130

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Background and Basis of Presentation

Background.  “Orion Power Holdings” refers to Orion Power Holdings, Inc., a Delaware corporation. “Orion Power” refers to Orion Power Holdings and its consolidated subsidiaries. “Reliant Energy” refers to Reliant Energy, Inc. and its consolidated subsidiaries. Orion Power owns and operates electric generation facilities in Ohio and Pennsylvania with an aggregate generating capacity of 2,683 megawatts (MW) as of December 31, 2007. Orion Power typically sells its wholesale products to independent system operators, regulated utilities, municipalities, energy supply companies (including Reliant Energy), cooperatives and retail “load” or customer aggregators.

On February 19, 2002, Reliant Energy acquired Orion Power through a merger.

Basis of Presentation.  These consolidated statements include all revenues and costs directly attributable to Orion Power including costs for facilities and costs for functions and services performed by Reliant Energy and charged to Orion Power. All significant intercompany transactions have been eliminated.

(2)   Summary of Significant Accounting Policies

(a)   Use of Estimates and Market Risk and Uncertainties.

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

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

Orion Power’s critical accounting estimates include: (a) fair value of recorded goodwill, property, plant and equipment and derivative assets and liabilities and (b) deferred tax assets, valuation allowances and tax liabilities. Actual results could differ from the estimates.

Orion Power is subject to various risks inherent in doing business. See notes 2(c), 2(d), 2(e), 2(g), 2(h), 2(n), 2(o), 2(p), 4, 5, 6, 7, 8, 9 and 10.

(b)   Principles of Consolidation.

Orion Power Holdings includes its accounts and those of its wholly-owned subsidiaries in the consolidated financial statements.

(c)   Power Generation and Capacity Revenues.

Orion Power records gross revenues from the sale of electricity and other energy services under the accrual method. Electric power and other energy services are sold at market-based prices through existing power exchanges, related party affiliates or third party contracts. Energy sales and services that have been delivered but not billed by period-end are estimated.

(d)   Derivatives and Hedging Activities.

Orion Power accounts for its derivatives instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” as amended (SFAS No. 133).

For Orion Power’s risk management activities, it uses both derivative and non-derivative contracts that provide for settlement in cash or by delivery of a commodity. The primary types of derivative instruments Orion Power uses are forwards, futures, swaps and options. Orion Power accounts for its derivatives under one

F-131

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of three accounting methods (mark-to-market, accrual (under the normal purchase/normal sale exception to fair value) or cash flow hedge accounting) based on facts and circumstances. The fair values of 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.

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

If certain conditions are met, a derivative instrument may be designated as a cash flow hedge. Derivatives designated as cash flow hedges must have a high correlation between price movements in the derivative and the hedged item. The changes in fair value of cash flow hedges are deferred in accumulated other comprehensive income (loss), net of tax, to the extent the contracts are, or have been, effective as hedges, until the forecasted transactions affect earnings. At the time the forecasted transactions affect earnings, Orion Power reclassifies the amounts in accumulated other comprehensive income (loss) into earnings. Orion Power records the ineffective portion of changes in fair value of cash flow hedges immediately into earnings. For all other derivatives, changes in fair value are recorded as unrealized gains or losses in its results of operations.

If and when an acceptable level of correlation no longer exists, hedge accounting ceases and changes in fair value are recognized in its results of operations. If it becomes probable that a forecasted transaction will not occur, Orion Power immediately recognizes the related deferred gains or losses in its results of operations. The associated hedging instrument is then marked to market through its results of operations for the remainder of the contract term unless a new hedging relationship is redesignated.

Realized gains and losses on derivatives contracts 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 Orion Power’s derivative activities and classification in its results of operations is:

	Purpose for Holding or	Transactions that	Transactions that
Instrument	Issuing Instrument(1)	Physically Flow	Financially Settle(2)
Power futures, forward, swap and option contracts	Power sales Power purchases	Revenues Cost of sales	Revenues Revenues
Natural gas and fuel futures, forward, swap and option contracts	Natural gas and fuel sales Natural gas and fuel purchases	Revenues Cost of sales	Cost of sales Cost of sales

(1)	The purpose for holding or issuing is not impacted by the accounting method elected for each instrument.
(2)	Includes classification for mark-to-market derivatives and amounts reclassified from accumulated other comprehensive income (loss) related to cash flow hedges.

In addition to market risk, Orion Power is exposed to credit and operational risk. Reliant Energy has a risk control framework, to which Orion Power is subject, 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. Orion Power uses mark-to-market valuation, value-at-risk and other metrics in monitoring and measuring risk. Reliant Energy’s risk control framework includes a variety of separate but complementary processes, which involve commercial and senior management and Reliant Energy’s Board of Directors. See note 2(e) for further discussion of Orion Power’s credit policy.

Effective September 1, 2006, Orion Power de-designated its cash flow hedges of coal contracts and either began utilizing the mark-to-market method of accounting or elected the normal purchase/normal sale exception. During the third quarter of 2006, Orion Power de-designated its remaining cash flows hedges; therefore, as of December 31, 2007 and 2006, Orion Power has no cash flow hedges.

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Set-off of Derivative Assets and Liabilities.  Where derivative instruments are subject to a master netting agreement and the accounting criteria to offset are met, Orion Power presents its derivative assets and liabilities on a net basis. Derivative assets/liabilities and accounts receivable/payable are presented and set-off separately in the consolidated balance sheets although in most cases contracts permit the set-off of derivative assets/liabilities and accounts receivable/payable with a given counterparty. However, Orion Power does not offset collateral (net margin deposits) related to these derivatives.

New Accounting Pronouncement Not Yet Adopted—Offsetting of Amounts.  The FASB issued FSP FIN 39-1, an amendment of FASB Interpretation No. 39 (FIN 39), which was applicable for Orion Power beginning January 1, 2008. This interpretation allows either (a) offsetting assets and liabilities for derivative instruments under a common 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, Orion Power plans to discontinue netting its derivative assets and liabilities and present them on a gross basis. Cash collateral amounts will remain presented on a gross basis. Orion Power’s December 31, 2007 consolidated balance sheet will not be affected because all derivative contracts accounted for under the mark-to-market and cash flow hedge accounting methods have settled over the contract terms.

(e)   Credit Risk.

Orion Power has 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 counterparties is reviewed periodically. Orion Power tries to mitigate credit risk by entering into contracts that permit netting and allow it to terminate upon the occurrence of certain events of default. Orion Power measures credit risk as the replacement cost for its derivative positions plus amounts owed for settled transactions.

Orion Power’s credit exposure is based on its derivative assets and accounts receivable from counterparties, after taking into consideration netting within each contract and any master netting contracts with counterparties. Orion Power provides reserves for non-investment grade counterparties representing a significant portion of its credit exposure. As of December 31, 2007, Orion Power has no credit exposure. As of December 31, 2006, one non-investment grade counterparty represented 100% ($4 million) of Orion Power’s credit exposure. As of December 31, 2007 and 2006, Orion Power held no collateral from these counterparties. There were no other counterparties representing greater than 10% of Orion Power’s credit exposure.

(f)   General and Administrative Expenses—Primarily Affiliates.

General and administrative expenses from affiliates include, among other items, (a) selling and marketing, (b) bad debt expense, (c) financial services, (d) legal costs, (e) regulatory costs and (f) certain benefit costs. See note 3.

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(g)   Property, Plant and Equipment and Depreciation Expense.

Orion Power computes depreciation using the straight-line method based on estimated useful lives. Depreciation expense was $87 million, $76 million and $95 million during 2007, 2006 and 2005, respectively.

	Estimated Useful		December 31,
	Lives (Years)		2007			2006
			(in millions)
Electric generation facilities		20 - 32	$	1,823		$	1,783
Land improvements		20 - 32		98			97
Other		3 - 10		10			9
Land				12			12
Assets under construction				89			28
Total				2,032			1,929
Accumulated depreciation				(412	)		(341	)
Property, plant and equipment, net			$	1,620		$	1,588

Orion Power periodically evaluates property, plant and equipment for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. The evaluation is highly dependent on the underlying assumptions of related cash flows. Orion Power recorded no material property, plant and equipment impairments during 2007, 2006 and 2005.

In the future, Orion Power could recognize impairments if its wholesale energy market outlook changes negatively. In addition, Orion Power’s ongoing evaluation of its business could result in decisions to mothball, retire or dispose of additional generation assets, any of which could result in impairment charges.

(h)   Intangible Assets and Amortization Expense.

Goodwill.  Orion Power performs its goodwill impairment test annually on April 1 and when events or changes in circumstances indicate that the carrying value may not be recoverable.

Other Intangibles.  Orion Power recognizes specifically identifiable intangible assets, including emission allowances and contractual rights, when specific rights and contracts are acquired. Orion Power has no intangible assets with indefinite lives recorded as of December 31, 2007 and 2006.

(i)   Capitalization of Interest Expense.

During 2007, 2006 and 2005, Orion power capitalized $3 million, $0 and $0 of interest expense, respectively.

(j)   Income Taxes.

Federal.  Orion Power is included in the consolidated federal income tax returns of Reliant Energy and calculates its income tax provision on a separate return basis, whereby Reliant Energy pays all federal income taxes on Orion Power’s behalf and is entitled to any related tax savings. The difference between Orion Power’s current federal income tax expense or benefit, as calculated on a separate return basis, and related amounts paid to/received from Reliant Energy, if any, were recorded in Orion Power’s financial statements as adjustments to additional paid-in capital. Reliant Energy changed its funding policy in late December 2006 and these differences are recorded to (a) income taxes payable to Reliant Energy, Inc. if Orion Power has cumulative taxable income on a separate return basis or (b) deferred tax assets if Orion Power has cumulative taxable losses on a separate return basis. Deferred federal income taxes reflected on Orion Power’s consolidated balance sheet will ultimately be settled with Reliant Energy. See notes 3 and 8.

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State.  Orion Power is included in the consolidated state income tax returns of Reliant Energy. It calculates its state provision, related payables or receivables and deferred state income taxes on a separate return basis and settles the related assets and liabilities directly with the governmental entity. See note 8.

(k)   Cash and Cash Equivalents.

Orion Power records all highly liquid short-term investments with maturities of three months or less as cash equivalents.

(l)   Allowance for Doubtful Accounts.

Orion Power accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing counterparty credit ratings, historical collections, accounts receivable agings and other factors. Orion Power writes-off accounts receivable balances against the allowance for doubtful accounts when it determines a receivable is uncollectible.

(m)   Inventory.

Orion Power values fuel inventories at the lower of average cost or market. Orion Power removes these inventories as they are used in the production of electricity or sold. Orion Power values materials and supplies at average cost. Orion Power removes these inventories when they are used for repairs, maintenance or capital projects. Sales of fuel inventory are classified as operating activities in the consolidated statement of cash flows.

	December 31,
	2007		2006
	(in millions)
Materials and supplies, including spare parts	$	21	$	19
Coal		34		30
Heating oil		2		1
Total inventory	$	57	$	50

(n)   Environmental Costs.

Orion Power expenses environmental expenditures related to existing conditions that do not have future economic benefit. Orion Power capitalizes environmental expenditures for which there is a future economic benefit. Orion Power records liabilities for expected future costs, on an undiscounted basis, related to environmental assessments and/or remediation when they are probable and can be reasonably estimated. See note 10.

(o)   Asset Retirement Obligations.

Orion Power’s asset retirement obligations relate to future costs associated primarily with ash disposal site closures. Orion Power’s asset retirement obligations are $8 million and $4 million as of December 31, 2007 and 2006, respectively. As of December 31, 2007 and 2006, Orion Power has $3 million (classified in other long-term assets) on deposit with the state of Pennsylvania to guarantee its obligation related to future closures of ash disposal sites. See note 10.

During 2005, Orion Power adopted an accounting interpretation relating to asset retirement obligations. This interpretation clarifies that an asset retirement obligation is unconditional even though uncertainty exists about the timing and/or method of settlement and requires that a liability be recognized if it can be reasonably estimated. Based on this, Orion Power (a) recorded a cumulative effect of an accounting change, net of tax, of

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$198,000, (b) increased other long-term liabilities by $624,000, (c) increased property, plant and equipment by $317,000 and (d) decreased deferred income tax liabilities by $109,000.

(p)   Repair and Maintenance Costs for Power Generation Assets.

Orion Power recognizes repair and maintenance costs as incurred.

(q)   New Accounting Pronouncement Not Yet Adopted—Fair Value.

The FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS No. 157 is to be applied prospectively, except for aspects that do not apply to Orion Power. Orion Power adopted SFAS No. 157 on January 1, 2008. In connection with the adoption, no cumulative effect of an accounting change will be recognized. For non-financial assets and liabilities, the adoption of SFAS No. 157 has been deferred until January 1, 2009.

(3)   Related Party Transactions

These financial statements include the impact of significant transactions between Orion Power and Reliant Energy. The majority of these transactions involve the purchase or sale of energy, capacity, fuel, emission allowances or related services (including transportation, transmission and storage services) from or to Orion Power and allocations of costs to Orion Power for support services.

Support and Technical Services.  Reliant Energy provides commercial support, technical services and other corporate services to Orion Power. Reliant Energy allocates certain support services costs to Orion Power based on Orion Power’s underlying planned operating expenses relative to the underlying planned operating expenses of other entities to which Reliant Energy provides similar services and also charges Orion Power for certain other services based on usage. Management believes this method of allocation is reasonable. These allocations and charges were not necessarily indicative of what would have been incurred had Orion Power been an unaffiliated entity. During 2005, Orion Power only paid a certain amount for these services. Beginning January 2006, Orion Power began paying all of the costs for these services.

The following details the amounts recorded as operation and maintenance—affiliates and general and administrative—affiliates:

	2007		2006		2005
	(in millions)
Allocated or charged by Reliant Energy	$	65	$	64	$	84
Unpaid allocations and charges recorded as non-cash equity contributions from Reliant Energy		—		—		57

Commodity Procurement and Marketing.  Orion Power has sales to and purchases from Reliant Energy related to commodity procurement and marketing services.

	2007		2006		2005
	(in millions)
Sales to Reliant Energy under various commodity agreements(1)	$	543	$	475	$	548
Purchases from Reliant Energy under various commodity agreements(2)		1		7		68
Gains on coal sales to Reliant Energy(3)		6		5		6
Sales of emission allowances to Reliant Energy(4)		13		69		56
Gains on emission allowances sales to Reliant Energy(5)		6		66		53

(1) Recorded in revenues—affiliates.

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(2)	Recorded in cost of sales—affiliates. Amounts include purchases from an affiliate to meet requirements of contractual commitments.
(3)	Recorded in cost of sales—affiliates.
(4)	Reflects price at which Reliant Energy sold the emission allowances to third parties.
(5)	Recorded in gains on sales of assets and emission allowances, net.

Debt Obligations from/to Reliant Energy.  In December 2004, Orion Power Midwest, L.P. (Orion MidWest) entered into the following with Reliant Energy: (a) two related-party notes for a total of $400 million and (b) a $75 million revolving credit facility. In December 2004, Orion Power New York, L.P. (Orion New York) entered into the following with Reliant Energy: (a) a related-party note for $400 million and (b) a $50 million revolving credit facility. The Orion MidWest and Orion New York related party notes bore interest at 6.5% per year and interest was payable monthly. The revolving credit facilities bore interest at London Inter Bank Offering Rate (LIBOR) plus 2.875%. Some of these amounts were classified as discontinued operations. See note 13. In connection with the sales of the New York plants and the Ceredo plant, the related party notes were paid off and the Orion New York revolving credit facility was terminated. The $75 million Orion MidWest revolving credit facility matures in December 2008; however, Reliant Energy plans to extend the maturity each December for 12 months from that date. Orion Power has incurred interest expense (in continuing operations) related to these notes and revolving credit facilities of $3 million, $1 million and $1 million during 2007, 2006 and 2005, respectively.

In March 2006, Orion Power made a term loan to Reliant Energy for $92 million, which matures in 2010. The note bore interest at ten percent through September 30, 2007 and interest is payable monthly. Effective October 1, 2007, the interest rate was changed to 7.5 percent. During 2007, Reliant energy paid down $25 million on this loan. Orion Power has earned interest income related to this term loan of $8 million and $7 million during 2007 and 2006, respectively.

Secured Revolving Letter of Credit Facility Agreement with Reliant Energy.  Reliant Energy posts letters of credit on behalf of Orion Power. As of December 31, 2007 and 2006, Reliant Energy posted letters of credit totaling $16 million on behalf of Orion Power. During September 2006, Reliant Energy and Orion Power entered into a Secured Revolving Letter of Credit Facility Agreement whereby Orion Power will provide cash to Reliant Energy as collateral for letters of credit when issued up to a maximum of $20 million. The agreement expires on April 30, 2010. As letters of credit expire, the cash collateral will be returned to Orion Power. Orion Power will reimburse Reliant Energy for the costs of the letters of credit and will earn interest income on the collateral posted. As of December 31, 2007 and 2006, Orion Power has provided cash collateral of $16 million to Reliant Energy. During 2007 and 2006, the letters of credit costs, recorded in interest expense, were insignificant and the related interest income was $1 million.

Cash Distributions to Reliant Energy.

	2007		2006			2005
	(in millions)
Orion Power Holdings cash distributions to Reliant Energy	$	—	$	(209	)	$	(340	)

Income Taxes. See discussion in note 2(k) regarding Orion Power’s policy with respect to income taxes and the long-term taxes payable to Reliant Energy, Inc.

	2007		2006			2005
	(in millions)
Non-cash contributions from (distributions to) Reliant Energy related to federal income taxes for continuing and discontinued operations	$	—	$	(40	)	$	(78	)

As of December 31, 2007 and 2006, Orion Power has $66 million and $84 million, respectively, recorded as long-term taxes payable to Reliant Energy, Inc., which includes accrued interest payable of $6 million and $0, respectively. Orion Power has incurred interest expense related to this payable of $6 million during 2007.

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(4)   Intangible Assets

(a)   Goodwill.

The following table shows goodwill and the changes (in millions):

As of January 1, 2006	$	181
Changes		(5	)
As of December 31, 2006		176
Changes		(2	)
As of December 31, 2007	$	174

As of December 31, 2007 and 2006, Orion Power had $35 million and $39 million, respectively, of goodwill that is deductible for United States income tax purposes in future periods.

Goodwill Impairment Tests.  Orion Power performed impairment tests at the following dates: April 2005, August 2005, September 2005, April 2006 and April 2007 due to either asset sales or annual impairment tests. No impairments were indicated in these tests.

Estimation of Fair Value.  Orion Power estimates the fair value based on a number of subjective factors, 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 future cost structure, (d) environmental assumptions, (e) discount rates for estimated cash flows, (f) selection of peer group companies for the public company approach, (g) required level of working capital, (h) assumed EBITDA multiple for terminal values and (i) time horizon of cash flow forecasts.

In determining the fair value, Orion Power made the following key assumptions: (a) the markets in which Orion Power operates will continue to be deregulated; (b) there will be a recovery in electricity margins over time such that companies building new generation facilities can earn a reasonable rate of return on their investment and (c) the long-term returns on future construction of new generation facilities will likely be driven by integrated utilities, which Orion Power expects will have a lower cost of capital than merchant generators. As part of the process, Orion Power modeled all of its power generation facilities and those of others in the regions in which Orion Power operates. The assumptions for each of the goodwill impairment tests during 2005, 2006 and 2007 were:

Number of years used in internal cash flow analysis	15
EBITDA(1) multiple for terminal values (2005 tests)	7.5
EBITDA multiple for terminal values (April 2006 test)	7.0	(2)
EBITDA multiple for terminal values (April 2007 test)	8.0	(2)
Risk-adjusted discount rate for estimated cash flows (2005 tests)	9.0	%
Risk-adjusted discount rate for estimated cash flows (April 2006 test)	9.5	%(3)
Risk-adjusted discount rate for estimated cash flows (April 2007 test)	10.0	%(3)
Approximate average anticipated growth rate for demand in power	2.0	%
Long-term after-tax return on investment for new investment	7.5	%

(1)	Defined as earnings (loss) before interest expense, interest income, income taxes, depreciation and amortization expenses.
(2)	Changed primarily due to market factors affecting peer company comparisons.
(3)	Changed primarily due to capital structure of peer company comparisons.

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(b)   Other Intangibles.

	Remaining
	Weighted			December 31,
	Average			2007					2006
	Amortization			Carrying		Accumulated			Carrying		Accumulated
	Period (Years)			Amount		Amortization			Amount		Amortization
				(in millions)
SO2 emission allowances(1)(2)		—	(1)	$	160	$	(103	)	$	134	$	(72	)
NOx emission allowances(1)(3)		—	(1)		180		(71	)		181		(60	)
Contractual rights(4)		—			—		—			4		(4	)
Total				$	340	$	(174	)	$	319	$	(136	)

(1)	SO2 is sulfur dioxide and NOx is nitrogen oxides. Amortized to amortization expense on a units-of-production basis. As of December 31, 2007, Orion Power has recorded (a) SO2 emission allowances through the 2039 vintage year (most of which relate to 2010 and beyond) and (b) NOx emission allowances through the 2039 vintage year (most of which relate to 2009 and beyond).
(2)	During 2007, 2006 and 2005, Orion Power purchased $28 million, $0 and $0, respectively, of SO2 emission allowances from affiliates.
(3)	During 2007, 2006 and 2005, Orion Power purchased $4 million, $0 and $2 million, respectively, of NOx emission allowances from affiliates.
(4)	Amortized to revenues and cost of sales, as applicable, based on the estimated realization of the fair value established on the acquisition date over the contractual lives. As of December 31, 2007, Orion Power has no contractual rights recorded on its consolidated balance sheet.

Amortization expense consists of:

	2007		2006			2005
	(in millions)
Emission allowances	$	50	$	25		$	31
Contractual rights(1)	$	—	$	(1	)	$	(1	)
Contractual obligations(1)(2)		—		3			9
Net	$	—	$	2		$	8

(1)	Amortized to revenues and cost of sales, as applicable, based on the estimated realization of the fair value established on the acquisition date over the contractual lives.
(2)	Contractual obligations are in other long-term liabilities.

Estimated amortization expense based on Orion Power’s intangibles as of December 31, 2007 for the next five years is (in millions):

2008	$	1	(1)
2009		6	(1)
2010		7	(1)
2011		7	(1)
2012		7	(1)

(1) These amounts do not include expected amortization expense of emission allowances, which have not been purchased as of December 31, 2007.

(5)   Derivatives and Hedging Activities

Orion Power uses derivative instruments to manage operational or market constraints and to increase return on its generation assets. The instruments used are fixed-price derivative contracts to hedge the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

variability in future cash flows from forecasted sales of power and purchases of fuel and power. Orion Power’s objective in entering into these fixed-price derivatives is to fix the price for a portion of these transactions. See note 2(d).

During 2006 and 2005, there was no hedge ineffectiveness recognized from derivatives that were designated and qualified as cash flow hedges. In addition, no component of the derivatives’ gain or loss was excluded from the assessment of effectiveness for these periods. If it becomes probable that an anticipated transaction will not occur, Orion Power realizes in net income (loss) the deferred gains and losses recognized in accumulated other comprehensive loss. During 2006 and 2005, $0 was recognized in the results of continuing operations as a result of the discontinuance of cash flow hedges because it was probable that the forecasted transaction would not occur.

As of December 31, 2007, all derivative instruments accounted for under the mark-to-market and cash flow hedge accounting methods have settled over the contract terms and there are no deferred derivative gains/losses remaining in accumulated other comprehensive loss.

(6)   Debt

Outstanding debt to third parties:

	December 31,
	2007						2006
	Weighted						Weighted
	Average						Average
	Stated						Stated
	Interest						Interest
	Rate(1)		Long-term		Current		Rate(1)		Long-term		Current
	(in millions, except interest rates)
Orion Power Holdings senior notes due 2010 (unsecured)		12.00	$	400	$	—		12.00	$	400	$	—
Adjustment to fair value of debt(2)				17		11				29		10
Total debt			$	417	$	11			$	429	$	10

(1)	The weighted average stated interest rates are as of December 31, 2007 or 2006.
(2)	Debt acquired by Reliant Energy in the Orion Power acquisition was adjusted to fair market value as of the acquisition date. Included in interest expense is amortization of $11 million, $9 million and $9 million for valuation adjustments for debt for 2007, 2006 and 2005, respectively.

Debt maturities as of December 31, 2007 are (in millions):

2008	$	—
2009		—
2010		400
2011		—
2012		—
2013 and thereafter		—
	$	400

Orion Power Holdings Senior Notes.  These notes were recorded at a fair value of $479 million upon the acquisition by Reliant Energy. The $79 million premium is being amortized to interest expense over the life of the notes. The senior notes are senior unsecured obligations of Orion Power Holdings, are not guaranteed by any of Orion Power Holdings’ subsidiaries and are non-recourse to Reliant Energy. The senior notes have covenants that restrict the ability of Orion Power Holdings and its subsidiaries to, among other

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

actions, (a) pay dividends or pay subordinated debt, (b) incur indebtedness or issue preferred stock, (c) make investments, (d) divest assets, (e) encumber its assets, (f) enter into transactions with affiliates, (g) engage in unrelated businesses and (h) engage in sale and leaseback transactions. As of December 31, 2007, conditions under these covenants were not met that allow the payment of dividends by Orion Power Holdings. As of December 31, 2007, the adjusted net assets of Orion Power that are restricted to Reliant Energy, Inc. are $1.3 billion.

See note 3 for debt transactions with affiliates.

(7)   Benefit Plans

(a)   Pension and Postretirement Benefits.

Benefit Plans.  Some Orion Power employees participate in a defined benefit pension plan. Orion Power provides subsidized postretirement benefits to some bargaining employees but generally does not provide them to non-bargaining employees.

Effective December 31, 2006, Orion Power adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement requires recognition of the funded status of plans, measured as of year end. Orion Power already uses the required measurement date. The adoption did not have a material effect on any individual line item of Orion Power’s consolidated balance sheet as of December 31, 2006. As of December 31, 2007, $0.1 million and $0.4 million of net loss and net prior service costs, respectively, in accumulated other comprehensive loss are expected to be recognized in net periodic benefit cost during the next 12 months.

The benefit obligations and funded status are:

	Pension						Postretirement Benefits
	2007			2006			2007			2006
	(in millions)
Change in Benefit Obligation
Beginning of year	$	57		$	52		$	31		$	28
Service cost		2			3			1			—
Interest cost		3			3			2			2
Benefits paid		(2	)		(1	)		—			—
Actuarial loss		—			—			(1	)		1
End of year	$	60		$	57		$	33		$	31
Change in Plan Assets
Beginning of year	$	36		$	30		$	—		$	—
Employer contributions		9			3			—			—
Benefits paid		(2	)		(1	)		—			—
Actual investment return		3			4			—			—
End of year	$	46		$	36		$	—		$	—
Funded Status	$	(14	)	$	(21	)	$	(33	)	$	(31	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Amounts recognized in the consolidated balance sheets are:

	Pension						Postretirement Benefits
	December 31,						December 31,
	2007			2006			2007			2006
	(in millions)
Current liabilities	$	—		$	—		$	(1	)	$	(1	)
Noncurrent liabilities		(14	)		(21	)		(32	)		(30	)
Net amount recognized	$	(14	)	$	(21	)	$	(33	)	$	(31	)

The accumulated benefit obligation for all pension plans was $54 million and $51 million as of December 31, 2007 and 2006, respectively. All pension plans have accumulated benefit obligations in excess of plan assets.

Net benefit costs are:

	Pension									Postretirement Benefits
	2007			2006			2005			2007		2006		2005
	(in millions)
Service cost	$	3		$	3		$	2		$	—	$	—	$	1
Interest cost		3			3			2			2		2		1
Expected return on plan assets		(3	)		(2	)		(1	)		—		—		—
Net amortization		1			1			1			—		—		—
Net benefit cost	$	4		$	5		$	4		$	2	$	2	$	2

Assumptions.  The significant weighted average assumptions used to determine the benefit obligations are:

	Pension						Postretirement Benefits
	December 31,						December 31,
	2007			2006			2007			2006
Discount rate		5.75	%		5.75	%		5.75	%		5.75	%
Rate of compensation increase		3.0	%		3.0	%		3.0	%		3.0	%

The significant weighted average assumptions used to determine the net benefit costs are:

	Pension									Postretirement Benefits
	2007			2006			2005			2007			2006			2005
Discount rate		5.75	%		5.75	%		5.75	%		5.75	%		5.75	%		5.75	%
Rate of compensation increase		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Expected long-term rate of return on assets		7.5	%		7.5	%		7.5	%		N/A			N/A			N/A

As of December 31, 2007 and 2006, Orion Power developed its expected long-term rate of return on pension plan assets based on third party models. These models consider expected inflation, current dividend yields, expected corporate earnings growth and risk premiums based on the expected volatility of each asset category. Orion Power weights the expected long-term rates of return for each asset category to determine its overall expected long-term rate of return on pension plan assets. In addition, Orion Power reviews peer data and historical returns.

F-142

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Orion Power’s assumed health care cost trend rates used to measure the expected cost of benefits covered by its postretirement plan are:

	2007			2006			2005
Health care cost trend rate assumed for next year		8.3	%		9.0	%		9.0	%
Rate to which the cost trend rate is assumed to gradually decline (ultimate trend rate)		5.5	%		5.5	%		5.5	%
Year that the rate reaches the ultimate trend rate		2015			2015			2011

Assumed health care cost trend rates can have a significant effect on the amounts reported for Orion Power’s health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 2007:

	One-Percentage Point
	Increase		Decrease
	(in millions)
Effect on service and interest cost	$	—	$	—
Effect on accumulated postretirement benefit obligation		5		(4	)

Plan Assets.  Orion Power’s pension weighted average asset allocations and target allocation by asset category are:

	Percentage of Plan Assets
	as of December 31,						Target Allocation
	2007			2006			2008
Domestic equity securities		49	%		50	%		50	%
International equity securities		10			11			10
Global equity securities		10			11			10
Debt securities		31			28			30
Total		100	%		100	%		100	%

In managing the investments associated with the pension plans, Orion Power’s objective is to exceed, on a net-of-fee basis, the rate of return of a performance benchmark composed of the following indices:

Asset Class	Index	Weight
Domestic equity securities	Wilshire 5000 Index		50	%
International equity securities	MSCI All Country World Ex-U.S. Index		10
Global equity securities	MSCI All Country World Index		10
Debt securities	Lehman Brothers Aggregate Bond Index		30
Total			100	%

As a secondary measure, Orion Power compares asset performance to the returns of a universe of comparable funds, where applicable, over a full market cycle. Reliant Energy’s Benefits Committee reviews plan asset performance each quarter by comparing the actual quarterly returns of each asset class to its related benchmark. Orion Power’s plan assets have generally performed in accordance with the benchmarks.

F-143

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash Obligations.  Orion Power does not expect to make pension cash contributions during 2008. Expected benefit payments for the next ten years, which reflect future service as appropriate, are:

			Postretirement
	Pension		Benefits
	(in millions)
2008	$	2	$	1
2009		2		1
2010		2		1
2011		3		2
2012		3		2
2013-2017		24		12

(b)   Savings Plan.

Orion Power’s employees participate in Reliant Energy’s employee savings plans under Sections 401(a) and 401(k) of the Internal Revenue Code. Orion Power’s savings plan benefit expense, including matching and discretionary contributions, was $2 million, $1 million and $1 million during 2007, 2006 and 2005, respectively.

(c)   Other Employee Matters.

As of December 31, 2007, approximately 74% of Orion Power’s employees are subject to collective bargaining arrangements. Collective bargaining arrangements covering 35% of these employees will expire in 2008.

(8)   Income Taxes

(a) Summary.

Orion Power’s income tax expense (benefit) is:

	2007			2006			2005
	(in millions)
Current:
Federal	$	—		$	—		$	(26	)
State		(4	)		(4	)		6
Total current		(4	)		(4	)		(20	)
Deferred:
Federal		(18	)		11			57
State		(4	)		(38	)		(13	)
Total deferred		(22	)		(27	)		44
Income tax expense (benefit) from continuing operations	$	(26	)	$	(31	)	$	24
Income tax expense (benefit) from discontinued operations	$	—		$	(1	)	$	6

F-144

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	2007			2006			2005
Federal statutory rate		(35	)%		35	%		35	%
Additions (reductions) resulting from:
State income taxes, net of federal income taxes		(9	)		254	(1)		(6	)
Other, net		2			(27	)		4
Effective rate		(42	)%		262	%		33	%

(1) Of this percentage, (a) $17 million (145%) relates to Pennsylvania state law changes, which effectively decreased our limitations to use net operating losses in that state and (b) $7 million (61%) relates to changes in valuation allowances.

	December 31,
	2007			2006
	(in millions)
Deferred tax assets:
Current:
Employee benefits	$	1		$	1
Other		4			6
Total current deferred tax assets		5			7
Non-current:
Employee benefits		18			21
Net operating loss carryforwards		29			29
Other		13			14
Valuation allowance		(3	)		(5	)
Total non-current deferred tax assets		57			59
Total deferred tax assets	$	62		$	66
Deferred tax liabilities:
Non-current:
Depreciation and amortization		215			209
Other		—			7
Total non-current deferred tax liabilities		215			216
Total deferred tax liabilities	$	215		$	216
Accumulated deferred income taxes, net	$	(153	)	$	(150	)

F-145

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(b)   Tax Attribute Carryovers.

			Statutory
	December 31,		Carryforward		Expiration
	2007		Period		Year(s)
	(in millions)		(in years)
Net Operating Loss Carryforwards:
State	$	480		20		2020 through 2027

(c)   Valuation Allowances.

Orion Power assesses its future ability to use federal and state 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 Orion Power’s 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.

Orion Power’s valuation allowances for deferred tax assets are:

	State
	(in millions)
As of January 1, 2005	$	25
Changes in valuation allowance		(1	)
As of December 31, 2005		24
Changes in valuation allowance		(19	)
As of December 31, 2006		5
Changes in valuation allowance		(2	)
As of December 31, 2007	$	3

(d)   Adoption of FIN 48 and Tax Uncertainties.

Effective January 1, 2007, Orion Power adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48). This interpretation addresses whether (and when) tax benefits claimed in Reliant Eenrgy’s federal and Orion Power’s state tax returns should be recorded in its financial statements. Pursuant to FIN 48, Orion Power 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. Orion Power classifies accrued interest and penalties related to uncertain income tax positions in income tax expense/benefit.

In connection with the adoption, Orion Power recognized the following in its consolidated financial statements:

	Adoption Effect on
	January 1, 2007
	Increase (Decrease)
	(in millions)
Goodwill	$	(2	)
Other long-term liabilities		(3	)
Retained deficit		(1	)

F-146

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Orion Power has the following in its consolidated balance sheet:

	January 1, 2007		December 31,
	(Immediately After Adoption)		2007
	(in millions)
Unrecognized tax benefits(1)	$	—	$	—	(2)
Interest and penalties(1)		—		—

(1)	The activity during 2007 was insignificant.
(2)	Of this amount, $0, if recognized, would affect the effective tax rate.

During 2007, 2006 and 2005, Orion Power recognized an insignificant amount of income tax expense (benefit) due to changes in interest and penalties for federal and state income taxes.

