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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

[ ] 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 1-16077

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ORION POWER HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 52-2087649
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

C/O RELIANT RESOURCES, INC.
1000 MAIN STREET
HOUSTON, TEXAS 77002 (713) 497-3000
(Address and Zip Code of Principal (Registrant's Telephone Number,
Executive Offices) Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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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 [X] No [ ]

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/A or any
amendment to this Form 10-K/A. [X]

Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

At March 12, 2004, 1,000 shares of voting common stock, which
constitute all of the outstanding common equity, with a par value of $1.00, were
outstanding. Aggregate market value of the outstanding voting stock held by
non-affiliates of the registrant as of June, 30 2003: None

DOCUMENTS INCORPORATED BY REFERENCE: Not applicable

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TABLE OF CONTENTS



Cautionary Statement Regarding Forward-Looking Information................................................. 1
Glossary of Terms.......................................................................................... 2

PART I

ITEM 1. Business..................................................................................... 4
Our Business................................................................................. 4
General.................................................................................. 4
Risk Factors............................................................................. 4
Generation Assets........................................................................ 5
Commercial Operations.................................................................... 6
Regulation............................................................................... 7
Competition.............................................................................. 8
Environmental Matters........................................................................ 8
Employees.................................................................................... 11
Available Information........................................................................ 11
ITEM 2. Properties................................................................................... 12
ITEM 3. Legal Proceedings............................................................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................... 12

PART II

ITEM 5. Market for Our Common Equity and Related Stockholder Matters................................. 12
ITEM 6. Selected Financial Data...................................................................... 13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15
Overview..................................................................................... 15
Consolidated Results of Operations........................................................... 15
2003 Compared to 2002.................................................................... 15
2002 Compared to 2001.................................................................... 18
Liquidity and Capital Resources.............................................................. 19
Sources of Liquidity and Capital Resources............................................... 20
Liquidity and Capital Requirements....................................................... 21
Off-Balance Sheet Arrangements........................................................... 22
Historical Cash Flows.................................................................... 23
New Accounting Pronouncements, Significant Accounting Policies and Critical
Accounting Estimates......................................................................... 26
New Accounting Pronouncements............................................................ 26
Significant Accounting Policies.......................................................... 26
Critical Accounting Estimates............................................................ 26
Related Party Transactions................................................................... 29
ITEM 7A. Quantitative and Qualitative Disclosures about Non-trading Activities and
Related Market Risks......................................................................... 29
Market Risks and Risk Management......................................................... 29
Non-trading Market Risk.................................................................. 29
ITEM 8. Financial Statements and Supplementary Data.................................................. F-1
Orion Power Holdings, Inc. and Subsidiaries Consolidated Financial Statements............ F-5
Orion Power Holdings, Inc. - Schedule I - Condensed Financial Information................ F-52
Orion Power Holdings, Inc. - Schedule II - Reserves ..................................... F-58
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... II-1
ITEM 9A. Controls and Procedures...................................................................... II-1
Evaluation of Disclosure Controls and Procedures......................................... II-1
Changes in Internal Controls............................................................. II-1

PART III

ITEM 10. Directors and Executive Officers............................................................. III-1
ITEM 11. Executive Compensation....................................................................... III-2


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ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.......................................................................... III-2
ITEM 13. Certain Relationships and Related Transactions............................................... III-2
ITEM 14. Principal Accountant Fees and Services....................................................... III-2

PART IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. IV-1


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

When we make statements containing projections, estimates or
assumptions about our revenues, income and other financial items, our plans for
the future, future economic performance, transactions for the sale of parts of
our operations and financings related thereto, we are making "forward-looking
statements." Forward-looking statements relate to future events and anticipated
revenues, earnings, business strategies, competitive position or other aspects
of our operations or operating results. 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. Although we believe that the expectations and the underlying
assumptions reflected in our forward-looking statements are reasonable, there
can be no assurance that these expectations will prove to be correct.
Forward-looking statements are not guarantees of future performance or events.
Such statements involve a number of risks and uncertainties, and actual results
may differ materially from the results discussed in the forward-looking
statements.

Among other things, the matters described in "Business -- Risk Factors"
in Item 1 of this report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this report and note 14 to our
consolidated financial statements could cause actual results to differ
materially from those expressed or implied in our forward-looking statements.

Each forward-looking statement speaks only as of the date of the
particular statement and we undertake no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information, future
events or otherwise.

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GLOSSARY OF TERMS

The following terms are used in this report:

APB No. 25............... Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."

CenterPoint.............. CenterPoint Energy, Inc., on and after August 31,
2002 and Reliant Energy, Incorporated prior to August
31, 2002.

CERCLA................... Comprehensive Environmental Response Corporation and
Liability Act of 1980.

CO(2).................... Carbon dioxide.

Distribution............. the distribution of approximately 83% of Reliant
Resources common stock owned by CenterPoint to its
stockholders on September 30, 2002.

EBITDA................... earnings (loss) before interest expense, interest
income, income taxes, depreciation and amortization
expense.

EITF..................... Emerging Issues Task Force.

EITF No. 02-03........... EITF Issue No. 02-03, "Issues Related to Accounting
for Contracts Involved in Energy Trading and Risk
Management Activities."

EITF No. 03-11........... EITF Issue No. 03-11, "Reporting Realized Gains and
Losses on Derivative Instruments that are Subject to
FASB Statement No. 133 and Not "Held for Trading
Purposes" as Defined in EITF Issue No. 02-03."

EPA...................... United States Environmental Protection Agency.

FASB..................... Financial Accounting Standards Board.

FERC..................... Federal Energy Regulatory Commission.

FIN No. 45............... FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including
Direct Guarantees of Indebtedness of Others."

FIN No. 46............... FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51."

FIN No. 46R.............. FASB Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51."

GAAP..................... United States generally accepted accounting
principles.

GWh...................... gigawatt hour.

Hydro facilities......... refers to our hydroelectric generation facilities
located in New York.

ISO...................... independent system operator.

LEP...................... Liberty Electric Power, LLC, one of our subsidiaries.

Liberty.................. Liberty Electric PA, LLC, one of our subsidiaries.

LIBOR.................... London inter-bank offered rate.

MACT..................... Maximum Achievable Control Technology.

Merger................... our acquisition by Reliant Resources on February 19,
2002.

Midwest facilities....... refers to our generation facilities, other than the
Liberty facility, located outside of the state of New
York.

MW....................... megawatts.

New York City facilities. refers to our generation facilities located in and
around New York City. It does not include the Hydro
facilities.

NO(x).................... Nitrogen oxide.

NYISO.................... New York Independent System Operator.

NYISO Market............. the wholesale electric market operated by NYISO.

Orion Capital............ Orion Power Capital, LLC, one of our subsidiaries.

Orion MidWest............ Orion Power MidWest, L.P., one of our subsidiaries.

Orion NY................. Orion Power New York, L.P., one of our subsidiaries.

Orion Power.............. Orion Power Holdings and its subsidiaries.

Orion Power Holdings..... Orion Power Holdings, Inc.

OTC...................... over-the-counter market.

PJM Market............... the wholesale electric market operated by PJM
Interconnection, LLC

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primarily in all or parts of Delaware, the District
of Columbia, Maryland, New Jersey, Ohio,
Pennsylvania, Virginia and West Virginia.

POLR.................... provider of last resort.

PUHCA................... Public Utility Holding Company Act of 1935.

Reliant Energy.......... Reliant Energy, Incorporated and its subsidiaries.

Reliant Resources....... Reliant Resources, Inc., our parent

RTO..................... regional transmission organization.

SEC..................... Securities and Exchange Commission.

SFAS.................... Statement of Financial Accounting Standards.

SFAS No. 123............ SFAS No. 123, "Accounting for Stock Based
Compensation."

SFAS No. 132............ SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits."

SFAS No. 132 (Revised 2003) SFAS No. 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement
Benefits - An Amendment of FASB Statements No. 87,
88 and 106."

SFAS No. 133............ SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended.

SFAS No. 141............ SFAS No. 141, "Business Combinations."

SFAS No. 142............ SFAS No. 142, "Goodwill and Other Intangible
Assets."

SFAS No. 143............ SFAS No. 143, "Accounting for Asset Retirement
Obligations."

SFAS No. 148............ SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure, an
amendment to SFAS No. 123."

SFAS No. 149............ SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities."

SO(2)................... Sulfur dioxide.

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PART I

ITEM 1. BUSINESS.

OUR BUSINESS

General

"Orion Power" and "we," "us" and "our" refer to Orion Power Holdings,
Inc. and its consolidated subsidiaries, unless we specify or the context
indicates otherwise. All of our outstanding stock is owned by Reliant Resources,
Inc. We refer to our parent as "Reliant Resources." For more information
regarding our corporate history, see note 1 to our consolidated financial
statements.

We have a portfolio of electric power generation facilities. Our
business operations consist of providing electric energy, capacity and ancillary
services in the wholesale energy markets in the eastern and mid-western United
States.

RISK FACTORS

The following risk factors should be considered carefully together with
the risk factors and contingencies described in other parts of this section,
"Management's Discussion and Analysis of Results of Operations" in Item 7 of
this report, and notes 13 and 14 to our consolidated financial statements. The
risks described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently believe to be
immaterial could also have a material impact on our business operations.

Market Risks. We sell electric energy, capacity and ancillary services
and purchase fuel under short and long-term contractual obligations and through
various spot markets. Because our facilities are not subject to traditional
cost-based regulation, we can generally sell electricity at market prices.
However, unlike a traditional regulated electric utility, we are not guaranteed
a rate of return on our capital investments and we cannot fully mitigate market
risks. Our results of operations, financial condition and cash flows depend, in
large part, upon prevailing market prices for electricity and fuel in our
markets. Market prices may fluctuate substantially over relatively short periods
of time, potentially adversely affecting our results of operations, financial
condition and cash flows. Changes in market prices for electricity and fuel may
result from the following factors among others:

- weather conditions;

- seasonality;

- demand for energy commodities and general economic conditions;

- forced or unscheduled plant outages;

- disruption of electricity or gas transmission or
transportation, infrastructure or other constraints or
inefficiencies;

- addition of generating capacity;

- availability of competitively priced alternative energy
sources;

- availability and levels of storage and inventory for fuel
stocks;

- natural gas, crude oil and refined products and coal
production levels;

- the financial position of market participants;

- changes in market liquidity;

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- natural disasters, wars, embargoes, acts of terrorism and
other catastrophic events; and

- governmental regulation and legislation.

We operate a significant number of power generation plants. To operate
these plants, we must enter into commitments with various terms for fuel and
transmission capacity or services. Although we attempt to hedge these purchases
against our commitments to sell in the future, it is not possible to hedge all
of our generation plant output beyond certain defined periods and, thus, changes
in commodity prices could negatively impact our results of operations, financial
condition and cash flows.

Risks Relating to Our Generation Assets. Our operation of generation
assets exposes us to risks relating to the breakdown of equipment, fuel supply
interruptions, shortages of equipment, material and labor and other operational
risks. In addition, significant portions of our facilities were constructed many
years ago. Older generating equipment, even if maintained in accordance with
good engineering practices, may require significant capital expenditures to add
to or upgrade equipment to maintain efficiency, to comply with changing
environmental requirements or to provide reliable operations. For more
information, see " -- Environmental Matters," below. Such expenditures affect
our operating costs. Any unexpected failure to produce power, including failure
caused by breakdown or forced outage, could have a material adverse effect on
our results of operations, financial condition and cash flows.

Dependence Upon Third Party Transmission Systems. We depend on power
transmission and distribution facilities owned and operated by utilities and
others to deliver energy products to our customers. If transmission or
transportation is inadequate or disrupted, our ability to sell and deliver our
products may be hindered. Any infrastructure failure that interrupts or impairs
delivery of electricity or natural gas could have a material adverse effect on
our business.

Risks Relating to Our Debt. As of December 31, 2003, we had total
consolidated debt of $2.0 billion. Our high level of debt could:

- limit our ability to obtain additional financing to operate
our business;

- limit our financial flexibility in planning for and reacting
to business and industry changes;

- place us at a competitive disadvantage as compared to less
leveraged companies;

- increase our vulnerability to general adverse economic and
industry conditions, including changes in interest rates and
volatility in commodity prices or a general decline in
economic activity; and

- require us to dedicate a substantial portion of our cash flows
to payments on our debt, thereby reducing the availability of
our cash flow for other purposes including our operations,
capital expenditures and future business opportunities.

Our future results of operations are dependent on the success of our
strategic plans as discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

GENERATION ASSETS

Power Generation Operations. As of December 31, 2003, we owned 85
operating electric power generation facilities with an aggregate net generating
capacity of 6,690 MW in three regions of the United States. The generating
capacity of the these facilities consists of approximately 44% of base-load
(2,927 MW), 31% of intermediate (2,059 MW) and 25% of peaking capacity (1,704
MW). The following table describes our electric power generation facilities as
of December 31, 2003:

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GENERATING
CAPACITY FUEL TYPES
GENERATION FACILITIES LOCATION (MW)(1) PRESENT DISPATCH TYPES
--------------------- -------- -------- ------- --------------

Operating
Astoria ................ New York City 1,282 Gas/Dual Inter/Peak
Avon Lake .............. Northeastern Ohio 721 Coal/Oil Base/Peak
Brunot Island .......... Western Pennsylvania 347 Gas/Oil Inter/Peak
Carr Street ............ Syracuse, New York 99 Dual Inter
Ceredo ................. West Virginia 475 Gas Peak
Cheswick ............... Western Pennsylvania 583 Coal Base
Elrama ................. Western Pennsylvania 487 Coal Base
Gowanus ................ New York City 610 Dual/Oil Peak
Liberty ................ Eastern Pennsylvania 568 Gas Base
Narrows ................ New York City 317 Dual Peak
New Castle ............. Western Pennsylvania 331 Coal/Gas Base/Peak
Niles .................. Northwestern Ohio 246 Coal/Gas Base/Peak
Hydroelectric assets (2) Upstate New York 624 Hydro Base
-----
Total Operating ............ 6,690
=====


- ----------------
(1) Generating capacity refers to the average of the facilities' summer and
winter generating capacities net of auxiliary power.

(2) Excludes two hydro plants with a total net generating capacity of 5 MW,
which are not currently operational.

The following table sets forth information regarding our generation
output by dispatch type, fuel type and capacity factor during 2003 and 2002:



CAPACITY CAPACITY
2002 % FACTOR (1) 2003 % FACTOR (1)
------ --- ---------- ------ --- ----------

DISPATCH TYPE (GWH)
Baseload ......................... 15,060 76 59% 15,222 78 59%
Intermediate ..................... 4,346 22 27% 3,883 20 22%
Peaking .......................... 539 2 4% 333 2 2%
------ --- ------ ---
Total .......................... 19,945 100% 35% 19,438 100% 33%
====== === ====== ===

SOURCES OF ELECTRIC ENERGY (GWH)
Coal ............................. 12,191 61 60% 12,099 62 60%
Natural gas ...................... 1,253 6 11% 756 4 6%
Oil .............................. 2 - - 4 - -
Dual ............................. 3,630 18 19% 3,456 18 19%
Hydro ............................ 2,869 15 52% 3,123 16 57%
------ --- ------ ---
Total .......................... 19,945 100% 35% 19,438 100% 33%
====== === ====== ===


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(1) Capacity factor is the ratio of the actual net electricity generated to
the energy that could have been generated at continuous full-power
operation during the year.

Our operations have been negatively affected by depressed conditions in
the wholesale energy markets. In February 2004, our parent company, Reliant
Resources, announced plans to mothball and/or retire certain generating units.
Such action will not affect any of our generating units. However, depending on
future market conditions in the wholesale power industry, we may sell, retire,
mothball or dispose of generation assets.

COMMERCIAL OPERATIONS

Energy. We sell electric energy, generation capacity and ancillary
service products to a variety of power customers including investor-owned
utilities and other companies that serve end users. We sell these products in
hour-ahead, day-ahead, forward bilateral and ISO markets. We sell principally
into the NYISO Market and pursuant to bilateral contracts. Our New York City
facilities sell into the NYISO Market. Our Midwest facilities and our Hydro
facilities generally sell to counterparties pursuant to bilateral contracts. The
Liberty facility sells into the PJM Market. Sales into the NYISO Market
accounted for 44% and 46% of our revenue for 2002 and 2003,

6


respectively. For information regarding customers who contributed in excess of
10% of our consolidated revenues in 2001, 2002 and 2003, see note 2(r) to our
consolidated financial statements.

Certain of our principal markets (most notably the NYISO and the PJM
Markets) have rules that, in certain instances, may impose limits or caps on the
price at which we can sell electricity. In addition, the market authorities in
certain regions have the authority to compel us to operate our generation
facilities in order to maintain the reliability of the local grid system. Under
these circumstances, we are entitled to receive a "mitigated price" for
electricity dispatched into the system that is intended to enable us to recoup
our incremental operating costs plus a designated surcharge.

In addition to standard market products, we have entered into full
requirements, POLR, tolling and other unit-specific power generation agreements.
These non-standard contracts may afford higher margin opportunities than
standard market products; however, such contracts may pose additional risks that
we may not be able to mitigate. These risks primarily relate to volumetric
uncertainty driven by weather and customer switching. For more information,
including information about a POLR contract with a utility expiring in 2004, see
note 13 to our consolidated financial statements.

Fuel. To ensure an adequate supply of fuel, we purchase natural gas,
coal and fuel oil for our generation plants from a variety of suppliers under
daily, monthly and forward contracts. These contracts generally include either
index or fixed price provisions. In connection with the operation of our natural
gas-fired plants, we also arrange for, certain scheduling and balancing
services, as well as transportation. We contract for a variety of transportation
arrangements under short-term, long-term, firm and interruptible agreements with
pipelines and storage facilities. In spite of our efforts, any given facility
may experience fuel supply constraints from time to time.

Risk Management. To manage the risk of our assets, we seek to sell
energy and purchase fuel on a forward basis through fixed price or tolling
contracts. We are required, by policy, to maintain a "one-for-one" balance
between the amount of fuel required to generate each megawatt of energy sold
from our generation assets. Although we enter into hedging activities related to
our generation facilities, we do not engage in proprietary trading with respect
to power, fuel, emissions or any other energy commodities.

REGULATION

Electricity. The FERC has exclusive rate making jurisdiction over
wholesale sales of electricity and the transmission of electricity in interstate
commerce by "public utilities." Public utilities that are subject to the FERC's
jurisdiction must file rates with the FERC. The FERC has authorized our
generation subsidiaries to sell electricity and certain related services at
wholesale under market-based rates. In addition, certain ancillary services are
sold at cost-based rates.

Under certain circumstances, the FERC can revoke or limit market-based
rate authority. If the FERC revokes or limits market-based rate authority, the
affected party would be required to obtain approval from the FERC of cost-based
rate schedules in order to make wholesale sales. In addition, the loss of
market-based rate authority could subject the affected party to the accounting,
record keeping and reporting requirements that the FERC imposes on public
utilities.

In November 2003, the FERC issued new rules designed to prevent market
abuse. The new rules relate to market manipulation and other abusive practices.
Under the rules, parties found to have engaged in prohibited behavior are
subject to disgorgement of unjust profits and possible revocation of their
market-based rate authority.

The FERC has issued a notice of proposed rules intended to standardize
electricity markets and eliminate discrimination in transmission service by
requiring that all users of the transmission grid take service pursuant to the
same terms and conditions of service, thus eliminating certain preferences
enjoyed by classes of users. The new rules would require transmission-owning
public utilities to join an ISO or RTO. In addition, the FERC seeks to establish
day-ahead and real-time electric energy and ancillary service markets modeled
after the energy markets that currently exist in the northeastern United States.
The rules contemplate the regional adoption of resource adequacy measures and
regional price mitigation measures. It is not possible for us at this time to
predict the timing of the implementation of these rules or their ultimate impact
on our business.

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Hydroelectric Facilities. We operate most of our Hydro facilities
pursuant to FERC licenses. These licenses, which periodically must be renewed,
typically include conditions regarding the operation of the facility.

SEC. A company engaged exclusively in the business of owning and/or
operating facilities used for the generation of electric energy exclusively for
sale at wholesale and selling electric energy at wholesale may be exempted from
regulation under the PUHCA as an exempt wholesale generator. Our electric
generation subsidiaries either have received determinations of exempt wholesale
generator status from the FERC or are companies that own or operate qualifying
facilities that are exempt from PUHCA. If any of our subsidiaries were to lose
their exempt wholesale generator status or qualifying facility status, we would
have to restructure our organization or risk being subjected to further
regulation by the SEC.

COMPETITION

The market for wholesale electricity customers is very competitive. In
certain markets, we face competition from independent electric providers,
independent power producers and wholesale power providers. In many cases, our
competitors have the advantage of long-standing relationships with customers,
longer operating histories and/or larger and better capital resources.

In general, we compete on the basis of price, our commercial and
marketing skills relative to other market participants, service and our
financial position. Other factors affecting our competitive position include our
ability to obtain at competitive prices (a) fuel supplies to operate our
generation plants, (b) electricity for resale and (c) related
transportation/transmission services. Since many of our energy customers,
suppliers and transporters require financial guarantees and other assurances
regarding contract performance, our access to credit support is another factor
affecting our ability to compete in the market.

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 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. Environmental
regulations affecting us include, but are not limited to:

- The Clean Air Act and the 1990 amendments to the Act, as well
as state laws and regulations impacting air emissions,
including State Implementation Plans related to existing and
new national ambient air quality standards for ozone and fine
particulate matter. Owners and/or operators of air emissions
sources are responsible for obtaining permits and for annual
compliance and reporting.

- The Federal Water Pollution Control Act, which requires
permits for facilities that discharge treated wastewater into
the environment.

- CERCLA, which can require any individual or entity that may
have owned or operated a disposal site, as well as
transporters or generators of hazardous wastes sent to such
site, to share in remediation costs.

- The Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act, which requires certain solid
wastes, including hazardous wastes, to be managed pursuant to
a comprehensive regulatory regime.

- The National Environmental Policy Act, which requires
consideration of potential environmental impacts by federal
agencies in their decisions, including siting approvals.

- The FERC, which regulates the approval and re-licensing of
hydroelectric facilities.

In order to comply with these requirements, we will, as necessary,
spend substantial funds to construct, modify and retrofit equipment, and clean
up or decommission disposal or fuel storage areas and other locations as
necessary.

8


We anticipate spending approximately $123 million from 2004 through 2008 for
environmental compliance of which $8 million is for remediation. For more
information on environmental matters involving us, including possible liability
and capital costs, see note 14(a) to our consolidated financial statements.

AIR QUALITY MATTERS

The Federal Clean Air Act requires the EPA to define standards for air
quality that are protective of public health. As a result of setting these
standards, the EPA has implemented a number of emission control programs that
affect industrial sources including power plants. In addition, the 1990
Amendments to the Clean Air Act directed the EPA to implement programs designed
to control acidic deposition (acid rain), improve visibility in the United
States' pristine areas and national parks (regional haze), and reduce emissions
of hazardous air pollutants.

REGULATION OF NO(x) AND SO(2) EMISSIONS

As a result of the mandates of the Clean Air Act, the EPA has
implemented programs limiting emissions of NO(x) and SO(2), both of which are
compounds that result from the combustion of fossil fuels. NO(x) is a precursor
to the formation of ozone, acid rain, fine particulate matter, and regional
haze. SO(2) is a precursor to the formation of acid rain, fine particulate
matter, and regional haze. In addition to regulations already implemented, the
EPA in December 2003 proposed a new regulation to control emissions of NO(x) and
SO(2) on a broad scale. This new proposed regulation is referred to as the
Interstate Air Quality Rule, and will affect our power generating facilities in
the eastern United States.

The Interstate Air Quality Rule would require reductions in NO(x) and
SO(2) beyond levels already required in existing federal programs in 29 states
in the eastern United States. The proposed rules will require reductions of
NO(x) and SO(2) in two phases. Although, the final form of the proposed
regulations is not yet known, the first phase, which takes effect in 2010, would
require approximately a 50% reduction in SO(2) and NO(x) emissions on an annual
basis. The second phase, which would take effect in 2015, would require
approximately a 70% reduction in SO(2) and NO(x) on an annual basis. These
reductions would be achieved through a trading program, allowing reductions to
be made at the most economical locations, and not requiring reductions on a
facility-by-facility basis. The proposed rules would affect primarily our
facilities in the eastern United States (particularly the coal-fired
facilities). We are unable at this time to estimate the potential impact on the
future operations of our generation facilities.

REGULATION OF EMISSIONS OF MERCURY AND OTHER HAZARDOUS AIR POLLUTANTS

In December 2003, the EPA also proposed two regulations to control
emissions of mercury from coal-fueled power plants in the United States. Only
one of these two regulations will ultimately be adopted in December 2004. The
MACT standard would require reductions on a facility-by-facility basis
regardless of cost. The MACT standard would require reductions to be achieved by
2008. The other rule, referred to as the cap-and-trade rule, would effect the
emission reductions on a national scale through a trading program, allowing
reductions to be made at the most economical locations, and not requiring
reductions on a facility-by-facility basis. Although the final form of these
proposed regulations is not yet known, the MACT standard would require a
reduction of about 30% from each of our coal fired facilities, which would
require the installation of control equipment. The cap-and-trade rule would
require larger reductions, but may be more economical because it allows trading
of emissions among facilities. Like the Interstate Air Quality Rule, the mercury
cap-and-trade rule would be accomplished in two phases, in 2010 and 2018, with
reduction levels set at approximately 50% and 70%, respectively. If the
cap-and-trade rule were ultimately adopted, our approach would be to balance
capital expenditures for controls and reliance on allowance markets to achieve
compliance. We are unable at this time to estimate the potential impact on the
future operations of our generation facilities.

In addition to mercury control from coal-fueled boilers, the MACT rule,
if adopted, would require the control of nickel emissions from oil-fired
facilities. While the final form of these provisions is uncertain, we do not
expect this provision of the MACT to have a material impact on our operations
since only a small number of our facilities are oil-fired.

The EPA has also proposed or issued MACT standards for sources other
than boilers used for power generation. The MACT rule for combustion turbines
was issued in August 2003 and there is no material impact on existing
facilities. We expect the MACT rulemaking for engines and industrial boilers to
be finalized in early 2004. Based

9


on the current form of the proposed rules for these source types, we do not
anticipate that the rules, if adopted, will have a material impact on our
operations.

CLEAR SKIES ACT

In February 2002, the White House announced its "Clear Skies
Initiative." The proposal is aimed at long-term reductions of multiple
pollutants produced from fossil fuel-fired power plants. Reductions averaging
70% are targeted for sulfur dioxide, nitrogen oxide and mercury. If approved by
the United States Congress, this program would entail a market-based approach
using emission allowances; compliance with emission limits would be phased in
over a period from 2008 to 2018. The Clear Skies Initiative is similar to the
proposed Interstate Air Quality rule and mercury MACT/cap-and-trade rule.

AIR QUALITY ENFORCEMENT ISSUES

The EPA is conducting a nationwide investigation regarding the
historical compliance of coal-fueled electric generating stations with various
permitting requirements of the Clean Air Act. Specifically, the EPA and the
United States Department of Justice have initiated formal enforcement actions
and litigation against several other utility companies that operate these
stations, alleging that these companies modified their facilities without proper
pre-construction permit authority. Since June 1998, two of our coal-fueled
facilities have received requests for information related to work activities
conducted at those sites by prior owners. The EPA has not filed an enforcement
action or initiated litigation in connection with these facilities at this time.
Nevertheless, any litigation, if pursued successfully by the EPA, could
accelerate the timing of emission reductions anticipated as a result of proposed
regulations, and result in the imposition of penalties. The EPA has also agreed
to provide information relating to these investigations to the New York state
attorney general's office.

GREENHOUSE GAS EMISSIONS

The Kyoto Protocol, which may become effective in 2004, if ratified by
a sufficient number of nations, would require ratifying nations to achieve
substantial reductions of CO(2) and certain other greenhouse gases between 2008
and 2012. Although the current United States government has indicated that it
does not intend to ratify the treaty at this time, any future limitations on
power plant carbon dioxide emissions could have a material impact on all fossil
fuel fired facilities, including those belonging to us.

There continues to be a debate within the United States over the
direction of domestic climate change policy. The United States Congress is
currently considering several bills that would impose mandatory limitation of
CO(2) emissions for the domestic power generation sector, and several other
states, primarily in the northeastern United States, are considering
state-specific or regional legislation initiatives to stimulate CO(2) emission
reductions in the electric utility industry. The specific impact 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.

WATER QUALITY MATTERS

The EPA and states periodically revise water quality criteria and
initiate total maximum daily load determinations under the Clean Water Act.
These actions may result in more stringent wastewater discharge limitations for
our power plants and the need to install additional water treatment systems or
control measures.

On February 16, 2004, the EPA signed final regulations relating to the
design and operation of cooling water intake structures at existing power
plants. While there may be significant compliance costs associated with this
rule, site-specific evaluation of compliance alternatives will be required to
determine the magnitude of those potential costs.

FERC MATTERS

In the course of the FERC licensing proceedings various agencies have
requested increased flow rates downstream of our hydroelectric dams in order to
enhance fish habitats and for other purposes. The FERC has imposed conditions in
the new licenses to increase such flow rates and we expect that the FERC will
also impose similar conditions in the licenses for which applications remain
pending. Increased flow rates may affect revenues

10


for these facilities due to the loss of use of water for power generation. We do
not, however, expect such lost revenues to be material to the economic viability
of such facilities.

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 have developed a
management plan that includes proper maintenance of existing non-friable
asbestos installations, and removal and abatement of asbestos containing
materials where necessary. We have planned for the proper management, abatement
and disposal of asbestos and lead-based paint at our facilities in our financial
planning.

Under CERCLA and similar state laws, 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, are liable for the costs of responding to that
release or threatened release, and the restoration of natural resources damaged
by any such release. We are not aware of any liabilities under the act that
would have a material adverse effect on our results of operations, financial
position or cash flows.

For information regarding plant remediation activities and other
environmental contingencies, see note 14(a) to our consolidated financial
statements.

EMPLOYEES

As of December 31, 2003, we had 851 full-time employees of which 578
were covered by collective bargaining agreements. Three collective bargaining
agreements applicable to 62% of our unionized employees will expire prior to
December 31, 2004.

AVAILABLE INFORMATION

Our financial information, including filings with the SEC, is available
on the investor relations section of the corporate web site of our parent
company, Reliant Resources, at www.reliantresources.com. Copies are also
available, without charge, from the investor relations department of Reliant
Resources at 1000 Main Street, Houston, Texas, 77002. Alternatively, reports
filed with the SEC may be viewed or obtained at the SEC Public Reference Room in
Washington D.C. or at www.sec.gov.

We have adopted as the code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, the business ethics policy of our parent company, Reliant Resources.
A copy of the business ethics policy is posted on the corporate governance and
ethics section of the corporate web site of our parent company, Reliant
Resources, at www.reliantresources.com. We undertake to provide to any person
without charge, upon request, a copy of such code of ethics. Copies are also
available, without charge, from the investor relations department of Reliant
Resources at 1000 Main Street, Houston, Texas, 77002.

It is our intent to disclose amendments to, or waivers from, provisions
of the business ethics policy by posting such information on the above-described
Internet address.

11


ITEM 2. PROPERTIES.

Our corporate offices are located within the corporate headquarters of
our parent, Reliant Resources, in Houston, Texas.

In addition to our corporate office space, we lease or own various real
property and facilities relating to our generation assets. Our principal
generation facilities are generally described under "Our Business" in Item 1 of
this report.

ITEM 3. LEGAL PROCEEDINGS.

