UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 1-16455

RRI 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.)

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

(713) 497-3000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of July 28, 2009, the latest practicable date for determination, RRI Energy, Inc. had 351,482,149 shares of common stock outstanding and no shares of treasury stock.

 

 

TABLE OF CONTENTS

Forward-Looking Information		ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			1
Consolidated Statements of Operations (unaudited) Three and Six Months Ended June 30, 2009 and 2008			1
Consolidated Balance Sheets (unaudited) June 30, 2009 and December 31, 2008			2
Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, 2009 and 2008			3
Notes to Unaudited Consolidated Interim Financial Statements			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			30
Business Overview			30
Consolidated Results of Operations			33
Liquidity and Capital Resources			43
Off-Balance Sheet Arrangements			44
New Accounting Pronouncements, Significant Accounting Policies and Critical Accounting Estimates			45
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			46
Market Risks and Risk Management			46
Non-Trading Market Risks			46
Trading Market Risks			47
Fair Value Measurements			48
ITEM 4. CONTROLS AND PROCEDURES			49
Evaluation of Disclosure Controls and Procedures			49
Changes in Internal Control Over Financial Reporting			49
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			49
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			49
ITEM 6. EXHIBITS			50
Exhibit 3.2
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING INFORMATION

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

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

•

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

•

Limitations on our ability to set rates at market prices;

•

Legislative, regulatory and/or market developments;

•

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

•

Interruption or breakdown of our generating equipment and processes;

•

Failure of third parties to perform contractual obligations;

•

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

•

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

•

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

•

Ineffective hedging and other risk management activities;

•

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

•

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

•

Weather-related events or other events beyond our control;

•

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

•

Financial and economic market conditions and our access to capital.

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

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

PART I.
FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

RRI ENERGY, INC. AND SUBSIDIARIES

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(thousands of dollars, except per share amounts)
Revenues:
Revenues (including $(21,842), $5,465, $(26,130) and $(6,737) unrealized gains (losses)) (including $0, $145,592, $0 and $253,001 from affiliates)		$	389,777			$	1,013,564			$	855,961			$	1,893,362
Expenses:
Cost of sales (including $28,486, $62,051, $(10,969) and $105,053 unrealized gains (losses)) (including $0, $34,593, $0 and $70,306 from affiliates)			280,067				568,876				604,741				1,077,715
Operation and maintenance			156,964				165,733				314,110				321,178
General and administrative			27,645				32,627				56,659				61,841
Western states litigation and similar settlements			—				—				—				34,000
Gains on sales of assets and emission and exchange allowances, net			(1,241	)			(22,312	)			(20,171	)			(22,923	)
Depreciation and amortization			67,646				82,909				135,504				165,706
Total operating expense			531,081				827,833				1,090,843				1,637,517
Operating Income (Loss)			(141,304	)			185,731				(234,882	)			255,845
Other Income (Expense):
Income (loss) of equity investment, net			(690	)			988				(149	)			1,195
Debt extinguishments gains (losses)			844				—				844				(1,353	)
Other, net			160				90				211				26
Interest expense			(45,067	)			(51,094	)			(91,986	)			(102,510	)
Interest income			721				8,226				969				14,651
Total other expense			(44,032	)			(41,790	)			(90,111	)			(87,991	)
Income (Loss) from Continuing Operations Before Income Taxes			(185,336	)			143,941				(324,993	)			167,854
Income tax expense (benefit)			(81,644	)			61,963				(115,520	)			72,940
Income (Loss) from Continuing Operations			(103,692	)			81,978				(209,473	)			94,914
Income from discontinued operations			907,258				276,710				861,626				640,986
Net Income		$	803,566			$	358,688			$	652,153			$	735,900
Basic Earnings (Loss) per Share:
Income (loss) from continuing operations		$	(0.30	)		$	0.24			$	(0.60	)		$	0.27
Income from discontinued operations			2.59				0.79				2.46				1.86
Net income		$	2.29			$	1.03			$	1.86			$	2.13
Diluted Earnings (Loss) per Share:
Income (loss) from continuing operations		$	(0.30	)		$	0.23			$	(0.60	)		$	0.27
Income from discontinued operations			2.59				0.78				2.46				1.81
Net income		$	2.29			$	1.01			$	1.86			$	2.08