Orion Power has the following years that remain subject to examination or are currently under audit for its major tax jurisdictions:

	Subject to Examination		Currently Under Audit
Federal		1997 to 2007		1997 to 2005
Pennsylvania		2004 to 2007		2006
New York state and city		2003 to 2006		2003 to 2006

Orion Power, through Reliant Energy, expects 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 during 2008; however, Orion Power cannot estimate the range of changes that might occur: the timing of tax deductions could be changed as a result of negotiations with respect to depreciation and emission allowances.

(9)   Commitments

(a)   Lease Commitments.

Operating Lease Expense.  Total lease expense for all operating leases was $2 million, $2 million and $1 million during 2007, 2006 and 2005, respectively.

(b)   Guarantees and Indemnifications.

Equity Pledged as Collateral for Reliant Energy.  Orion Power Holdings’ equity is pledged as collateral under certain of Reliant Energy’s credit and debt agreements, which have an outstanding balance of $1.2 billion as of December 31, 2007.

Interests Pledged as Collateral to Reliant Energy.  In connection with Orion Power’s debt to Reliant Energy (as discussed in note 3), Orion Power Holdings has pledged its interests in Orion Power Capital, LLC, and its subsidiaries, including Orion New York and Orion MidWest, to Reliant Energy. In connection with the sale of the New York plants, the related interests were released.

Other.  Orion Power enters into contracts that include indemnification and guarantee provisions. In general, Orion Power enters 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, service agreements and procurement agreements.

Orion Power is unable to estimate its maximum potential exposure under these agreements until an event triggering payment occurs. Orion Power does not expect to make any material payments under these agreements.

F-147

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(c)   Other Commitments.

Property, Plant and Equipment Commitments.  As of December 31, 2007, Orion Power has contractual commitments to spend approximately $203 million on plant and equipment relating primarily to SO₂ emissions reductions.

(10)   Contingencies

Orion Power is involved in a number of legal, environmental and other matters before courts and governmental agencies, some of which may involve substantial amounts. Unless otherwise noted, Orion Power cannot predict the outcome of these 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.” The EPA has agreed to share information relating to its investigations with state environmental agencies.

Ash Disposal Site Closures.  Orion Power is responsible for environmental costs related to the future closures of two ash disposal sites owned by Orion MidWest. Orion Power recorded the estimated discounted costs associated with these environmental liabilities as part of its asset retirement obligations. See note 2(o).

(11)   Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable and payable and derivative assets and liabilities approximate their carrying amounts. Values of Orion Power’s debt (see note 6) are:

	December 31,
	2007				2006
	Carrying		Fair		Carrying		Fair
	Value		Value(1)		Value		Value(1)
	(in millions)
Fixed rate debt	$	428	$	436	$	439	$	456
Total debt	$	428	$	436	$	439	$	456

(1) Orion Power based the fair values of its fixed rate debt on information from market participants.

(12)   Sales of Assets and Emission Allowances

Emission Allowances.  Orion Power sold emission allowances during 2007, 2006 and 2005 for gains of $7 million, $67 million and $56 million, respectively.

(13)   Discontinued Operations

(a)   New York Plants.

General.  In February 2006, Orion Power closed on the sale of its three remaining New York plants with an aggregate net generating capacity of approximately 2,100 MW for $979 million. During the third quarter of 2005, Orion Power began to report the results of the New York plants as discontinued operations.

Use of Proceeds.  Orion Power applied $704 million of cash proceeds, which is net of estimated city, state and transfer taxes and transaction costs, to pay down the Orion New York and Orion MidWest notes (including outstanding interest) owed to Reliant Energy. After tendering for $0.2 million of the 12% senior notes, the remaining net cash proceeds of $248 million were distributed to/invested in Reliant Energy, including the issuance of a $92 million note. See note 3.

F-148

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assumptions Related to Debt, Deferred Financing Costs and Interest Expense on Discontinued Operations.  Based on Orion Power’s obligation to utilize the net proceeds from the sale to prepay debt, Orion Power classified the related debt amounts for the Orion New York and Orion MidWest related party notes and the Orion New York related party revolver (and the related interest expense) as discontinued operations. Orion Power classified the related deferred financing costs (and associated interest expense) on all of these debt amounts as discontinued operations. Orion Power allocated $1 million of related third party interest expense during 2006 and 2005 to discontinued operations. Orion Power allocated $7 million and $53 million of related interest expense—affiliates during 2006 and 2005, respectively, to discontinued operations. No interest was allocated to discontinued operations subsequent to the closing.

(b)   Ceredo Plant.

In 2005, Orion Power sold its 505 MW Ceredo power plant for $100 million. Orion Power used the net cash proceeds of $100 million to pay down the Orion MidWest term notes owed to Reliant Energy. During the third quarter of 2005, Orion Power began to report results of Ceredo’s operations as discontinued operations effective January 1, 2005.

(c)   All Discontinued Operations.

The following summarizes certain financial information of the businesses reported as discontinued operations:

	New York
	Plants			Ceredo Plant			Total
2006
Revenues	$	104		$	—		$	104
Income before income tax expense/benefit		4	(1)		—			4
2005
Revenues	$	1,014		$	—		$	1,014
Loss before income tax expense/benefit		(48	)(2)		(32	)(3)		(80	)

(1)	Includes an additional pre-tax loss on disposal of $16 million during 2006 primarily due to changes in derivative assets not terminated as of the date of sale. The cumulative pre-tax loss on disposal through December 31, 2006 is $308 million.
(2)	Includes $292 million estimated loss on disposal.
(3)	Includes $32 million loss on disposal.

Subsequent to the sale of the New York plants in February 2006, Orion Power continues to have (a) insignificant settlements with the independent system operator and (b) property tax settlements. Orion Power recognized $7 million of income before income taxes from discontinued operations during 2007. These amounts are classified as discontinued operations in the results of operations. In addition, Orion Power has some amounts on its consolidated balance sheets classified as discontinued operations relating to these settlements and other insignificant items.

F-149

EX-10.59

Exhibit 10.59

FORM OF
CHANGE IN CONTROL AGREEMENT
FOR CEO, CFO AND COO

     This Change in Control Agreement (“Agreement”) is by and between Reliant Energy, Inc. (the “Company”), Reliant Energy Corporate Services, LLC (the “Employer”) and                                          (“Executive”).

     The Company and the Employer consider it essential to the interests of the Company’s stockholders to secure the continued employment of key management personnel. The Board of Directors of the Company recognizes that the possibility of a Change in Control (as defined below) exists and that the uncertainty this raises may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. In order to encourage the continued attention and dedication of key management personnel, this Agreement is being entered into by the Company, the Employer and Executive.

     The Company, the Employer and Executive agree as follows:

1. Definitions: Capitalizedterms are defined in Exhibit A.

2. Severance Benefits: If Executive (a) experiences a Covered Termination, (b) executes and returns to the Company a Waiver and Release within the time period prescribed in the Waiver and Release following the Covered Termination, and (c) does not revoke such Waiver and Release within the time period prescribed in the Waiver and Release, then Executive will be entitled to receive from the Employer the following severance benefits:

(a)	Severance Payment Based on Salary. An amount equal to the sum of 3 times Salary plus 3 times the Executive’s target award under the AICP for the year in which the Covered Termination occurs.
(b)	Severance Payment Based on Bonus.

(1)

Current Performance Year. An amount equal to the product of (A) the Salary and (B) the Target Bonus Percentage, with the product of (A) and (B) prorated based on the number of days Executive was employed during the bonus year in which Executive’s employment terminated.

(2)

Prior Performance Year. An Executive whose termination date occurs before the date on which awards under the AICP are paid out for the prior calendar year, or the date on which the Company announces that awards under the AICP will not be paid, will be entitled to an amount equal to the product of (A) the Salary and (B) the Target Bonus Percentage (or, if greater, the actual amount of the bonus determined under the AICP for such prior calendar

1

year). Any prepayments of AICP awards made during the prior calendar year will be deducted from the amount calculated under the preceding sentence of Section 2(b)(2).

The severance benefits provided for in Sections 2(a) and 2(b) above will be paid in one lump sum payment as soon as practicable after the expiration of the Waiver and Release revocation period (subject to any delay required to comply with the requirements of Section 409A of the Code).

(c) Welfare Benefit Coverage.

(1)	Active Coverage. The Employer will provide, or will cause to be provided, continued Welfare Benefit Coverage (as in effect from time to time for similarly situated active employees) for Executive and Executive’s eligible dependents at the active employee rate for a period of 2 years following the date of Executive’s Covered Termination.
(2)	Post Retirement Coverage.
	If Executive would be entitled to post-retirement medical coverage within 2 years following termination of employment, if Executive had remained employed, the Company or the Employer will provide the coverage as follows:

(A)	the coverage provided will be the coverage in effect immediately before the Covered Termination; and
(B)	coverage will begin on the later of (i) the date on which the post-retirement coverage would have become available or (ii) the date on which the benefits under Section 2(c)(1) end.

(3) Reduction for Other Coverage. Benefits otherwise receivable by Executive pursuant to this Section 2(c) will be reduced to the extent Executive becomes eligible to receive benefits pursuant to a government-sponsored health insurance or health care program.

(d)	Outplacement. The Employer will provide or cause to be provided outplacement services for a period of 12 months in connection with Executive’s efforts to obtain new employment. Executive must notify the Employer or the outplacement firm designated by the Employer, in writing, within 180 days of termination of employment if the Executive wishes to utilize this outplacement benefit.
(e)	Financial Planning: The Employer will provide, or cause to be provided, continued access, for the remainder of the calendar year in which the

2

Covered Termination occurs or for 60 days (if greater), to the financial planning services available to executive employees at the time of the Covered Termination.

3. Change in Control Equity-Based Benefits: Immediately upon any Change in Control, Executive will be entitled to receive benefits with respect to any equity-based compensation in accordance with the applicable plans and agreements.

4. Special Internal Revenue Code Requirements: It is the intent of the Company that the provisions of this Agreement comply with Section 409A of the Code and related regulations and Department of the Treasury pronouncements. Accordingly, notwithstanding any provision in this Agreement to the contrary, this Agreement will be interpreted, applied and to the minimum extent necessary, unilaterally amended by the Company in its sole discretion, without the consent of Executive, as the Company deems appropriate for the Agreement to satisfy the requirements of Section 409A.

5.

Certain Additional Payments: Whether or not Executive becomes entitled to the payments or benefits pursuant to Section 2 of this Agreement, if any of the payments or benefits received or to be received by Executive (including any payment or benefit received or to be received in connection with a Change in Control or Executive’s termination of employment, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement) (all such payments and benefits, excluding the Gross-Up Payment described below, being hereinafter referred to as the “Total Payments”) will be subject to the tax under Section 4999 of the Code (the “Excise Tax”), the Company will pay to the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, and after taking into account the phase out of itemized deductions and personal exemptions attributable to the Gross-Up Payment, is equal to the Total Payments. In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the “Safe Harbor”), then the preceding provisions of this Section will not apply and any noncash payments or benefits will first be reduced ( if necessary, to zero), and any cash payments will thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash payments reduced (or eliminated) before any reduction of the noncash payments or benefits.

For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments will be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments” within the meaning of

3

Section 280G(b)(l) of the Code will be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the base amount allocable to such reasonable compensation (within the meaning of Section 280G of the Code), or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit will be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, (1) the Executive will be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the date of the Covered Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (2) Executive will be deemed to be subject to the loss of itemized deductions and personal exemptions to the maximum extent provided by the Code for each dollar of incremental income.

In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Executive must repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Executive’s taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company will make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Executive and the Company must each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

6. Confidentiality: Executive agrees that he will not, while employed by the Company or the Employer or an Affiliate and thereafter, disclose or make available to any other person or entity, or use for his own personal gain, any Confidential Information, except for such disclosures as are required in the performance of his duties hereunder or as may otherwise be required by law or legal process (in which case Executive must notify the Company of such legal or judicial proceeding as soon as practicable, and permit the Company to seek to protect its interests and information).

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7. Return of Property: Executive agrees that at the time of leaving his or her employ, he will deliver to the Employer (and will not keep in his possession, recreate or deliver to anyone else) all Confidential Information as well as all other devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, customer or client lists or information, or any other documents or property (including all reproductions of the aforementioned items) belonging to the Company or any of its Affiliates, regardless of whether such items were prepared by Executive.

8. Non-Solicitation: Executive agrees that while employed by the Company or the Employer or an Affiliate and for one year following a Covered Termination, he will not, without the prior written consent of the Company, directly or indirectly, hire or induce, entice or solicit (or attempt to induce entice or solicit) any employee of the Company or any of its Affiliates to leave the employment of the Company or any of its Affiliates.

9. Notices: For purposes of this Agreement, notices and all other communications must be in writing and will be deemed to have been given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to Company or the Employer:	Reliant Energy, Inc.
	1000 Main Street
	Houston, Texas 77002
	ATTENTION: General Counsel
If to Executive:

 or to such other address as either party may furnish to the other in writing in accordance with this Section.

10.	Applicable Law: The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Texas, but without giving effect to the principles of conflict of laws of such State.
11.	Severability: If any provision of this Agreement is determined to be invalid or unenforceable, then the invalidity or unenforceability of that provision will not affect the validity or enforceability of any other provision of this Agreement and all other provisions will remain in full force and effect.
12.	Withholding of Taxes: The Company or the Employer, as applicable, may withhold from any payments under this Agreement all federal, state, local or other taxes as may be required pursuant to any law or governmental regulation or ruling.

5

13.	No Assignment; Successors: Executive’s right to receive payments or benefits under this Agreement will not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, whether voluntary, involuntary, by operation of law or otherwise, other than a transfer by will or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this Section 13 the Company or Employer will have no liability to pay any amount so attempted to be assigned or transferred. This Agreement inures to the benefit of and is enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
	This Agreement is binding upon and inures to the benefit of the Company and the Employer and their respective successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate).
14.	Payment Obligations Absolute: Except for the requirement of Executive to execute and return to the Company the Waiver and Release in accordance with Section 2, the Company’s and the Employer’s obligation to pay Executive the amounts and to make the arrangements provided herein are absolute and unconditional and may not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company or the Employer (including their Affiliates) may have against Executive or anyone else. All amounts payable or arrangements to be made hereunder by the Company or the Employer (including their Affiliates) must be paid or made without notice or demand. Executive may not be obligated to sign an agreement not to compete with the Company or its Affiliates or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and the obtaining of any other employment will not effect any reduction of the Company’s or the Employer’s obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. In the event that the Employer fails to pay any amount or provide any benefit required to be made or provided by the terms of this Agreement, the Company will be required to make such payment or provide such benefit, as the case may be, under the same terms and conditions that were applicable to the Employer.
15.	Number and Gender: Wherever appropriate herein, words used in the singular will include the plural, the plural will include the singular, and the masculine gender will include the feminine gender.
16.	Conflicts: This Agreement constitutes the entire understanding of the parties with respect to its subject matter and supercedes any other agreement or other understanding, whether oral or written, express or implied, between them concerning, related to or otherwise in connection with, the subject matter hereof.
17.	Amendment and Waiver: No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by any party hereto at any time of any breach by the other party hereto of, or

6

of any lack of compliance with, any condition or provision of this Agreement to be performed by any other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

18. Counterparts: This Agreement may be executed in several counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.

19. Term: The effective date of the Agreement is October 29, 2007. Upon the occurrence of a Change in Control, the term will be automatically extended to a date which is two years from the date upon which the Change in Control occurs. If Executive’s employment is terminated before the occurrence of a Change in Control, this Agreement shall immediately terminate, except that terms of this Agreement, which must survive the termination this Agreement in order to be effectuated (including the provisions of Sections 6, 7 and 8) will survive.

RELIANT ENERGY, INC.
By:
	Mark M. Jacobs
	President and Chief Executive Officer

Date:                                         

RELIANT ENERGY CORPORATE SERVICES, LLC
By:
	Mark M. Jacobs
	President and Chief Executive Officer

Date:                                              

EXECUTIVE

Date:                                         

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Exhibit A

Definitions

The following terms have the meanings set forth below.

“Affiliate” means an Affiliate within the meaning of Rule 12b-2 promulgated under Section 12 of the Exchange Act.

“AICP” means the Reliant Energy, Inc. Annual Incentive Compensation Plan (or any successor plan).

“Board” means the Board of Directors of the Company.

“Cause” means Executive’s (a) gross negligence in the performance of Executive’s duties, (b) intentional and continued failure to perform Executive’s duties, (c) intentional engagement in conduct that materially injures the Company, the Employer, or its Affiliates (monetarily or otherwise) or (d) being charged with, indicted for or convicted of a felony. For purposes of the definition of Cause, an act or failure to act by Executive is “intentional” only if done or omitted to be done by Executive in bad faith and without reasonable belief that Executive’s action or omission was in the best interest of the Company and its Affiliates, and no act or failure to act by Executive is “intentional” if it was due primarily to an error in judgment or negligence.

A “Change in Control” will be deemed to have occurred upon the occurrence of any of the following:

(a)	30% Ownership Change: Any Person, other than an ERISA-regulated pension plan established by the Company, the Employer, or an Affiliate, makes an acquisition of Outstanding Voting Stock and is, immediately thereafter, the beneficial owner of 30% or more of the then Outstanding Voting Stock, unless such acquisition is made directly from the Company in a transaction approved by a majority of the Incumbent Directors; or any group is formed that is the beneficial owner of 30% or more of the Outstanding Voting Stock; or
(b)	Board Majority Change: Individuals who are Incumbent Directors cease for any reason to constitute a majority of the members of the Board; or
(c)	Major Mergers and Acquisitions: Consummation of a Business Combination unless, immediately following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Voting Stock immediately before such Business Combination beneficially own, directly or indirectly, more than 70% of the then outstanding shares of voting stock of the parent corporation resulting from such Business Combination in substantially the same relative proportions as their ownership, immediately before such

8

Business Combination, of the Outstanding Voting Stock, (ii) if the Business Combination involves the issuance or payment by the Company of consideration to another entity or its shareholders, the total fair market value of such consideration plus the principal amount of the consolidated long-term debt of the entity or business being acquired (in each case, determined as of the date of consummation of such Business Combination by a majority of the Incumbent Directors) does not exceed 50% of the sum of the fair market value of the Outstanding Voting Stock plus the principal amount of the Company’s consolidated long-term debt (in each case, determined immediately before such consummation by a majority of the Incumbent Directors), (iii) no Person (other than any corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of voting stock of the parent corporation resulting from such Business Combination and (iv) a majority of the members of the board of directors of the parent corporation resulting from such Business Combination were Incumbent Directors of the Company immediately before consummation of such Business Combination; or

(d) Major Asset Dispositions: Consummation of a Major Asset Disposition unless, immediately following such Major Asset Disposition, (i) individuals and entities that were beneficial owners of the Outstanding Voting Stock immediately before such Major Asset Disposition beneficially own, directly or indirectly, more than 70% of the then outstanding shares of voting stock of the Company (if it continues to exist) and of the entity that acquires the largest portion of such assets (or the entity, if any, that owns a majority of the outstanding voting stock of such acquiring entity) and (ii) a majority of the members of the Board (if it continues to exist) and of the entity that acquires the largest portion of such assets (or the entity, if any, that owns a majority of the outstanding voting stock of such acquiring entity) were Incumbent Directors of the Company immediately before consummation of such Major Asset Disposition.

     For purposes of the definition of a “Change in Control”,

(1)	“Person” means an individual, entity or group;
(2)	“group” is used as it is defined for purposes of Section 13(d)(3) of the Exchange Act;
(3)	“beneficial owner” is used as it is defined for purposes of Rule 13d-3 under the Exchange Act;
(4)	“Outstanding Voting Stock” means outstanding voting securities of the Company entitled to vote generally in the election of directors; and any specified percentage or portion of the

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Outstanding Voting Stock (or of other voting stock) is determined based on the combined voting power of such securities;

(5)	“Incumbent Director” means a director of the Company (x) who was a director of the Company on the effective date of this Agreement or (y) who becomes a director after such date and whose election, or nomination for election by the Company’s shareholders, was approved by a vote of a majority of the Incumbent Directors at the time of such election or nomination, except that any such director will not be deemed an Incumbent Director if his or her initial assumption of office occurs as a result of an actual or threatened election contest or other actual or threatened solicitation of proxies by or on behalf of a Person other than the Board;
(6)	“election contest” is used as it is defined for purposes of Rule 14a-11 under the Exchange Act;
(7)	“Business Combination” means

(x)	a merger or consolidation involving the Company or its stock or
(y)	an acquisition by the Company, directly or through one or more subsidiaries, of another entity or its stock or assets;

(8)	“parent corporation resulting from a Business Combination” means the Company if its stock is not acquired or converted in the Business Combination and otherwise means the entity which as a result of such Business Combination owns the Company or all or substantially all the Company’s assets either directly or through one or more subsidiaries; and
(9)	“Major Asset Disposition” means the sale or other disposition in one transaction or a series of related transactions of 70% or more of the assets of the Company and its subsidiaries on a consolidated basis; and any specified percentage or portion of the assets of the Company will be based on fair market value, as determined by a majority of the Incumbent Directors.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company” means Reliant Energy, Inc., and, except for purposes of determining whether a Change in Control has occurred, any successor thereto.

“Confidential Information” means any and all information, data and knowledge that has been created, discovered, developed or otherwise become known to the Company or any of its

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Affiliates or in which property rights have been assigned or otherwise conveyed to the Company or any of its Affiliates, which information, data or knowledge has commercial value in the business in which the Company or any of its Affiliates or ventures is engaged, except such information, data or knowledge as is or becomes known to the public without violation of the terms of this Agreement. By way of illustration, but not limitation, Confidential Information includes business trade secrets, secrets concerning the Company’s or any of its Affiliate’s plans and strategies, nonpublic information concerning material market opportunities, technical trade secrets, processes, formulas, know-how, improvements, discoveries, developments, designs, inventions, techniques, marketing plans, manuals, records of research, reports, memoranda, computer software, strategies, forecasts, new products, unpublished financial information, projections, licenses, prices, costs, and employee, customer and supplier lists.

“Covered Termination” means a termination of Executive’s employment (such that Executive ceases to be employed by the Employer, the Company or an Affiliate) following a Change in Control during the term of this Agreement as follows:

(a) an involuntary termination that does not result from any of the following:

(1)	death;
(2)	disability entitling Executive to benefits under the Company’s or the Employer’s long-term disability plan; or
(3)	termination for Cause;

(b)	a termination by the Executive for Good Reason; or
(c)	a termination initiated by the Employer, the Company or an Affiliate and mutually agreed upon by Executive and the Employer.

“Employer” means Reliant Energy Corporate Services, LLC, and any successor thereto.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Good Reason” means any one or more of the following which occurs following a Change in Control:

(a)	a significant reduction in the duties or responsibilities of Executive from those applicable immediately before the date on which a Change in Control occurs;
(b)	a reduction in Executive’s annual base salary as in effect on the effective date of this Agreement or as the same may be increased from time to time;
(c)	the failure by the Company or the Employer to continue in effect any compensation plan in which Executive participates immediately before the

11

Change in Control which is material to Executive’s total compensation, unless a comparable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company or the Employer to continue Executive’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, as existed immediately before the Change in Control, unless the action by the Company or the Employer applies to all similarly situated employees;

(d)

the failure by the Company and the Employer to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of the Company’s (or the Employer’s or their respective Affiliates’) pension, savings, life insurance, medical, health and accident, or disability plans in which Executive was participating immediately before the Change in Control, the taking of any other action by the Company or the Employer which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by Executive at the time of the Change in Control or the failure by the Company or the Employer to provide Executive with paid vacation on the same basis as was applicable to Executive immediately before the Change in Control, unless the action by the Company or the Employer applies to all similarly situated employees; or

(e)

a change in the location of Executive’s principal place of employment with the Employer or the Company by more than 50 miles from the location where Executive was principally employed immediately before the Change in Control or the Company or the Employer requiring Executive to be based in a location other than that of the Company’s principal executive offices.

“Salary” means Executive’s base salary as in effect immediately before the termination of Executive’s employment or, if higher, the base salary in effect immediately before the first event or circumstance constituting Good Reason.

“Target Bonus Percentage” means Executive’s target incentive award opportunity under the AICP in effect immediately before the termination of Executive’s employment or, if higher, immediately before the first event or circumstance constituting Good Reason.

“Waiver and Release” means a legal document substantially in the form attached as Exhibit B.

“Welfare Benefit Coverage” shall mean medical, dental and vision benefits.

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Exhibit B

Waiver And Release

     In exchange for the payment to me of the severance benefits described in Section 2 of the Change in Control Agreement between Reliant Energy, Inc. (the “Company”), Reliant Energy Corporate Services, LLC (the “Employer”) and me effective as of _________, (the “Agreement”) and of other remuneration and consideration provided for in the Agreement (collectively, the “Benefits”), which is in addition to any remuneration or benefits to which I am already entitled, I agree not to sue and to release and forever discharge the Company, the Employer and all of their respective parents, subsidiaries, affiliates and unincorporated divisions, and its or their respective officers, directors, agents, servants, employees, successors, assigns, insurers, employee benefit plans and fiduciaries, and agents of any of the foregoing (collectively, the “Corporate Group”) from any and all damages, losses, causes of action, expenses, demands, liabilities, and claims on behalf of myself, my heirs, executors, administrators, and assigns with respect to all matters relating to or arising out of my employment with or separation from the Company, under any employee benefit plan or claims for indemnity arising as a result of my being an officer or fiduciary of the Corporate Group. The release does not apply to claims or causes of action accruing after the date hereof.

     I acknowledge that signing this Waiver and Release is an important legal act and that I have been advised in writing to consult an attorney prior to execution. I also understand that, in order to be eligible for the Benefits, I must sign and return this Waiver and Release to the Company’s General Counsel. I acknowledge that I have been given at least 21 days to consider whether to execute this Waiver and Release.

     In exchange for the payment to me of the Benefits, which is in addition to any remuneration or benefits to which I am already entitled, (1) I agree not to sue in any local, state or federal court regarding or relating in any way to my employment with or separation from the Company, the Employer or any member of the Corporate Group, and (2) I knowingly and voluntarily waive all claims and release the Corporate Group from any and all claims, demands, actions, liabilities, and damages, whether known or unknown, arising out of or relating in any way to my employment with or separation from the Company, the Employer or any member of the Corporate Group, except to the extent that my rights are vested under the terms of employee benefit plans sponsored by the Corporate Group, rights described in the Agreement, claims for indemnity from the Corporate Group arising as a result of being an officer or fiduciary of the Corporate Group, and except with respect to such rights or claims as may arise after the date this Waiver and Release is executed. Except for the matters identified above that are not the subject of this Waiver and Release, this Waiver and Release includes, but is not limited to, claims and causes of action under: Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended, including the Older Workers Benefit Protection Act of 1990; the Civil Rights Act of 1866, as amended; the Civil Rights Act of 1991; the Americans with Disabilities Act of 1990; the Energy Reorganization Act, as amended, 42 U.S.C. § 5851; the Workers Adjustment and Retraining Notification Act of 1988; the Pregnancy

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Discrimination Act of 1978; the Employee Retirement Income Security Act of 1974, as amended; the Family and Medical Leave Act of 1993; the Fair Labor Standards Act; the Occupational Safety and Health Act; the Texas Labor Code §21.001 et. seq.; the Texas Labor Code; the Sarbanes-Oxley Act of 2002; claims in connection with workers’ compensation or “whistle blower” statutes; and claims for breach of contract (whether written or oral, expressed or implied), tort, personal injury, defamation, negligence or wrongful termination; and any other claims under the statutory, regulatory, administrative, constitutional or common law of any nation, state, locality or any other jurisdiction.

     Further, I expressly represent that no promise or agreement which is not expressed in this Waiver and Release has been made to me in executing this Waiver and Release, and that I am relying on my own judgment in executing this Waiver and Release, and that I am not relying on any statement or representation of any member of the Corporate Group or any of their agents. I agree that this Waiver and Release is valid, fair, adequate and reasonable, is with my full knowledge and consent, was not procured through fraud, duress or mistake and has not had the effect of misleading, misinforming or failing to inform me. I acknowledge and agree that the Company or the Employer, as applicable, will withhold any taxes required by federal, state or local law from the Benefits otherwise payable to me.

     I understand that for a period of seven calendar days following the Company’s receipt of this Waiver and Release executed by me, I may revoke my acceptance of the offer of the Benefits by delivering a written statement to the Company’s General Counsel, by hand or by registered-mail, in which case the Waiver and Release will not become effective. In the event I revoke my acceptance of this offer, the Company and the Employer will have no obligation to provide me the Benefits. I understand that failure to revoke my acceptance of the offer within seven days after the date I sign this Waiver and Release will result in this Waiver and Release being permanent and irrevocable.

     I agree that the terms of this Waiver and Release are CONFIDENTIAL and that any disclosure to anyone for any purpose whatsoever except as required by law by me or my agents, representatives, heirs, spouse, employees or spokespersons will be a breach of this Waiver and Release.

     I agree that this Waiver and Release is valid. I agree that this Waiver and Release is fair, adequate and reasonable. I agree that my consent to this Waiver and Release was with my full knowledge and was not procured through fraud, duress or mistake.

     I acknowledge that payment of the Benefits is not an admission by any member of the Corporate Group that they engaged in any wrongful or unlawful act or that any member of the Corporate Group violated any law or regulation. I understand that nothing in this Waiver and Release is intended to prohibit, restrict or otherwise discourage me from engaging in any activity related to matters of public or employee health or safety. Similarly, nothing herein is intended to prohibit, restrict or otherwise discourage me or any other individual from making reports of unsafe, wrongful or illegal conduct to any agency or branch of the local, state or federal government, including law enforcement authorities, public utility commissions, energy regulatory commissions or any other lawful authority. I agree that if called upon to serve as a

14

witness or consultant in or with respect to any actual or potential litigation or administrative proceeding, I will truthfully cooperate with the Company and the Employer to the full extent permitted by law.

     I understand and agree that in the event of any breach or threatened breach of the provisions of Sections 6, 7 or 8 of the Agreement by me, the Company or the Employer, in their discretion, may initiate appropriate action as provided in those Sections and may recover all lawful damages which it or they may prove by a preponderance of the evidence in accordance with the law specified in those Sections.

     I acknowledge that this Waiver and Release sets forth the entire understanding and agreement between me, the Company and the Employer concerning the subject matter of this Waiver and Release and supersedes any prior or contemporaneous oral and/or written agreements or representations, if any, between me, the Company, the Employer or any other member of the Corporate Group. The invalidity or enforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provision.

Name 

Social Security Number 

Signature Date 

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EX-10.60

     Exhibit 10.60

FORM OF
CHANGE IN CONTROL AGREEMENT
FOR PERSONS OTHER THAN THE CEO, CFO AND COO

          This Change in Control Agreement (“Agreement”) is by and between Reliant Energy, Inc. (the “Company”), Reliant Energy Corporate Services, LLC (the “Employer”) and                      (“Executive”).

          The Company and the Employer consider it essential to the interests of the Company’s stockholders to secure the continued employment of key management personnel. The Board of Directors of the Company recognizes that the possibility of a Change in Control (as defined below) exists and that the uncertainty this raises may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. In order to encourage the continued attention and dedication of key management personnel, this Agreement is being entered into by the Company, the Employer and Executive.

          The Company, the Employer and Executive agree as follows:

1.

Definitions: Capitalizedterms are defined in Exhibit A.

2.

Severance Benefits: If Executive (a) experiences a Covered Termination, (b) executes and returns to the Company a Waiver and Release within the time period prescribed in the Waiver and Release following the Covered Termination, and (c) does not revoke such Waiver and Release within the time period prescribed in the Waiver and Release, then Executive will be entitled to receive from the Employer the following severance benefits:

(a)	Severance Payment Based on Salary. An amount equal to the sum of 2 times Salary plus 2 times the Executive’s target award under the AICP for the year in which the Covered Termination occurs.
(b)	Severance Payment Based on Bonus.

(1)

Current Performance Year. An amount equal to the product of (A) the Salary and (B) the Target Bonus Percentage, with the product of (A) and (B) prorated based on the number of days Executive was employed during the bonus year in which Executive’s employment terminated.

(2)

Prior Performance Year. An Executive whose termination date occurs before the date on which awards under the AICP are paid out for the prior calendar year, or the date on which the Company announces that awards under the AICP will not be paid, will be entitled to an amount equal to the product of (A) the Salary and (B) the Target Bonus Percentage (or, if greater, the actual amount of the bonus determined under the AICP for such prior calendar

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year). Any prepayments of AICP awards made during the prior calendar year will be deducted from the amount calculated under the preceding sentence of Section 2(b)(2).

The severance benefits provided for in Sections 2(a) and 2(b) above will be paid in one lump sum payment as soon as practicable after the expiration of the Waiver and Release revocation period (subject to any delay required to comply with the requirements of Section 409A of the Code).
(c)	Welfare Benefit Coverage.

(1)	Active Coverage. The Employer will provide, or will cause to be provided, continued Welfare Benefit Coverage (as in effect from time to time for similarly situated active employees) for Executive and Executive’s eligible dependents at the active employee rate for a period of 2 years following the date of Executive’s Covered Termination.
(2)	Post Retirement Coverage.
	If Executive would be entitled to post-retirement medical coverage within 2 years following termination of employment, if Executive had remained employed, the Company or the Employer will provide the coverage as follows:

(A)	the coverage provided will be the coverage in effect immediately before the Covered Termination; and
(B)	coverage will begin on the later of (i) the date on which the post-retirement coverage would have become available or (ii) the date on which the benefits under Section 2(c)(1) end.

(3) Reduction for Other Coverage. Benefits otherwise receivable by Executive pursuant to this Section 2(c) will be reduced to the extent Executive becomes eligible to receive benefits pursuant to a government-sponsored health insurance or health care program.

(d)	Outplacement. The Employer will provide or cause to be provided outplacement services for a period of 12 months in connection with Executive’s efforts to obtain new employment. Executive must notify the Employer or the outplacement firm designated by the Employer, in writing, within 180 days of termination of employment if the Executive wishes to utilize this outplacement benefit.
(e)	Financial Planning: The Employer will provide, or cause to be provided, continued access, for the remainder of the calendar year in which the

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Covered Termination occurs or for 60 days (if greater), to the financial planning services available to executive employees at the time of the Covered Termination.