For a description of certain legal, regulatory and environmental
proceedings affecting us, see note 14 to our consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our security holders during the
fourth quarter for the year ended December 31, 2003.

PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

All of our shares of common stock are owned by Reliant Resources and
therefore, there is no trading market in such shares.

12


ITEM 6. SELECTED FINANCIAL DATA.

The following tables present our selected consolidated financial data
for 1999 through 2003. The data set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our historical consolidated financial statements and the notes to
those statements included in this report. The historical financial information
may not be indicative of our future performance and does not reflect what our
financial position and results of operations would have been had we operated as
a subsidiary of Reliant Resources in 1999, 2000, 2001 and for the period January
1, 2002 to February 19, 2002. See note 4 to our consolidated financial
statements.



FORMER ORION | CURRENT ORION
------------------------------------------------------|--------------------------
JANUARY 1, |FEBRUARY 20,
2002 | 2002
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH | THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 19,| DECEMBER 31, DECEMBER 31,
1999 2000 2001 2002 | 2002 2003
(1) (1) (1) (2) (1) (2) | (1) (2) (3) (1) (2) (4)
------------ ------------ ------------ ------------| ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
|
INCOME STATEMENT DATA: |
Revenues ...................................... $ 134 $ 958 $ 1,190 $ 122 | $ 1,002 $ 1,182
Revenues-affiliates ........................... - - - - | 20 33
------- ------- ------- ------- | ------- -------
Total ....................................... 134 958 1,190 122 | 1,022 1,215
------- ------- ------- ------- | ------- -------
Expenses: |
Fuel ........................................ 20 326 420 43 | 236 301
Fuel - affiliates ........................... - - - - | 99 145
Purchased power ............................. - 112 50 3 | 14 21
Purchased power - affiliates ................ - - - - | 43 25
Operation and maintenance ................... 23 98 130 22 | 160 220
General, administrative and development ..... 16 37 58 86 | 36 103
Goodwill impairment ......................... - - - - | 338 585
Taxes other than income taxes ............... 21 61 57 9 | 56 73
Depreciation and amortization ............... 19 103 138 26 | 137 157
Cost of buyout of operations and |
maintenance contracts with related party .. - 19 - - | - -
------- ------- ------- ------- | ------- -------
Total ..................................... 99 756 853 189 | 1,119 1,630
------- ------- ------- ------- | ------- -------
Operating income (loss) ....................... 35 202 337 (67) | (97) (415)
------- ------- ------- ------- | ------- -------
Other expense: |
Interest expense ............................ (26) (168) (203) (25) | (127) (147)
Interest income ............................. 2 15 22 1 | 7 6
------- ------- ------- ------- | ------- -------
Total other expense ....................... (24) (153) (181) (24) | (120) (141)
------- ------- ------- ------- | ------- -------
Income (loss) before income taxes and |
cumulative effect of accounting change ...... 11 49 156 (91) | (217) (556)
Income tax expense (benefit) .................. 5 20 55 (39) | 40 2
------- ------- ------- ------- | ------- -------
Income (loss) before cumulative effect of |
accounting change ........................... 6 29 101 (52) | (257) (558)
------- ------- ------- ------- | ------- -------
Cumulative effect of accounting change, net |
of tax ...................................... - - - - | - 2
------- ------- ------- ------- | ------- -------
Net income (loss) ............................. $ 6 $ 29 $ 101 $ (52) | $ (257) $ (556)
======= ======= ======= ======= | ======= =======
BASIC EARNINGS PER SHARE:
Net income .................................. $ 0.39 $ 0.46 $ 1.02
======= ======= =======
DILUTED EARNINGS PER SHARE:
Net income .................................. $ 0.38 $ 0.44 $ 0.97
======= ======= =======


13




FORMER ORION CURRENT ORION
------------------------------------------------------|--------------------------
JANUARY 1, | FEBRUARY 20,
2002 | 2002
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH | THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 19,| DECEMBER 31, DECEMBER 31,
1999 2000 2001 2002 | 2002 2003
(1) (1) (1) (1) | (1) (1)
------------ ------------ ------------ ------------|------------- ------------
(IN MILLIONS, EXCEPT OPERATING DATA) |
|
STATEMENT OF CASH FLOW DATA: |
Cash flows from operating activities...... $ 10 $ (3) $ 171 $ 13 | $ 154 $ 227
Cash flows from investing activities...... (1,047) (2,113) (502) (50) | (72) (76)
Cash flows from financing activities...... 1,114 2,173 379 (54) | (168) (125)
|
OPERATING DATA: |
Power generation data : |
Net power generation volumes (GWh)...... 2,794 14,801 19,057 1,413 | 18,532 19,438




FORMER ORION | CURRENT ORION
------------------------------ | --------------------
DECEMBER 31, | DECEMBER 31,
------------------------------ | --------------------
1999 2000 2001 | 2002 2003
(1) (1) (1) (2) (1) | (2) (3) (1) (2) (4)
------ ------ ----------- | ------- -----------
(IN MILLIONS)
|
BALANCE SHEET DATA: |
Property, plant and equipment, net ................ $ 976 $3,083 $3,259 | $3,785 $ 3,729
Total assets ...................................... 1,252 3,870 4,328 | 5,762 5,098
Current portion of long-term debt and short-term |
borrowings ...................................... - - 1,614 | 454 408
Long-term debt to third parties ................... 716 2,368 870 | 1,724 1,586
Stockholders' equity .............................. 395 1,255 1,582 | 2,872 2,415


- --------------

(1) Our results of operations include the results of the following
acquisitions from their respective acquisition dates: the purchase of
our Hydro facilities in July 1999, the purchase of our New York City
facilities in August 1999, the purchase of Constellation Operating
Services, Inc. in April 2000, the purchase of seven generation
facilities in Pennsylvania and Ohio in April 2000, the purchase of a
generation facility in West Virginia in December 2000 and the purchase
of a generation facility under development in October 2001, which was
canceled in 2002 and our acquisition by Reliant Resources on February
19, 2002. See note 4 to our consolidated financial statements.

(2) Effective January 1, 2001, we adopted SFAS No. 133, which established
accounting and reporting standards for derivative instruments. See
notes 2(d) and 6 to our consolidated financial statements.

(3) During the fourth quarter of 2002, we performed a goodwill impairment
analysis and recognized an impairment charge of $338 million. See note
5 to our consolidated financial statements.

(4) During the third quarter of 2003, we performed a goodwill impairment
analysis and recognized an impairment charge of $585 million. See note
5 to our consolidated financial statements.

14


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

In this section, we discuss our consolidated results of operations for
2001, for the periods January 1, 2002 through February 19, 2002 and February 20,
2002 through December 31, 2002 and for 2003. For information about our business
and operations, see "Business" in Item 1 of this report and note 1 to our
consolidated financial statements.

We are a wholly-owned subsidiary of Reliant Resources, our parent
company. Our parent company has three key objectives and strategies:

- Reliant Resources seeks to be a highly efficient,
customer-focused competitor. To achieve this objective, it
intends to (a) effect significant reductions in our overhead
and operating costs, (b) implement process efficiencies and
reduce costs, (c) mothball/retire marginal assets and (d)
establish an environment conducive to the development of a
highly focused and motivated team.

- Reliant Resources intends to strengthen its balance sheet by
(a) enhancing its profitability, (b) divesting non-strategic
assets and (c) accessing the capital markets to repay bank
debt with the proceeds from offerings of fixed income or
equity securities.

- In order to capitalize on our competitive advantages, Reliant
Resources intends to focus on regions where it believes the
rules support competitive markets, to link its generation
assets to customer loads and to capitalize on its unique
retail skill set.

In February 2004, Reliant Resources announced that it intends to target
$200 million in additional cost reductions and that it intends to reduce its net
debt-to-adjusted EBITDA ratio significantly by the end of 2006. We intend to
pursue objectives and strategies consistent with those of our parent company.
Our ability to achieve our strategies and objectives are subject to a number of
factors some of which we may not be able to control. Among other things, we
continue to face a number of near and long-term challenges.

- Since 2001, our results of operations have been negatively
affected by depressed conditions in the wholesale energy
markets.

- In the fourth quarter of 2002 and in July 2003, we recognized
impairments of goodwill in the amounts of $338 million and
$585 million, respectively (see note 5 to our consolidated
financial statements).

- In July 2003, there was an event of default under a
non-recourse credit facility entered into by one of our
subsidiaries. The event of default, which was initially
triggered by the bankruptcy of a counterparty to a tolling
agreement, does not constitute an event of default under any
other debt agreements of Orion Power or its affiliates,
including its parent company. A foreclosure of the interest in
the generation asset owned by the subsidiary could result in
an impairment of assets on our balance sheet. See note 14(b)
to our consolidated financial statements.

Based on current market trends, we do not anticipate that conditions in
the wholesale energy markets are likely to improve significantly in 2004. We
believe that the wholesale energy market is cyclical, and that conditions will
ultimately improve. However, there can be no assurance as to the certainty,
magnitude or timing of such recovery. For additional information, see "Business
- - Risk Factors."

CONSOLIDATED RESULTS OF OPERATIONS

2003 COMPARED TO 2002

Net loss. We recorded a net loss of $556 million during 2003 compared
to a net loss of $52 million and $257 million for January 1, 2002 through
February 19, 2002 and February 20, 2002 through December 31, 2002, respectively.
The reasons for the increase in net loss are explained below.

15


Revenues. Revenues increased $71 million in 2003 compared to the
periods January 1, 2002 through February 19, 2002 and February 20, 2002 through
December 31, 2002. The increase is detailed as follows (in millions):



New York City facilities........................................ $ 37 (1)
Hydro facilities................................................ 16 (2)
Liberty facility................................................ 8 (3)
Midwest facilities.............................................. 2
Other, net...................................................... 8
----
Net increase in revenues...................................... $ 71
====


- ------------------
(1) Increase is primarily due to a $33 million increase resulting primarily
from a 14% increase in power sales prices and an $8 million increase in
capacity sales revenues resulting primarily from higher capacity prices
in the second half of 2003.

(2) Increase is due to a $10 million increase primarily resulting from a 9%
increase in sales volumes due to increased precipitation and a 1%
increase in prices for power sales and a $6 million increase in
revenues resulting primarily from a decrease in the amortization of
contractual rights and obligations (see notes 4 and 5 to our
consolidated financial statements).

(3) Increase is due to energy revenues as the facility began selling power
as a merchant energy plant in July 2003, as compared to earning
capacity revenues under a tolling agreement from its commercial
operation date (May 2002) through July 2003. See note 14(b) to our
consolidated financial statements.

Fuel and Purchased Power. Fuel and purchased power costs increased $54
million in 2003 compared to the periods January 1, 2002 through February 19,
2002 and February 20, 2002 through December 31, 2002. The increase is detailed
as follows (in millions):



New York City facilities........................................ $ 54 (1)
Liberty facility................................................ 17 (2)
Midwest facilities.............................................. (17)(3)
----
Net increase in expense....................................... $ 54
====


- -----------------
(1) Increase in fuel expenses primarily due to higher fuel prices.

(2) Increase due to the termination of the tolling agreement at the Liberty
generating facility. From its operational commencement date of May 2002
through July 2003, the Liberty generating facility operated under a
tolling agreement, whereby the tolling counterparty purchased all of
the fuel consumed. As a result of the termination of the tolling
agreement in July 2003, Liberty must purchase fuel to operate the
station as a merchant plant. See note 14(b) to our consolidated
financial statements.

(3) Decrease in purchased power primarily due to reduced POLR load
obligations driven by milder temperatures. See note 13(c) to our
consolidated financial statements.

Operation and Maintenance. Operation and maintenance expenses increased
$38 million in 2003 compared to the periods January 1, 2002 through February 19,
2002 and February 20, 2002 through December 31, 2002. The increase is detailed
as follows (in millions):



New York City facilities and Hydro facilities................... 24 (1)
Liberty facility reaching commercial operation in 2002.......... 1
Other, net...................................................... 13
-----
Net increase in expense....................................... $ 38
=====


- -----------------
(1) Increase primarily due to increased planned gas turbine overhauls and
general maintenance in 2003.

General, Administrative and Development. General, administrative and
development expenses decreased $19 million in 2003 compared to the periods
January 1, 2002 through February 19, 2002 and February 20, 2002 through December
31, 2002. The decrease is detailed as follows (in millions):



Severance expense related to our acquisition in 2002............ $ (46)
Legal and consulting costs related to our acquisition in 2002... (29)
Decrease in contract services expense........................... (18)
Decrease in salary expense...................................... (13)
Costs charged and allocated from affiliate...................... 81 (1)
Provision for doubtful accounts................................. 5
Legal and insurance costs....................................... 3
Other, net...................................................... (2)
-----
Net decrease in expense....................................... $ (19)
=====


16


- ------------------
(1) Beginning in October 2002, a subsidiary of Reliant Resources, charged
and allocated certain administrative costs to us under a support
services agreement to which we are a party. See note 3 to our
consolidated financial statements.

Goodwill Impairment. During the fourth quarter of 2002, we recognized a
$338 million impairment of goodwill. During the third quarter of 2003, we
recognized a $585 million impairment of goodwill. For further discussion on
these impairments, see note 5 to our consolidated financial statements.

Taxes Other Than Income Taxes. Taxes other than income taxes increased
$8 million in 2003 compared to the periods January 1, 2002 through February 19,
2002 and February 20, 2002 through December 31, 2002. The increase is due to an
increase in property tax rates at the New York City facilities partially offset
by a tax refund of $5 million received from a settlement in 2003.

Depreciation and Amortization. Depreciation and amortization expense
decreased $6 million in 2003 compared to the periods January 1, 2002 through
February 19, 2002 and February 20, 2002 through December 31, 2002. The decrease
is detailed as follows (in millions):



Closure of Baltimore office..................................... $ (3)
Assets removed from service..................................... (2)
Full year of Liberty operations................................. 1 (1)
Other, net...................................................... (2)
----
Net decrease in expense....................................... $ (6)
====


- ----------------------
(1) Liberty commenced operations in May 2002.

Interest Expense. We incurred $147 million of interest expense to third
parties during 2003 compared to $25 million and $127 million for the periods
from January 1, 2002 through February 19, 2002 and February 20, 2002 through
December 31, 2002, respectively. The $5 million decrease in interest expense to
third parties is detailed as follows (in millions):



Amortization of adjustments to fair value of interest rate swaps.. $ (8)(1)
Interest expense on third-party debt.............................. (4)(1)
Bank and facility fees............................................ (3)
Amortization of deferred financing costs.......................... 6 (2)
Offsets to interest expense for amortization of adjustments to
fair value of debt.............................................. 3 (1)
Other, net........................................................ 1
----
Net decrease in expense......................................... $ (5)
====


- ---------------------
(1) See note 7 to our consolidated financial statements.

(2) See note 2(q) to our consolidated financial statements.

Interest Income. We recognized interest income from third parties of $6
million for 2003 compared to $1 million and $7 million for the periods from
January 1, 2002 through February 19, 2002 and February 20, 2002 through December
31, 2002, respectively. The decrease is primarily due to lower average cash on
deposit to earn interest during 2003.

Income Tax Expense. For the period from January 1, 2002 through
February 19, 2002, our effective tax rate was 42.5%. For the period from
February 20, 2002 through December 31, 2002 and for 2003, our effective tax
rates were not meaningful, due to the goodwill impairment charges of $338
million and $585 million, respectively, which are non-deductible for income tax
purposes. Our reconciling items from the federal statutory rate of 35% to the
effective tax rate totaled $7 million for the period January 1, 2002 through
February 19, 2002, which primarily related to state income tax benefits. Our
reconciling items from the federal statutory rate of 35% to the effective tax
rate totaled $2 million and $8 million, excluding the goodwill impairment
charges, for the period February 20, 2002 through December 31, 2002 and 2003,
respectively. These items primarily related to state income tax expenses and the
Empire Zone tax credit. See note 12 to our consolidated financial statements.

Certain of our New York operations qualify for the Empire Zone program
beginning with calendar tax year ending December 31, 2001. The benefits under
the program include a New York state income tax reduction credit, a

17


wage tax credit, a sales tax credit and a real property tax credit. All credits
are used to offset New York state income tax with any excess credits being
refundable. We recognized in our results of operations annual Empire Zone
benefits of $16 million, $16 million and $18 million (before federal taxes) in
2001, 2002 and 2003, respectively. Under current law, we are entitled to program
benefits for a 14-year period, which began in 2001 and ends in 2014. Legislation
has been introduced that, if passed, could materially change or eliminate the
benefits received from the Empire Zone program.

2002 COMPARED TO 2001

Net Income (Loss). We reported a $52 million net loss for the period
January 1, 2002 through February 19, 2002 and a $257 million net loss for the
period from February 20, 2002 through December 31, 2002, compared to $101
million consolidated net income for 2001. The reasons for the net loss are
explained below.

Revenues. Revenues decreased $46 million for the periods from January
1, 2002 through February 19, 2002 and February 20, 2002 through December 31,
2002 compared to 2001. The decrease is primarily due to (in millions):



New York City facilities........................................ $ (86)(1)
Liberty facility................................................ 22 (2)
Hydro facilities................................................ 15 (3)
Midwest facilities.............................................. 3 (4)
-----
Net decrease in revenues...................................... $ (46)
=====


- -------------------
(1) The decrease is primarily due to a $68 million decrease resulting from
a 17% decrease in power sales prices, and lower sales volumes for power
due to load pocket modeling in New York City, which began in June 2002
and an $18 million decrease in capacity sales revenues primarily due to
lower capacity prices.

(2) Liberty reached commercial operations in May 2002.

(3) Net increase is due to a $30 million increase primarily resulting from
higher sales prices of approximately 11% and higher sales volumes
resulting from favorable amendments to a contract with Niagara Mohawk
in October 2001. This was partially offset by a $15 million decrease in
revenue due to the amortization of contractual rights and obligations,
which prior to Reliant Resources' acquisition of us, were not valued on
our balance sheet. There was no such amortization in 2001. See notes 4
and 5 to our consolidated financial statements.

(4) Increase is primarily due to the amortization of contractual
obligations that were recognized as a result of our acquisition by
Reliant Resources. There was no such amortization in 2001. See notes 4
and 5 to our consolidated financial statements.

Fuel and Purchased Power. Fuel and purchased power costs decreased $32
million for the periods from January 1, 2002 through February 19, 2002 and
February 20, 2002 through December 31, 2002 compared to 2001. The decrease is
detailed as follows (in millions):



Midwest facilities.............................................. $(40)(1)
New York City facilities........................................ (2)(2)
Midwest facilities.............................................. 9 (3)
Other, net...................................................... 1
----
Net decrease in expense....................................... $(32)
====


- --------------------
(1) Decrease of $31 million primarily resulting from the amortization of
contractual obligations recorded in 2002 related to fuel contracts that
were recognized as a result of our acquisition by Reliant Resources.
There was no such amortization in 2001. See notes 4 and 5 to our
consolidated financial statements. Additionally, there was a $9 million
decrease due to lower fuel volumes purchased in 2002.

(2) Decrease primarily due to lower fuel costs in 2002 resulting from a 5%
reduction in average fuel prices.

(3) Increase in purchase power due primarily due to increased outages and
higher maintenance in 2002.

Operation and Maintenance. Operation and maintenance expenses increased
$52 million for the periods from January 1, 2002 through February 19, 2002 and
February 20, 2002 through December 31, 2002 compared to 2001. The increase is
detailed as follows (in millions):



Higher maintenance and outage costs............................ $ 39 (1)
Liberty facility commencing operations in May 2002............. 5
Increased labor costs at Hydro facilities...................... 4
Other, net..................................................... 4
----
Net increase in expense...................................... $ 52
====


18


- ------------------
(1) Increase due to overhauls at New Castle, Niles and the New York City
facilities as well as outages at Cheswick and Avon Lake.

General, Administrative and Development. General, administrative and
development expenses increased $64 million for the periods from January 1, 2002
through February 19, 2002 and February 20, 2002 through December 31, 2002
compared to 2001. The increase is detailed as follows (in millions):



Severance expense related to our acquisition in 2002.......... $ 46
Legal and consulting costs related to our acquisition in 2002. 29
Other, net.................................................... (11)
----
Net increase in expense..................................... $ 64
====


Goodwill Impairment. During the fourth quarter of 2002, we recognized a
$338 million impairment of goodwill. There were no such impairments during 2001.
For further discussion, see note 5 to our consolidated financial statements.

Taxes Other Than Income Taxes. Taxes other than income taxes increased
$8 million for the periods from January 1, 2002 through February 19, 2002 and
February 20, 2002 through December 31, 2002 compared to 2001. The increase was
due to lower taxes in 2001 resulting from tax credits recognized in 2001 related
to New York property taxes that were not available in 2002.

Depreciation and Amortization. Depreciation and amortization expense
increased $25 million for the periods from January 1, 2002 through February 19,
2002 and February 20, 2002 through December 31, 2002 compared to 2001. The
increase was due to increased capital costs being depreciated in 2002 coupled
with the increase in the fair value of the assets resulting from the application
of purchase accounting. See notes 4 and 5 to our consolidated financial
statements.

Interest Expense. Interest expense to third parties decreased $51
million for the periods from January 1, 2002 through February 19, 2002 and
February 20, 2002 through December 31, 2002 compared to 2001. The decrease in
interest expense was due to a reduction in our effective interest rate in 2002,
net debt repayments of $445 million during 2002 and the amortization of the
adjustments in the fair value of debt and interest rate swaps recorded in
connection with our acquisition by Reliant Resources for the periods presented.
See notes 6 and 7 to our consolidated financial statements.

Interest Income. We recognized interest income from third parties of $1
million for the period January 1, 2002 through February 19, 2002 and $7 million
for the period from February 20, 2002 through December 31, 2002 compared to $22
million for 2001. The decrease is primarily due to lower average cash on deposit
to earn interest during 2002.

Income Tax Expense. For the period from January 1, 2002 through
February 19, 2002 and 2001, our effective tax rates were 42.5% and 35.3%,
respectively. For the period from February 20, 2002 through December 31, 2002
the effective tax rate was not meaningful, due to the goodwill impairment charge
of $338 million, which is non-deductible for income tax purposes. The rate
without the goodwill impairment would have been 33.4%. The income tax rate,
excluding the impact of the goodwill impairment, was lower for the period
February 20, 2002 through December 31, 2002, compared to 2001, due to state
income taxes. See note 12 to our consolidated financial statements

LIQUIDITY AND CAPITAL RESOURCES

In this section, we discuss the principal sources of capital resources
required to operate our business. We also identify known trends, demands,
commitments, events or uncertainties that may affect our current and future
liquidity or capital resources. In the last part of this section, we provide
information regarding our historical cash flows.

19



SOURCES OF LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity and capital resources are cash flows
from operations, borrowings under our various revolving credit facilities, as
described below, and capital contributions from Reliant Resources.

Cash Flows from Operations. All of our operations are conducted by our
subsidiaries. As a result, our cash flow is dependent upon the receipt from our
subsidiaries of cash dividends, distributions or other transfers of cash
generated by their operations. For a description of restrictions on our
subsidiaries' ability to pay dividends, see notes 2(l) and 7 to our consolidated
financial statements.

For the periods January 1, 2002, through February 19, 2002 and February 20,
2002 through December 31, 2002 and for 2003, our earnings were insufficient to
cover our fixed charges by $92 million, $221 million and $555 million,
respectively.

Credit Capacity, Cash and Cash Equivalents. The following table summarizes
our credit capacity, cash and cash equivalents and current restricted cash at
December 31, 2003:



TOTAL
-----------
(IN MILLIONS)

Total committed credit.......................... $ 2,007(1)
Outstanding borrowings.......................... 1,880(1)
Outstanding letters of credit................... 40(1)
-----------
Unused borrowing capacity....................... 87(2)
Cash and cash equivalents....................... 33
Current restricted cash ........................ 189(3)
-----------
Total......................................... $ 309
===========


- ------------
(1) As of December 31, 2003, we had consolidated current and long-term debt
outstanding of $2.0 billion. As of December 31, 2003, $136 million of our
committed credit facilities are set to expire by December 31, 2004. For a
discussion of our credit facilities, notes and other debt, see note 7 to
our consolidated financial statements.

(2) As discussed in notes 7 and 14(b) to our consolidated financial statements,
$5 million of the unused capacity relates to Liberty's working capital
facility, which is currently not available to Liberty.

(3) Current restricted cash includes cash at certain subsidiaries, the transfer
or distribution of which is effectively restricted by the terms of
financing agreements but is otherwise available to the applicable
subsidiary for use in satisfying certain of its obligations.

During October 2002, we refinanced the Orion MidWest credit facility that
matured in October 2002 and the Orion NY credit facility that was to mature in
December 2002. As part of this transaction, the Orion Power Holdings revolving
credit facility, which was to mature in December 2002 was terminated and the
Orion MidWest and Orion NY credit facilities were extended until October 2005.
See note 7 to our consolidated financial statements for discussion of our debt
and credit facilities.

All of our credit and other debt agreements contain restrictive covenants.
Failure to comply with these covenants could have a number of effects, including
limitations on our ability to make additional borrowings under the credit
facilities, increases in borrowing costs and the acceleration of indebtedness.
For additional information regarding these covenants, and the impact of a
default of these covenants on our ability to borrow funds, see note 7 to the
consolidated financial statements.

Contributions from Reliant Resources. Orion Power has outstanding $400
million aggregate principal amount of 12% senior notes due 2010. The senior
notes are unsecured. Credit agreements entered into by Orion MidWest and Orion
NY contain requirements that may restrict these entities from making dividends,
loans or advances to Orion Power for future interest payments on the senior
notes. If at the time such payments are due, dividends, loans or advances are
restricted under the Orion NY and Orion MidWest credit agreements, and funds
generated from Orion Power's other subsidiaries or from other sources are
insufficient, payment default under Orion Power's senior notes may occur unless
Reliant Resources elects to invest additional funds in Orion Power. In May 2003
and November 2003, Reliant Resources contributed $15 million and $20 million,
respectively, to us, as a partial funding of the semi-annual interest payment of
$24 million on the senior notes due in each of May 2003 and November

20



2003. While Reliant Resources has no obligation, it intends to contribute any
shortfall, as a partial funding of the semi-annual interest payments due in May
2004 and November 2004. See notes 3 and 7 to our consolidated financial
statements.

Factors affecting Future Sources of Liquidity and Capital Resources. The
major risks to our liquidity sources for 2004 are declines in cash flows from
operations, significant increases in interest rates and Reliant Resources'
refusal or lack of ability to make capital contributions to us.

We anticipate that continuing depressed conditions within the wholesale
electric markets, our sub-investment grade credit ratings and other
uncertainties will continue to have an impact on our ability to borrow funds on
acceptable terms. If we require, but are unable to obtain, additional sources of
financing to meet our future capital requirements, our financial condition and
future results of operations could be materially adversely affected.

Credit Ratings. Our long-term credit ratings are, and are likely to remain
for the next few years, below investment grade. Our long-term credit ratings
are:



DATE ASSIGNED RATING AGENCY RATING (1) RATING DESCRIPTION (2) RATING
------------- ------------- ---------- ---------------------- ------

November 25, 2003 Moody's B2 Stable outlook Unsecured
June 10, 2003 Standard & Poor's B- Negative outlook Unsecured
June 10, 2003 Standard & Poor's B Negative outlook Corporate


- ---------------
(1) Each of the ratings assigned to us by Moody's and Standard & Poor's are
sub-investment grade.

(2) Moody's rating description represents its opinion regarding the likely
direction of a rating over an approximately 18-month horizon. A stable
outlook indicates that no change is expected. Standard & Poor's rating
description assesses the potential direction of a credit rating over the
intermediate to long term. A negative outlook means that a rating may be
lowered.

The ratings of our $400 million 12.00% senior unsecured notes due 2010 are:



DATE ASSIGNED RATING AGENCY RATING
------------- ------------- ------

November 25, 2003..................... Moody's B2
June 10, 2003......................... Standard & Poor's B-


We cannot assure that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agencies. Each rating should be evaluated
independently of any other rating.

LIQUIDITY AND CAPITAL REQUIREMENTS

Our liquidity and capital requirements are primarily a function of our
working capital needs, capital expenditures, debt service requirements and
collateral requirements. Examples of working capital needs include purchases of
fuel and electricity, plant maintenance costs (including required environmental
expenditures) and corporate costs such as payroll.

In 2003, Reliant Resources began a review of its operating structure with
the objective of reducing costs to which we are subject. In 2004, Reliant
Resources intends to continue to identify and pursue opportunities to
restructure its business operations in order to reduce its costs and liquidity
and capital requirements, to which we are subject.

Capital Expenditures. The following table sets forth the capital
expenditures we incurred in 2003 and the estimates of these expenditures for
2004 through 2006 (in millions):



2003 2004 2005 2006
------- ------- ------- -------

Maintenance capital expenditures......... $ 76 $ 61 $ 31 $ 64
======= ======= ======= =======


21



The amounts in this table include $96 million in capital expenditures from
2004 to 2006 for environmental compliance, totaling approximately $24 million,
$22 million and $50 million for 2004, 2005 and 2006, respectively. In addition,
we anticipate spending $20 million in capital expenditures for environmental
compliance in 2007.

We have no further capital expenditure commitments in 2007 and 2008.

In addition, we expect to spend $8 million for 2004 through 2008 for
pre-existing environmental conditions and remediations, all of which have been
provided for in our consolidated balance sheet as of December 31, 2003 and are
excluded from the table above.

Contractual Obligations and Contractual Commitments. In the following
table, we provide disclosure concerning our obligations and commitments to make
future payments under contracts, such as debt and lease agreements and purchase
obligations, as of December 31, 2003 for 2004 through 2009 and thereafter:



2009 AND
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008 THEREAFTER
- ----------------------------------------- ------- ------- ------- ------- ------- ------- ----------
(IN MILLIONS)

Debt, including credit facilities (1).... $ 1,881 $ 136 $ 1,102 (5) $ 10 $ 10 $ 11 $ 612
Operating lease payments (2)............. 19 4 4 3 3 1 4
Derivative liabilities (3)............... 36 20 11 4 1 - -
Other commodity commitments (4).......... 474 160 133 86 39 9 47
------- ------- ------- ------- ------- ------- ----------
Total contractual cash obligations..... $ 2,410 $ 320 $ 1,250 $ 103 $ 53 $ 21 $ 663
======= ======= ======= ======= ======= ======= ==========


- ---------------
(1) See note 7 to our consolidated financial statements.

(2) See note 13(a) to our consolidated financial statements.

(3) See note 6 to our consolidated financial statements.

(4) See note 13(b) to our consolidated financial statements.

(5) Included in this amount is $1.1 billion of Orion MidWest and Orion NY
credit maturities (October 2005). Prior to their maturities, we believe
that Orion MidWest's and Orion NY's future cash flows from operations will
be sufficient to meet the scheduled principal payments and required
prepayments. We anticipate refinancing outstanding borrowings prior to or
upon maturity.

In most cases involving our commercial contracts and/or guarantees, the
impact of further rating downgrades is negligible. The following table details
the cash collateral posted by us and letters of credit outstanding as of
February 20, 2004 (in millions):



Cash collateral posted:
For commercial operations..................... $ 7
In support of financings...................... -
-----------
$ 7
===========

Letters of credit outstanding:
For commercial operations..................... $ 20
In support of financings...................... 17
-----------
$ 37
===========


Other. We are involved in a number of legal, environmental and other
proceedings before courts and governmental agencies. Although we cannot predict
the outcome of these proceedings, we believe that the effects on the financial
statements, if any, from the disposition of these matters will not have a
material adverse effect on our results of operations, financial condition and
cash flows. For additional information, see note 14 to our consolidated
financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements. An off-balance sheet arrangement
is any transaction, agreement or other contractual arrangement involving an
unconsolidated entity under which a company has (a) made guaranties, (b) a
retained or a contingent interest in transferred assets, (c) an obligation under
derivative instruments classified as equity or (d) any obligation arising out of
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to us or engages in
leasing, hedging or research and development with us.

