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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2004

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

ORION POWER HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

c/o Reliant Energy, Inc.

1000 Main Street

Houston, Texas 77002

(Address of Principal Executive Offices) (Zip Code)

(713) 497-3000

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x

As of November 1, 2004, Orion Power Holdings, Inc. had 1,000 shares of voting common stock outstanding. All shares of voting common stock are held by Reliant Energy, Inc.

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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

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PART I.

FINANCIAL INFORMATION

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

As used in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (this Form 10-Q), “Orion Power” refers to Orion Power Holdings, Inc. and its consolidated subsidiaries.

When Orion Power makes statements containing projections, estimates or assumptions about revenues, income and other financial items, plans for the future, future economic performance, transactions and dispositions and financings related thereto, Orion Power is making “forward-looking statements.” Forward-looking statements relate to future events and anticipated revenues, earnings, business strategies, competitive position or other aspects of the 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 Orion Power believes that the expectations and the underlying assumptions reflected in the 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:

could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

Each forward-looking statement speaks only as of the date of the particular statement and Orion Power undertakes 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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PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Thousands of Dollars)

(Unaudited)

See Notes to the Unaudited Consolidated Interim Financial Statements

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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, except share amounts)

(Unaudited)

See Notes to the Unaudited Consolidated Interim Financial Statements

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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

(Unaudited)

See Notes to the Unaudited Consolidated Interim Financial Statements

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ORION POWER HOLDINGS, INC. AND SUBSIDIARIES

N OTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(1) Background and Basis of Presentation

Background

As used in this Form 10-Q, “Orion Power Holdings” refers to Orion Power Holdings, Inc. “Orion Power” refers to Orion Power Holdings, Inc. and its consolidated subsidiaries. Orion Power Holdings, a Delaware corporation, and its subsidiaries own and operate electric generation facilities in New York, Ohio, Pennsylvania and West Virginia with an aggregate generating capacity from continuing operations of 5,967 megawatts as of September 30, 2004. Orion Power typically sells its wholesale products to electric power retailers, which are the entities that supply power to consumers.

Orion Power is an indirect, wholly-owned subsidiary of Reliant Energy, Inc. (Reliant Energy).

This Form 10-Q includes Orion Power’s consolidated interim financial statements and notes (interim financial statements). The interim financial statements are unaudited, omit certain financial statement disclosures and should be read in conjunction with (a) Orion Power’s audited consolidated financial statements and notes in its Form 10-K, (b) Orion Power’s unaudited interim financial statements and notes in its First Quarter Form 10-Q and (c) Orion Power’s unaudited interim financial statements and notes in its Second Quarter Form 10-Q.

Basis of Presentation

Estimates. 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 those estimates.

Adjustments and Reclassifications. In September 2004, Orion Power sold 770 megawatts (MW) of generation assets located in upstate New York (hydropower plants) for $874 million in cash. Orion Power has reported the operations of the hydropower plants as discontinued operations since May 2004 and, accordingly, has reclassified amounts for all periods. See notes 5 and 13 for further discussion.

The interim financial statements reflect all normal recurring adjustments necessary, in management’s opinion to present fairly the financial position and results of operations for the reported periods. Amounts reported for interim periods, however, may not be indicative of a full year period due to seasonal fluctuations in demand for energy and energy services, changes in energy commodity prices, timing of maintenance and other expenditures, dispositions, changes in interest expense and other factors.

Orion Power has reclassified certain amounts reported in this Form 10-Q from prior periods to conform to the 2004 presentation of financial statements. These reclassifications had no impact on reported earnings.

Orion Power has reclassified general and administrative expenses and operation and maintenance expenses from prior year’s presentation. Other general and administrative expenses in the consolidated statements of operations include (a) administrative services (including management services, financial and accounting, cash management and treasury support, certain legal costs, information technology system support, communications, office management and human resources), (b) regulatory costs and (c) certain benefit costs.

FIN No. 46R. In January 2004, Orion Power adopted Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN No. 46R), which modified certain criteria in determining which entities should be considered as variable interest entities. The adoption had no impact on the 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 its application of clarified or revised guidance related to FIN No. 46R.

Each of Orion Power New York, LP (Orion New York); Orion Power New York LP, LLC; Orion Power New York GP, Inc.; Astoria Generating Company, L.P. (Astoria); Orion Power MidWest, LP (Orion MidWest); Orion

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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.

(2) Related Party Transactions

The interim financial statements include significant transactions between Orion Power and Reliant Energy and its other subsidiaries. The majority of these transactions involve the purchase or sale of energy, capacity, fuel, emissions allowances or related services (including transportation, transmission and storage services) by Reliant Energy Services, Inc. (Reliant Energy Services), a wholly-owned subsidiary of Reliant Energy, from or to Orion Power. In addition, significant technical and administrative support services are provided by affiliates. The following describes the impacts on the interim financial statements for the particular transactions:

Support Services Agreement. In October 2002, Orion Power entered into a services arrangement with Reliant Energy Wholesale Service Company (REWSC), a wholly-owned subsidiary of Reliant Energy. 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 New York 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 Energy. During the three months ended September 30, 2004 and 2003, $16 million and $14 million, respectively, and during the nine months ended September 30, 2004 and 2003, $55 million and $52 million, respectively, of support services costs were allocated to Orion Power by REWSC (and are recorded in operation and maintenance expenses and general and administrative expenses). Of these amounts, during the nine months ended September 30, 2004 and 2003, $11 million were billed and $44 million and $41 million, respectively, were recorded as non-cash equity contributions from Reliant Energy.