3.	Change in Control Equity-Based Benefits: Immediately upon any Change in Control, Executive will be entitled to receive benefits with respect to any equity-based compensation in accordance with the applicable plans and agreements.
4.	Special Internal Revenue Code Requirements: It is the intent of the Company that the provisions of this Agreement comply with Section 409A of the Code and related regulations and Department of the Treasury pronouncements. Accordingly, notwithstanding any provision in this Agreement to the contrary, this Agreement will be interpreted, applied and to the minimum extent necessary, unilaterally amended by the Company in its sole discretion, without the consent of Executive, as the Company deems appropriate for the Agreement to satisfy the requirements of Section 409A.
5.	Certain Additional Payments: Whether or not Executive becomes entitled to the payments or benefits pursuant to Section 2 of this Agreement, if any of the payments or benefits received or to be received by Executive (including any payment or benefit received or to be received in connection with a Change in Control or Executive’s termination of employment, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement) (all such payments and benefits, excluding the Gross-Up Payment described below, being hereinafter referred to as the “Total Payments”) will be subject to the tax under Section 4999 of the Code (the “Excise Tax”), the Company will pay to the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, and after taking into account the phase out of itemized deductions and personal exemptions attributable to the Gross-Up Payment, is equal to the Total Payments. In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the “Safe Harbor”), then the preceding provisions of this Section will not apply and any noncash payments or benefits will first be reduced ( if necessary, to zero), and any cash payments will thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash payments reduced (or eliminated) before any reduction of the noncash payments or benefits.
	For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments will be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments” within the meaning of

3

	Section 280G(b)(l) of the Code will be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the base amount allocable to such reasonable compensation (within the meaning of Section 280G of the Code), or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit will be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, (1) the Executive will be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the date of the Covered Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (2) Executive will be deemed to be subject to the loss of itemized deductions and personal exemptions to the maximum extent provided by the Code for each dollar of incremental income.
	In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Executive must repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Executive’s taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company will make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Executive and the Company must each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.
6.	Confidentiality: Executive agrees that he will not, while employed by the Company or the Employer or an Affiliate and thereafter, disclose or make available to any other person or entity, or use for his own personal gain, any Confidential Information, except for such disclosures as are required in the performance of his duties hereunder or as may otherwise be required by law or legal process (in which case Executive must notify the Company of such legal or judicial proceeding as soon as practicable, and permit the Company to seek to protect its interests and information).

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7.	Return of Property: Executive agrees that at the time of leaving his or her employ, he will deliver to the Employer (and will not keep in his possession, recreate or deliver to anyone else) all Confidential Information as well as all other devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, customer or client lists or information, or any other documents or property (including all reproductions of the aforementioned items) belonging to the Company or any of its Affiliates, regardless of whether such items were prepared by Executive.
8.	Non-Solicitation: Executive agrees that while employed by the Company or the Employer or an Affiliate and for one year following a Covered Termination, he will not, without the prior written consent of the Company, directly or indirectly, hire or induce, entice or solicit (or attempt to induce entice or solicit) any employee of the Company or any of its Affiliates to leave the employment of the Company or any of its Affiliates.
9.	Notices: For purposes of this Agreement, notices and all other communications must be in writing and will be deemed to have been given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to Company or the Employer:	Reliant Energy, Inc.
	1000 Main Street
	Houston, Texas 77002
	ATTENTION: General Counsel
If to Executive:

or to such other address as either party may furnish to the other in writing in accordance with this Section.

10.	Applicable Law: The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Texas, but without giving effect to the principles of conflict of laws of such State.
11.	Severability: If any provision of this Agreement is determined to be invalid or unenforceable, then the invalidity or unenforceability of that provision will not affect the validity or enforceability of any other provision of this Agreement and all other provisions will remain in full force and effect.
12.	Withholding of Taxes: The Company or the Employer, as applicable, may withhold from any payments under this Agreement all federal, state, local or other taxes as may be required pursuant to any law or governmental regulation or ruling.

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13.	No Assignment; Successors: Executive’s right to receive payments or benefits under this Agreement will not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, whether voluntary, involuntary, by operation of law or otherwise, other than a transfer by will or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this Section 13 the Company or Employer will have no liability to pay any amount so attempted to be assigned or transferred. This Agreement inures to the benefit of and is enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
	This Agreement is binding upon and inures to the benefit of the Company and the Employer and their respective successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate).
14.	Payment Obligations Absolute: Except for the requirement of Executive to execute and return to the Company the Waiver and Release in accordance with Section 2, the Company’s and the Employer’s obligation to pay Executive the amounts and to make the arrangements provided herein are absolute and unconditional and may not be affected by any circumstances, including, without limitation, any set-off, counter-claim, recoupment, defense or other right which the Company or the Employer (including their Affiliates) may have against Executive or anyone else. All amounts payable or arrangements to be made hereunder by the Company or the Employer (including their Affiliates) must be paid or made without notice or demand. Executive may not be obligated to sign an agreement not to compete with the Company or its Affiliates or to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and the obtaining of any other employment will not effect any reduction of the Company’s or the Employer’s obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. In the event that the Employer fails to pay any amount or provide any benefit required to be made or provided by the terms of this Agreement, the Company will be required to make such payment or provide such benefit, as the case may be, under the same terms and conditions that were applicable to the Employer.
15.	Number and Gender: Wherever appropriate herein, words used in the singular will include the plural, the plural will include the singular, and the masculine gender will include the feminine gender.
16.	Conflicts: This Agreement constitutes the entire understanding of the parties with respect to its subject matter and supercedes any other agreement or other understanding, whether oral or written, express or implied, between them concerning, related to or otherwise in connection with, the subject matter hereof.
17.	Amendment and Waiver: No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by any party hereto at any time of any breach by the other party hereto of, or

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	of any lack of compliance with, any condition or provision of this Agreement to be performed by any other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
18.	Counterparts: This Agreement may be executed in several counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument.
19.	Term: The effective date of the Agreement is December 10, 2007. Upon the occurrence of a Change in Control, the term will be automatically extended to a date which is two years from the date upon which the Change in Control occurs. If Executive’s employment is terminated before the occurrence of a Change in Control, this Agreement shall immediately terminate, except that terms of this Agreement, which must survive the termination this Agreement in order to be effectuated (including the provisions of Sections 6, 7 and 8) will survive.

RELIANT ENERGY, INC.
By:
	Mark M. Jacobs
	President and Chief Executive Officer
Date:
RELIANT ENERGY CORPORATE SERVICES, LLC
By:
	Mark M. Jacobs
	President and Chief Executive Officer
Date:
EXECUTIVE
Date:

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Exhibit A

Definitions

The following terms have the meanings set forth below.

“Affiliate” means an Affiliate within the meaning of Rule 12b-2 promulgated under Section 12 of the Exchange Act.

“AICP” means the Reliant Energy, Inc. Annual Incentive Compensation Plan (or any successor plan).

“Board” means the Board of Directors of the Company.

“Cause” means Executive’s (a) gross negligence in the performance of Executive’s duties, (b) intentional and continued failure to perform Executive’s duties, (c) intentional engagement in conduct that materially injures the Company, the Employer, or its Affiliates (monetarily or otherwise) or (d) being charged with, indicted for or convicted of a felony. For purposes of the definition of Cause, an act or failure to act by Executive is “intentional” only if done or omitted to be done by Executive in bad faith and without reasonable belief that Executive’s action or omission was in the best interest of the Company and its Affiliates, and no act or failure to act by Executive is “intentional” if it was due primarily to an error in judgment or negligence.

A “Change in Control” will be deemed to have occurred upon the occurrence of any of the following:

(a)	30% Ownership Change: Any Person, other than an ERISA-regulated pension plan established by the Company, the Employer, or an Affiliate, makes an acquisition of Outstanding Voting Stock and is, immediately thereafter, the beneficial owner of 30% or more of the then Outstanding Voting Stock, unless such acquisition is made directly from the Company in a transaction approved by a majority of the Incumbent Directors; or any group is formed that is the beneficial owner of 30% or more of the Outstanding Voting Stock; or
(b)	Board Majority Change: Individuals who are Incumbent Directors cease for any reason to constitute a majority of the members of the Board; or
(c)	Major Mergers and Acquisitions: Consummation of a Business Combination unless, immediately following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Voting Stock immediately before such Business Combination beneficially own, directly or indirectly, more than 70% of the then outstanding shares of voting stock of the parent corporation resulting from such Business Combination in substantially the same relative proportions as their ownership, immediately before such

8

Business Combination, of the Outstanding Voting Stock, (ii) if the Business Combination involves the issuance or payment by the Company of consideration to another entity or its shareholders, the total fair market value of such consideration plus the principal amount of the consolidated long-term debt of the entity or business being acquired (in each case, determined as of the date of consummation of such Business Combination by a majority of the Incumbent Directors) does not exceed 50% of the sum of the fair market value of the Outstanding Voting Stock plus the principal amount of the Company’s consolidated long-term debt (in each case, determined immediately before such consummation by a majority of the Incumbent Directors), (iii) no Person (other than any corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of voting stock of the parent corporation resulting from such Business Combination and (iv) a majority of the members of the board of directors of the parent corporation resulting from such Business Combination were Incumbent Directors of the Company immediately before consummation of such Business Combination; or

(d) Major Asset Dispositions: Consummation of a Major Asset Disposition unless, immediately following such Major Asset Disposition, (i) individuals and entities that were beneficial owners of the Outstanding Voting Stock immediately before such Major Asset Disposition beneficially own, directly or indirectly, more than 70% of the then outstanding shares of voting stock of the Company (if it continues to exist) and of the entity that acquires the largest portion of such assets (or the entity, if any, that owns a majority of the outstanding voting stock of such acquiring entity) and (ii) a majority of the members of the Board (if it continues to exist) and of the entity that acquires the largest portion of such assets (or the entity, if any, that owns a majority of the outstanding voting stock of such acquiring entity) were Incumbent Directors of the Company immediately before consummation of such Major Asset Disposition.

For purposes of the definition of a “Change in Control”,

(1)	“Person” means an individual, entity or group;
(2)	“group” is used as it is defined for purposes of Section 13(d)(3) of the Exchange Act;
(3)	“beneficial owner” is used as it is defined for purposes of Rule 13d-3 under the Exchange Act;
(4)	“Outstanding Voting Stock” means outstanding voting securities of the Company entitled to vote generally in the election of directors; and any specified percentage or portion of the

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Outstanding Voting Stock (or of other voting stock) is determined based on the combined voting power of such securities;

(5)	“Incumbent Director” means a director of the Company (x) who was a director of the Company on the effective date of this Agreement or (y) who becomes a director after such date and whose election, or nomination for election by the Company’s shareholders, was approved by a vote of a majority of the Incumbent Directors at the time of such election or nomination, except that any such director will not be deemed an Incumbent Director if his or her initial assumption of office occurs as a result of an actual or threatened election contest or other actual or threatened solicitation of proxies by or on behalf of a Person other than the Board;
(6)	“election contest” is used as it is defined for purposes of Rule 14a-11 under the Exchange Act;
(7)	“Business Combination” means

(x)	a merger or consolidation involving the Company or its stock or
(y)	an acquisition by the Company, directly or through one or more subsidiaries, of another entity or its stock or assets;

(8)	“parent corporation resulting from a Business Combination” means the Company if its stock is not acquired or converted in the Business Combination and otherwise means the entity which as a result of such Business Combination owns the Company or all or substantially all the Company’s assets either directly or through one or more subsidiaries; and
(9)	“Major Asset Disposition” means the sale or other disposition in one transaction or a series of related transactions of 70% or more of the assets of the Company and its subsidiaries on a consolidated basis; and any specified percentage or portion of the assets of the Company will be based on fair market value, as determined by a majority of the Incumbent Directors.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company” means Reliant Energy, Inc., and, except for purposes of determining whether a Change in Control has occurred, any successor thereto.

“Confidential Information” means any and all information, data and knowledge that has been created, discovered, developed or otherwise become known to the Company or any of its

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Affiliates or in which property rights have been assigned or otherwise conveyed to the Company or any of its Affiliates, which information, data or knowledge has commercial value in the business in which the Company or any of its Affiliates or ventures is engaged, except such information, data or knowledge as is or becomes known to the public without violation of the terms of this Agreement. By way of illustration, but not limitation, Confidential Information includes business trade secrets, secrets concerning the Company’s or any of its Affiliate’s plans and strategies, nonpublic information concerning material market opportunities, technical trade secrets, processes, formulas, know-how, improvements, discoveries, developments, designs, inventions, techniques, marketing plans, manuals, records of research, reports, memoranda, computer software, strategies, forecasts, new products, unpublished financial information, projections, licenses, prices, costs, and employee, customer and supplier lists.

“Covered Termination” means a termination of Executive’s employment (such that Executive ceases to be employed by the Employer, the Company or an Affiliate) following a Change in Control during the term of this Agreement as follows:

(a) an involuntary termination that does not result from any of the following:

(1)	death;
(2)	disability entitling Executive to benefits under the Company’s or the Employer’s long-term disability plan; or
(3)	termination for Cause;

(b)	a termination by the Executive for Good Reason; or
(c)	a termination initiated by the Employer, the Company or an Affiliate and mutually agreed upon by Executive and the Employer.

“Employer” means Reliant Energy Corporate Services, LLC, and any successor thereto.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Good Reason” means any one or more of the following which occurs following a Change in Control:

(a)	a significant reduction in the duties or responsibilities of Executive from those applicable immediately before the date on which a Change in Control occurs;
(b)	a reduction in Executive’s annual base salary as in effect on the effective date of this Agreement or as the same may be increased from time to time;
(c)	the failure by the Company or the Employer to continue in effect any compensation plan in which Executive participates immediately before the

11

Change in Control which is material to Executive’s total compensation, unless a comparable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company or the Employer to continue Executive’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, as existed immediately before the Change in Control, unless the action by the Company or the Employer applies to all similarly situated employees;

(d)

the failure by the Company and the Employer to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of the Company’s (or the Employer’s or their respective Affiliates’) pension, savings, life insurance, medical, health and accident, or disability plans in which Executive was participating immediately before the Change in Control, the taking of any other action by the Company or the Employer which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by Executive at the time of the Change in Control or the failure by the Company or the Employer to provide Executive with paid vacation on the same basis as was applicable to Executive immediately before the Change in Control, unless the action by the Company or the Employer applies to all similarly situated employees; or

(e)

a change in the location of Executive’s principal place of employment with the Employer or the Company by more than 50 miles from the location where Executive was principally employed immediately before the Change in Control or the Company or the Employer requiring Executive to be based in a location other than that of the Company’s principal executive offices.

“Salary” means Executive’s base salary as in effect immediately before the termination of Executive’s employment or, if higher, the base salary in effect immediately before the first event or circumstance constituting Good Reason.

“Target Bonus Percentage” means Executive’s target incentive award opportunity under the AICP in effect immediately before the termination of Executive’s employment or, if higher, immediately before the first event or circumstance constituting Good Reason.

“Waiver and Release” means a legal document substantially in the form attached as Exhibit B.

“Welfare Benefit Coverage” shall mean medical, dental and vision benefits.

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Exhibit B

Waiver And Release

     In exchange for the payment to me of the severance benefits described in Section 2 of the Change in Control Agreement between Reliant Energy, Inc. (the “Company”), Reliant Energy Corporate Services, LLC (the “Employer”) and me effective as of                     , (the “Agreement”) and of other remuneration and consideration provided for in the Agreement (collectively, the “Benefits”), which is in addition to any remuneration or benefits to which I am already entitled, I agree not to sue and to release and forever discharge the Company, the Employer and all of their respective parents, subsidiaries, affiliates and unincorporated divisions, and its or their respective officers, directors, agents, servants, employees, successors, assigns, insurers, employee benefit plans and fiduciaries, and agents of any of the foregoing (collectively, the “Corporate Group”) from any and all damages, losses, causes of action, expenses, demands, liabilities, and claims on behalf of myself, my heirs, executors, administrators, and assigns with respect to all matters relating to or arising out of my employment with or separation from the Company, under any employee benefit plan or claims for indemnity arising as a result of my being an officer or fiduciary of the Corporate Group. The release does not apply to claims or causes of action accruing after the date hereof.

     I acknowledge that signing this Waiver and Release is an important legal act and that I have been advised in writing to consult an attorney prior to execution. I also understand that, in order to be eligible for the Benefits, I must sign and return this Waiver and Release to the Company’s General Counsel. I acknowledge that I have been given at least 21 days to consider whether to execute this Waiver and Release.

     In exchange for the payment to me of the Benefits, which is in addition to any remuneration or benefits to which I am already entitled, (1) I agree not to sue in any local, state or federal court regarding or relating in any way to my employment with or separation from the Company, the Employer or any member of the Corporate Group, and (2) I knowingly and voluntarily waive all claims and release the Corporate Group from any and all claims, demands, actions, liabilities, and damages, whether known or unknown, arising out of or relating in any way to my employment with or separation from the Company, the Employer or any member of the Corporate Group, except to the extent that my rights are vested under the terms of employee benefit plans sponsored by the Corporate Group, rights described in the Agreement, claims for indemnity from the Corporate Group arising as a result of being an officer or fiduciary of the Corporate Group, and except with respect to such rights or claims as may arise after the date this Waiver and Release is executed. Except for the matters identified above that are not the subject of this Waiver and Release, this Waiver and Release includes, but is not limited to, claims and causes of action under: Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended, including the Older Workers Benefit Protection Act of 1990; the Civil Rights Act of 1866, as amended; the Civil Rights Act of 1991; the Americans with Disabilities Act of 1990; the Energy Reorganization Act, as amended, 42 U.S.C. § 5851; the Workers Adjustment and Retraining Notification Act of 1988; the Pregnancy

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Discrimination Act of 1978; the Employee Retirement Income Security Act of 1974, as amended; the Family and Medical Leave Act of 1993; the Fair Labor Standards Act; the Occupational Safety and Health Act; the Texas Labor Code §21.001 et. seq.; the Texas Labor Code; the Sarbanes-Oxley Act of 2002; claims in connection with workers’ compensation or “whistle blower” statutes; and claims for breach of contract (whether written or oral, expressed or implied), tort, personal injury, defamation, negligence or wrongful termination; and any other claims under the statutory, regulatory, administrative, constitutional or common law of any nation, state, locality or any other jurisdiction.

     Further, I expressly represent that no promise or agreement which is not expressed in this Waiver and Release has been made to me in executing this Waiver and Release, and that I am relying on my own judgment in executing this Waiver and Release, and that I am not relying on any statement or representation of any member of the Corporate Group or any of their agents. I agree that this Waiver and Release is valid, fair, adequate and reasonable, is with my full knowledge and consent, was not procured through fraud, duress or mistake and has not had the effect of misleading, misinforming or failing to inform me. I acknowledge and agree that the Company or the Employer, as applicable, will withhold any taxes required by federal, state or local law from the Benefits otherwise payable to me.

     I understand that for a period of seven calendar days following the Company’s receipt of this Waiver and Release executed by me, I may revoke my acceptance of the offer of the Benefits by delivering a written statement to the Company’s General Counsel, by hand or by registered-mail, in which case the Waiver and Release will not become effective. In the event I revoke my acceptance of this offer, the Company and the Employer will have no obligation to provide me the Benefits. I understand that failure to revoke my acceptance of the offer within seven days after the date I sign this Waiver and Release will result in this Waiver and Release being permanent and irrevocable.

     I agree that the terms of this Waiver and Release are CONFIDENTIAL and that any disclosure to anyone for any purpose whatsoever except as required by law by me or my agents, representatives, heirs, spouse, employees or spokespersons will be a breach of this Waiver and Release.

     I agree that this Waiver and Release is valid. I agree that this Waiver and Release is fair, adequate and reasonable. I agree that my consent to this Waiver and Release was with my full knowledge and was not procured through fraud, duress or mistake.

     I acknowledge that payment of the Benefits is not an admission by any member of the Corporate Group that they engaged in any wrongful or unlawful act or that any member of the Corporate Group violated any law or regulation. I understand that nothing in this Waiver and Release is intended to prohibit, restrict or otherwise discourage me from engaging in any activity related to matters of public or employee health or safety. Similarly, nothing herein is intended to prohibit, restrict or otherwise discourage me or any other individual from making reports of unsafe, wrongful or illegal conduct to any agency or branch of the local, state or federal government, including law enforcement authorities, public utility commissions, energy regulatory commissions or any other lawful authority. I agree that if called upon to serve as a

14

witness or consultant in or with respect to any actual or potential litigation or administrative proceeding, I will truthfully cooperate with the Company and the Employer to the full extent permitted by law.

     I understand and agree that in the event of any breach or threatened breach of the provisions of Sections 6, 7 or 8 of the Agreement by me, the Company or the Employer, in their discretion, may initiate appropriate action as provided in those Sections and may recover all lawful damages which it or they may prove by a preponderance of the evidence in accordance with the law specified in those Sections.

     I acknowledge that this Waiver and Release sets forth the entire understanding and agreement between me, the Company and the Employer concerning the subject matter of this Waiver and Release and supersedes any prior or contemporaneous oral and/or written agreements or representations, if any, between me, the Company, the Employer or any other member of the Corporate Group. The invalidity or enforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provision.

Name

Social Security Number

Signature Date

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EX-10.65

Exhibit 10.65

RELIANT ENERGY, INC.
2002 LONG-TERM INCENTIVE PLAN

QUARTERLY COMMON STOCK AND PREMIUM RESTRICTED STOCK AWARD

     Pursuant to this Award Agreement, as of October 1, 2007, Reliant Energy, Inc.(the “Company”) hereby grants to «Director» (the “Participant”), a Director of the Company, «Shares» shares of Common Stock, in lieu of fees otherwise payable to the Participant for services as a Director for the period from July 1, 2007 through September 30, 2007 plus an additional «Premium» premium restricted shares of Common Stock (“Premium Restricted Stock”). Such number of shares are subject to adjustment as provided in Section 15 of the Reliant Energy, Inc. 2002 Long-Term Incentive Plan (the “Plan”), subject to the terms, conditions and restrictions described in the Plan and in this Agreement.

1.	Relationship to the Plan. This grant of Common Stock and Premium Restricted Stock is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee and are in effect on this date. Except as defined herein, capitalized terms have the same meanings as under the Plan. If any provision of this Award Agreement conflicts with the express terms of the Plan, the terms of the Plan control and, if necessary, the applicable provisions of this Award Agreement are deemed amended so as to carry out the purpose and intent of the Plan. References to the Participant also include the heirs or other legal representatives of the Participant or the Participant’s estate.
2.	Restrictions. The Premium Restricted Stock granted under this Agreement may not be sold, assigned, transferred, pledged or otherwise encumbered until the restrictions have lapsed (“Restriction Period”) except as otherwise provided in this Section 2. Notwithstanding anything herein or in the Plan to the contrary, the shares of Premium Restricted Stock are transferable by the Participant to Immediate Family Members, Immediate Family Member Trusts, and Immediate Family Member Partnerships pursuant to Section 14 of the Plan.
3.	Vesting and Forfeiture.

(a)	The Common Stock granted herein is fully vested and transferable as of the date granted.
(b)	The Premium Restricted Stock vests as of the date of the Company’s annual meeting in «Vest_Year» (“Vesting Date”) (the end of the Participant’s current term as a Director during which the shares of Premium Restricted Stock were granted), provided the Participant does not terminate service, except as otherwise provided in this Section 3, before the Vesting Date.
(c)	If the Participant’s service as a Director is terminated due to death or Disability, Participant’s right to receive Premium Restricted Stock vests at the time of such termination to the extent not previously vested pursuant to this Section 3. For purposes of this Award Agreement, “Disability” means a physical or mental impairment of sufficient severity such that the Participant can no longer serve as a Director.

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(d) If the Participant terminates service on the Board for any reason other than death or Disability, the Participant’s right to receive Premium Restricted Stock granted during the term during which the Participant terminates service will be forfeited in its entirety upon termination.

4.	Rights as a Stockholder. Except as otherwise specifically provided in this Award Agreement and the Plan, during the Restriction Period the Participant shall have all the rights of a stockholder with respect to the Premium Restricted Stock including, without limitation, the right to vote the Premium Restricted Stock and the right to receive any dividends with respect thereto.
5.	Cash Payment Upon a Change of Control. Notwithstanding anything herein to the contrary, upon or immediately prior to the occurrence of any Change of Control of the Company, Participant’s right to receive Premium Restricted Stock shall be settled by a cash payment to Participant equal to the product of (i) the Fair Market Value per share of Common Stock on the date immediately preceding the date on which the Change of Control occurs and (ii) the total number of shares of Premium Restricted Stock granted. Such cash payment shall satisfy the rights of Participant and the obligations of the Company under this Award Agreement in full.
6.	Notices. For purposes of this Award Agreement, notices and all other communications must be in writing and will be deemed to have been given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to Company:	Reliant Energy, Inc.
	1000 Main Street
	Houston, Texas 77002
	ATTENTION: Senior Vice President and
	Corporate Secretary
If to Director:	«Director»
	c/o Corporate Secretary
	Reliant Energy, Inc.
	1000 Main Street
	Houston, Texas 77002

or to such other address as either party may furnish to the other in writing in accordance with this Section 6.

7. Successors and Assigns. This Award Agreement is binding upon and inures to the benefit of the Participant, the Company and their respective permitted successors and assigns.

Mark M. Jacobs 

President and Chief Executive Officer 

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EX-10.66

Exhibit 10.66

RELIANT ENERGY, INC.

2002 LONG-TERM INCENTIVE PLAN

RESTRICTED STOCK AWARD AGREEMENT

     Pursuant to this Award Agreement, as of May 16, 2007, Reliant Energy, Inc.(the “Company”) hereby grants to «Director» (the “Participant”), a Director of the Company, «Shares» shares of Restricted Stock. Such number of shares are subject to adjustment as provided in Section 15 of the Reliant Energy, Inc. 2002 Long-Term Incentive Plan (the “Plan”), subject to the terms, conditions and restrictions described in the Plan and in this Agreement.

1.	Relationship to the Plan. This grant of Restricted Stock is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee and are in effect on this date. Except as defined herein, capitalized terms have the same meanings as under the Plan. If any provision of this Award Agreement conflicts with the express terms of the Plan, the terms of the Plan control and, if necessary, the applicable provisions of this Award Agreement are deemed amended so as to carry out the purpose and intent of the Plan. References to the Participant also include the heirs or other legal representatives of the Participant or the Participant’s estate.
2.	Restrictions. The Restricted Stock granted under this Agreement may not be sold, assigned, transferred, pledged or otherwise encumbered until the restrictions have lapsed (“Restriction Period”) except as otherwise provided in this Section 2. Notwithstanding anything herein or in the Plan to the contrary, the shares of Restricted Stock are transferable by the Participant to Immediate Family Members, Immediate Family Member Trusts, and Immediate Family Member Partnerships pursuant to Section 14 of the Plan.
3.	Vesting and Forfeiture.

(a)	The Restricted Stock vests as of the date of the Company’s annual meeting in «Vest_Year» (“Vesting Date”) (the end of the Participant’s current term as a Director during which the shares of Restricted Stock were granted), provided the Participant does not terminate service, except as otherwise provided in this Section 3, before the Vesting Date.
(b)	If the Participant’s service as a Director is terminated due to death or Disability, the Restricted Stock vests at the time of such termination to the extent not previously vested pursuant to this Section 3. For purposes of this Award Agreement, “Disability” means a physical or mental impairment of sufficient severity such that the Participant can no longer serve as a Director.
(c)	If the Participant terminates service on the Board for any reason other than death or Disability, the Restricted Stock granted during the term during which the Participant terminates service will be forfeited in its entirety upon termination.

4. Rights as a Stockholder. Except as otherwise specifically provided in this Award Agreement and the Plan, during the Restriction Period the Participant shall have all the rights of a stockholder with respect to the Restricted Stock including, without limitation, the right

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to vote the Restricted Stock and the right to receive any dividends with respect thereto.

5.	Change in Control. Notwithstanding anything herein to the contrary, upon any Change of Control the Restricted Stock will vest to the extent not previously vested.
6.	Notices. For purposes of this Award Agreement, notices and all other communications must be in writing and will be deemed to have been given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to Company:	Reliant Energy, Inc. 1000 Main Street Houston, Texas 77002 ATTENTION: Senior Vice President and Corporate Secretary
If to Director:	«Director» c/o Corporate Secretary Reliant Energy, Inc. 1000 Main Street Houston, Texas 77002

	or to such other address as either party may furnish to the other in writing in accordance with this Section 6.
7.	Successors and Assigns. This Award Agreement is binding upon and inures to the benefit of the Participant, the Company and their respective permitted successors and assigns.

——————————————————
Mark M. Jacobs
President and Chief Executive Officer
 

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EX-10.77

Exhibit 10.77

RELIANT ENERGY, INC.
2002 LONG TERM INCENTIVE PLAN
LONG TERM INCENTIVE AWARD

AWARD AGREEMENT

     Pursuant to this award agreement (“Agreement”), as of January 2, 2008, Reliant Energy, Inc.(the “Company”) hereby grants to Albert H. Myres (the “Participant”), 6,700 Restricted Stock Units and rights (the “Nonqualified Stock Options” or “Options”) to purchase from the Company 16,800 shares of Common Stock of the Company at $26.285 per share. The number of units and shares is subject to adjustment as provided in Section 15 of the Reliant Energy, Inc. 2002 Long-Term Incentive Plan (the “Plan”), subject to the terms, conditions and restrictions described in the Plan and in this Agreement.

1. Relationship to the Plan; Definitions.

(a)	This grant of Restricted Stock Units and Options is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee and are in effect on this date. If any provision of this Agreement conflicts with the express terms of the Plan, the terms of the Plan control and, if necessary, the applicable provisions of this Agreement are deemed amended so as to carry out the purpose and intent of the Plan. References to the Participant also include the heirs or other legal representatives of the Participant or the Participant’s estate.
(b)	Except as defined herein, capitalized terms have the same meanings as under the Plan.
	Disability means a physical or mental impairment of sufficient severity such that the Participant is receiving benefits under the Company’s long-term disability plan.
	Employment means employment with the Company or any of its subsidiaries.
	Options mean Nonqualified Stock Options.
	Option Period means the period beginning on the date of this Agreement and ending on the date the Options expire pursuant to Section 4.
	Option Shares means shares of Common Stock which the Participant may have the right to purchase under this Agreement.
	Restricted Stock Unit means a Stock Award with restrictions and subject to a vesting condition as described in this Agreement.

Retirement means termination of Employment on or after attainment of age 55 with at least five years of service with the Company.

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2.

Account. The Awards granted pursuant to this Agreement will be implemented by a credit to a bookkeeping account maintained by the Company evidencing the accrual in favor of the Participant of the unfunded and unsecured right to receive the Restricted Stock Units and the Options granted. Except as provided in Section 9, the Awards credited to the bookkeeping account may not be sold, assigned, transferred, pledged or otherwise encumbered until the Participant has been registered as the holder of shares of Common Stock representing the Restricted Stock Units or exercised Options.

3.

Vesting. Unless earlier forfeited as described below, the Awards will vest as follows:

     (i) The Options will vest and become exercisable in three cumulative annual installments as follows:

     5,600 Option Shares exercisable on January 2, 2009;

     an additional 5,600 Option Shares exercisable on January 2, 2010;

     and the remaining 5,600 Option Shares exercisable on January 2, 2011.

The Participant must be continuously employed by the Company through the date of exercisability of each installment for the Options to become exercisable with respect to additional shares of Common Stock on such date.

     (ii) The Restricted Stock Units will vest on January 2, 2011.

The Participant must be continuously employed by the Company through the date of vesting for the Restricted Stock Units to vest.

4. Expiration of Option Period. The Option Period will expire on January 1, 2018 except as follows:

     (i) Upon termination of Employment of the Participant due to death or Disability, (a) the unvested portion of the Options will expire immediately, and (b) the vested Options, if any, will expire upon the earlier of (I) one year following the date of termination of Employment or (II) the expiration of the Option Period.

     (ii) Upon termination of Employment of the Participant because of Retirement, (a) the unvested portion of the Options will expire immediately and (b) the vested Options, if any, will expire upon the earlier of (I) three years following the date of termination of Employment or (II) the expiration of the Option Period.

     (iii) Upon termination of Employment of the Participant by the Company or any of its subsidiaries for any reason or due to voluntary resignation by the Participant, (a) the unvested portion of the Options will expire immediately and (b) the vested Options, if any, will expire upon the earlier of (I) one year following the date of termination of Employment or (II) the expiration of the Option Period.

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     (iv) Notwithstanding anything herein to the contrary, in the event the Participant dies following termination of Employment but prior to the expiration of the Option Period pursuant to this Section 4, the portion of the Option exercisable upon the Participant’s death will expire one year following the date of the Participant’s death or, if earlier, upon the expiration of the Option Period.

5.	Payment of Restricted Stock Units. Upon the vesting of the Participant’s right to receive Restricted Stock Units, a number of shares of Common Stock equal to the number of vested Restricted Stock Units will be registered in the Participant’s name and issued or distributed to him as soon as practicable after the vesting date, but in no event later than March 15th of the year immediately following the year during which the vesting date occurs. The Company will have the right to withhold applicable taxes from any such payment or from other compensation payable to the Participant at the time of such vesting and delivery pursuant to Section 12 of the Plan.
6.	Exercise of Options. Subject to the limitations set forth herein and in the Plan, the Options may be exercised pursuant to the procedures established by the Committee. Unless otherwise permitted by the Committee, upon exercise the Participant must provide to the Company or its designated representative, cash, check or money order payable to the Company equal to the full amount of the purchase price for any shares of Common Stock being acquired or, at the election of the Participant, Common Stock held by the Participant for at least six months equal in value to the full amount of the purchase price (or any combination of cash, check, money order or such Common Stock). For purposes of determining the amount, if any, of the purchase price satisfied by payment in Common Stock, the Common Stock will be valued at its Fair Market Value on the date of exercise. Any Common Stock delivered in satisfaction of all or a portion of the purchase price must be appropriately endorsed for transfer and assignment to the Company. The Company will have the right to withhold applicable taxes from compensation otherwise payable to the Participant at the time of exercise pursuant to Section 12 of the Plan.
7.	Cash Payment Upon a Change of Control. Notwithstanding anything herein to the contrary, upon or immediately prior to the occurrence of any Change of Control of the Company prior to one or more of the vesting dates provided for under this Agreement, (i) the Participant’s right to receive Restricted Stock Units will vest and will be settled by a cash payment to the Participant equal to the product of (A) the Fair Market Value per share of Common Stock on the date immediately preceding the date on which the Change of Control occurs and (B) the total number of Restricted Stock Units granted, and (ii) the Participant’s right to receive the Options (unless previously expired pursuant to Section 4) shall be settled by a cash payment to the Participant equal to the product of (A) the difference between (1) the Fair Market Value per share of Common Stock on the date immediately preceding the date on which the Change in Control occurs and (2) the exercise price of the Options and (B) the total number of unexercised Option Shares, regardless of whether such Option Shares have become exercisable under Section 3, with such payments under clauses (i) and (ii) above in no event made later than March 15th of the year immediately following the year during which the date immediately prior to the date of the Change of Control occurs. Such cash payment will satisfy the rights of the Participant and the obligations of the Company under this Agreement in full.

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8.	Notices. For purposes of this Agreement, notices and all other communications must be in writing and will be deemed to have been given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at 1000 Main St., Houston, TX 77002, and to the Participant at the address on record for the Participant in the Company’s human resources department or to such other address as either party may furnish to the other in writing in accordance with this Section 8.
9.	Successors and Assigns. This Agreement is binding upon and inures to the benefit of the Participant, the Company and their respective permitted successors and assigns. Notwithstanding anything herein to the contrary, the Restricted Stock Units and/or Options are transferable by the Participant to Immediate Family Members, Immediate Family Member Trusts and Immediate Family Member Partnerships pursuant to Section 14 of the Plan.
10.	No Employment Guaranteed. Nothing in this Agreement gives the Participant any rights to (or imposes any obligations for) continued Employment by the Company or any Subsidiary thereof or successor thereto, nor does it give those entities any rights (or impose any obligations) with respect to continued performance of duties by the Participant.
11.	Shareholder Rights. The Participant shall have no rights of a shareholder with respect to the Restricted Stock Units or the Options unless and until the Participant is registered as the holder of shares of Common Stock representing the Restricted Stock Units and/or the Option Shares on the records of the Company.
12.	Section 409A of the Code. It is intended that this Agreement and any Awards under this Agreement satisfy the short-term deferral exclusion from Section 409A of the Code.