22



HISTORICAL CASH FLOWS

The following table provides an overview of cash flows relating to our
operating, investing and financing activities in 2001, 2002 and 2003:



FORMER ORION | CURRENT ORION
---------------------------------- | ----------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
(IN MILLIONS) | (IN MILLIONS)
|
Cash provided by (used in): |
Operating activities................... $ 171 $ 13 | $ 154 $ 227
Investing activities................... (502) (50) | (72) (76)
Financing activities................... 379 (54) | (168) (125)


Cash Flows - Operating Activities

2003 Compared to 2002 and 2002 Compared to 2001. Net cash provided by
operating activities increased $60 million in 2003 compared to 2002. Net cash
provided by operating activities decreased $4 million in 2002 compared to 2001.
The decrease and increase is detailed as follows:



YEAR ENDED DECEMBER 31,
--------------------------------
2002 COMPARED 2003 COMPARED
TO 2001 TO 2002
------------- -------------
(IN MILLIONS)

Changes in working capital and other assets and liabilities.......... $ 58 (1) $ (16)(3)
Changes in cash flows from operations, excluding working capital and
other assets and liabilities....................................... (62)(2) 76 (4)
------------- -------------
Net (decrease) increase............................................ $ (4) $ 60
============= =============


- -------------------
(1) Decrease in net cash outflows from $105 million in 2001 to $47 million in
2002 due to decrease in cash used to meet working capital and other assets
and liabilities requirements. See further analysis below.

(2) Decrease in net cash inflows from $276 million in 2001 to $214 million in
2002 due to changes in our results of operations. See "- Consolidated
Results of Operations."

(3) Increase in net cash outflows from $47 million in 2002 to $63 million in
2003 due to increase in cash used to meet working capital and other assets
and liabilities requirements. See further analysis below.

(4) Increase in net cash inflows from $214 million in 2002 to $290 million in
2003 due to changes in our results of operations. See "- Consolidated
Results of Operations."

Year Ended December 31, 2003. Net cash provided by our operations in 2003
is detailed as follows (in millions):



Net cash flows from operations, excluding changes in
working capital and other assets and liabilities....... $ 290 (1)
Net purchases of emissions credits....................... (50)(2)
Increase in inventory.................................... (8)
Other, net............................................... (5)
-----------
Cash provided by operating activities.................. $ 227
===========


- --------------
(1) Due to results of operations. See "- Consolidated Results of Operations."

(2) See note 5 to our consolidated financial statements.

Year Ended December 31, 2002. Net cash provided by our operations in 2002
is detailed as follows (in millions):

23





Net cash flows from operations, excluding changes in
working capital and other assets and liabilities....... $ 214 (1)
Decrease in restricted cash.............................. 137 (2)
Increase in prepaid expenses and other current assets.... (55)(3)
Increase in other assets................................. (45)(3)
Changes in income tax receivables, net................... (32)(4)
Decrease in other liabilities............................ (25)(5)
Increase in inventory.................................... (15)(6)
Other, net............................................... (12)
-----------
Cash provided by operating activities.................. $ 167
===========


- --------------
(1) Increase due to results of operations. See "-Consolidated Results of
Operations."

(2) Decrease primarily attributable to a $187 million reduction in restricted
cash at Orion NY to pay down debt balances related to the refinancing of
the Orion MidWest and Orion NY credit agreements in October 2002, partially
offset by increases in restricted cash at Orion MidWest, Liberty and Orion
Capital. See note 7 to our consolidated financial statements.

(3) Increase in prepaid expenses and other current assets and in other assets
is due to payments of property taxes and other changes in prepaid expenses
and other current assets and other assets.

(4) Increase in income taxes receivable, net is due to 2002 current federal and
state tax losses. See note 12 to our consolidated financial statements.

(5) Decrease due primarily to the cancellation of construction projects related
to the acquisition of us by Reliant Resources partially offset by an
increase in pension obligations. See notes 4 and 11 to our consolidated
financial statements.

(6) Increase due primarily to purchases of fuel inventory.

Year Ended December 31, 2001. Net cash provided by our operations in 2001
is detailed as follows (in millions):



Net cash flows from operations, excluding changes in
working capital and other assets and liabilities....... $ 276 (1)
Decrease in accounts receivable.......................... 21 (2)
Increase in restricted cash.............................. (53)(3)
Decrease in accounts payable............................. (35)(2)
Decrease in accrued expenses............................. (30)
Increase in inventory.................................... (14)
Other, net............................................... 6
-----------
Cash provided by operating activities.................. $ 171
===========


- -----------------

(1) Due primarily to results of operations. See "- Consolidated Results of
Operations."

(2) Decrease primarily due to timing of cash payments.

(3) Increase due to increased restricted cash balances at our subsidiaries.

Cash Flows - Investing Activities

2003 Compared to 2002. Net cash used in investing activities decreased by
$46 million in 2003 compared to 2002, primarily due to the completion of the
Liberty facility and completion of the repowering of the Brunot Island facility
in mid-2002 and the cancellation of capital projects in 2002.

2002 Compared to 2001. Net cash used in investing activities decreased $380
million in 2002 compared to 2001, primarily due to the cancellation of capital
projects including the Atlantic generating station and the completion of the
Liberty facility and completion of the repowering of the Brunot Island facility
in mid-2002.

Cash Flows - Financing Activities

2003 Compared to 2002. Net cash used in financing activities during 2003
decreased by $97 million compared to 2002. See below for discussion.

2002 Compared to 2001. Net cash provided by/(used in) financing activities
during 2002 changed by $601 million compared to 2001. See below for discussion.

Year Ended December 31, 2003. Net cash used in financing activities in 2003
is detailed as follows (in millions):

24





Payments and prepayments of Orion MidWest and Orion NY
senior term loans...................................... $ (102)(1)
Net payments of Orion MidWest and Orion NY revolving
credit facility........................................ (51)(1)
Payments on the Liberty credit agreement................. (6)(2)
Payments of financings costs............................. (1)(3)
Contributions from parent................................ 35 (4)
-----------
Cash used in financing activities...................... $ (125)
===========


- ----------------

(1) See note 7 to our consolidated financial statements.

(2) See notes 7 and 14(b) to our consolidated financial statements.

(3) See note 2(q) to our consolidated financial statements.

(4) See notes 3 and 7 to our consolidated financial statements.

Year Ended December 31, 2002. Net cash used in financing activities during
2002 is detailed as follows (in millions):



Repurchase of Orion Power Holdings 4.5% convertible
senior notes............................................ $ (200)(1)
Payments on the term loans under the Orion MidWest and
Orion NY credit agreements.............................. (272)(1)
Payments under the Orion MidWest and Orion NY revolving
working capital facilities and the Orion Power Holdings
revolving credit facility............................... (71)(2)
Payments of financing costs............................... (27)(2)
Net payments under the Liberty credit agreement........... (15)(3)
Contributions from Reliant Resources...................... 247 (4)
Borrowings under the Orion MidWest and Orion NY revolving
working capital facilities and Orion Power Holdings
revolving credit facility............................... 112 (1)
Payments on officers' notes receivable.................... 4
-----------
Cash used in financing activities....................... $ (222)
===========


- ----------------
(1) See note 7 to our consolidated financial statements.

(2) See note 2(q) to our consolidated financial statements. Payments are
primarily associated with the acquisition of us by Reliant Resources.

(3) See notes 7 and 14(b) to our consolidated financial statements.

(4) See notes 3 and 7 to our consolidated financial statements.

Year Ended December 31, 2001. Net cash provided by financing activities
during 2001 is detailed as follows (in millions):



Borrowings under the Orion Power Holdings 4.5%
convertible senior notes and Liberty credit agreement... $ 448 (1)
Net proceeds from the issuance of common stock............ 273 (1)
Payments on officers' notes receivable.................... 3
Payments under the Orion MidWest credit agreement......... (332)(1)
Payments of financings costs.............................. (13)(1)
-----------
Cash provided by in financing activities................ $ 379
===========


- ----------------
(1) See note 7 to our consolidated financial statements.

25



NEW ACCOUNTING PRONOUNCEMENTS, SIGNIFICANT ACCOUNTING POLICIES AND
CRITICAL ACCOUNTING ESTIMATES

NEW ACCOUNTING PRONOUNCEMENTS

For discussion regarding new accounting pronouncements that impact us, see
note 2(v) to our consolidated financial statements.

SIGNIFICANT ACCOUNTING POLICIES

For discussion regarding our significant accounting policies, see note 2 to
our consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

As required by GAAP, we make a number of estimates and judgments in
preparing the consolidated financial statements. These estimates, to the extent
they differ from actual results, can have a significant impact on recorded
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. In this section, we discuss those estimates deemed to be
"critical accounting estimates." We consider an estimate to be a material
"critical accounting estimate" due to either (a) the level of subjectivity or
judgment necessary to account for highly uncertain matters or (b) the
susceptibility of such matters to change, and that have a material impact on the
presentation of the financial condition or results of operations. The audit
committee of Reliant Resources' board of directors reviews with senior
management the critical accounting estimates used in the financial statements of
its consolidated companies.

GOODWILL.

As of November 1 of each year, we test goodwill. In addition, we test
goodwill if an event occurs indicating that an asset carrying value may not be
recoverable. We had goodwill of $986 million and $395 million as of December 31,
2002 and 2003.

In 2002, we recognized an impairment charge of $338 million. In 2003, we
recognized an impairment charge of $585 million. For information regarding
impairment charges reflected in the reported periods in our consolidated
financial statements, see note 5 to our consolidated financial statements.

We estimate the fair value of Orion Power 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) discount rates for the estimated cash flows, (e) selection
of peer group companies for the public company approach, (f) required level of
working capital, (g) assumed terminal value and (h) time horizon of cash flow
forecasts.

We consider the estimate of fair value to be a critical accounting estimate
because (a) a potential 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.

In determining the fair value in 2003, we made the following key
assumptions: (a) the markets in which we operate will continue to be
deregulated; (b) demand for electricity will grow, which will result in lower
reserve margins; (c) there will be a recovery in electricity margins over time
to a level sufficient such that companies building new generation facilities can
earn a reasonable rate of return on their investment and (d) the economics of
future construction of new generation facilities will likely be driven by
regulated utilities. As part of this process, we modeled all of our power
generation facilities and those of others in the regions in which we operate.
The following table summarizes certain of these significant assumptions:

26





NOVEMBER JULY NOVEMBER
2002 2003 2003
-------- ---- --------

Number of years used in internal cash flow analysis ...... 15 15 15
EBITDA multiple for terminal values ...................... 7.5 7.5 7.5
Risk-adjusted discount rate for our estimated cash flows.. 9.0% 9.0% 9.0%
Average anticipated growth rate for demand in power (1)... 2.0% 2.0% 2.0%
After-tax return on investment for new investment (2)..... 9.0% 7.5% 7.5%


- ------------------
(1) Depending on the region, the specific rate is projected to be somewhat
higher or lower.

(2) Based on our assumption in 2003 that regulated utilities will be the
primary drivers underlying the construction of new generation facilities,
we have assumed that the after-tax return on investment will yield a return
representative of a regulated utility's cost of capital (7.5%) rather than
that of an independent power producer (9.0%). Based on changes in assumed
market conditions, including regulatory rules, we have changed the
projected time horizon for substantially achieving the after-tax return on
investment to 2008 - 2012 (depending on region). Formerly, we had assumed
that the time horizon for substantially achieving this rate of return was
2006 - 2010.

Because we recognized goodwill impairments in 2002 and 2003, in the near
future, if the wholesale energy market outlook changes negatively, we could have
additional impairments of goodwill that would need to be recognized. In
addition, Reliant Resources' ongoing evaluation of the wholesale energy business
could result in decisions to mothball, retire or dispose of additional
generation assets, any of which could result in additional impairment charges
related to goodwill, impact our fixed assets' depreciable lives or result in
fixed asset impairment charges.

PROPERTY, PLANT AND EQUIPMENT.

We evaluate our property, plant and equipment for impairment if events
indicate that the carrying value of these assets may not be recoverable. If the
sum of the undiscounted expected future cash flows from an asset is less than
the carrying value of the asset, we recognize an impairment by subtracting the
fair value of the asset from its carrying value. We consider the fair value
estimate to be a critical accounting estimate because (a) an impairment can have
a material impact on our financial position and results of operations and (b)
the highly subjective nature of the many judgments and assumptions used in the
estimate.

In determining the existence of an impairment in carrying value, we make a
number of subjective assumptions as to: (a) whether an indicator of impairment
has occurred, (b) the grouping of assets, (c) the intention of "holding" versus
"selling" an asset, (d) the forecast of undiscounted expected future cash flow
over the asset's estimated useful life and (e) if an impairment exists, the fair
value of the asset or asset group. If the wholesale energy market outlook
changes negatively, we could have impairments of our property, plant and
equipment in future periods. Additionally, future decisions to mothball, retire
or dispose of assets could result in impairment charges.

We did not recognize an impairment related to property, plant and equipment
in 2002 or 2003.

For information concerning the possible impairment of our Liberty plant,
see note 14(b) to our consolidated financial statements.

DEPRECIATION EXPENSE.

As of December 31, 2003, approximately 84% of our total gross property,
plant and equipment was comprised of electric generation facilities and
equipment. We estimate depreciation expense using the straight-line method based
on projected useful lives. We consider these estimates to be critical accounting
estimates because (a) they require subjective judgments regarding the estimated
useful lives of property, plant and equipment and (b) changes in the estimates
could affect future depreciation expense and hence our results of operations.

For additional information regarding depreciation expense, see note 2(f) to
our consolidated financial statements.

As we were acquired by Reliant Resources in 2002, our power generation
facilities' useful lives were based on: (a) the condition of the acquired
facilities, (b) the fuel type of the generation facilities, (c) future
environmental requirements, (d) projected maintenance and (e) projected future
cash flows. For power generation facilities and related assets that we
constructed, we use the design life provided in the construction contract. In
the absence of a

27



specified design life, we estimate the weighted average life of the components
of a power generation unit of a facility.

Significant portions of our facilities were constructed many years ago.
Older generating equipment may require significant upgrades, which could affect
judgments to their useful life. In addition, alternative technologies could
reduce the useful lives of portions of these facilities.

If we had assumed that the gross property, plant and equipments' lives had
decreased by 10% from the estimated lives used in the calculation of
depreciation expense for 2003, depreciation expense would have been
approximately $147 million or 11% higher.

DERIVATIVE ACTIVITIES.

Derivative Activities. We report our derivative assets/liabilities on our
consolidated balance sheets at fair value. As discussed in Item 7A "Quantitative
and Qualitative Disclosures about Derivative Activities and Related Market
Risks" of this report, we estimate the fair value of our derivative
assets/liabilities based on (a) prices actively quoted, (b) prices provided by
other external sources or (c) prices based on models and other valuation
methods.

We consider the fair values of our derivative instruments 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 (a) estimated
forward market price curves; (b) valuation adjustments relating to time value;
(c) liquidity valuation adjustments, calculated by utilizing observed market
price liquidity, which represent the estimated impact on fair values resulting
from the widening of bid/ask spreads for transactions occurring further in the
future; (d) costs of administering future obligations under existing contracts;
and (e) credit adjustments based on estimated defaults by counterparties that
are calculated using historical default probabilities for corporate bonds for
companies with similar credit ratings. We also believe estimates regarding the
probability that hedged forecasted transactions will occur by the end of the
time period specified in the original hedging documentation to be a critical
accounting estimate.

For additional information regarding our derivative activities, see notes
2(d), 6 and 7(b) to our consolidated financial statements and Item 7A
"Quantitative and Qualitative Disclosures about Derivative Activities and
Related Market Risks." Item 7A includes an analysis of the impact of a 10%
hypothetical adverse change on the fair value of our derivatives at December 31,
2002 and 2003.

LOSS CONTINGENCIES.

We record a loss contingency when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. We regularly
analyze current information and, as necessary, provide accruals for probable
liabilities on the eventual disposition of those matters that can be estimated.
We consider these estimates to be critical accounting estimates because (a) they
entail significant judgment by us regarding probabilities and ranges of
exposure, (b) the ultimate outcome of the proceedings relating to these
contingencies is unknown, and (c) the ultimate outcome could have a material
adverse effect on our results of operations, financial condition and cash flows.
For a discussion of these contingencies, see note 14 to our consolidated
financial statements.

DEFERRED TAX ASSETS VALUATION ALLOWANCE.

We estimate (a) income taxes in each of the jurisdictions in which we
operate, (b) net deferred tax assets based on expected future taxable benefits
in such jurisdictions and (c) valuation allowances for deferred tax assets. For
additional information regarding these estimates, see note 12 to our
consolidated financial statements. We consider these estimates to be critical
accounting estimates because (a) they require estimates of projected future
operating results (which are inherently imprecise) and (b) they depend on
assumptions regarding our ability to generate future taxable income during the
periods in which temporary differences are deductible.

28



RELATED PARTY TRANSACTIONS

For a discussion of related party transactions, see note 3 to our
consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT NON-TRADING ACTIVITIES
AND RELATED MARKET RISKS.

MARKET RISK AND RISK MANAGEMENT

We are exposed to various market risks. These risks arise from the
ownership of our assets and operation of our business. Most of the revenues,
expenses, results of operations and cash flows from our business activities are
impacted by market risks. Categories of significant market risks include
exposures primarily related to commodity prices and interest rates.

During the normal course of business, we review our hedging strategies and
determine the hedging approach we deem appropriate based upon the circumstances
of each situation. We utilize derivative instruments to execute our risk
management and hedging strategies. Derivative instruments are instruments, such
as forward contracts, swaps or options that derive their value from underlying
assets, indices, reference rates or a combination of these factors. These
derivative instruments include negotiated contracts, which are referred to as
over-the-counter derivatives.

We primarily use derivative instruments to manage and hedge exposures to
the extent allowed under our credit agreements, such as exposure to changes in
electricity and fuel prices and interest rate risk on our floating-rate
borrowings. We believe that the associated market risk of these instruments can
best be understood relative to the underlying assets or risk being hedged and
our hedging strategy.

Through our parent, Reliant Resources, we have a risk control framework
designed to monitor, measure and define appropriate transactions to hedge and
manage the risk in our existing portfolio of assets and contracts and to
authorize new transactions. These risks fall into three different categories:
market risk, credit risk and operational risk. We believe that we have effective
procedures for evaluating and managing these risks to which we are exposed. Key
risk control activities include definition of appropriate transactions for
hedging, credit review and approval, credit and performance risk measurement and
monitoring, validation of transactions, portfolio valuation and daily portfolio
reporting including mark-to-market valuation and other risk measurement metrics.
We seek to monitor and control our risk exposures through a variety of separate
but complementary processes and committees, which involve business unit
management, senior management and Reliant Resources' board of directors.

The effectiveness of our policies and procedures for managing risk exposure
can never be completely estimated or fully assured. For example, we could
experience losses, which could have a material adverse effect on our results of
operations, financial condition or cash flows from unexpectedly large or rapid
movements or disruptions in the energy markets, from regulatory-driven market
rules changes and/or bankruptcy of customers or counterparties.

See notes 2(d) and 6 to our consolidated financial statements for the
accounting for these types of transactions.

NON-TRADING MARKET RISK

Commodity Price Risk. Commodity price risk is an inherent component of
wholesale electric businesses. Prior to the energy delivery period, we hedge to
the extent permitted under our credit agreements, in part, the economics of our
wholesale electric business. Derivative instruments are used to mitigate
exposure to variability in future cash flows from probable, anticipated future
transactions attributable to a commodity risk.

29



The following table sets forth the fair values of the contracts related to
our net derivative assets and liabilities as of December 31, 2003:



FAIR VALUE OF CONTRACTS AT DECEMBER 31, 2003
----------------------------------------------------------------
2009 AND TOTAL
SOURCE OF FAIR VALUE 2004 2005 2006 2007 2008 THEREAFTER FAIR VALUE
- ------------------------------- ---- ---- ---- ---- ---- ---------- ----------
(IN MILLIONS)

Prices provided by other
external sources (1)........ $ 4 $ 1 $ (5) $ (1) $ - $ - $ (1)


- ---------------
(1) Represents our forward positions in power, oil and coal commodities and
interest rate swaps. OTC broker quotes are available for power, oil and
coal, which on average extend 24, 36 and 36 months into the future,
respectively. Commodity positions are valued against internally developed
forward market price curves that are frequently validated and recalibrated
against OTC broker quotes. Interest rate hedges are valued using external
forward market curves. This category also includes some transactions whose
prices are obtained from external sources and then modeled as appropriate.

The fair values in the above table are subject to significant changes based
on fluctuating market prices and conditions. Changes in our derivative assets
and liabilities result primarily from changes in the valuation of the portfolio
of contracts and the timing of settlements. The most significant parameters
impacting the value of our portfolios of contracts include oil, coal and power
and interest rate forward market prices, volatility and credit risk. Market
prices assume a normal functioning market with an adequate number of buyers and
sellers providing market 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.

We assess the risk of our derivatives using a sensitivity analysis method.
Derivative instruments, which we use as economic hedges, create exposure to
commodity prices, which, in turn, offset the commodity exposure inherent in our
business. The stand-alone commodity risk created by these instruments, without
regard to the offsetting effect of the underlying exposure these instruments are
intended to hedge, is described below. The sensitivity analysis performed on our
energy derivatives measures the potential loss in fair value based on a
hypothetical 10% movement in the underlying energy prices. A decrease of 10% in
the market prices of energy commodities from their December 31, 2003 levels
would have decreased the fair value of our energy derivatives by $14 million. Of
this amount, $12 million relates to a loss in fair value of the derivatives that
are designated as cash flow hedges and $2 million relates to a loss in earnings
of the economic hedges. A decrease of 10% in the market prices of energy
commodities from their December 31, 2002 levels would have decreased the fair
value of our energy derivatives by $12 million.

The above analysis of the energy derivatives utilized for hedging purposes
does not include the favorable impact that the same hypothetical price movement
would have on our physical purchases and sales of oil, coal and electric power
to which the hedges relate. Furthermore, the energy derivative portfolio is
managed to complement our asset portfolio, thereby reducing overall risks.
Therefore, the adverse impact to the fair value of the portfolio of energy
derivatives held for hedging purposes associated with the hypothetical changes
in commodity prices referenced above would be offset by a favorable impact on
the underlying hedged physical transactions, assuming:

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

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

- as applicable, anticipated underlying transactions settle as expected.

If any of the above-mentioned assumptions cease to be true, a loss on the
derivative instruments may occur, or the options might be worthless as
determined by the prevailing market value on their termination or maturity date,
whichever comes first. Energy derivatives, which qualify as cash flow hedges,
and which are effective as hedges, may still have some percentage that is not
effective. The change in value of the energy derivatives, which represents the
ineffective component of the cash flow hedges, is recorded in the results of
operations. During 2001, 2002 and 2003, our hedge ineffectiveness was
immaterial.

30



Interest Rate Risk. We have issued long-term debt and have obligations
under bank facilities that subject us to the risk of loss associated with
movements in market interest rates. In addition, we have entered into interest
rate swap agreements to mitigate our exposure to interest rate fluctuations
associated with certain of our variable rate debt instruments. We assess
interest rate risks using a sensitivity analysis method. The table below
provides information concerning our financial instruments as of December 31,
2002 and 2003, that are sensitive to changes in interest rates:



FAIR MARKET HYPOTHETICAL
AGGREGATE VALUE/SWAP CHANGE IN
NOTIONAL TERMINATION UNDERLYING AT
AMOUNT VALUE (1) END OF PERIOD FINANCIAL IMPACT
-------- ----------- ------------- -----------------------------------------------
(IN MILLIONS)

DECEMBER 31, 2002:
Floating rate debt (2)(3) $ 1,371 N/A (4) 10% increase $0.5 million increased monthly interest expense
Fixed rate debt (3)...... 400 $ 323 10% decrease $25 million increase in fair market value
Interest rate swaps (5):
Orion Midwest.......... 600 (69) 10% decrease $4 million increase in termination cost
Orion NY............... 250 (45) 10% decrease $4 million increase in termination cost

DECEMBER 31, 2003:
Floating rate debt (2)
(3).................... $ 1,218 $ 1,218 10% increase $0.4 million increased monthly interest expense
Fixed rate debt (3)...... 400 488 10% decrease $20 million increase in fair market value
Interest rate swaps (5):
Orion Midwest.......... 300 (48) 10% decrease $3 million increase in termination cost
Orion NY............... 250 (36) 10% decrease $3 million increase in termination cost


- ------------

(1) See note 15 to our consolidated financial statements for further discussion
on the fair market value of our financial instruments.

(2) Excludes adjustment to fair value of the interest rate swaps.

(3) Excludes Liberty's debt and the adjustment to the fair value of debt.

(4) As of December 31, 2002, we had floating rate debt with a carrying value of
$1.4 billion, excluding adjustment to fair value of interest rate swaps and
Liberty's debt. There was no active market for our floating rate debt
obligations as of December 31, 2002.

(5) These derivative instruments qualify for hedge accounting under SFAS No.
133 and the periodic settlements are recognized as an adjustment to
interest expense in our results of operations over the term of the related
agreement. As of December 31, 2002 and 2003, these swaps have negative
termination values (i.e., we would have to pay). See note 7(b) to our
consolidated financial statements.

31


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES



Independent Auditors' Reports............................... F-2
Consolidated Statements of Operations for the Year Ended
December 31, 2001, for the periods from January 1, 2002
through February 19, 2002 and February 20, 2002 through
December 31, 2002 and for the Year Ended December 31,
2003...................................................... F-5
Consolidated Balance Sheets as of December 31, 2002 and
2003...................................................... F-6
Consolidated Statements of Cash Flows for the Year Ended
December 31, 2001, for the periods from January 1, 2002
through February 19, 2002 and February 20, 2002 through
December 31, 2002 and for the Year Ended December 31,
2003...................................................... F-7
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Year Ended December
31, 2001, for the periods from January 1, 2002 through
February 19, 2002 and February 20, 2002 through December
31, 2002 and for the Year Ended December 31, 2003......... F-8
Notes to Consolidated Financial Statements.................. F-9
Supplementary Data.......................................... F-52




F-1


INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Orion Power Holdings, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheet of Orion Power
Holdings, Inc. and subsidiaries ("the Company") as of December 31, 2002 and
2003, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss), and cash flows for the periods from
January 1, 2002 to February 19, 2002 and February 20, 2002 to December 31, 2002
and for the year ended December 31, 2003. Our audits also included the financial
statement schedules (Schedule I and II) listed in the Index at Item 15(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits. The consolidated financial statements and the financial statement
schedules of the Company for the year ended December 31, 2001, were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements and stated that such 2001
financial statement schedules, when considered in relation to the 2001 basic
consolidated financial statements taken as a whole, presented fairly, in all
material respects, the information set forth therein, in their reports dated
February 19, 2002 (which report on the consolidated financial statements
includes an explanatory paragraph concerning the adoption of a new accounting
principle in 2001).

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 2002 and 2003 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002 and 2003, and the results of its operations and its cash flows
for the periods from January 1, 2002 to February 19, 2002 and February 20, 2002
to December 31, 2002 and for the year ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.

As discussed in notes 2 and 5 to the consolidated financial statements, the
Company changed its accounting for asset retirement obligations and its
presentation of revenues and cost of sales associated with non-trading commodity
derivatives activities in 2003 and changed its method of accounting for goodwill
and other intangibles in 2002.

As discussed above, the consolidated financial statements of the Company
for the year ended December 31, 2001 were audited by other auditors who have
ceased operations. Such financial statements and financial statement schedules
have been revised to give effect to the following transitional disclosures,
expanded disclosures and reclassifications:

- As discussed in note 5, the Company has presented the transitional
disclosures for 2001 as required by Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
We audited the adjustments described in note 5 that were applied to
revise the 2001 financial statements to include the transitional
disclosures required by SFAS No. 142, which was adopted by the Company as
of January 1, 2002. Our audit procedures with respect to the disclosure
in note 5 with respect to 2001 included (1) comparing the previously
reported net income to the previously issued financial statements and the
adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in those periods related
to goodwill and intangible assets no longer being amortized as a result
of initially applying SFAS No. 142 (including any related tax effects) to
the Company's underlying analysis obtained from management and (2)
testing the mathematical accuracy of the reconciliation of adjusted net
income to reported net income and the related earnings per share amounts.


F-2


- As discussed in note 4, the Company has presented selected financial
information and unaudited pro forma information for 2001 as if the
acquisition had occurred on January 1, 2001. We audited the expanded
disclosures and our procedures included (1) comparing the previously
reported revenues and net income to the previously issued financial
statements and (2) agreeing the expanded pro forma disclosure amounts to
the Company's underlying analysis obtained from management.

- The financial statements have also been revised to give effect to the
following reclassifications: (1) in note 2(a), for the 2001 financial
statements the Company has presented gains and losses on derivative
instruments net in revenues rather than separately and has also presented
purchased power separately from fuel expense, (2) for the 2001 cash flow
statements, the Company has presented amortization of deferred financing
fees separately, (3) in note 2(i), for 2001 the Company presented the
capitalized interest for the year rather than the cumulative capitalized
interest included in the balance sheet as of December 31, 2001.

We audited these reclassifications that were applied to revise the 2001
financial statements and financial statement schedules to conform to the
presentation of such amounts in the 2003 financial statements and
financial statement schedules. Our audit procedures with respect to the
2001 amounts included (1) comparing the previously reported tabular
presentation of each amount to a reconciliation schedule prepared by
management, (2) testing the mathematical accuracy of the underlying
analysis and (3) determining the reclassifications were consistent with
the 2003 financial statement presentation.

In our opinion, the transitional disclosures, expanded disclosures and
reclassifications to the 2001 financial statements and disclosures and financial
statement schedules described above have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the 2001 financial
statements or financial statement schedules of the Company other than with
respect to such transitional disclosures, expanded disclosures and
reclassifications and, accordingly, we do not express an opinion or any form of
assurance on the 2001 financial statements taken as a whole.

Our audit was conducted for the purpose of forming an opinion on the 2002
and 2003 basic consolidated statements taken as a whole. The 2002 and 2003
financial statement schedules are presented for the purpose of additional
analysis and are not a required part of the 2002 and 2003 basic consolidated
financial statements. These schedules are the responsibility of the Company's
management. Such schedules have been subjected to the auditing procedures
applied in our audit of the 2002 and 2003 basic consolidated financial
statements and, in our opinion, are fairly stated in all material respects when
considered in relation to the 2002 and 2003 basic consolidated financial
statements taken as a whole.

DELOITTE & TOUCHE, LLP

Houston, Texas
March 5, 2004



F-3


The following is a copy of a report previously issued by Arthur Andersen
LLP (Andersen). The report has not been reissued by Andersen.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Orion Power Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Orion Power
Holdings, Inc. (a Delaware corporation) and subsidiaries (Orion Power) as of
December 31, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of Orion Power's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the 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 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, 2000 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

As explained in Note 6 to the financial statements, effective January 1,
2001, Orion Power changed its method of accounting for derivative financial
instruments.