See Notes to our Unaudited Consolidated Interim Financial Statements

RRI ENERGY, INC. AND SUBSIDIARIES

		June 30, 2009				December 31, 2008
		(thousands of dollars, except per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,486,965			$	1,004,367
Restricted cash			2,778				2,721
Accounts and notes receivable, principally customer			127,479				249,871
Inventory			303,984				314,999
Derivative assets			157,023				161,340
Margin deposits			18,078				32,676
Investment in and receivables from Channelview, net			24,569				58,703
Prepayments and other current assets			105,146				124,449
Current assets of discontinued operations ($152,000 and $295,477 of margin deposits)			271,538				2,506,340
Total current assets			2,497,560				4,455,466
Property, plant and equipment, gross			6,510,780				6,417,268
Accumulated depreciation			(1,722,634	)			(1,597,479	)
Property, Plant and Equipment, net			4,788,146				4,819,789
Other Assets:
Other intangibles, net			373,773				380,554
Derivative assets			84,004				78,879
Prepaid lease			264,893				273,374
Other ($31,888 and $29,012 accounted for at fair value)			238,142				219,552
Long-term assets of discontinued operations			25,717				494,781
Total other assets			986,529				1,447,140
Total Assets		$	8,272,235			$	10,722,395
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and short-term borrowings		$	410,799			$	12,517
Accounts payable, principally trade			137,239				156,604
Derivative liabilities			234,906				202,206
Margin deposits			28,000				93,000
Other			206,698				199,026
Current liabilities of discontinued operations ($42,250 and $0 of margin deposits)			187,391				2,375,895
Total current liabilities			1,205,033				3,039,248
Other Liabilities:
Derivative liabilities			115,596				140,493
Other			305,407				272,079
Long-term liabilities of discontinued operations			29,872				873,190
Total other liabilities			450,875				1,285,762
Long-term Debt			2,160,501				2,610,737
Commitments and Contingencies
Temporary Equity Stock-based Compensation			4,934				9,004
Stockholders’ Equity:
Preferred stock; par value $0.001 per share (125,000,000 shares authorized; none outstanding)			—				—
Common stock; par value $0.001 per share (2,000,000,000 shares authorized; 350,711,802 and 349,812,537 issued)			112				111
Additional paid-in capital			6,248,060				6,238,639
Accumulated deficit			(1,723,048	)			(2,375,201	)
Accumulated other comprehensive loss			(74,232	)			(85,905	)
Total stockholders’ equity			4,450,892				3,777,644
Total Liabilities and Equity		$	8,272,235			$	10,722,395

See Notes to our Unaudited Consolidated Interim Financial Statements

RRI ENERGY, INC. AND SUBSIDIARIES

		Six Months Ended June 30,
		2009				2008
		(thousands of dollars)
Cash Flows from Operating Activities:
Net income		$	652,153			$	735,900
Income from discontinued operations			(861,626	)			(640,986	)
Net income (loss) from continuing operations			(209,473	)			94,914
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			135,504				165,706
Deferred income taxes			(115,850	)			71,419
Net changes in energy derivatives			37,099				(98,316	)
Amortization of deferred financing costs			4,292				4,206
Gains on sales of assets and emission and exchange allowances, net			(20,171	)			(22,923	)
Western states litigation and similar settlements			—				34,000
Other, net			7,450				(1,268	)
Changes in other assets and liabilities:
Accounts and notes receivable, net			126,059				(158,758	)
Changes in notes, receivables and payables with affiliate, net			(1,230	)			(5,440	)
Inventory			12,610				(42,445	)
Margin deposits, net			(50,402	)			(54,644	)
Net derivative assets and liabilities			(21,965	)			(9,519	)
Accounts payable			(7,453	)			88,399
Other current assets			3,759				(6,819	)
Other assets			9,073				19,190
Taxes payable/receivable			(4,936	)			19,971
Other current liabilities			(4,207	)			(8,100	)
Other liabilities			3,322				(1,242	)
Net cash provided by (used in) continuing operations from operating activities			(96,519	)			88,331
Net cash provided by discontinued operations from operating activities			508,602				102,531
Net cash provided by operating activities			412,083				190,862
Cash Flows from Investing Activities:
Capital expenditures			(114,964	)			(102,930	)
Proceeds from sales of assets, net			35,931				—
Proceeds from sales of emission and exchange allowances			19,175				28,420
Purchases of emission allowances			(5,662	)			(17,644	)
Restricted cash			(57	)			(3,835	)
Other, net			1,500				1,435
Net cash used in continuing operations from investing activities			(64,077	)			(94,554	)
Net cash provided by (used in) discontinued operations from investing activities			299,004				(14,200	)
Net cash provided by (used in) investing activities			234,927				(108,754	)
Cash Flows from Financing Activities:
Payments of long-term debt			(44,780	)			(45,193	)
Payments of debt extinguishments expenses			—				(423	)
Proceeds from issuances of stock			2,309				5,769
Net cash used in continuing operations from financing activities			(42,471	)			(39,847	)
Net cash used in discontinued operations from financing activities			(225,300	)			—
Net cash used in financing activities			(267,771	)			(39,847	)
Net Change in Cash and Cash Equivalents, Total Operations			379,239				42,261
Less: Net Change in Cash and Cash Equivalents, Discontinued Operations			(103,359	)			(325	)
Cash and Cash Equivalents at Beginning of Period, Continuing Operations			1,004,367				524,070
Cash and Cash Equivalents at End of Period, Continuing Operations		$	1,486,965			$	566,656
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid (net of amounts capitalized) for continuing operations		$	95,105			$	104,797
Income taxes paid (net of income tax refunds) for continuing operations			3,582				(13,449	)