RELIANT ENERGY, INC.
By:
	Karen D. Taylor
	Senior Vice President-Human Resources

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EX-10.78

Exhibit 10.78

RELIANT ENERGY, INC.
2002 LONG TERM INCENTIVE PLAN
LONG TERM INCENTIVE AWARD

AWARD AGREEMENT

     Pursuant to this award agreement (“Agreement”), as of January 2, 2008, Reliant Energy, Inc.(the “Company”) hereby grants to Charles Griffey (the “Participant”), 3,000 Restricted Stock Units. The number of units is subject to adjustment as provided in Section 15 of the Reliant Energy, Inc. 2002 Long-Term Incentive Plan (the “Plan”), subject to the terms, conditions and restrictions described in the Plan and in this Agreement.

1. Relationship to the Plan; Definitions.

(a)	This grant of Restricted Stock Units is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee and are in effect on this date. If any provision of this Agreement conflicts with the express terms of the Plan, the terms of the Plan control and, if necessary, the applicable provisions of this Agreement are deemed amended so as to carry out the purpose and intent of the Plan. References to the Participant also include the heirs or other legal representatives of the Participant or the Participant’s estate.
(b)	Except as defined herein, capitalized terms have the same meanings as under the Plan.
	Employment means employment with the Company or any of its subsidiaries.
	Restricted Stock Unit means a Stock Award with restrictions and subject to a vesting condition as described in this Agreement.

2.

Account. The Awards granted pursuant to this Agreement will be implemented by a credit to a bookkeeping account maintained by the Company evidencing the accrual in favor of the Participant of the unfunded and unsecured right to receive the Restricted Stock Units. Except as provided in Section 7, the Awards credited to the bookkeeping account may not be sold, assigned, transferred, pledged or otherwise encumbered until the Participant has been registered as the holder of shares of Common Stock representing the Restricted Stock Units.

3.

Vesting. Unless earlier forfeited as described below, the Restricted Stock Units will vest on January 2, 2011. The Participant must be continuously employed by the Company through the date of vesting for the Restricted Stock Units to vest.

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4.	Payment of Restricted Stock Units. Upon the vesting of the Participant’s right to receive Restricted Stock Units, a number of shares of Common Stock equal to the number of vested Restricted Stock Units will be registered in the Participant’s name and issued or distributed to him as soon as practicable after the vesting date, but in no event later than March 15th of the year immediately following the year during which the vesting date occurs. The Company will have the right to withhold applicable taxes from any such payment or from other compensation payable to the Participant at the time of such vesting and delivery pursuant to Section 12 of the Plan.
5.	Cash Payment Upon a Change of Control. Notwithstanding anything herein to the contrary, upon or immediately prior to the occurrence of any Change of Control of the Company prior to one or more of the vesting dates provided for under this Agreement, the Participant’s right to receive Restricted Stock Units will vest and will be settled by a cash payment to the Participant equal to the product of (A) the Fair Market Value per share of Common Stock on the date immediately preceding the date on which the Change of Control occurs and (B) the total number of Restricted Stock Units granted, with such payments in no event made later than March 15th of the year immediately following the year during which the date immediately prior to the date of the Change of Control occurs. Such cash payment will satisfy the rights of the Participant and the obligations of the Company under this Agreement in full.
6.	Notices. For purposes of this Agreement, notices and all other communications must be in writing and will be deemed to have been given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at 1000 Main St., Houston, TX 77002, and to the Participant at the address on record for the Participant in the Company’s human resources department or to such other address as either party may furnish to the other in writing in accordance with this Section 6.
7.	Successors and Assigns. This Agreement is binding upon and inures to the benefit of the Participant, the Company and their respective permitted successors and assigns. Notwithstanding anything herein to the contrary, the Restricted Stock Units are transferable by the Participant to Immediate Family Members, Immediate Family Member Trusts and Immediate Family Member Partnerships pursuant to Section 14 of the Plan.
8.	No Employment Guaranteed. Nothing in this Agreement gives the Participant any rights to (or imposes any obligations for) continued Employment by the Company or any Subsidiary thereof or successor thereto, nor does it give those entities any rights (or impose any obligations) with respect to continued performance of duties by the Participant.
9.	Shareholder Rights. The Participant shall have no rights of a shareholder with respect to the Restricted Stock Units unless and until the Participant is registered as

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	the holder of shares of Common Stock representing the Restricted Stock Units on the records of the Company.
10.	Section 409A of the Code. It is intended that this Agreement and any Awards under this Agreement satisfy the short-term deferral exclusion from Section 409A of the Code.

RELIANT ENERGY, INC.
By:
	Karen D. Taylor
	Senior Vice President-Human Resources

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EX-10.79

Exhibit 10.79

Annual Base Salaries of Named Executive Officers

     In February 2008, the 2008 annual base salaries of Messrs. Jacobs, Dobson, Landrum, Jines and Herndon, each of whom is a named executive officer, were approved by the Compensation Committee (and the Board, in the case of Mr. Jacobs).

	2008 Base Salary
Named Executive Officer	(effective April 1, 2008)
Mark M. Jacobs
President and Chief Executive Officer	$910,000
Rick L. Dobson
Executive Vice President and Chief Financial Officer	$515,000
Brian Landrum
Executive Vice President and Chief Operating Officer	$665,000
Michael L. Jines
Senior Vice President, General Counsel and Corporate Secretary	$430,000
D. Rogers Herndon
Senior Vice President, Strategic Planning and Business Development	$350,000

EX-10.80

Exhibit 10.80

EXECUTION COPY

ASSET PURCHASE AGREEMENT

By and Among

RELIANT ENERGY CHANNELVIEW LP

And

RELIANT ENERGY SERVICES CHANNELVIEW LLC

AS SELLERS

And

KELSON ENERGY IV LLC

AS BUYER

Dated as of February 25, 2008

TABLE OF CONTENTS

		Page
ARTICLE 1 DEFINITIONS AND CONSTRUCTION			1
1.1.	Definitions		1
1.2.	Construction.		13
ARTICLE 2 PURCHASE AND SALE OF THE ACQUIRED ASSETS			14
2.1.	Transfer of Acquired Assets		14
2.2.	Excluded Assets		15
2.3.	Assumption of Liabilities		17
2.4.	Excluded Liabilities		17
2.5.	Non-Assignment of Assigned Contracts		18
ARTICLE 3 CONSIDERATION			20
3.1.	Purchase Price		20
3.2.	Deposit		20
3.3.	Post-Closing Adjustment.		20
3.4.	Allocation of Purchase Price		21
3.5.	Equistar Payment		21
ARTICLE 4 CLOSING AND DELIVERIES			22
4.1.	Closing		22
4.2.	Closing Deliveries by Sellers to Buyer		22
4.3.	Closing Deliveries by Buyer		23
4.4.	RES Fuel Purchase Transactions		24
ARTICLE 5 REPRESENTATIONS AND WARRANTIES REGARDING THE ACQUIRED ASSETS			24
5.1.	Organization and Qualification; Authority		24
5.2.	No Conflicts; Consents and Approvals		25
5.3.	Subsidiaries		25
5.4.	Financial Statements		25
5.5.	Absence of Undisclosed Liabilities; Certain Developments		25
5.6.	Litigation		26
5.7.	Compliance with Laws		26
5.8.	Permits		26
5.9.	Contracts.		26
5.10.	Taxes		28
5.11.	Employee Benefit Plans; ERISA.		29
5.12.	Labor and Employment.		30
5.13.	Environmental Matters		31
5.14.	Intellectual Property		31
5.15.	Real Estate		32
5.16.	Insurance		32
5.17.	Federal Regulation		32

5.18.	Brokers	32
5.19.	Conduct of Business and Operations	32
5.20.	Sufficiency of Assets	32
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BUYER		32
6.1.	Organization and Qualification	32
6.2.	Authority	33
6.3.	No Conflicts; Consents and Approvals	33
6.4.	Legal Proceedings	33
6.5.	Compliance with Laws and Orders	33
6.6.	Brokers	34
6.7.	Financial Resources	34
6.8.	No Knowledge of a Sellers’ Breach	34
6.9.	Opportunity for Independent Investigation	34
ARTICLE 7 COVENANTS		34
7.1.	Access.	34
7.2.	Conduct of Business Pending the Closing.	35
7.3.	Use of Certain Names	37
7.4.	Support Obligations.	37
7.5.	Termination of Certain Services, Contracts	38
7.6.	Insurance	39
7.7.	Tax Matters.	39
7.8.	Confidentiality.	40
7.9.	Employee and Benefit Matters.	40
7.10.	Public Announcements	44
7.11.	Expenses and Fees	45
7.12.	Regulatory and Other Approvals	45
7.13.	Further Assurances	46
7.14.	Schedule Update	46
7.15.	PUCT Matters	47
7.16.	Equistar Consents	47
7.17.	Boiler Feedwater Pump	47
7.18.	Fulfillment of Conditions	47
7.19.	Cure of Defaults	47
7.20.	2007 Financial Statements	47
ARTICLE 8 BANKRUPTCY PROCEDURES		48
8.1.	Bankruptcy Actions.	48
ARTICLE 9 CONDITIONS TO THE CLOSING		49
9.1.	Conditions to the Obligations of Each Party	49
9.2.	Conditions to the Obligations of Buyer	49
9.3.	Conditions to the Obligations of Sellers	50
ARTICLE 10 TERMINATION		51
10.1.	Termination	51

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10.2.	Effect of Termination	52
10.3.	Termination Fees.	52
ARTICLE 11 INDEMNIFICATION		53
11.1.	Survival	53
11.2.	Indemnification.	53
11.3.	Waiver of Other Representations.	55
11.4.	Waiver of Remedies; Certain Limitations	56
11.5.	Procedures for Indemnification	58
11.6.	Manner of Payment	59
ARTICLE 12 MISCELLANEOUS		59
12.1.	Notices	59
12.2.	Headings	60
12.3.	Assignment	60
12.4.	Governing Law	60
12.5.	Jurisdiction	60
12.6.	Counterparts	61
12.7.	Amendments; Extensions.	61
12.8.	Entire Agreement	61
12.9.	Severability	61
12.10.	Joint and Several	61

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EXHIBITS

Exhibit A	Form of Bill of Sale
Exhibit B	Form of Assignment and Assumption Agreement (Contracts)
Exhibit C	Form of Assignment and Assumption Agreement (Lease)
Exhibit D	Form of RES Assignment and Assumption Agreement
Exhibit E	Form of Sale Order
Exhibit F	Interim Period Capital Expenditures
Exhibit G-1	Administrative Services Transition Services Agreement
Exhibit G-2	Fuel and Power Transition Services Agreement
Exhibit H	Form of Escrow Agreement

DISCLOSURE SCHEDULES

Schedule 1.1(x)	Knowledge of Sellers
Schedule 1.1(y)	Knowledge of Buyer
Schedule 1.1(z)	Buyer’s Energy Manager
Schedule 2.1(a)	Real Estate Leases
Schedule 2.1(b)	Entitled Real Property
Schedule 2.1(c)	Equipment
Schedule 2.1(d)	Supplier Contracts
Schedule 2.1(e)	Other Contracts
Schedule 2.1(f)	Inventory
Schedule 2.1(h)	Permits
Schedule 2.1(g)	Intellectual Property
Schedule 2.1(i)	Business Records
Schedule 2.2(m)	Reliant Marks
Schedule 2.2(p)	Excluded Assets
Schedule 2.4	Excluded Liabilities
Schedule 4.2(i)	RES Agreements
Schedule 5.2(b)	Company Consents
Schedule 5.2(c)	Sellers’ Governmental Approvals
Schedule 5.4	Financial Statements
Schedule 5.5	Undisclosed Liabilities
Schedule 5.6	Litigation
Schedule 5.7	Compliance with Laws
Schedule 5.8	Permits
Schedule 5.9(a)	Contracts
Schedule 5.9(c)	Excluded Contracts
Schedule 5.10	Taxes
Schedule 5.11(a)	Seller Affiliate Plans
Schedule 5.11(c)	Favorable Determination Letters
Schedule 5.12(f)	Seller Affiliate Plan Increases or Acceleration
Schedule 5.13	Environmental Matters
Schedule 5.14	Intellectual Property

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Schedule 5.15	Real Estate
Schedule 6.3(c)	Buyer’s Governmental Approvals
Schedule 7.2	Conduct of Business Pending the Closing
Schedule 7.4(a)	Support Obligations
Schedule 7.9(b)	Non-Collective Bargaining Contract Employees
Schedule 8.1(b)	Publications
Schedule 8.1(d)	Bid Protections
Schedule 9.1(c)	Certain Consents

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ASSET PURCHASE AGREEMENT

     THIS ASSET PURCHASE AGREEMENT (this “Agreement”), dated as of February 25, 2008 (the “Execution Date”), is made by and between Reliant Energy Channelview LP, a Delaware limited partnership (“Channelview LP”) and Reliant Energy Services Channelview LLC, a Delaware limited liability company (“RESC” and together with Channelview LP, the “Sellers”) and Kelson Energy IV LLC, a Delaware limited liability company (the “Buyer”).

RECITALS

     WHEREAS, Channelview LP owns the Channelview Facility and certain other Acquired Assets;

     WHEREAS, on August 20, 2007, Channelview LP filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court;

     WHEREAS, RESC owns certain Acquired Assets;

     WHEREAS, on August 20, 2007, RESC filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court;

     WHEREAS, on the terms and subject to the conditions set forth in this Agreement, Buyer desires to purchase from Sellers, and Sellers desire to sell to Buyer, the Acquired Assets, in a sale authorized by the Bankruptcy Court pursuant to, inter alia, sections 105, 363, and 365 of the Bankruptcy Code;

     WHEREAS, Buyer also desires to assume, and Sellers desire to assign and transfer to Buyer, the Assumed Liabilities.

     NOW, THEREFORE, in consideration of the foregoing and their respective representations, warranties, covenants and undertakings herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sellers and Buyer hereby agree as follows:

ARTICLE 1

DEFINITIONS AND CONSTRUCTION

     1.1. Definitions. As used in this Agreement, the following terms shall have the following meanings:

     “2007 Financial Statements” has the meaning set forth in Section 7.20.

     “Accounts Payable” has the meaning set forth in Section 2.4.

     “Accounts Receivable” has the meaning set forth in Section 2.2(c).

     “Acquired Assets” has the meaning set forth in Section 2.1.

     “Administrative Services Transition Services Agreement” means that certain Transition Services Agreement, to be dated as of the Closing Date, by and among Operator and Buyer, in substantially the form of Exhibit G-1 hereto.

     “Adverse Ruling” means relief granted by the Bankruptcy Court to a third party that the Buyer in good faith believes, based on the advice of counsel, would adversely impact the relief provided in the Sale Order under Section 363(m) of the Bankruptcy Code.

     “Affiliate” means any Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether through ownership of voting securities or ownership interests, by contract or otherwise, and specifically with respect to a corporation, partnership, trust or limited liability company, shall include direct or indirect ownership of more than 50% of the voting securities in such corporation or of the voting interest in a partnership or limited liability company or of the beneficial interest in a trust.

     “Agreement” has the meaning set forth in the Recitals to this Agreement.

     “Assigned Contracts” has the meaning set forth in Section 2.1(e).

     “Assumed Liabilities” has the meaning set forth in Section 2.3.

     “Assumption Agreements” has the meaning set forth in Section 4.2(b).

     “Bankruptcy Code” means Title 11 of the United States Code.

     “Bankruptcy Court” means the United States Bankruptcy Court for the District of Delaware or such other court having jurisdiction over the Chapter 11 Cases originally administered in the United States Bankruptcy Court of the District of Delaware.

     “Base Purchase Price” has the meaning set forth in Section 3.1(a).

     “Benefit Plan” means: (a) each “employee benefit plan,” as such term is defined in Section 3(3) of ERISA, (b) each plan or program that would be an employee benefit plan if it were subject to ERISA, such as foreign plans and plans for directors, (c) each stock bonus, stock ownership, stock option, stock purchase, restricted stock, stock appreciation rights, phantom stock, or other equity plan (whether qualified or nonqualified), (d) each bonus, deferred compensation or incentive compensation plan, and (e) any other material employee benefit plan, program, contract, commitment, policy, agreement or arrangement of any kind (including, any employment, consulting, retention, disability, accident, savings and thrift, unemployment compensation, post-retirement, fringe benefits, cafeteria plans, change in control or severance plan, policy, arrangement or agreement providing compensation or benefits to any employee (whether active or on leave of absence) and/or former employee of the Operator, Sellers, their Affiliates or any Commonly Controlled Entity); provided, that such term shall not include (1) routine employment policies and procedures, including wage, vacation, holiday, and sick or other leave policies, (2) workers compensation insurance, and (3) directors and officers liability insurance.

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     “Bid Procedures Order” has the meaning set forth in Section 8.1(d).

     “Business” means the business of generating and selling steam, electric power, capacity and ancillary services from the Channelview Facility, as managed by Channelview LP, or its Affiliates, on the date hereof; or, as applicable, RESC’s business of purchasing power from third-parties and selling power to Equistar pursuant to the Energy Supply Agreement, and any business activities of Channelview LP or RESC incidental to the foregoing.

     “Business Day” means a day other than Saturday, Sunday or any day on which banks located in the State of New York and the State of Texas are authorized or obligated to close.

     “Business Records” means all books, files and records (whether in paper or electronic format) to the extent they apply to the Acquired Assets or the Business, including customer lists, historical customer files, reports, plans, data, accounting and tax records, test results, product specifications, drawings, diagrams, training manuals, procedures manuals, logs, engineering data, safety and environmental reports and documents, maintenance schedules, operating and production records, inventory records, business plans, and marketing and all other studies, documents and records but excluding any Retained Books and Records.

     “Buyer” has the meaning set forth in the Recitals to this Agreement.

     “Buyer Governmental Approvals” has the meaning set forth in Section 6.3(c).

     “Buyer Indemnified Group” means Buyer and Buyer’s Affiliates and their respective officers, directors, managers, members, employees and agents.

     “Buyer Savings Plan” has the meaning set forth in Section 7.9(g).

     “Capital Expenditures” means expenditures for capital additions to, or replacements of, property, plant and equipment included in the Channelview Facility and other expenditures for repairs on property, plant and equipment included in the Channelview Facility that would be capitalized by Sellers in accordance with their normal capitalization policies, which are in accordance with GAAP.

     “Change of Law” means the adoption, implementation, promulgation, repeal, modification or reinterpretation of any Law of or by any Governmental Authority which occurs subsequent to the Execution Date.

     “Channelview Facility” means the 830 MW combined cycle, cogeneration facility located in Channelview, Texas, and all facilities and equipment owned or leased by Channelview LP in connection with the Business.

     “Channelview Facility Employees” has the meaning set forth in Section 5.12(a).

     “Channelview LP” has the meaning set forth in the Recitals to this Agreement.

     “Channelview September 30 Balance Sheet” has the meaning set forth in Section 5.5.

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     “Chapter 11 Cases” means collectively, the cases commenced under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court by Channelview LP and RESC, and which are jointly administered under case no. 07-11160 (MFW).

     “Charter Documents” means, with respect to any Person, the articles of incorporation or organization and by-laws, the limited partnership agreement, the partnership agreement or the limited liability company agreement, and/or such other organizational documents of such Person, including those that are required to be registered or kept in the place of incorporation, organization or formation of such Person and which establish the legal personality of such Person.

     “Claims” has the meaning set forth in Section 2.2(j).

     “Closing” has the meaning set forth in Section 4.1.

     “Closing Date” has the meaning set forth in Section 4.1.

     “Code” means the Internal Revenue Code of 1986, as amended.

     “Collective Bargaining Contract” means that certain Agreement, effective as of January 1, 2004, between Reliant Energy Corporate Services, LLC, as successor by merger to Reliant Energy Power Operations I, Inc., and the International Brotherhood of Electrical Workers Local Union No. 66 Houston, Texas.

     “Commonly Controlled Entity” means any trade or business, whether or not incorporated, that, together with either Seller, would be a “single employer” within the meaning of Section 4001(b) of ERISA.

     “Company Consents” has the meaning set forth in Section 5.2(b).

     “Confidentiality Agreement” has the meaning set forth in Section 7.8(a).

     “Consent” means any consent, approval, authorization, qualification, waiver or notification of a Governmental Authority or other Person.

     “Continuing Employee” means each individual who accepts an offer of employment from Buyer or its designee as provided in Section 7.9(b), reports to work with Buyer or its designee, and is hired by Buyer or its designee.

     “Contract” means any written contract, agreement, instrument, bond, commitment, lease, license, evidence of indebtedness, mortgage, indenture, purchase order, binding bid, letter of credit, security agreement or other written legally binding arrangement.

     “Court Auction Determination” has the meaning set forth in Section 8.1(d).

     “Credit Agreement” means that certain Credit Agreement, dated as of December 15, 1999, as amended, among Channelview LP, the Lenders parties thereto, The Bank of New York,

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as successor Administrative Agent and Collateral Agent, and Teachers Insurance and Annuity Association of America, as Institutional Agent.

     “Credit Rating” means, with respect to any Person, each rating given by Standard & Poor’s or Moody’s, as applicable, to such Person’s long-term, unsecured, unsubordinated debt obligations not supported by third party credit enhancement.

     “Cure Cost Reserve Amount” has the meaning set forth in Section 7.19.

     “Cure Costs” means all (i) cure costs required to be paid and all defaults required to be cured as a condition to assumption and assignment of the Assigned Contracts pursuant to section 365 of the Bankruptcy Code and (ii) all contingent, unliquidated or unmatured liabilities under such Assigned Contracts or under any subcontracts related thereto (whether or not such subcontracts are Assigned Contracts) arising prior to the Closing Date.

     “Deposit” has the meaning set forth in Section 3.2.

     “Disclosure Schedules” has the meaning set forth in Section 2.1(a).

     “Emission Allowances” means authorizations to emit specified units of substances, whether those authorizations are described as allowances, offsets, credits or by another term, from the Channelview Facility that are allocated to the Channelview Facility and owned by Channelview LP as of the time of Closing, or to which the Channelview Facility becomes entitled to after Closing, which units are established by any Governmental Authority with jurisdiction over the Channelview Facility.

     “Energy Manager” means any one of the entities set forth on Schedule 1.1(z) or another energy manager, which may be an Affiliate of Buyer, reasonably satisfactory to Sellers or RES, as applicable.

     “Energy Supply Agreement” means that certain Second Amended and Restated Energy Supply Agreement, dated as of December 15, 1999, by and between Equistar and RESC.

     “Entitled Real Property” has the meaning set forth in Section 2.1(b).

     “Environmental Law” means any federal, state, or local law, statute, ordinance, rule, regulation, code, directive, judicial or administrative order, judgment, decree, injunction, or requirement of any Governmental Authority, relating to (a) pollution or the protection, preservation or restoration of the environment (including air, water vapor, surface water, groundwater, surface land, subsurface land and natural resources), as the same may be amended or adopted as of the Closing Date or any date prior to the Closing Date, (b) Releases or threatened Releases (including, without limitation, Releases into the ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to Hazardous Substances; or (c) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, testing, discharge, control, cleanup, production, or disposal of Hazardous Substances.

     “Equipment” has the meaning set forth in Section 2.1(c).

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     “Equistar” means Equistar Chemicals LP, a Delaware limited partnership.

     “ERCOT” means the Electric Reliability Counsel of Texas.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

     “Escrow Agent” means Wilmington Trust Company the escrow agent under the Escrow Agreement.

     “Escrow Agreement” means the escrow agreement by and between Sellers, Buyer and the Escrow Agent, in substantially the form of Exhibit H.

     “Estimated Purchase Price” has the meaning set forth in Section 4.3(a).

     “Excluded Assets” has the meaning set forth in Section 2.2.

     “Excluded Liabilities” has the meaning set forth in Section 2.4.

     “Execution Date” has the meaning set forth in the Recitals to this Agreement.

     “FERC” means the Federal Energy Regulatory Commission.

     “Final Purchase Price” has the meaning set forth in Section 3.3(c).

     “Fuel and Power Transition Services Agreement” means that certain Transition Services Agreement, to be dated as of the Closing Date, by and among RES and Buyer, in substantially the form of Exhibit G-2 hereto.

     “Fuel Purchase and Sale Agreement” means that certain Fuel Purchase and Sale Agreement, dated as of December 15, 1999, by and among RES, Channelview LP and Equistar.

     “Fuel Supply Agreement” has the meaning set forth in Section 2.5.

     “FutureCare Program” has the meaning set forth in Section 7.9(b).

     “GAAP” means generally accepted accounting principles in the United States of America.

     “Generator Operator” has the meaning set forth in Section 5.7.

     “Governmental Authority” means (i) any federal, state, local, or foreign government, (ii) any court, tribunal, arbitrator, authority, agency, administrative body, taxing authority, commission, official or other instrumentality of the United States or any state, county, city, municipality, local authority or other political subdivision or similar governing entity, and (iii) any governmental, quasi—governmental or non-governmental body administering, regulating or having general oversight over gas, electricity, power or other markets, including ERCOT, the Texas Regional Entity and NERC.

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     “Hazardous Substance” means any chemical, material or substance in any form, whether solid, liquid, gaseous, semisolid, or any combination thereof, whether waste material, raw material, chemical, finished product, byproduct, or any other material or article, listed, defined, designated, regulated or classified as a pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, solid waste, or special waste, or that is otherwise listed or regulated, or as to which liability could be imposed under any Environmental Law; including without limitation, petroleum products, and toxic mold.

     “HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

     “Indemnified Party” has the meaning set forth in Section 11.5.

     “Indemnifying Party” has the meaning set forth in Section 11.5.

     “Indemnity Security” has the meaning set forth in Section 11.2(c).

     “Intellectual Property” means any and all (a) patents and patent applications, (b) marks (including trademarks, service marks, certification marks, collective marks, registered or unregistered), trade names, designs, expressions and works of authorship, logos, slogans, trade dress and applications for registration of the foregoing, (c) copyrights, mask works and applications for registration of the foregoing, and (d) trade secrets and confidential information, including confidential know-how and any other similar property, whether or not embodied in tangible form (including but not limited to technical drawings and specifications, shop drawings, manuals, forms, working notes and memos, technical and laboratory data, notebooks, samples, engineering prototypes and computer software).

     “Interest Rate” means the prime per annum rate of interest as published by The Wall Street Journal.

     “Interim Period” means the period of time from the Execution Date until the earlier of the Closing Date or termination of this Agreement.

     “Inventory” has the meaning set forth in Section 2.1(f).

     “Investment Grade” means an entity having long term, unsecured, unsubordinated debt not supported by third party credit enhancement that is rated “BBB-” or higher by Standard & Poor’s, and “Baa3” or higher by Moody’s, and that in either case is not on negative credit watch.

     “IRS” means the U.S. Internal Revenue Service.

     “Knowledge” means, in the case of Sellers, the actual knowledge (as opposed to any constructive or imputed knowledge) of the individuals listed on Schedule 1.1(x), and in the case of Buyer, the actual knowledge (as opposed to any constructive or imputed knowledge) of the individuals listed on Schedule 1.1(y), in each case without inquiry.

     “Laws” means all laws, codes, statutes, rules, regulations, ordinances, orders and other legally-binding pronouncements having the effect of law of any Governmental Authority.

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     “Leased Real Property” has the meaning set forth in Section 2.1(a).

     “Lenders” means the lenders party to the Credit Agreement.

     “Lien” means any mortgage, pledge, hypothecation, assessment, levy, imposition, charge, claim, assignment, security interest, easement, deed, restriction, transfer restriction, lien or other similar restriction or encumbrance of any kind.

     “Losses” means any and all judgments, losses, liabilities, amounts paid in settlement, damages, fines, penalties, supplemental environmental project costs, deficiencies, losses and expenses (including interest, court costs, reasonable fees of attorneys, accountants and other experts and other reasonable expenses of litigation, settlement, judgment or other proceedings or of any claim, default or assessment).

     “LTMA Support Obligations” shall mean any Support Obligations arising under that certain Guaranty Agreement, dated as of September 30, 2002, by and between Reliant Energy Power Generation, Inc. and Siemens Power Generation, Inc.

     “Material Adverse Effect” means any change, event or effect that is materially adverse to the Acquired Assets, taken as a whole, in each case, except for any such change, event or effect resulting from or arising out of (a) changes in economic conditions generally or in the industry in which the Channelview Facility operates, (b) changes in international, national, regional, state or local wholesale or retail markets for electric power or fuel or related products, including those due to actions by competitors (excluding any such change to the extent it only or disproportionately affects the Acquired Assets relative to other combined-cycle cogeneration facilities in ERCOT), (c) changes in general regulatory or political conditions, including any acts of war or terrorist activities, (d) changes in national, regional, state or local electric transmission or distribution systems, (e) strikes, work stoppages or other labor disturbances, (f) increases in costs of commodities or supplies, including fuel, (g) effects of weather or meteorological events, (h) any Change of Laws, (i) any actions to be taken pursuant to or in accordance with this Agreement, (j) any changes, events or effects to which Sellers have cured prior to or as of Closing, and (k) the Chapter 11 Cases.

     “Material Contracts” has the meaning set forth in Section 5.9.

     “Moody’s” means Moody’s Investors Services, Inc., and its successors.

     “Multiemployer Plan” has the meaning set forth in ERISA § 3(37).

     “NERC” means North American Electric Reliability Corporation.

     “Operator” means Reliant Energy Corporate Services, LLC, a Delaware limited liability company.

     “Other Contracts” has the meaning set forth in Section 2.1(e).

     “Parties” means each of Buyer and Sellers.

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     “Permits” means all licenses, permits, authorizations, approvals, registrations, variances, exemptions, concessions, franchises and similar consents granted or issued by any Governmental Authority.

     “Permitted Exceptions” means (i) all Liens and any defects, exceptions, restrictions, easements, rights of way and encumbrances (x) disclosed in the title commitment referenced in Schedule 5.15, (y) which are shown on that certain TSPS Category 5 Survey made by Carter Burgess, dated September 26, 2002, or (z) which a search of the public records would reveal; (ii) statutory liens for Taxes, assessments or other governmental charges not yet due and payable; (iii) mechanics’, carriers’, workers’, repairers’ and similar Liens arising or incurred in the ordinary course of business that are not yet delinquent or, if delinquent, that are being contested in good faith; (iv) zoning, entitlement and other land use and environmental regulations by any Governmental Authority; (v) such other Liens, imperfections in title and easements, restrictions and encumbrances which do not materially detract from the value of, or materially interfere with the present use of, the Channelview Facility in the aggregate; (vi) Liens arising under fuel procurement arrangements; (vii) any encumbrances or liens arising under the Credit Agreement in favor of the Lenders; (viii) liens for pre-petition ad valorem Taxes which will be satisfied by Sellers upon Closing; and (ix) any rights of Equistar to purchase the partnership interests of Channelview LP, pursuant to the Second Amended and Restated Agreement Steam Supply Agreement, dated as of December 15, 1999, between Channelview LP and Equistar.

     “Person” means any natural person, corporation, general partnership, limited partnership, limited liability company, proprietorship, other business organization, trust, union, association, entity or Governmental Authority.

     “Pre-Closing Portion” has the meaning set forth in Section 7.7(b).

     “Prudent Industry Practice” means those practices, methods, equipment, specifications and standards of safety and performance, as the same may change from time to time, as are commonly used in the North American electric utility industry by independent operators of electric generation stations of a type and size similar to those constituting the Channelview Facility during a particular time period as good, safe and prudent engineering practices in connection with the operation, maintenance, repair and use of gas turbines, electrical generators and other equipment and facilities with commensurate standards of safety, performance, dependability, efficiency and economy, and consistent with applicable Laws and Regulations. Prudent Industry Practices are not intended to be limited to the optimum practice or method to the exclusion of others, but rather to be a spectrum of possible but reasonable practices and methods generally accepted in the North American electric utility industry during the relevant time period in light of the circumstances.

     “PUCT” means the Public Utility Commission of Texas.

     “Pump Payments” has the meaning set forth in Section 7.17.

     “Purchase Price Allocation” has the meaning set forth in Section 3.4.

     “QF” has the meaning set forth in Section 5.17.

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     “QSE” means a qualified scheduling entity qualified by ERCOT in accordance with ERCOT Protocol Section 16, Registration and Qualification of Market Participants, to submit Balanced Schedules and Ancillary Services bids and settle payments with ERCOT.

     “Real Estate Leases” has the meaning set forth in Section 2.1(a).

     “Real Property” has the meaning set forth in Section 2.1(b).

     “Related Person” means, with respect to any Person, all past, present and future directors, officers, members, managers, stockholders, employees, controlling persons, agents, professionals, attorneys, accountants, investment bankers, Affiliates or representatives of any such Person.

     “Release” means any release, spill, leak, discharge, abandonment, disposal, pumping, pouring, emitting, emptying, injecting, leaching, dumping, depositing, dispersing, allowing to escape or migrate into or through the environment (including ambient air, surface water, ground water, land surface and subsurface strata or within any building, structure, facility or fixture) of any Hazardous Substance, including the abandonment or discarding of Hazardous Substances in barrels, drums, or other containers.

     “Reliant Energy” has the meaning set forth in Section 2.2(d).

     “Reliant Marks” has the meaning set forth in Section 2.2(m).

     “Representatives” means officers, directors, employees, counsel, accountants, financial advisers or consultants of either Sellers or Buyer, as applicable.

     “RES” means Reliant Energy Services, Inc.

     “RES Agreements” has the meaning set forth in Section 4.2(i).

     “RES Assignment and Assumption Agreement” has the meaning set forth in Section 4.2(i).

     “RES Fuel Purchase Transactions” shall mean those fuel purchase transactions listed on Schedule 2 of the Fuel and Power Transition Services Agreement or entered into after the date hereof in accordance with such Schedule 2.

     “RESC” has the meaning set forth in the Recitals to this Agreement.

     “Retained Books and Records” means: (i) all corporate seals, minute books, charter documents, corporate stock record books, original tax and financial records and such other files, books and records to the extent that any of the foregoing relates to any of the Excluded Assets or Excluded Liabilities or the organization, existence, capitalization or debt financing of a Seller or of any Affiliate of a Seller; (ii) all books, files and records that would otherwise constitute a Business Record but for the fact that disclosure of books, files or records could (v) disclose information related to a Seller or any of its Affiliates concerning public utility regulatory matters, including matters before ERCOT, the FERC, or other similar bodies, (w) violate any legal

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constraints or obligations regarding the confidentiality thereof, provided that such Seller shall use its commercially reasonable efforts to obtain a waiver of any such confidentiality restrictions in order to permit such disclosure, (x) waive any attorney client, work product or like privilege, (y) disclose information about such Seller or any of its Affiliates that is unrelated to the Channelview Facility or the Business or (z) disclose information about such Seller or any of its Affiliates pertaining to energy or project evaluation, energy or natural gas price curves or projections or other economic predictive models; or (iii) all books and records prepared in connection with or relating in any way to the transactions contemplated by this Agreement, including bids received from other parties and analyses relating in any way to the Acquired Assets or the Assumed Liabilities.

     “Rule” or “Rules” means the Federal Rules of Bankruptcy Procedure.

     “Sale Motion” has the meaning set forth in Section 8.1(b).