/s/ ARTHUR ANDERSEN LLP

Vienna, Virginia
February 19, 2002



F-4


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



FORMER ORION | CURRENT ORION
------------------------------------- | -------------------------------------
JANUARY 1, 2002 | FEBRUARY 20, 2002
YEAR ENDED THROUGH | THROUGH YEAR ENDED
DECEMBER 31, 2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 DECEMBER 31, 2003
----------------- ----------------- | ----------------- -----------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
|
REVENUES: |
Revenues................... $1,190,299 $122,408 | $1,001,764 $1,182,273
Revenues -- affiliates..... -- -- | 20,279 33,042
---------- -------- | ---------- ----------
Total................... 1,190,299 122,408 | 1,022,043 1,215,315
EXPENSES: |
Fuel....................... 420,176 43,282 | 235,846 301,429
Fuel -- affiliates......... -- -- | 98,902 145,220
Purchased power............ 50,257 3,232 | 13,831 20,765
Purchased |
power -- affiliates..... -- -- | 42,743 24,735
Operation and |
maintenance............. 129,413 22,419 | 160,196 220,644
General, administrative and |
development............. 58,315 86,188 | 36,330 103,160
Goodwill impairment........ -- -- | 337,500 585,000
Taxes other than income |
taxes................... 57,388 8,576 | 57,013 72,840
Depreciation and |
amortization............ 137,932 25,530 | 136,605 156,533
---------- -------- | ---------- ----------
Total................... 853,481 189,227 | 1,118,966 1,630,326
---------- -------- | ---------- ----------
OPERATING INCOME (LOSS)...... 336,818 (66,819) | (96,923) (415,011)
OTHER EXPENSE: |
Interest expense........... (202,825) (25,067) | (127,515) (146,724)
Interest income............ 21,529 1,101 | 7,112 5,729
---------- -------- | ---------- ----------
Total other expense..... (181,296) (23,966) | (120,403) (140,995)
---------- -------- | ---------- ----------
INCOME (LOSS) BEFORE INCOME |
TAXES AND CUMULATIVE EFFECT |
OF ACCOUNTING CHANGE....... 155,522 (90,785) | (217,326) (556,006)
INCOME TAX EXPENSE |
(BENEFIT).................. 54,919 (38,611) | 40,090 1,800
---------- -------- | ---------- ----------
INCOME (LOSS) BEFORE |
CUMULATIVE EFFECT OF |
ACCOUNTING CHANGE.......... 100,603 (52,174) | (257,416) (557,806)
Cumulative effect of |
accounting change, net of |
tax........................ -- -- | -- 2,121
---------- -------- | ---------- ----------
NET INCOME (LOSS)....... $ 100,603 $(52,174) | $ (257,416) $ (555,685)
========== ======== | ========== ==========
Earnings per average common
share:
Basic...................... $ 1.02
==========
Diluted.................... $ 0.97
==========


See Notes to the Consolidated Financial Statements

F-5


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



DECEMBER 31,
-----------------------
2002 2003
---------- ----------
(THOUSANDS OF DOLLARS)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,400 $ 33,441
Restricted cash........................................... 199,830 189,440
Accounts receivable, net.................................. 112,535 111,795
Receivable from affiliates, net........................... -- 221
State income taxes receivable............................. 47,364 34,850
Inventory................................................. 61,152 69,479
Derivative assets......................................... 8,762 23,045
Accumulated deferred income taxes......................... 53,095 11,530
Prepaid insurance and property taxes...................... 14,535 11,756
Other current assets...................................... 12,496 9,345
---------- ----------
Total current assets.................................... 517,169 494,902
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 3,784,627 3,729,433
---------- ----------
OTHER ASSETS:
Goodwill, net............................................. 986,037 395,079
Other intangibles, net.................................... 434,899 434,413
Derivative assets......................................... 7,286 12,150
Deferred financing costs, net............................. 25,808 17,484
Restricted cash........................................... -- 8,656
Other..................................................... 6,279 5,523
---------- ----------
Total other assets...................................... 1,460,309 873,305
---------- ----------
TOTAL ASSETS............................................ $5,762,105 $5,097,640
========== ==========

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term
borrowings.............................................. $ 454,244 $ 407,690
Accounts payable.......................................... 44,937 49,373
Derivative liabilities.................................... 25,479 19,480
Payable to affiliates, net................................ 7,930 --
Accrued expenses.......................................... 35,898 29,025
Accrued interest.......................................... 18,800 19,487
---------- ----------
Total current liabilities............................... 587,288 525,055
---------- ----------
OTHER LIABILITIES:
Accumulated deferred income taxes......................... 385,628 429,168
Derivative liabilities.................................... 27,153 17,293
Contractual obligations................................... 85,715 52,439
Other..................................................... 80,393 72,519
---------- ----------
Total other liabilities................................. 578,889 571,419
---------- ----------
LONG-TERM DEBT.............................................. 1,724,095 1,585,689
---------- ----------
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................................ 3,152,701 3,233,308
Retained deficit.......................................... (257,416) (813,101)
Accumulated other comprehensive loss...................... (23,453) (4,731)
---------- ----------
Stockholder's equity.................................... 2,871,833 2,415,477
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............. $5,762,105 $5,097,640
========== ==========


See Notes to the Consolidated Financial Statements

F-6


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



FORMER ORION | CURRENT ORION
------------------------------------- | -------------------------------------
JANUARY 1, 2002 | FEBRUARY 20, 2002
YEAR ENDED THROUGH | THROUGH YEAR ENDED
DECEMBER 31, 2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 DECEMBER 31, 2003
----------------- ----------------- | ----------------- -----------------
(THOUSANDS OF DOLLARS)
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss).......................... $100,603 $(52,174) | $(257,416) $(555,685)
Adjustments to reconcile net income (loss) |
to net cash provided by operating |
activities: |
Cumulative effect of accounting change... -- -- | -- (2,121)
Impairment of goodwill................... -- -- | 337,500 585,000
Depreciation and amortization............ 137,932 25,530 | 136,605 156,533
Non-cash equity contribution of general |
and administrative costs from |
stockholder............................ -- -- | -- 69,631
Deferred income taxes.................... 30,986 (4,787) | 114,381 85,359
(Gain) loss on derivative financial |
instruments............................ (11,919) 12,065 | 3,699 (3,007)
Deferred compensation.................... 1,596 1,763 | -- --
Net amortization of contractual rights |
and obligations........................ -- -- | (3,537) (5,449)
Amortization of deferred financing |
costs.................................. 16,497 2,633 | 1,455 9,671
Amortization of revaluation of swaps and |
debt................................... -- -- | (30,816) (26,280)
Tax benefit from exercise of options..... 927 -- | -- --
Interest income on officers' notes |
receivable............................. (318) -- | -- --
Federal income tax contribution from |
Reliant Resources, Inc................. -- -- | (72,932) (24,038)
Changes in assets and liabilities: |
Restricted cash........................ (53,288) 86,339 | 50,545 1,734
Accounts receivable, net............... 20,664 (50,375) | 58,082 740
Inventory.............................. (14,088) (539) | (14,328) (8,327)
Prepaid insurance and property taxes |
and other current assets............. 5,763 (44,279) | (10,931) 2,040
Other assets........................... 5,045 (40,431) | (4,637) (44,764)
Accounts payable....................... (35,002) 26,041 | (35,993) 4,266
Payable/receivable to affiliates,
net.................................. -- -- | 7,930 (8,137)
Accrued expenses....................... (29,941) (10,958) | (6,969) (5,881)
Income taxes receivable/payable........ -- -- | (32,364) (2,571)
Deferred revenue....................... 39 (517) | -- --
Accrued interest....................... (1,365) 16,738 | (15,210) 687
Other long-term liabilities............ (2,904) 45,802 | (70,672) (2,546)
-------- -------- | --------- ---------
Net cash provided by operating |
activities......................... 171,227 12,851 | 154,392 226,855
-------- -------- | --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Capital expenditures..................... (475,863) (49,642) | (72,117) (75,646)
Purchases of property, plant and |
equipment and related assets in |
acquisition............................ (26,336) -- | -- --
-------- -------- | --------- ---------
Net cash used in investing |
activities......................... (502,199) (49,642) | (72,117) (75,646)
-------- -------- | --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Proceeds from debt....................... 448,400 21,000 | 108,200 40,000
Proceeds from issuance of stock, net..... 272,603 491 | -- --
Payments of debt......................... (331,964) (78,758) | (495,940) (199,579)
Contributions from stockholder........... -- -- | 246,832 35,000
Payments on officers' notes receivable... 2,498 3,736 | -- --
Payments of financing costs.............. (12,680) (100) | (27,264) (589)
-------- -------- | --------- ---------
Net cash provided by (used in) |
financing activities............... 378,857 (53,631) | (168,172) (125,168)
-------- -------- | --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS.... 47,885 (90,422) | (85,897) 26,041
CASH AND CASH EQUIVALENTS AT BEGINNING OF |
PERIOD................................... 135,834 183,719 | 93,297 7,400
-------- -------- | --------- ---------
CASH AND CASH EQUIVALENTS AT END OF |
PERIOD................................... $183,719 $ 93,297 | $ 7,400 $ 33,441
======== ======== | ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments:
Interest paid (net of amounts
capitalized)........................... $188,930 $ 5,634 $ 166,454 $ 160,023
Income taxes paid (net of income tax
refunds received)...................... 55,632 65 -- (56,949)


See Notes to the Consolidated Financial Statements

F-7


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

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


NOTES
COMMON STOCK ADDITIONAL RECEIVABLE RETAIN
--------------------- PAID-IN DEFERRED FROM EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION OFFICERS (DEFICIT)
------------ ------ ----------- ------------ ---------- ---------
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

FORMER ORION
BALANCE, DECEMBER 31, 2000............. 93,095,926 $ 931 $ 1,230,467 $(3,359) $(5,916) $ 32,659
Net income........................... 100,603
Sale of common stock, net of fees.... 10,552,983 106 272,497
Change in notes receivable from
officers........................... 2,180
Amortization of deferred
compensation....................... 1,596
Tax benefit -- exercise of stock
options............................ 927
Cumulative effect of adoption of SFAS
No. 133, net of tax of $26
million............................
Deferred loss from cash flow hedges,
net of tax of $4 million...........
Reclassification of net deferred gain
from cash flow hedges..............
Comprehensive income.................
------------ ------ ----------- ------- ------- ---------
BALANCE, DECEMBER 31, 2001............. 103,648,909 1,037 1,503,891 (1,763) (3,736) 133,262
Net loss............................. (52,174)
Exercise of stock options............ 491
Change in notes receivable from
officers........................... 3,736
Amortization of deferred
compensation....................... 1,763
Deferred loss from cash flow hedges,
net of tax of $5 million...........
Reclassification of net deferred loss
from cash flow hedges, net of tax
of $3 million......................
Comprehensive loss...................
------------ ------ ----------- ------- ------- ---------
BALANCE, FEBRUARY 19, 2002............. 103,648,909 1,037 1,504,382 -- -- 81,088
Purchase accounting adjustment....... (103,648,909) (1,037) (1,504,382) -- -- (81,088)
CURRENT ORION
PURCHASE ALLOCATION.................... 1,000 1 2,963,801 -- -- --
Net loss............................. (257,416)
Contributions from stockholder....... 188,900
Net deferred loss from cash flow
hedges, net of tax of $24
million............................
Reclassification of net deferred loss
from cash flow hedges, net of tax
of $7 million......................
Comprehensive loss...................
------------ ------ ----------- ------- ------- ---------
BALANCE, DECEMBER 31, 2002............. 1,000 1 3,152,701 -- -- (257,416)
Net loss............................. (555,685)
Net contributions from stockholder... 80,607
Deferred gain from cash flow hedges,
net of tax of $8 million...........
Reclassification of net deferred loss
from cash flow hedges, net of tax
of $6 million......................
Comprehensive loss...................
------------ ------ ----------- ------- ------- ---------
BALANCE, DECEMBER 31, 2003............. 1,000 $ 1 $ 3,233,308 $ -- $ -- $(813,101)
============ ====== =========== ======= ======= =========


ACCUMULATED
OTHER TOTAL COMPREHENSIVE
COMPREHENSIVE STOCKHOLDERS' INCOME
LOSS EQUITY (LOSS)
------------- ------------- -------------
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

FORMER ORION
BALANCE, DECEMBER 31, 2000............. $ -- $ 1,254,782
Net income........................... 100,603 $ 100,603
Sale of common stock, net of fees.... 272,603
Change in notes receivable from
officers........................... 2,180
Amortization of deferred
compensation....................... 1,596
Tax benefit -- exercise of stock
options............................ 927
Cumulative effect of adoption of SFAS
No. 133, net of tax of $26
million............................ (33,330) (33,330) (33,330)
Deferred loss from cash flow hedges,
net of tax of $4 million........... (6,775) (6,775) (6,775)
Reclassification of net deferred gain
from cash flow hedges.............. (10,956) (10,956) (10,956)
---------
Comprehensive income................. $ 49,542
-------- ----------- =========
BALANCE, DECEMBER 31, 2001............. (51,061) 1,581,630
Net loss............................. (52,174) $ (52,174)
Exercise of stock options............ 491
Change in notes receivable from
officers........................... 3,736
Amortization of deferred
compensation....................... 1,763
Deferred loss from cash flow hedges,
net of tax of $5 million........... (6,055) (6,055) (6,055)
Reclassification of net deferred loss
from cash flow hedges, net of tax
of $3 million...................... 3,711 3,711 3,711
---------
Comprehensive loss................... $ (54,518)
-------- ----------- =========
BALANCE, FEBRUARY 19, 2002............. (53,405) 1,533,102
Purchase accounting adjustment....... 53,405 (1,533,102)
CURRENT ORION
PURCHASE ALLOCATION.................... -- 2,963,802
Net loss............................. (257,416) $(257,416)
Contributions from stockholder....... 188,900
Net deferred loss from cash flow
hedges, net of tax of $24
million............................ (33,829) (33,829) (33,829)
Reclassification of net deferred loss
from cash flow hedges, net of tax
of $7 million...................... 10,376 10,376 10,376
---------
Comprehensive loss................... $(280,869)
-------- ----------- =========
BALANCE, DECEMBER 31, 2002............. (23,453) 2,871,833
Net loss............................. (555,685) $(555,685)
Net contributions from stockholder... 80,607
Deferred gain from cash flow hedges,
net of tax of $8 million........... 10,765 10,765 10,765
Reclassification of net deferred loss
from cash flow hedges, net of tax
of $6 million...................... 7,957 7,957 7,957
---------
Comprehensive loss................... $(536,963)
-------- ----------- =========
BALANCE, DECEMBER 31, 2003............. $ (4,731) $ 2,415,477
======== ===========


See Notes to the Consolidated Financial Statements


F-8

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BACKGROUND AND BASIS OF PRESENTATION

In this report "Orion Power Holdings" refers to Orion Power Holdings, Inc.
"Orion Power" refers to Orion Power Holdings, Inc. and its subsidiaries
collectively unless the context clearly indicates otherwise. Orion Power
Holdings, a Delaware corporation, and subsidiaries own and operate electric
generation facilities in New York, Ohio, Pennsylvania and West Virginia with an
aggregate generating capacity of 6,690 megawatts, as of December 31, 2003. Orion
Power typically sells its wholesale products to electric power retailers, which
are the entities that supply power to consumers. Power retailers include
independent system operators, regulated utilities, municipalities, energy supply
companies, cooperatives and retail "load" or customer aggregators. Orion Power
has grown its business by strategically acquiring, developing and modernizing
non-nuclear generating facilities located in critical locations in regions
across the United States.

On February 19, 2002, Orion Power was acquired by merger (the Merger) by a
wholly-owned subsidiary of Reliant Resources, Inc. (Reliant Resources). The
transaction resulted in the purchase by Reliant Resources of all of Orion Power
Holdings' outstanding shares of common stock for $26.80 per share in cash for an
aggregate purchase price of approximately $2.9 billion. Reliant Resources funded
the acquisition with a $2.9 billion credit facility and $41 million of cash on
hand. As a result of the Merger, Orion Power became a wholly-owned subsidiary of
Reliant Resources.

BASIS OF PRESENTATION

These consolidated financial statements present the results of operations
for the year ended December 31, 2001 and for the periods from January 1, 2002
through February 19, 2002 (the date that Reliant Resources acquired Orion Power)
and February 20, 2002 through December 31, 2002 and for the year ended December
31, 2003. Within these consolidated financial statements, "Current Orion" and
"Former Orion" refer to Orion Power after and before, respectively, the Merger.
The results of operations in these consolidated financial statements also
include general corporate expenses allocated by Reliant Resources to Orion Power
subsequent to the Merger. All of the allocations in the consolidated financial
statements are based on assumptions that management believes are reasonable
under the circumstances. However, these allocations may not necessarily be
indicative of the costs and expenses that would have resulted if Orion Power had
operated as a separate entity subsequent to the Merger.

The fair value adjustments related to the Merger, which have been pushed
down to Orion Power from Reliant Resources, primarily included adjustments in
property, plant and equipment, goodwill, contractual rights and obligations,
severance liabilities, debt, unrecognized pension and postretirement benefits
liabilities and related deferred taxes. For additional information regarding the
Merger, see note 4.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) RECLASSIFICATIONS.

Some amounts from the previous years have been reclassified to conform to
the 2003 presentation of financial statements. These reclassifications do not
affect earnings.

As discussed in note 5, "Goodwill and Intangibles," Orion Power has
presented the transitional disclosures for 2001 required by SFAS No. 142.
Additionally, as discussed in note 2(f), "Summary of Significant Accounting
Policies -- Property, Plant and Equipment and Depreciation Expense," and in note
5, "Goodwill and Intangibles," for 2001 Orion Power has reclassified air
emissions regulatory allowances and the related accumulated amortization from
net property, plant and equipment to net intangibles." For the 2001 financial
statements and the 2001 pro forma adjustment discussed in note 4, "Business
Acquisitions" Orion Power has presented gains and losses on derivative
instruments net in revenues rather than separately. Orion Power has also
presented purchased power separately from fuel


F-9


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expense. For the 2001 cash flow statement, Orion Power has presented
amortization of deferred financing fees separately from depreciation and
amortization. In note 2(i), for 2001, Orion Power presented capitalized interest
for the year rather than the cumulative capitalized interest included in the
balance sheet as of December 31, 2001.

(b) USE OF ESTIMATES AND MARKET RISK AND UNCERTAINTIES.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Orion Power's critical accounting estimates include: (a) goodwill,
(b) property, plant and equipment, (c) depreciation expense, (d) derivative
activities, (e) contingencies and (f) deferred tax assets valuation allowance
and tax liabilities.

Orion Power is subject to the risk associated with price movements of
energy commodities and the credit risk associated with its commercial
activities. For additional information regarding these risks, see notes 2(d) and
(b). Orion Power is subject to risks relating to the reliability of the systems,
procedures and other infrastructure necessary to operate its business. Orion
Power is also subject to risks relating to changes in laws and regulations; the
outcome of pending lawsuits, governmental proceedings and investigations; the
effects of competition; liquidity concerns in its markets; changes in interest
rates; the availability of adequate supplies of fuel and transportation; weather
conditions; financial market conditions and Orion Power's access to capital; the
creditworthiness or financial distress of Orion Power's counterparties; actions
by rating agencies with respect to Orion Power or its competitors; political,
legal, regulatory and economic conditions and developments; the successful
operation of deregulating power markets and other items.

(c) PRINCIPLES OF CONSOLIDATION.

Orion Power's accounts and those of Orion Power's wholly-owned and
majority-owned subsidiaries are included in the consolidated financial
statements. All significant intercompany transactions and balances are
eliminated in consolidation.

Each of Orion Power New York, LP (Orion NY), Orion Power New York LP, LLC,
Orion Power New York GP, Inc., Astoria Generating Company, L.P. (Astoria), Carr
Street Generating Station, LP (Carr Street), Erie Boulevard Hydropower, LP (Erie
Boulevard), Orion Power MidWest, LP (Orion MidWest), Orion Power MidWest LP,
LLC, Orion Power MidWest GP, Inc., Twelvepole Creek, LLC and Orion Power
Capital, LLC (Orion Capital) is a separate legal entity and has its own assets.

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51," (FIN No. 46). The objective of FIN No. 46 is to
achieve more consistent application of consolidation policies to variable
interest entities and to improve comparability between enterprises engaged in
similar activities. FIN No. 46 states that an enterprise must consolidate a
variable interest entity if the enterprise has a variable interest that will
absorb a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both. FIN No. 46 requires entities to
either (a) record the effects prospectively with a cumulative effect adjustment
as of the date on which FIN No. 46 is first applied or (b) restate previously
issued financial statements for the years with a cumulative effect adjustment as
of the beginning of the first year being restated.

Orion Power adopted FIN No. 46 on January 1, 2003. FIN No. 46 did not have
any impact on Orion Power's consolidated financial statements.



F-10


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In December 2003, the FASB released FASB Interpretation No. 46 (revised
December 2003) "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51" (FIN No. 46R), which replaces FIN No. 46 and modified certain
criteria in determining which entities should be considered as variable interest
entities. Orion Power does not believe the application of FIN No. 46R will have
a material impact to the consolidated financial statements. The application of
FIN No. 46R continues to evolve as the FASB continues to address issues
submitted for consideration. Orion Power will continue to assess the application
of clarified or revised guidance related to FIN No. 46R.

(d) REVENUES AND ACCOUNTING FOR HEDGING ACTIVITIES.

Power Generation Revenues. Orion Power records gross revenue for energy
sales and services related to the electric power generation facilities under the
accrual method and these revenues generally are recognized upon delivery.
Electric power and other energy services are sold at market-based prices through
existing power exchanges or through third-party contracts. Energy sales and
services related to the electric power generation facilities not billed by
month-end are accrued based upon estimated energy and services delivered. See
below for the discussion of the impact of implementation of Emerging Issues Task
Force (EITF) Issue No. 03-11, "Reporting Realized Gains and Losses on Derivative
Instruments That Are Subject to FASB Statement No. 133 and Not "Held for Trading
Purposes" As Defined in EITF Issue No. 02-03" (EITF No. 03-11).

Hedging Activities. Effective January 1, 2001, Orion Power adopted
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended (SFAS No. 133), which
establishes accounting and reporting standards for derivative instruments.
Adoption of SFAS No. 133 on January 1, 2001 resulted in an after-tax increase in
accumulated other comprehensive loss of $33 million.

If certain conditions are met, Orion Power may designate a derivative
instrument as hedging (a) the exposure to variability in expected future cash
flows (cash flow hedge) or (b) the exposure to changes in the fair value of an
asset or liability (fair value hedge). This statement requires that a derivative
be recognized at fair value in the balance sheet whether or not it is designated
as a hedge. Derivative commodity contracts for the physical delivery of purchase
and sale quantities transacted in the normal course of business are designated
as normal purchases and sales exceptions and are not reflected in the
consolidated balance sheets at fair value. For a derivative that is designated
as a cash flow hedge, and depending on its effectiveness, changes in fair value
are deferred as a component of accumulated other comprehensive income (loss),
net of applicable taxes.

Orion Power designates its derivatives as cash flow hedges only if there is
a high correlation between price movements in the derivative and the item
designated as being hedged. This correlation is measured both at the inception
of the hedge and on an ongoing basis, with an acceptable level of correlation of
at least 80% to 125% for hedge designation. The gains and losses related to
derivative instruments designated as cash flow hedges are deferred in
accumulated other comprehensive income (loss), net of tax, to the extent the
contracts are effective as hedges, and then are recognized in the results of
operations in the same period as the settlement of the underlying hedged
transactions. Once the anticipated transaction occurs, the accumulated deferred
gain or loss recognized in accumulated other comprehensive income (loss) is
reclassified and included in the consolidated statements of operations (a) prior
to October 1, 2003, under the captions (i) fuel expense, in the case of hedging
activities related to physical natural gas or coal purchases, (ii) purchased
power, in the case of hedging activities related to physical power purchases,
(iii) revenues, in the case of hedging activities related to physical power and
natural gas sales transactions and financial transactions and (iv) interest
expense, in the case of interest rate hedging activities and (b) effective
October 1, 2003, under the captions (i) fuel expense, in case of hedging
activities related to physical natural gas or coal purchases and physical
natural gas sales transactions that



F-11


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

do not physically flow, (ii) purchased power, in the case of hedging activities
related to physical power purchases that do physically flow, (iii) revenues, in
the case of hedging activities related to financial transactions, physical power
sales transactions, physical power purchases that do not physically flow and
natural gas sales transactions that do physically flow and (iv) interest
expense, in the case of interest rate hedging activities. Prior to October 1,
2003, revenues, fuel expense and purchased power related to sale and purchase
contracts designated as hedges were generally recorded on a gross basis in the
delivery period.

For a derivative not designated as a hedge, changes in fair value are
recorded as unrealized gains or losses in the results of operations. If and when
correlation ceases to exist at an acceptable level, hedge accounting ceases and
changes in fair value are recognized currently in our results of operations. If
it becomes probable that a forecasted transaction will not occur, we immediately
recognize the respective 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. Prior to October 1, 2003, revenues, fuel expense
and purchased power related to sale and purchase contracts designated as hedges
were generally recorded on a gross basis in the delivery period. In July 2003,
the EITF issued EITF No. 03-11, which stated that realized gains and losses on
derivative contracts not "held for trading purposes" should be reported either
on a net or gross basis based on the relevant facts and circumstances.
Reclassification of prior year amounts is not required. Orion Power's sales and
purchases of fuel and purchased power related to its commodity derivative
activities physically deliver and the related settlements are reported on a
gross basis in the consolidated statement of operations. Therefore, EITF No.
03-11 resulted in no change in revenues, fuel expense and purchased power for
the fourth quarter of 2003 and is believed not to have a significant impact on
the presentation of future operations. EITF No. 03-11 has no impact on margins
or net income. Comparative financial statements for prior periods have not been
reclassified to conform to this presentation, as it is not required. In
addition, it is not practicable to determine sales and purchases of fuel and
purchased power in 2001, 2002 and the nine months ended September 30, 2003 that
would have been shown net if EITF No. 03-11 had been applied to the results of
operations historically.

In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149
clarifies when a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 also amends certain existing pronouncements, which will
result in more consistent reporting of contracts as either derivative or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30, 2003
and should be applied prospectively. The implementation of SFAS No. 149 did not
have a material impact on the consolidated financial statements.

For additional discussion of derivative and hedging activities, see note 6.

Set-off of Derivative Assets and Liabilities. Where derivative instruments
are subject to a master netting agreement and the criteria of FASB
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," are
met, Orion Power presents its derivative assets and liabilities on a net basis
in the consolidated balance sheets. Derivative assets/liabilities and accounts
receivable/payable are presented separately in the consolidated balance sheets.
The derivative assets/liabilities and accounts receivable/payable are set-off
separately in the consolidated balance sheets although in certain cases
contracts permit the set-off of derivative assets/liabilities and accounts
receivable/payable with a given counterparty.

(e) GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES.

The general, administrative and development expenses in the consolidated
statements of operations include (a) certain employee-related costs, (b) certain
contractor costs, (c) bad debt expense,


F-12


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(d) corporate and administrative services, as provided by affiliates (including
management services, financial and accounting, cash management and treasury
support, legal, information technology system support, office management and
human resources) and (e) certain benefit costs. See note 3 for discussion of
related party transactions.

(f) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION EXPENSE.

Property, plant and equipment is stated at cost. Cost of acquired property,
plant and equipment includes an allocation of the purchase price based on the
asset's fair market value. Orion Power expenses all repair and maintenance costs
as incurred, including planned major maintenance. Depreciation is computed using
the straight-line method based on estimated useful lives commencing when assets,
or major components thereof, are either placed in service or acquired, as
appropriate.

Property, plant and equipment includes the following:



DECEMBER 31,
ESTIMATED USEFUL ---------------
LIVES (YEARS) 2002 2003
---------------- ------ ------
(IN MILLIONS)

Electric generation facilities....................... 10 - 50 $3,221 $3,345
Land improvements.................................... 20 - 50 455 455
Land................................................. 121 121
Assets under construction............................ 98 48
------ ------
Total.............................................. 3,895 3,969
Accumulated depreciation............................. (110) (240)
------ ------
Property, plant and equipment, net................... $3,785 $3,729
====== ======


Orion Power recorded depreciation expense of $128 million, $25 million,
$110 million and $132 million for 2001, for January 1, 2002 through February 19,
2002, February 20, 2002 through December 31, 2002, and 2003, respectively.

Orion Power periodically evaluates property, plant and equipment for
impairment when events or changes in circumstances indicate that the carrying
value of these assets may not be recoverable. The determination of whether an
impairment has occurred is based on an estimate of undiscounted cash flows
attributable to the assets, as compared to the carrying value of the assets. A
resulting impairment loss is highly dependent on the underlying assumptions.
There were no impairments recognized for 2001, for January 1, 2002 through
February 19, 2002, February 20, 2002 through December 31, 2002, and 2003. As of
December 31, 2002 and 2003, Orion Power performed impairment analyses of certain
property, plant and equipment. In addition, in November 2002 and July 2003,
Orion Power performed impairment analyses of all of its property, plant and
equipment, as Orion Power believed events had indicated that these assets may
not be recoverable. Based on these analyses, no impairments were recorded.

If the wholesale energy market outlook changes negatively, Orion Power
could have impairments of property, plant and equipment in future periods. In
addition, Orion Power's ongoing evaluation of the wholesale energy business
could result in decisions to mothball, retire or dispose of generation assets,
any of which could result in impairment charges.

See note 14(b) for discussion of Orion Power's Liberty Electric PA, LLC
(Liberty) generating station.



F-13


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(g) GOODWILL AND AMORTIZATION EXPENSE.

Orion Power records goodwill for the excess of the purchase price over the
fair value assigned to the net assets of an acquisition. Through 2001, Orion
Power amortized goodwill on a straight-line basis over 30 years. Pursuant to the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142)
on January 1, 2002, Orion Power discontinued amortizing goodwill. See note 5 for
a discussion regarding the adoption of SFAS No. 142. Goodwill amortization
expense for 2001 was $857,000. Amortization expense for other intangibles,
excluding contractual rights and obligations, for 2001, for January 1, 2002
through February 19, 2002, February 20, 2002 through December 31, 2002, and 2003
was $9 million, $1 million, $27 million and $21 million, respectively. See also
note 5.

Orion Power periodically evaluates goodwill and other intangibles when
events or changes in circumstances indicate that the carrying value of these
assets may not be recoverable. Effective January 1, 2002, goodwill and other
intangibles are evaluated for impairment in accordance with SFAS No. 142 (see
note 5). In 2002 Orion Power recognized an impairment charge of $338 million
(pre-tax and after-tax) relating to goodwill. Due to the disposition of one of
Reliant Resources' plants, not owned by Orion Power, goodwill was tested for
impairment effective July 2003. In connection with this analysis, an impairment
of $585 million (pre-tax and after-tax) was recognized. For further discussion
of goodwill and other intangible asset impairment analyses in 2002 and 2003, see
note 5.

(h) STOCK-BASED COMPENSATION PLANS.

Orion Power applied the intrinsic value method of accounting for employee
stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Under
the intrinsic value method, no compensation expense was recorded when options
were issued with an exercise price equal to or greater than the market price of
the underlying stock on the date of grant. Orion Power complies with the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) and SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment to SFAS No. 123" (SFAS
No. 148) and discloses the pro forma effect on net income (loss) and per share
amounts as if the fair value method of accounting had been applied to all stock
awards. The FASB has announced that it plans to require all companies to expense
the fair value of employee stock options in 2005. The FASB is still evaluating
"fair value" valuation models and other items. Orion Power no longer has
stock-based employee compensation as it is a wholly-owned subsidiary of Reliant
Resources.

