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

---

FORM 10-Q

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

For the quarterly period ended: September 30, 2001

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: 001-16077

ORION POWER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

|Delaware
(State or other jurisdiction of
incorporation or organization)
7 East Redwood Street
Baltimore, Maryland
(Address of principal executive offices) | 52-2087649
(I.R.S. Employer
Identification No.)
21202
(Zip Code)
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------

(410) 230-3500
(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 |_|

The
number of shares outstanding of the registrant's common stock, $0.01 par value
was 103,500,186 at September 30, 2001.

---

INDEX

| |  | Page
| |  | ----

|PART I. | FINANCIAL INFORMATION | 1
|------- | --------------------- | -

|Item 1. | Financial Statements | 1
|------- | -------------------- | -

|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13
|------- | ------------------------------------------------------------------------------------- | --

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20
|------- | ---------------------------------------------------------- | --

|PART II. | OTHER INFORMATION | 22
|-------- | ----------------- | --

|Item 6. | Exhibits and Reports on Form 8-K | 22
|------- | -------------------------------- | --

PART I.  FINANCIAL INFORMATION.

|Item 1. | Financial Statements.
|------- | ---------------------

Orion Power Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)

`As of
                                                             -----------------------------------------------------------
                                                                    December 31,                  September 30,
                                                             ---------------------------  ------------------------------
                                                                        2000                           2001
                                                                                                   (Unaudited)
ASSETS

CURRENT ASSETS:
     Cash and cash equivalents                                  $      135,834               $       420,013
     Restricted cash                                                   283,426                       250,493
     Accounts receivable, net of allowances for bad debts
      of $1,458 and $1,631 at December 31, 2000 and
      September 30, 2001, respectively                                 154,777                       161,294
     Inventories and supplies                                           44,881                        50,830
     Deferred income tax asset                                          14,920                             -
     Derivative assets                                                       -                        16,013
     Prepaid expenses and other current assets                          28,307                        27,274
                                                                 -------------                 -------------
Total current assets                                                   662,145                       925,917
                                                                 -------------                 -------------
PROPERTY AND EQUIPMENT, NET                                          3,083,546                     3,345,583

DEFERRED INCOME TAX ASSET                                                    -                        25,174

OTHER NONCURRENT ASSETS:
     Prepaid expenses and other noncurrent assets                       12,134                         6,691
     Derivative assets                                                       -                        12,569
     Identifiable purchased intangibles, net of
      accumulated amortization of $4,998 and $8,748 at
      December 31, 2000 and September 30, 2001,
      respectively                                                      70,786                        67,036
     Deferred financing costs, net of accumulated
      amortization of $13,587 and $25,649 at December 31,
      2000 and September 30, 2001, respectively
                                                                        41,579                        40,345
                                                                 -------------                 -------------
Total other noncurrent assets                                          124,499                       126,641
                                                                 -------------                 -------------
Total assets                                                    $    3,870,190               $     4,423,315
                                                                 =============                 =============`

The accompanying notes are an integral part of these consolidated balance sheets.

Orion Power Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)

`As of
                                                             -----------------------------------------------------------
                                                                    December 31,                  September 30,
                                                             ---------------------------  ------------------------------
                                                                        2000                           2001
                                                                                                   (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                           $     121,000              $         64,681
     Accrued expenses                                                  46,711                        42,853
     Accrued interest                                                  18,641                        32,086
     Deferred revenue                                                   1,836                           917
     Deferred tax liability                                                 -                         3,218
     Note payable                                                         261                           261
     Derivative liabilities                                                 -                         1,616
                                                                 -------------                 -------------
Total current liabilities                                             188,449                       145,632
                                                                 -------------                 -------------
Long-term debt (Note 4)                                             2,367,637                     2,548,471
Deferred income tax liabilities                                         8,931                             -
Other long-term liabilities                                            50,391                        47,046
Derivative liabilities                                                      -                       109,510
                                                                 -------------                 -------------
Total liabilities                                                   2,615,408                     2,850,659
                                                                 -------------                 -------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)

STOCKHOLDERS' EQUITY (NOTE 8):
     Common stock, $.01 par value; 200,000,000 shares
      authorized; 93,095,926 and 103,500,186 shares issued
      and outstanding at December 31, 2000 and September
      30, 2001, respectively
                                                                          931                         1,035
     Additional paid-in capital                                     1,230,467                     1,501,479
     Deferred compensation                                            (3,359)                       (2,162)
     Notes receivable from officers                                   (5,916)                       (4,079)
     Accumulated other comprehensive income                                 -                      (57,601)
     Retained earnings                                                 32,659                       133,984
                                                                 -------------                 -------------
Total stockholders' equity                                          1,254,782                     1,572,656
                                                                 -------------                 -------------
Total liabilities and stockholders' equity                       $  3,870,190               $      4,423,315
                                                                 =============                 =============`

The accompanying notes are an integral part of these consolidated balance sheets.