See Notes to our Unaudited Consolidated Interim Financial Statements

RRI ENERGY, INC. AND SUBSIDIARIES

(1) Background and Basis of Presentation

(a) Background.

“RRI Energy” refers to RRI Energy, Inc. and “we,” “us” and “our” refer to RRI Energy, Inc. and its consolidated subsidiaries. Our business consists primarily of one business segment, wholesale energy. See note 13. Our consolidated interim financial statements and notes (interim financial statements) are unaudited, omit certain disclosures and should be read in conjunction with our audited consolidated financial statements and notes in our Form 10-K.

On May 1, 2009, we sold our interests in the affiliates that operated our Texas retail business. In connection with this sale, we changed our name to RRI Energy, Inc. from Reliant Energy, Inc. effective May 2, 2009. See note 15.

(b) Basis of Presentation.

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

•

the reported amounts of assets, liabilities and equity;

•

the reported amounts of revenues and expenses; and

•

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

We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. We have evaluated subsequent events for recording and disclosure to August 3, 2009, the date the interim financial statements were issued.

Adjustments and Reclassifications. The interim financial statements reflect all normal recurring adjustments necessary, in management’s opinion, to present fairly our financial position and results of operations for the reported periods. Amounts reported for interim periods, however, may not be indicative of a full year period due to seasonal fluctuations in demand for electricity and energy services, changes in commodity prices, and changes in regulations, timing of maintenance and other expenditures, dispositions, changes in interest expense and other factors. We have reclassified certain amounts reported in these interim financial statements from prior periods to conform to the 2009 presentation. We reclassified amounts on our December 31, 2008 consolidated balance sheet relating primarily to continuing versus discontinued margin deposits, which increased our total assets and total liabilities by $93 million. These reclassifications had no impact on reported earnings/losses.

Deconsolidation of Channelview. On August 20, 2007, four of our wholly-owned subsidiaries, RRI Energy Channelview LP (Channelview LP), RRI Energy Channelview (Texas) LLC, RRI Energy Channelview (Delaware) LLC and RRI Energy Services Channelview LLC (collectively, Channelview), filed for reorganization under Chapter 11 of the Bankruptcy Code. As Channelview is currently subject to the supervision of the bankruptcy court, we deconsolidated Channelview’s financial results beginning August 20, 2007 and began reporting our investment in Channelview using the cost method. The Channelview plant was sold on July 1, 2008. See note 14 for further discussion of Channelview.

Inventory. We value fuel inventories at the lower of average cost or market. We reduce these inventories as they are used in the production of electricity or sold. We recorded $35 million and $1 million during the three months ended June 30, 2009 and 2008, respectively, for lower of average cost or market adjustments in cost of sales and recorded $59 million and $1 million during the six months ended June 30, 2009 and 2008, respectively.

FASB Codification. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification became effective for us in the third quarter of 2009. The Codification brings together in one place all authoritative GAAP and substantially retains existing GAAP. This change will not affect our consolidated financial statements.