Orion Power Holdings granted options to acquire shares of its common stock
at an exercise price less than the market value of Orion Power Holdings' common
stock. As of December 31, 2001, Orion Power recognized deferred compensation of
$5 million to be amortized over the three-year vesting period. Orion Power
recorded $2 million of compensation expense related to these options for the
year ended December 31, 2001.

If compensation costs had been determined as prescribed by SFAS No. 123,
the net income (loss) and per share amounts would have approximated the
following pro forma results for 2001, which take into account the amortization
of stock-based compensation, including stock options, to expense on a straight-
line basis over the vesting periods (in thousands, except per share amounts):



Pro forma net income........................................ $86,071
Pro forma net income per common share-basic................. 0.87
Pro forma net income per common share-assuming dilution..... 0.83


For further information regarding the Orion Power stock-based compensation
plan see note 9.



F-14


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) CAPITALIZATION OF INTEREST EXPENSE.

Interest expense is capitalized as a component of major projects under
construction and is amortized over the estimated useful lives of the assets.
During 2001, for January 1, 2002 through February 19, 2002, and February 20,
2002 through December 31, 2002 and during 2003, Orion Power capitalized interest
of $24 million, $2 million, $5 million and $0, respectively.

(j) INCOME TAXES.

Orion Power uses the asset and liability method of accounting for deferred
income taxes and measures deferred income taxes for all significant income tax
temporary differences. For additional information regarding income taxes, see
note 12.

Prior to February 20, 2002, Orion Power filed a consolidated federal income
tax return. Orion Power's pre-acquisition consolidated federal income tax
returns have been filed through the tax year ending February 19, 2002.

From February 20, 2002 through September 30, 2002, as a wholly-owned
subsidiary of Reliant Resources, Orion Power was included in the consolidated
income tax returns of CenterPoint Energy, Inc., formerly the majority owner of
Reliant Resources.

As of October 1, 2002, Orion Power is included in the consolidated income
tax returns of Reliant Resources and calculates its income tax provision on a
separate return basis, whereby Reliant Resources 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 or received
to/from Reliant Resources, if any, are recorded in Orion Power's financial
statements as adjustments to additional paid-in capital on Orion Power's
consolidated balance sheet. See note 12 for further discussion.

(k) CASH.

Orion Power records as cash and cash equivalents all highly liquid
short-term investments with original maturities or remaining maturities at date
of purchase of three months or less.

(l) RESTRICTED CASH.

Restricted cash primarily includes cash at certain subsidiaries, the
distribution or transfer of which to Orion Power Holdings or its other
subsidiaries, is restricted by financing and other agreements, but is available
to the applicable subsidiary to use to satisfy certain of its obligations. For a
discussion of Orion Power's various financing agreements, see note 7. The
following table details Orion Power's current and long-term restricted cash by
reporting entity:



DECEMBER 31,
--------------
2002 2003
---- ----
(IN MILLIONS)

Orion MidWest............................................... $ 72(1) $ 64(1)
Orion NY.................................................... 73(1) 119(1)
Orion Capital............................................... 27(1) --(1)
Liberty Electric PA, LLC.................................... 28(1) 15(1)
---- ----
Total current and long-term restricted cash............... $200 $198
==== ====




F-15

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

(1) The credit facilities and other debt agreements of certain of Orion Power
Holdings' subsidiaries contain various covenants that include, among others,
restrictions on the payment of dividends to Orion Power Holdings unless
certain conditions are satisfied.

(m) ALLOWANCE FOR DOUBTFUL ACCOUNTS.

Accounts and notes receivable, principally from customers, in the
consolidated balance sheets are net of an allowance for doubtful accounts of $2
million and $7 million at December 31, 2002 and 2003, respectively. The net
provision for doubtful accounts in the consolidated statements of operations for
February 20, 2002 through December 31, 2002, and 2003 was $1 million and $6
million, respectively.

(n) INVENTORY.

Inventory consists of materials and supplies, including spare parts, coal
and heating oil. All inventory is valued at the lower of average cost or market.
Below is a detail of inventory:



DECEMBER 31,
--------------
2002 2003
----- -----
(IN MILLIONS)

Materials and supplies...................................... $32 $35
Coal........................................................ 4 20
Heating oil................................................. 25 14
--- ---
Total inventory........................................... $61 $69
=== ===


(o) ENVIRONMENTAL COSTS.

Orion Power expenses or capitalizes environmental expenditures, as
appropriate, depending on their future economic benefit. Amounts that relate to
an existing condition caused by past operations and that do not have future
economic benefit are expensed. Orion Power records liabilities related to
expected future costs related to environmental assessments and/or remediation
activities when they are probable and the costs can be reasonably estimated. See
note 14(a) for further discussion.

(p) ASSET RETIREMENT OBLIGATIONS.

On January 1, 2003, Orion Power adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of
a liability for an asset retirement legal obligation to be recognized in the
period in which it is incurred. When the liability is initially recorded,
associated costs are capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Prior to the adoption of SFAS No. 143, Orion Power
recorded asset retirement obligations in connection with the respective business
combinations. These obligations were recorded at their present values on the
dates of acquisition. Orion Power's asset retirement obligations primarily
relate to environmental obligations related to ash site closures at Orion
Power's MidWest facilities. The impact of the adoption of SFAS No. 143 resulted
in a gain of $2 million, net of tax of $2 million, which is reflected as a
cumulative effect of an accounting change in the consolidated statement of
operations for 2003.

The impact of the adoption of SFAS No. 143 for Orion Power's operations
resulted in a January 1, 2003 cumulative effect of an accounting change to
record (a) a $1 million increase in the carrying values of property, plant and
equipment, (b) a $44 thousand increase in accumulated depreciation of property,
plant and equipment, (c) a $3 million decrease in asset retirement obligations
and (d) a $2 million increase in deferred income tax liabilities.



F-16


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If Orion Power had adopted SFAS No. 143 on January 1, 2001, the impact
would have been immaterial to consolidated net income (loss) for 2001, for
January 1, 2002 through February 19, 2002 and February 20, 2002 through December
31, 2002.

The following table presents the detail of the asset retirement
obligations, which are included in other long-term liabilities in the
consolidated balance sheet (in thousands):



Balance at January 1, 2003.................................. $1,951
Accretion expense........................................... 116
Additions................................................... 60
------
Balance at December 31, 2003................................ $2,127
======


(q) DEFERRED FINANCING COSTS.

Deferred financing costs are costs incurred in connection with obtaining
financings. These costs are deferred and amortized, using the straight-line
method, which approximates the effective interest method, over the life of the
related debt. From October 29, 2002 through December 31, 2003, Orion Power had
incurred approximately $29 million in financing costs related to its 2002
refinancing. Orion Power capitalized $28 million and directly expensed $1
million in fees and other costs related to this refinancing.

During 2001, for January 1, 2002 through February 19, 2002, February 20,
2002 through December 31, 2002 and 2003, Orion Power amortized $16 million, $3
million, $1 million and $10 million of deferred financing costs to interest
expense. As of December 31, 2002 and 2003, $26 million and $17 million,
respectively, of net deferred financing costs were classified in other long-term
assets in the consolidated balance sheets. See note 7 for discussion of Orion
Power's various financing agreements.

(r) CUSTOMER CONCENTRATION.

The following tables represent customers who contributed in excess of 10%
of the consolidated revenues for 2001, for January 1, 2002 through February 19,
2002, February 20, 2002 through December 31, 2002 and 2003 (in millions, except
percentages):



FORMER ORION
-------------------------------------------------
YEAR ENDED JANUARY 1, 2002 THROUGH
DECEMBER 31, 2001 FEBRUARY 19, 2002
----------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF
CUSTOMER REVENUE TOTAL REVENUE REVENUE TOTAL REVENUE
- -------- ------- ------------- ------- -------------

New York Independent System Operator
(NYISO)................................. $567 48% $53 43%
Duquesne Light Company.................... 406 34% 53 43%
Niagara Mohawk Corporation (Niagara
Mohawk)................................. -- -- 13 11%




CURRENT ORION
---------------------------------------------------
FEBRUARY 20, 2002 THROUGH YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2003
------------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF
CUSTOMER REVENUE TOTAL REVENUE REVENUE TOTAL REVENUE
- -------- -------- -------------- ------- -------------

NYISO..................................... $447 44% $557 46%
Duquesne Light Company.................... 363 36% 391 32%
Niagara Mohawk............................ 99 10% 123 10%




F-17


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table represents accounts receivable balances in excess of
10% of the total consolidated accounts receivable balance and the related
percentages as of December 31, 2002 and 2003 (in millions, except percentages):



DECEMBER 31, 2002 DECEMBER 31, 2003
-------------------------------- --------------------------------
ACCOUNTS ACCOUNTS
RECEIVABLE PERCENTAGE OF TOTAL RECEIVABLE PERCENTAGE OF TOTAL
CUSTOMER BALANCE ACCOUNTS RECEIVABLE BALANCE ACCOUNTS RECEIVABLE
- -------- ---------- ------------------- ---------- -------------------

Duquesne Light Company......... $62 55% $54 48%
NYISO.......................... 30 27% 36 32%
Niagara Mohawk................. -- -- 12 11%


(s) PREPAID INSURANCE AND PROPERTY TAXES.

Prepaid insurance and property taxes are costs paid in advance (but paid
when due in the ordinary course of business) for insurance and property taxes.
These costs are deferred and amortized, using the straight-line method, over the
service period for which the prepayment pertains.

(t) GUARANTEES AND INDEMNIFICATIONS.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Direct
Guarantees of Indebtedness of Others," (FIN No. 45) which increases the
disclosure requirements for a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires a guarantor to recognize, at the inception of a guarantee issued
after December 31, 2002, a liability for the fair value of the obligation
undertaken in issuing the guarantee, including its ongoing obligation to stand
ready to perform over the term of the guarantee in the event that specified
triggering events or conditions occur. Orion Power adopted the reporting
requirements of FIN No. 45 on January 1, 2003. The adoption of FIN No. 45 had no
impact to Orion Power's historical financial statements, as existing guarantees
are not subject to the measurement provisions. The adoption of FIN No. 45 did
not have a material impact on the consolidated financial position or results of
operations as of and for the year ended December 31, 2003 as the fair value of
guarantees issued after December 31, 2002 was nominal on the date on which the
guarantee was issued. See note 13(e).

(u) DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS.

In December 2003, the FASB issued a revision to SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits -- An Amendment of
FASB Statements No. 87, 88 and 106" (SFAS No. 132 (Revised 2003)). This
statement revises employers' disclosures about pension plans and other
postretirement benefit plans. This statement retains the disclosure requirements
contained in SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132), which it replaces. It requires
additional disclosures to those in the original SFAS No. 132 about the assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans. Orion Power adopted these
additional disclosures. See note 11.

(v) NEW ACCOUNTING PRONOUNCEMENTS.

As of February 20, 2004, no standard setting body or authoritative body has
established new accounting pronouncements or changes to existing accounting
pronouncements that would have a material impact to Orion Power's results of
operations, financial position or cash flows, for which Orion Power had not
already adopted and/or disclosed elsewhere in these notes.



F-18


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) RELATED PARTY TRANSACTIONS

The consolidated financial statements include significant transactions
between Orion Power and Reliant Resources and its other subsidiaries. The
majority of these transactions involve the purchase or sale of energy, capacity,
ancillary services, fuel, emissions allowances or related derivatives or
services (including transportation, transmission and storage services) by
Reliant Energy Services, Inc. (Reliant Energy Services), a wholly-owned
subsidiary of Reliant Resources, from or to Orion Power. The following describes
related party agreements and transactions:

Support Services Agreement. On October 28, 2002, Orion Power entered into
a services arrangement with Reliant Energy Wholesale Service Company (REWSC), a
wholly-owned subsidiary of Reliant Resources. REWSC allocates certain support
services costs to Orion Power based on Orion Power's direct labor costs relative
to the direct labor costs of other entities to which REWSC provides similar
services. Management believes this method of allocation is reasonable. These
allocations are not necessarily indicative of what would have been incurred had
Orion Power been an unaffiliated entity. Orion MidWest and Orion NY may only pay
a fixed amount for certain of these services due to contractual restrictions.
The excess of the allocated amount over the fixed amount has been recorded as a
non-cash equity contribution to Orion Power from Reliant Resources. REWSC billed
Orion MidWest and Orion NY approximately $3 million collectively, which was
included in general, administrative and development expense for the period from
October 28, 2002 through December 31, 2002. In 2003, the amount of support
services costs allocated to Orion Power on this basis by REWSC was $84 million,
of which $14 million was billed to Orion Power and $70 million was recorded as a
non-cash equity contribution from Reliant Resources.

Services Agreements. On October 28, 2002, Orion Power entered into an
agreement with Reliant Energy Services to provide support services to Orion
Power Holdings' subsidiaries, Orion MidWest and Orion NY, and their respective
subsidiaries. Under the support services agreement, Reliant Energy Services will
assist the subsidiaries with the following: the sale and purchase of energy
related products; the purchase and sale of electric transmission service; the
sale and purchase of fuel related products and the sale of allowances for air
emissions credits, in connection with the operation of the Orion MidWest and
Orion NY electric generating facilities. In addition, Reliant Energy Services
will assist in the administration and management of the energy and fuel related
products such as scheduling and dispatch of energy related products and
scheduling and nomination of fuel related products. These arrangements are
provided for a flat monthly fee payable to Reliant Energy Services, plus
out-of-pocket costs and expenses and will continue until 60 days after the final
maturity date of the Orion MidWest and Orion NY credit agreements which mature
in October 2005. From February 20, 2002 through October 27, 2002, these services
were provided under a previous agreement entered into at the time of the Merger.
Purchases from Reliant Energy Services, recorded in fuel expense and purchased
power expense, were $99 million and $43 million and $145 million and $25 million
for February 20, 2002 through December 31, 2002, and 2003, respectively. Sales
to Reliant Energy Services, recorded in revenue, were $20 million and $33
million and for February 20, 2002 through December 31, 2002 and 2003,
respectively.

Technical Services Arrangement. As of July 1, 2002, REWSC agreed to
provide personnel and technical services as required to the operating services
subsidiaries of Orion Power Holdings under an informal agreement. These services
assure that facilities are properly operated and maintained. Amounts incurred
under this agreement for February 20, 2002 through December 31, 2002 and 2003
were approximately $3 million and $6 million, respectively, and were included in
operations and maintenance expense.

Liberty Station Agency Letter Agreement. Effective February 19, 2002,
Liberty Electric Power, LLC (LEP) entered into an agency agreement with Reliant
Energy Services wherein, Reliant Energy Services will act as an agent in certain
transactions (purchase of station energy, scheduling and dispatching


F-19


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

services) with PJM Interconnection, LLC (PJM) on behalf of LEP. This agreement
provides for reimbursement to Reliant Energy Services of amounts paid to PJM on
behalf of LEP. The agreement may be terminated by either party upon 10 days
written notice. Amounts incurred under this agreement for February 20, 2002
through December 31, 2002 and 2003 were approximately $0 and $1 million,
respectively, and were included in operations and maintenance expense. Although
this agreement is still in place, there are no longer transactions entered into
under it. Transactions are now conducted under the Liberty energy services
agreement and gas purchase agreement, as described below.

Liberty Energy Services Agreement and Gas Purchase Agreement. On August
20, 2003, LEP entered into an agreement with Reliant Energy Services to provide
the following services to LEP: dispatching of the Liberty station; coordination
with PJM; bidding of all energy related products from the Liberty station into
PJM on behalf of LEP; and fuel scheduling, coordination with fuel transporters
and management of any balancing agreements. Reliant Energy Services receives a
flat monthly fee from LEP for providing these services in the amount of $0.1
million. The agreement had an initial term of 60 days and has been extended on a
month-to-month basis. Amounts incurred in 2003 under this agreement were $0.4
million. In addition, on August 20, 2003, LEP and Reliant Energy Services
entered into a Base Contract for Sale and Purchase of Natural Gas pursuant to
which LEP buys natural gas from Reliant Energy Services. Liberty is required to
pre-pay Reliant Energy Services at least monthly for all gas purchases. The
contract had an initial term of 60 days and has been extended on a
month-to-month basis. Amounts incurred under this agreement in 2003 were $20
million.

Other. From February 20, 2002 through December 31, 2002 and during 2003,
Reliant Resources made net equity contributions to Orion Power totaling $189
million and $81 million, respectively. For February 20, 2002 through December
31, 2002, the contributions were primarily to fund the redemption of the
convertible senior notes, federal income taxes, working capital and interest on
the senior notes, partially offset by a deemed distribution related to current
federal income taxes of $73 million (see note 2(j)). For 2003, the net
contributions were primarily composed of funding interest on the senior notes
and support services allocations from REWSC, partially offset by deemed
distributions related to current federal income taxes.

In May 2003 and November 2003, Reliant Resources contributed $15 million
and $20 million, respectively, to Orion Power, as a partial funding of the
semi-annual interest payment of $24 million on the senior notes due in each of
May 2003 and November 2003. While Reliant Resources has no obligation, it
intends to contribute any funding shortfall for the semi-annual interest
payments due in May 2004 and November 2004 should Orion Power Holdings' funds be
insufficient. See note 7.

(4) BUSINESS ACQUISITIONS

ACQUISITION BY RELIANT RESOURCES.

In February 2002, Reliant Resources acquired all of Orion Power's
outstanding shares of common stock for an aggregate purchase price of $2.9
billion. Reliant Resources funded the acquisition with a $2.9 billion credit
facility and $41 million of cash on hand.

Reliant Resources accounted for the acquisition as a purchase with assets
and liabilities reflected at their estimated fair values. The excess of the
purchase price over the fair value of net assets acquired was recorded as
goodwill for $1.3 billion. The fair value adjustments have been pushed down to
Orion Power from Reliant Resources and primarily included adjustments in
property, plant and equipment, goodwill, contractual rights and obligations,
severance liabilities, debt, unrecognized pension and postretirement benefits
liabilities and related deferred taxes. These fair value adjustments were
finalized in February 2003, based on final valuations of property, plant and
equipment, intangible assets and other assets and



F-20


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

obligations. There were no additional material modifications to the preliminary
adjustments from December 31, 2002.

Reliant Resources' net purchase price allocated to Orion Power's book value
was as follows, in millions:



PURCHASE PRICE
ALLOCATION
--------------

Current assets.............................................. $ 636
Property, plant and equipment............................... 3,823
Goodwill.................................................... 1,324
Other intangibles........................................... 477
Other long-term assets...................................... 103
-------
Total assets acquired..................................... 6,363
-------
Current liabilities......................................... (1,777)
Current contractual obligations............................. (29)
Long-term contractual obligations........................... (86)
Long-term debt.............................................. (1,006)
Other long-term liabilities................................. (501)
-------
Total liabilities assumed................................. (3,399)
-------
Net assets acquired.................................... $ 2,964
=======


Adjustments to property, plant and equipment and other intangibles,
excluding contractual rights, are based primarily on valuation reports prepared
by independent appraisers and consultants.

The following factors contributed to the recognized goodwill of $1.3
billion: commercialization value attributable to Reliant Resources' trading
capabilities, commercialization and synergy value associated with fuel
procurement in conjunction with Reliant Resources' existing generating plants in
the region, Reliant Resources' entry into the New York power market, general and
administrative cost synergies with Reliant Resources' existing PJM power market
generating assets, and Reliant Resources' risk diversification value due to
increased scale, fuel supply mix and the nature of the acquired assets. Of the
resulting goodwill, only $105 million was deductible for United States income
tax purposes. See note 5 for a discussion of the subsequent goodwill impairment
in 2003.

The components of other intangible assets and the related weighted average
amortization period consist of the following, as of the acquisition date:



WEIGHTED AVERAGE
PURCHASE PRICE AMORTIZATION
ALLOCATION PERIOD (YEARS)
-------------- ----------------
(IN MILLIONS)

Air emission regulatory allowances...................... $314 38
Contractual rights...................................... 106 8
Federal Energy Regulatory Commission (FERC) licenses.... 57 38
----
Total................................................. $477
====


There was no allocation of purchase price to any intangible assets that are
not subject to amortization. See note 5 for further discussion of goodwill and
intangible assets.



F-21


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents selected financial information and unaudited
pro forma information for 2001 and 2002, as if the acquisition had occurred on
January 1, 2001 and 2002, as applicable:



YEAR ENDED JANUARY 1, 2002 THROUGH
DECEMBER 31, 2001 FEBRUARY 19, 2002
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN MILLIONS)

Revenues.................................. $1,190 $1,168 $122 $107
Net income (loss)......................... 101 104 (52) (56)


These unaudited pro forma results, based on assumptions deemed appropriate,
have been prepared for informational purposes only and are not necessarily
indicative of the amounts that would have resulted if the acquisition by Reliant
Resources had occurred on January 1, 2001 and 2002, as applicable. Purchase-
related adjustments to the results of operations include the effects on
revenues, fuel expense, depreciation and amortization, interest expense,
interest income and income taxes. Adjustments that affected revenues and fuel
expense were a result of the amortization of contractual rights and obligations
relating to the applicable power and fuel contracts that were in existence at
January 1, 2001 and 2002, as applicable. Such amortization included in the pro
forma results above was based on the value of the contractual rights and
obligations at February 19, 2002. The amounts applicable to 2002 were
retroactively applied to January 1, 2002 through February 19, 2002 to arrive at
the pro forma effect on that period. The unaudited pro forma financial
information presented above reflects the acquisition by Reliant Resources in
accordance with SFAS No. 141, "Business Combinations" and SFAS No. 142. See
notes 2(g) and 5.

FORMER ORION ACQUISITION.

The acquisition described below occurred prior to the Merger with Reliant
Resources and amounts described may have been adjusted as a result of the Merger
discussed above or are no longer applicable.

COMPETITIVE POWER VENTURES -- ATLANTIC.

In October 2001, Orion Power purchased one combined-cycle power project
located in Florida from Competitive Power Ventures Holdings, LLC, a subsidiary
of Competitive Power Ventures, Inc., for approximately $26 million in cash
(Atlantic Project). This was a 250 megawatt development project located near
Palm Beach with substantial expansion capability. During 2002, as a result of
the acquisition by Reliant Resources, Orion Power decided to cancel the 250
megawatt Atlantic Project because of capital market and economic considerations.

The acquisition was recorded under the purchase method of accounting. The
purchase price was allocated to assets acquired and liabilities assumed based on
the estimated fair market value at the date of acquisition. The allocation of
the purchase price is as follows:



PURCHASE PRICE
ALLOCATION
--------------
(IN MILLIONS)

Current assets.............................................. $ 5
Property, plant and equipment............................... 21
---
Net assets acquired....................................... $26
===


(5) GOODWILL AND INTANGIBLES

In July 2001, the FASB issued SFAS No. 142, which states that goodwill and
certain intangibles with indefinite lives will not be amortized into results of
operations, but instead will be reviewed periodically for impairment and charged
to results of operations in periods in which the recorded value of goodwill and



F-22


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain intangibles with indefinite lives exceeds their fair values. Orion Power
adopted the provisions of the statement, which apply to goodwill and intangible
assets acquired prior to June 30, 2001 on January 1, 2002, and thus Orion Power
discontinued amortizing goodwill into its results of operations. A
reconciliation of 2001 reported net income and earnings per share to the amounts
adjusted for the exclusion of goodwill amortization with a comparison to 2002
and 2003 follows:



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
(IN MILLIONS)
|
Reported net income (loss)....... $ 101 $(52) | $(257) $(556)
Add: Goodwill amortization, net |
of tax......................... 1 -- | -- --
----- ---- | ----- -----
Adjusted net income (loss)....... $ 102 $(52) | $(257) $(556)
===== ==== | ===== =====
Adjusted basic and diluted |
earnings per share(1): |
Basic EPS...................... $1.02 |
Diluted EPS.................... 0.97 |


- ---------------

(1) Earnings per share were not affected by the exclusion of goodwill
amortization due to the immaterial nature of the amount in 2001. As of the
Merger date all the shares were purchased by Reliant Resources as such, no
earnings per share data is presented subsequent to the Merger date.

Intangibles. Other intangible assets consist of the following:



DECEMBER 31, 2002 DECEMBER 31, 2003
WEIGHTED AVERAGE ----------------------- -----------------------
AMORTIZATION CARRYING ACCUMULATED CARRYING ACCUMULATED
PERIOD (YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------- -------- ------------ -------- ------------
(IN MILLIONS)

Air emissions regulatory
allowances..................... 38 $325 $(26) $ 375 $ (46)
Contractual rights............... 8 106 (26) 105 (54)
FERC licenses.................... 38 57 (1) 57 (3)
---- ---- ----- -----
Total.......................... $488 $(53) $ 537 $(103)
==== ==== ===== =====


Orion Power's measurement of the fair value of other intangibles, except
contractual rights, was determined by Orion Power with the assistance of an
independent third party appraiser based on a weighted average approach
considering both an income approach, using future discounted cash flows, and a
market approach, using acquisition multiples, including price per megawatt,
based on publicly available data for recently completed transactions.

Orion Power recognizes specifically identifiable intangibles, including air
emissions regulatory allowances it has been issued or those it is entitled to be
allocated during the remaining useful lives of the plants, contractual rights
and obligations and FERC licenses for its hydroelectric plants, when specific
rights and contracts are acquired. Orion Power amortizes air emissions
regulatory allowances on a units-of-production basis as utilized. The
amortization of other intangibles, including FERC licenses, but excluding
contractual rights, are recorded on a straight-line basis over the lesser of
their contractual or estimated useful lives. Orion Power has no intangible
assets, other than goodwill, with indefinite lives recorded as of December 31,
2003. Therefore, all intangibles, except goodwill, are subject to amortization.



F-23


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Estimated amortization expense, excluding contractual rights and
obligations (see below), for the next five years is as follows (in millions):



2004........................................................ $36
2005........................................................ 19
2006........................................................ 15
2007........................................................ 13
2008........................................................ 11
---
Total..................................................... $94
===


In connection with the Merger, Orion Power recorded the fair value of
certain fuel and power contracts acquired. Orion Power estimated the fair value
of the contracts using forward pricing curves as of the acquisition date over
the life of each contract. Those contracts with positive fair value at the date
of acquisition (contractual rights) were recorded to intangible assets and those
contracts with negative fair values at the date of acquisition (contractual
obligations) were recorded to other long-term liabilities in the consolidated
balance sheet.

Contractual rights and contractual obligations are amortized to fuel
expense and revenues, as applicable, based on the estimated realization of the
fair value established on the acquisition date over the contractual lives. There
may be times during the life of the contract when accumulated amortization
exceeds the carrying value of the recorded assets or liabilities due to the
timing of realizing the fair value established on the acquisition date.

Orion Power amortized $26 million and $29 million of contractual rights and
contractual obligations, respectively, for a net amount of $3 million, for
February 20, 2002 through December 31, 2002. Orion Power amortized $28 million
and $33 million of contractual rights and contractual obligations, respectively,
for a net amount of $5 million during 2003. Estimated amortization of
contractual rights and contractual obligations, excluding Liberty's terminated
tolling agreement (see notes 7(a) and 14(b)), for the next five years is as
follows:



CONTRACTUAL CONTRACTUAL NET INCREASE
RIGHTS OBLIGATIONS IN INCOME
----------- ----------- ------------
(IN MILLIONS)

2004............................................... $17 $(31) $14
2005............................................... -- (9) 9
2006............................................... -- (3) 3
2007............................................... -- (1) 1
2008............................................... -- (1) 1
--- ---- ---
Total............................................ $17 $(45) $28
=== ==== ===




F-24


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill. The following table shows the composition of goodwill for
January 1, 2002 through February 19, 2002, February 20, 2002 through December
31, 2002 and 2003:



FORMER ORION | CURRENT ORION
----------------- | --------------------------------
JANUARY 1, 2003 | FEBRUARY 20, 2002 YEAR ENDED
THROUGH | THROUGH DECEMBER 31,
FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
----------------- | ----------------- ------------
(IN MILLIONS) | (IN MILLIONS)
|
Beginning balance........................ $102 | $1,324 $ 986
Impairment............................... -- | (338) (585)
Other(1)................................. -- | -- (6)
---- | ------ -----
Ending balance........................... $102 | $ 986 $ 395
==== | ====== =====


- ---------------

(1) Fair value adjustments related to the Merger were finalized in February
2003. See note 4.

As of December 31, 2002 and 2003, Orion Power had $105 million and $95
million, respectively, of net goodwill recorded in the consolidated balance
sheets that is deductible for United States income tax purposes for future
periods.

SFAS No. 142 requires goodwill to be tested at least annually and more
frequently in certain circumstances. The date of Orion Power's annual impairment
test was November 1 for 2002 and 2003. A goodwill impairment test is performed
in two steps. The initial step is designed to identify potential goodwill
impairment by comparing an estimate of the fair value of the applicable
reporting unit to its carrying value, including goodwill. If the carrying value
exceeds the fair value, a second step is performed, which compares the implied
fair value of the applicable reporting unit's goodwill to the carrying amount of
that goodwill, to measure the amount of the goodwill impairment, if any.

2002 Annual Goodwill Impairment Test. Orion Power performed an annual
impairment test in 2002 effective November 1, 2002. Based on the fair values
determined by management, with the assistance of an independent appraiser, Orion
Power recorded an impairment of $338 million in the fourth quarter of 2002. The
circumstances leading to the impairment include: a decline in recent acquisition
multiples (price per megawatt) for comparable assets sold due to a significant
increase in the number of assets held for sale across the market as energy
companies attempt to address capital and liquidity concerns; the constrained
development of efficient unregulated markets in which we operate due to
regulatory, capital and liquidity concerns; weaker prices for electric energy,
capacity and ancillary services; and market contraction.

July 2003 Goodwill Impairment Test. On July 9, 2003, Reliant Resources
entered into a definitive agreement to sell a power generation plant, Desert
Basin. The sale closed in October 2003. Orion Power did not own the plant. As a
result of the sale, Reliant Resources was required to allocate a portion of the
goodwill in the wholesale energy reporting unit to the Desert Basin plant
operations on a relative fair value basis as of July 2003 in order to compute
the gain or loss on disposal. Reliant Resources was also required to test the
recoverability of goodwill in the remaining wholesale energy reporting unit as
of July 2003.

As a result of the July 2003 test, Orion Power recognized an impairment of
$585 million (pre-tax and after-tax) in the third quarter of 2003. This
impairment was due to a decrease in the estimated fair value of Orion Power.
This change in fair value was primarily due to: reduced projected
commercialization opportunities related to its power generation assets; lower
projected regulatory capacity values due to the lack of development of
appropriate market structures and a lower outlook for revenues from existing
regulatory capacity markets; reduced long-term margins from its existing
portfolio as a result of lowering the estimates of the margins required to
induce new capacity to enter the markets; lower market and comparable public
company values data; and the level of working capital; partially offset by
reductions in



F-25


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Orion Power's projected commercial, operational and support groups costs and
lower projected operations and maintenance expense.

2003 Annual Goodwill Impairment Tests. Orion Power performed its annual
goodwill impairment test effective November 1, 2003 and determined that no
additional impairments of goodwill had occurred since July 2003.

Estimation of Fair Value. Orion Power estimates reporting unit 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) discount rates for Orion Power's
estimated cash flows, (e) selection of peer group companies for the public
company approach, (f) required level of working capital, (g) assumed terminal
value and (h) time horizon of cash flow forecasts.

The income approach used in the analyses is a discounted cash flow analysis
based on Orion Power's internal forecasts and contains numerous assumptions made
by management and the independent appraiser, any of which if changed could
significantly affect the outcome of the analyses. Orion Power believes the
income approach is the most subjective of the approaches.