Orion Power Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Data) (Unaudited)

`For the Three Months Ended             For the Nine Months Ended
                                             --------------------------             -------------------------
                                      September 30, 2000  September 30, 2001  September 30, 2000 September 30, 2001
                                      ------------------  ------------------  ------------------ ------------------

OPERATING REVENUES                     $     343,010        $    366,999      $     684,684       $    946,812
                                       -------------        ------------       -----------        -------------

OPERATING EXPENSES:
     Fuel                                    189,539             147,646           317,245             385,838
     Gain on derivative financial
        instruments                                -            (14,748)                 -             (16,407)
     Operations and maintenance               32,569              35,041            68,122              92,725
     General and administrative                9,837              15,183            24,333              43,363
     Taxes other than income taxes            18,336              10,484            45,352              46,354
     Depreciation and amortization            33,143              34,439            75,439              99,634
     Cost on buyout of operations
        and maintenance contracts                  -                   -            19,000                   -
                                       -------------        ------------       -----------        -------------
Total operating expenses                     283,424             228,045           549,491             651,507

OPERATING INCOME                              59,586             138,954           135,193             295,305

Interest income                                3,625               6,427             7,834              17,372

Interest expense                             (56,460)            (50,755)         (112,972)           (154,686)
                                       -------------        ------------       -----------        -------------
Income before provision for
    income tax                                 6,751              94,626            30,055             157,991

Income tax provision                           2,830              29,752            12,384              56,666
                                       -------------        ------------       -----------        -------------
NET INCOME                             $       3,921        $     64,874      $     17,671        $    101,325
                                       =============        ============       ===========        =============
Earnings per average common share:
     Basic                             $        0.05        $       0.63      $       0.31        $       1.04
                                       =============        ============       ===========        =============
     Diluted                           $        0.05        $       0.58      $       0.29        $       0.98
                                       =============        ============       ===========        =============`

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

Orion Power Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands) (Unaudited)

`For the Nine Months Ended
                                                                         -------------------------
                                                                 September 30, 2000     September 30, 2001
                                                                 ------------------     ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                       $      17,671          $      101,325

Adjustments to reconcile net income to net cash flow (used
in) provided by operating activities-
     Deferred income taxes                                               2,759                  25,383
     Deferred compensation                                                 904                   1,197
     Gain on derivative financial instruments                                -                 (16,407)
     Gain on sale of fixed assets                                         (394)
     Interest income on officers note receivable                             -                    (243)
     Cost of buyout of operations and maintenance contracts             18,900                       -
     Depreciation and amortization                                      83,307                 111,696
     Change in assets and liabilities:
              Restricted cash                                         (101,007)                 32,933
              Accounts receivable                                      (95,063)                 (6,517)
              Inventories and supplies                                   1,777                  (5,949)
              Prepaid expenses and other current assets                (39,116)                  1,033
              Prepaid expenses and other noncurrent assets                   -                   5,443
              Accounts payable                                          36,669                 (56,319)
              Accrued expenses                                          22,386                  (3,858)
              Other long-term liabilities                                  958                  (3,345)
              Deferred revenue                                           (897)                    (919)
              Accrued interest                                          28,223                  13,445
                                                                 -------------         ---------------
     Net cash (used in) provided by operating activities               (22,923)                198,898
                                                                 -------------         ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:

     Purchase of property, equipment and related assets in
        acquisitions                                                (1,728,741)                      -
     Disposal of fixed assets                                            5,606                       -
     Purchase of property and equipment in operations                  (67,880)               (357,761)

                                                                 -------------         ---------------
     Net cash used in investing activities                       $  (1,791,015)        $      (357,761)
                                                                 -------------         ---------------`

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

Orion Power Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands) (Unaudited)

`For the Nine Months Ended
                                                              September 30, 2000      September 30, 2001

CASH FLOWS FROM FINANCING ACTIVITIES:

     Issuance of common stock, net                            $     304,278           $       271,116
     Distributions to stockholders                                  (17,050)                        -
     Payments from officers' notes receivable                             -                     2,080
     Proceeds from long-term debt                                 1,593,137                   431,200
     Payments on long-term debt                                     (41,000)                 (250,366)
     Funding of reserve accounts established with Credit
      Agreement (restricted cash)                                   (55,000)                        -
     Payments on deferred financing fees                            (31,601)                  (10,988)
                                                              -------------           ---------------
     Net cash provided by financing activities                    1,752,764                   443,042
                                                              -------------           ---------------
     NET CHANGE IN CASH AND CASH EQUIVALENTS                        (61,174)                  284,179

     CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                  78,549                   135,834
                                                              -------------           ---------------
     CASH AND CASH EQUIVALENTS, ENDING OF PERIOD              $      17,375           $       420,013
                                                              =============           ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     Cash paid for:
         Interest                                             $      77,088           $       130,324
                                                              =============           ===============
         Income taxes                                         $      17,873           $        36,006
                                                              =============           ===============
     Noncash disclosure:
         Notes receivable from officers                       $       5,000           $             -
                                                              =============           ===============
         Other long-term liabilities assumed in acquisition   $      23,785           $             -
                                                              =============           ===============
         Conversion of note payable to equity                 $      71,086           $             -
                                                              =============           ===============`

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

Orion Power Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2001

1. Organization and Operations of the Company:

Orion Power Holdings, Inc., a Delaware corporation, and its subsidiaries (the
Company) own, operate, acquire, and develop non-nuclear electric power
generating facilities in North America.

2. Summary of Significant Accounting Policies:

Basis of Interim Presentation

The
accompanying interim consolidated financial statements of the Company have been
prepared by the Company, without audit by independent public accountants,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the consolidated financial statements include the
adjustments necessary to present fairly the information required to be set forth
therein. Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted from these unaudited
consolidated financial statements pursuant to such rules and regulations and,
accordingly, should be read in conjunction with the consolidated financial
statements and related notes and management's discussion and analysis of
financial condition and results of operations, included in the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000. The results of interim
periods are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2001.

Derivatives

Derivative financial instruments (Derivatives) are contracts which typically
derive value from changes in interest rates, foreign exchange rates, credit
spreads, prices of securities or financial or commodity indices. The timing of
cash receipts and payments for derivatives is generally determined by
contractual agreement. Derivatives can be either standardized contracts that are
traded on an organized exchange or privately negotiated contracts. Futures
contracts are examples of standard exchange-traded derivatives. Privately
negotiated derivative contracts include forwards, interest rate swaps and
certain option contracts. The Company enters into interest rate swap agreements
and commodity forward contracts for purposes other than trading. Derivatives
used for purposes other than trading are related to hedging variable cash flows
on floating rate debt and hedging the purchase and sale price of various
commodities.

Interest rate swaps are contractual agreements to exchange periodic interest
payments at specified intervals. The notional amounts of interest rate swaps are
not exchanged; they are used in conjunction with the agreed-upon fixed and/or
floating interest rates to calculate the periodic interest payments.

Commodity swaps are contractual commitments to exchange the fixed price of a
commodity for a floating price. Commodity forwards are privately negotiated
agreements to purchase or sell a specific amount of a commodity at an
agreed-upon price and settlement date.

The
Company accounts for its derivative instruments as either cash flow hedges or no
hedging designation. To qualify for cash flow hedge accounting, the hedge
relationship must be formally documented at inception and be anticipated to be
highly effective. If the requirements for hedge accounting are not met, the
Company accounts for derivatives through the statement of operations on a mark
to market basis.

The
Company reports interest rate swaps at fair value with changes in the swap fair
value reported in either other comprehensive income (OCI) or earnings as
determined by the accounting method applied. For swaps qualifying for hedge
accounting, the gains/losses on the swaps that are deemed effective are deferred
in OCI. Deferred gains and losses from effective hedge relationships will be
reclassified into earnings as adjustments to interest expense over the life of
the hedged debt. If the swap does not qualify for hedge accounting, any change
in fair value is reported currently in earnings.

The
Company accounts for the commodity forwards at fair value, with the change in
fair value reported in OCI. The effective portion of the derivative fair value
change for those swaps that qualify as cash flow hedges are deferred as part of
OCI. The deferred gains/losses on the commodity forward contracts are
reclassified from OCI to earnings in the same period as the hedged sale of the
commodity impacts earnings. If hedge accounting is not applied, any fair value
changes in the commodity forwards are reported currently in earnings.

The
Company also has certain derivative commodity contracts for the physical
delivery of purchase and sale quantities transacted in the normal course of
business. These derivatives are exempt from the requirements of SFAS No. 133
under the normal purchases and sales exception, and thus are not reflected on
the balance sheet at fair value.