New Accounting Pronouncement Adopted — Interim Disclosures about Fair Value of Financial Instruments. The FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which is effective for our June 30, 2009 interim financial statements. The FSP amends Statement of Financial Accounting Standards (SFAS) No. 107, “Disclosures about Fair Value of Financial Instruments” and requires us to provide information about the fair value of our financial instruments, including methods and significant assumptions used to estimate the fair value, in interim financial statements. See note 3.

New Accounting Pronouncement Adopted — Fair Value Measurements. The FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” which is effective for our June 30, 2009 interim financial statements. The FSP provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157, “Fair Value Measurements” when there has been a significant decrease in the volume and level of activity for an asset or liability compared with normal market activity for the asset or liability. This FSP did not have a significant impact on our consolidated financial statements since the markets in which we purchase and sell commodities and derivative instruments are not distressed. See notes 3 and 4.

New Accounting Pronouncement Not Yet Adopted — Disclosures about Plan Assets. The FASB issued FSP FAS 132(R)-1, “Employer’s Disclosures about Postretirement Benefit Plan Assets,” which is effective for 2009. In addition to enhanced disclosures regarding investment policies and strategies, this FSP will require us to disclose in our 2009 Annual Report on Form 10-K information about fair value measurements of plan assets that would be similar to the disclosures about fair value measurements required by SFAS No. 157, “Fair Value Measurements.”

(2) Stock-based Compensation and Other Employee Matters

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in millions)
Stock-based incentive plans compensation expense (pre-tax)(1)		$	1			$	4			$	4			$	8

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

Other Employee Matters. As of June 30, 2009, approximately 45% of our employees are subject to collective bargaining arrangements. Approximately 35% of our employees are subject to collective bargaining arrangements that will expire by June 30, 2010. We intend to negotiate the renewal of these agreements.

(3) Fair Value Measurements

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

Level 1:		Level 1 represents unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. This category primarily includes our energy derivative instruments that are exchange-traded or that are cleared and settled through the exchange. It also includes our available-for-sale and trading securities.
Level 2:		Level 2 represents quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. This category includes emission allowances futures that are exchange-traded and over-the-counter (OTC) derivative instruments such as generic swaps, forwards and options.

Level 3:		This category includes our energy derivative instruments whose fair value is estimated based on internally developed models and methodologies utilizing significant inputs that are generally less readily observable from objective sources (such as implied volatilities and correlations). Our OTC, complex or structured derivative instruments that are transacted in less liquid markets with limited pricing information are included in Level 3. Examples are coal contracts, longer term natural gas contracts and options valued using implied or internally-developed inputs.

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

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

		June 30, 2009
																		Total
		Level 1				Level 2				Level 3				Reclassification				Fair Value
		(in millions)
Total derivative assets		$	172			$	68			$	1			$	—	(1)		$	241
Total derivative liabilities			53				179				118				—	(1)			350
Other assets(2)			32				—				—				—				32

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

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

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value(1)				Value				Value(1)
		(in millions)
Fixed rate debt		$	2,572			$	2,421			$	2,623			$	2,168
Total debt		$	2,572			$	2,421			$	2,623			$	2,168

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		Net Derivatives (Level 3)								Net Derivatives (Level 3)
		(in millions)
Balance, beginning of period		$	(153	)		$	85			$	(114	)		$	21
Total gains (losses) realized/unrealized:
Included in earnings			(12	)(1)			127	(1)			(79	)(1)			141	(1)
Purchases, issuances and settlements (net)			48				(36	)			76				14
Transfers in and/or out of Level 3 (net)			—	(2)			—	(3)			—	(4)			—	(5)
Balance, end of period		$	(117	)		$	176			$	(117	)		$	176
Changes in unrealized gains (losses) relating to derivative assets and liabilities still held at June 30, 2009 and 2008:
Revenues		$	—			$	(2	)		$	(2	)		$	(1	)
Cost of sales			(5	)			124				(54	)			102
Total		$	(5	)		$	122			$	(56	)		$	101

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

(4) Derivative Instruments and Hedging Activities

We account for our derivative instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133). Effective January 1, 2009, we adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161).

Changes in commodity prices prior to the energy delivery period are inherent in our business. However, we believe the benefits of generally hedging our generation assets do not justify the costs, including collateral postings. Accordingly, we may enter selective hedges, including originated transactions, based on our assessment of (a) operational and market limitations requiring us to enter into power, fuel, capacity and emissions transactions to manage our generation assets, (b) the near term economic environment and volatile commodity markets and the benefits of hedging some of the downside risk to our earnings and cash flows and (c) market fundamentals and the opportunity to increase the return from our generation assets. For our risk management activities, we use derivative and non-derivative contracts that provide for settlement in cash or by delivery of a commodity. We use derivative instruments such as futures, forwards, swaps and options to execute our wholesale hedge strategy. We may also enter into derivatives to manage our exposure to changes in prices of emission and exchange allowances.