Management has determined the fair value of Orion Power, with the
assistance of an independent appraiser. In determining the fair value of Orion
Power in 2003, the following key assumptions were made: (a) the markets in which
Orion Power operates will continue to be deregulated; (b) demand for electricity
will grow, which will result in lower reserve margins; (c) there will be a
recovery in electricity margins over time to a level sufficient such that
companies building new generation facilities can earn a reasonable rate of
return on their investment and (d) the economics of future construction of new
generation facilities will likely be driven by regulated utilities. As part of
this process, all of Orion Power's power generation facilities and those of
others in the regions in which Orion Power operates were modeled. The following
table summarizes certain of these significant assumptions:



NOVEMBER JULY NOVEMBER
2002 2003 2003
-------- ---- --------

Number of years used in internal cash flow analysis........ 15 15 15
EBITDA multiple for terminal values........................ 7.5 7.5 7.5
Risk-adjusted discount rate for estimated cash flows....... 9.0% 9.0% 9.0%
Average anticipated growth rate for demand in power(1)..... 2.0% 2.0% 2.0%
After-tax return on investment for new investment(2)....... 9.0% 7.5% 7.5%


- ---------------

(1) Depending on the region, the specific rate is projected to be somewhat
higher or lower.

(2) Based on the assumption in 2003 that regulated utilities will be the primary
drivers underlying the construction of new generation facilities, Orion
Power has assumed that the after-tax return on investment will yield a
return representative of a regulated utility's cost of capital (7.5%) rather
than that of an independent power producer (9.0%). Based on changes in
assumed market conditions, including regulatory rules, Orion Power has
changed the projected time horizon for substantially achieving the after-tax
return on investment to 2008-2012 (depending on region). Formerly, Orion
Power had assumed that the time horizon for substantially achieving this
rate of return was 2006-2010.

Potential Future Impairments of Goodwill. Because Orion Power recognized a
goodwill impairment in 2003, in the near future, if actual results of operations
are worse than projected or Orion Power's market outlook changes negatively,
Orion Power could have additional impairments of goodwill that would need to be
recognized. In addition, ongoing evaluations of the wholesale energy business
could result in decisions to mothball, retire or dispose of additional
generation assets, any of which could result in additional impairment charges
related to goodwill, impact Orion Power's fixed assets' depreciable lives or
result in fixed asset impairment charges.



F-26


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) DERIVATIVE INSTRUMENTS

Orion Power is exposed to various market risks. These risks arise from the
ownership of assets and operation of the business. To the extent permitted by
the Orion MidWest and Orion NY credit agreements, Orion Power utilizes
derivative instruments such as futures, physical forward contracts and swaps to
mitigate the impact of changes in electricity, natural gas and fuel prices on
Orion Power's operating results and cash flows. Orion Power utilizes interest
rate swaps to mitigate the impact of changes in interest rates and other
financial instruments to manage various other market risks.

Reliant Resources has a risk control framework, which Orion Power is
subject to, designed to monitor, measure and define appropriate transactions to
hedge and manage the risk in its existing portfolio of assets and contracts and
to authorize new transactions. These risks fall into three different categories:
market risk, credit risk and operational risk. Orion Power believes that it has
effective procedures for evaluating and managing these risks to which it is
exposed. Key risk control activities include definition of appropriate
transactions for hedging, credit review and approval, credit and performance
risk measurement and monitoring, validation of transactions, portfolio valuation
and daily portfolio reporting including mark-to-market valuation, value-at-risk
and other risk measurement metrics. Orion Power seeks to monitor and control its
risk exposures through a variety of separate but complementary processes and
committees, which involve business unit management, senior management and
Reliant Resources' board of directors.

Derivatives primarily used by Orion Power are described below:

- Futures contracts are exchange-traded standardized commitments to
purchase or sell an energy commodity or financial instrument, or to make
a cash settlement, at a specific price and future date.

- Physical forward contracts are commitments to purchase or sell energy
commodities in the future.

- Swap agreements require payments to or from counterparties based upon the
differential between a fixed price and variable index price (fixed price
swap) or two variable index prices (variable price swap) for a
predetermined contractual notional amount. The respective index may be an
exchange quotation or an industry pricing publication.

- Option contracts convey the right to buy or sell an energy commodity or a
financial instrument at a predetermined price or settlement of the
differential between a fixed price and a variable index price or two
variable index prices.



F-27


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Derivative assets and liabilities at December 31, 2002 and 2003 are as
follows:



ASSETS LIABILITIES
------------------- ------------------- NET ASSETS
CURRENT LONG-TERM CURRENT LONG-TERM (LIABILITIES)
------- --------- ------- --------- -------------
(IN MILLIONS)

DECEMBER 31, 2002:
Derivative activities:
Cash flow hedges -- offset to
accumulated other
comprehensive income (loss):
Commodity..................... $ 4 $ 6 $ (3) $ -- $ 7
Interest...................... -- -- (21) (26) (47)
--- --- ---- ---- ----
Total....................... 4 6 (24) (26) (40)
Derivatives marked to market
through earnings.............. 5 1 (1) (1) 4
--- --- ---- ---- ----
Total derivative assets and
liabilities.............. $ 9 $ 7 $(25) $(27) $(36)
=== === ==== ==== ====
DECEMBER 31, 2003:
Derivative activities:
Cash flow hedges -- offset to
accumulated other
comprehensive income (loss):
Commodity..................... $17 $10 $ -- $ -- $ 27
Interest...................... -- -- (18) (17) (35)
--- --- ---- ---- ----
Total....................... 17 10 (18) (17) (8)
Derivatives marked to market
through earnings.............. 6 2 (1) -- 7
--- --- ---- ---- ----
Total derivative assets and
liabilities.............. $23 $12 $(19) $(17) $ (1)
=== === ==== ==== ====


(a) DERIVATIVE ACTIVITIES.

To reduce the risk from market fluctuations in the results of operations
and the resulting cash flows, Orion Power may enter into energy derivatives in
order to hedge some expected purchases of electric power, natural gas and other
commodities and sales of electric power (energy derivatives) to the extent
permitted by the Orion MidWest and Orion NY credit agreements. The energy
derivative portfolios are managed to complement the Orion Power asset portfolio,
reducing overall risks.

The fair values of Orion Power's derivative activities as of December 31,
2002 and 2003, are determined by (a) prices actively quoted, (b) prices provided
by other external sources or (c) prices based on models and other valuation
methods.

Cash flow hedge ineffectiveness for 2001, for January 1, 2002 through
February 19, 2002, February 20, 2002 through December 31, 2002 and 2003 was
immaterial. In addition, no component of the derivative instruments' gain or
loss was excluded from the assessment of effectiveness for January 1, 2002
through February 19, 2002, February 20, 2002 through December 31, 2002 and 2003.



F-28


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Below is a reconciliation of Orion Power's net derivative assets
(liabilities) to accumulated other comprehensive income (loss), net of tax, as
of December 31, 2002 and 2003:



AS OF
DECEMBER 31,
-------------
2002 2003
----- -----
(IN MILLIONS)

Net derivative liabilities.................................. $(36) $(1)
Derivatives not designated as cash flow hedges.............. (4) (7)
Deferred tax assets attributable to accumulated other
comprehensive loss on cash flow hedges.................... 17 3
---- ---
Accumulated other comprehensive loss from derivative
instruments, net of tax(1)................................ $(23) $(5)
==== ===


- ---------------

(1) As of December 31, 2003, Orion Power expects $1 million of accumulated other
comprehensive loss to be reclassified into the results of operations during
2004.

As of December 31, 2002 and 2003, the maximum length of time Orion Power is
hedging its exposure to the variability in future cash flows for forecasted
transactions, excluding the payment of variable interest on existing financial
instruments, is three years and two years, respectively. As of December 31, 2002
and 2003, the maximum length of time Orion Power is hedging its exposure to the
payment of variable interest rates is seven years and six years, respectively.

For a discussion of Orion Power's interest rate derivative instruments
designated as cash flow hedges, see note 7(b).

(b) CREDIT RISK.

Credit risk is inherent in Orion Power's commercial activities and relates
to the risk of loss resulting from non-performance of contractual obligations by
a counterparty. Reliant Resources has broad credit policies and parameters, to
which Orion Power is subject. Orion Power seeks to enter into contracts that
permit it to net receivables and payables with a given counterparty. Orion Power
also enters into contracts that enable it to obtain collateral from a
counterparty as well as to terminate upon occurrence of certain events of
default. The credit risk control organization establishes counterparty credit
limits. Reliant Resources employs tiered levels of approval authority for
counterparty credit limits, with authority increasing from the credit risk
control organization through senior management. Credit risk exposure is
monitored daily and the financial condition of Orion Power's counterparties is
reviewed periodically.

If any of Orion Power's counterparties failed to perform, Orion Power might
be forced to acquire alternative hedging arrangements or be required to replace
the underlying commitment at then-current market prices. In this event, Orion
Power might incur additional losses in addition to amounts owed to us by the
counterparty. For information regarding the tolling agreement related to
Liberty, see note 14(b).

For counterparties representing greater than 10% of Orion Power's total
credit exposure, see note 2(r).



F-29


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) CREDIT FACILITIES, NOTES AND OTHER DEBT

The following table presents the debt outstanding to third parties as of
December 31, 2002 and 2003:



DECEMBER 31,
-------------------------------------------------------------------------------------
2002 2003
----------------------------------------- -----------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
STATED INTEREST STATED INTEREST
RATE(1) LONG-TERM CURRENT(2) RATE(1) LONG-TERM CURRENT(2)
---------------- --------- ---------- ---------------- --------- ----------
(IN MILLIONS, EXCEPT INTEREST RATES)

BANKING OR CREDIT
FACILITIES AND NOTES
Orion Power Holdings
senior notes........... 12.00% $ 400 $ -- 12.00% $ 400 $ --
Orion MidWest and Orion
NY term loans.......... 3.96 1,211 109 3.93 1,093 125
Orion MidWest revolving
working capital
facility............... 3.92 -- 51 -- -- --
Orion NY revolving
working capital
facility............... -- -- -- -- -- --
Liberty credit agreement:
Floating rate debt..... 3.02 -- 103(3) 2.40 -- 97(3)
Fixed rate debt........ 9.02 -- 165(3) 9.02 -- 165(3)
OTHER
Adjustment to fair value
of debt(4)............. -- 66 8 -- 58 8
Adjustment to fair value
of interest rate
swaps(4)............... -- 46 18 -- 34 13
Capital lease............ 6.20 1 -- 6.20 1 --
------ ---- ------ ----
Total debt............. $1,724 $454 $1,586 $408
====== ==== ====== ====


- ---------------

(1) The weighted average stated interest rate is for borrowings outstanding as
of December 31, 2002 or 2003, as applicable.

(2) Includes amounts due within one year of the date noted, as well as loans
outstanding under revolving and working capital facilities classified as
current liabilities.

(3) The entire balance outstanding under this credit agreement has been
classified as current as of December 31, 2002 and 2003. Included in the
outstanding amount as of December 31, 2003, is $2 million and $2 million of
scheduled principal payments, which were due in October 2003 and January
2004, respectively, for which no payment has been made. As interest payments
due in October 2003 and January 2004 were deferred, additional interest will
be charged on the past due interest amounts. Of the amount shown as current
under the Liberty credit agreement, $11 million matures within 12 months of
December 31, 2003. See below and note 14(b) for further discussion.

(4) As a result of the Merger, debt and interest rate swaps were adjusted to
fair market value as of the acquisition date. Included in the adjustment to
fair value of debt is $74 million and $66 million related to the Orion Power
Holdings senior notes as of December 31, 2002 and 2003, respectively.
Included in the adjustment to fair value of interest rate swaps is $42
million and $22 million related to the Orion MidWest and Orion NY credit
facilities, respectively, as of December 31, 2002. Included in the
adjustment to fair value of interest rate swaps is $28 million and $19
million related to the Orion MidWest and Orion NY credit facilities,
respectively, as of December 31, 2003. Included in interest expense is
amortization of $5 million and $8 million for valuation adjustments for debt
and $25 million and $17 million for valuation adjustments for interest rate
swaps, respectively, for 2002 and 2003, respectively. These valuation
adjustments are being amortized over the respective remaining terms of the
related financial instruments.

Restricted Net Assets of Subsidiaries. Certain of Orion Power Holdings'
subsidiaries have effective restrictions on their ability to pay dividends or
make intercompany loans and advances pursuant to their



F-30


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financing arrangements. The amount of restricted net assets of Orion Power
Holdings' subsidiaries as of December 31, 2003 are approximately $2.7 billion.
Such restrictions are on the net assets of Orion Capital, Liberty and LEP. Orion
MidWest and Orion NY are indirect wholly-owned subsidiaries of Orion Capital.

Maturities. As of December 31, 2003, maturities of all facilities and
other debt were as follows (in millions):



2004........................................................ $ 136(1)
2005........................................................ 1,102(1)
2006........................................................ 10(1)
2007........................................................ 10(1)
2008........................................................ 11(1)
2009 and thereafter......................................... 612(1)
------
Subtotal.................................................. 1,881
Other items included in debt................................ 113
------
Total debt................................................ $1,994
======


- ---------------

(1) Included in the amounts for years 2004, 2005, 2006, 2007, 2008 and 2009 and
thereafter are $11 million, $9 million, $10 million, $10 million, $11
million and $211 million, respectively, related to the Liberty credit
agreement and which have all been classified as current liabilities in the
consolidated balance sheet as of December 31, 2003. See below and note 14(b)
for further discussion.

Debt Covenant Compliance. Orion Power was in compliance with all of its
debt covenants as of December 31, 2003, other than under the Liberty credit
agreement. See below for further discussion.

(a) BANKING OR CREDIT FACILITIES AND NOTES.

The following table provides a summary of the amounts owed and amounts
available as of December 31, 2003 under Orion Power's various committed credit
facilities and notes:



COMMITMENTS
TOTAL EXPIRING BY
COMMITTED DRAWN LETTERS OF UNUSED DECEMBER 31, PRINCIPAL AMORTIZATION AND
CREDIT AMOUNT CREDIT AMOUNT 2004 COMMITMENT EXPIRATION DATE
--------- ------ ---------- ------ ------------ --------------------------
(IN MILLIONS)

Orion Power Holdings senior
notes..................... $ 400 $ 400 $-- $-- $ -- May 2010
Orion MidWest and Orion NY
term loans................ 1,218 1,218 -- -- 125 March 2004 - October 2005
Orion MidWest revolving
working capital
facility.................. 75 -- 16 59 -- October 2005
Orion NY revolving working
capital facility.......... 30 -- 7 23 -- October 2005
Liberty credit agreement.... 284 262 17(1) 5(2) 11 January 2004 - April 2026
------ ------ --- --- ----
Total..................... $2,007 $1,880 $40 $87 $136
====== ====== === === ====


- ---------------

(1) With consent of the lenders, Liberty has chosen to defer the principal and
interest payments due October 2003 rather than draw on the $17 million
letter of credit posted as debt service reserve. See below and note 14(b)
for further discussion.

(2) As discussed below and in note 14(b), this amount is currently not available
to Liberty.

Orion Power Holdings Senior Notes. Orion Power Holdings has outstanding
$400 million aggregate principal amount of 12% senior notes. In connection with
the Merger, Orion Power Holdings recorded the senior notes at an estimated fair
value of $479 million. The $79 million premium is being amortized to



F-31


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest expense using the effective interest rate method over the life of the
senior notes. The fair value of the senior notes was based on Reliant Resources'
incremental borrowing rates for similar types of borrowing arrangements as of
the acquisition date. The senior notes are senior unsecured obligations of Orion
Power Holdings. Orion Power Holdings is not required to make any mandatory
redemption or sinking fund payments with respect to the senior notes. However,
if at the time such principal or interest are due, dividends, loans or advances
are restricted under the Orion MidWest and Orion NY credit agreements, and funds
generated from Orion Power Holdings' other subsidiaries or from other sources
are insufficient, payment default under Orion Powers Holdings' senior notes may
occur unless Reliant Resources elects to invest additional funds in Orion Power
Holdings, which it is not obligated to do. The senior notes are not guaranteed
by any of Orion Power Holdings' subsidiaries. The senior notes indenture
contains covenants, which bind Orion Power Holdings and certain of its
subsidiaries, that include, among others, restrictions on (a) the payment of
dividends, (b) the incurrence of indebtedness and the issuance of preferred
stock, (c) investments, (d) asset sales, (e) liens, (f) transactions with
affiliates, (g) engaging in unrelated businesses and (h) sale and leaseback
transactions. See note 3.

Orion MidWest and Orion NY Credit Agreements. During October 2002, the
Orion Power Holdings revolving credit facility was prepaid and terminated, and
Orion Power refinanced the Orion MidWest and Orion NY credit agreements. In
connection with these refinancings, Orion Power applied excess cash of $145
million to prepay and terminate the Orion Power Holdings revolving credit
facility and to reduce the term loans and revolving working capital facilities
at Orion MidWest and Orion NY. As of the refinancing date, the amended and
restated Orion MidWest credit agreement included a term loan of approximately
$974 million and a $75 million revolving working capital facility. As of the
refinancing date, the amended and restated Orion NY credit agreement included a
term loan of approximately $353 million and a $30 million revolving working
capital facility. As of December 31, 2002 and 2003, Orion MidWest had $969
million and $884 million, respectively, of term loans outstanding. As of
December 31, 2002 and 2003, Orion NY had $351 million and $334 million,
respectively, of term loans outstanding. The refinancing included an extension
of the maturities of the Orion MidWest and Orion NY credit agreements by three
years to October 2005.

The loans under each facility bear interest at LIBOR plus a margin or at a
base rate plus a margin. The LIBOR margin is 2.75% as of December 31, 2003 and
increases to 3.25% in April 2004 and 3.75% in October 2004. The base rate margin
is 1.75% as of December 31, 2003 and increases to 2.25% in April 2004 and 2.75%
in October 2004.

The amended and restated Orion MidWest credit agreement is secured by a
first lien on substantially all of the assets of Orion MidWest and its
subsidiary. Orion NY and its subsidiaries are guarantors of the Orion MidWest
obligations under the amended and restated Orion MidWest credit agreement. A
substantial portion of the assets of Orion NY and its subsidiaries (excluding
certain plants) are pledged, via a second lien, as collateral for this
guarantee. The amended and restated Orion NY credit agreement is, in turn,
secured by a first lien on a substantial portion of the assets of Orion NY and
its subsidiaries (excluding certain plants). Orion MidWest and its subsidiary
are guarantors of the Orion NY obligations under the amended and restated Orion
NY credit agreement. Substantially all of the assets of Orion MidWest and its
subsidiary are pledged, via a second lien, as collateral for this guarantee.
Orion MidWest's and Orion NY's obligations under the respective agreements are
non-recourse to Orion Power Holdings.

Both the Orion MidWest and Orion NY credit agreements contain affirmative
and negative covenants, including negative pledges, that must be met by each
borrower under its respective facility to borrow funds or obtain letters of
credit, and which require Orion MidWest and Orion NY to maintain a combined debt
service coverage ratio of 1.5 to 1.0. These covenants are not anticipated to
materially restrict either borrower's ability to borrow funds or obtain letters
of credit. The agreements also provide for any available



F-32


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cash at one borrower to be made available to the other borrower to meet
shortfalls in the other borrower's ability to make certain payments, including
operating costs. This is effected through distributions of such available cash
to Orion Capital, a direct subsidiary of Orion Power Holdings formed in
connection with the refinancing. Orion Capital, as indirect owner of each of
Orion MidWest and Orion NY, can then contribute such cash to the other borrower.
The ability of the borrowers to make dividends, loans or advances to Orion Power
Holdings for interest payments or otherwise is restricted. In any event, no
distributions may be made after October 28, 2004 until the earlier of maturity
or retirement. No distributions are anticipated during the remaining terms of
the credit agreements. Any restricted cash, which is not dividended, will be
applied on a quarterly basis to prepay outstanding loans at Orion MidWest and
Orion NY. See note 2(l) for a detail of restricted cash under the Orion MidWest
and Orion NY credit agreements. In addition, the Orion MidWest and Orion NY
credit agreements contain operational covenants governing the commercial terms
of transactions to purchase or sell fuel and energy related products with
Reliant Energy Services and third parties.

Liberty Credit Agreement. In July 2000, LEP and Liberty, indirect
wholly-owned subsidiaries of Orion Power Holdings, entered into a credit
agreement, that provided for (a) a construction/term loan in an amount of up to
$105 million, (b) an institutional term loan in an amount of up to $165 million,
(c) a debt service reserve letter of credit facility of $17 million, (d) a
revolving working capital facility for an amount of up to $5 million and (e) an
equity bridge loan in an amount of up to $41 million. In May 2002, the
construction loans were converted to term loans. On the conversion date, Orion
Power Holdings made the required cash equity contribution of $30 million into
Liberty, which was used to repay a like amount of equity bridge loans advanced
by the lenders. A related $41 million letter of credit furnished by Orion Power
Holdings as credit support was canceled.

The floating rate loans under the Liberty credit agreement bear interest at
LIBOR plus a margin or a base rate plus margin. For the floating rate term loan,
as of December 31, 2003, the LIBOR margin is 1.25% and increases to 1.375% in
May 2005 and 1.625% in May 2008. As of December 31, 2003, the base rate margin
is 0.25% and increased to 0.375% in May 2005 and 0.625% in May 2008. For the
revolving working capital facility, as of December 31, 2003, the LIBOR margin is
1.25% and increases to 1.375% in May 2005. As of December 31, 2003, the base
rate margin is 0.25% and increases to 0.375% in May 2005.

The lenders under the Liberty credit agreement have a security interest in
substantially all of the assets of Liberty and LEP. The outstanding borrowings
related to the Liberty credit agreement are non-recourse to Orion Power Holdings
and all other subsidiaries. The Liberty credit agreement contains affirmative
and negative covenants, including a negative pledge that must be met to borrow
funds or obtain letters of credit. Liberty is currently unable to access the
revolving working capital facility. Additionally, the Liberty credit agreement
restricts Liberty's ability to, among other things, make dividend distributions
unless Liberty satisfies various conditions. See note 2(l) for a detail of
restricted cash under the Liberty credit agreement.

Given that Liberty is currently in default under the credit agreement,
Orion Power has classified the debt as a current liability. Neither Orion Power
Holdings nor any other of its subsidiaries is in default under other debt
agreements due to the credit agreement default at Liberty. See note 14(b).

(b) INTEREST RATE DERIVATIVE INSTRUMENTS.

In connection with the Merger, the existing interest rate swaps for the
Orion MidWest credit agreement and the Orion NY credit agreement were bifurcated
into a debt component and a derivative component. The fair values of the debt
components, approximately $59 million for the Orion MidWest credit agreement and
$31 million for the Orion NY credit agreement, were based on Reliant Resources'
incremental borrowing rates at the acquisition date for similar types of
borrowing arrangements. The value



F-33


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the debt component is amortized to interest expense as interest rate swap
payments are made. See note 6 regarding Orion Power's derivative financial
instruments.

Orion Power has entered into a number of interest rate swap contracts
having an aggregate notional amount of $250 million as of December 31, 2002 and
2003, that hedge the floating interest rate risk associated with the floating
rate long-term debt under the Orion NY credit agreement. As of December 31,
2003, floating rate LIBOR-based interest payments are exchanged for weighted
fixed rate interest payments of 7.13% for the Orion NY credit agreement. Orion
Power has entered into interest rate swap contracts having an aggregate notional
amount of $600 million and $300 million as of December 31, 2002 and 2003,
respectively, that hedge the floating interest rate risk associated with the
floating rate long-term debt under the Orion MidWest credit agreement. As of
December 31, 2003, floating rate LIBOR-based interest payments are exchanged for
weighted fixed rate interest payments of 7.66% for the Orion MidWest credit
agreement. These swaps qualify as cash flow hedges under SFAS No. 133 and the
periodic settlements are recognized as an adjustment to interest expense in the
consolidated statements of operations over the term of the swap agreements. See
note 6 for further discussion of Orion Power's cash flow hedges.

(8) STOCKHOLDERS' EQUITY

The Merger (see note 1) resulted in the purchase by Reliant Resources of
all of Orion Power Holdings' outstanding shares of common stock. Subsequently,
all of Orion Power Holdings' common stock was beneficially owned by Reliant
Resources.

In the Merger, a wholly-owned subsidiary of Reliant Resources (Merger
Subsidiary) was merged into Orion Power Holdings. Orion Power Holdings was the
surviving entity. In accordance with the Merger, effective on February 19, 2002,
Orion Power Holdings converted each issued and outstanding share of common
stock, par value $0.01, into the right to receive $26.80 per share in cash
resulting in the cancellation of all issued and outstanding shares, warrants and
options of Orion Power Holdings. Additionally, each share of common stock of
Merger Subsidiary, par value $1.00 per share, issued and outstanding immediately
prior to February 19, 2002 was converted into one share of common stock of Orion
Power Holdings. As of December 31, 2002 and 2003, Orion Power had 1,000 shares
authorized, issued and outstanding with a par value of $1.00 per share.

The following describes Orion Power's equity transactions prior to the
Merger:

The Second Amended and Restated Stockholder's Agreement (the Agreement)
dated November 5, 1999 stated that at the time of a capital call, Orion Power
Holdings would issue warrants to GS Capital Partners II, L.P. (GSCP) and
Constellation Power Source, Inc. (CPS) for shares of Orion Power Holdings common
stock in accordance with certain formulas, as defined in the Agreement. Under
the terms of the original stockholder's agreement between CPS and GSCP, only
GSCP was entitled to receive warrants. The warrants had an exercise price equal
to the subscription price of the common stock ($10.00 or $15.50) and expire on
the tenth anniversary of their issuance. The warrant holder may exercise the
warrants for an equivalent number of shares of Orion Power Holdings common stock
when accompanied by payment of the full exercise price. The warrant holder may
also exercise the warrant without payment and would be entitled to a number of
shares of Orion Power Holdings common stock equivalent to (a) the difference
between the aggregate Current Market Price, as defined, less the aggregate
exercise price, divided by (b) the Current Market Price of one share of common
stock. As of December 31, 2001, 705,900 warrants had been issued to
Constellation Holdings, Inc. No warrants had been exercised as of December 31,
2001. No more capital is subject to call under this agreement and no more
warrants are issuable subsequent to the Merger.



F-34


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On June 6, 2001, Orion Power Holdings completed a $356 million common stock
offering, comprised of 10,400,000 shares sold by Orion Power Holdings and
2,600,000 shares sold by certain selling stockholders at a gross per share
offering price of $27.35, resulting in net proceeds of approximately $273
million. Concurrent with this offering, Orion Power Holdings completed a $200
million offering of 4.50% convertible senior notes.

(9) STOCK OPTION PLAN

In May 1998, Orion Power Holdings adopted the 1998 Stock Incentive Plan
(the plan), which provided for granting of stock options and other equity based
awards to directors, officers, employees and consultants. The plan, as amended,
provided that up to 7,500,000 shares of common stock may be issued pursuant to
such options and other awards. Stock options were granted at an exercise price
as determined by the board of directors or a committee designated by the board
of directors, were exercisable in installments beginning one year from the date
of grant and expired 10 years after the date of grant. The plan permitted the
issuance of either incentive stock options or non-qualified stock options. The
Merger resulted in the cancellation of all of the outstanding shares, warrants
and options of Orion Power Holdings, and as such, the plan was canceled.

Orion Power Holdings granted options to acquire shares of its common stock
at an exercise price less than the fair value of its common stock. As of
December 31, 2001, Orion Power Holdings recognized deferred compensation of $5
million to be amortized over the three-year vesting period. Compensation expense
related to these options of $2 million was recorded for 2001.

The following summarizes options granted to directors, officer and
employees:



NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------

Outstanding at December 31, 2000.......................... 5,237,379 $ 15.23
Granted................................................. 468,000 24.10
Forfeited............................................... (37,128) (20.72)
Exercised............................................... (165,906) (10.67)
---------
Outstanding at December 31, 2001.......................... 5,502,345 16.17
=========
Options exercisable at December 31, 2001.................. 1,871,744 13.08


Exercise prices for options outstanding as of December 31, 2001, ranged
from $10 to $29.80. The following table provides certain information with
respect to stock options outstanding at December 31, 2001:



WEIGHTED AVERAGE
STOCK OPTIONS WEIGHTED AVERAGE REMAINING
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE
- ------------------------ ------------- ---------------- ----------------

$10.00 - $15.50.......................... 2,833,345 $12.03 8.47
$15.51 - $20.00.......................... 2,308,000 19.84 8.92
$20.01 - $29.80.......................... 361,000 25.24 9.44
---------
5,502,345 16.17 8.72
=========




F-35


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table provides certain information with respect to stock
options exercisable at December 31, 2001:



STOCK OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ------------------------ ------------- ----------------

$10.00 - $15.50......................................... 1,492,415 $11.31
$15.51 - $20.00......................................... 375,478 20.00
$20.01 - $29.80......................................... 3,851 26.53
---------
1,871,744 13.08
=========


The weighted average fair value at date of grant for options granted during
2000 and 2001 were $15.60 and $9.64, respectively, and was estimated using the
Black-Scholes option valuation model with the following weighted average
assumptions:



YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 2001
------------ ------------

Expected life in years...................................... 10 10
Risk-free interest rate..................................... 5.11% 5.03%
Volatility.................................................. 35.00% 9.80%
Dividend yield.............................................. -- --


(10) EARNINGS PER SHARE

The following table presents the basic and diluted earnings per share (EPS)
calculation for 2001. As of December 31, 2002 and 2003, all of Orion Power
Holdings' common stock was beneficially owned by Reliant Resources and
therefore, EPS data is not presented for 2002 or 2003 (in thousands, except per
share amounts):



Net income -- for basic EPS................................. $100,603
Effect of dilutive securities:
Convertible securities................................. 3,414
--------
Net Income -- for diluted EPS............................... $104,017
========
Diluted Weighted Average Shares Calculation:
Weighted average shares outstanding......................... 99,071
Plus: Incremental shares from assumed conversions:
Stock options.......................................... 1,163
Warrants............................................... 3,936
Convertible securities................................. 3,414
--------
Weighted average shares assuming dilution................... 107,584
========
Basic EPS................................................. $ 1.02
Diluted EPS............................................... 0.97


(11) RETIREMENT AND OTHER BENEFIT PLANS

(a) PENSION.

Orion Power sponsors multiple noncontributory defined benefit pension plans
covering certain union and non-union employees. Depending on the plan, the
benefit payment is either based on years of service



F-36


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with final average salary and covered compensation, or in the form of a cash
balance account which grows based on a percentage of annual compensation and
accrued interest.

Orion Power's funding policy is to review amounts annually in accordance
with applicable regulations in order to determine contributions necessary to
achieve adequate funding of projected benefit obligations. Orion Power uses a
December 31 measurement date for its plans. The pension obligation and funded
status are as follows:



YEAR ENDED
DECEMBER 31,
---------------
2002 2003
------ ------
(IN MILLIONS)

CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year..................... $ 39.1 $ 57.6
Service cost.............................................. 3.4 4.1
Interest cost............................................. 2.8 3.9
Settlement loss........................................... -- 0.8
Benefits paid............................................. (1.1) (2.9)
Plan amendments........................................... 2.0 0.7
Actuarial loss............................................ 11.4 6.6
------ ------
Benefit obligation, end of year........................... $ 57.6 $ 70.8
====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year.............. $ 19.8 $ 23.8
Employer contributions.................................... 6.0 9.1
Benefits paid............................................. (1.1) (2.9)
Actual investment return.................................. (0.9) 5.7
------ ------
Fair value of plan assets, end of year.................... $ 23.8 $ 35.7
====== ======
RECONCILIATION OF FUNDED STATUS
Funded status............................................. $(33.8) $(35.1)
Unrecognized prior service cost........................... 2.0 2.4
Unrecognized actuarial loss............................... 14.3 16.9
------ ------
Net amount recognized, end of year..................... $(17.5) $(15.8)
====== ======


Amounts recognized in the consolidated balance sheets are as follows:



DECEMBER 31,
---------------
2002 2003
------ ------
(IN MILLIONS)

Accrued benefit cost........................................ $(18.8) $(16.3)
Intangible assets........................................... 1.3 0.5
------ ------
Net amount recognized..................................... $(17.5) $(15.8)
====== ======


The accumulated benefit obligation for all defined benefit plans was $39
million and $46 million at December 31, 2002 and 2003, respectively.