The
Company classifies its fuel swap contracts and financial tolling arrangements as
no hedging designation under Statement of Financial Accounting Standards (SFAS)
No. 133 "Accounting for Derivative Instruments and Hedging Activity." These
contracts are reported at fair value with any changes in fair value reported
currently in earnings.

In
October 2001, the Financial Accounting Standards Board (FASB) approved two
interpretations issued by the Derivatives Implementation Group (DIG) that change
the definition of normal purchase and sales for certain power and commodity
contracts. Certain of our derivative commodity contracts may no longer be exempt
from the requirements of SFAS No. 133. We are evaluating the impact of the
implementation guidance on our financial statements, and will implement this
guidance, as applicable, on a prospective basis.

Comprehensive Income

The
Company's comprehensive income consists of net income and other items recorded
directly to the equity accounts. The objective is to report a measure of all
changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners. The Company's
other comprehensive income consists principally of gains and losses on
derivative instruments that qualify for cash flow hedge treatment.

Reclassifications

Some
2000 balances have been reclassified to conform with the current year financial
statement presentation.

Recent Accounting Pronouncements

In
June 2001, the FASB issued SFAS No. 141, "Business Combinations." This standard
prohibits the use of pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and applies to all business
combinations accounted for under the purchase method that are completed after
June 30, 2001. We do not expect that implementation of this standard will have a
significant impact on our financial statements.

Also
in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This standard eliminates the amortization of goodwill, and requires
goodwill to be reviewed periodically for impairment. This standard also requires
the useful lives of previously recognized intangible assets to be reassessed and
the remaining amortization periods to be adjusted accordingly. This standard is
effective for fiscal years beginning after December 15, 2001, for all goodwill
and other intangibles assets recognized on our balance sheet at that date,
regardless of when the assets were initially recognized. We have not yet
determined the effects of this standard on our financial statements.

In
July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard is effective for fiscal years beginning after June
15, 2002, and provides accounting requirements for asset retirement obligations
associated with tangible long-lived assets. We have not yet determined the
effects of this standard on our financial statements.

3. Commitments and Contingencies:

Turbine Purchases

In
February and March 2001, the Company entered into two letters of intent for
delivery of turbine generators for the Company's development projects for a
total of approximately $281.2 million. We signed purchase contracts in August
2001 for turbines within these letters of intent related to the Kelson Ridge
facility. The Company has made approximately $86.6 million in turbine payments
for the nine months ended September 30, 2001, including $8 million in
deposits.

Letters of Credit

As
of September 30, 2001, the Company had $63.5 million of outstanding letters of
credit. These letters of credit are purchased guarantees that ensure the
Company's performance or payment to third parties in accordance with unspecified
terms and conditions. As of September 30, 2001, no amounts had been drawn
against these letters of credit.

4. Long-Term Debt:

On
June 6, 2001, the Company completed a $200 million offering of 4.50 percent
convertible senior notes, which mature on June 1, 2008. The notes are
convertible into shares of the Company's common stock at a conversion price of
$34.19 per share, representing a 25 percent conversion premium and are first
subject to call by the Company on June 4, 2004. Concurrently with this offering,
the Company and certain selling stockholders completed a $355.6 million common
stock offering, comprised of approximately 10.4 million shares sold by the
Company and approximately 2.6 million shares sold by the selling stockholders at
a per share price of $27.35 (see Note 7). A portion of the proceeds from these
offerings was used to repay approximately $100 million of outstanding debt held
by the Company's subsidiaries.

5. Earnings Per Share:

Basic earnings per share (EPS) is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. The
dilutive effect of the potential exercise of outstanding options to purchase
shares of common stock is calculated using the treasury stock method.

Diluted EPS assumes the issuance of common stock pursuant to stock options and
warrants at the beginning of the year.