We account for our derivatives under one of three accounting methods (mark-to-market, accrual (under the normal purchase/normal sale exception to fair value accounting) or cash flow hedge accounting) based on facts and circumstances. The fair values of our derivative activities are determined by (a) prices actively quoted, (b) prices provided by other external sources or (c) prices based on models and other valuation methods. See note 5 for discussion on fair value measurements.

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.

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

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

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

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 5 for further discussion of our credit policy.

Earnings Volatility from Derivative Instruments. We procure natural gas, coal, oil, natural gas transportation and storage capacity and other energy-related commodities to support our business. 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.

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

Cash Flow Hedges. 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.

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. During the first quarter of 2007, we de-designated our remaining cash flow hedges; therefore, as of June 30, 2009 and December 31, 2008, we do not have any designated cash flow hedges.

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

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

		Derivative Assets								Derivative Liabilities								Net Derivative
		Current				Long-Term				Current				Long-Term				Assets (Liabilities)
		(in millions)
Non-trading		$	95			$	64			$	(194	)		$	(102	)		$	(137	)
Trading			62				20				(41	)			(13	)			28
Total derivatives		$	157			$	84			$	(235	)		$	(115	)		$	(109	)

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

						Notional Volumes
Commodity		Unit				Current				Long-term
						(in millions)
Power		MWh(1)					(3	)(2)			(5	)(2)
Natural gas		MMBTU(3)					7				25
Natural gas basis		MMBTU(3)					—				1
Coal		MMBTU(3)					109				235

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

		Three Months Ended June 30, 2009
Derivatives Not Designated as Hedging Instruments Under SFAS No. 133(1)		Revenues				Cost of Sales
		(in millions)
Non-Trading Commodity Contracts:
Unrealized(2)		$	(22	)		$	31
Realized(3)(4)(5)			81				(66	)
Total non-trading		$	59			$	(35	)
Trading Commodity Contracts:
Unrealized		$	—			$	(2	)
Realized(3)			—				1
Total trading		$	—			$	(1	)

		Six Months Ended June 30, 2009
Derivatives Not Designated as Hedging Instruments Under SFAS No. 133(1)		Revenues				Cost of Sales
		(in millions)
Non-Trading Commodity Contracts:
Unrealized(2)		$	(26	)		$	(9	)
Realized(3)(4)(5)			187				(74	)
Total non-trading		$	161			$	(83	)
Trading Commodity Contracts:
Unrealized		$	—			$	(2	)
Realized(3)			—				20
Total trading		$	—			$	18

As of June 30, 2009 and December 31, 2008, we do not have any designated cash flow hedges. Amounts included in accumulated other comprehensive loss are:

		June 30, 2009
						Expected to be
						Reclassified into
						Results of
		At the End of the				Operations
		Period				in Next 12 Months
		(in millions)
De-designated cash flow hedges(1)(2)(3)		$	41			$	15

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
						(in millions)
Revenues		$	—			$	—			$	—			$	—
Cost of sales			5				(13	)			16				(17	)
Total(1)		$	5			$	(13	)		$	16			$	(17	)

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

Our credit exposure is based on our derivative assets and accounts receivable from our wholesale energy counterparties, after taking into consideration netting within each contract and any master netting contracts with counterparties. We believe this represents the maximum potential loss we would incur if our counterparties failed to perform according to their contract terms. In determining the fair value of our derivative assets, we include assumptions for counterparty non-performance risk. See note 3 above and note 2(e) to our consolidated financial statements in our Form 10-K for additional information about fair value measurements. Additionally, we provide an allowance for doubtful accounts for outstanding receivable balances.