     “Sale Order” means an order: (i) (x) in substantially the form of Exhibit E hereto, or (y) in such other form which is in form and substance reasonably acceptable to Sellers and Buyer approving this Agreement and all of the terms and conditions hereof, and approving and authorizing Sellers to consummate the transactions contemplated hereby. Without limiting the generality of the foregoing, such order shall find and provide, among other things, that (a) other than Permitted Exceptions, the Acquired Assets sold to Buyer pursuant to this Agreement shall be transferred to Buyer free and clear of all Liens and liabilities of any Person, such Liens and liabilities to attach to the Purchase Price, (b) Buyer has acted in good faith within the meaning of section 363(m) of the Bankruptcy Code and, as such, is entitled to the protections afforded thereby, (c) this Agreement was negotiated, proposed and entered into by the parties without collusion, in good faith and from arm’s length bargaining positions, (d) Buyer is not acquiring or assuming any of Sellers’ or any other Person’s liabilities except as expressly provided in this Agreement, (e) all Assigned Contracts shall be assumed by Sellers and assigned to Buyer pursuant to section 365 of the Bankruptcy Code, (f) the Bankruptcy Court shall retain jurisdiction to resolve any controversy or claim arising out of or relating to this Agreement, or the breach hereof as provided in Section 8.1 hereof during the pendency of the Chapter 11 Cases, (g) this Agreement and the transactions and instruments contemplated hereby shall be specifically enforceable against and binding upon, and not subject to rejection or avoidance by, each Seller or any trustee of a Seller and its applicable estate, (h) is it not a principal purpose of any Person entering into this Agreement or any transactions contemplated by this Agreement to evade liability to which such Person would be subject under Subtitle D of Title IV of ERISA, and (i) the provisions thereof are non-severable and mutually dependent; and (ii) that does not require the assignment and assumption of the Cash Flow Participation Agreement, dated as of December 15, 1999, by and between Channelview LP and Equistar.

     “Schedule Update” has the meaning set forth in Section 7.14.

     “Seller Affiliate Plan” means each Benefit Plan that is sponsored, administered, maintained or contributed to as of the date of this Agreement by any Affiliate of either Seller and which Benefit Plan provides benefits with respect to employees of the Operator who are employed at the Channelview Facility.

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     “Seller Affiliate Savings Plans” means the Reliant Energy, Inc. Savings Plan and the Reliant Energy, Inc. Union Savings Plan.

     “Seller Indemnified Group” means each Seller and such Seller’s Affiliates and their respective officers, directors, employees and agents.

     “Sellers” has the meaning set forth in the Recitals to this Agreement.

     “Sellers’ Governmental Approvals” has the meaning set forth in Section 5.2(c).

     “Sellers’ Post-Closing Estimate” has the meaning set forth in Section 3.3(a).

     “Settlement Agreement” means that certain Settlement Agreement, dated as of July 10th, 2007, by and between Channelview LP, RESC, and Equistar.

     “Severance Plan” means the Reliant Energy, Inc. 2003 Involuntary Severance Benefits Plan for Employees With Annual Base Pay Less Than $150,000 As Amended and Restated Effective June 1, 2004.

     “Standard & Poor’s” means Standard & Poor’s Ratings Group (a division of McGraw Hill, Inc.), and its successors.

     “Straddle Period” has the meaning set forth in Section 7.7(b).

     “Supplier Contracts” has the meaning set forth in Section 2.1(d).

     “Support Obligations” has the meaning set forth in Section 7.4(a).

     “Tax” or “Taxes” means any federal, state, local, or foreign income, profits, franchise, withholding, ad valorem, personal property (tangible and intangible), employment, payroll, sales and use, social security (or similar), disability, occupation, real property, severance, excise, gross receipts, utility, severance, license, transfer, stamp, premium, windfall profits, environmental (including taxes under Code § 59A), customs duties, capital stock, unemployment, registration, utility, production, value added, alternative or add-on minimum, estimated, and other taxes imposed by a Taxing Authority of any kind whatsoever, whether computed on a separate or consolidated, unitary or combined basis or in any other manner, including any interest, penalty or addition thereto, whether disputed or not.

     “Tax Proceeding” has the meaning set forth in Section 7.7(e).

     “Tax Returns” means any and all returns, reports, statements, information returns or other similar filings filed or required to be filed with respect to any Taxes, including any supporting information, schedules, attachments or amendments thereof.

     “Taxing Authority” means, with respect to any Tax, the Governmental Authority or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision.

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     “Termination Date” has the meaning set forth in Section 10.1.

     “Texas Regional Entity” means the Texas Regional Entity, a Division of ERCOT.

     “Third-Party Claim” has the meaning set forth in Section 11.5.

     “Transfer Taxes” means all transfer, Real Property transfer, goods and services, value added, recordation, documentary, stamp, duty, excise and conveyance Taxes and other similar Taxes, duties, fees or charges, as levied by any Taxing Authority in connection with the transactions contemplated by this Agreement, provided, however, that for the avoidance of doubt, the term Transfer Taxes shall not include any income Taxes based on or measured by net income, including the Texas franchise or margins tax.

     “Transition Services Agreements” means the Administrative Services Transition Services Agreement and the Fuel and Power Transition Services Agreement.

     “Union” has the meaning set forth in Section 7.9(c).

     “WARN Act” means the Worker Adjustment and Retraining Notification Act of 1988, as amended and any similar foreign, state or local law, regulation or ordinance.

     “Welfare Benefits” has the meaning set forth in Section 7.9(h).

     1.2. Construction.

          (a) All Article, Section, Subsection, Schedule and Exhibit references used in this Agreement are to Articles, Sections, Subsections, Schedules and Exhibits to this Agreement unless otherwise specified. The Exhibits and Schedules attached to this Agreement constitute a part of this Agreement and are incorporated herein for all purposes.

          (b) If a term is defined as one part of speech (such as a noun), it shall have a corresponding meaning when used as another part of speech (such as a verb). Unless the context of this Agreement clearly requires otherwise, words importing the masculine gender shall include the feminine and neutral genders and vice versa. The words “includes” or “including” shall mean “includes without limitation” or “including without limitation,” the words “hereof,” “hereby,” “herein,” “hereunder” and similar terms in this Agreement shall refer to this Agreement as a whole and not any particular Section or Article in which such words appear and any reference to a Law shall include any amendment thereof or any successor thereto and any rules and regulations promulgated thereunder. Currency amounts referenced herein are in U.S. Dollars.

          (c) Time is of the essence in this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. Whenever any action must be taken hereunder on or by a day that is not a Business Day, then such action may be validly taken on or by the next day that is a Business Day.

          (d) Sellers may, at their option, include in the Schedules items that are not material, and any such inclusion, or any references to dollar amounts, shall not be deemed to be

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an acknowledgment or representation that such items are material or would be reasonably expected to cause a Material Adverse Effect, to establish any standard of materiality or to define further the meaning of such terms for purposes of this Agreement. Information disclosed in each Schedule of the Sellers’ Disclosure Schedules shall be deemed to be disclosed in each other Schedule therein, if it is disclosed in such a way as to make reasonably apparent its relevance or applicability to another Section of this Agreement or any other Schedule (or subparts thereof) in order to avoid a misrepresentation hereunder.

          (e) Each Party acknowledges that it and its attorneys have been given an equal opportunity to negotiate the terms and conditions of this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting Party or any similar rule operating against the drafter of an agreement shall not be applicable to the construction or interpretation of this Agreement.

ARTICLE 2

PURCHASE AND SALE OF THE ACQUIRED ASSETS

     2.1. Transfer of Acquired Assets. At the Closing, and upon the terms and conditions herein set forth, each Seller (as applicable) shall sell to Buyer (or Buyer’s designee, in the case of the Energy Supply Agreement), and Buyer (or Buyer’s designee, in the case of the Energy Supply Agreement) shall acquire from Sellers, all of each Seller’s right, title and interest in, to and under the Acquired Assets free and clear of Liens, claims and other interests (except for Permitted Exceptions) pursuant to sections 105, 363 and 365 of the Bankruptcy Code. “Acquired Assets” shall mean all of each Seller’s right, title and interest in, to and under all property (tangible or intangible), rights, goodwill, claims and assets to the extent relating to or used in or held for use in connection with the Business (except for the Excluded Assets) as the same exist on the Closing Date including:

          (a) subject to the receipt of any necessary consents or approvals, all of Sellers’ rights under the leases of real property (the “Real Estate Leases”), listed on Schedule 2.1(a) of the disclosure schedules accompanying this Agreement (the “Disclosure Schedules”) and the real property leased by Channelview LP pursuant to the Real Estate Leases, together with any improvements and fixtures owned by Channelview LP erected on the real property subject to the Real Estate Leases (the “Leased Real Property”);

          (b) subject to the receipt of any necessary consents or approvals, all of Sellers’ rights under the easements, rights of way, real property licenses, and other real property entitlements used in the Business or listed on Schedule 2.1(b) (the “Entitled Real Property” and, together with the Leased Real Property, the “Real Property”);

          (c) all of (i) Sellers’ owned and leased equipment, spare parts, machinery, furniture, materials, supplies, fixtures, and other personal property used in the Business, and in connection with Channelview LP, located on the Real Property or listed on Schedule 2.1(c) (the “Equipment”); and (ii) any rights of Sellers to the warranties and licenses received from third parties with respect to the Equipment;

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          (d) subject to the receipt of any necessary consents or approvals, all of Sellers’ rights under outstanding purchase orders or other similar Contracts used exclusively in the Business entered into by Channelview LP with any supplier that are listed on Schedule 2.1(d) of the Disclosure Schedules (“Supplier Contracts”);

          (e) subject to the receipt of any necessary consents or approvals, all of Sellers’ rights under the Contracts that are listed on Schedule 2.1(e) of the Disclosure Schedules (the “Other Contracts” and, together with the Real Estate Leases, the Entitled Real Property constituting Contracts, and the Supplier Contracts, the “Assigned Contracts”);

          (f) all (i) inventories of fuel, chemicals and gas wherever located (including in transit to the Channelview Facility) and owned by Channelview LP on the Closing Date, or listed on Schedule 2.1(f) (the “Inventory”), and (ii) any rights of Channelview LP to the warranties received from third parties with respect to such Inventory;

          (g) any Intellectual Property, including any computer software or systems (i) located at the Real Property, the offices of RESC or listed on Schedule 2.1(g) and (ii) owned exclusively by either Seller and licenses held exclusively by either Seller, to the extent transferable, in each case that pertain solely to the Business;

          (h) to the extent transferable under applicable Law, all rights of either Seller under the Permits relating exclusively to the Business including those listed on Schedule 2.1(h);

          (i) copies of all Business Records (including those listed on Schedule 2.1(i) to the extent they apply to the Acquired Assets) and the right to receive mail and other communications addressed to the Sellers that pertain to the Channelview Facility or the Business;

          (j) all accounts, rights, or allowances involving Emissions Allowances, and all rights to any future Emission Allowances, if any, that will be granted or allocated with respect to the Channelview Facility (other than those Emission Allowances expended in the ordinary course of operation of the Channelview Facility prior to the Closing);

          (k) subject to Section 2.2(o), all claims, causes of action, choses in action, rights of set-off of any kind, rights of recovery, whether known or unknown, in favor of any of the Sellers, and pertaining to, arising out of or relating to, the Acquired Assets or offsetting any Assumed Liabilities, but excluding any of the same relating to any Affiliate of the Sellers, or relating to any matter covered by the Settlement Agreement; and

          (l) all of Channelview LP’s right, title and interest in the Channelview Facility.

     2.2. Excluded Assets. Notwithstanding anything to the contrary in this Agreement, the Acquired Assets do not include the following (collectively, the “Excluded Assets”):

          (a) any right, title or interest of any Person other than a Seller in any property or asset;

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          (b) all of Sellers’ cash and cash equivalents, marketable securities, prepaid expenses, advance payments, surety accounts, deposits and other similar prepaid items (including for the purchase of natural gas), checks in transit and undeposited checks to the extent attributable to the period prior to the Closing Date;

          (c) all of Sellers’ accounts and notes receivable to the extent attributable to the period prior to 11:59 pm on the day prior to the Closing Date (the “Accounts Receivable”);

          (d) other than assets, property, and other rights specifically identified in any Schedule referenced in Section 2.1 above, any assets, property and other rights held or owned by Reliant Energy, Inc. (“Reliant Energy”) or its Affiliates to the extent not used in the operation of the Business;

          (e) financial information or financial statements and proprietary manuals (except rights to use manuals specific to and necessary for the operation of the Business) prepared by or used by either Seller or their Affiliates to the extent not relating exclusively to the Business;

          (f) all of Sellers’ rights under Contracts that are not Assigned Contracts;

          (g) all rights to Claims, refunds or adjustments with respect to Excluded Assets, relating to any proceeding before any Governmental Authority relating to the period prior to the Closing, and all rights to insurance proceeds or other insurance recoveries: (i) that are reimbursement for, either Seller’s or such Seller’s Affiliate’s expenditures made prior to the Closing Date for which insurance proceeds are available or due to a Seller or such Seller’s Affiliates or (ii) to the extent relating to Excluded Assets or Excluded Liabilities;

          (h) any asset of a Seller that would constitute an Acquired Asset (if owned by such Seller on the Closing Date) that is conveyed or otherwise disposed of during the period from the date hereof until the Closing Date either: (i) in the ordinary course of business of the Sellers, (ii) at the direction of the Bankruptcy Court or (iii) as otherwise permitted by the terms of this Agreement;

          (i) all losses, loss carry forwards and rights to receive refunds, credits and loss carry forwards with respect to any and all Taxes of Sellers incurred or accrued on or prior to the Closing Date, including interest receivable with respect thereto;

          (j) any and all rights, demands, claims, credits, allowances, rebates, causes of action, known or unknown, pending or threatened (including all causes of action arising under sections 510, 544 through 551 and 553 of the Bankruptcy Code or under similar state Laws, including fraudulent conveyance claims, and all other causes of action of a trustee and debtor-in-possession under the Bankruptcy Code) or rights of set-off (collectively, “Claims”), of a Seller or any Affiliate of a Seller: (i) in respect of the Excluded Assets or the Excluded Liabilities, or (ii) arising out of or relating in any way to the Chapter 11 Cases or any of the transactions contemplated thereby or entered into as a consequence thereof, including any claims (as defined in section 101(5) of the Bankruptcy Code) filed, scheduled or otherwise arising in the Chapter 11 Cases;

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          (k) all shares of capital stock or other equity interests of either Seller and all Affiliates of Sellers;

          (l) all rights of either Seller arising under this Agreement and under any other agreement between either Seller and Buyer entered into in connection with this Agreement;

          (m) all rights to or goodwill represented by or pertaining to all names, marks, trade names, trademarks and service marks incorporating the name Reliant Energy or any other name set forth on Schedule 2.2(m) (the “Reliant Marks”) and any brand names or derivatives thereof no matter how used, whether as a corporate name, domain name or otherwise and including the corporate design logo associated with any Reliant Mark or variant of any Reliant Mark;

          (n) all Retained Books and Records;

          (o) all rights and Claims of a Seller against any Affiliate of such Seller relating to the Assigned Contracts that arose prior to the Closing Date; and

          (p) any assets set forth on Schedule 2.2(p) of the Disclosure Schedules.

     2.3. Assumption of Liabilities. At the Closing, Buyer shall assume, and Buyer shall hereafter pay, perform and discharge when due, the following liabilities and obligations (collectively, the “Assumed Liabilities”):

          (a) all liabilities and obligations of Sellers under the Assigned Contracts, other than Excluded Liabilities;

          (b) all liabilities and obligations of Sellers under the Permits;

          (c) to the extent provided in Section 7.7(a), Transfer Taxes;

          (d) all liabilities and obligations of Sellers, any of their Affiliates or any of their respective Related Persons arising under or relating to any environmental matter (including any liability or obligation arising under any Environmental Law) relating to the Acquired Assets

          (e) any liability for any Taxes attributable to the Acquired Assets to the extent arising or accruing (on a pro rata daily basis in the case of Taxes other than income Taxes) with respect to a period (or any portion thereof) beginning after the Closing Date; and

          (f) all other liabilities and obligations relating to or arising from the operation of the Business or the ownership of the Acquired Assets (other than the Excluded Liabilities), but for purposes of clarity, excluding liabilities or obligations under the Credit Agreement and any other Contract (written or oral) which is not an Assigned Contract, including those obligations of Sellers associated with that certain Channel Area Industrial District Agreement between Lyondell Petrochemical Company and the City of Houston, dated as of June 17, 1997.

     2.4. Excluded Liabilities. Buyer is assuming only the Assumed Liabilities, and all liabilities of Sellers not expressly assumed by Buyer pursuant to Section 2.3, whether or not

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incurred or accrued, whether asserted before, on or after the Closing Date, shall be assumed or retained, as the case may be, by Sellers, who shall be responsible for paying, performing and discharging such liabilities and Buyer shall not have any responsibility for such liabilities (such liabilities are hereinafter referred to as the “Excluded Liabilities”), including: (i) all Cure Costs and other liabilities and obligations with respect to accounts payable accrued under Assigned Contracts as of 11:59 pm on the day prior to the Closing Date (the “Accounts Payable”); (ii) liabilities to the extent arising in connection with Excluded Assets; (iii) any liability for any Taxes attributable to the Acquired Assets to the extent arising or accruing (on a pro rata daily basis in the case of Taxes other than income Taxes) with respect to a period (or any portion thereof) ending on or before the Closing Date; (iv) liabilities with respect to Benefit Plans (including Seller Affiliate Plans); (v) all liabilities and obligations of Sellers or any Affiliate thereof representing indebtedness for money borrowed (or any refinancing thereof); (vi) liabilities with respect to loans made by and, other than with respect to transactions under the Transition Services Agreements, accounts payable arising from transactions with Affiliates; (vii) any liability of any of the Sellers for (a) transaction fees and expenses and fees and expenses payable to lenders, brokers, financial advisors, legal counsel, accountants and other professionals, and (b) except as provided otherwise in Section 7.7(a), Transfer Taxes; (viii) those listed on Schedule 2.4 of the Disclosure Schedules; (ix) all liabilities arising out of any exchange act or securities liability; (x) all costs and expenses associated with the Chapter 11 Cases; (xi) all liability for any claims discharged pursuant to the Chapter 11 Cases or for claims against either of the Sellers which are filed after the bar date or disallowed by the Bankruptcy Court; (xii) all liability for any rejection damages claim filed in the Chapter 11 Cases; and (xiii) all interests and liabilities that have not been otherwise assumed pursuant to this Agreement, to the extent that applicable law permits this sale under Section 363 of the Bankruptcy Code to be free and clear of such interests and liabilities.

     2.5. Non-Assignment of Assigned Contracts. Anything contained herein to the contrary notwithstanding, (i) this Agreement shall not constitute an agreement to assign any Assigned Contracts if, after giving effect to the provisions of Sections 363 and 365 of the Bankruptcy Code, an attempted assignment thereof, without obtaining a Consent, would constitute a breach thereof or in any way negatively affect the rights of Sellers or Buyer, as the assignee of such Assigned Contracts and (ii) unless Sellers have otherwise violated the provisions of this Section 2.5, no breach of this Agreement or failure of a closing condition shall have occurred by virtue of such nonassignment. Sellers shall use commercially reasonable efforts to obtain the consent of the counterparties to each Assigned Contract, to the extent that after giving effect to the provisions of Sections 363 and 365 of the Bankruptcy Code, such Consent is required; provided, that nothing in this Section 2.5 shall (x) require Sellers to make any significant expenditure or incur any significant obligation on its own or on Buyer’s behalf or (y) prohibit Sellers from ceasing operations or winding up its affairs following the Closing. Any assignment to Buyer of any Assigned Contracts that shall, after giving effect to the provisions of Sections 363 and 365 of the Bankruptcy Code, require the Consent of any third party for such assignment as aforesaid shall be made subject to such Consent being obtained. Without limiting the foregoing, the Parties agree that, if any required consent to the assignment or release of RES’ obligations under the Fuel Purchase and Sale Agreement is not obtained, Buyer and Buyer’s Energy Manager will enter into an agreement (the “Fuel Supply Agreement”) in form and substance reasonably acceptable to the Parties, in relation to the Fuel Purchase and Sale Agreement, pursuant to which (i) RES shall consult with Buyer (or Buyer’s Energy Manager)

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with respect to transactions occurring under the Fuel Purchase and Sale Agreement and keep Buyer and Buyer’s Energy Manager advised of all transactions thereunder, and not take any material discretionary action thereunder without Buyer or Buyer’s Energy Manager’s consent, not to be unreasonably withheld; (ii) RES shall not modify, amend or terminate the Fuel Purchase and Sale Agreement without Buyer’s consent, which consent shall not be unreasonably withheld or delayed; (iii) RES shall continue to perform and act such that the gas sold to RES under such agreement shall be resold to the Buyer through the Buyer’s Energy Manager; (iv) RES shall agree that Buyer’s Energy Manager may be replaced from time to time in Buyer’s sole discretion with a new Energy Manager, and (v) RES shall use commercially reasonable efforts to obtain the execution and delivery by Equistar of the RES Assignment and Assumption Agreement. The Parties agree further that if RES continues to be directly obligated to purchase gas from Equistar under the Fuel Purchase and Sale Agreement after the Closing Date, Buyer’s Energy Manager shall, pursuant to the Fuel Supply Agreement, accept and purchase from RES all such gas accepted and purchased by RES from Equistar. The price for such gas shall be equal to the price paid for such gas by RES, and the terms and conditions of Buyer’s Energy Manager’s purchase of such gas shall be substantially identical to the terms and conditions on which RES purchased such gas from Equistar, and, in turn, such gas shall be resold to the Buyer on such terms and conditions. The Fuel Supply Agreement shall require RES to indemnify, defend and hold Buyer (and Buyer’s Energy Manager) harmless from and against any and all claims, losses, damages, liabilities, suits, payments, costs and expenses, including reasonable attorneys’ fees and costs of investigation arising out of (i) the performance or breach of the Fuel Purchase and Sale Agreement by RES except to the extent that a liability arises out of the breach by Buyer or Buyer’s Energy Manager of the Fuel Supply Agreement, and (ii) any breach or alleged breach of the Fuel Purchase and Sale Agreement as a result of the Fuel Supply Agreement (except to the extent that a liability arises out of the breach by Buyer or Buyer’s Energy Manager of the Fuel Supply Agreement). Buyer shall indemnify defend and hold RES harmless from and against any and all claims, losses, damages, liabilities, suits, payments, costs and expenses, including attorneys’ fees and costs of investigation arising out of Buyer’s (or Buyer’s Energy Manager’s) breach of the Fuel Supply Agreement. At least 10 (ten) days prior to Closing, in the event the Parties will execute the Fuel Supply Agreement as hereinabove provided at Closing, Buyer may request that Sellers deliver a guaranty of Reliant Energy of RES’ obligations under the indemnity described in the preceding sentence, such guaranty to be in form and substance reasonably satisfactory to Buyer and Reliant Energy with a duration of two (2) years and an aggregate limit of liability of $10 million. If Reliant Energy, in its sole discretion does not, at least five (5) days prior to Closing, agree to deliver said guaranty, then Buyer shall have the right, exercisable during the three (3) day period after Reliant Energy has declined to deliver the guarantee, to terminate this Agreement without any further obligation or liability of either Party hereunder, it being understood that nothing herein shall in any way obligate Reliant Energy to deliver said guaranty if requested. Notwithstanding anything in this Section 2.5 to the contrary in using commercially reasonable efforts to obtain any consent described above, RES shall not be obligated to commence litigation or expend any sums of money to obtain such consent.

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ARTICLE 3

CONSIDERATION

     3.1. Purchase Price. The purchase price to be paid by Buyer to Sellers for the Acquired Assets is equal to:

          (a) Four Hundred Sixty Eight Million Dollars ($468,000,000) (the “Base Purchase Price”), plus

          (b) the amount of Capital Expenditures paid or payable by the Sellers for work done during the Interim Period, subject to and in accordance with the budget for which is provided on Exhibit F hereto, plus or minus (as applicable)

          (c) the amount of the LTMA Adjustment calculated in accordance with Item 6 on Schedule 2.4 .

     3.2. Deposit. On or before the later of (i) February 28, 2008 and (ii) the first Business Day after the Escrow Agreement is executed by the Escrow Agent, Buyer will deposit with the Escrow Agent Forty Million Dollars ($40,000,000) (the “Deposit”). The Deposit shall be held and disbursed pursuant to the terms of the Escrow Agreement and this Agreement. The Parties shall use commercially reasonable efforts to cause the execution and delivery of the Escrow Agreement as soon as possible after the date hereof.

     3.3. Post-Closing Adjustment.

          (a) As soon as practicable after the Closing, but no later than 90 days after the Closing Date, Sellers shall determine the actual adjustment to the Base Purchase Price pursuant to Section 3.1 as of the Closing Date. Sellers and Buyer shall cooperate and provide each other access to their respective books and records and those of Channelview LP as are reasonably requested in connection with the matters addressed in this Section 3.3. Sellers shall provide Buyer with written notice of such determinations within such 90 days, along with reasonable supporting information (the “Sellers’ Post-Closing Estimate”).

          (b) If Buyer objects to any determinations set forth in Sellers’ Post-Closing Estimate, then it shall provide Sellers written notice thereof within 10 Business Days after receiving Sellers’ Post-Closing Estimate. Such notice shall specify in reasonable detail Buyer’s objections to specific determinations, along with reasonable supporting documentation. Any objections not so specified shall be deemed waived, and Sellers’ determinations to which specific objections were not so made shall prevail. If the Parties are unable to agree on the disputed amounts as of the Closing Date within 120 days after the Closing Date or such longer time as may be agreed by the Parties, the Parties shall refer such dispute to an internationally recognized accounting firm that is not the principal accounting firm of Buyer or either Seller, mutually acceptable to Buyer and Sellers, which firm shall make a final and binding determination as to all such matters in dispute (and only such matters) on a timely basis (and such accounting firm shall be instructed to make such determination within 45 days of such engagement or as soon thereafter as reasonably practicable) and promptly shall notify the Parties in writing of its resolution. Such firm shall not have the power to modify or amend any term or provision of this

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Agreement. The fees and disbursements of the accounting firm shall be allocated between Buyer and Sellers in inverse proportion as they shall prevail on the amounts of such disputed items so submitted (as finally determined by such accounting firm).

          (c) If the Base Purchase Price adjusted using such actual values (as agreed or determined by the above-referenced accounting firm) (the “Final Purchase Price”) is greater than the Estimated Purchase Price, then Buyer shall pay Sellers within 10 Business Days after such actual values are agreed or determined, by wire transfer of immediately available funds, the difference between the Final Purchase Price and the Estimated Purchase Price plus interest thereon at the Interest Rate from the Closing Date through and including the date of such payment. If the Final Purchase Price is less than the Estimated Purchase Price, then Sellers shall pay Buyer within 10 Business Days after such actual values are agreed or determined, by wire transfer of immediately available funds, the difference between the Estimated Purchase Price and the Final Purchase Price plus interest thereon at the Interest Rate from the Closing Date through and including the date of such payment. In each case, the recipient Party shall designate the account to which such payment is to be made at least two Business Days prior to the date such payment is due.

     3.4. Allocation of Purchase Price. Within thirty (30) days after the determination of the Final Purchase Price, Sellers and Buyer shall agree upon an allocation of the purchase price (as determined in accordance with US federal income tax principles) among the Acquired Assets in accordance with Section 1060 of the Code and the Treasury Regulations promulgated thereunder (the “Purchase Price Allocation”), provided that the purchase price shall not be increased by or otherwise reflect the obligations under any of the Assigned Contracts. Buyer and Sellers shall work in good faith to resolve any disagreements regarding the Purchase Price Allocation. If the Parties fail to agree within such 30-day period upon Purchase Price Allocation, such dispute shall be resolved by an independent accounting firm mutually acceptable to Buyer and Sellers, and the decision of such independent accounting firm shall be final and binding on the Parties. Sellers together shall bear and pay one-half of such fees and other costs charged by such accounting firm and Buyer shall bear and pay one-half of such fees and other costs. Sellers and Buyer shall each prepare and timely file IRS Form 8594 “Asset Acquisition Statement Under Section 1060” and any other similar statements or forms as are prescribed under federal, state, local or foreign Tax Law (including any exhibits thereto) to report the Purchase Price Allocation. The Parties agree that they shall not, and shall not permit their Affiliates to take a position on any Tax Return or for any Tax purpose that is inconsistent with the Purchase Price Allocation unless otherwise required by applicable laws; provided, however, that neither Sellers nor Buyer shall be obligated to litigate any challenge to the Purchase Price Allocation by any Governmental Authority. The Parties agree to provide, and shall cause their Affiliates to provide, each other promptly with any information required to complete such Tax forms or statements as are required under applicable law to report the Purchase Price Allocation.

     3.5. Equistar Payment. In accordance with the Settlement Agreement and provided the Settlement Agreement is then still in effect, Channelview LP agrees to apply $10,000,000 of its portion of the Purchase Price payable at Closing either to (in Channelview LP’s discretion): (i) Equistar pursuant to paragraphs 2 and 6 of the Settlement Agreement, or (ii) into the escrow account contemplated by paragraph 6 of the Settlement Agreement.

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ARTICLE 4

CLOSING AND DELIVERIES

     4.1. Closing. Subject to satisfaction or waiver of the conditions to the Closing set forth herein, unless the Parties mutually agree otherwise in writing, the closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Reliant Energy, Inc., 1000 Main Street, 21st Floor, Houston, Texas 77002 at 10:00 A.M. local time, on the second Business Day after the conditions to the Closing set forth in Article 11 (other than actions to be taken or items to be delivered at the Closing) have been satisfied or waived by the applicable Party or Parties or such other date and at such other time and place as may be mutually agreed to in writing (the “Closing Date”). All actions listed in Section 4.2 and Section 4.3 that occur on the Closing Date shall be deemed to occur simultaneously at the Closing.

     4.2. Closing Deliveries by Sellers to Buyer. At the Closing, the appropriate Seller shall deliver, or shall cause to be delivered, as applicable, to Buyer the following:

          (a) subject to the receipt of applicable Company Consents and Sellers’ Governmental Approvals, a bill of sale with respect to the Acquired Assets, duly executed by the appropriate Seller and substantially in the form of Exhibit A hereto;

          (b) subject to the receipt of applicable Company Consents and Sellers’ Governmental Approvals, one or more assignment and assumption agreements (the “Assumption Agreements”), in the form attached as Exhibit B hereto, duly executed by the appropriate Seller or Related Person with respect to the Assigned Contracts and Assumed Liabilities;

          (c) subject to the receipt of applicable Company Consents and Sellers’ Governmental Approvals, assignments of the Real Estate Leases and all Entitled Real Property interests held by Channelview LP, in the form attached as Exhibit C hereto, including, without limitation, all such interests set forth on Schedules 2.1(a) and 2.1(b), each duly executed by Channelview LP and in recordable form;

          (d) the Business Records (either at Closing or as soon as practicable thereafter);

          (e) (i) an executed copy of the Administrative Services Transition Services Agreement (to the extent Buyer notifies Sellers at least ten (10) days prior to the Closing Date that it intends to enter into the Administrative Services Transition Services Agreement), and (ii) subject to Section 4.4, an executed copy of the Fuel and Power Transition Services Agreement.

          (f) a duly executed affidavit of non-foreign status that complies with Section 1445 of the Code;

          (g) duly executed certificates referenced in Section 9.2(c);

          (h) a copy of the Sale Order that has been entered on the docket by the clerk of the Bankruptcy Court;

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          (i) unless Buyer has elected Gas Services under the Fuel and Power Transition Services Agreement (which services would include the sale of gas purchased by RES under the Fuel Purchase and Sale Agreement), either (i) an assignment and assumption agreement executed by RES (the “RES Assignment and Assumption Agreement”), in substantially the form attached as Exhibit D hereto, assigning to Buyer’s designee the agreements which RES is a party as set forth in Schedule 4.2(i) hereto (the “RES Agreements”), or (ii) if required by Section 2.5, the Fuel Supply Agreement executed by RES; if Buyer has elected such Gas Services, then Sellers shall deliver the RES Assignment and Assumption Agreement or the Fuel Supply Agreement, as applicable, at the time such Gas Services terminate; and

          (j) a joint direction letter executed by Sellers instructing the Escrow Agent to (i) transfer $40,000,000 of the funds held in the Deposit Escrow Account (as defined in the Escrow Agreement) into the Indemnity Escrow Account (as defined in the Escrow Agreement) and (ii) to transfer all interest earned in the Deposit Escrow Account as directed by Sellers.

     4.3. Closing Deliveries by Buyer. At the Closing, Buyer shall deliver to Sellers the following:

          (a) a wire transfer of immediately available funds (to such accounts as Sellers shall have notified Buyer of at least two Business Days prior to the Closing Date) in an amount equal to the Base Purchase Price, reduced by the amount of the Deposit together with any interest earned thereon, as adjusted pursuant to Sections 3.1(b) and 3.1(c), as estimated in good faith by Sellers (the “Estimated Purchase Price”). Sellers shall deliver the Estimated Purchase Price in writing to Buyer at least two Business Days prior to the Closing Date and shall attach to the calculation of the Estimated Purchase Price a schedule showing the estimated adjustments to the Base Purchase Price pursuant to Sections 3.1(b) and 3.1(c);

          (b) an executed counterpart to the Assumption Agreements relating to the Assigned Contracts and Assumed Liabilities;

          (c) (i) an executed copy of the Administrative Services Transition Services Agreement (to the extent Buyer notifies Sellers at least ten (10) days prior to the Closing Date that it intends to enter into the Administrative Services Transition Services Agreement), and (ii) subject to Section 4.4, an executed copy of the Fuel and Power Transition Services Agreement;

          (d) a release of the LTMA Support Obligations (other than with respect to amounts owing prior to Closing) and unless Buyer has elected Gas Services under the Fuel and Power Transition Services Agreement, either (i) RES Assignment and Assumption Agreement executed by Buyer in substantially the form attached as Exhibit D hereto, assigning to Buyer’s designee the RES Agreements, or (ii) if required by Section 2.5, the Fuel Supply Agreement executed by Buyer and Buyer’s Energy Manager; if Buyer has elected such Gas Services, then Buyer shall deliver the RES Assignment and Assumption Agreement or the Fuel Supply Agreement, as applicable, at the time such Gas Services terminate;

          (e) a joint direction letter executed by Buyer instructing the Escrow Agent to (i) transfer $40,000,000 of the funds held in the Deposit Escrow Account into the Indemnity

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Escrow Account and (ii) to transfer all interest earned in the Deposit Escrow Account as directed by Sellers; and

          (f) a duly executed certificate as described in Section 9.3(c).

     4.4. RES Fuel Purchase Transactions. If Buyer does not intend to utilize RES’ services under the Fuel and Power Transition Services Agreement, the Parties shall nonetheless enter into the Fuel and Power Transition Services Agreement with respect to the sale to Buyer of the fuel purchased by RES under the RES Fuel Purchase Transactions from and after the Closing Date in accordance with the terms and conditions of the Fuel and Power Transition Services Agreement (including without limitation under Article VI thereto concerning the supplying of credit support) but without payment of the monthly fee set forth in Section 2.1 of the Fuel and Power Transition Services Agreement. Notwithstanding the foregoing, if as of Closing or at anytime thereafter, the Parties are able to cause one or more of the RES Fuel Purchase Transactions to be novated directly to Buyer’s Energy Manager, then such transactions shall be excluded from the Fuel and Power Transition Services Agreement. Each of the Parties shall use commercially reasonable efforts to cause such novations to occur. Each such novation shall include the acknowledgment of the counterparty under such RES Fuel Purchase Transaction that it will look solely to RES for the payments of amounts arising or accruing under such RES Fuel Purchase Transaction prior to the effective time of such novation.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES
REGARDING THE ACQUIRED ASSETS

     Each Seller hereby represents and warrants to Buyer, for itself, and with respect to the Acquired Assets owned by such Seller that:

     5.1. Organization and Qualification; Authority. Each Seller is duly formed and existing under the laws of the State of Delaware. Each Seller has the requisite power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby and to own, lease and operate its assets and properties and to carry on its business as it is now being conducted or as contemplated herein and in accordance with Sections 363, 1107 and 1108 of the Bankruptcy Code. Each Seller is qualified to transact business and, where applicable, is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except in the jurisdictions where the failure to be so qualified or licensed would not, in the aggregate, be reasonably expected to have a Material Adverse Effect on such Seller’s ability to perform its obligations hereunder. The execution and delivery by Sellers of this Agreement and the performance by each Seller of its respective obligations hereunder have been duly and validly authorized by all necessary limited partnership or limited liability company (as applicable) action on behalf of such Seller. This Agreement has been duly and validly executed and delivered by each Seller and constitutes the legal, valid and binding obligation of such Seller enforceable against such Seller in accordance with its terms except as the same may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar Laws relating to or affecting the rights of creditors generally or by general equitable principles.

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     5.2. No Conflicts; Consents and Approvals. The execution and delivery by each Seller of this Agreement and each of the documents contemplated hereby does not, and the performance by such Seller of its obligations under this Agreement and each of the documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby will not:

          (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Charter Documents of such Seller;

          (b) assuming the consents set forth on Schedule 5.2(b) (the “Company Consents”) have been obtained, require the consent of, notice to or approval of any Person under any Material Contract which is an Assigned Contract, be in violation of or result in a default (or give rise to any notice requirement or right of termination, cancellation or acceleration) under any Material Contract that is an Assigned Contracts except for any such violations or defaults (or rights of termination, cancellation or acceleration), as would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect;

          (c) assuming all required filings, approvals, consents, authorizations and notices set forth on Schedule 5.2(c) (collectively, the “Sellers’ Governmental Approvals”) including the Sale Order have been made, obtained or given, (i) conflict with or result in a violation or breach of any term or provision of any Law or writ, judgment, order or decree applicable to Sellers or (ii) require the consent of, notice to or approval of any Governmental Authority under any applicable Law, except in each case such conflicts, violations or breaches, or the failure to obtain such consents or approvals, which would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect; and

          (d) result in the imposition or creation of a Lien upon or with respect to the Acquired Assets.

     5.3. Subsidiaries. Sellers have no subsidiaries and do not own equity interests in any Person.

     5.4. Financial Statements. Attached as Schedule 5.4 are copies of (i) the audited financial statements of Channelview LP for the years ended December 31, 2005 and December 31, 2006; and (ii) the unaudited balance sheet and statements of income and cash flow of Channelview LP as of and for the quarter ended September 30, 2007. The December 31, 2006 financial statements fairly present, in all material respects and in accordance with GAAP, the financial position and the results of operations, as the case may be, of Channelview LP as of the dates and for the periods indicated, except in the case of the interim financial statement for footnote disclosure and year-end audit adjustments.

     5.5. Absence of Undisclosed Liabilities; Certain Developments. Except as recorded in the September 30, 2007 Balance Sheet included in Schedule 5.4 (the “Channelview September 30 Balance Sheet”) or the notes thereto or as disclosed on Schedule 5.5, and except such liabilities that do not and would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect, to their Knowledge, neither Seller has aggregate liabilities that would be required to be recorded in a balance sheet prepared in accordance with GAAP,

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excluding (i) liabilities under Material Contracts, (ii) liabilities under this Agreement, (iii) liabilities incurred in the ordinary course of business since September 30, 2007, (iv) liabilities that will be repaid or extinguished on or prior to the Closing, or not assumed by Buyer pursuant to the terms hereof, (v) liabilities incurred after the date of this Agreement, in accordance with Article 8, and (vi) to the extent not otherwise included in (i) — (iii) and (v) above, administrative expenses in the Chapter 11 Cases.

     5.6. Litigation. Except as disclosed on Schedule 5.6, there is no litigation pending, or, to either Seller’s Knowledge, threatened in writing against such Seller before any Governmental Authority or any arbitrator, except for litigation that would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed on Schedule 5.6, neither Seller is subject to any judgment, writ, decree, injunction, rule or order of any Governmental Authority (whether preliminary or final) that prohibits the consummation of the transactions contemplated by this Agreement or otherwise detracts from the value of, or interferes with the present use of, the Acquired Assets, other than, in each case, those that would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

     5.7. Compliance with Laws. Except as disclosed on Schedule 5.7, neither Seller nor Reliant Energy Power Supply LLC, as registered with NERC and the Texas Regional Entity, as Generator Operator of the Channelview Facility (in such capacity the “Generator Operator”), is in violation of or has been given written notice of any current violation of any Law, except violations that would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed on Schedule 5.7, with respect to the Channelview Facility, to Sellers’ Knowledge, no investigation, audit or review relating to Sellers, the Channelview Facility, the Generator Operator or any of the other Acquired Assets by any Governmental Authority is pending or threatened, other than, in each case, those that would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. For the avoidance of doubt, the representation above, insofar as it relates to the Generator Operator, is only made with respect to any Law applicable to it in its capacity as Generator Operator.

     5.8. Permits. Each material Permit used with respect to the operation of the Channelview Facility and the conduct of the Business is set forth on Schedule 5.8(i). Except as disclosed on Schedule 5.8(ii), neither Seller is in violation of the terms of any Permit used to conduct their respective businesses as currently conducted, except for violations which would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. To Sellers’ Knowledge, such Permits are in full force and effect, except as would not reasonably be expected to have a Material Adverse Effect.

     5.9. Contracts.

          (a) Excluding Assigned Contracts, any Benefit Plans and any Contracts with respect to which Buyer will not be bound or have any liability after the Closing, Schedule 5.9(a) sets forth a list as of the date of this Agreement of the following Contracts to which either Seller is bound (collectively, the “Material Contracts”):

     (i) Contracts for the future purchase, exchange or sale of electric power, steam or ancillary services or fuel;

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     (ii) Contracts for the future transmission of electric power or fuel or for the storage of fuel;

     (iii) interconnection Contracts;

     (iv) other than Contracts of the nature addressed by Section 5.9(a)(i) — (ii), Contracts that grant a right or option to purchase any asset of Sellers, other than in each case, Contracts entered into in the ordinary course of business consistent with past practices relating to assets with a value of less than $500,000 individually or $2,000,000 in the aggregate;

     (v) other than Contracts of the nature addressed by Section 5.9(a)(i) — (ii), Contracts for the future provision of goods or services requiring payments in excess of $500,000 for each individual Contract, excluding any such Contracts that are terminable by Sellers without penalty on not more than 30 days’ notice;

     (vi) Contracts under which such Seller has created, incurred, assumed or guaranteed any outstanding indebtedness for borrowed money or any capitalized lease obligation, or under which such Seller has imposed a security interest on any of its assets, tangible or intangible, which security interest secures outstanding indebtedness;

     (vii) letters of credit or outstanding agreements of guaranty, surety or indemnification, direct or indirect, by Channelview LP, or by a Seller or any Affiliate of a Seller for the benefit of Channelview LP;

     (viii) Contracts with Reliant Energy or any Affiliate of Reliant Energy relating to the future provision of goods or services;

     (ix) Contracts under which Channelview LP has advanced or loaned money outside of the ordinary course of business;

     (x) employment, consulting or separation Contracts and any Contract that will result in the payment of any severance, termination, “golden parachute,” or similar payments to any present or former personnel following termination of employment or otherwise as a result of the consummation of the transactions contemplated by this Agreement and each of the agreements executed in connection therewith;

     (xi) any collective bargaining agreement;

     (xii) outstanding futures, swap, collar, put, call, floor, cap, option or other Contracts that are intended to benefit from or reduce or eliminate the risk of fluctuations in the price of commodities, including electric power, fuel or securities;

     (xiii) Contracts that purport to limit either Sellers’ freedom to compete in any line of business or in any geographic area;

     (xiv) partnership, joint venture or limited liability company agreements; and

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     (xv) leases for real property.

     (b) Sellers have provided Buyer with, or access to, true and complete copies of all Material Contracts.

     (c) Except as a result of the filing of the Chapter 11 Cases or as set forth on Schedule 5.9(c) hereto, neither Seller is, and to Sellers’ Knowledge, no counterparty is, in default in the performance or observance of any term or provision of, and no event has occurred which, with lapse of time or action by a third party, would result in such a default under any Assigned Contracts to which either Seller is a party other than as would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

     5.10. Taxes. Except as set forth on Schedule 5.10:

          (a) Each Seller has duly filed with the appropriate Taxing Authorities all Tax Returns required to be filed by it, and such Tax Returns are true, correct, and complete in all material respects.

          (b) Each Seller has duly paid in full any and all Taxes owed by it (whether or not shown or required to be shown on any Tax Return, except in each case where the failure to file such Tax Returns or pay such Tax would not reasonably be expected to, in the aggregate, have a Material Adverse Effect).

          (c) There are no liens for Taxes upon any Acquired Asset, except for liens for Taxes not yet due.

          (d) As of the date hereof, to Sellers’ Knowledge, there are no pending or threatened in writing, Tax audits, examinations, actions, suits, claims, investigations or proceedings with respect to the ownership of the Acquired Assets and no outstanding written deficiencies or assessments for any amount of Tax have been assessed by any Taxing Authority with respect to Taxes relating to the ownership of the Acquired Assets that have been received by Sellers.

          (e) There are no outstanding agreements extending or waiving the statutory period of limitations applicable to any claim for, or the period for the collection or assessment or reassessment of, Taxes due from either Seller for any taxable period and no request for any such waiver or extension is currently pending.

          (f) Neither Seller is a party to or bound by any agreement relating to the sharing or allocation of Taxes.

          (g) Neither Seller is a party to any agreement, Contract, arrangement or plan that (i) has resulted or could result, separately or in the aggregate, in the payment of any “excess parachute payment” within the meaning of Section 280G of the Code (or any similar provision of state, local or foreign Law) or any amount that would not be fully deductible as a result of Section 162(m) of the Code (or any similar provision of state, local or foreign Law), or (ii) could provide for the deferral of compensation subject to Section 409A of the Code (or any similar provision of state, local or foreign Law).

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          (h) Neither Seller currently is the beneficiary of any extension of time within which to pay any Tax or to file any Tax Return.

          (i) Neither Seller is required to include any item of income in, or exclude any item of deduction or loss from, taxable income for any taxable period or portion thereof beginning on or after the Closing Date as a result of (A) a change in method of accounting for a taxable period beginning on or before the Closing Date, (B) any “closing agreement” described in Section 7121 of the Code (or any similar provision of state, local or foreign Law) executed on or before the Closing Date, (C) any installment sale or open transaction disposition made on or before the Closing Date, or (D) any prepaid amount received on or before the Closing Date.

          (j) All Taxes required to be withheld or collected by Sellers have been duly withheld and collected and have been properly paid or deposited as required by applicable Laws.

          (k) RESC, at all times since its formation, has been classified and treated for Tax purposes as a disregarded entity, and not as a corporation.

          (l) Channelview LP, at all times since its formation, has been classified and treated for Tax purposes as a partnership, and not as a corporation.

     5.11. Employee Benefit Plans; ERISA.

          (a) Schedule 5.11(a) sets forth a true, correct and complete list, as of the Execution Date, of all Seller Affiliate Plans. No Continuing Employee is entitled to, or may become eligible to receive, any benefit from a Benefit Plan other than a Seller Affiliate Plan. On or before the Execution Date, Sellers have made available to Buyer copies (including amendments) of (i) each of the Seller Affiliate Plans, including any plan documents, trust agreements, annuity contracts, insurance contracts or other funding documents related to a Seller Affiliate Plan, (ii) the latest determination letter obtained from the IRS with respect to any Seller Affiliate Plan intended to be qualified or exempt under Section 401 or 501 of the Code, and (iii) census data for the Channelview Facility Employees for each Seller Affiliate Plan.

          (b) None of Sellers, Sellers’ Affiliates, or any Commonly Controlled Entity contribute to, have an obligation to contribute to, or have ever contributed to, or ever had an obligation to contribute to, any multiemployer plan (within the meaning of Section 3(37) of ERISA).

          (c) All Seller Affiliate Plans and related trust agreements are and have been maintained in compliance both as to form and operation with all Laws, including the Code and ERISA, except to the extent that any such non-compliance would not reasonably be expected to have a Material Adverse Effect. Except as set forth in Schedule 5.11(c), a favorable determination letter as to qualification under Section 401 of the Code has been issued with respect to any Seller Affiliate Plan intended to be qualified under Section 401 of the Code, and the related trust has been determined to be exempt from taxation under Section 501 of the Code. The Sellers and their Affiliates know of no events or circumstances that have occurred that would adversely affect the qualified status of any such plans or trusts.

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          (d) Other than as provided under the Collective Bargaining Contract, no individual listed on Schedule 7.9(b) has ever received employer-subsidized health care or any other non-pension benefits with respect to employment at the Channelview Facility for more than 3l days after his or her employment is terminated (other than as required by part 6 of subtitle B of title I of ERISA) and has never been promised such employer-subsidized post-termination benefits with respect to employment at the Channelview Facility.

     5.12. Labor and Employment.

          (a) With respect to each individual employed by Operator who performs services for the Channelview Facility (the “Channelview Facility Employees”), except for the Collective Bargaining Contract, Operator is not a party to, nor is bound by, the terms of any collective bargaining agreement or any other Contract with any labor union or representative of employees. To Sellers’ Knowledge, there are no union organization campaigns or attempts to organize or establish any employee association underway or threatened involving employees of either Seller.

          (b) Channelview LP is in compliance with all laws, rules and regulations relating to labor relations and employment with respect to the Continuing Employees, except to the extent that any such non-compliance would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

          (c) To Sellers’ Knowledge, no Channelview Facility Employees are in violation of any term or provision of any employment contract, confidentiality or other proprietary information disclosure agreement or other contract relating to the right of any such Person to be employed or engaged by a Seller which would reasonably be expected to have a Material Adverse Effect.

          (d) To Sellers’ Knowledge, none of Operator’s employment policies or practices applicable to the Channelview Facility Employees are currently being audited or investigated by any Governmental Authority which would reasonably be expected to have a Material Adverse Effect. To Sellers’ Knowledge there are no current, nor have there been since four (4) years prior to the Closing Date, any, charges, claims, or demands filed with any Governmental Authority from any current or former Channelview Facility Employees regarding their employment or former employment at the Channelview Facility which would reasonably be expected to have a Material Adverse Effect, including claims or charges of employment discrimination, sexual harassment or unfair labor practices.

          (e) With respect to the Channelview Facility Employees, Operator has complied with all applicable Laws respecting employment and employment practices, terms and conditions of employment, wages and hours and other Laws, regulations and requirements related to employment, except to the extent that any such non-compliance would not reasonably be expected to have a Material Adverse Effect.

          (f) Except as set forth on Schedule 5.12(f), neither the execution and delivery of this Agreement or the documents contemplated hereby by the Sellers, the performance by the Sellers of their obligations hereunder and thereunder, nor the consummation of the transactions

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contemplated hereby and thereby will (i) materially increase or enhance any benefits payable to a Continuing Employee under any Seller Affiliate Plan, or (ii) materially accelerate the time of payment or vesting, or increase the amount, of any compensation due to any Continuing Employee under a Seller Affiliate Plan.

     5.13. Environmental Matters. Except for such matters as disclosed on Schedule 5.13 or for such matters that would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect:

          (a) With respect to the Acquired Assets, Sellers are in compliance with all applicable Environmental Laws;

          (b) All Permits required under Environmental Laws for conducting the operations of the Channelview Facility, as such facility is currently being operated, have been obtained or applied for and, to the extent obtained, are currently in full force and effect;

          (c) Neither Channelview LP nor any of its Affiliates, with respect to the Channelview Facility, have received any written notice of a pending Claim from any Governmental Authority or other Person alleging that it or the Channelview Facility is in violation of, or has liability under, any applicable Environmental Law;

          (d) To Channelview LP’s Knowledge, there has been no disposal or Release by Sellers or their Affiliates at, on, under or from the Channelview Facility, except in compliance with Environmental Laws; and

          (e) Neither Channelview LP nor any of its Affiliates have received any written notice from any Governmental Authority or other Person alleging that Channelview LP or the Channelview Facility have liability under applicable Environmental Laws with respect to the disposal or transportation, or the arrangement for disposal or transportation, of Hazardous Substances from the Channelview Facility by Channelview LP or any of its Affiliates at or to any off-site location.

     Notwithstanding any other provision of this Agreement to the contrary, this Section 5.13 contains the sole and exclusive representations and warranties of Sellers on environmental matters with respect to Sellers and the Acquired Assets.

     5.14. Intellectual Property. Except as set forth on Schedule 5.14, or as would not reasonably be expected to have a Material Adverse Effect, (a) each Seller owns or has the right to use all Intellectual Property used in the operations of its respective business as currently conducted; (b) to the Knowledge of Sellers, no Person has or is infringing or misappropriating any Intellectual Property of Channelview LP that is exclusively used in the operation of the Channelview Facility; and (c) to the Knowledge of Sellers, no Person has or is infringing or misappropriating any Intellectual Property of RESC that is used exclusively in the running of RESC’s Business. Except for such violations which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect, neither the Sellers nor the Channelview Facility have infringed or misappropriated, and the operation of the Channelview Facility does not infringe or misappropriate any valid rights of third parties with respect to Intellectual Property.

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     5.15. Real Estate. Channelview LP has delivered or otherwise made available to Buyer true, correct and complete copies of the surveys, title reports and the ground lease set forth on Schedule 5.15. Channelview LP does not own any real property or interest in real property other than pursuant to the Real Estate Leases or with respect to the Entitled Real Property.

     5.16. Insurance. The Channelview Facility and Sellers are covered by valid policies of insurance as part of Reliant Energy’s corporate insurance program. Such insurance coverage shall not survive the Closing.

     5.17. Federal Regulation. As of the Closing Date, the Channelview Facility meets the requirements for a “Qualifying Cogeneration Facility” as defined in Section 3(18)(B) of the Federal Power Act, as amended, and the rules and regulations thereunder and the Public Utility Regulatory Policies Act of 1978, as amended (a “QF”).

     5.18. Brokers. Neither Seller has any liability or obligation to pay fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement.

     5.19. Conduct of Business and Operations. To Channelview LP’s Knowledge, since December 31, 2006, Channelview LP has operated and maintained the Channelview Facility in accordance with Prudent Industry Practice, except as would not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

     5.20. Sufficiency of Assets. Except for the Excluded Assets and assets consumed in the ordinary course of business, the Acquired Assets include all of the assets (whether tangible or intangible) used by the Channelview Facility to conduct the business of the Channelview Facility as conducted as of each of the date hereof, except as would not reasonably be expected to have a Material Adverse Effect. Except as would not reasonably be expected to have a Material Adverse Effect, the Sellers have good title to, or valid license or right to use, free and clear of all Liens (other than Liens that will be discharged prior to Closing or pursuant to the Chapter 11 Cases, or Permitted Exceptions), all of the tangible personal property described in the preceding sentence.

ARTICLE 6

REPRESENTATIONS AND WARRANTIES OF BUYER

     In order to induce Sellers to enter into this Agreement and consummate the transactions contemplated hereby, Buyer hereby represents and warrants to Sellers that:

     6.1. Organization and Qualification. Buyer is a limited liability company duly formed and existing under the Laws of the State of Delaware. Buyer is qualified to transact business and, where applicable, is in good standing in each jurisdiction where the nature of the business conducted by it makes such qualification necessary, except in those jurisdictions where the failure to be so qualified or licensed would not, in the aggregate, be reasonably expected to result in a material adverse effect on Buyer’s ability to perform its obligations hereunder.

     6.2. Authority. Buyer has all requisite limited liability company power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the

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transactions contemplated hereby. The execution and delivery by Buyer of this Agreement and the performance by Buyer of its obligations hereunder have been duly and validly authorized by all necessary limited liability company action on behalf of Buyer. This Agreement has been duly and validly executed and delivered by Buyer and constitutes the legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms except as the same may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar Laws relating to or affecting the rights of creditors generally or by general equitable principles.

     6.3. No Conflicts; Consents and Approvals. The execution and delivery by Buyer of this Agreement and each of the documents contemplated hereby do not, and the performance by Buyer of its obligations hereunder and under each of the documents contemplated hereby and the consummation of the transactions contemplated hereby and thereby will not:

          (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of its Charter Documents;

          (b) be in violation of or result in a default (or give rise to any right of termination, cancellation or acceleration) under any material Contract to which Buyer is a party or by which any of its assets may be bound except for any such violations or defaults (or rights of termination, cancellation or acceleration) which would not, in the aggregate, be reasonably expected to result in a material adverse effect on Buyer’s ability to perform its obligations hereunder; or

          (c) assuming all required filings, approvals, consents, authorizations and notices set forth in Schedule 6.3(c) (collectively, the “Buyer Governmental Approvals”) have been made, obtained or given, (i) conflict with or result in a violation or breach of any term or provision of any Law or writ, judgment, order or decree applicable to Buyer or any of its assets or (ii) require the consent or approval of any Governmental Authority under any applicable Law, except in each case such conflicts, violations or breaches, or the failure to obtain such consents or approvals, which would not reasonably be expected to result in a material adverse effect on Buyer’s ability to perform its obligations hereunder.

     6.4. Legal Proceedings. Buyer has not been served with written notice of any Claim, and to Buyer’s Knowledge, none is threatened, against Buyer which seeks a writ, judgment, order or decree restraining, enjoining or otherwise prohibiting or making illegal any of the transactions contemplated by this Agreement.

     6.5. Compliance with Laws and Orders. Buyer is not in violation of or has been given written notice of any current violation of any Law applicable to Buyer or its assets the effect of which, in the aggregate, would reasonably be expected to result in a material adverse effect on Buyer’s ability to perform its obligations hereunder.

     6.6. Brokers. Buyer does not have any liability or obligation to pay fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Sellers or any of their Affiliates could become liable or obligated.

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     6.7. Financial Resources. Buyer at Closing will have sufficient funds to satisfy its obligations required to be performed at Closing.

     6.8. No Knowledge of a Sellers’ Breach. Buyer has no Knowledge of any breach by either Seller of any representation or warranty made hereunder which breach would reasonably be expected to result in a Material Adverse Effect, of which the Buyer has not advised Sellers.

     6.9. Opportunity for Independent Investigation. Prior to its execution of this Agreement, Buyer has conducted to its satisfaction an independent investigation and verification of the current condition and affairs of the Sellers and the Channelview Facility without reliance on Sellers or any of their Affiliates; provided that such independent investigation and verification shall not affect the express representations, warranties, covenants or other obligations of Sellers contained in this Agreement. Buyer has had reasonable and sufficient access to documents, other information and materials as it considers appropriate to make its evaluations.

ARTICLE 7

COVENANTS

     The Parties hereby, as applicable, covenant and agree as follows:

     7.1. Access.

          (a) During the Interim Period, to the extent within their reasonable control in light of the commencement of the Chapter 11 Cases, each Seller (as applicable) will provide, and will cause its Affiliates to provide, Buyer and its Representatives with reasonable access during normal business hours to the Channelview Facility, and the officers and management employees of Sellers and their Affiliates who are responsible for the Channelview Facility in such a manner so as not to unreasonably interfere with the business or operations of Sellers or their Affiliates; provided, that each Seller shall have the right to (i) have a Representative present for any communication with employees or officers of such Seller or its Affiliates, and (ii) impose reasonable restrictions and requirements for safety or operational purposes; provided further, that the right of access granted hereunder shall not include physical testing or sampling. Notwithstanding the foregoing, neither Seller shall be required to provide any information or allow any inspection which (i) such Seller reasonably believe contravenes applicable Law, (ii) constitutes or allows access to information protected by attorney/client privilege, or (iii) such Seller or its Affiliates is required to keep confidential or prevent access to by reason of any Contract with third parties; provided, however, that Sellers shall advise Buyer of the existence of such Contracts at Closing. Following the Closing, Sellers shall be entitled to retain copies of all books and records relating to the ownership and/or operation of their respective businesses (as applicable) and at Buyer’s request after the Closing, to the extent such books and records have not been disposed of, Sellers shall at Buyer’s sole cost and expense, provide Buyer with a copy of any such books and records.

          (b) Buyer agrees to indemnify, defend and hold harmless Sellers, their Affiliates and their Representatives from and against any and all Losses incurred by Sellers, their Affiliates, their Representatives or any other Person arising out of the access rights under this

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Section 7.1, including any Claims by any of Buyer’s Representatives for any injuries or Losses while present at the Channelview Facility, EVEN IN INSTANCES OF THE NEGLIGENCE OF SELLERS, THEIR AFFILIATES OR THEIR REPRESENTATIVES, BUT NOT TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLERS, THEIR AFFILIATES OR THEIR REPRESENTATIVES.

          (c) Each Party agrees that, after the Closing Date, it will use its commercially reasonable efforts to cooperate with and make available to the other Party and its Representatives for reviewing and making copies or taking extracts, upon reasonable notice and during normal business hours, books and records and information of or relating to the Acquired Assets which are necessary or useful in connection with any investigation, dispute or proceeding or audit by a Governmental Authority, or any claim by or against a third party involving the Acquired Assets (other than in connection with disputes between the Parties); provided that no such Party shall be required to make available any information, books or records, the disclosure of which would cause a waiver of any applicable privilege or breach of an obligation of confidentiality to a third-party and either party may make access to such information, books and records conditioned upon execution and delivery of a confidentiality agreement reasonably satisfactory to the party requesting disclosure. Further, after the Closing, Buyer shall grant to Sellers or their Representatives the access and right to make copies or take extracts described in the preceding sentence for such other purpose as may be reasonably requested by either Seller. The Party requesting any such books and records, information or cooperation shall bear all of the out-of-pocket costs and expenses of the other Party reasonably incurred in connection therewith (including out-of-pocket expenses to third parties incurred by any Party).

     7.2. Conduct of Business Pending the Closing.

          (a) Except as otherwise contemplated by this Agreement or set forth in Schedule 7.2, during the Interim Period, Sellers will, to the extent within their reasonable control in light of the commencement of the Chapter 11 Cases:

     (i) use their commercially reasonable efforts to operate and maintain the Channelview Facility and the Business in the ordinary course of business consistent with past practices and in accordance with Prudent Industry Practice;

     (ii) use their commercially reasonable efforts to (A) preserve its present business operations, organization (including management) and goodwill with respect to the Channelview Facility and (B) preserve its present relationship with Persons having business dealings with respect to the Channelview Facility;

     (iii) provide to Buyer copies of invoices paid or to be paid during or attributable to the Interim Period; and

     (iv) provide to Buyer copies of the monthly operations reports delivered to Lenders.

          (b) Except as otherwise contemplated by this Agreement, as set forth in Schedule 7.2, as required by any Material Contract or material Permit of either Seller, or as consented to by Buyer, which consent shall not be unreasonably withheld, conditioned or

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delayed, during the Interim Period, each Seller (as applicable) will, to the extent within its reasonable control (and as applicable in light of the Chapter 11 Cases) with respect to the Business, the Channelview Facility or the other Acquired Assets, not:

     (i) other than any Permitted Exceptions, permit or allow any Lien securing indebtedness for borrowed money against any of the Acquired Assets;

     (ii) except in the ordinary course of business consistent with past practice, terminate, amend or renegotiate in any material respect or grant a waiver of any material term of, or give any material consent with respect to, any Material Contract which is an Assigned Contract or Permit, or enter into a Contract after the Execution Date that would be a Material Contract if entered into prior to the Execution Date (other than Contracts that will be fully performed prior to Closing or renewals of Contracts in place on the Execution Date);

     (iii) other than accounts payable incurred in the ordinary course of business consistent with past practices or otherwise incurred pursuant to the Material Contracts (or Contracts entered into in accordance with clause (ii) above, after the Execution Date that would be Material Contracts if entered into prior to the Execution Date), incur, create, assume or otherwise become liable for indebtedness for borrowed money or issue any debt securities or assume or guarantee the obligations of any other Person unless in any such case paid in full and discharged at or before the Closing;

     (iv) fail to maintain their limited partnership or limited liability company existence or merge or consolidate with any other Person or acquire all or substantially all of the assets of any other Person;

     (v) issue or sell any membership interests, partnership interests or securities or rights convertible into membership interests, partnership interests or securities;

     (vi) liquidate, dissolve, recapitalize, reorganize or otherwise wind up its business or operations if any such action would impact the transactions contemplated hereby;

     (vii) except in the ordinary course of business, sell, assign, license, transfer, convey, lease or otherwise dispose of any assets with a value in excess of $500,000;

     (viii) make or change any material election with respect to Taxes;

     (ix) make any material change in its accounting principles, methods or policies, except as otherwise required by GAAP or applicable Law;

     (x) make any loans or purchase any securities of any Person, except for short-term investments or cash equivalents made in the ordinary course of business consistent with past practices;

     (xi) cancel, terminate or allow any material property or liability insurance policy to lapse;

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     (xii) cancel any debts, discount any receivables or waive any claims in excess of $500,000;

     (xiii) amend or modify its Charter Documents if such amendment or modification would affect such Seller’s ability to perform its respective obligations hereunder or under the documents contemplated hereby; or

     (xiv) agree or commit to do any of the foregoing.

     Notwithstanding the foregoing, each Seller may take commercially reasonable actions in accordance with Prudent Industry Practice with respect to emergency situations and to comply with applicable Law so long as such Seller shall, and with respect to Channelview LP, to the extent within its reasonable control in light of the commencement of the Chapter 11 Cases, promptly (but no later than two (2) Business Days after the taking of any such action) inform Buyer of such actions.

     For purposes of clarification, it is understood and agreed that Capital Expenditures made by Sellers for the items and in the amounts set forth in the budget attached hereto as Exhibit F shall be deemed to have been commercially reasonable and made by Sellers to operate and maintain the Channelview Facility and the Business in the ordinary course of business.

     7.3. Use of Certain Names. Within 30 days following the Closing, Buyer shall cease using the Reliant Marks, including eliminating the Reliant Marks from all Acquired Assets and disposing of any unused stationery and literature including the Reliant Marks, and thereafter, Buyer shall not, and shall cause the Channelview Facility not to, use the Reliant Marks or any logos, trademarks, trade names, patents or other Intellectual Property rights belonging to Sellers or any of their Affiliates, or which Sellers or any of their Affiliates have the right to use, and Buyer acknowledges that it, its Affiliates and the Channelview Facility have no rights whatsoever to use such Intellectual Property. Sellers hereby agree not to object to Buyer’s use of any Reliant Marks in connection with the operation of the Channelview Facility during the aforementioned thirty (30) day period.

     Without limiting the foregoing, within 30 days after the Closing Date, Buyer shall provide evidence to Sellers, in a format that is reasonably acceptable to Sellers, that Buyer has provided notice to all applicable Governmental Authorities and all counterparties to the Assigned Contracts regarding the sale of the Acquired Assets to Buyer and the new addresses for notice purposes.

     7.4. Support Obligations.

          (a) Prior to Closing, Buyer shall use commercially reasonable efforts to effect the full and unconditional release, effective as of the Closing, of the Sellers and their Affiliates from any credit support obligations provided by Sellers or such Affiliates with respect to the Acquired Assets or the Business, which are specifically listed on Schedule 7.4(a) at the time required under such schedule (collectively, the “Support Obligations”), including by offering within a reasonable time in advance of such release replacement bonds, guaranties, letters of credit, cash collateral and/or escrow arrangements, as needed, to effect the replacement of such

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Support Obligations, in accordance with the applicable requirements of such Support Obligations. Sellers shall reasonably cooperate with Buyer in such effort.

          (b) If Buyer is not successful, following the use of commercially reasonable efforts, in obtaining the complete and unconditional release of Sellers and their Affiliates from the LTMA Support Obligations as of Closing, then Sellers shall have the right to waive the condition to Closing set forth in Section 9.3(a); and

     (i) from and after the Closing, Buyer shall continue to use commercially reasonable efforts to obtain promptly the full and unconditional release of Sellers and their Affiliates from the LTMA Support Obligations;

     (ii) Buyer shall indemnify Sellers (as applicable) and their Affiliates for any liabilities, losses, costs or expenses incurred by Sellers or their Affiliates in connection with the LTMA Support Obligations arising or accruing after the Closing (excluding any such liabilities, losses, costs or expenses resulting from any breach of the LTMA Support Obligations) by Sellers and their Affiliates;

     (iii) Buyer shall not, and shall cause its Affiliates not to, effect any amendments or modifications or any other changes to the contracts or obligations to which any of the LTMA Support Obligations relate, or to otherwise take any action that in either case would reasonably be expected to increase, extend or accelerate the liability of either Seller or their Affiliates under the LTMA Support Obligations, without such Seller’s prior written consent; and

     (iv) Buyer shall deliver to Sellers at the Closing and maintain at all times thereafter until the full and unconditional release of the LTMA Support Obligations in accordance with this Section 7.4, at Sellers’ election, either (A) an irrevocable, standby letter of credit in the amount of the maximum amount of exposure under the LTMA Support Obligations, in form and substance and from an issuing bank reasonably satisfactory to Sellers or (B) a guaranty of the Buyer’s obligations hereunder with respect to the LTMA Support Obligations from a Person with a Credit Rating of Investment Grade, which guarantee shall be in form and substance reasonably satisfactory to Sellers.

     7.5. Termination of Certain Services, Contracts. Except as otherwise provided in the Administrative Services Transition Services Agreement and for purposes of clarity, Buyer shall be responsible for providing all administrative, operating and energy management services, including tax, legal, insurance, financial reporting, operations and maintenance services, technical support and banking services for the Acquired Assets from and after the Closing, and any and all arrangements under which such services are provided by Reliant Energy or an Affiliate shall not be assigned to Buyer and/or shall be terminated, as applicable, including serving as a QSE or a “Retail Electric Provider” with respect to the Channelview Facility.

     7.6. Insurance. Sellers shall be solely responsible for providing insurance to the Channelview Facility and the Business for periods prior to the Closing. Buyer shall be solely responsible for providing insurance to the Channelview Facility and the Business for all periods after the Closing. Buyer acknowledges that no insurance coverage or policy maintained for the

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Channelview Facility or the Business will extend beyond the Closing for the benefit of Buyer. Buyer shall provide evidence of such independent coverage to Sellers as of Closing. Notwithstanding any provision hereof to the contrary, if, before the Closing, all or any material portion of the Acquired Assets is (a) condemned or taken by eminent domain or is the subject of a pending or threatened condemnation or taking which has not been consummated, or (b) materially damaged or destroyed by fire or other casualty, Sellers shall notify Buyer promptly in writing of such fact, and (i) in the case of condemnation or taking, Sellers shall assign or pay, as the case may be, any proceeds thereof to Buyer at the Closing and (ii) in the case of a fire or other casualty, Sellers shall either restore such Acquired Asset to substantially the same condition as before such casualty or assign the insurance proceeds therefrom to Buyer at Closing.