The
following table shows the computation of the Company's basic and diluted EPS for
2000 and 2001 (in thousands, except share data):

`2000                                    2001
                                      ----------------------------------     -----------------------------------
                                                              Per Share                               Per Share
                                      Net Income    Shares      Amount        Net Income    Shares      Amount
                                      ----------    ------    ---------       ----------    ------    ---------
For the three months ended
 September 30:
   Basic EPS-                           $3,921    68,816,894                   $64,874    103,499,109
   Less: accretion of common stock        (383)
     subject
     to put rights
   Net income attributable to common    $3,538                  $0.05           64,874                   $0.63
     stockholders
   Effect of dilutive securities                   3,114,695                     1,327     10,191,855
                                       -------    ----------                  --------    -----------
   Diluted EPS-                         $3,538    71,931,589    $0.05          $66,201    113,690,964    $0.58
                                       =======    ==========   ======         ========    ===========    ======
For the nine months ended
 September 30:
   Basic EPS-                          $17,671    55,289,366                  $101,325     97,552,958
   Less: accretion of common stock        (654)
     subject
     to put rights
   Net income attributable to common    17,017                  $0.31          101,325     97,552,958    $1.04
     stockholders
   Effect of dilutive securities                   2,654,091                     1,327      6,996,492
                                       -------    ----------                  --------    -----------
   Diluted EPS-                        $17,017    57,943,457    $0.29         $102,652    104,549,450    $0.98
                                       =======    ==========   ======         ========    ===========    ======`

Equivalent shares of options and convertible securities that were excluded from
diluted earnings per share due to their antidilutive effect were 0, 1,608,522,
and 36,146 for the three months ended March 31, 2001, June 30, 2001, and
September 30, 2001, respectively.

6. Income Taxes

Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:

`2001           2000
                                                   ----           ----
       THREE MONTHS ENDING SEPTEMBER 30,
       ---------------------------------
       Statutory federal tax rate                 35.0%          35.0%
       State and local taxes,
          net of federal tax benefit               0.5%           6.5%
       State tax credits                          (4.0%)          0.4%
                                             ---------------------------
       Effective tax rate                         31.5%          41.9%
                                             ===========================

       NINE MONTHS ENDING SEPTEMBER 30,
       --------------------------------
       Statutory federal tax rate                 35.0%          35.0%
       State and local taxes,
          net of federal tax benefit               3.3%           6.5%
       State tax credits                          (2.4%)         (0.3%)
                                             ---------------------------
       Effective tax rate                         35.9%          41.2%
                                             ===========================`

The
rate reductions for the three and nine months ended September 30, 2001 are
related to the implementation of several tax planning strategies, including
utilization of several tax savings incentive programs, primarily focused on the
high tax jurisdictions in which the Company has substantial
operations.

7. Accounting Change:

Effective January 1, 2001, the Company adopted SFAS No. 133, (the Statement)
as amended by SFAS Nos. 137 and 138. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a cash flow hedge, the effective portions of the changes in fair value of the
derivative are recorded in OCI and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in fair value
of cash flow hedges are recognized as earnings.

The
adoption of the Statement resulted in a pre-tax reduction to OCI of $57.0
million ($33.3 million after taxes). The reduction to OCI for the nine months
ended September 30, 2001 is mostly attributable to valuation losses of
approximately $29.0 million on our interest rate swaps and reclassifications out
of OCI of $4.7 million in gains, respectively. The net derivative losses
included in OCI will be reclassified into earnings as these derivative contracts
settle.

At
September 30, 2001, the Company had net derivative assets of approximately $28.6
million, derivative liabilities of approximately $111.1 million and OCI of
approximately $(57.6) million, after tax, related to fair values of the
Company's derivatives.

The
Company uses derivative instruments to manage exposures to interest rate and
commodity price risks. The Company's objectives for holding derivatives are to
minimize the variability in the Company's cash flow using the most effective
methods to eliminate or reduce the impacts of these risks. The Company does not
use derivative financial instruments for speculative or trading
purposes.

Interest Rate Risk

The
Company's credit facilities are subject to interest rate risk. The interest rate
swaps are derivative instruments used to mitigate the risk of increasing
interest rates for the Company's floating rate debt. These derivatives represent
the Company's attempt to hedge its exposure to interest rate risk in the event
of significant increases in interest rates.

Commodity Price Risk

The
Company attempts to hedge some aspects of its operations against inflation,
rising fuel costs, and flat or decreasing energy prices. The Company engages in
the forward sale of electricity, the forward purchases of natural gas and oil as
well as financial tolling contracts. The forward sales of electricity are
treated as cash flow hedges, with the exception of one long-term contract, which
is treated as a derivative. The forward purchase and financial tolling contracts
are treated as derivatives with gains and losses recorded in earnings. The net
gain attributable to the change in these derivative contracts included in the
operating expenses on the accompanying consolidated statements of operations was
$16.4 million for the nine months ended September 30, 2001. The Company's use of
derivative financial instruments, whether considered and treated as a hedge or
not, is designed to lock in sale prices and the associated fuel costs to create
a fixed and less variable energy margin.

8. Stockholders' equity and comprehensive income:

Stockholders' equity and comprehensive income amounted to the following as of
and for the nine months ended September 30, 2001 (in thousands, except share
data):

`Notes     Accumulated
                                   Additional              Receivable    Other
                    Common Stock     Paid-In    Deferred      From     Comprehensive  Retained           Comprehensive
                 Shares     Amount  Capital   Compensation  Officers      Income      Earnings   Total      Income
                 -----------------------------------------------------------------------------------------------------
Balance,
December 31,
 2000           93,095,926 $  931  $1,230,467  $ (3,359)  $ (5,916)    $    -        $  32,659   $1,254,782 $   -
 Sale of
 common stock,
 net of fees    10,404,260    104     271,012                                                       271,116
 Net income                                                                            101,325      101,325  101,325
 Change in
 notes
 receivable                                                  1,837                                    1,837
 Amortization
 of deferred
 compensation                                     1,197                                               1,197
 Derivative
 transition
 adjustment                                                                (33,330)                 (33,330) (33,330)
 Change in
 valuation of
 cash flow
 hedges                                                                    (24,271)                 (24,271) (24,271)
                                                                                                             ---------
   Comprehensive income                                                                                      $43,724
                 -----------------------------------------------------------------------------------------------------
Balance,
September
30, 2001      $103,500,186 $1,035  $1,501,479  $ (2,162)  $ (4,079)    $   (57,601)  $ 133,984   $1,572,656
              ============ ======  ==========  ========   =========    ============  =========   ==========`

On
June 6, 2001, the Company completed a $355.6 million common stock offering,
comprised of 10.4 million shares sold by the Company and 2.6 million shares sold
by certain selling stockholders at a gross per share offering price of $27.35,
resulting in net proceeds to the Company of approximately $270.7 million.
Concurrently with this offering, the Company completed a $200 million offering
of 4.50% convertible senior notes (see Note 4). The net proceeds from these
offerings is being used by the Company to repay debt and to fund the development
of a generating station. Additionally, excess proceeds will be used to fund
future acquisitions.

9. Merger with Reliant Resources, Inc.

On
September 26, 2001, Reliant Resources, Inc. (Reliant), a wholly owned
subsidiary of Reliant and the Company entered into an Agreement and Plan of
Merger pursuant to which such wholly owned subsidiary will be merged into the
Company, and the Company will become a wholly owned subsidiary of Reliant. Under
the terms of the agreement, each of the outstanding shares of the Company's
stock will be converted into $26.80 in cash.

The
companies anticipate the merger will be completed in early 2002. The merger is
conditioned upon, among other things, the approval of the stockholders of the
Company and various regulatory approvals.

10. Subsequent Event:

In
October 2001, the Company purchased one combined-cycle power project located in
Florida from Competitive Power Ventures Holdings, LLC, a subsidiary of
Competitive Power Ventures, Inc. This is a 250 MW project near Palm Beach with
substantial expansion capability. The initial phase of 250 MW for the project is
scheduled for completion in 2004. Construction on the gas-fired, baseload
facility will commence in early 2002. GE Frame 7FA turbines have been procured
for the project. The capital cost is anticipated at $175 million for the first
phase.

|Item 2. | Management's Discussion and Analysis of Financial Condition and
Results of Operations.
|------- | --------------------------------------------------------------------------------------

This
report contains "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements include, among others, statements concerning the Company's outlook
for 2001 and beyond, the Company's expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. The forward-looking statements in this
report are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed in or implied by the
statements.

Overview

We
were incorporated in Delaware in March 1998 for the purpose of acquiring,
developing, owning, and operating non-nuclear electric power generating
facilities throughout North America. Commencing in November 1998, in five
separate acquisitions, we directly or through our wholly-owned subsidiaries
acquired our facilities with a total electric generating capacity of 5,926
megawatts in operation and an additional 5,000 megawatts in construction and
various stages of development.

Similar to other wholesale power generators, we typically sell three types of
products: energy, capacity, and ancillary services. Energy refers to the actual
electricity generated by our facilities and sold to intermediaries for ultimate
transmission and distribution to consumers of electricity. Capacity refers to
the physical capability of a facility to produce energy. Ancillary services
generally are support products used to ensure the safe and reliable operation of
the electric power supply system.

We
typically sell our wholesale products to electric power retailers, which are the
entities that supply power to consumers. Power retailers include independent
service operators, regulated utilities, municipalities, energy supply companies,
cooperatives, and retail "load" or customer aggregators.