Services and Commodity Agreements. In October 2002, Reliant Energy Services entered into agreements to provide support services to Orion Power Holdings’ subsidiaries, Orion MidWest and Orion New York, and their respective subsidiaries. Purchases from Reliant Energy Services under various commodity agreements, recorded in fuel expense and purchased power expense, were $69 million and $17 million, respectively, and $65 million and $7 million, respectively, during the three months ended September 30, 2004 and 2003, respectively. Purchases from Reliant Energy Services under various commodity agreements, recorded in fuel expense and purchased power expense, were $131 million and $55 million, respectively, and $108 million and $20 million, respectively, during the nine months ended September 30, 2004 and 2003, respectively. Sales to Reliant Energy Services under various commodity agreements, recorded in revenue, were $1 million and $6 million during the three months ended September 30, 2004 and 2003, respectively, and were $14 million and $24 million during the nine months ended September 30, 2004 and 2003, respectively.

Technical Services Arrangement. Beginning July 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 during the three months ended September 30, 2004 and 2003, were $2 million and during the nine months ended September 30, 2004 and 2003, were $7 million and $6 million, respectively, and are included in operation and maintenance expense or property, plant and equipment, as appropriate.

Liberty Energy Services Agreement and Gas Purchase Agreement. In August 2003, Liberty Electric Power, LLC (Liberty Power) entered into an agreement with Reliant Energy Services to provide certain services to Liberty Power. Reliant Energy Services received a flat monthly fee from Liberty Power for providing these services in the amount of $0.1 million. During the three and nine months ended September 30, 2004, $0.2 million and $0.6 million, respectively, was incurred and expensed under this agreement. In addition, in August 2003, Liberty Power and Reliant Energy Services entered into a base contract for sale and purchase of natural gas pursuant to which Liberty Power buys natural gas from Reliant Energy Services. Liberty Power was required to pre-pay Reliant Energy Services for all gas purchases. During the three and nine months ended September 30, 2004, $24 million and $59 million, respectively, was incurred and expensed under this agreement. During the three and nine months ended September 30, 2003, $7 million was incurred and expensed under this agreement. In September 2004, both agreements expired by their terms. In October 2004, Reliant Energy Services and Liberty Power reentered into substantially similar agreements with a term of seven days. Upon expiration, a third party began providing substantially similar services to Liberty Power. See note 12.

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Other. In May 2003 and November 2003, Reliant Energy contributed $15 million and $20 million, respectively, to Orion Power Holdings, as a partial funding of the semi-annual interest payments of $24 million on the senior notes due at those dates. Orion Power Holdings used the cash from income tax refunds to fund the $24 million interest payments in May 2004 and November 2004. While Reliant Energy has no obligation, it intends to contribute any funding shortfall of the semi-annual interest payments due in May 2005 should Orion Power Holdings’ funds be insufficient. See note 7.

Deemed contributions from Reliant Energy related to current federal income taxes were $42 million during the three and nine months ended September 30, 2004. In addition, during the three and nine months ended September 30, 2004, Orion Power Holdings distributed deferred income tax liabilities of $103 million to Reliant Energy due to the capital gain for federal income tax purposes recognized in connection with the sale of the hydropower plants. See note 13.

(3) Retirement Plans

Net benefit cost for Orion Power’s qualified retirement plans includes the following components:

Orion Power expects cash contributions to its pension plans for continuing operations will be approximately $5 million during 2004. As of September 30, 2004, Orion Power had contributed $5 million.

(4) Comprehensive Income (Loss)

The following table summarizes the components of total comprehensive income (loss):

(5) Goodwill and Property, Plant and Equipment

Orion Power evaluates goodwill annually (in November) and goodwill and property, plant and equipment when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

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July 2003 Goodwill Impairment Test. In July 2003, Reliant Energy 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. This sale required Reliant Energy 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 loss on disposal. Reliant Energy was also required to test the recoverability of goodwill in its 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.

November 2003 Annual Goodwill Impairment Test. 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.

May 2004 Goodwill Impairment Test. In May 2004, Orion Power signed an agreement to sell 770 MW of generation assets. The sale closed in September 2004. Generally accepted accounting principles required Orion Power to allocate a portion of its goodwill to the assets being sold on a relative fair value basis as of May 2004 in order to compute the gain on disposal. As of May 2004, Orion Power also tested the recoverability of it remaining goodwill and determined that no impairment had occurred. As of September 30, 2004, Orion Power had consolidated goodwill of $291 million. See note 13.

For additional information regarding the process and assumptions used in Orion Power’s impairment tests for 2003 and 2002, see note 5 to its consolidated financial statements in its Form 10-K. The significant assumptions used in the May 2004 test are consistent with the November 2003 annual impairment test assumptions, which were previously disclosed in the Form 10-K.

Potential Future Impairments of Property, Plant and Equipment. See note 12 for discussion of an anticipated future impairment of Orion Power’s net investment in a subsidiary.

(6) Derivative Instruments

Derivative assets and liabilities at September 30, 2004 and December 31, 2003 are as follows:

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Pre-tax income (loss) of derivative instruments from continuing operations, including energy derivatives and interest rate derivatives, for the three and nine months ended September 30, 2004 and 2003 are as follows:

As of September 30, 2004 and December 31, 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 two years. As of September 30, 2004 and December 31, 2003, the maximum length of time Orion Power is hedging its exposure to the payment of variable interest rates is three years and four years, respectively. As of September 30, 2004, Orion Power expects $35 million of net gains deferred in accumulated other comprehensive income to be reclassified into net income (loss) during the period from October 1, 2004 to September 30, 2005.

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(7) Credit Facilities and Debt

The following table sets forth the debt outstanding to third parties as of September 30, 2004 and December 31, 2003: