Summary of NRG ENERGY, INC.

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations

In this discussion and analysis, the Company discusses and explains the financial condition and the results of operations for NRG for the year ended December 31, 2008 that will include the points below:

• Factors which affect NRG's business;

• NRG's earnings and costs in the periods presented;

• Changes in earnings and costs between periods;

• Impact of these factors on NRG's overall financial condition;

• A discussion of new and ongoing initiatives that may affect NRG's future results of operations and financial condition;

• Expected future expenditures for capital projects; and

• Expected sources of cash for future operations and capital expenditures.

As you read this discussion and analysis, refer to NRG's Consolidated Statements of Operations, which presents the results of the Company's operations for the years ended December 31, 2008, 2007 and 2006. The Company analyzes and explains the differences between the periods in the specific line items of NRG's Consolidated Statements of Operations. This discussion and analysis has been organized as follows:

• Business strategy;

• Business environment in which NRG operates including how regulation, weather, and other factors affect the business;

• Significant events that are important to understanding the results of operations and financial condition;

• Results of operations including an overview of the Company's results, followed by a more detailed review of those results by operating segment;

• Financial condition addressing its credit ratings, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and

• Critical accounting policies which are most important to both the portrayal of the Company's financial condition and results of operations, and which require management's most difficult, subjective or complex judgment.

Executive Summary

Overview

NRG is a wholesale power generation company with a significant presence in major competitive power markets in the United States. NRG is engaged in the ownership, development, construction and operation of power generation facilities, the transacting in and trading of fuel and transportation services, and the trading of energy, capacity and related products in the regional markets in the United States and select international markets where its generating assets are located.

As of December 31, 2008, NRG had a total global portfolio of 189 active operating fossil fuel and nuclear generation units, at 48 power generation plants, with an aggregate generation capacity of approximately 24,005 MW, and approximately 550 MW under construction which includes partners' interests of 275 MW. In addition, NRG has ownership interests in two wind farms representing an aggregate generation capacity of 270 MW, which includes partner interests of 75 MW. Within the US, NRG has one of the largest and most diversified power generation portfolios in terms of geography, fuel-type and dispatch levels, with approximately 22,925 MW of fossil fuel and nuclear generation capacity in 177 active generating units at 43 plants and ownership interests in two wind farms representing 195 MW of wind generation capacity. These power generation facilities are primarily located in Texas (approximately 11,010 MW, including the 195 MW from the two wind farms), the Northeast (approximately 7,020 MW), South Central (approximately 2,845 MW), and West (approximately 2,130 MW) regions of the US, and approximately 115 MW of additional generation capacity from the Company's thermal assets.

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NRG's principal domestic power plants consist of a mix of natural gas-, coal-, oil-fired, nuclear and wind facilities, representing approximately 45%, 33%, 16%, 5% and 1% of the Company's total domestic generation capacity, respectively. In addition, 15% of NRG's domestic generating facilities have dual or multiple fuel capacity, which allows plants to dispatch with the lowest cost fuel option.

NRG's domestic generation facilities consist of intermittent, baseload, intermediate and peaking power generation facilities, the ranking of which is referred to as Merit Order, and include thermal energy production plants. The sale of capacity and power from baseload generation facilities accounts for the majority of the Company's revenues and provides a stable source of cash flow. In addition, NRG's generation portfolio provides the Company with opportunities to capture additional revenues by selling power during periods of peak demand, offering capacity or similar products to retail electric providers and others, and providing ancillary services to support system reliability.

NRG's Business Strategy

NRG's business strategy is designed to enhance the Company's position as a leading wholesale power generation company in the US. NRG will continue to utilize its asset base as a platform for growth and development and as a source of cash flow generation which can be used for the return of capital to debt and equity holders. The Company's strategy is focused on: (i) top decile operating performance of its existing operating assets and enhanced operating performance of the Company's commercial operations and hedging program; (ii) repowering of power generation assets at existing sites and development of new power generation projects; and (iii) investment in energy-related new businesses and new technologies where such investments create low to no carbon. This strategy is supported by the Company's five major initiatives (FORNRG, RepoweringNRG, econrg, Future NRG and NRG Global Giving) which are designed to enhance the Company's competitive advantages in these strategic areas and allow the Company to surmount the challenges faced by the power industry in the coming years. This strategy is being implemented by focusing on the following principles:

