UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 1-16455

GenOn Energy, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		76-0655566 (I.R.S. Employer Identification No.)
1000 Main Street, Houston, Texas (Address of Principal Executive Offices)		77002 (Zip Code)

(832) 357-3000

(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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of May 2, 2011, there were 771,484,710 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 

 

TABLE OF CONTENTS

Glossary of Certain Defined Terms		ii
Cautionary Statement Regarding Forward-Looking Information		vi
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			1
Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, 2011 and 2010			1
Condensed Consolidated Balance Sheets March 31, 2011 (Unaudited) and December 31, 2010			2
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Loss (Unaudited) Three Months Ended March 31, 2011			3
Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2011 and 2010			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			31
Overview			31
Merger of Mirant and RRI Energy			31
Hedging Activities			31
Capital Expenditures and Capital Resources			32
Environmental Matters			33
Potrero Shutdown			34
Commodity Prices			34
Results of Operations			34
Financial Condition			46
Historical Cash Flows			49
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			51
Fair Value Measurements			51
Counterparty Credit Risk			52
Interest Rate Risk			53
Coal Agreement Risk			54
ITEM 4. CONTROLS AND PROCEDURES			55
Effectiveness of Disclosure Controls and Procedures			55
Changes in Internal Control Over Financial Reporting			55
PART II
ITEM 1. LEGAL PROCEEDINGS			56
ITEM 1A. RISK FACTORS			56
ITEM 6. EXHIBITS			57
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Glossary of Certain Defined Terms

AB 32		California’s Global Warming Solutions Act.
ancillary services		Services that ensure reliability and support the transmission of electricity from generation sites to customer loads. Such services include regulation service, spinning and non-spinning reserves and voltage support.
Bankruptcy Court		United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division.
baseload generating units		Units designed to satisfy minimum baseload requirements of the system and produce electricity at an essentially constant rate and run continuously.
CAIR		Clean Air Interstate Rule.
CAISO		California Independent System Operator.
CAMR		Clean Air Mercury Rule.
capacity		Energy that could have been generated at continuous full-power operation during the period.
CARB		California Air Resources Board.
CenterPoint		CenterPoint Energy, Inc. and its subsidiaries, on and after August 31, 2002, and Reliant Energy, Incorporated and its subsidiaries, prior to August 31, 2002.
CFTC		Commodity Futures Trading Commission.
Clean Air Act		Federal Clean Air Act.
Clean Water Act		Federal Water Pollution Control Act.
CO2		Carbon dioxide.
dark spread		The difference between power prices and coal fuel costs.
D.C. Circuit		The United States Court of Appeals for the District of Columbia Circuit.
Dodd-Frank Act		The Dodd-Frank Wall Street Reform and Consumer Protection Act.
EBITDA		Earnings before interest, taxes, depreciation and amortization.
EPA		United States Environmental Protection Agency.
EPC		Engineering, procurement and construction.
EPS		Earnings per share.
Exchange Act		Securities Exchange Act of 1934, as amended.
Exchange Ratio		Right of Mirant Corporation stockholders to receive 2.835 shares of common stock of RRI Energy, Inc. in the Merger.
FASB		Financial Accounting Standards Board.
FERC		Federal Energy Regulatory Commission.
GAAP		United States generally accepted accounting principles.
GenOn		GenOn Energy, Inc. (formerly known as RRI Energy, Inc.) and, except where the context indicates otherwise, its subsidiaries, after giving effect to the Merger.

GenOn Americas		GenOn Americas, Inc. (formerly known as Mirant Americas, Inc.).
GenOn Americas Generation		GenOn Americas Generation, LLC (formerly known as Mirant Americas Generation, LLC).
GenOn credit facilities		Senior secured term loan and revolving credit facility of GenOn and certain of its subsidiaries.
GenOn Energy Holdings		GenOn Energy Holdings, Inc. (formerly known as Mirant Corporation) and, except where the context indicates otherwise, its subsidiaries.
GenOn Energy Management		GenOn Energy Management, LLC (formerly known as Mirant Energy Trading, LLC).
GenOn Lovett		GenOn Lovett, LLC, owner of the former Lovett generating facility, which was shut down on April 19, 2008, and has been demolished (formerly known as Mirant Lovett, LLC).
GenOn Marsh Landing		GenOn Marsh Landing, LLC (formerly known as Mirant Marsh Landing, LLC).
GenOn Mid-Atlantic		GenOn Mid-Atlantic, LLC (formerly known as Mirant Mid-Atlantic, LLC) and, except where the context indicates otherwise, its subsidiaries.
GenOn North America		GenOn North America, LLC (formerly known as Mirant North America, LLC).
HAP		Hazardous Air Pollutant.
intermediate generating units		Units designed to satisfy system requirements that are greater than baseload and less than peaking.
IRC		Internal Revenue Code of 1986, as amended.
ISO		Independent system operator.
ISO-NE		Independent System Operator-New England.
LIBOR		London InterBank Offered Rate.
MACT		Maximum achievable control technology.
MC Asset Recovery		MC Asset Recovery, LLC.
MDE		Maryland Department of the Environment.
Merger		The merger completed on December 3, 2010 pursuant to the Merger Agreement.
Merger Agreement		The agreement by and among Mirant Corporation, RRI Energy, Inc. and RRI Energy Holdings, Inc. dated as of April 11, 2010.
Mirant		GenOn Energy Holdings, Inc. (formerly known as Mirant Corporation) and, except where the context indicates otherwise, its subsidiaries.
MISO		Midwest Independent Transmission System Operator.
MW		Megawatt.
MWh		Megawatt hour.
NAAQS		National Ambient Air Quality Standards.
net generating capacity		Net summer capacity.
NOL		Net operating loss.