Recent Developments

On
July 12, 2001, the Federal Energy Regulatory Commission announced that it would
facilitate a process designed to create a Northeast Regional Transmission
Organization, (Northeast RTO), which would likely be comprised of all entities
under the governance of the New England Independent Systems Operator (NEISO),
the New York Independent Systems Operator, (NY-ISO), and the Pennsylvania-New
Jersey-Maryland Interconnection (PJM) markets. This process is at a very early
stage and is being challenged by some organizations. We are unable to determine
what impact, if any, implementation of a Northeast RTO would have on
us.

In
July 2001, we executed a Purchase and Consulting Agreement with Signal
Development, L.P. for Fork Shoals Energy, LLC including a land purchase option
in Fork Shoals, South Carolina and some consulting services related to
developing the land into a viable power plant.

In
August 2001, we received a Certificate of Public Convenience and Need for the
1,650 megawatt, gas-fired Kelson Ridge Generating Station (Kelson Ridge). The
facility will be located in Waldorf, Maryland. We expect the initial phase of
1,100 megawatts to be completed in two stages of 550 megawatts by 2004, with a
potential second phase of an additional 550 megawatts to be completed in 2005.
We have entered into a purchase contract to purchase the four combustion
turbines and two steam turbines from Siemens Westinghouse Power Corporation for
the initial phase. The output will be committed under contract and/or made
available for the regional wholesale energy market, currently the PJM.

In
August 2001, Duquesne Light Company indicated that it may join PJM-West, a newly
created wholesale market covering the Mid-Atlantic region of the country. This
market could be created and operational as early as January 2002. We may sell
all or part of our capacity as well as ancillary services into this new
market.

On
September 26, 2001 Reliant and our Board of Directors approved a definitive
merger agreement. Under the terms of the agreement, each outstanding share of
our stock will be converted into $26.80 in cash. The merger is conditioned upon,
among other things, the approval of our stockholders and various regulatory
approvals.

The four primary approvals are:

| |  | Antitrust Review by the Federal Government. Under the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) and
the rules and regulations promulgated under the HSR Act, the merger may not be
completed until we and Reliant have made filings with the U.S. Federal Trade
Commission and the U.S. Department of Justice and the applicable waiting periods
have expired or been terminated. We and Reliant filed the requisite notification
reports with the DOJ on October 19, 2001.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FERC. The merger is subject to the approval of the Federal Energy
Regulatory Commission (FERC) under Section 203 of the Federal Power
Act. We and Reliant filed our application with the FERC on October 22, 2001.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NY-PSC. The New York Public Service Commission (NY-PSC)
reserves the right to review any proposed business combination that could lead
to an adverse effect to ratepayers in the state. We and Reliant believe that the
NY-PSC will not review the merger because there will be no adverse effect on
competition or rates. Nevertheless, we and Reliant are asking the NY-PSC to
either declare that it will not review the merger or, in the alternative,
approve the merger. We and Reliant filed an application with the NY-PSC on
October 26, 2001.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Orion Power Stockholders. The merger is subject to the approval of our
stockholders at a special meeting of stockholders to be held later this year or
early in 2002. Stockholders who, collectively, own approximately 60% of our
outstanding shares have agreed to vote in favor of the merger.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
anticipate the merger will be completed in early 2002.

In
October 2001, we purchased one combined-cycle power project located in Florida
from Competitive Power Ventures Holdings, LLC, a subsidiary of Competitive Power
Ventures, Inc. This is a 250 MW project near Palm Beach with substantial
expansion capability. The initial phase of 250 MW for the project is scheduled
for completion in 2004. Construction on the gas-fired, baseload facility will
commence in early 2002. GE Frame 7FA turbines have been procured for the
project. The capital cost is anticipated at $175 million for the first
phase.

Results of Operations

The
principal factor affecting recent changes in our results has been the timing of
the acquisitions of our facilities. We acquired our significant assets on the
following dates:

| |  | Carr Street Generating Station -- November 19, 1998;
| | - | ----------------------------------------------------

| |  | Hydroelectric assets -- July 30, 1999;
| | - | --------------------------------------

| |  | Assets located in New York City -- August 20, 1999;
| | - | ---------------------------------------------------

| |  | Assets located in Cleveland, Pittsburgh, West Pittsburg, Youngstown -- April 28, 2000; and
| | - | ------------------------------------------------------------------------------------------

| |  | Assets under construction from Columbia Electric Corporation -- December 11, 2000.
| | - | ----------------------------------------------------------------------------------

Set
forth below are certain operating data which we believe indicate the general
performance of our operations:

