1126294--3/15/2006--RELIANT_ENERGY

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Risks Related to the Retail and Wholesale Energy Industries The financial results of our wholesale and retail energy segments are subject to market risks beyond our control. The wholesale and retail electricity markets in which we operate are relatively immature markets that are characterized by elements of both deregulated and regulated markets. Our operations are subject to extensive regulations. Changes in these regulations could adversely affect the cost, manner or feasibility of conducting our business. We depend on facilities and systems that we do not own or control for our fuel and fuel supply and to deliver electricity to and bill our customers. Any disruption in these facilities or systems could have an adverse effect on our business. The operation of generation facilities involves significant risks that could interrupt operations and increase our costs. Our business operations expose us to the risk of loss if third parties fail to perform their contractual obligations. We have a substantial coal- and oil-fired generation portfolio that poses environmental issues. Our costs of compliance with environmental laws are significant and can affect our future financial results. Failure to obtain or maintain any required permits or approvals could prevent or limit us from operating our business. Significant events beyond our control, such as hurricanes and other weather-related problems or acts of terrorism, could have a material adverse effect on our businesses. Special Risks Relating to Our Texas Retail Operations We depend on third parties to provide electricity to supply our Texas retail customers. Initiatives undertaken by the PUCT may negatively impact the wholesale cost of power. The financial performance of our Texas retail electric operations depends on the amount of gross margin, or headroom, available in the "price-to-beat" tariff. The declines we have experienced in our Houston retail gross margins may continue or accelerate. We may lose further market share in the Houston retail electricity market, which is a significant contributor of income to our consolidated results. Our ability to set rates at market prices in Texas may be constrained by new legislative or regulatory restrictions. We depend on the ERCOT ISO to communicate operating and system information in a timely and accurate manner. Corrections to prior estimated billing and other information can have an impact on our future reported financial results. We could be liable for a share of the payment defaults of other retail electric providers within the ERCOT market. Risks Related to Our Company Our borrowing levels and debt service obligations may adversely affect our business. Although we have taken steps to achieve greater financial flexibility, there is no assurance that we will be successful in achieving this goal. Because of our debt levels and the capital-intensive nature of our business, we are vulnerable to reductions in our cash flows or liquidity. Our hedging and other risk management activities may not work as planned. Changes in the wholesale energy market or sales of generation assets could result in impairments. Lawsuits and regulatory proceedings could adversely affect our business. We have entered into outsourcing arrangements with third party service providers. In addition, our retail and other commercial operations are highly dependent on computer and other operating systems, including telecommunications systems. Any interruptions in these arrangements or systems could significantly disrupt our business operations. If we acquire or develop additional generation assets, or dispose of existing generation assets, we may incur additional costs and risks.

Full 10-K form ▸

1126294--3/15/2006--RELIANT_ENERGY_INC