NOV		Notice of violation.
NOx		Nitrogen oxides.
NPDES		National pollutant discharge elimination system.
NYISO		New York Independent System Operator.
NYMEX		New York Mercantile Exchange.
OTC		Over-the-counter.
PADEP		Pennsylvania Department of Environmental Protection.
peaking generating units		Units designed to satisfy demand requirements during the periods of greatest or peak load on the system.
PEDFA		Pennsylvania Economic Development Financing Authority.
PG&E		Pacific Gas & Electric Company.
PJM		PJM Interconnection, LLC.
Plan		The plan of reorganization that was approved in conjunction with Mirant Corporation’s emergence from bankruptcy protection on January 3, 2006.
PPA		Power purchase agreement.
REMA		GenOn REMA, LLC and its subsidiaries (formerly known as RRI Energy Mid-Atlantic Power Holdings, LLC).
RGGI		Regional Greenhouse Gas Initiative.
RMR		Reliability-must-run.
RPM		Model utilized by PJM to meet load serving entities’ forecasted capacity obligations through a forward-looking commitment of capacity resources.
RRI Energy		RRI Energy, Inc., which changed its name to GenOn Energy, Inc. in connection with the Merger.
RTO		Regional Transmission Organization.
scrubbers		Flue gas desulfurization emissions controls.
SEC		United States Securities and Exchange Commission.
Securities Act		Securities Act of 1933, as amended.
Series A Warrants		Warrants issued by Mirant on January 3, 2006, with an exercise price of $21.87 and expiration date of January 3, 2011.
Series B Warrants		Warrants issued by Mirant on January 3, 2006, with an exercise price of $20.54 and expiration date of January 3, 2011.
SO2		Sulfur dioxide.
Stone & Webster		Stone & Webster, Inc.
Total margin capture factor		Represents the percentage of actual energy, contracted and capacity gross margin generated of the potential energy, contracted and capacity gross margin that could have been generated for a unit.
Transport Rule		The EPA’s Proposed Federal Implementation Plan To Reduce Interstate Transport of Fine Particulate Matter and Ozone, which would replace the CAIR.
VaR		Value at risk.
VIE		Variable interest entity.
Virginia DEQ		Virginia Department of Environmental Quality.
WCI		Western Climate Initiative.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

In addition to historical information, the information presented in this Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements involve known and unknown risks and uncertainties and relate to our revenues, income, capital structure and other financial items, future events, our future financial performance or our projected business results and our view of economic and market conditions. In some cases, one can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “expect,” “intend,” “seek,” “plan,” “think,” “anticipate,” “estimate,” “predict,” “target,” “potential” or “continue” or the negative of these terms or other comparable terminology.

Forward-looking statements are only predictions. Actual events or results may differ materially from any forward-looking statement as a result of various factors, which include:

•

our ability to integrate successfully the businesses following the Merger or realize cost savings and any other synergies as a result of the Merger;

•

our ability to enter into intermediate and long-term contracts to sell power or to hedge economically our expected future generation of power, and to obtain adequate supply and delivery of fuel for our generating facilities, at our required specifications and on terms and prices acceptable to us;

•

failure to obtain adequate fuel supply, including from curtailments of the transportation of fuel;

•

changes in market conditions, including developments in the supply, demand, volume and pricing of electricity and other commodities in the energy markets, including efforts to reduce demand for electricity and to encourage the development of renewable sources of electricity, and the extent and timing of the entry of additional competition in our markets;

•

deterioration in the financial condition of our counterparties and the failure of such parties to pay amounts owed to us beyond collateral posted or to perform obligations or services due to us;

•

the failure of our generating facilities to perform as expected, including outages for unscheduled maintenance or repair;

•

hazards customary to the power generation industry and the possibility that we may not have adequate insurance to cover losses resulting from such hazards or the inability of our insurers to provide agreed upon coverage;

•

our failure to utilize new, or advancements in, power generation technologies;

•

strikes, union activity or labor unrest;

•

our ability to develop or recruit capable leaders and our ability to retain or replace the services of key employees;

•

weather and other natural phenomena, including hurricanes and earthquakes;

•

the cost and availability of emissions allowances;

•

the curtailment of operations and reduced prices for electricity resulting from transmission constraints;

•

our ability to execute our business plan in California, including entering into new arrangements for sales of capacity, energy and other products from our existing generating facilities;

•

our ability to execute our plan in respect of our Marsh Landing generating facility, including obtaining and maintaining the governmental authorizations necessary for construction and operation of the generating facility and completing the construction of the generating facility by mid-2013;

•

our relative lack of geographic diversification of revenue sources resulting in concentrated exposure to the PJM market;

•

the potential of additional limitation or loss of our income tax NOLs as a result of an ownership change as defined in IRC Section 382;

•

war, terrorist activities, cyberterrorism and inadequate cybersecurity, or the occurrence of a catastrophic loss;

•

our failure to provide a safe working environment for our employees and visitors thereby increasing our exposure to additional liability, loss of productive time, other costs and a damaged reputation;

•

poor economic and financial market conditions, including impacts on financial institutions and other current and potential counterparties, and negative impacts on liquidity in the power and fuel markets in which we hedge economically and transact;