F-37


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net pension cost includes the following components:



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
(IN MILLIONS) | (IN MILLIONS)
|
Service cost -- benefits earned |
during the period.............. $ 3.0 $0.4 | $ 3.0 $ 4.1
Interest cost on projected |
benefit obligation............. 2.3 0.3 | 2.5 3.9
Expected return on plan assets... (1.1) -- | (1.9) (2.2)
Accounting settlement charge..... -- -- | -- 0.6
Net amortization................. 0.2 0.2 | -- 1.0
----- ---- | ----- -----
Net pension cost............... $ 4.4 $0.9 | $ 3.6 $ 7.4
===== ==== | ===== =====


The significant weighted average assumptions used to determine the pension
benefit obligation include the following:



DECEMBER 31,
-------------
2002 2003
----- -----

Discount rate............................................... 6.75% 6.25%
Rate of increase in compensation levels..................... 4.50% 4.50%


The significant weighted average assumptions used to determine the net
pension cost include the following:



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
|
Discount rate.................... 7.75% 7.25% | 7.25% 6.75%
Rate of increase in compensation |
levels......................... 4.00% 4.00% | 4.50% 4.50%
Expected long-term rate of return |
on assets...................... 8.50% 8.50% | 8.50% 8.50%


As of December 31, 2003, Orion Power's expected long-term rate of return on
pension plan assets is developed 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. The expected long-term rates of return for each asset category are
weighted to determine the overall expected long-term rate of return on pension
plan assets. In addition, peer data and historical returns are reviewed.



F-38


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Orion Power's pension plan weighted average asset allocations at December
31, 2002 and 2003 and target allocation for 2004 by asset category are as
follows:



PERCENTAGE OF PLAN
ASSETS AT DECEMBER 31, TARGET ALLOCATION
----------------------- -----------------
2002 2003 2004
------ ------ ----

Domestic equity securities....................... 55% 55% 55%
International equity securities.................. 15 15 15
Debt securities.................................. 30 30 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 55%
International equity securities....... MSCI All Country World Ex-U.S. Index 15
Debt securities....................... Lehman Brothers Aggregate Bond Index 30
---
Total............................... 100%
===


As a secondary measure, asset performance is compared to the returns of a
universe of comparable funds, where applicable, over a full market cycle.

During 2001, January 1, 2002 through February 19, 2002, February 20, 2002
through December 31, 2002 and 2003, Orion Power made cash contributions of $8
million, $1 million, $5 million and $9 million, respectively, to the pension
plans. Orion Power expects cash contributions to approximate $9 million during
2004.

Information for pension plans with an accumulated benefit obligation in
excess of plan assets is as follows:



DECEMBER 31,
-------------
2002 2003
----- -----
(IN MILLIONS)

Projected benefit obligation................................ $57.6 $70.8
Accumulated benefit obligation.............................. 38.9 45.8
Fair value of plan assets................................... 23.8 35.7


Two of Orion Power's pension plans were amended on October 15, 2002. A
third plan contained the following features: subsidized optional forms of
benefits, an early retirement subsidy and a provision for a cost of living
adjustment increase, while the other plans did not include these features. The
two plans were amended to include these additional features. This resulted in a
$2 million increase in the projected benefit obligation in 2002. One of Orion's
pension plans was amended on July 23, 2003 to provide certain plan design
changes in accordance with a collective bargaining agreement, and was amended
again on October 9, 2003 to make certain design changes to the forms of pension
distributions under the plan. This resulted in a $0.7 million increase in the
projected benefit obligation in 2003.



F-39


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) SAVINGS PLAN.

Orion Power has an employee savings plan that is a tax-qualified plan under
Section 401(a) of the Internal Revenue Code of 1986, as amended (Code), and
includes a cash or deferred arrangement under Section 401(k) of the Code for all
Orion Power employees.

Under the plan, participating employees may contribute a portion of their
compensation, pre-tax or after-tax, generally up to a maximum of 18% of
compensation. Orion Power's savings plan matching contribution, any payroll
period discretionary employer contribution and any discretionary annual employer
contribution will be made in cash.

Orion Power's savings plan benefit expense was $8.1 million, $0.4 million,
$1.6 million and $1.5 million in 2001 and for January 1, 2002 through February
19, 2002, February 20, 2002 through December 31, 2002 and 2003, respectively.

(c) POSTRETIREMENT BENEFITS.

Orion Power funds the postretirement benefits on a pay-as-you-go basis.
Orion Power uses a December 31 measurement date for its plans.

Accumulated postretirement benefit obligation and funded status are as
follows:



YEAR ENDED
DECEMBER 31,
---------------
2002 2003
------ ------
(IN MILLIONS)

CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year..................... $ 21.8 $ 27.9
Service cost.............................................. 1.7 1.5
Interest cost............................................. 2.2 1.9
Benefit payments.......................................... -- (0.6)
Actuarial loss............................................ 2.2 0.3
------ ------
Benefit obligation, end of year........................... $ 27.9 $ 31.0
====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year.............. $ -- $ --
Employer contributions.................................... -- 0.5
Benefits paid............................................. -- (0.5)
------ ------
Fair value of plan assets, end of year.................... $ -- $ --
====== ======
RECONCILIATION OF FUNDED STATUS
Funded status............................................. $(27.9) $(31.0)
Unrecognized actuarial gain............................... (6.6) (5.9)
------ ------
Net amount recognized, end of year........................ $(34.5) $(36.9)
====== ======


Amounts recognized in the consolidated balance sheets are as follows:



DECEMBER 31,
---------------
2002 2003
------ ------
(IN MILLIONS)

Accrued benefit cost........................................ $(34.5) $(36.9)




F-40


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net postretirement benefit cost includes the following components:



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
(IN MILLIONS) | (IN MILLIONS)
|
Service cost -- benefits earned |
during the period............. $1.3 $0.2 | $1.5 $ 1.5
Interest cost on projected |
benefit obligation............ 1.4 0.2 | 2.0 1.9
Net amortization................ -- -- | -- (0.4)
---- ---- | ---- -----
Net periodic benefit cost..... $2.7 $0.4 | $3.5 $ 3.0
==== ==== | ==== =====


The significant weighted average assumptions used to determine the
accumulated postretirement benefit obligation include the following:



DECEMBER 31,
------------
2002 2003
----- ----

Discount rate............................................... 6.75% 6.25%
Rate of increase in compensation levels..................... 4.50% 4.50%


The significant weighted average assumptions used to determine the
accumulated postretirement benefit cost include the following:



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
|
Discount rate................ 7.75% 7.25% | 7.25% 6.75%
Rate of increase in |
compensation levels........ 4.00% 4.00% | 4.50% 4.50%


The following table shows Orion Power's assumed health care cost trend
rates used to measure the expected cost of benefits covered by its
postretirement plan:



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
|
Health care cost trend rate |
assumed for next year...... 8.0% 12.0% | 11.25% 10.5%
Rate to which the cost trend |
rate is assumed to |
gradually decline.......... 5.0% 5.5% | 5.5% 5.5%
Year that the rate reaches |
the rate to which it is |
assumed to decline......... 2008 2011 | 2011 2011




F-41


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Assumed health care cost trend rates 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, 2003:



ONE-PERCENTAGE POINT
--------------------
INCREASE DECREASE
-------- --------
(IN THOUSANDS)

Effect on service and interest cost......................... $ 610 $ (498)
Effect on accumulated postretirement benefit obligation..... 5,393 (4,495)


In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 became law. This law introduces a prescription drug
benefit, as well as a federal subsidy under certain circumstances to sponsors of
retiree health care benefit plans. In January 2004, the FASB issued FASB Staff
Position No. 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." This
FASB staff position permits sponsors of postretirement health care plans that
provide a prescription drug benefit to make a one time election to defer
accounting for the effects of this law until the earlier of: (a) the issuance of
authoritative guidance on accounting for the federal subsidy or (b) the
occurrence of a significant event that would call for remeasurement of a plan's
assets and obligations, such as a plan amendment, settlement or curtailment.
Orion Power has elected to defer accounting for the effects of this law. The
measurements of Orion Power's accumulated postretirement benefit obligation and
net periodic postretirement benefit cost do not reflect the effect of this law.
When authoritative guidance on accounting for the federal subsidy is issued,
Orion Power will revise its accounting as required.

(d) POSTEMPLOYMENT BENEFITS.

Orion Power records postemployment benefits based on SFAS No. 112,
"Employer's Accounting for Postemployment Benefits," which requires the
recognition of a liability for benefits provided to former or inactive
employees, their beneficiaries and covered dependents, after employment but
before retirement (primarily health care and life insurance benefits for
participants in the long-term disability plan). Net postemployment benefit costs
were insignificant for 2001 and 2002 and $1 million for 2003.

(e) OTHER EMPLOYEE MATTERS.

As of December 31, 2003, approximately 68% of Orion Power's employees are
subject to collective bargaining agreements. The agreements covering 62% of
those employees will expire prior to December 31, 2004.



F-42


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) INCOME TAXES

Orion Power's current and deferred components of income tax expense
(benefit) were as follows:



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
(IN MILLIONS) | (IN MILLIONS)
|
Current: |
Federal.................... $27.3 $(24.6) | $(67.0) $(69.1)
State...................... (3.4) (9.2) | (7.3) (14.5)
----- ------ | ------ ------
Total current........... 23.9 (33.8) | (74.3) (83.6)
----- ------ | ------ ------
Deferred: |
Federal.................... 27.1 (3.5) | 109.8 84.7
State...................... 3.9 (1.3) | 4.6 0.7
----- ------ | ------ ------
Total deferred.......... 31.0 (4.8) | 114.4 85.4
----- ------ | ------ ------
Income tax expense |
(benefit).................. $54.9 $(38.6) | $ 40.1 $ 1.8
===== ====== | ====== ======


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



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
(IN MILLIONS) | (IN MILLIONS)
|
Income (loss) before income |
taxes and cumulative effect |
of accounting change....... $155.5 $(90.8) | $(217.3) $(556.0)
Federal statutory rate....... 35% 35% | 35% 35%
------ ------ | ------- -------
Income tax expense (benefit) |
at statutory rates......... 54.4 (31.8) | (76.1) (194.6)
------ ------ | ------- -------
Net addition (reduction) in |
taxes resulting from: |
Non-deductible goodwill |
impairment.............. -- -- | 118.1 204.8
State income taxes, net of |
federal income tax |
benefit................. 10.8 (6.8) | 8.3 2.9
State tax credits.......... (10.4) -- | (10.2) (11.8)
Other...................... 0.1 -- | -- 0.5
------ ------ | ------- -------
Total................... 0.5 (6.8) | 116.2 196.4
------ ------ | ------- -------
Income tax expense |
(benefit).................. $ 54.9 $(38.6) | $ 40.1 $ 1.8
====== ====== | ======= =======
Effective tax rate........... 35.3% 42.5% | NM(1) NM(1)


- ---------------

(1) Not meaningful as for February 20, 2002 through December 31, 2002 and 2003,
Orion Power had a pre-tax loss of $217 million and $556 million,
respectively, and income tax expense of $40 million and $2 million,
respectively. The primary reason is due to Orion Power's goodwill
impairments for February 20, 2002 through December 31, 2002 and 2003 of $338
million and $585 million, respectively, for which no tax benefit can be
recognized, as the goodwill is non-deductible.



F-43

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following were Orion Power's tax effects of temporary differences between
the carrying amounts of assets and liabilities in the consolidated financial
statements and their respective tax bases:



DECEMBER 31,
-----------------------------------------
2002 2003
------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
(IN MILLIONS)

Deferred tax assets:
Allowance for doubtful accounts.............. $ 0.4 $ -- $ 3.0 $ --
Inventory writedown.......................... 3.8 -- 3.8 --
Net operating loss and credit
carryforwards............................. 18.2 35.8 -- 48.2
Valuation allowances......................... -- (29.7) -- (33.6)
Employee benefits............................ -- 18.6 -- 24.4
Derivative liabilities....................... 8.0 8.7 -- 2.1
Contractual rights and obligations........... 13.7 -- -- --
Environmental liability...................... -- 6.5 -- 3.2
Adjustment to fair value of debt............. 10.9 46.5 8.6 38.2
Other........................................ 1.2 -- 0.1 4.0
----- ------- ----- -------
Total deferred tax assets................. 56.2 86.4 15.5 86.5
----- ------- ----- -------
Deferred tax liabilities:
Prepaid insurance............................ (2.1) -- (1.9) --
Depreciation and amortization................ -- (456.0) -- (511.1)
Derivative assets............................ (1.0) (0.4) (1.5) --
Contractual rights and obligations........... -- (11.4) -- (0.3)
Other........................................ -- (4.2) (0.6) (4.3)
----- ------- ----- -------
Total deferred liabilities................ (3.1) (472.0) (4.0) (515.7)
----- ------- ----- -------
Net accumulated deferred income tax assets
(liabilities)................................ $53.1 $(385.6) $11.5 $(429.2)
===== ======= ===== =======


Tax Attribute Carryovers. As of December 31, 2003, Orion Power had state
net operating loss carryovers of $467 million, which are due to expire in tax
years 2015 through 2023.

During 2002, a valuation allowance of $30 million was established as part
of purchase accounting (see note 4). This valuation allowance resulted from
Orion Power's assessment of its future ability to use state net operating
losses. During 2003, Orion Power increased its valuation allowance to $34
million, which results primarily from the assessment of Orion Power's future
ability to use state net operating losses.

(13) COMMITMENTS

(a) LEASE COMMITMENTS.

Orion Power has entered into various non-cancelable operating lease
arrangements for office space, storage space, office furniture and vehicles.
These leases terminate at various dates through 2022.



F-44


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum payments due under these leases are as follows (in
thousands):



CAPITAL OPERATING
LEASES LEASES
------- ---------

2004........................................................ $ 126 $ 4,063
2005........................................................ 126 3,870
2006........................................................ 126 3,058
2007........................................................ 126 2,841
2008........................................................ 126 1,026
2009 and Thereafter......................................... 767 4,317
------ -------
Subtotal.................................................. 1,397 $19,175
=======
Interest.................................................... (388)
------
Total..................................................... $1,009
======


In November 1999, Erie Boulevard entered into a capital lease arrangement
for the land at the Watertown hydroelectric plant located in Potsdam, New York.
This land houses a maintenance facility and a regional headquarters for the
hydroelectric assets. The lease began at the completion of the facility, in
October 2000, and expires in 2015. Under the terms of the lease, the monthly
payments are $10,500. Erie Boulevard has the option to purchase the land for
$450,000 at the end of the lease term.

Total rental expense for 2001, for January 1, 2002 through February 19,
2002, February 20, 2002 through December 31, 2002 and 2003, was $1.8 million,
$0.2 million, $1.6 million and $2.0 million, respectively.

(b) FUEL CONTRACTS AND TRANSPORTATION COMMITMENTS.

Orion Power is a party to fuel supply contracts and commodity
transportation contracts, that have various quantity requirements and durations
that are not classified as derivative assets and liabilities and hence are not
included in the consolidated balance sheet as of December 31, 2003. Minimum
purchase commitment obligations under these agreements are as follows, as of
December 31, 2003:



FUEL TRANSPORTATION
COMMITMENTS COMMITMENTS
----------- --------------
(IN MILLIONS)

2004....................................................... $152 $ 8
2005....................................................... 124 9
2006....................................................... 77 9
2007....................................................... 30 9
2008....................................................... -- 9
2009 and thereafter........................................ -- 47
---- ---
Total.................................................... $383 $91
==== ===


As of December 31, 2003 the maximum remaining terms under any individual
fuel supply contract and transportation contract is four years and 10 years,
respectively.

(c) PROVIDER OF LAST RESORT CONTRACTS.

One of Orion Power Holdings' subsidiaries is contractually obligated
through the end of 2004 to provide energy to Duquesne Light Company to satisfy
the demands of any customer in its service area that purchases power from
Duquesne Light Company as its "provider of last resort." These contracts do not


F-45


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

specify a minimum or maximum quantity of energy to be supplied. Although Orion
Power expects to produce more energy than needed to meet these contractual
obligations, it is possible that, due to seasonal variations in demand or
operational outages, its subsidiary may occasionally need to purchase energy
from third parties to cover its contractual obligations. Since these events are
likely to occur at times of higher market prices, Orion Power is at risk that
the cost of power purchased may exceed the fixed prices for power under
contracts with Duquesne Light Company. Failure to provide sufficient energy
under the terms of the contracts could give rise to, in addition to other direct
damages, penalties of up to $1,000 per megawatt hour, depending upon the
circumstances of such under delivery. During the period February 20, 2002
through December 31, 2002 and 2003, Orion Power did not incur or pay any
penalties.

(d) COLLATERAL POSTING PROVIDED BY RELIANT RESOURCES.

As a result of credit rating downgrades in the first quarter of 2003,
collateral requirements, which are based on a contractual provision relating to
creditworthiness and market exposure, were triggered pursuant to a provision in
a power contract between Orion MidWest and one of its customers, which required
Orion Power to provide collateral of approximately $16 million. On July 30,
2003, this collateral was posted by Reliant Resources on Orion MidWest's behalf.
There is no obligation by Orion MidWest to repay this collateral to Reliant
Resources. As of December 31, 2003, there have been no changes to the collateral
posted by Reliant Resources on Orion MidWest's behalf.

(e) GUARANTEE.

Together with certain of Reliant Resources' other subsidiaries, Orion Power
Holdings is a guarantor of the obligations under Reliant Resources' Amended and
Restated Credit and Guaranty Agreement dated as of March 28, 2003, subject to
certain limitations under Orion Power Holdings' senior notes. These limitations
limit the amount of the guarantee based on a fixed charge coverage ratio,
consolidated tangible assets and a restricted payment ceiling test, under the
Orion Power Holdings senior notes. Additionally, Orion Power Holdings is the
only limited guarantor of the obligations under Reliant Resources' senior
secured notes issued in July 2003, subject to the same limitations. None of
Orion Power Holdings' subsidiaries guarantee Reliant Resources' senior secured
notes.

Reliant Resources has calculated the aggregate amount permitted to be
guaranteed under both the guarantee for its March 2003 credit facility and the
guarantee for its senior secured notes to be approximately $1.1 billion, which
is the maximum potential amount of future payments. These guarantees mature at
varying dates from 2007 to 2013.

Both Reliant Resources' March 2003 credit facility and its senior secured
notes restrict Orion Power Holdings and its subsidiaries ability to take
specific actions, subject to numerous exceptions that are designed to allow for
the execution of Reliant Resources' and its subsidiaries' business plans in the
ordinary course, including the preservation and optimization of existing
investments in the retail energy and wholesale energy businesses and the ability
to provide credit support for commercial obligations. Orion Power's failure to
comply with these restrictions could result in an event of default under the
Reliant Resources' March 2003 credit facility or its senior secured notes that,
if not cured or waived, could result in Reliant Resources being required to
repay its borrowings before their due date.

(14) CONTINGENCIES

(a) LEGAL AND ENVIRONMENTAL MATTERS.

Orion Power is liable under the terms of a consent order issued in 2000
with the New York State Department of Environmental Conservation (NYSDEC) for
past releases of petroleum and other substances at two of its generation
facilities. Based on Orion Power's evaluations with assistance from



F-46


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

third-party consultants and engineers, Orion Power has developed remediation
plans for both facilities. As of December 31, 2002 and 2003, Orion Power has
recorded the estimated liability for the remediation costs of $8 million and $7
million, respectively, which it expects to pay out through 2008.

Under a separate consent order issued by the NYSDEC in 2000, Orion Power is
required to evaluate certain technical changes to modify the intake cooling
system of one of its plants. Orion Power and the NYSDEC will discuss the
technical changes to be implemented. Depending on the outcome of these
discussions, including the form of technology ultimately selected, Orion Power
estimates that capital expenditures necessary to comply with the order could
equal or exceed $87 million. Orion Power expects to begin construction on a
portion of the cooling water intake in 2004.

Orion Power is responsible for environmental liabilities associated with
the future closure of three ash disposal sites in Pennsylvania. As of December
31, 2002 and 2003, the total estimated liability determined by management with
assistance from third-party engineers and recorded by Orion Power for these
disposal sites was $14 million and $11 million, respectively, of which $1
million is to be paid over the next five years.

New Source Review Matters. The United States Environmental Protection
Agency (EPA) has requested information from two Orion Power facilities, related
to work activities conducted at the sites that may be associated with various
permitting requirements of the Clean Air Act. Orion Power has responded to the
EPA's requests for information. Furthermore, the New York state attorney
general's office recently requested from the EPA a copy of all such
correspondence relating to all facilities, which the EPA granted.

Other Matters. Orion Power is involved in a number of other legal,
environmental and other proceedings before courts and governmental agencies.
Although Orion Power cannot predict the outcome of these proceedings, Orion
Power believes that the effects on the financial statements, if any, from the
disposition of these matters will not have a material adverse effect on its
results of operations, financial condition or cash flows.

(b) TOLLING AGREEMENT FOR LIBERTY'S GENERATING STATION.

LEP owns a 530 MW combined cycle gas fired power generation facility (the
Liberty generating station). Liberty financed the construction costs of the
Liberty generating station with borrowings under a credit agreement of which
$262 million is outstanding as of December 31, 2003. Borrowings under the credit
agreement, which are non-recourse to Orion Power and its affiliates (other than
LEP and Liberty), are secured by pledges of the assets of the Liberty generating
station and of the ownership interest in LEP. See note 7(a).

In July 2003, the counterparty to the tolling agreement under which LEP
sold the generation output of the Liberty generation station filed for
bankruptcy. Subsequently, a federal bankruptcy court issued an order that
terminated the tolling agreement and triggered another event of default under
the Liberty credit agreement. The default under the Liberty credit agreement,
and the possible foreclosure by the lenders upon the assets of the Liberty
generating station, do not constitute an event of default under any other debt
agreements of Orion Power or its affiliates.



F-47


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

To date, the lenders under the Liberty credit agreement have not foreclosed
upon the Liberty generating station. However, there can be no assurance that the
lenders will continue to refrain from exercising such rights. If the lenders
elect to foreclose on LEP, Liberty and/or the Liberty generating station, Orion
Power could incur a pre-tax loss of an amount up to Orion Power's recorded net
book value, with the potential of an additional loss due to an impairment of
goodwill to be allocated to LEP. As of December 31, 2003, the combined net book
value of LEP and Liberty was $346 million, excluding the non-recourse debt
obligations of $262 million. At December 31, 2002 and 2003, Orion Power
evaluated the Liberty generating station and the related intangible asset for
the terminated tolling agreement for impairment. Based on the analyses, there
were no impairments.

In September 2003, LEP sued the corporate guarantor of the counterparty to
the tolling agreement, Gas Transmission Northwest Corporation, seeking payment
of $140 million (the maximum amount of the guarantee) out of the $177 million
termination claim calculated by LEP under the agreement. Subsequently, the
counterparty to the tolling agreement and its corporate guarantors countersued
LEP seeking to collect a $108 million termination payment under the tolling
agreement. The obligations of LEP under the tolling agreement are secured by a
$35 million letter of credit issued under the senior secured revolver of Reliant
Resources. If the letter of credit were to be drawn, Reliant Resources would be
required to reimburse the issuing bank.

In light of current market conditions and the termination of the tolling
agreement, LEP does not expect to have sufficient cash flow to pay both (a) all
of its expenses and to post the collateral required to buy fuel or in respect of
the gas transportation agreements and (b) debt service obligations. Liberty
received temporary deferrals until April 2004 from its lenders for the quarterly
principal installments that were due in October 2003 and January 2004, which
aggregated $4 million. Based on the foregoing, Orion Power is exploring various
strategic options with respect to its subsidiaries' interest in the Liberty
generating station, including, among other things, the execution of a
foreclosure arrangement with the lenders resulting in a transfer of ownership to
the lenders or a sale of Orion Power's interest in the generating station. There
can be no assurances regarding the outcome of this process. A foreclosure of
Orion Power's interest in the generation station would, however, result in an
impairment of the asset on the balance sheet.

If LEP recovers the amount of the termination claim, the lenders are
entitled to require that such amounts be used to pay deferred interest and to
prepay debt under the Liberty credit agreement. Under United States and
Pennsylvania tax laws, it is possible that receipt of a termination payment by
LEP could be deemed taxable income to Orion Power Holdings and its other
subsidiaries.

(15) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of financial instruments, including cash and cash
equivalents and derivative assets and liabilities (see note 6), are equivalent
to their carrying amounts in the consolidated balance sheets. The fair values of
derivative assets and liabilities as of December 31, 2002 and 2003 have been
determined using quoted market prices for the same or similar instruments when
available or other estimation techniques, see note 6.



F-48


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying values and related fair market values of Orion Power's
short-term and long-term debt are detailed as follows (excluding adjustment to
fair value of interest rate swaps and debt under Liberty's credit agreement):



DECEMBER 31,
--------------------------------------------------
2002 2003
------------------------- ----------------------
CARRYING FAIR MARKET CARRYING FAIR MARKET
VALUE(1) VALUE(1)(2)(3) VALUE(1) VALUE(1)(3)
-------- -------------- -------- -----------
(IN MILLIONS)

Fixed rate debt............................. $ 475 $323 $ 467 $ 488
Floating rate debt.......................... 1,371 N/A 1,218 1,218
------ ---- ------ ------
Total debt, excluding adjustment to fair
value of interest rate swaps and
Liberty's debt......................... $1,846 N/A $1,685 $1,706
====== ==== ====== ======


- ---------------

(1) Excludes Liberty's fixed rate debt of $165 million and floating rate debt of
$103 million and $97 million as of December 31, 2002 and 2003, respectively,
as there was no active market for this debt. Due to the situation with
Liberty (see note 14(b)), if the holders of Liberty's debt were to have
tried to sell such debt instrument to a third party, the price which could
have been realized would likely be substantially less than the face value of
the debt instrument and substantially less than the carrying value.

(2) As of December 31, 2002, Orion Power had floating rate debt with a carrying
value of $1.4 billion, excluding adjustment to fair value of interest rate
swaps and Liberty's debt. There was no active market for Orion Power's
floating rate debt obligations as of December 31, 2002. Given the liquidity
and credit situation as of December 31, 2002, if the holders of these
borrowings were to have tried to sell such debt instruments to third
parties, the prices which could have been realized could have been
substantially less than the face values of the debt instruments and
substantially less than Orion Power's carrying values.

(3) The fair market values of the fixed rate debt (December 31, 2002 and 2003)
and floating rate debt (for December 31, 2003 only) were based on (a)
Reliant Resources' incremental borrowing rates for similar types of
borrowing arrangements or (b) information from market participants. For $1.2
billion of our floating rate debt, the carrying value equals the fair market
value as of December 31, 2003.

(16) UNAUDITED QUARTERLY INFORMATION

Summarized unaudited quarterly information is as follows:



FORMER ORION | CURRENT ORION
----------------- | -----------------------------------------------------------------
JANUARY 1, 2002 | FEBRUARY 20, 2002 QUARTER ENDED QUARTER ENDED QUARTER ENDED
THROUGH | THROUGH JUNE 30, SEPTEMBER 30, DECEMBER 31,
FEBRUARY 19, 2002 | MARCH 31, 2002 2002 2002 2002
----------------- | ----------------- ------------- ------------- -------------
(IN THOUSANDS) | (IN THOUSANDS)
|
Operating revenues... $122,408 | $113,009 $290,445 $420,640 $ 197,949
Operating (loss) |
income............. (66,819) | 32,207 82,152 139,986 (351,268)
Net (loss) income.... (52,174) | 13,090 27,558 61,370 (359,434)




CURRENT ORION
-------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2003 2003 2003 2003
------------- ------------- ------------- -------------
(IN THOUSANDS)

Operating revenues.............. $279,669 $267,012 $ 404,116 $264,518
Operating income (loss)......... 29,039 35,504 (474,779) (4,775)
Cumulative effect of accounting
change, net of tax............ 2,121 -- -- --
Net income (loss)............... 185 1,391 (537,377) (19,884)




F-49


ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The variances in revenues from quarter to quarter for 2002 and 2003 were
primarily due to (a) the Merger and the related purchase accounting, see note 1,
(b) the seasonal fluctuations in demand for electric energy and energy services
and (c) changes in energy commodity prices. Changes in operating income (loss)
and net income (loss) from quarter to quarter for 2002 and 2003 were primarily
due to:

- the seasonal fluctuations in demand for electric energy and energy
services;

- $2 million, net of tax, cumulative effect of accounting change primarily
in the first quarter of 2003 (only impacted net loss) (see note 2(p));

- the impact of an increase in allocated general and administrative costs
from affiliate;

- changes in energy commodity prices; and

- the timing of maintenance expenses on electric generation plants.

In addition, operating income (loss) and net income (loss) changed from
quarter to quarter in 2002 by:

- the impact of the Merger (see note 4);

- costs related to plant cancellations and equipment impairments in 2002;
and

- $338 million goodwill impairment in the fourth quarter of 2002 (see note
5).

- Also, operating income (loss) and net income (loss) changed from quarter
to quarter in 2003 by the $585 million goodwill impairment in the third
quarter of 2003 (see note 5).

* * *



F-50


The following is a copy of a report previously issued by Arthur Andersen LLP
(Andersen). The report has not been reissued by Andersen.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Orion Power Holdings, Inc.:

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Orion Power
Holdings, Inc. and subsidiaries, incorporated by reference in this Form 10-K,
and have issued our report thereon dated February 19, 2002. Our audit was made
for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The schedule listed in the index of financial
statements is the responsibility of the company's management and is presented
for the purposes of complying with the Securities and Exchange Commission's
rules and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Vienna, Virginia
February 19, 2002




F-51

ORION POWER HOLDINGS, INC.

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
CONDENSED STATEMENTS OF OPERATIONS



FORMER ORION | CURRENT ORION
-------------------------------- | --------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY 20, 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ----------------- ------------
(THOUSANDS OF DOLLARS)
|
(EXPENSES) INCOME: |
General, administrative and |
development....................... $(22,908) $(49,799) | $ (10,275) $ (2,940)
Depreciation and amortization....... (1,278) (119) | -- (75)
Equity in earnings (loss) of |
investments in subsidiaries and |
impairment of goodwill............ 188,266 (18,972) | (229,891) (529,041)
Interest expense.................... (56,172) (8,215) | (39,371) (40,807)
Interest income..................... 9,435 360 | 1,877 54
-------- -------- | --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES... 117,343 (76,745) | (277,660) (572,809)
Income tax expense (benefit)........ 16,740 (24,571) | (20,244) (17,124)
-------- -------- | --------- ---------
NET INCOME (LOSS)................... $100,603 $(52,174) | $(257,416) $(555,685)
======== ======== | ========= =========


See Notes to the Condensed Financial Statements and Orion Power's Consolidated
Financial Statements


F-52

ORION POWER HOLDINGS, INC.

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS



DECEMBER 31,
-----------------------
2002 2003
---------- ----------
(THOUSANDS OF DOLLARS)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,220 $ 32,786
State income taxes receivable............................. 45,458 21,883
Accumulated deferred income taxes......................... 973 3,226
Other..................................................... 371 434
---------- ----------
Total current assets................................... 53,022 58,329
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 504 664
OTHER ASSETS:
Investment in subsidiaries and goodwill, net.............. 3,282,695 2,820,926
Accumulated deferred income taxes......................... 32,549 25,667
Other..................................................... 1,050 793
---------- ----------
Total other assets..................................... 3,316,294 2,847,386
---------- ----------
TOTAL ASSETS........................................... $3,369,820 $2,906,379
========== ==========

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 7,506 $ 8,139
Accounts payable.......................................... 69 135
Payable to affiliates, net................................ 7,889 7,937
Accrued expenses.......................................... 4,965 4,909
Accrued interest.......................................... 8,000 8,000
---------- ----------
Total current liabilities.............................. 28,429 29,120
---------- ----------
LONG-TERM DEBT.............................................. 465,821 457,681
Other....................................................... 3,737 4,101
---------- ----------
TOTAL LIABILITIES...................................... 497,987 490,902
---------- ----------
STOCKHOLDER'S EQUITY:
Common stock; par value $1.00 per share (1,000 shares
authorized, issued and outstanding).................... 1 1
Additional paid-in capital................................ 3,152,701 3,233,308
Retained deficit.......................................... (257,416) (813,101)
Accumulated other comprehensive loss...................... (23,453) (4,731)
---------- ----------
Stockholder's Equity................................... 2,871,833 2,415,477
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............. $3,369,820 $2,906,379
========== ==========


See Notes to the Condensed Financial Statements and Orion Power's Consolidated
Financial Statements


F-53

ORION POWER HOLDINGS, INC.

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CASH FLOWS



FORMER ORION | CURRENT ORION
-------------------------------- | ---------------------------------
YEAR ENDED JANUARY 1, 2002 | FEBRUARY, 20 2002 YEAR ENDED
DECEMBER 31, THROUGH | THROUGH DECEMBER 31,
2001 FEBRUARY 19, 2002 | DECEMBER 31, 2002 2003
------------ ----------------- | ------------------ ------------
(THOUSANDS OF DOLLARS)
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss)............................. $ 100,603 $(52,174) | $(257,416) $(555,685)
Adjustments to reconcile net income (loss) to |
net cash (used in) provided by operating |
activities: |
Depreciation and amortization............... 1,278 119 | -- 75
Deferred income taxes....................... 16,740 48,767 | 2,132 19,669
Equity in (earnings) loss of investment in |
subsidiaries and impairment of goodwill... (188,266) 18,972 | 229,891 529,041
Amortization of deferred financing fees..... 2,498 317 | -- --
Amortization of the revaluation of debt..... -- -- | (5,927) (7,506)
Deferred compensation....................... 1,596 1,763 | -- --
Interest income on officers' notes |
receivable................................ 2,180 -- | -- --
Federal income taxes payable................ -- -- | (17,737) (951)
Change in assets and liabilities: |
Restricted cash............................. (518) (583) | 1,101 --
Receivable from affiliates, net............. (82,006) (66,559) | 57,253 (153)
Income taxes receivable..................... -- (33,947) | (45,458) 23,575
Other assets................................ 1,101 495 | 480 (18)
Accounts payable............................ (182) 14,618 | (15,601) 66
Accrued expenses............................ (7,843) 2,308 | 2,099 306
Accrued interest............................ 725 7,758 | 8,000 --
--------- -------- | --------- ---------
Net cash (used in) provided by operating |
activities.............................. (152,094) (58,146) | (41,183) 8,419
--------- -------- | --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Purchase of property, equipment and related |
assets in acquisition, net.................. (1,518) (112) | (504) (235)
Distributions received from subsidiaries...... 86,466 -- | -- 831
Investment made in subsidiaries............... (364,728) (37,944) | (75,557) (17,449)
--------- -------- | --------- ---------
Net cash used in investing activities..... (279,780) (38,056) | (76,061) (16,853)
--------- -------- | --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Proceeds from long-term debt.................. 200,000 -- | 60,000 --
Payments on long-term debt.................... -- -- | (260,000) --
Proceeds from issuance of common stock, net... 273,530 491 | -- --
Contributions from stockholder................ -- -- | 246,832 35,000
Payment on officers' notes receivable......... -- 3,736 | -- --
Payments of deferred financing fees........... (6,702) -- | -- --
--------- -------- | --------- ---------
Net cash provided by financing |
activities.............................. 466,828 4,227 | 46,832 35,000
--------- -------- | --------- ---------
NET CHANGE IN CASH AND EQUIVALENTS............ 34,954 (91,975) | (70,412) 26,566
CASH AND CASH EQUIVALENTS, BEGINNING OF |
PERIOD...................................... 133,653 168,607 | 76,632 6,220
--------- -------- | --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD...... $ 168,607 $ 76,632 | $ 6,220 $ 32,786
========= ======== | ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW |
INFORMATION: |
Cash payments: |
Interest paid............................... $ 52,949 $ -- | $ 50,942 $ 48,000
Income taxes paid (net of income tax refunds |
received)................................. -- -- | -- (59,417)


See Notes to the Condensed Financial Statements and Orion Power's Consolidated
Financial Statements


F-54

ORION POWER HOLDINGS, INC.

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS

(1) BACKGROUND AND BASIS OF PRESENTATION

These condensed parent company financial statements have been prepared in
accordance with Rule 12-04, Schedule 1 of Regulation S-X, as the restricted net
assets of Orion Power Holdings, Inc.'s . (Orion Power Holdings) subsidiaries
exceed 25% of the consolidated net assets of Orion Power Holdings. This
information should be read in conjunction with the Orion Power Holdings and
subsidiaries (Orion Power) consolidated financial statements included elsewhere
in this filing.

Orion Power Holdings' 100% investments in its subsidiaries have been
recorded using the equity basis of accounting in the accompanying condensed
parent company financial statements. Included in equity in earnings (loss) of
investments in subsidiaries in 2003 is a cumulative effect of accounting change
for a new accounting pronouncement as more fully described in note 2(p) to Orion
Power's consolidated financial statements.

Some amounts from the previous years have been reclassified to conform to
the 2003 presentation of condensed financial information. These
reclassifications do not affect earnings.

For the 2001 cash flow statement, Orion Power Holdings has presented
amortization of deferred financing fees separately from depreciation and
amortization.

(2) CONTRIBUTIONS FROM STOCKHOLDER

In May 2003 and November 2003, Reliant Resources, Inc. (Reliant Resources)
contributed $15 million and $20 million, respectively, to Orion Power Holdings,
as a partial funding of the semi-annual interest payment of $24 million on the
senior notes due in each of May 2003 and November 2003. While Reliant Resources
has no obligation, it intends to contribute any funding shortfall for the
semi-annual interest payments due in May 2004 and November 2004 should Orion
Power Holdings' funds be insufficient. See notes 3 and 7 to Orion Power's
consolidated financial statements.

(3) RESTRICTED NET ASSETS OF SUBSIDIARIES

Certain of Orion Power Holdings' subsidiaries have effective restrictions
on their ability to pay dividends or make intercompany loans and advances
pursuant to their financing arrangements. The amount of restricted net assets of
Orion Power Holdings' subsidiaries at December 31, 2002 and 2003 is
approximately $2.2 billion and $2.7 billion, respectively. Such restrictions are
on the net assets of Orion Power Capital, LLC Liberty Electric PA, LLC and
Liberty Electric Power, LLC. Orion Power Midwest, LP and Orion Power New York,
LP are indirect wholly-owned subsidiaries of Orion Power Capital, LLC.

(4) DEBT FACILITIES

For a discussion of Orion Power Holdings' senior notes, which are due in
2010, see note 7 to Orion Power's consolidated financial statements.

(5) COMMITMENTS AND CONTINGENCIES

(a) GUARANTEES

Orion Power Holdings 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. 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.



F-55

ORION POWER HOLDINGS, INC.

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables detail Orion Power Holdings' various guarantees,
including the maximum potential amounts of future payments, assets held as
collateral and the carrying amount of the liabilities recorded on the balance
sheets, if applicable:



DECEMBER 31, 2002
-------------------------------------------------------
MAXIMUM POTENTIAL CARRYING AMOUNT OF
AMOUNT OF FUTURE ASSETS HELD AS LIABILITY RECORDED
TYPE OF GUARANTEE PAYMENTS COLLATERAL ON BALANCE SHEET
- ----------------- ----------------- -------------- ------------------
(IN MILLIONS)

Guarantees under Reliant Resources'
debt(1)............................. $1,100 $ -- $ --
Hedging obligations(2)................ 2 -- --
Payment and performance obligations
under service contracts(3).......... 26 -- --
------ ----- -----
Total guarantees.................... $1,128 $ -- $ --
====== ===== =====




DECEMBER 31, 2003
-------------------------------------------------------
MAXIMUM POTENTIAL CARRYING AMOUNT OF
AMOUNT OF FUTURE ASSETS HELD AS LIABILITY RECORDED
TYPE OF GUARANTEE PAYMENTS COLLATERAL ON BALANCE SHEET
- ----------------- ----------------- -------------- ------------------
(IN MILLIONS)

Guarantees under Reliant Resources'
debt................................ $1,100 $ -- $ --
Hedging obligations(2)................ 2 -- --
------ ----- -----
Total guarantees.................... $1,102 $ -- $ --
====== ===== =====


- ---------------

(1) Orion Power Holdings has guaranteed Reliant Resources' March 2003 credit
facility and senior secured notes. The related debt matures at varying dates
from 2007 to 2013.

(2) Orion Power Holdings has guaranteed the performance of certain of its
wholly-owned subsidiaries' hedging obligations. These guarantees were
provided to counterparties in order to facilitate physical and financial
agreements in fuel and emissions. As of December 31, 2003, the expiration of
certain guarantees was not yet determinable, as they are ongoing. The fair
values of the underlying transactions are included in Orion Power Holdings'
subsidiaries' balance sheets.

(3) Orion Power Holdings has guaranteed the payment obligations of certain
wholly-owned subsidiaries arising under long-term service agreements. These
guarantees have varying expiration dates. As of December 31, 2002,
guarantees with determinable expiration dates expire over varying year's
through December 2014. As of December 31, 2003, the expiration date of
certain guarantees was not yet determinable.

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 Orion Power Holdings. To the
extent liabilities exist under the various agreements and contracts that Orion
Power Holdings guarantees, such liabilities are recorded in Orion Power
Holdings' subsidiaries' balance sheets at December 31, 2003. Management believes
the likelihood that Orion Power Holdings would be required to perform or
otherwise incur any significant losses associated with any of these guarantees
is remote.

Together with certain of Reliant Resources' other subsidiaries, Orion Power
Holdings is a guarantor of the obligations under Reliant Resources' Amended and
Restated Credit and Guaranty Agreement dated as of March 28, 2003, subject to
certain limitations under the Orion Power Holdings' senior notes. These
limitations limit the amount of Orion Power Holdings' guarantee based on a fixed
charge coverage ratio, consolidated tangible assets and a restricted payment
ceiling test, under the Orion Power Holdings' senior notes. Additionally, Orion
Power Holdings is the only limited guarantor of the obligations under Reliant



F-56

ORION POWER HOLDINGS, INC.

SCHEDULE I - CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

Resources' senior secured notes issued in July 2003, subject to the same
limitations. None of Orion Power Holdings' subsidiaries guarantee Reliant
Resources' senior secured notes.

Both Reliant Resources' March 2003 credit facility and its senior secured
notes restrict Orion Power Holdings' and its subsidiaries' ability to take
specific actions, subject to numerous exceptions that are designed to allow for
the execution of Reliant Resources' and its subsidiaries' business plans in the
ordinary course, including the preservation and optimization of existing
investments in the retail energy and wholesale energy businesses and the ability
to provide credit support for commercial obligations. See note 13(e) to Orion
Power's consolidated financial statements.

(b) LEASES

Orion Power Holdings has entered in various non-cancelable operating lease
arrangements for office space and storage space. These leases terminate in 2005.
Future minimum payments due under these leases are as follows (in thousands):



2004........................................................ $340
2005........................................................ 173
----
$513
====


Total rental expense for 2001, January 1, 2002 through February 19, 2002,
February 20, 2002 through December 31, 2002 and 2003 was $377,000, $43,000,
$275,000 and $445,000, respectively.

(6) CASH DISTRIBUTIONS

Orion Power New York, L.P. made cash distributions to Orion Power Holdings
in 2001 of $86 million and in 2002 as part of a refinancing, repaid a $60
million revolving senior credit facility on behalf of Orion Power Holdings,
which was deemed a distribution to Orion Power Holdings (see note 7 to Orion
Power's consolidated financial statements). No dividends or distributions had
been made to Orion Power Holdings by Orion Power New York, L.P. in 2002 or 2003.
No dividends or distributions had been made to Orion Power Holdings by Orion
Power MidWest, L.P. or Liberty Electric Power, LLC through December 31, 2003.
Orion Power Development Company, Inc. distributed $831,000 to Orion Power
Holdings in 2003. See note 7 to Orion Power's consolidated financial statements
regarding restrictions on cash distributions from Orion Power Holdings'
subsidiaries to Orion Power Holdings.

* * *


F-57



ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

SCHEDULE II - RESERVES
FOR THE PERIOD FEBRUARY 20, 2002 THROUGH DECEMBER 31, 2002 AND
THE YEAR ENDED DECEMBER 31, 2003
(THOUSANDS OF DOLLARS)



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
- --------------------------------------------- ---------- ------- ------------ ------------ ----------

For the Period February 20, 2002 through
December 31, 2002:
Accumulated provisions:
Uncollectible accounts receivable........ $ - $ 951 $ 989 $ - $ 1,940
Reserves for inventory................... - - 208 - 208
Deferred tax assets valuation............ - - 29,714 - 29,714

For the Year Ended December 31, 2003:
Accumulated provisions:
Uncollectible accounts receivable........ 1,940 6,164 - (989) 7,115
Reserves for inventory................... 208 - - - 208
Deferred tax assets valuation............ 29,714 3,831 - - 33,545


- -------------
(1) Charged to other accounts represents obligations established related to
Reliant Resources, Inc.'s acquisition of Orion Power Holdings, Inc. and its
subsidiaries.

(2) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible accounts
reserve, such deductions are net of recoveries of amounts previously
written off.

* * *

F-58


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 president 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 such evaluation, such officers
have concluded that, as of the end of such period, our disclosure controls and
procedures are effective in alerting them on a timely basis to material
information required to be included in our reports filed or submitted under the
Securities Exchange Act of 1934.

CHANGES IN INTERNAL CONTROLS

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) during
our fiscal quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

II-1



PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

DIRECTORS AND EXECUTIVE OFFICERS



NAME AGE (1) PRESENT POSITION
- ----------------------------------- ------- -----------------------------------------------------------------

Robert W. Harvey................... 48 President and a Director
Orlando Figueroa................... Director
Mark M. Jacobs..................... 41 Executive Vice President and Chief Financial Officer
Michael L. Jines................... 45 Senior Vice President, General Counsel, Corporate Secretary and a
Director
Thomas C. Livengood................ 48 Vice President and Controller


- ------------------
(1) Age as of March 1, 2004.

ROBERT W. HARVEY has served as our President and a Director since June
2003. He has served as Reliant Resources' Executive Vice President, Power
Generation and Supply since January 2004 and its Executive Vice President and
Group President, Wholesale from May 2003 to January 2004. He served as its
Executive Vice President and Group President, Retail from January 2002 to May
2003. Mr. Harvey served as a Vice Chairman of CenterPoint from June 1999 until
the Distribution. From 1982 to June 1999, Mr. Harvey was with the Houston office
of McKinsey & Company. He was a director (senior partner) of the firm and was
the leader of the firm's North American electric power and natural gas practice.

ORLANDO FIGUEROA has served as a Director since August 2003. He is employed
by Lord Securities Corporation and serves on our board pursuant to our agreement
with them. He joined Lord Securities Corporation in March 2002 and is
responsible for domicile regulatory compliance in both domestic and
international jurisdictions wherein Lord Securities Corporation has a business
presence. Prior to joining Lord Securities Corporation, he was employed by Loeb
& Loeb LLP, where he was the Director of Corporate Services for the firm's
85-lawyer New York office.

MARK M. JACOBS has served as our Executive Vice President and Chief
Financial Officer since December 2003. He has served as Reliant Resources'
Executive Vice President and Chief Financial Officer since the Distribution. Mr.
Jacobs served as Executive Vice President and Chief Financial Officer of
CenterPoint from July 2002 until the Distribution. Mr. Jacobs was employed by
Goldman, Sachs & Co. from 1989 to 2002. He was a Managing Director in the firm's
Natural Resources Group.

MICHAEL L. JINES has served as our Senior Vice President, General Counsel
and Corporate Secretary since June 2003. He has served as a Director since
August 2003. From February 2002 until June 2003, he served as our Vice President
and Assistant Corporate Secretary. He has served as Reliant Resources' Senior
Vice President, General Counsel and Corporate Secretary since May 2003. He
served as Reliant Resources' Deputy General Counsel and Senior Vice President
and General Counsel, Wholesale Group from March 2002 to May 2003. Mr. Jines
served as the Deputy General Counsel of Reliant Energy and Senior Vice President
and General Counsel of its Wholesale Group until the Distribution.

THOMAS C. LIVENGOOD has served as our Vice President and Controller since
December 2003. He has served as Reliant Resources' Vice President and Controller
since August 2002. From 1996 to August 2002, he served as Executive Vice
President and Chief Financial Officer of Carriage Services, Inc.

III-1



ITEM 11. EXECUTIVE COMPENSATION.

All of our executive officers are employees of Reliant Resources. None of
the executive officers receives any compensation or participates in any benefit
plan or other compensatory arrangement from any of our subsidiaries or us. In
addition, we pay no management fees to Reliant Resources or any of its
subsidiaries for the direct services of our executive officers. Each executive
officer splits his time between our parent and its various subsidiaries
(including us).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

We have 1,000 shares of common stock outstanding. Reliant Resources owns
all of our common stock and has pledged our common stock to secure the
indebtedness under one of its credit facilities. If Reliant Resources defaults
on such obligation, the lenders could foreclose on our stock, effecting a change
of control. Other than such a situation, there are no securities outstanding or
any other agreements in effect that would require us to issue, or give any
person the right to acquire, any of our securities.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

See note 3 to our consolidated financial statements.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Our parent company, Reliant Resources, retained Deloitte & Touche LLP,
Deloitte Touche Tohmatsu and their respective affiliates to provide services to
Reliant Resources and its subsidiaries, including us, for 2002 and 2003.

In accordance with the terms of its charter, the Audit Committee of our
parent company, Reliant Resources, approves in advance all audits, non-audit
services and related fees.

The following table shows the aggregate fees that Deloitte & Touche billed
directly to us for audit and other professional services in the years ended
December 31, 2002 and 2003. These fees, which primarily reflect the cost of
incremental work associated with our business operations, may not be indicative
of the accounting and other fees that we might have incurred if we were a
separate stand-alone entity and not a subsidiary of Reliant Resources. In
addition, in 2002 and 2003 Reliant Resources and its subsidiaries (other than
us) were billed audit fees, audit-related fees, tax fees and other fees that are
partially attributable to work performed for us and our subsidiaries, however,
such amounts cannot be directly allocated between us and Reliant Resources and
its other subsidiaries. All of the following fees were approved by the Audit
Committee of Reliant Resources.



Years Ended
December 31,
--------------
TYPE OF FEES: 2002 2003
---- ----
(in thousands)

Audit fees $ 43 $463
Audit-related fees 32 7
Tax fees 118 83
---- ----
Total $193 $553
==== ====



- "Audit fees" are the aggregate fees that Deloitte & Touche billed us
directly for professional services rendered by Deloitte & Touche for
professional services rendered for the audit of our annual financial
statements and for services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements. These "audit fees" include audit fees of our subsidiary
financial statements related to Orion NY, Orion MidWest, Liberty
and LEP.

- "Audit-related fees" are the aggregate fees that Deloitte & Touche
billed us directly for assurance and


III-2



related services that are related to the performance of the audit or
the review of our financial statements that are not included in "audit
fees."

- "Tax fees" are the aggregate fees that Deloitte & Touche billed us
directly for professional services provided by the principal
accountant for tax compliance, tax advice and tax planning.

Information regarding Reliant Resources' principal accountant fees and
services will be set forth in the definitive proxy statement relating to Reliant
Resources' annual meeting to be filed with the SEC pursuant to SEC Regulation
14A.

III-3



PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.



(a)(1) Orion Power Holdings, Inc. and Subsidiaries Financial Statements.
Independent Auditors' Report.................................................................... F-2
Consolidated Statements of Operations for the Year Ended December 31, 2001, for the periods
from January 1, 2002 through February 19, 2002 and February 20, 2002 though December 31, 2002
and for the Year Ended December 31, 2003...................................................... F-5
Consolidated Balance Sheets as of December 31, 2002 and 2003.................................... F-6
Consolidated Statements of Cash Flows for the Year Ended December 31, 2001, for the periods
from January 1, 2002 through February 19, 2002 and February 20, 2002 though December 31, 2002
and for the Year Ended December 31, 2003...................................................... F-7
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Year
Ended December 31, 2001, for the periods from January 1, 2002 through February 19, 2002 and
February 20, 2002 though December 31, 2002 and for the Year Ended December 31, 2003........... F-8
Notes to Consolidated Financial Statements...................................................... F-9

(a)(2) Financial Statement Schedules.
Schedule I - Condensed Financial Information of Orion Power Holdings, Inc.
Condensed Statements of Operations for the Year Ended December 31, 2001, for the periods from
January 1, 2002 through February 19, 2002 and February 20, 2002 though December 31, 2002 and
for the Year Ended December 31, 2003.......................................................... F-52
Condensed Balance Sheets as of December 31, 2002 and 2003....................................... F-53
Condensed Statements of Cash Flows for the Year Ended December 31, 2001, for the periods from
January 1, 2002 through February 19, 2002 and February 20, 2002 though December 31, 2002 and
for the Year Ended December 31, 2003.......................................................... F-54
Notes to Condensed Financial Statements......................................................... F-55
Schedule II - Orion Power Holdings, Inc. and Subsidiaries - Reserves for period February 20,
2002 through December 31, 2002 and the Year Ended December 31, 2003........................... F-58


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.

(a)(3) Exhibits

See Index of Exhibits.

(b) Reports on Form 8-K.

None.

IV-1



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

ORION POWER HOLDINGS, INC.

By: /s/ Robert W. Harvey
----------------------------------
Robert W. Harvey
PRESIDENT
MARCH 15, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.



SIGNATURE TITLE DATE

By: /s/ Robert W. Harvey
--------------------------- PRESIDENT AND A DIRECTOR MARCH 15, 2004
ROBERT W. HARVEY (PRINCIPAL EXECUTIVE OFFICER)

By: /s/ Mark M. Jacobs
--------------------------- EXECUTIVE VICE PRESIDENT AND MARCH 15, 2004
MARK M. JACOBS CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)

By: /s/ Thomas C. Livengood
--------------------------- VICE PRESIDENT AND CONTROLLER MARCH 15, 2004
THOMAS C. LIVENGOOD (PRINCIPAL ACCOUNTING OFFICER)

By: /s/ Michael L. Jines
--------------------------- SENIOR VICE PRESIDENT, MARCH 15, 2004
MICHAEL L. JINES GENERAL COUNSEL, CORPORATE
SECRETARY AND A DIRECTOR




INDEX OF EXHIBITS

Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated herein by
reference to a prior filing as indicated.



SEC FILE OR
EXHIBIT REPORT OR REGISTRATION REGISTRATION EXHIBIT
NUMBER DOCUMENT DESCRIPTION STATEMENT NUMBER REFERENCE
- -------- --------------------------------------------- -------------------------- ------------ ---------

3.1 Certificate of Merger of Reliant Energy Power Orion Power Holding's 1-10677 3.1.1
Generation Merger Sub, Inc. into Orion Power Annual Report on Form 10-K
Holdings, Inc., dated February 19, 2002, with for the year ended
Certificate of Incorporation of the Survivor December 31, 2001
Corporation attached.

3.2 Amendment of Certificate of Incorporation of Orion Power Holding's 1-10677 3.1.2
Reliant Energy Power Generation Merger Sub, Annual Report on Form 10-K
Inc., dated February 19, 2002, renaming the for the year ended
corporation Orion Power Holdings, Inc. December 31, 2001

3.3 Amended and Restated Bylaws Orion Power Holding's 1-10677 3.2.1
Annual Report on Form 10-K
for the year ended
December 31, 2001

3.4 Amendment to Amended and Restated Bylaws. Orion Power Holding's 1-10677 3.2.2
Annual Report on Form 10-K
for the year ended
December 31, 2001

4.1 Indenture, dated as of April 27, 2000 between Orion Power Holding's 333-44118 4.1
Orion Power Holdings, Inc. and Wilmington Registration Statement on
Trust Company. Form S-1, dated August 18,
2000

10.1 Transition Power Purchase Agreement, dated as Orion Power Holding's 333-44118 10.10
of February 4, 1999, between Niagara Mohawk Registration Statement on
Power Corporation and Erie Boulevard Form S-1, dated August 18,
Hydropower, L.P. 2000

10.2 Provider of Last Resort Agreement, dated as Orion Power Holding's 333-44118 10.9
of September 24, 1999, between Duquesne Light Registration Statement on
Company and Orion Power Holdings, Inc. Form S-1, dated August 18,
2000

10.3 Master Agreement dated as of July 31, 2000 Orion Power Holding's 333-57110 10.30
between Liberty Electric Power, LLC, Liberty Registration Statement on
Electric PA, LLC, the Institutional Lenders Form S-4, dated March 16,
named therein, and The Chase Manhattan Bank 2001
as Administrative Agent.

10.4 Credit Agreement dated as of July 31, 2000 Orion Power Holding's 333-57110 10.31
between Liberty Electric PA, LLC, the Bank Registration Statement on
Lenders named therein, and the Chase Form S-4, dated March 16,
Manhattan Bank as Administrative Agent. 2001

10.5 Note Purchase Agreement dated as of July 31, Orion Power Holding's 333-57110 10.32
2000 between Liberty Electric PA, LLC and the Registration Statement on
Institutional Lenders named therein. Form S-4, dated March 16,
2001

10.6 Agreement Plan of Merger dated as of Orion Power Holding's, 1-10677 2.1
September 26, 2001 by and Among Orion Power Inc. Current Report on
Holdings, Inc., Reliant Resources, Inc. and Form 8-K dated September
Reliant Energy Power Generation Merger Sub, 26, 2002
Inc.






SEC FILE OR
EXHIBIT REPORT OR REGISTRATION REGISTRATION EXHIBIT
NUMBER DOCUMENT DESCRIPTION STATEMENT NUMBER REFERENCE
- -------- --------------------------------------------- -------------------------- ------------ ---------

10.7 Second Amended and Restated Credit Agreement, Orion Power Holding's 1-10677 10.1
dated October 28, 2002, among Orion Power New Quarterly Report on Form
York, L.P., Banc of America Securities, LLC 10-Q for the quarterly
and BNP Paribas, as Lead Arrangers and as period ended September 30,
Joint Book Runners, and the financial 2002
institutions party thereto.

10.8 Second Amended and Restated Credit Agreement, Orion Power Holding's 1-10677 10.2
dated October 28, 2002, among Orion Power Quarterly Report on Form
MidWest, L.P., Banc of America Securities, 10-Q for the quarterly
LLC and BNP Paribas, as Lead Arrangers and as period ended September 30,
Joint Book Runners, and the financial 2002
institutions party thereto.

10.9 Deposit Account Agreement, dated October 28, Orion Power Holding's 1-10677 10.3
2002, between Orion Power Capital, L.L.C. and Quarterly Report on Form
Bank of America, N.A., as Collateral Agent 10-Q for the quarterly
period ended September 30,
2002

10.10 Amended and Restated Credit and Guaranty Reliant Resources, Inc.'s 1-6455 10.42
Agreement, dated as of March 28, 2003, among Amendment No. 1 to its
(i) Reliant Resources, Inc., as a Borrower Annual Report on Form
and Guarantor; (ii) Orion Power Holdings, 10-K/A for the year ended
Inc., as a Limited Guarantor; (iii) the other December 31, 2002
Credit Parties referred to therein, as
Borrowers and/or Guarantors; (iv) the Lenders
referred to therein; (v) Bank of America,
N.A., as administrative agent for the
Lenders, as Collateral Agent and as an
Issuing Bank; (vi) Barclays Bank PLC and
Deutsche Bank AG, New York Branch, as
syndication agents for the Lenders; (vii)
Citicorp USA, Inc., as Tranche A Agent; and
(viii) Citibank, N.A., as Tranche A
Collateral Agent

10.11 Amendment No. 1 to First Amended and Restated Reliant Resources, Inc.'s 333-107297 10.43
Credit and Guaranty Agreement, dated as of Registration Statement on
June 16, 2003, among (i) Reliant Resources, Form S-4, dated July 24,
Inc., as a Borrower and Guarantor; (ii) Orion 2003, to which Orion Power
Power Holdings, Inc., as a Limited Guarantor; Holdings, Inc. is a
(iii) the other Credit Parties referred to registrant
therein, as Borrowers and/or Guarantors; (iv)
the Lenders referred to therein; (v) Bank of
America, N.A., as administrative agent for
the Lenders, as Collateral Agent and as an
Issuing Bank; (vi) Barclays Bank PLC and
Deutsche Bank AG, New York Branch, as
syndication agents for the Lenders; (vii)
Citicorp USA, Inc., as Tranche A Agent; and
(viii) Citibank, N.A., as Tranche A
Collateral Agent.

10.12 Amendment No. 2 dated as of December 29, 2003 Reliant Resources, Inc.'s 1-16455 99.2
to the Amended and Restated Credit and Current Report on Form
Guaranty Agreement dated as of March 28, 8-K, dated December 29,
2003, as amended by Amendment No. 1 dated as 2003
of June 16, 2003 among (i) Reliant Resources,
Inc., as a Borrower and Guarantor; (ii) Orion
Power Holdings, Inc., as a Limited Guarantor;
(iii) the other Credit Parties referred to
therein, as Borrowers and/or Guarantors; (iv)
the Lenders referred to therein; (v) Bank of
America, N.A., as administrative agent for
the Lenders, as Collateral Agent and as an
Issuing Bank; (vi) Barclays Bank PLC and
Deutsche Bank AG, New York Branch, as
syndication agents for the Lenders; (vii)
Citicorp USA, Inc., as Tranche A Agent; and
(viii) Citibank, N.A., as Tranche A
Collateral Agent

+10.13 Amended and Restated Limited
Guaranty, dated as of July 1, 2003, executed
by Orion Power Holdings, Inc. and delivered
to Wachovia Bank, National Association, as
the Collateral Trustee.






SEC FILE OR
EXHIBIT REPORT OR REGISTRATION REGISTRATION EXHIBIT
NUMBER DOCUMENT DESCRIPTION STATEMENT NUMBER REFERENCE
- -------- --------------------------------------------- -------------------------- ------------ ---------

+12.1 Reliant Resources, Inc. and Subsidiaries
Ratio of Earnings from Continuing Operations
to Fixed Charges

+21.1 Subsidiaries of Orion Power Holdings, Inc.

+23.1 Consent of Deloitte & Touche LLP

+31.1 Certification of the President of Orion Power
Holdings, Inc pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

+31.2 Certification of the Executive Vice President
and Chief Financial Officer of Orion Power
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

+32.1 Certification of the President of Orion Power
Holdings, Inc. 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)

+32.2 Certification of Executive Vice President and
Chief Financial Officer of Reliant Resources,
Inc. 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)