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

		Exposure				Credit								Number of				Net Exposure of
		Before				Collateral				Exposure				Counterparties				Counterparties
Credit Rating Equivalent		Collateral(1) (2)				Held(3)				Net of Collateral				>10%				>10%
		(dollars in millions)
Investment grade		$	224			$	45			$	179				2	(4)		$	145
Non-investment grade			2				—				2				—				—
No external ratings:
Internally rated — Investment grade			66				—				66				1	(5)			65
Internally rated — Non-investment grade			7				6				1				—				—
Total		$	299			$	51			$	248				3			$	210

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

Based on our current credit ratings, any additional collateral postings that would be required from us due to a credit downgrade would be immaterial. As of June 30, 2009 and December 31, 2008, we have posted cash margin deposits of $122 million and $70 million, respectively, as collateral for our derivative liabilities receiving mark-to-market accounting treatment and our accounts payable (classified either as continuing or discontinued operations). Additionally, as of June 30, 2009 and December 31, 2008, we have $95 million and $103 million, respectively, in letters of credit issued as collateral for our derivative liabilities receiving mark-to-market accounting treatment and our accounts payable (classified either as continuing or discontinued operations). See note 7.

(6) Comprehensive Income

The components of total comprehensive income are:

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in millions)
Net income		$	803			$	359			$	652			$	736
Other comprehensive income, net of tax:
Reclassification of net deferred loss from cash flow hedges realized into net income/loss (net of tax)			3				6				8				16
Unrealized gain on available-for-sale securities (net of tax)(1)			2				—				3				—
Reclassification of benefits actuarial net loss into net income/loss (net of tax)			1				—				1				—
Comprehensive income		$	809			$	365			$	664			$	752

		June 30, 2009												December 31, 2008
		Weighted												Weighted
		Average												Average
		Stated												Stated
		Interest												Interest
		Rate(1)				Long-term				Current				Rate(1)				Long-term				Current
		(in millions, except interest rates)
Facilities, Bonds and Notes:
RRI Energy:
Senior secured revolver due 2012			2.35	%		$	—			$	—				3.18	%		$	—			$	—
Senior secured notes due 2014(2)(3)			6.75				453				—				6.75				498				—
Senior unsecured notes due 2014			7.625				575				—				7.625				575				—
Senior unsecured notes due 2017			7.875				725				—				7.875				725				—
Subsidiary Obligations:
Orion Power Holdings, Inc. senior notes due 2010 (unsecured)			12.00				—				400				12.00				400				—
PEDFA(4) fixed-rate bonds due 2036(5)			6.75				408				—				6.75				408				—
Total facilities, bonds and notes							2,161				400								2,606				—
Other:
Adjustment to fair value of debt(6)							—				11								4				13
Total other debt							—				11								4				13
Total debt(7)						$	2,161			$	411							$	2,610			$	13

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

		Total Committed				Drawn				Letters				Unused
		Credit				Amount				of Credit				Amount
		(in millions)
RRI Energy senior secured revolver due 2012		$	500			$	—			$	39			$	461
RRI Energy letter of credit facility due 2014			250				—				250				—
Total		$	750			$	—			$	289			$	461

(8) Earnings (Loss) Per Share

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in millions)
Income (loss) from continuing operations (basic and diluted)		$	(103	)		$	82			$	(209	)		$	95

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(shares in thousands)
Diluted Weighted Average Shares Calculation:
Weighted average shares outstanding (basic)			350,665				346,616				350,577				346,017
Plus: Incremental shares from assumed conversions:
Stock options			—	(1)			4,317				—	(1)			4,285
Restricted stock			—	(1)			575				—	(1)			559
Employee stock purchase plan			—	(1)			47				—	(1)			23
5.00% convertible senior subordinated notes			N/A	(2)			18				N/A	(2)			115
Warrants			N/A	(3)			2,481				N/A	(3)			3,079
Weighted average shares outstanding assuming conversion (diluted)			350,665				354,054				350,577				354,078

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(shares in thousands, dollars in millions)
Shares excluded from the calculation of diluted earnings (loss) per share			438	(1)			N/A	(2)			442	(1)			N/A	(2)
Shares excluded from the calculation of diluted earnings (loss) per share because the exercise price exceeded the average market price			6,217	(3)			1,833	(3)			7,086	(3)			1,849	(3)

(9) Income Taxes

(a) Tax Rate Reconciliation.

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Federal statutory rate			(35	)%			35	%			(35	)%			35	%
Additions (reductions) resulting from:
Federal valuation allowance			(8	)			—				—				—
State income taxes, net of federal income taxes			(1	)(1)			5	(2)			(1	)(3)			6	(4)
Other			—				3				—				2
Effective rate			(44	)%			43	%			(36	)%			43	%