Operational Performance - The Company is focused on increasing value from its existing assets. Through the FORNRG initiative, NRG will continue to focus on extracting value from its portfolio by improving plant performance, reducing costs and harnessing the Company's advantages of scale in the procurement of fuels and other commodities, parts and services, and in doing so improving the Company's return on invested capital, or ROIC. FORNRG is a companywide effort designed to increase ROIC through operational performance improvements to the Company's asset fleet, along with a range of initiatives at plants and at corporate offices to reduce costs, or in some cases, monetize or reduce excess working capital and other assets. The FORNRG accomplishments include both recurring and one-time improvements measured from a prior base year. For plant operations, the program measures cumulative current year benefits using current gross margins multiplied by the change in baseline levels of certain key performance indicators. The plant performance benefits include both positive and negative results for plant reliability, capacity, heat rate and station service.

In addition to the FORNRG initiative, the Company seeks to maximize profitability and manage cash flow volatility through the Company's commercial operations strategy. The Company will continue to execute asset-based risk management, hedging, marketing and trading strategies within well-defined risk and liquidity guidelines in order to manage the value of the Company's physical and contractual assets. The Company's marketing and hedging philosophy is centered on generating stable returns from its portfolio of baseload power generation assets while preserving an ability to capitalize on strong spot market conditions and to capture the extrinsic value of the Company's intermediate and peaking facilities and portions of its baseload fleet. NRG believes that it can successfully execute this strategy by leveraging its
(i) expertise in marketing power and ancillary services, (ii) its knowledge of markets, (iii) its balanced financial structure and (iv) its diverse portfolio of power generation assets.

Finally, NRG remains focused on cash flow and maintaining appropriate levels of liquidity, debt and equity in order to ensure continued access to capital for investment, to enhance risk-adjusted returns and to provide flexibility in executing NRG's business strategy during business downturns, including a regular return of capital to its shareholders. NRG will continue to focus on maintaining operational and financial controls designed to ensure that the Company's financial position remains strong.

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Development - NRG is favorably positioned to pursue growth opportunities through expansion of its existing generating capacity and development of new generating capacity at its existing facilities. NRG intends to invest in its existing assets through plant improvements, repowerings, brownfield development and site expansions to meet anticipated requirements for additional capacity in NRG's core markets. Through the RepoweringNRG initiative, NRG will continue to develop, construct and operate new and enhanced power generation facilities at its existing sites, with an emphasis on new baseload capacity that is supported by long-term power sales agreements and financed with limited or non-recourse project financing. RepoweringNRG is a comprehensive portfolio redevelopment program designed to develop, construct and operate new multi-fuel, multi-technology, highly efficient and environmentally responsible generation capacity over the next decade. Through this initiative, the Company anticipates retiring certain existing units and adding new generation to meet growing demand in the Company's core markets, with an emphasis on new capacity that is expected to be supported by long-term hedging programs, including PPAs, and financed with limited or non-recourse project financing. NRG expects that these efforts will provide one or more of the following benefits: improved heat rates; lower delivered costs; expanded electricity production capability; an improved ability to dispatch economically across the regional general portfolio; increased technological and fuel diversity; and reduced environmental impacts, including facilities that either have near zero greenhouse gas, or GHG, emissions or can be equipped to capture and sequester GHG emissions.

New Businesses and New Technology - NRG is focused on the development and investment in energy-related new businesses and new technologies where the benefits of such investments represent significant commercial opportunities and create a comparative advantage for the Company, including low or no GHG emitting energy generating sources, such as nuclear, wind, solar thermal, photovoltaic, "clean" coal and gas, and the employment of post-combustion carbon capture technologies. In 2008, the Company began to increase its focus on ways to invest in or support the development of new energy-related businesses and technologies that could advance its multi-fuel, multi-technology growth strategy and look for new ways to reduce carbon emissions from its overall fleet, and we expect to continue to do so in the future. Furthermore, the Company intends to capitalize on the high growth opportunities presented by government-mandated renewable portfolio standards, tax incentives and loan guaranties for renewable energy projects and new technologies and expected future carbon regulation. A primary focus of this strategy is supported by the econrg initiative whereby NRG is pursuing investments in new generating facilities and technologies that will be highly efficient and will employ no and low carbon technologies to limit CO2 emissions and other air emissions. econrg represents NRG's commitment to environmentally responsible power generation by addressing the challenges of climate change, clean air and water, and conservation of our natural resources while taking advantage of business opportunities that may inure to NRG as a result of our demonstration and deployment of "green" technologies. Within NRG, econrg builds upon a foundation in environmental compliance and embraces environmental initiatives for the benefit of our communities, employees and shareholders, such as encouraging investment in new environmental technologies, pursuing activities that preserve and protect the environment and encouraging changes in the daily lives of the Company's employees.

Company-Wide Initiatives - In addition, the Company's overall strategy is also supported by Future NRG and NRG Global Giving initiatives. Future NRG is the Company's workforce planning and development initiative and represents NRG's strong commitment to planning for future staffing requirements to meet the on-going needs of the Company's current operations in addition to the Company's RepoweringNRG initiatives. Future NRG encompasses analyzing the demographics, skill set and size of the Company's workforce in addition to the organizational structure with a focus on succession planning, training, development, staffing and recruiting needs. Included under the Future NRG umbrella is NRG University, which provides leadership, managerial, supervisory and technical training programs and individual skill development courses. NRG Global Giving is designed to enhance respect for the community, which is one of NRG's core values. Our Global Giving Program invests NRG's resources to strengthen the communities where we do business and seeks to make community investments in four focus areas: community and economic development, education, environment and human welfare.

Finally, NRG will continue to pursue selective acquisitions, joint ventures and divestitures to enhance its asset mix and competitive position in the Company's core markets. NRG intends to concentrate on opportunities that present attractive risk-adjusted returns. NRG will also opportunistically pursue other strategic transactions, including mergers, acquisitions or divestitures.

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Business Environment

General Industry - Trends impacting the power industry include (i) the continued constrained credit and capital markets along with deepening recessionary environment, and (ii) increased regulatory and political scrutiny. The industry dynamics and external influences that will affect the Company and the power generation industry in 2009 and for the medium term include:

Financial Credit Market Availability and Domestic Recession - A sharp economic downturn in the US and overseas during 2008 was prompted by a combination of factors: tight credit markets, speculation and fear regarding the health of the US and global financial systems, and weaker economic activity including a global economic recession. Power generation companies are capital intensive and, as such, rely on the credit markets for liquidity and for the financing of power generation investments. In addition, economic recessions historically result in lower power demand, power prices, and fuel prices. NRG has a diversified liquidity program, with $3.4 billion in total liquidity, excluding funds deposited by counterparties, and a first and second lien structure that enables significant strategic hedging while reducing requirements for the posting of cash or letters of credit as collateral. NRG expects to continue to manage commodity price volatility through its strategic hedging program, under which the Company expects to hedge revenues and fuel costs. This program should provide the Company with the flexibility to enter into hedges opportunistically, such as when gas prices are increasing, while at the same time protecting NRG against longer-term volatility in the commodity markets. The Company believes that an economic recession is unlikely to have material impact on the Company's cash generation in the near term due to the hedged position of its portfolio. NRG transacts with a diversified pool of counterparties and actively manages our exposure to any single counterparty. See also Part II, Item 7 - Liquidity and Capital Resources, and Part II, Item 7a - Quantitative and Qualitative Disclosures about Market Risk for a further discussion.

Consolidation - Over the long-term, industry consolidation is expected to occur, with mergers and acquisitions activity in the power generation sector likely to involve utility-merchant or merchant-merchant combinations. There may also be interest by foreign power companies, particularly European utilities, in the American power generation sector.

Climate Change - There is a marked shift towards federal action to address climate change under the Obama administration, which has made clear its intention to make climate change policy a priority for the US through legislation, regulation, and global leadership. President Obama reiterated this commitment in his inaugural address. Congressman Waxman, who sees aggressive action on climate change as a major priority, was elected chair of the House Energy and Commerce Committee and announced that a climate change bill would be delivered out of committee before Memorial Day.