•

increased credit standards, margin requirements, market volatility or other market conditions that could increase our obligations to post collateral beyond amounts that are expected, including additional collateral costs associated with OTC hedging activities as a result of new or proposed laws, rules and regulations governing derivative financial instruments (such as the Dodd-Frank Act and related pending rulemaking proceedings);

•

our inability to access effectively the OTC and exchange-based commodity markets or changes in commodity market conditions and liquidity, including as a result of new or proposed laws, rules and regulations governing derivative financial instruments (such as the Dodd-Frank Act and related pending rulemaking proceedings), which may affect our ability to engage in asset management, proprietary trading and fuel oil management activities as expected, or may result in material gains or losses from open positions;

•

volatility in our gross margin as a result of our accounting for derivative financial instruments used in our asset management, proprietary trading and fuel oil management activities and volatility in our cash flow from operations resulting from working capital requirements, including collateral, to support our asset management, proprietary trading and fuel oil management activities;

•

legislative and regulatory initiatives regarding deregulation, regulation or restructuring of the industry of generating, transmitting and distributing electricity (the electricity industry); changes in state, federal and other regulations affecting the electricity industry (including rate and other regulations); changes in tax laws and regulations to which we and our subsidiaries are subject; and changes in, or changes in the application of, environmental and other laws and regulations to which we and our subsidiaries and affiliates are or could become subject;

•

more stringent environmental laws and regulations (including the cumulative effect of many such regulations) that restrict our ability or render it uneconomic to operate our assets, including regulations related to air emissions;

•

increased regulation that limits our access to adequate water supplies and landfill options needed to support power generation or that increases the costs of cooling water and handling, transporting and disposing of ash and other byproducts;

•

price mitigation strategies employed by ISOs or RTOs that reduce our revenue and may result in a failure to compensate our generating units adequately for all of their costs;

•

legal and political challenges to or changes in the rules used to calculate payments for capacity, energy and ancillary services or the establishment of bifurcated markets, incentives or other market design changes that give preferential treatment to new generating facilities over existing generating facilities;

•

the disposition of pending or threatened litigation, including environmental litigation;

•

the inability of our operating subsidiaries to generate sufficient cash to support our operations;

•

the ability of lenders under our revolving credit facility to perform their obligations;

•

our consolidated indebtedness and the possibility that we or our subsidiaries may incur additional indebtedness in the future;

•

restrictions on the ability of our subsidiaries to pay dividends, make distributions or otherwise transfer funds to us, including restrictions on GenOn Mid-Atlantic and REMA contained in their respective operating lease documents, which may affect our ability to access the cash flows of those subsidiaries to make debt service and other payments;

•

our failure to comply with provisions of our operating leases, loan agreements and debt may lead to a breach and, if not remedied, result in an event of default thereunder, which could result in such lessors, lenders and debt holders exercising remedies, limit access to needed liquidity and damage our reputation and relationships with financial institutions;

•

covenants contained in our credit facilities, debt and leases that restrict our current and future operations, particularly our ability to respond to changes or take certain actions that may be in our long-term best interests; and

•

our ability to borrow additional funds and access capital markets.

Many of these risks, uncertainties and assumptions are beyond our ability to control or predict. All forward-looking statements contained herein are expressly qualified in their entirety by cautionary statements contained throughout this report. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made.

We undertake no obligation to update publicly or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Our filings and other important information are also available on our investor relations page at www.genon.com/investors.aspx.

In addition to the discussion of certain risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying notes to GenOn’s interim financial statements, other factors that could affect our future performance are set forth in our 2010 Annual Report on Form 10-K.

Certain Terms

As used in this report, unless the context requires otherwise, “we,” “us,” “our” and “GenOn” refer to GenOn Energy, Inc. and its consolidated subsidiaries, after giving effect to the Merger.

PART I

ITEM 1.		FINANCIAL STATEMENTS

GENON ENERGY, INC. AND SUBSIDIARIES

		Three Months Ended March 31,
		2011				2010
		(in millions, except per share data)
		(See notes 1 and 2 on the Merger)
Operating revenues (including unrealized gains (losses) of $(99) million and $363 million, respectively)		$	814			$	880
Cost of fuel, electricity and other products (including unrealized (gains) losses of $(20) million and $11 million, respectively)			404				207
Gross Margin (excluding depreciation and amortization)			410				673
Operating Expenses:
Operations and maintenance			304				166
Depreciation and amortization			86				51
Gain on sales of assets, net			(1	)			(2	)
Total operating expenses			389				215
Operating Income			21				458
Other Income (Expense), net:
Interest expense			(109	)			(50	)
Other, net			(22	)			(1	)
Total other expense, net			(131	)			(51	)
Income (Loss) Before Income Taxes			(110	)			407
Provision for income taxes			3				—
Net Income (Loss)		$	(113	)		$	407
Basic and Diluted EPS:
Basic EPS		$	(0.15	)		$	0.99
Diluted EPS		$	(0.15	)		$	0.99
Weighted average shares outstanding			771				412
Effect of dilutive securities			—				1
Weighted average shares outstanding assuming dilution			771				413

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

GENON ENERGY, INC. AND SUBSIDIARIES

		March 31, 2011				December 31, 2010
		(in millions)
		(See notes 1 and 2 on the Merger)
ASSETS
Current Assets:
Cash and cash equivalents		$	2,390			$	2,402
Funds on deposit			811				1,834
Receivables, net			293				536
Derivative contract assets			1,016				1,420
Inventories			508				554
Prepaid expenses and other current assets			137				155
Total current assets			5,155				6,901
Property, plant and equipment, gross			7,338				7,275
Accumulated depreciation and amortization			(1,046	)			(977	)
Property, Plant and Equipment, net			6,292				6,298
Noncurrent Assets:
Intangible assets, net			136				144
Derivative contract assets			621				716
Deferred income taxes			427				362
Prepaid rent			324				348
Other			535				505
Total noncurrent assets			2,043				2,075
Total Assets		$	13,490			$	15,274
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	924			$	2,058
Accounts payable and accrued liabilities			714				902
Derivative contract liabilities			860				1,227
Deferred income taxes			427				362
Other			130				133
Total current liabilities			3,055				4,682
Noncurrent Liabilities:
Long-term debt, net of current portion			4,022				4,023
Derivative contract liabilities			140				189
Pension and postretirement obligations			172				171
Other			577				579
Total noncurrent liabilities			4,911				4,962
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, par value $.001 per share, authorized 125,000,000 shares, no shares issued at March 31, 2011 and December 31, 2010			—				—
Common stock, par value $.001 per share, authorized 2.0 billion shares, issued 771,243,978 shares and 770,857,530 shares at March 31, 2011 and December 31, 2010, respectively			1				1
Additional paid-in capital			7,437				7,432
Accumulated deficit			(1,891	)			(1,778	)
Accumulated other comprehensive loss			(23	)			(25	)
Total stockholders’ equity			5,524				5,630
Total Liabilities and Stockholders’ Equity		$	13,490			$	15,274

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

GENON ENERGY, INC. AND SUBSIDIARIES

														Accumulated
						Additional								Other				Total
		Common				Paid-In				Accumulated				Comprehensive				Stockholders’
		Stock				Capital				Deficit				Loss				Equity
		(in millions)
		(See notes 1 and 2 on the Merger)
Balance, December 31, 2010		$	1			$	7,432			$	(1,778	)		$	(25	)		$	5,630
Stock-based compensation			—				4				—				—				4
Exercise of stock options			—				1				—				—				1
Total stockholders’ equity before other comprehensive loss			1				7,437				(1,778	)			(25	)			5,635
Net loss			—				—				(113	)			—				(113	)
Change in fair value of available-for-sale securities, net of tax of $0			—				—				—				(1	)			(1	)
Change in fair value of qualifying derivatives, net of settlements, net of tax of $0			—				—				—				3				3
Total other comprehensive loss																			(111	)
Balance, March 31, 2011		$	1			$	7,437			$	(1,891	)		$	(23	)		$	5,524

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

GENON ENERGY, INC. AND SUBSIDIARIES

		Three Months Ended March 31,
		2011				2010
		(in millions)
		(See notes 1 and 2 on the Merger)
Cash Flows from Operating Activities:
Net income (loss)		$	(113	)		$	407
Adjustments to reconcile net income (loss) and changes in other operating assets and liabilities to net cash provided by operating activities:
Depreciation and amortization			90				52
Amortization of acquired contracts			(5	)			—
Gain on sales of assets, net			(1	)			(2	)
Net changes in derivative contracts			79				(352	)
Stock-based compensation expense			3				5
Lower of cost or market inventory adjustments			—				8
Loss on extinguishment of debt			24				—
Funds on deposit			(42	)			(14	)
Changes in other operating assets and liabilities			183				198
Total adjustments			331				(105	)
Net cash provided by operating activities of continuing operations			218				302
Net cash provided by operating activities of discontinued operations			—				2
Net cash provided by operating activities			218				304
Cash Flows from Investing Activities:
Capital expenditures			(98	)			(85	)
Proceeds from the sales of assets			1				2
Restricted funds on deposit, net			1,020				—
Net cash provided by (used in) investing activities			923				(83	)
Cash Flows from Financing Activities:
Repayment of long-term debt			(1,153	)			(67	)
Other			—				(2	)
Net cash used in financing activities			(1,153	)			(69	)
Net Increase (Decrease) in Cash and Cash Equivalents			(12	)			152
Cash and Cash Equivalents, beginning of period			2,402				1,953
Cash and Cash Equivalents, end of period		$	2,390			$	2,105
Supplemental Disclosures:
Cash paid for interest, net of amounts capitalized		$	16			$	2
Cash paid for income taxes (net of refunds received)		$	(5	)		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

GENON ENERGY, INC. AND SUBSIDIARIES

1. Description of Business and Accounting and Reporting Policies

Background

We provide energy, capacity, ancillary and other energy services to wholesale customers in competitive energy markets in the United States through ownership and operation of, and contracting for, power generation capacity. We are a wholesale generator with approximately 24,200 MW of net electric generating capacity in the PJM, MISO, Northeast and Southeast regions, and California. We also operate integrated asset management and energy marketing organizations, including proprietary trading operations.

We were formed as a Delaware corporation in August 2000. GenOn changed its name from RRI Energy, Inc. effective December 3, 2010 in connection with the Merger. “We,” “us,” “our” and “GenOn” refer to GenOn Energy, Inc. and, except where the context indicates otherwise, its subsidiaries, after giving effect to the Merger.

Merger of Mirant and RRI Energy

On December 3, 2010, Mirant and RRI Energy completed the Merger. See note 2 for additional information on the Merger.

Basis of Presentation

The consolidated interim financial statements and notes (interim financial statements) are unaudited, omit certain disclosures and should be read in conjunction with our audited consolidated financial statements and notes in our 2010 Annual Report on Form 10-K. These interim financial statements have been prepared in accordance with GAAP from records maintained by us. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim financial statements reflect all normal recurring adjustments necessary, in management’s opinion, to present fairly our financial position and results of operations for the reported periods. Amounts reported for interim periods may not be indicative of a full year period because of seasonal fluctuations in demand for electricity and energy services, changes in commodity prices, and changes in regulations, timing of maintenance and other expenditures, dispositions, changes in interest expense and other factors.

In connection with the Merger, former Mirant stockholders received approximately 54% of the voting interest in the combined company. Although RRI Energy was the legal acquirer, the Merger is accounted for as a reverse acquisition whereby Mirant is treated as the accounting acquirer and RRI Energy is treated as the acquired company for financial reporting purposes. As such, the interim financial statements presented herein for periods ended prior to the closing of the Merger (and any other financial information presented herein with respect to such pre-merger dates, unless otherwise specified) are the interim financial statements and other financial information of Mirant.

At March 31, 2011, substantially all of our subsidiaries are wholly-owned and located in the United States. We do not consolidate five power generating facilities which are under operating leases; a 50% equity investment in a cogeneration facility; and a VIE (MC Asset Recovery) for which we are not the primary beneficiary. See note 11 for further discussion of MC Asset Recovery.

The preparation of interim financial statements in conformity with GAAP requires management to make various estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Our significant estimates include:

	•		estimating the fair value of assets acquired and liabilities assumed in connection with the Merger;
	•		determining the fair value of certain derivative contracts;
	•		estimating future taxable income in evaluating the deferred tax asset valuation allowance;
	•		estimating the useful lives of long-lived assets;
	•		estimating future costs and the valuation of asset retirement obligations;
	•		estimating future cash flows in determining impairments of long-lived assets and definite-lived intangible assets;
	•		estimating the fair value and expected return on plan assets, discount rates and other actuarial assumptions used in estimating pension and other postretirement benefit plan liabilities; and
	•		estimating losses to be recorded for contingent liabilities.

We evaluate events that occur after the balance sheet date but before the financial statements are issued for potential recognition or disclosure. Based on the evaluation, we determined that there were no material subsequent events for recognition or disclosure other than those disclosed herein.

Funds on Deposit

Funds on deposit are included in current and noncurrent assets in the consolidated balance sheets. Funds on deposit include the following:

		March 31,				December 31,
		2011				2010
		(in millions)
Funds deposited with the trustee to defease the PEDFA fixed-rate bonds, due 2036(1)		$	394			$	394
Cash collateral posted(2)			297				299
GenOn Marsh Landing development project cash collateral posted(3)			152				106
GenOn Mid-Atlantic restricted cash(4)			143				—
Environmental compliance deposits(5)			32				32
Funds deposited with the trustee to discharge the GenOn senior secured notes, due 2014(1)			—				285
Funds deposited with the trustee to discharge the GenOn North America senior notes, due 2013(1)			—				866
Other			26				40
Total current and noncurrent funds on deposit			1,044				2,022
Less: Current funds on deposit			811				1,834
Total noncurrent funds on deposit		$	233			$	188

Inventories

Inventories were comprised of the following:

		March 31,				December 31,
		2011				2010
		(in millions)
Fuel inventory:
Coal		$	170			$	153
Fuel oil			108				170
Natural gas			—				1
Other			2				1
Materials and supplies			197				194
Purchased emissions allowances			31				35
Total inventories		$	508			$	554

During the three months ended March 31, 2011 and 2010, we recorded $0 and $8 million, respectively, for lower of average cost or market valuation adjustments in cost of fuel, electricity and other products.

Capitalization of Interest Cost

We incurred the following interest costs:

		Three Months Ended March 31,
		2011				2010
		(in millions)
Total interest costs		$	111			$	52
Capitalized and included in property, plant and equipment, net			(2	)			(2	)
Interest expense		$	109			$	50

The amounts of capitalized interest above include interest accrued. During the three months ended March 31, 2011 and 2010, cash paid for interest was $17 million and $2 million, respectively, of which $1 million and $0, respectively, were capitalized.

Income Taxes

At March 31, 2011, our deferred tax assets, as reduced by the valuation allowance, are completely offset by our deferred tax liabilities. Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. We have evaluated the evidence at March 31, 2011 and based on our judgment have determined that it is more-likely-than-not (greater than a 50% probability) that the net deferred tax assets will not be realized.

Recently Adopted Accounting Guidance

We adopted FASB accounting guidance for the quarter ended March 31, 2011 that requires a reconciliation for Level 3 fair value measurements, including presenting separately the amounts of purchases, issuances and settlements on a gross basis. See note 4 for additional information on fair value measurements.

2. Merger

On December 3, 2010, Mirant and RRI Energy completed the Merger. The Merger is accounted for under the acquisition method of accounting for business combinations. Accordingly, we have conducted an assessment of the net assets acquired and recognized provisional amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition are expensed as incurred. The initial accounting for the business combination is not complete because the valuations necessary to assess the fair values of certain net assets acquired and contingent liabilities assumed are still in process. The significant assets and liabilities for which provisional amounts are recognized at March 31, 2011 and December 31, 2010 are property, plant and equipment, intangible assets and long-term liabilities related to out-of-market contracts, contingencies, taxes and asset retirement obligations. The provisional amounts recognized are subject to revision until the valuations are completed and to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. Any changes to the fair value assessments will affect the gain on bargain purchase and material changes could require the financial statements to be retroactively amended. The allocation of the purchase price may be modified up to one year from the date of the Merger, as more information is obtained about the fair value of assets acquired and liabilities assumed. We will finalize these amounts during 2011.

3. Merger-Related Costs

Changes in merger-related costs (recorded in operations and maintenance expense in the Other Operations segment) are as follows (in millions):

Balance, January 1, 2011		$	30	(1)
Accrued and expensed			23	(2)
Paid			(32	)
Balance, March 31, 2011		$	21	(1)

4. Financial Instruments

Derivatives and Hedging Activities.

In connection with the business of generating electricity, we are exposed to energy commodity price risk associated with the acquisition of fuel and emissions allowances needed to generate electricity, the price of electricity produced and sold, and the fair value of fuel inventories. We through our asset management activities enter into a variety of exchange-traded and OTC energy and energy-related derivative financial instruments, such as forward contracts, futures contracts, option contracts and financial swap agreements to manage exposure to commodity price risks. These contracts have varying terms and durations, which range from a few days to years, depending on the instrument. Our proprietary trading activities also utilize similar derivative contracts in markets where we have a physical presence to attempt to generate incremental gross margin. Our fuel oil management activities use derivative financial instruments to hedge economically the fair value of physical fuel oil inventories, optimize the approximately three million barrels of storage capacity that we own or lease, and attempt to profit from market opportunities related to timing and/or differences in the pricing of various products. The open positions in our trading activities comprising proprietary trading and fuel oil management activities expose us to risks associated with changes in energy commodity prices.

Derivative financial instruments are recorded in the consolidated balance sheets at fair value, except for derivative contracts that qualify for and for which we have elected the normal purchase or normal sale exceptions, which are not reflected in the consolidated balance sheet or results of operations prior to accrual of the settlement. We present our derivative contract assets and liabilities on a gross basis (regardless of master netting arrangements with the same counterparty). Cash collateral amounts are also presented on a gross basis.

If certain criteria are met, a derivative financial instrument may be designated as a fair value hedge or cash flow hedge. In the fourth quarter of 2010, GenOn Marsh Landing entered into interest rate protection agreements (interest rate swaps) in connection with its project financing, which have been designated as cash flow hedges. GenOn Marsh Landing entered into the interest rate swaps to reduce the risks with respect to the variability of the interest rates for the term loan. With the exception of these interest rate swaps, we did not have any other derivative financial instruments designated as fair value or cash flow hedges for accounting purposes during the three months ended March 31, 2011 or during 2010.

The changes in fair value of cash flow hedges are deferred in accumulated other comprehensive loss, net of tax, to the extent the contracts are, or have been, effective as hedges, until the forecasted transactions affect earnings. We record the ineffective portion of changes in fair value of cash flow hedges immediately into earnings.

Derivative financial instruments designated as cash flow hedges must have a high correlation between price movements in the derivative and the hedged item. If and when an acceptable level of correlation no longer exists, hedge accounting ceases and changes in fair value are recognized in our results of operations. If it becomes probable that a forecasted transaction will not occur, we immediately recognize the related deferred gains or losses in our results of operations. Changes in fair value of the associated hedging instrument are then recognized immediately in earnings for the remainder of the contract term unless a new hedging relationship is designated.

For our derivative financial instruments that have not been designated as cash flow hedges for accounting purposes, changes in such instruments’ fair values are recognized currently in earnings. Our derivative financial instruments are categorized based on the business objective the instrument is expected to achieve: asset management or trading, which includes proprietary trading and fuel oil management. For asset management activities, changes in fair value and settlement of derivative financial instruments used to hedge electricity economically are reflected in operating revenue and changes in fair value and settlement of derivative financial instruments used to hedge fuel economically are reflected in cost of fuel, electricity and other products in the consolidated statements of operations. Changes in the fair value and settlements of derivative financial instruments for proprietary trading and fuel oil management activities are recorded on a net basis as operating revenue in the consolidated statements of operations.

We also consider risks associated with interest rates, counterparty credit and our own non-performance risk when valuing derivative financial instruments. The nominal value of the derivative contract assets and liabilities is discounted to account for time value using a LIBOR forward interest rate curve based on the tenor of the transactions being valued.

The following table presents the fair value of derivative financial instruments:

																		Net Derivative
		Derivative Contract Assets								Derivative Contract Liabilities								Contract
		Current				Long-Term				Current				Long-Term				Assets (Liabilities)
		(in millions)
March 31, 2011
Commodity Contracts:
Asset management		$	491			$	555			$	(312	)		$	(91	)		$	643
Trading activities			525				44				(548	)			(49	)			(28	)
Total commodity contracts			1,016				599				(860	)			(140	)			615
Interest Rate Contracts			—				22				—				—				22
Total derivatives		$	1,016			$	621			$	(860	)		$	(140	)		$	637
December 31, 2010
Commodity Contracts:
Asset management		$	564			$	627			$	(368	)		$	(117	)		$	706
Trading activities			856				70				(859	)			(72	)			(5	)
Total commodity contracts			1,420				697				(1,227	)			(189	)			701
Interest Rate Contracts			—				19				—				—				19
Total derivatives		$	1,420			$	716			$	(1,227	)		$	(189	)		$	720

The following table presents the net gains (losses) for derivative financial instruments recognized in income in the unaudited condensed consolidated statements of operations:

		Three Months Ended March 31,
		2011								2010
						Cost of Fuel,								Cost of Fuel,
		Operating				Electricity and				Operating				Electricity and
Derivatives Not Designated as Hedging Instruments		Revenues				Other Products				Revenues				Other Products
		(in millions)
Asset Management Commodity Contracts:
Unrealized		$	(75	)		$	20			$	353			$	(11	)
Realized(1)(2)			79				(43	)			85				(15	)
Total asset management		$	4			$	(23	)		$	438			$	(26	)
Trading Commodity Contracts:
Unrealized		$	(24	)		$	—			$	10			$	—
Realized(1)(2)			6				—				19				—
Total trading		$	(18	)		$	—			$	29			$	—
Total derivatives		$	(14	)		$	(23	)		$	467			$	(26	)

The following table presents the effect of the interest rate swaps designated as cash flow hedges in the unaudited consolidated statements of stockholders’ equity and comprehensive income/loss during the three months ended March 31, 2011 (amount of gain (loss)):

Recognized in OCI on

Reclassified from

Interest Rate

Location of Gain (Loss)

Accumulated OCI into

Recognized in Earnings on

Derivatives

Recognized in Income/Loss

Earnings

Derivative(1)(2)

(in millions)

$24

Interest expense

$

—

$

—

At March 31, 2011, the maximum length of time we are hedging our exposure to the variability in future cash flows that may result from changes in interest rates is 12 years. Because a significant portion of the interest expense incurred by GenOn Marsh Landing during construction will be capitalized, amounts included in accumulated other comprehensive loss associated with construction period interest payments will be reclassified to property, plant and equipment and depreciated over the expected useful life of the Marsh Landing generating facility once it commences commercial operations in mid-2013. Actual amounts reclassified into earnings could vary from the amounts currently recorded as a result of future changes in interest rates.

The following tables present the notional quantity on long (short) positions for derivative financial instruments:

		Notional Volumes at March 31, 2011
		Derivative				Derivative				Net
		Contract				Contract				Derivative
Derivative Instruments		Assets				Liabilities				Contracts
		(in millions)
Commodity Contracts (in equivalent MWh):
Power(1)			(27	)			(24	)			(51	)
Natural gas			(13	)			14				1
Fuel oil			2				(2	)			—
Coal			8				9				17
Interest Rate Contracts (in dollars)(2)			475				—				475

		Notional Volumes at December 31, 2010
		Derivative				Derivative				Net
		Contract				Contract				Derivative
Derivative Instruments		Assets				Liabilities				Contracts
		(in millions)
Commodity Contracts (in equivalent MWh):
Power(1)			(25	)			(26	)			(51	)
Natural gas			(28	)			29				1
Fuel oil			2				(3	)			(1	)
Coal			10				10				20
Interest Rate Contracts (in dollars)(2)			475				—				475

Fair Value Measurements.

Fair Value Hierarchy and Valuation Techniques. We apply recurring fair value measurements to our financial assets and liabilities. In determining fair value, we generally use a market approach and incorporate assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. The fair value measurement inputs we use vary from readily observable prices for exchange-traded instruments to price curves that cannot be validated through external pricing sources. Based on the observability of the inputs used in the valuation techniques, the financial assets and liabilities carried at fair value in the financial statements are classified as follows:

Level 1:		Represents unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. This category primarily includes natural gas and crude oil futures traded on the NYMEX and swaps cleared against NYMEX prices. The interest bearing funds and available-for-sale and trading securities are also valued using Level 1 inputs.
Level 2:		Represents quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. This category primarily includes non-exchange traded derivatives such as OTC forwards, swaps and options, and certain energy derivative instruments that are cleared and settled through exchanges. This category also includes the interest rate swaps.
Level 3:		This category includes the commodity derivative instruments whose fair value is estimated based on internally developed models and methodologies utilizing significant inputs that are generally less readily observable from market sources (such as implied volatilities and correlations). The OTC, complex or structured derivative instruments that are transacted in less liquid markets with limited pricing information are included in Level 3. Examples are coal contracts, power transmission congestion products, power and natural gas contracts, and options valued using internally developed inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls must be determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

The fair value of our derivative contract assets and liabilities is based largely on observable quoted prices from exchanges and indicative quoted prices from independent brokers in active markets that regularly facilitate our transactions. An active market is considered to have transactions with sufficient frequency and volume to provide pricing information on an ongoing basis. We think that these prices represent the best available information for valuation purposes. In determining the fair value of derivative contract assets and liabilities, we use third-party market pricing where available. For transactions classified in Level 1 of the fair value hierarchy, we use the unadjusted published settled prices on the valuation date. For transactions classified in Level 2 of the fair value hierarchy, we value these transactions using indicative quoted prices from independent brokers or other widely-accepted valuation methodologies. Transactions are classified in Level 2 if substantially all (greater than 90%) of the fair value can be corroborated using observable market inputs such as transactable broker quotes. In accordance with the exit price objective under the fair value measurements accounting guidance, the fair value of our derivative contract assets and liabilities is determined based on the net underlying position of the recorded derivative contract assets and liabilities using bid prices for assets and ask prices for liabilities. The quotes that we obtain from brokers are non-binding in nature, but are from brokers that typically transact in the market being quoted and are based on their knowledge of market transactions on the valuation date. We typically obtain multiple broker quotes as of the valuation date that extend for the tenor of the underlying contracts for each delivery location. The number of quotes that we can obtain depends on the relative liquidity of the delivery location on the valuation date. If multiple broker quotes are received for a contract, we use an average of the quoted bid or ask prices. If only one broker quote is received for a delivery location and it cannot be validated through other external sources, we will assign the quote to a lower level within the fair value hierarchy. In some instances, we may combine broker quotes for a liquid delivery hub with broker quotes for the price spread between the liquid delivery hub and the delivery location under the contract. We also may apply interpolation techniques to value monthly strips if broker quotes are only available on a seasonal or annual basis. We perform validation procedures on the broker quotes at least monthly. The validation procedures include reviewing the quotes for accuracy and comparing them to our internal price curves. In certain instances, we may exclude from consideration a broker quote if it is a clear outlier and other quotes are obtained. As of March 31, 2011, we obtained broker quotes for 100% of our delivery locations classified in Level 2 of the fair value hierarchy.

Inactive markets are considered to be those markets with few transactions, noncurrent pricing or prices that vary over time or among market makers. Our transactions in Level 3 of the fair value hierarchy may involve transactions whereby observable market data, such as broker quotes, are not available for substantially all of the tenor of the contract or we are only able to obtain indicative broker quotes that cannot be corroborated by observable market data. In such cases, we may apply valuation techniques such as extrapolation and other quantitative methods to determine fair value. Proprietary models may also be used to determine the fair value of derivative contract assets and liabilities that may be structured or otherwise tailored. Our techniques for fair value estimation include assumptions for market prices, correlation and volatility. The degree of estimation increases for longer duration contracts, contracts with multiple pricing features, option contracts and off-hub delivery points. At March 31, 2011, the assets and liabilities classified as Level 3 in the fair value hierarchy represented approximately 3% of total assets and 10% of total liabilities measured at fair value.

The fair value of our derivative contract assets and liabilities is also affected by assumptions as to time value, credit risk and non-performance risk. The nominal value of derivatives is discounted to account for time value using a LIBOR forward interest rate curve based on the tenor of the transaction. Derivative contract assets are reduced to reflect the estimated default risk of counterparties on their contractual obligations to us. The counterparty default risk for our overall net position is measured based on published spreads on credit default swaps for counterparties, where available, or proxies based upon published spreads, applied to our current exposure and potential loss exposure from the financial commitments in our risk management portfolio. The fair value of derivative contract liabilities is reduced to reflect the estimated risk of default on contractual obligations to counterparties and is measured based on published default rates of our debt, where available, or proxies based upon published spreads. Credit risk and non-performance risk are calculated with consideration of our master netting agreements with counterparties and our exposure is reduced by cash collateral posted to us against these obligations.

Fair Value of Derivative Instruments and Certain Other Assets. The fair value measurements of financial assets and liabilities by class are as follows:

		March 31, 2011
														Total
		Level 1(1)				Level 2(1)(2)				Level 3				Fair Value
		(in millions)
Derivative contract assets:
Commodity Contracts
Asset Management:
Power		$	5			$	995			$	9			$	1,009
Fuel			2				2				33				37
Total Asset Management			7				997				42				1,046
Trading Activities			257				300				12				569
Interest Rate Contracts			—				22				—				22
Total derivative contract assets		$	264			$	1,319			$	54			$	1,637
Derivative contract liabilities:
Commodity Contracts
Asset Management:
Power		$	10			$	287			$	4			$	301
Fuel			13				—				89				102
Total Asset Management			23				287				93				403
Trading Activities			262				326				9				597
Interest Rate Contracts			—				—				—				—
Total derivative contract liabilities		$	285			$	613			$	102			$	1,000
Interest-bearing funds(3)		$	3,131			$	—			$	—			$	3,131
Other assets(4)		$	34			$	—			$	—			$	34

		December 31, 2010
														Total
		Level 1(1)				Level 2(1)(2)				Level 3				Fair Value
		(in millions)
Derivative contract assets:
Commodity Contracts
Asset Management:
Power		$	1			$	1,140			$	6			$	1,147
Fuel			4				3				37				44
Total Asset Management			5				1,143				43				1,191
Trading Activities			530				385				11				926
Interest Rate Contracts			—				19				—				19
Total derivative contract assets		$	535			$	1,547			$	54			$	2,136
Derivative contract liabilities:
Commodity Contracts
Asset Management:
Power		$	12			$	340			$	4			$	356
Fuel			18				2				109				129
Total Asset Management			30				342				113				485
Trading Activities			533				389				9				931
Interest Rate Contracts			—				—				—				—
Total derivative contract liabilities		$	563			$	731			$	122			$	1,416
Interest-bearing funds(3)		$	2,977			$	—			$	—			$	2,977
Other assets(4)		$	31			$	—			$	—			$	31

The following is a reconciliation of changes in fair value of net commodity derivative contract assets and liabilities classified as Level 3 during the three months ended March 31, 2011 and 2010, respectively:

		Net Derivatives Contracts (Level 3)
		Asset				Trading
		Management				Activities				Total
		(in millions)
Balance, January 1, 2011 (net asset (liability))		$	(70	)		$	2			$	(68	)
Total gains (losses) realized/unrealized:
Included in earnings (1)			23				1				24
Purchases(2)			—				—				—
Issuances(2)			—				—				—
Settlements(3)			(4	)			—				(4	)
Transfers in and out of Level 3(4)			—				—				—
Balance, March 31, 2011 (net asset (liability))		$	(51	)		$	3			$	(48	)
Balance, January 1, 2010 (net asset (liability))		$	19			$	13			$	32
Total gains (losses) realized/unrealized:
Included in earnings (1)			(11	)			21				10
Purchases(2)			—				—				—
Issuances(2)			—				—				—
Settlements(5)			(13	)			10				(3	)
Transfers in and out of Level 3(4)			37				—				37
Balance, March 31, 2010 (net asset (liability))		$	32			$	44			$	76