     7.7. Tax Matters.

          (a) Transfer Taxes. Notwithstanding anything in this Agreement to the contrary, all Transfer Taxes shall be paid one-half by Buyer and one-half by Sellers. Buyer shall file all Tax Returns required to be filed to report Transfer Taxes.

          (b) Responsibility for Pre-Closing Taxes. Sellers shall be responsible for all Taxes relating to the Acquired Assets with respect to any period (or portion thereof) ending on or before the Closing Date. Sellers shall pay, and shall indemnify Buyer, for any such Taxes. For this purpose, in the case of any taxable period that includes (but does not end on) the Closing Date (a “Straddle Period”), Taxes (including any applicable withholding obligations) other than income or franchise Taxes will be allocated between the portion of the Straddle Period ending on the Closing Date (“Pre-Closing Portion”) and the portion of the Straddle Period beginning on the day after the Closing Date. The amount of such Taxes allocable to the Pre-Closing Portion will be determined on the basis of a deemed closing of the books of Sellers as of the close of business on the Closing Date; provided, that in the case of ad valorem Taxes and any other Tax that is a fixed amount for the entire taxable period, the amount of each such Tax allocable to the Pre-Closing Portion will be equal to the product of each such Tax multiplied by a fraction, the numerator of which is the number of days in the Straddle Period from the commencement of such period through and including the Closing Date, and the denominator of which is the number of days in the entire Straddle Period. The amount of Taxes (other than income or franchise Taxes) for a Straddle Period not allocable to the Pre-Closing Portion shall be allocable to the portion of the Straddle Period beginning the day after the Closing Date.

          (c) Income and Franchise Taxes. Notwithstanding anything in this Agreement to the contrary, each Seller shall be responsible for reporting for any income or franchise Taxes for which it may be liable. Without limiting the foregoing, Sellers shall be responsible for reporting and paying the Texas franchise Tax and any associated penalties and interest with respect to the total revenues of Sellers attributable to the Business through and including the Closing Date. Buyer shall be responsible for reporting and paying the Texas franchise Tax with respect to the total revenues of the Acquired Assets after the Closing Date.

          (d) Texas Temporary Credits. Buyer (i) acknowledges and agrees that a purchaser of the Acquired Assets will not be entitled to any Channelview Texas temporary credits; and (ii) agrees that the Sellers shall have no obligation to the Buyer from and after the Closing, with respect thereto.

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          (e) Cooperation. Buyer and Sellers shall cooperate fully as and to the extent reasonably requested by either Party, in connection with the filing of Tax Returns relating to the Acquired Assets and any audit, litigation or other proceeding (each a “Tax Proceeding”) with respect to such Tax Returns. Such cooperation shall include, the retention and (upon request and until the expiration of the applicable statute of limitations,) the provision of records and information relating solely to the Acquired Assets which are reasonably relevant to any such Tax Return or Tax Proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Promptly following receipt of any notice of a Tax Proceeding relating to the Acquired Assets with respect to a taxable period (or portion thereof) ending on or before the Closing Date, the appropriate Seller or Buyer, as the case may be, shall inform the other Party of such Tax Proceeding. The Buyer and Sellers further agree, upon reasonable request, to use their commercially reasonable efforts to obtain any certificate or other document from any Taxing Authority or any other Person, or make any election, as may be necessary to mitigate, reduce, or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

     7.8. Confidentiality.

          (a) All nonpublic information provided to, or obtained by, Buyer or its Representatives in connection with the transactions contemplated hereby shall be “Evaluation Material” for purposes of the letter dated May 24, 2007 between Channelview LP and Kelson Energy, Inc., an Affiliate of Buyer (the “Confidentiality Agreement”), the terms of which shall continue in force until the Closing; provided, that Buyer may disclose such information as may be necessary in connection with seeking Buyer Governmental Approvals.

          (b) Notwithstanding anything to the contrary set forth herein or in any other agreement to which the Parties hereto are parties or by which they are bound, the obligations of confidentiality contained herein and therein, as they relate to the Acquired Assets, shall not apply to the U.S. federal tax structure or U.S. federal tax treatment of the Acquired Assets and the Parties hereto (and any employee, Representative, or agent of any party hereto) may disclose to any and all persons, without limitation of any kind, the U.S. federal tax structure and U.S. federal tax treatment of the Acquired Assets. The preceding sentence is intended to cause the Acquired Assets not to be treated as having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. In addition, each Party hereto acknowledges that it has no proprietary or exclusive rights to the tax structure of the Acquired Assets or any tax matter or tax idea related to the Acquired Assets.

     7.9. Employee and Benefit Matters.

          (a) On or before the Closing, Channelview LP shall take, or shall cause to be taken, all actions necessary to cause the Continuing Employees to cease to accrue any additional benefits on or after the Closing Date under all Seller Affiliate Plans (except as set forth in the Transition Services Agreement to the extent applicable). Prior to the Closing Date, Sellers shall provide Buyer or its designee with census information for the Continuing Employees and all

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Seller Affiliate Plan documents as necessary for Buyer to construct and implement the benefit plans required by this Section 7.9.

          (b) Within 45 days after the Execution Date, but effective as of the Closing Date, Buyer or its designee shall offer employment (which shall be contingent on the occurrence of the Closing to each individual who is (i) eligible for employment under applicable law, (ii) actively at work on the Closing Date, and (iii) listed as “actively at work” on Schedule 7.9(b)). Sellers shall not, and shall cause their affiliates to not, discourage such employees from accepting, or otherwise interfere with, the offers made by Buyer or its designee, although such employees may, on their own initiative, post for and be considered for open position with Sellers’ Affiliates. For purposes of this Section 7.9, an employee is not “actively at work” if the employee applied for long-term disability benefits or is receiving long-term disability benefits under any long-term disability plan or program established or maintained by Sellers, Sellers’ Affiliates or any Commonly Controlled Entity as of the Closing Date. All employees described in the preceding sentence shall be listed as “not actively at work” on Schedule 7.9(b). The list of employees identified as “not actively at work” on Schedule 7.9(b) shall be updated as of the Closing Date. Each offer of employment shall be consistent with the provisions of this Section 7.9 and shall remain open for a period of at least 10 days. For a period of at least one year beginning on the Closing Date and subject to the Collective Bargaining Contract (for covered Continuing Employees) and the remaining paragraphs of this Section 7.9 and such individual’s continued employment with Buyer or its designee, Buyer or its designee shall cause each such Continuing Employee to be provided with compensation (including annual incentive compensation) on a substantially equivalent basis to the compensation provided to such employee by the Operator immediately prior to the Closing and benefits (including severance benefits and worker’s compensation benefits) on a basis substantially similar in the aggregate to those provided to such employee by the Operator immediately prior to the Closing (but excluding participation in a defined benefit plan, any right to employer contributions to a defined contribution plan, participation in an employee stock purchase plan, and participation in any stock-based compensation program, in each case, to the extent not offered to employees of Buyer or its designee). Notwithstanding the foregoing sentence, Buyer shall not be required to provide post-retirement medical benefits to any Continuing Employee except for (i) amounts required to be contributed on an annual basis under the Collective Bargaining Contract to accounts of eligible Continuing Employees established by Buyer or its designee to replicate amounts referred to as “Basic Credits”, “Additional Credits” and “Interest” under the Reliant Energy FutureCare program as of the date hereof (“FutureCare Program”), (ii) providing access to accounts under the FutureCare Program for eligible Continuing Employees as required under the Collective Bargaining Contract, and (iii) as required under part 6 of subtitle B of title I of ERISA. After Closing, subject to the Collective Bargaining Contract (for covered Continuing Employees), the employment policies and practices of Buyer or its designee shall apply to the Continuing Employees. Individuals listed on Schedule 7.9(b) who are not actively at work on the Closing Date will not become employees of Buyer or its designee until such time as they are medically certified to return to work, provided such release is within 6 months of the Closing Date. Offers of employment by Buyer or its designee to these employees will be made consistent with the conditions outlined in this Section 7.9.

          (c) Buyer acknowledges and agrees that (i) certain employees employed at the Channelview Facility are represented by the International Brotherhood of Electrical Workers and

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its Local Union No. 66 (the “Union”) pursuant to the terms of the Collective Bargaining Contract, (ii) Buyer, or its designee, as applicable, will continue to recognize the Union as the exclusive bargaining representative of the employees whose employment is covered by the Collective Bargaining Contract, (iii) the Collective Bargaining Contract will continue to be effective until it expires by its own terms or is renegotiated, and (iv) Buyer or its designee will assume and be bound by the terms, conditions and provisions of the Collective Bargaining Contract. Buyer further acknowledges that, subject to the terms of the Collective Bargaining Contract and applicable Law, Buyer or its designee shall offer employment (which shall be contingent on the occurrence of the Closing) to the employees covered by the Collective Bargaining Contract. The employment policies and practices of Buyer or its designee shall apply to the Continuing Employees covered by the Collective Bargaining Contract to the extent consistent with the Collective Bargaining Contract. Nothing herein is intended to restrict or prohibit the ability of Buyer or its designee to negotiate modifications of the Collective Bargaining Contract with the Union.

          (d) Buyer shall cause the employee benefit plans and programs maintained after the Closing by Buyer or its designee to recognize each Continuing Employee’s years of service and level of seniority prior to the Closing Date with the Operator (including service and seniority with any other employer that was previously recognized by the Operator) for purposes of terms of employment and eligibility, vesting and benefit determination (but not for benefit accrual under any defined benefit plan) under such plans and programs. Buyer shall cause each employee welfare benefit plan or program sponsored by Buyer or its designee in which a Continuing Employee may be eligible to participate on or after the Closing Date to waive any preexisting condition exclusion with respect to participation and coverage requirements applicable to such Continuing Employee, to the extent that a Continuing Employee provides Buyer with a certificate of creditable coverage as defined in Section 701(c)(1) of ERISA.

          (e) To the extent consistent with the Collective Bargaining Contract, as applicable, Buyer shall cause, or as applicable shall cause its designee to cause, each Continuing Employee and his or her eligible dependents (including all such Continuing Employee’s dependents covered immediately prior to the Closing Date by a Seller Affiliate Plan that is a group health plan) to be offered coverage under a group health plan maintained by Buyer or its designee that (i) provides medical and dental benefits to the Continuing Employee and such eligible dependents effective immediately upon the Closing Date and (ii) credits such Continuing Employee, for the year during which such coverage under such group health plan begins, with any deductibles and co-payments already incurred during such year under a Seller Affiliate Plan that is a group health plan.

          (f) Buyer expressly agrees that it assumes all obligations to provide any required notice under the WARN Act, or other applicable Laws, and to pay all severance payments, damages for wrongful dismissal and related costs, with respect to the termination of any employee of the Operator employed at the Channelview Facility that occurs on or after the Closing Date. Sellers, as applicable, shall remain liable for any such liabilities that may arise as a result of any action taken by Seller prior to the Closing Date.

          (g) Sellers (as applicable) shall cause each Continuing Employee to be permitted to elect on the Closing Date (or as soon thereafter as reasonably practicable) a direct

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rollover of his/her account balance under a Seller Affiliate Savings Plan to a defined contribution plan designated by Buyer (the “Buyer Savings Plan”), and Sellers shall cause the applicable Seller Affiliate Savings Plan to deliver to the Buyer Savings Plan as soon as reasonably practicable after such date the promissory notes and other loan documentation, if any, of each Continuing Employee who has elected such a direct rollover in accordance with the procedures as determined by Sellers and Buyer. Buyer and Sellers shall cooperate and take such actions, if any, as are necessary to permit the continuation of loan repayments by Continuing Employees to the Seller Affiliate Savings Plans by payroll deductions during the 90-day period beginning on the Closing Date; provided, however, that if a Continuing Employee makes a direct rollover election as described in this Section 7.9(g) within such 90-day period, then the applicable Seller Affiliate Savings Plan shall continue to accept loan repayments from such Continuing Employee by payroll deduction until the date of such direct rollover. Buyer shall cause the Buyer Savings Plan to accept the direct rollover of electing Continuing Employees’ benefits in cash and, if applicable, promissory notes that are not accelerated from the Seller Affiliate Savings Plans. Sellers represent, warrant and agree with respect to the Seller Affiliate Savings Plans, and Buyer represents warrants and agrees with respect to the Buyer Savings Plan, that, as of each date of a rollover described in this Section 7.9(g), such plan (i) is intended to satisfy the requirements of Sections 401(a), (k), and (m) of the Code and (ii) will have received, or a pending application will have been timely filed for, a favorable determination letter from the IRS regarding such qualified status and covering amendments required to have been adopted prior to the expiration of the applicable remedial amendment period. Except as required by Law or as required by the Collective Bargaining Contract, Buyer or its designee shall not be required to provide any particular benefit under the Buyer Savings Plan. Except as required by Law or as required by the Collective Bargaining Contract, Buyer or its designee shall not be required to provide any particular benefit under the Buyer Savings Plan.

          (h) Claims of Continuing Employees and their eligible beneficiaries and dependents for medical, dental, prescription drug, life insurance, and/or other welfare benefits (“Welfare Benefits”) (other than long-term disability benefits) that are incurred before the Closing Date shall be the sole responsibility of the Seller Affiliate Plans. Claims of Continuing Employees and their eligible beneficiaries and dependents for Welfare Benefits (other than long-term disability benefits) that are incurred on or after the Closing Date shall be the sole responsibility of Buyer or its designee. Claims for workers compensation and unemployment compensation arising prior to Closing shall be the sole responsibility of Sellers and their Affiliates. For purposes of the preceding provisions of this paragraph, a medical/dental claim shall be considered incurred on the date when the medical/dental services are rendered or medical/dental supplies are provided, and not when the condition arose or when the course of treatment began. Claims for long-term disability benefits that are made under a Seller Affiliate Plan prior to the Closing Date, or that relate to any condition of a Continuing Employee existing as of the Closing Date as a result of which such Continuing Employee is not actively at work on the Closing Date, shall be the sole responsibility of the Seller Affiliate Plan. Except as provided in the preceding sentence, claims of Continuing Employees and their eligible beneficiaries and dependents for long-term disability benefits that are incurred from and after the Closing Date shall be the sole responsibility of Buyer or its designee. For purposes of the preceding provisions of this paragraph, claims for long-term disability benefits based on an injury or illness occurring prior to the Closing Date will be deemed to have been incurred prior to the Closing Date. In the case of any claim for benefits other than a medical/dental claim or a long-term

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disability claim, a claim will be deemed to have been incurred upon the occurrence of the event giving rise to such claim.

          (i) Except to the extent required by applicable Law, Sellers shall not pay Continuing Employees their accrued and unused vacation, and Buyer or its designee, as applicable, shall provide, without duplication of benefits, all such Continuing Employees with vacation time rather than cash in lieu of vacation time for all accrued and unused vacation through the Closing Date.

          (j) If, within the one-year period beginning on the Closing Date, (i) a Continuing Employee voluntarily terminates his or her employment with Buyer or its designee within 30 days after the date upon which he or she is notified that the principal place of his or her employment is changing to a location that is 25 miles or more from the location of such employee’s principal place of employment immediately prior to the Closing Date, or (ii) the employment of a Continuing Employee is terminated by Buyer or its designee for a reason other than cause (as that term is defined in the Severance Plan as of the Closing Date, but based on the terms of the plan as in effect on the Execution Date), then, in any such case, Buyer or its designee, as applicable, shall provide such Continuing Employee with severance benefits at least equal to the severance benefits which such Continuing Employee would have received under the Severance Plan had the employment of such Continuing Employee been terminated under circumstances entitling him or her to benefits under such plan. Such severance benefits shall be determined based on the terms of the Severance Plan in effect on the Execution Date, but Buyer or its designee shall take into account such Continuing Employee’s aggregate service with Buyer or its designee and his or her pre-Closing Date service recognized pursuant to Section 7.9(d). Notwithstanding the foregoing, the provisions of this Section 7.9(k) shall not apply to any Continuing Employee who is covered by the Collective Bargaining Contract.

          (k) No assets or liabilities of any Seller Affiliate Plan shall be transferred to, or assumed by, Buyer or its designee.

     7.10. Public Announcements. Sellers and Buyer will consult with each other before issuing, and provide each other a reasonable opportunity to review and make reasonable comment upon, any press release or making any public statement with respect to this Agreement and the transactions contemplated hereby and, except as may be required by applicable Law or any listing agreement with the NYSE, will not issue any such press release or make any such public statement prior to such consultation; provided, that each of the Parties may issue a press release or make any public statement in response to specific questions by the press, analysts, investors or those attending industry conferences or financial analyst conference calls; provided further, that each Party may make disclosures to Persons bound by a confidentiality obligation to the disclosing Party that covers such disclosed information.

     7.11. Expenses and Fees. Except as expressly provided otherwise herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses.

     7.12. Regulatory and Other Approvals. During the Interim Period:

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          (a) The Parties will, in order to consummate the transactions contemplated hereby, (i) take all commercially reasonable steps necessary, and proceed diligently and in good faith and use all commercially reasonable efforts, as promptly as practicable, to obtain or make, as applicable, all necessary or appropriate waivers, consents, approvals and authorizations of, filings with and notices to all third parties and Governmental Authorities required in order to consummate the transactions contemplated by this Agreement and (ii) provide such other information and communications to such Governmental Authorities or other Persons as such Governmental Authorities or other Persons may reasonably request in connection therewith.

          (b) The Parties will provide prompt notification to each other when any such waiver, consent, approval, authorization, filing or notice referred to in Section 7.13(a) is obtained, taken, made, given or denied, as applicable, and will advise each other of any material communications with any Governmental Authority or other Person regarding any of the transactions contemplated by this Agreement.

          (c) In furtherance of the foregoing covenants:

     (i) Each Party shall prepare, as soon as is practical following the execution of this Agreement, all necessary filings in connection with the transactions contemplated by this Agreement that may be required by FERC, the PUCT or other Governmental Authority or under the HSR Act or any other federal, state or local Laws. Each Party shall submit such filings as soon as practicable, but in no event later than ten (10) Business Days after the execution hereof for filings with the FERC, and ten (10) Business Days after the execution hereof for filings under the HSR Act. The Parties shall request expedited treatment of any such filings, shall promptly furnish each other with copies of any notices, correspondence or other written communication from the relevant Governmental Authority, shall promptly make any appropriate or necessary subsequent or supplemental filings and shall cooperate in the preparation of such filings as is reasonably necessary and appropriate (provided that HSR Act filings and attachments need not be exchanged or preapproved by the other party and provided that any exchange of information between Sellers and Buyer in connection with any filings shall be done in a manner that complies with applicable antitrust laws). Buyer and Sellers shall each pay 50% of the filing fees in connection with submissions by the Parties pursuant to the HSR Act. Except as described in the immediately preceding sentence, each Party shall bear its own costs incurred in connection with the filing.

     (ii) The Parties shall not, and shall cause their respective Affiliates not to, take any action that could reasonably be expected to adversely affect the approval of any Governmental Authority of any of the aforementioned filings. Without limiting the foregoing, Buyer agrees that except as may be agreed in writing by Sellers or as may be expressly permitted pursuant to this Agreement, it shall not, and shall not permit any of its subsidiaries or Affiliates to, acquire, develop or construct any electric generation or transmission facility, enter into any Contract with respect to any electric generation or transmission facility, or otherwise obtain control over any electric generation or transmission facility, located within the State of Texas or the control areas operated by ERCOT or take any action with any Governmental Authority relating to the foregoing, or agree, in writing or otherwise, to do any of the foregoing, in each case which could

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reasonably be expected to materially delay the consummation of the transactions contemplated hereby or result in the failure to satisfy any condition to consummation of the transactions contemplated hereby.

     (iii) Buyer shall cooperate in good faith with the Governmental Authorities and undertake promptly any and all action required to complete lawfully the transactions contemplated by this Agreement, including proffering and consenting to a governmental order providing for the sale or other disposition, or the holding separate, of particular Acquired Assets or of any other assets or lines of business of Buyer or its Affiliates in order to remedy any competition concerns that any Governmental Authority may have. The entry by any Governmental Authority in any legal proceeding of a governmental order permitting the consummation of the transactions contemplated hereby but requiring any of the assets or lines of business of Buyer or its Affiliates to be held separate or sold or disposed of thereafter (including the Acquired Assets) shall not be deemed a failure to satisfy any condition to Closing.

          (d) Each Party agrees that, after the Closing Date, it will cooperate in good faith with the other Parties to complete in a timely manner, all post-closing filings and notices required by FERC or any other Governmental Authorities.

     7.13. Further Assurances. Subject to the terms and conditions of this Agreement, at any time or from time to time after the Closing, at any Party’s request and without further consideration, the other Party shall execute and deliver to such Party such other instruments of sale, transfer, conveyance, assignment and confirmation, provide such materials and information and take such other actions and execute and deliver such other documents as such Party may reasonably request in order to consummate the transactions contemplated by this Agreement.

     7.14. Schedule Update. From time to time, but no less than 15 days prior to the Closing Date, either Seller may, at its option, supplement or amend and deliver updates to the Disclosure Schedules (each a “Schedule Update”) that are necessary to complete or correct any information in such Schedules or in any representation or warranty of such Seller provided, however, that no such updates shall be permitted with respect to Schedules 2.1(a), (b), (c), (g), (h), Schedule 2.2(p), Schedule 7.2, Schedule 7.4(a), and Schedule 8.1(d). If Buyer has the right to terminate the Agreement pursuant to Section 10.1(c) as a result of such Schedule Update and does not exercise such right by the tenth day after delivery of the Schedule Update then such Schedule Update shall be deemed to have amended the appropriate Schedule or Schedules as of the date of this Agreement, to have qualified the representations and warranties contained in Article 5 as of the date of this Agreement and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the existence of such matter.

     7.15. PUCT Matters. Buyer understands and acknowledges that RESC is certificated by the PUCT to provide retail electric service to Channelview LP and Equistar under Certificate No. 10044. Buyer acknowledges and accepts the obligation to take all steps required prior to Closing to (i) apply for its own PUCT certification as a “Retail Electric Provider” and (ii) engage a QSE to act on Buyer’s behalf with regard to sales of electricity at retail.

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     7.16. Equistar Consents. Buyer will act in good faith and cooperate with Sellers in obtaining any and all consents of Equistar required for the transaction contemplated by this Agreement.

     7.17. Boiler Feedwater Pump. Provided such installation is not completed prior to Closing, and pursuant to paragraph 4.B of the Settlement Agreement (as in effect on the date hereof), Buyer agrees to complete the installation of the Pump (as defined in the Settlement Agreement) in accordance with the terms and conditions of the Settlement Agreement. Sellers shall pay to Buyer amounts incurred by Buyer, to the extent such amounts are reimbursable by Equistar, and at the time such amounts would otherwise be due from Equistar in accordance with Section 4.B of the Settlement Agreement, for its share of the work performed after the Closing Date in connection with the installation of the Pump as required by the Settlement Agreement, subject to receipt by Sellers of an appropriate invoice and supporting documentation (the “Pump Payments”).

     7.18. Fulfillment of Conditions. Subject to the terms and conditions herein, each of the Parties hereto shall use its commercially reasonable efforts to consummate and make effective, as soon as reasonably practicable, the transactions contemplated hereby, including the satisfaction of all conditions thereto set forth herein, to the extent it can reasonably do so.

     7.19. Cure of Defaults. At or prior to Closing, each Seller shall (i) cure any and all defaults under the Assigned Contracts required to be cured under the Bankruptcy Code in order to assign such Contract to Buyer pursuant to Section 365 thereof, and (ii) pay all Cure Costs that are required to be paid as a condition to the assumption and assignment of such Assigned Contracts under section 365 of the Bankruptcy Code. At Closing, Sellers shall establish a reserve of cash in a bank account (the “Cure Cost Reserve Amount”) in an amount sufficient to satisfy any disputed Cure Costs and any Cure Costs not settled or paid (whether or not then due and payable) prior to Closing. After Closing, Sellers shall promptly resolve, settle and/or pay from the Cure Cost Reserve Amount all remaining Cure Costs.

     7.20. 2007 Financial Statements. It is understood and agreed between Buyer and Sellers that if the audit of the financial statements of Channelview LP for the period ended December 31, 2007 (the “2007 Financial Statements”) is completed on or prior to Closing, a true, correct and complete copy of the audited 2007 Financial Statements shall be promptly provided to Buyer. If the audit of the 2007 Financial Statements is not completed prior to Closing (i.e., the auditors have not completed their review and approval thereof), Sellers shall provide at Closing (and, to the extent necessary, at any time thereafter that further information is reasonably requested by Buyer, provided that such information has to such date been retained by Sellers or their Affiliates) to Buyer the current form of the 2007 Financial Statements that are under review by the auditors, contact information for such auditors, all correspondence to and from such auditors relating to the 2007 Financial Statements which does not contain confidential information about the Sellers’ Affiliates, and any other relevant documentation and/or materials in Sellers’ possession or control that is reasonably requested by Buyer in order for the auditors to complete the audit of the 2007 Financial Statements. Buyer, acknowledges that Sellers’ auditors are under no obligation to, and may opt not to, complete an audit of the 2007 Financial Statements.

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ARTICLE 8

BANKRUPTCY PROCEDURES

     8.1. Bankruptcy Actions.

          (a) The approval of this Agreement by the Bankruptcy Court is required for the Agreement to be binding and enforceable against the Sellers.

          (b) Not later than two (2) days after the date hereof, Channelview LP shall file with the Bankruptcy Court and provide sufficient notice to all parties entitled to notice under applicable provisions of the Bankruptcy Code and Rules, including all Persons who have asserted liens, encumbrances or other interests in the Acquired Assets, counsel to any official committee appointed in the Chapter 11 Cases, the United States trustee, all creditors of any debtor in the Chapter 11 Cases and all parties to the Assigned Contracts, in form and substance reasonably satisfactory to Buyer, of the motion of the Sellers seeking entry of the Sale Order (the “Sale Motion”). In addition, notice of the Sale Motion and the proposed entry of the Sale Order shall be given by Sellers (at Sellers’ expense) by publication of a notice, in form and substance reasonably satisfactory to Buyer, in each publication listed on Schedule 8.1(b). Channelview LP shall seek a hearing on the Sale Motion to occur as soon as possible in accordance with the Local Rules of the Bankruptcy Court. In the event that an auction of the Acquired Assets is required by the Bankruptcy Court, the Sellers shall use commercially reasonable efforts to have the Sale Order entered on or before sixty (60) days after the date hereof. In the event that no auction of the Acquired Assets is required by the Bankruptcy Court, the Sellers shall use commercially reasonable efforts to have the Sale Order entered on or before thirty (30) days after the date hereof. Each Seller shall promptly provide Buyer with drafts of all documents, motions, orders, filings or pleadings, that such Seller proposes to file with the Bankruptcy Court that relate to (i) this Agreement or the transactions contemplated hereunder, (ii) entry of the Sale Order, (iii) the Sale Motion or (iv) Buyer, and will provide Buyer with a reasonable opportunity to review such documents in advance of their service and filing. Each Seller shall consult and cooperate with Buyer, and consider in good faith the views of Buyer with respect to all such filings. Buyer covenants and agrees that it shall cooperate with Channelview LP in connection with furnishing information or documents to Channelview LP to satisfy the requirements of adequate assurance of future performance under section 365(f)(2)(B) of the Bankruptcy Code.

          (c) Seller shall promptly make any filings, take all actions, and use all reasonable efforts to obtain any and all other approvals and orders of the Bankruptcy Court necessary or appropriate for consummation of the transactions contemplated hereby, subject to Seller’s obligations to comply with any order of the Bankruptcy Court and other applicable Laws. Buyer will, if requested by Sellers, reasonably cooperate with the Sellers with respect to the Chapter 11 Cases in order to consummate the transactions contemplated hereunder, and will not take any action opposing or attempting to delay or hinder the transactions contemplated hereby in the Chapter 11 Cases.

          (d) Notwithstanding anything in this Agreement to the contrary, if the Bankruptcy Court declines to enter the Sale Order on the basis that an auction for the Acquired Assets should first take place (a “Court Auction Determination”), Sellers shall, within 48 hours

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of such determination, file a bidding procedures motion with the Bankruptcy Court, in form and substance reasonably satisfactory to Buyer, seeking the entry of an order approving the bid protections and procedures set forth on Schedule 8.1(d) (“Bid Procedures Order”).

ARTICLE 9

CONDITIONS TO THE CLOSING

     9.1. Conditions to the Obligations of Each Party. The obligations of the Parties to proceed with the Closing are subject to the satisfaction on or prior to the Closing Date of all of the following conditions, any one or more of which may be waived in writing (other than the condition contained in Section 9.1(d), the satisfaction of which cannot be waived), in whole or in part, as to a Party by such Party:

          (a) no judgment, injunction, order or decree of a court or other Governmental Authority of competent jurisdiction or other condition arising under Law shall be in effect which has the effect of making the transactions contemplated by this Agreement illegal or otherwise restraining or prohibiting the consummation of the transactions contemplated by this Agreement (each Party agreeing to use its commercially reasonable efforts, including appeals to higher courts, to have any judgment, injunction, order or decree lifted);

          (b) (i) any waiting period applicable to consummation of the transactions contemplated by this Agreement under the HSR Act shall have expired or been terminated, and (ii) all Sellers’ Governmental Approvals designated with an asterisk on Schedule 5.2(c) and Buyer’s Governmental Approvals designated with an asterisk on Schedule 6.3(c) shall have been filed, made or obtained, as the case may be;

          (c) Subject to Section 2.5, the consents, waivers and approvals listed on Schedule 9.1(c) shall have been obtained (with no conditions that would reasonably be expected to materially and adversely impact the rights and obligations under the applicable Assigned Contract for which such consent, waiver or approval is provided) either from the applicable third party or through entry of the Sale Order; and

          (d) the Bankruptcy Court shall have entered the Sale Order, and the Sale Order shall not have been stayed, and no Adverse Ruling shall be in effect.

     9.2. Conditions to the Obligations of Buyer. The obligation of Buyer to proceed with the Closing is subject to the satisfaction on or prior to the Closing Date of the following further conditions, any one or more of which may be waived, in whole or in part, by Buyer:

          (a) Sellers shall have performed their obligations hereunder required to be performed by such Seller at or prior to the Closing Date, unless the failure to perform would not reasonably be expected to have a Material Adverse Effect (except for Channelview LP’s obligations contained in Section 3.5, which, assuming the Settlement Agreement is then still in effect, shall have been performed in full through an application of a portion of the payment of the Purchase Price in accordance with Section 3.5);

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          (b) the representations and warranties of each Seller contained in this Agreement (without regard to “materiality”, “material adverse effect”, Material Adverse Effect or similar qualifiers) shall be true and correct as of the Closing Date (except to the extent such representations and warranties expressly relate to an earlier date, in which case as of such earlier date), except for failures to be true and correct that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

          (c) Buyer shall have received certificates signed on behalf of each Seller by an executive officer of each Seller indicating that the conditions provided in Section 9.2(a) and Section 9.2(b) have been satisfied;

          (d) Sellers shall have complied with their obligations under Section 7.19 in all material respects;

          (e) Sellers shall have delivered each of the items required by Section 4.2;

          (f) Buyer shall have received a letter from URS consenting to Buyer’s reliance on the Phase I Environmental Site Assessment, dated as of November 2007, as updated December 20, 2007, in form and substance reasonably acceptable to Buyer; and

          (g) since the Execution Date, no Material Adverse Effect shall have occurred and be continuing.

     9.3. Conditions to the Obligations of Sellers. The obligation of Sellers to proceed with the Closing is subject to the satisfaction on or prior to the Closing Date of the following further conditions, any one or more of which may be waived, in whole or in part, by Sellers:

          (a) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date;

          (b) the representations and warranties of Buyer contained in this Agreement (without regard to “materiality”, “material adverse effect”, or similar qualifiers) shall be true and correct as of the Closing Date (except to the extent such representations and warranties expressly relate to an earlier date, in which case as of such earlier date), except for failures to be true and correct that would not reasonably be expected, individually or in the aggregate, to have a material adverse effect on Buyer’s ability to perform its obligations hereunder;

          (c) Sellers shall have received a certificate signed on behalf of Buyer by an executive officer of Buyer indicating that the conditions provided in Section 9.3(a) and Section 9.3(b) have been satisfied;

          (d) Sellers shall have received the complete and unconditional release of Sellers and their Affiliates from the LTMA Support Obligations (other than with respect to amounts owing prior to Closing) and unless Buyer has elected Gas Services under the Fuel and Power Transition Services Agreement, either (i) the full execution of the RES Assignment and Assumption Agreement, or (ii) or if required by Section 2.5, the Fuel Supply Agreement shall have been executed by Buyer and Buyer’s Energy Manager; and

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          (e) Buyer shall have delivered each of the items required by Section 4.3.

ARTICLE 10

TERMINATION

     10.1. Termination. This Agreement may be terminated and the consummation of the transactions contemplated hereby may be abandoned at any time prior to the Closing only under one of the following circumstances:

          (a) by mutual written consent of Sellers and Buyer; or

          (b) by either Sellers or Buyer:

     (i) if the Closing has not occurred on or before 6 months after the Execution Date (such date, the “Termination Date”) provided, that the right to terminate this Agreement pursuant to this Section 10.1(b)(i) shall not be available to any Party whose breach of any provision of this Agreement has been the cause of, or resulted in, the failure of the Closing to occur by the Termination Date; or

     (ii) if any court of competent jurisdiction in the United States or other United States Governmental Authority shall have issued a final order, decree or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement and such order, decree, ruling or other action is or shall have become final and nonappealable;

          (c) by Buyer if there has been a material breach by either Seller of any representation, warranty, covenant or agreement contained in this Agreement which (x) would result in a failure of a closing condition set forth in Section 9.2(a) — (e) (which is not waived) and (y) cannot be cured prior to the Termination Date; provided that Buyer is not then in breach in any material respect of any representation, warranty, covenant or agreement contained herein; and

          (d) by either Seller (i) if Buyer has not made the Deposit on the date required to be made pursuant to Section 3.2, or (ii) if there has been a material breach by Buyer of any representation, warranty, covenant or agreement contained in this Agreement which (x) would result in a failure of a closing condition set forth in Section 9.3(a) — (e) (which is not waived) and (y) cannot be cured prior to the Termination Date; provided that Sellers are not then in breach in any material respect of any representation, warranty, covenant or agreement contained herein.

     The Party desiring to terminate this Agreement pursuant to Section 10.1 (other than pursuant to Section 10.1(a)) shall give notice of such termination to the other Party.

     10.2. Effect of Termination. In the event of termination of this Agreement by either Sellers or Buyer prior to the Closing pursuant to the provisions of Section 10.1, this Agreement shall forthwith become void, and there shall be no liability or further obligation on the part of Buyer or Sellers or their respective officers or directors (except pursuant to Section 7.1(b), Section 7.8, Section 7.11, Section 10.2, Section 10.3, Article 11, Section 12.4 and Section 12.5,

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all of which shall survive the termination); provided, that nothing in this Section 10.2 shall relieve any Party from liability for any willful breach of this Agreement by such Party prior to termination of this Agreement.

     10.3. Termination Fees.

          (a) If this Agreement is terminated pursuant to Section 10.1(d), then in lieu of all other claims and remedies that might otherwise be available with respect thereto, including elsewhere hereunder and notwithstanding any other provision of this Agreement, Buyer shall pay immediately to Sellers as liquidated damages in connection with such termination, an amount in immediately available funds equal $40,000,000, and Sellers shall have the right immediately to draw on the Deposit to satisfy such payment obligation of Buyer.

          (b) The provision for payment of liquidated damages in this Section 10.3 has been included because, in the event of a termination of this Agreement pursuant to Section 10.1(d), the actual damages to be incurred by Sellers can reasonably be expected to approximate the amount of liquidated damages called for herein and because the actual amount of such damages would be difficult if not impossible to measure accurately.

          (c) If this Agreement is terminated pursuant to Section 10.1(c), Sellers shall pay (and shall be jointly and severally responsible for the payment thereof) to Buyer all of Buyer’s reasonable third-party costs and expenses (including reasonable attorneys’ and accountants’ fees and related expenses) incurred by Buyer in connection with the transactions contemplated by this Agreement, including: (i) Buyer’s due diligence review with respect to the Acquired Assets (including costs and expenses for third party consultants and related reports); (ii) the negotiation of this Agreement, the exhibits attached hereto and the documents to be executed pursuant hereto; and (iii) analysis of securities, Tax and other transaction related issues. Provided, however, that in the event this Agreement is terminated pursuant to Section 10.1(c), Sellers shall only be responsible for Buyer’s third-party expenses to the extent such expenses do not exceed $2,000,000; provided further that in the event this Agreement is terminated pursuant to Section 10.1(c) as a result of a willful breach of this Agreement by Sellers, Sellers shall pay immediately to Buyer as liquidated damages in connection with such termination, $15,000,000 in immediately available funds. Any obligation of Sellers to pay damages hereunder shall be an administrative expense under Section 507(a)(1) of the Bankruptcy Code and shall be payable as specified herein and not be subject to any defense, counterclaim, offset, recoupment or reduction of any kind whatsoever.

ARTICLE 11

INDEMNIFICATION

     11.1. Survival. All representations, warranties, covenants and agreements contained herein, and the right to commence any Claim with respect thereto, shall terminate upon the Closing Date, except that (a) the representations and warranties of Sellers and Buyer contained herein shall survive until the first anniversary of the Closing Date, (b) the representations and warranties contained in Section 5.10 shall survive until thirty (30) days after the expiration of the applicable statute of limitations, and (c) the covenants and agreements of the Parties contained

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herein that by their terms are to be performed after the Closing Date, shall survive and continue in effect in accordance with their terms; provided, that in the event written notice of any Claim for indemnification under Section 11.2(a)(i), Section 11.2(a)(ii), Section 11.2(d)(i) or Section 11.2(d)(ii) shall have been given in accordance herewith within the applicable survival period setting forth such Claim in reasonable detail (including a reasonable specification of the legal and factual basis for such Claim and the Loss incurred), the representations, warranties, covenants and agreements that are the subject of such indemnification Claim shall survive with respect to that Claim until such time as the Claim is fully and finally resolved.

     11.2. Indemnification.

          (a) Subject to the provisions of this Article 11, from and after the Closing, Sellers shall jointly and severally indemnify, defend and hold the Buyer Indemnified Group harmless from and against any and all Losses, whether arising out of contract, tort, strict liability, other Law or otherwise, actually incurred by any of them to the extent arising out of or resulting from:

     (i) any breach as of the Closing Date of a representation or warranty made by either Seller herein (including the related Schedules);

     (ii) any breach of any covenant or agreement of either Seller herein;

     (iii) the Excluded Liabilities; and

     (iv) any failure of Sellers to make the Pump Payments to Buyer in accordance with Section 7.17.

          (b) Notwithstanding anything to the contrary in this Agreement, Sellers shall not be liable for any Losses with respect to the matters set forth in Section 11.2(a) unless (x) a Claim is timely asserted during the survival period specified in Section 11.1, (y) the Loss with respect to the particular act, circumstance, development, event, fact, occurrence or omission exceeds $500,000 (aggregating all Losses arising from substantially identical facts) and (z) the aggregate of all Losses under Section 11.1(a) exceeds, on a cumulative basis, 2% of the Final Purchase Price and then only to the extent of such excess. Notwithstanding anything to the contrary in this Agreement, the aggregate liability of Sellers to the Buyer Indemnified Group arising under or related to the matters set forth in this Agreement, whether based in contract, tort, strict liability, other Law or otherwise, shall not exceed 15% of the Final Purchase Price, provided that the foregoing limitations shall not apply to the Excluded Liabilities and the Pump Payments.

          (c) In connection with Sellers’ obligations under this Section 11.2, upon Closing, pursuant to Sections 4.2(j) and 4.3(e), Forty Million Dollars ($40,000,000) will be transferred into the Indemnity Escrow Account (the “Indemnity Security”) to be held and disbursed pursuant to the terms of the Escrow Agreement and this Agreement; provided, however, the Sellers may at any time and in their sole discretion, withdraw the Indemnity Security so long as Reliant Energy simultaneously provides Buyer with a guaranty of all of Sellers’ obligations under this Section 11.2, in form and substance reasonably satisfactory to Buyer, such guaranty to terminate one (1) year from the Closing Date. It is further agreed that at

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any time, beginning one (1) year from the Closing Date, if Sellers have not replaced the Indemnity Security with a guaranty of Reliant Energy, Sellers may withdraw the entire amount of the Indemnity Security and any accrued interest without providing any replacement security, provided, however, if a claim has been made on the Indemnity Security, the amount remaining in the Indemnity Escrow Account may not be less than the amount of such claim (if the amount of such claim is indeterminate, the amount remaining in the Indemnity Escrow Account shall be the highest reasonable estimate for such claim in the reasonable judgment of Buyer).

          (d) Subject to the provisions of this Article 11, from and after the Closing, Buyer hereby agrees to indemnify, defend and hold the Seller Indemnified Group harmless from and against any and all Losses, whether arising out of contract, tort, strict liability, other Law or otherwise, actually incurred by any of them to the extent arising out of or resulting from:

     (i) any breach as of the Closing Date of a representation or warranty made by Buyer herein;

     (ii) any breach of any covenant or agreement of Buyer herein; and

     (iii) the Assumed Liabilities.

          (e) THE PARTIES INTEND AND AGREE THAT THE INDEMNITY OBLIGATIONS SET FORTH IN THIS SECTION 11.2 ARE INTENDED TO AND SHALL EXTEND TO AND COVER ANY AND ALL LOSSES RESULTING FROM OR CAUSED IN WHOLE OR IN PART BY ANY ACTIVE, PASSIVE, AFFIRMATIVE, SOLE, CONCURRENT OR OTHER NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF, REGARDLESS OF WHETHER SUCH LOSSES RESULT FROM OR ARE CAUSED IN WHOLE OR IN PART BY ANY ALLEGED OR ACTUAL NEGLIGENCE OR OTHER FAULT OF, (I) ANY OF THE BUYER INDEMNIFIED PARTIES WITH RESPECT TO SECTION 11.2(a), AND (II) ANY OF THE SELLER INDEMNIFIED PARTIES WITH RESPECT TO SECTION 11.2(d); and shall be the sole and exclusive remedy of the parties hereunder from and after the Closing.

          (f) Notwithstanding anything to the contrary contained in this Agreement, for purposes of determining whether there has been a breach and the amount of any Losses that are the subject matter of a claim for indemnification hereunder, each representation and warranty in this Agreement and each certificate or document delivered pursuant to this Agreement shall be read without regard and without giving effect to the term(s) “material” or “Material Adverse Effect”, or any derivation thereof, in each instance where the effect of such term(s) would be to make such representation and warranty less restrictive (as if such standard or qualification were deleted from such representation and warranty).

          (g) The indemnification obligations set forth in this Section 11.2 are made notwithstanding any investigation by or on behalf of Buyer or the result of any investigation and notwithstanding the participation of Buyer in the Closing.

     11.3. Waiver of Other Representations.

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          (a) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO, AND THE PARTIES HEREBY AGREE, THAT NONE OF SELLERS OR ANY OF THEIR AFFILIATES OR REPRESENTATIVES HAS MADE OR IS MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO THE CONDITION, MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE ACQUIRED ASSETS, OR ANY PART THEREOF, EXCEPT THOSE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 5. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO, AND THE PARTIES HEREBY AGREE, THAT NEITHER BUYER NOR ITS AFFILIATES OR REPRESENTATIVES HAS MADE OR IS MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY, EXCEPT THOSE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 6. IN PARTICULAR, AND WITHOUT IN ANY WAY LIMITING THE FOREGOING, (I) NEITHER SELLER MAKES ANY REPRESENTATION OR WARRANTY REGARDING ANY ENVIRONMENTAL MATTERS EXCEPT AS EXPRESSLY SET FORTH IN SECTION 5.13, (II) NEITHER SELLER MAKES ANY REPRESENTATION OR WARRANTY TO BUYER WITH RESPECT TO ANY FINANCIAL PROJECTIONS OR FORECASTS RELATING TO THE ACQUIRED ASSETS, AND (III) NEITHER SELLER MAKES ANY REPRESENTATION OR WARRANTY TO BUYER WITH RESPECT TO INFORMATION PROVIDED TO BUYER IN RESPONSE TO QUESTIONS PRESENTED BY BUYER OR OTHER INFORMATION PROVIDED TO BUYER RELATING TO THE ACQUIRED ASSETS; PROVIDED, THAT THIS SENTENCE SHALL NOT LIMIT THE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 5.

          (b) EXCEPT FOR THOSE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 5, THE ACQUIRED ASSETS ARE BEING TRANSFERRED “AS IS, WHERE IS, WITH ALL FAULTS,” AND SELLERS EXPRESSLY DISCLAIM ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO THE CONDITION, VALUE OR QUALITY OF THE ACQUIRED ASSETS OR THE PROSPECTS (FINANCIAL OR OTHERWISE), RISKS AND OTHER INCIDENTS OF THE ACQUIRED ASSETS.

          (c) BUYER ACKNOWLEDGES THAT IT HAS INVESTIGATED TO ITS SATISFACTION, THE CONDITION AND SUITABILITY OF ALL ASPECTS OF THE ACQUIRED ASSETS AND ALL MATTERS AFFECTING THE VALUE OR DESIRABILITY OF THE ACQUIRED ASSETS, INCLUDING, BUT NOT LIMITED TO, THE OPERATIONAL ASPECTS OF THE CHANNELVIEW FACILITY, POTENTIAL ENVIRONMENTAL HAZARDS ARISING FROM THE PRESENCE ON OR ABOUT THE PROPERTY OF HAZARDOUS SUBSTANCES, INCLUDING ASBESTOS, FORMALDEHYDE, RADON GAS, LEAD-BASED PAINT, OTHER LEAD CONTAMINATION, FUEL OR CHEMICAL STORAGE TANKS, CAVERNS, PIPELINES, ELECTROMAGNETIC FIELDS, PHOSPHO-GYPSUM OR POLYCHLORINATED BIPHENYLS. EXCEPT AS EXPRESSLY PROVIDED HEREIN,

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NEITHER THE SELLERS, NOR THEIR AFFILIATES OR REPRESENTATIVES MAKES OR HAS MADE ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, WRITTEN OR ORAL, AS TO THE PHYSICAL CONDITION OF THE ACQUIRED ASSETS, THE USES OF THE ACQUIRED ASSETS OR ANY LIMITATIONS THEREON, THE INCOME TO BE DERIVED THEREFROM, THE COSTS OF OPERATION, COMPLIANCE WITH LAW, AND/OR ANY REQUIREMENTS FOR ALTERATIONS OR IMPROVEMENTS TO COMPLY WITH LAW, INCLUDING ANY REPRESENTATIONS OR WARRANTIES PERTAINING TO ZONING, ENVIRONMENTAL OR OTHER LAW; THE UTILITIES, PIPELINES OR OTHER PHYSICAL EQUIPMENT AND FIXTURES ON THE REAL PROPERTY COMPRISING OR ASSOCIATED WITH THE ACQUIRED ASSETS OR ANY OTHER ASPECT OF THE ECONOMIC OPERATIONS ON SUCH REAL PROPERTY; THE CONDITIONS OF THE SOILS, WATER OR GROUNDWATER OF, OR IN THE VICINITY OF, SUCH REAL PROPERTY; THE PRESENCE OR ABSENCE OF ELECTROMAGNETIC FIELDS, TOXIC MATERIALS OR HAZARDOUS SUBSTANCES ON OR UNDER SUCH REAL PROPERTY OR IN THE VICINITY OF SUCH REAL PROPERTY; OR ANY OTHER MATTER BEARING ON THE USE, VALUE OR CONDITION OF THE ACQUIRED ASSETS.

     11.4. Waiver of Remedies; Certain Limitations. Notwithstanding anything in this Agreement to the contrary:

          (a) the Parties hereby agree that no Party shall have any liability, and no Party shall make any Claim, for any Loss or other matter, under, relating to or arising out of this Agreement or any other document, agreement, certificate or other matter delivered pursuant hereto, whether arising out of contract, tort, strict liability, other Law or otherwise, except as expressly set forth in Section 3.3, Section 7.1(b), Article 10 and this Article 11.

          (b) NO PARTY SHALL BE LIABLE FOR SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES OR LOST PROFITS, WHETHER BASED ON CONTRACT, TORT, STRICT LIABILITY, OTHER LAW OR OTHERWISE AND WHETHER OR NOT ARISING FROM THE OTHER PARTY’S SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT, EXCEPT SUCH DAMAGES THAT ARE PAYABLE TO A THIRD PARTY WITH RESPECT TO A THIRD PARTY CLAIM FOR WHICH ANY PERSON IS SEEKING INDEMNIFICATION HEREUNDER;

          (c) in calculating any amount of Losses recoverable pursuant to Section 11.2(a) or Section 11.2(d), the amount of such Losses shall appropriately take into account Tax consequences and be reduced by (i) any insurance proceeds actually received relating to such Loss, net of any related deductible and any expenses to obtain such proceeds, and (ii) any recoveries from third parties pursuant to indemnification (or otherwise) with respect thereto, net of any expenses incurred by the Indemnified Party in obtaining such third party payment. The Parties agree to treat any indemnification payment pursuant to this Article 11 as an adjustment to the Purchase Price for all Tax purposes unless otherwise required by applicable Law. The Indemnified Party shall use its commercially reasonable efforts to seek insurance recoveries in respect of Losses to be indemnified hereunder. In the event any insurance proceeds or other

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recoveries from third parties (described in clause (ii) of this Section 11.4(c)) are actually realized (in each case net of expenses of such recoveries) by an Indemnified Party subsequent to the receipt by such Indemnified Party of an indemnification payment hereunder in respect of the claims to which such insurance proceedings or third party recoveries described in clause (ii) of this Section 11.4(c) relate, appropriate refunds shall be made promptly to the Indemnifying Party regarding the amount of such indemnification payment (net of reasonable attorney’s fees and other expenses incurred in connection with such recoveries);

          (d) no Representative or Affiliate of either Seller shall have any personal liability to Buyer or any other Person as a result of the breach of any representation, warranty, covenant, agreement or obligation of such Seller in this Agreement and no Representative or Affiliate of Buyer shall have any personal liability to Sellers or any other Person as a result of the breach of any representation, warranty, covenant, agreement or obligation of Buyer in this Agreement;

          (e) no member of the Buyer Indemnified Group shall be entitled to indemnification under this Article 11 if the facts and circumstances giving rise to such claim for indemnification would result in a breach of Section 6.8 hereof;

          (f) each Party shall have a duty to use commercially reasonable efforts to mitigate any Loss suffered by such Party in connection with this Agreement;

          (g) No Seller shall have any liability for any Losses that represent the cost of repairs, replacements or improvements which enhance the value of the repaired, replaced or improved asset above its value on the Closing Date or which represent the cost of repair or replacement exceeding the reasonable cost of repair or replacement;

          (h) Buyer, on behalf of itself and its Affiliates (including RESC), hereby releases, waives and discharges forever each Seller and its Affiliates from all present and future Claims and from all Losses, present and future, that are or may be attributable to the matters described in Section 11.3;

          (i) From and after Closing, Buyer, on behalf of itself and its Affiliates, agrees to release and indemnify and hold harmless Sellers, their Affiliates and the managers, officers, directors and employees of Channelview LP and RESC (acting in their capacity as such) from and against any Losses for controlling member liability or breach of fiduciary duty or other duty relating to any pre-Closing actions or failures to act (including negligence or gross negligence) in connection with the Business prior to the Closing; provided that nothing in this Section 11.4(h) shall effect Sellers’ obligations under Section 11.2(a)-(c). THE PARTIES INTEND AND AGREE THAT THE INDEMNITY OBLIGATIONS SET FORTH IN THIS SECTION 11.4(i) ARE INTENDED TO AND SHALL EXTEND TO AND COVER ANY AND ALL LOSSES RESULTING FROM OR CAUSED IN WHOLE OR IN PART BY ANY ACTIVE, PASSIVE, AFFIRMATIVE, SOLE, CONCURRENT OR OTHER NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF, REGARDLESS OF WHETHER SUCH LOSSES RESULT FROM OR ARE CAUSED IN WHOLE OR IN PART BY ANY ALLEGED OR ACTUAL NEGLIGENCE OR OTHER FAULT OF ANY OF THE PERSONS TO BE INDEMNIFIED PURSUANT TO THIS SECTION 11.4(i);

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          (j) THE REMEDIES FOR ENVIRONMENTAL CLAIMS SET FORTH IN THIS AGREEMENT SHALL BE THE BUYER’S SOLE AND EXCLUSIVE REMEDIES AND BUYER EXPRESSLY WAIVES ALL OTHER RIGHTS OF RECOVERY AGAINST SELLERS UNDER ANY ENVIRONMENTAL LAW INCLUDING, BUT NOT LIMITED TO, THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT (CERCLA) AND THE RESOURCE CONSERVATION AND RECOVERY ACT (RCRA).

     11.5. Procedures for Indemnification. Whenever a Claim shall arise for indemnification resulting from or in connection with a Claim by a third party (a “Third-Party Claim”), the Person entitled to indemnification (the “Indemnified Party”) shall promptly notify the Party from which indemnification is sought (the “Indemnifying Party”) of such Claim and, when known, the facts constituting the basis of such Claim; provided, that failure to notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability it may have to the Indemnified Party, except to the extent that the Indemnifying Party has been prejudiced by such failure. Following receipt of notice of any such Third-Party Claim, and unless the assumption of such defense by the Indemnifying Party would be inappropriate due to a conflict of interest, the Indemnifying Party shall have the option, at its cost and expense, to assume the defense of such Third-Party Claim and to retain counsel (not reasonably objected to by the Indemnified Party) to defend any such claim or legal proceeding, and the Indemnifying Party shall not be liable to the Indemnified Party for any fees of other counsel or any other expenses (except as expressly provided to the contrary herein) with respect to the defense of such Claim, other than reasonable fees and expenses of counsel employed by the Indemnified Party for any period during which the Indemnifying Party has not assumed the defense thereof. In the defense of such Claim, the Indemnifying Party shall act in good faith and conduct the defense actively and diligently, and in the event the Indemnifying Party is not complying with the foregoing, the Indemnified Party shall have the right to assume the defense of such Claim. The Indemnified Party shall have the option of joining the defense of such Claim (which shall be at the sole cost and expense of the Indemnified Party) with counsel not reasonably objected to by the Indemnifying Party and counsel for each party shall, to the extent consistent with such counsel’s professional responsibilities, cooperate with the other party and any counsel designated by that party. In effecting the settlement or compromise of, or consenting to the entry of any judgment with respect to, any such Third-Party Claim with respect to which the Indemnifying Party has assumed the defense in accordance with this Section 11.5, the Indemnifying Party, or the Indemnified Party, as the case may be, shall act in good faith, shall consult with the other party and shall enter into only such settlement or compromise or consent to the entry of any judgment as the other party shall consent, such consent not to be unreasonably withheld, conditioned or delayed; provided that no such consent shall be required if (a) there is a full release of the Indemnified Party and (b) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party. An Indemnifying Party shall not be liable for any settlement, compromise or judgment entered into by the Indemnified Party not made in accordance with the preceding sentence. Notwithstanding the rights of Sellers under this Section 11.5 with respect to the defense of claims, the Buyer shall control any environmental remediation performed at the Channelview Facility, and shall have the right to take any action required, in Buyer’s reasonable judgment, by prudent environmental management and plant operation. Notwithstanding anything to the contrary in this Section 11.5, the Parties shall jointly control any Tax Proceeding involving Taxes attributable to a Straddle Period.

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     11.6. Manner of Payment. Except as otherwise provided herein, any payment with respect to an indemnification obligation owing hereunder shall be made by wire transfer of immediately available funds to an account designated by such indemnified party, within ten (10) days after determination thereof.

ARTICLE 12

MISCELLANEOUS

     12.1. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally to, or mailed by registered or certified mail (return receipt requested) if and when received by, or sent via facsimile if and when received by, the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice):

If to Sellers, to:

Reliant Energy Channelview LP
Reliant Energy Services, Inc.
1000 Main Street, 12th Floor
Houston, Texas 77002
Attention: General Counsel
Facsimile: (713) 537-7465

With a copy to:

Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, NY 10038

Attention: Michael S. Shenberg
Facsimile: (212) 806-6006

If to Buyer, to:

Kelson Energy IV LLC
6700 Alexander Bell Drive
Columbia, Maryland 21046

Attention: President
Facsimile: (410) 872-9460

With a copy to:

Dickstein Shapiro LLP
1825 Eye Street, N.W.
Washington, DC 20006
Attention: Larry F. Eisenstat, Patrick W. Lynch
Facsimile: (202) 420-2201

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     12.2. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

     12.3. Assignment. This Agreement (including the documents and instruments referred to herein) shall not be assigned by operation of Law or otherwise by any Party hereto without the prior written consent of the other Parties hereto, which consent shall not be unreasonably withheld or delayed; provided that Buyer may assign its rights and interests hereunder (but not any of its obligations) to (i) any Affiliate, or (ii) any persons providing financing to Buyer in connection with the transactions contemplated hereby. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns.

     12.4. Governing Law. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAWS PRINCIPLES OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).

     12.5. Jurisdiction. For so long as Sellers are subject to the jurisdiction of the Bankruptcy Court, the parties hereto irrevocably elect as the sole judicial forum for the adjudication of any matters arising under or in connection with the Agreement, and consent to the exclusive jurisdiction of, the Bankruptcy Court. After Sellers are no longer subject to the jurisdiction of the Bankruptcy Court, any legal action or proceeding with respect to this Agreement or the transactions contemplated hereby shall be brought exclusively in the courts of the State of New York sitting in New York County or of the United States for the Southern District of New York, and by execution and delivery of this Agreement, each of the Parties consents to the jurisdiction of those courts. Each of the Parties irrevocably waives any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction in respect of this Agreement or the transactions contemplated hereby.

     12.6. Counterparts. This Agreement may be executed in two or more counterparts, and by facsimile and/or electronic transmission, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.

     12.7. Amendments; Extensions.

          (a) This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties.

          (b) At any time a Party may (i) extend the time for the performance of any of the obligations or other acts of the other Party, (ii) waive any inaccuracies in the representations and warranties of the other Party contained herein or in any document delivered pursuant hereto

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and (iii) waive compliance with any of the covenants or agreements of the other Party contained herein. Any agreement on the part of a Party to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such Party. The failure or delay of any Party to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights.

     12.8. Entire Agreement. This Agreement, the Confidentiality Agreement and the other agreements contemplated hereby constitute the entire agreement between the Parties with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the Parties with respect to the subject matter of this Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by any Party. Neither this Agreement nor any provision hereof is intended to confer upon any Person other than the Parties hereto any rights or remedies hereunder except as expressly provided otherwise in Section 7.1(b), Section 7.5, Section 7.10, Section 7.14 and Article 11.

     12.9. Severability. If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any rule of applicable Law, or public policy (including any term or provision of Section 12.5), then such term or provision shall be severed from the remaining terms and provisions of this Agreement (including the remaining terms and provisions of Section 12.5), and such remaining terms and provisions shall nevertheless remain in full force and effect.

     12.10. Joint and Several. Each Seller shall be jointly and severally liable for the payment and performance of all “Seller” obligations and liabilities hereunder.

[Remainder of Page Intentionally Left Blank]

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     IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

RELIANT ENERGY CHANNELVIEW LP
By:	Reliant Energy Channelview (Texas) LLC,
	General Partner of Reliant Energy Channelview LP
By:	/s/ Andrew C. Johannesen
	Name:	Andrew C. Johannesen
	Title:	Vice President and Treasurer
RELIANT ENERGY SERVICES CHANNELVIEW LLC
By:	Reliant Energy Services, Inc.,
	Manager of Reliant Energy Services Channelview LLC
By:	/s/ Andrew C. Johannesen
	Name:	Andrew C. Johannesen
	Title:	Vice President and Treasurer
KELSON ENERGY IV LLC
By:	/s/ Neal Cody
	Name:	Neal Cody
	Title:	President

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EX-12.1

EXHIBIT 12.1

RELIANT ENERGY, INC. AND SUBSIDIARIES
RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES
(Unaudited)

	2007			2006(1)			2005(2)			2004(3)			2003(4)
				(in thousands, except ratio amounts)
Fixed charges:
Interest expense	$	349,199		$	427,867		$	399,281		$	417,514		$	406,809
Capitalized interest		4,186			—			441			45,784			84,225
Interest within rent expense		49,991			57,037			56,458			61,539			58,955
Total fixed charges	$	403,376		$	484,904		$	456,180		$	524,837		$	549,989
Earnings from continuing operations:
Income (loss) from continuing operations before income taxes	$	493,098		$	(448,621	)	$	(693,827	)	$	(391,674	)	$	(840,729	)
(Income) loss of equity investments of unconsolidated subsidiaries		(4,686	)		(5,791	)		(25,458	)		9,478			1,652
Subtotal		488,412			(454,412	)		(719,285	)		(382,196	)		(839,077	)
Plus –
Fixed charges from above		403,376			484,904			456,180			524,837			549,989
Amortization of capitalized interest		8,513			8,469			8,462			7,692			5,525
Distributed income of equity investees		5,500			10,000			5,500			3,850			4,400
Less –
Capitalized interest		(4,186	)		—			(441	)		(45,784	)		(84,225	)
	$	901,615		$	48,961		$	(249,584	)	$	108,399		$	(363,388	)
Ratio of earnings from continuing operations to fixed charges		2.24			—			—			—			—

(1)	For 2006, our earnings were insufficient to cover our fixed charges by $436 million.
(2)	For 2005, our earnings were insufficient to cover our fixed charges by $706 million.
(3)	For 2004, our earnings were insufficient to cover our fixed charges by $416 million.
(4)	For 2003, our earnings were insufficient to cover our fixed charges by $913 million.

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF RELIANT ENERGY, INC.
AS OF FEBRUARY 26, 2008

Subsidiary Name	Jurisdiction of Incorporation/Organization
Conemaugh Fuels, LLC*	Delaware
Keystone Fuels, LLC*	Delaware
Orion Power Atlantic, Inc.	Delaware
Orion Power Capital, LLC	Delaware
Orion Power Development Company, Inc.	Delaware
Orion Power Holdings, Inc.	Delaware
Orion Power Marketing and Supply, Inc.	Delaware
Orion Power Midwest GP, Inc.	Delaware
Orion Power Midwest LP, LLC	Delaware
Orion Power Midwest, L.P.	Delaware
Orion Power New York GP, Inc.	Delaware
Orion Power New York LP, LLC	Delaware
Orion Power New York, L.P.	Delaware
Orion Power Operating Services MidWest, Inc.	Delaware
Orion Power Operating Services, Inc.	Delaware
RE Retail Receivables, LLC	Delaware
Reliant Energy Asset Management, LLC	Delaware
Reliant Energy Broadband, Inc.	Delaware
Reliant Energy California Holdings, LLC	Delaware
Reliant Energy Channelview (Delaware) LLC	Delaware
Reliant Energy Channelview (Texas) LLC	Delaware
Reliant Energy Channelview LP	Delaware
Reliant Energy Communications, Inc.	Delaware
Reliant Energy Coolwater, Inc.	Delaware
Reliant Energy Corporate Services, LLC	Delaware
Reliant Energy Electric Solutions, LLC	Delaware
Reliant Energy Ellwood, Inc.	Delaware
Reliant Energy Etiwanda, Inc.	Delaware
Reliant Energy Florida, LLC	Delaware
Reliant Energy IT Trust	Delaware
Reliant Energy Key/Con Fuels, LLC	Delaware
Reliant Energy Mandalay, Inc.	Delaware
Reliant Energy Mid-Atlantic Power Holdings, LLC	Delaware
Reliant Energy Mid-Atlantic Power Services, Inc.	Delaware
Reliant Energy New Jersey Holdings, LLC	Delaware
Reliant Energy Northeast Generation, Inc.	Delaware
Reliant Energy Northeast Holdings, Inc.	Delaware
Reliant Energy Northeast Management Company	Pennsylvania
Reliant Energy Ormond Beach, Inc.	Delaware
Reliant Energy Power Generation, Inc.	Delaware
Reliant Energy Power Supply, LLC	Delaware
Reliant Energy Retail Holdings, LLC	Delaware
Reliant Energy Retail Services, LLC	Delaware
Reliant Energy Sabine (Delaware), Inc.	Delaware
Reliant Energy Sabine (Texas), Inc.	Delaware
Reliant Energy Services Canada, Ltd.	Canada
Reliant Energy Services Channelview LLC	Delaware
Reliant Energy Services Desert Basin, LLC	Delaware
Reliant Energy Services Mid-Stream, LLC	Delaware
Reliant Energy Services, Inc.	Delaware
Reliant Energy Seward, LLC	Delaware
Reliant Energy Solutions East, LLC	Delaware
Reliant Energy Solutions Northeast, LLC	Delaware
Reliant Energy Trademark Trust	Delaware
Reliant Energy Trading Exchange, Inc.	Delaware
Reliant Energy Ventures, Inc.	Delaware
Reliant Energy Wholesale (Europe) Holdings B.V.	The Netherlands
Reliant Energy Wholesale Generation, LLC	Delaware
RERH Holdings, LLC	Delaware
Sabine Cogen, LP*	Delaware
San Gabriel Power Generation, LLC	Delaware

*      Indicates subsidiaries not wholly-owned either directly or indirectly.

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Reliant Energy, Inc.:

We consent to the incorporation by reference in the registration statements on Form S-3 (No. 333-107295 and 333-107296) and on Form S-8 (No. 333-60124, 333-60328, 333-74754, 333-74790, 333-86608, 333-86610, 333-86612, 333-98273, 333-101471, 333-101473, 333-106097, and 333-106098) of Reliant Energy, Inc. of our:

Reports dated February 25, 2008, with respect to (i) the consolidated balance sheets of Reliant Energy, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the years then ended, and the related financial statement schedule and (ii) the effectiveness of internal control over financial reporting as of December 31, 2007, which reports appear in the December 31, 2007 annual report on Form 10-K of Reliant Energy, Inc. Our report with respect to the consolidated financial statements refers to our audit of the adjustments to the financial information in note 16 to the 2005 consolidated financial statements to retrospectively reflect the change in subsidiary guarantors of Reliant Energy Inc.’s senior secured notes, as more fully described in that note. However, we were not engaged to audit, review, or apply any procedures to the 2005 consolidated financial statements other than with respect to such adjustments. Our report with respect to the consolidated financial statements also refers to changes in accounting for income tax uncertainties in 2007 and share-based payment transactions and defined benefit pension and other postretirement plans in 2006.

Report dated February 25, 2008, with respect to the consolidated balance sheets of RERH Holdings, LLC and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, members’ equity and comprehensive income, and cash flows for the years then ended, which report appears in the December 31, 2007 annual report on Form 10-K of Reliant Energy, Inc. Our report with respect to the consolidated financial statements refers to a change in accounting for income tax uncertainties in 2007.

Report dated February 25, 2008, with respect to the consolidated balance sheets of Reliant Energy Mid-Atlantic Power Holdings, LLC and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, member’s equity and comprehensive income (loss), and cash flows for the years then ended, which report appears in the December 31, 2007 annual report on Form 10-K of Reliant Energy, Inc. Our report with respect to the consolidated financial statements refers to changes in accounting for income tax uncertainties in 2007 and defined benefit pension and other post retirement plans in 2006.

Report dated February 25, 2008, with respect to the consolidated balance sheets of Orion Power Holdings, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholder’s equity and comprehensive income (loss), and cash flows for the years then ended, which report appears in the December 31, 2007 annual report on Form 10-K of Reliant Energy, Inc. Our report with respect to the consolidated financial statements refers to changes in accounting for income tax uncertainties in 2007 and defined benefit pension and other post retirement plans in 2006.

KPMG LLP

Houston, Texas
February 25, 2008

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in registration statements on Form S-3 (No. 333-107295 and 333-107296) and Form S-8 (No. 333-60124, 333-60328, 333-74754, 333-74790, 333-86608, 333-86610, 333-86612, 333-98273, 333-101471, 333-101473, 333-106097 and 333-106098) of Reliant Energy, Inc. of our:

Report dated March 14, 2006 related to the consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows of Reliant Energy, Inc. and subsidiaries before the effects of the adjustments to retrospectively account for the change in subsidiary guarantors as described in note 16 and financial statement schedule appearing in this Annual Report on the Form 10-K of Reliant Energy, Inc. for the year ended December 31, 2007.

Report dated March 14, 2006 related to the consolidated statements of operations, member’s equity and comprehensive income, and cash flows of Reliant Energy Mid-Atlantic Power Holdings, LLC appearing in this Annual Report on Form 10-K of Reliant Energy, Inc. for the year ended December 31, 2007.

Report dated March 14, 2006 related to the consolidated statements of operations, stockholder’s equity and comprehensive loss, and cash flows of Orion Power Holdings, Inc. appearing in this Annual Report on Form 10-K of Reliant Energy, Inc. for the year ended December 31, 2007.

Report dated March 14, 2006 related to the consolidated statements of operations, member’s equity and comprehensive income, and cash flows of Reliant Energy Retail Holdings, LLC appearing in this Annual Report on Form 10-K of Reliant Energy, Inc. for the year ended December 31, 2007.

DELOITTE & TOUCHE LLP

Houston, Texas
February 25, 2008

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Mark M. Jacobs, certify that:

     1. I have reviewed this Annual Report on Form 10-K of Reliant Energy, Inc. (the registrant);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2008	/s/ Mark M. Jacobs
	Mark M. Jacobs
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Rick J. Dobson, certify that:

     1. I have reviewed this Annual Report on Form 10-K of Reliant Energy, Inc. (the registrant);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2008	/s/ Rick J. Dobson
	Rick J. Dobson
	Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
AND THE CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,
UNITED STATES CODE)

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the Act), Mark M. Jacobs, President and Chief Executive Officer of Reliant Energy, Inc. (the Company), and Rick J. Dobson, Executive Vice President and Chief Financial Officer, each hereby certify, to the best of their knowledge:

(a) the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 26, 2008	/s/ Mark M. Jacobs
	Mark M. Jacobs
	President and Chief Executive Officer
	/s/ Rick J. Dobson
	Rick J. Dobson
	Executive Vice President and Chief Financial Officer