Regional efforts have gained momentum as well. The RGGI CO2 cap-and-trade program for electric generating units went into effect on January 1, 2009. California, the Western Climate Initiative, and the Midwest GHG Accord continue to develop market based programs in their respective jurisdictions.

Since fossil fueled power plants, particularly coal-fired plants, are a significant source of GHG emissions both in the US and globally, it is almost certain that future GHG legislative and regulatory actions will encompass power plants as well as other GHG emitting stationary sources. In 2008, in the course of producing approximately 80 million MWh of electricity, NRG's power plants emitted 68 million tonnes of CO2, of which 61 million tonnes were emitted in the US, 4 million tonnes in Germany, and 3 million tonnes in Australia. NRG emissions subject to RGGI were 12 million tonnes in 2008. Federal, state or regional regulation of GHG emissions could have a material impact on the Company's financial performance. The actual impact on the Company's financial performance will depend on a number of factors, including the overall level of GHG reductions required under any such regulations, the degree to which offsets may be used for compliance and their price and availability, and the extent to which NRG would be entitled to receive GHG emissions allowances without having to purchase them in an auction or on the open market. Thereafter, the impact would depend on the level of success of the Company's multifold strategy, which includes (a) shaping public policy with the objective being constructive and effective federal GHG regulatory policy, and (b) pursuing its RepoweringNRG and econrg programs. The Company's multifold strategy is discussed in greater detail in Item 1, Business under Carbon Update.

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Infrastructure Development - In response to record peak power demand, tightening reserve margins, and volatile natural gas prices experienced in recent years, the power generation industry has added significant capacity for both transmission and generation. In addition to traditional gas-fired capacity, much of the new generation would be from non-fossil fuel sources, including nuclear and renewable sources. The Energy Policy Act of 2005 created financial incentives for non-traditional baseload generation, such as advance nuclear and "clean" coal technologies in order to reduce reliance on the more traditional pulverized coal technologies. During 2007, 18 gigawatts of previously announced pulverized coal generation projects were canceled due to increasing public and political concern regarding carbon emissions limiting the pace of development. During 2008, the credit market crisis severely constrained the industry's ability to finance power projects. Despite the challenges presented by financing availability and carbon legislation constraints, NRG believes the long-term demand for power generation will continue to require new generation.

Competition

Wholesale power generation is a capital-intensive, commodity-driven business with numerous industry participants. NRG competes on the basis of the location of its plants and owning multiple plants in its regions, which increases the stability and reliability of its energy supply. Wholesale power generation is basically a local business that is currently highly fragmented relative to other commodity industries and diverse in terms of industry structure. As such, there is a wide variation in terms of the capabilities, resources, nature and identity of the companies NRG competes against depending on the market.

Weather

Weather conditions in the different regions of the US influence the financial results of NRG's businesses. Weather conditions can affect the supply and demand for electricity and fuels. Changes in energy supply and demand may impact the price of these energy commodities in both the spot and forward markets, which may affect the Company's results in any given period. Typically, demand for and the price of electricity is higher in the summer and the winter seasons, when temperatures are more extreme. The demand for and price of natural gas and oil are higher in the winter. However, all regions of North America typically do not experience extreme weather conditions at the same time, thus NRG is typically not exposed to the effects of extreme weather in all parts of its business at once.

Other Factors

A number of other factors significantly influence the level and volatility of prices for energy commodities and related derivative products for NRG's business. These factors include:

• seasonal daily and hourly changes in demand;

• extreme peak demands;

• available supply resources;

• transportation and transmission availability and reliability within and between regions;

• location of NRG's generating facilities relative to the location of its load-serving opportunities;

• procedures used to maintain the integrity of the physical electricity system during extreme conditions; and

• changes in the nature and extent of federal and state regulations.

These factors can affect energy commodity and derivative prices in different ways and to different degrees. These effects may vary throughout the country as a result of regional differences in:

• weather conditions;

• market liquidity;

• capability and reliability of the physical electricity and gas systems;

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• local transportation systems; and

• the nature and extent of electricity deregulation.

Environmental Matters, Regulatory Matters and Legal Proceedings

NRG discusses details of its other environmental matters in Item 15 - Note 23, Environmental Matters, to its Consolidated Financial Statements and Item 1, Business - Environmental Matters, section. NRG discusses details of its regulatory matters in Item 15 - Note 22, Regulatory Matters, to its Consolidated Financial Statements and Item 1, Business - Environmental Matters, section. NRG discusses details of its legal proceedings in Item 15 - Note 21, Commitments and Contingencies, to its Consolidated Financial Statements. Some of this information is about costs that may be material to the Company's financial results.

Impact of inflation on NRG's results

Unless discussed specifically in the relevant segment, for the years ended December 31, 2008, 2007 and 2006, the impact of inflation and changing prices (due to changes in exchange rates) on NRG's revenues and income from continuing operations was immaterial.

Capital Allocation Program

NRG's capital allocation philosophy includes reinvestment in its core facilities, maintenance of prudent debt levels and interest coverage, the regular return of capital to shareholders and investment in repowering opportunities. Each of these components are described further as follows:

• Reinvestment in existing assets - Opportunities to invest in the existing business, including maintenance and environmental capital expenditures that improve operational performance, ensure compliance with environmental laws and regulations, and expansion projects.

• Management of debt levels - The Company uses several metrics to measure the efficiency of its capital structure and debt balances, including the Company's targeted net debt to total capital ratio range of 45% to 60% and certain cash flow and interest coverage ratios. The Company intends in the normal course of business to continue to manage its debt levels towards the lower end of the range and may, from time to time, pay down its debt balances for a variety of reasons.

• Return of capital to shareholders - The Company's debt instruments include restrictions on the amount of capital that can be returned to shareholders. The Company has in the past returned capital to shareholders while maintaining compliance with existing debt agreements and indentures. The Company expects to regularly return capital to shareholders through opportunistic share repurchases, while exploring other prospects to increase its flexibility under restrictive debt covenants.

• Repowering, econrg and new build opportunities - The Company intends to pursue repowering initiatives that enhance and diversify its portfolio and provide a targeted economic return to the Company.

On October 30, 2008, the Company announced its 2009 Capital Allocation Plan to purchase an additional $300 million in common stock, subject to restrictions under the US securities laws. As part of the 2009 program, the Company will invest over $511 million in maintenance and environmental capital expenditures in the existing assets in 2009 and $256 million in investment in projects under RepoweringNRG that are currently under construction or for which there exists current obligations. Finally, in addition to scheduled debt amortization payment, in the first quarter 2009 the Company will offer its first lien lenders $197 million of its 2008 excess cash flow (as defined in the Senior Credit Facility).

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Significant events during the year ended December 31, 2008

Results of Operations and Financial Condition

• Mark-to-market gains - The Company's risk management activities recognized $414 million in mark-to-market gains driven by lower energy prices due to the downward trend in natural gas prices during the second half 2008. High price volatility in energy related commodities during 2008 drove the extreme volatility reported in NRG interim results of operations and consolidated balance sheets during the second and third quarters of 2008, due to the commodities' impact on the fair value of our derivative contracts.

• Liquidity Position - The Company's total liquidity rose $1.4 billion as the declining natural gas prices increased funds deposited by counterparties by $754 million. Cash balances grew by $362 million since the end of 2007 as $1.4 billion of cash provided by operating activities exceeded cash used for all phases of the Company's Capital Allocation Program, including $899 million of capital expenditures, $185 million in treasury share payments and a $214 million net debt reduction.

• Higher energy prices - Energy revenues rose 6% as a result of strong operating performance at the power plants which allowed the Company to sell generation at higher energy prices especially in the second quarter 2008.

• Higher capacity revenues - Capacity revenues rose $163 million as a result of a greater portion of Texas baseload contracts having a capacity component.

• Sale of ITISA - On April 28, 2008, NRG completed the sale of its interest in a 156 MW hydroelectric power plant to Brookfield Renewable Power Inc. . . .