`Three Months    Three Months      Nine Months       Nine Months
                                                   Ended           Ended            Ended             Ended
                                                September       September      September 30,      September 30,
                                                ----------      ----------     --------------     -------------
                                                 30, 2000        30, 2001           2000               2001
                                                 --------        --------           -----              ----
                                                                    (Dollars in Thousands)
Consolidated EBITDA.........................    $   92,729     $  173,393       $   210,632           394,939
                                                ==========     ==========       ===========        ===========
Megawatt hours produced during period.......     4,875,779      5,270,679        10,370,161        15,048,615
Net capacity owned at end of period
(Megawatts).................................       ( 5,396)        (5,926)           (5,396)           (5,926)`

Three Months and Nine Months Ended September 30, 2001 Compared
to the Three and Nine Months Ended September 30, 2000

Revenue. Our revenue was $367.0 million and $946.8 million for the three months
and nine months ended September 30, 2001, respectively, as compared to revenue
of $343.0 million and $684.7 for the three months and nine months ended
September 30, 2000, respectively. The increase for the three months ended
September 30, 2001 as compared to the three months ended September 30, 2000 was
primarily contributed having no financial hedge for the POLR load in the Midwest
in 2001 as opposed to the $30 million pre-tax loss incurred in 2000 for the
financial power purchased as a hedge in that period. The increase for the nine
months ended September 30, 2001 as compared to the nine months ended September
30, 2000, was primarily due to the acquisition in April 2000 of our assets
located in Cleveland, Pittsburgh, West Pittsburg and Youngstown as well as the
commencement of operations of our Ceredo facility in Ceredo, West Virginia, in
June 2001. Other factors in determining our revenue stream are weather patterns
and the seasonality of energy consumption, which is often correlated with
weather patterns. Extreme temperatures can cause significant fluctuations in our
revenue stream by significantly affecting energy usage patterns. Plant outages,
due to a variety of factors, can also lead to changes in revenues of our own
facilities, and those of other energy producers, by affecting the volume or
prices of our wholesale energy products. In early August 2001, we had a
significant outage in one of our main units, Avon Lake #9, located in Cleveland,
Ohio. The loss of generation coupled with the cost of purchasing power to cover
our POLR obligations reduced our fully diluted earnings per share for the three
months ended September 30, 2001 between $0.03 to $0.05. This unit returned to
service in mid August 2001 and has operated normally since that time. No other
such outages have occurred in the periods described that have had a significant
impact on our business.

Operating Expenses. Our operating expenses consisted of fuel expense, operations
and maintenance expense, taxes other than income taxes (principally property
taxes), general and administrative expenses and depreciation and amortization
expense.

We
had fuel expenses of $147.6 million and $385.8 million for the three months and
nine months ended September 30, 2001, respectively, compared with $189.5 million
and $317.2 million for the three months and nine months ended September 30,
2000, respectively. The decrease from the three months ended September 30, 2001
compared to the three months ended September 30, 2000 was driven by lower fuel
costs for natural gas and fuel oil. The increase for the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000, was in
part the result of our acquisition of our assets located in Cleveland,
Pittsburgh, West Pittsburg and Youngstown in April 2000. Another component of
our fuel expenses is purchased power, which is power that we buy rather than
generate. Purchased power was $16.1 million and $30.5 million for the three
months and nine months ended September 30, 2001, respectively, compared to $36.2
million and $42.7 million for the three months and nine months ended September
30, 2000, respectively; a decrease of 56% and 29%, respectively. Other factors
that affect our fuel expenses include market fluctuations in the price of fuel
and our ability to substitute one fuel type for another for economic or
operating reasons.

Our
gain in derivative financial instruments was $14.7 million and $16.4 million for
the three months and nine months ended September 30, 2001, respectively,
compared to $0 for the three months and nine months ended September 30, 2000.
This gain reflects the change in market value during the three months and nine
months ended September 30, 2001, for the derivative financial instruments
(certain electricity, natural gas, oil, and financial tolling agreements) that
do not qualify as hedges under generally accepted accounting principles. See the
discussion of the "Accounting Change" below.

Our
operations and maintenance expenses were $35.0 million and $92.7 million for the
three months and nine months ended September 30, 2001, respectively, as compared
to $32.6 million and $68.1 million for the three months and nine months ended
September 30, 2000, respectively. The increase for the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000, was in
part a result of the acquisition of our assets located in Cleveland, Pittsburgh,
West Pittsburgh and Youngstown in April 2000 and the commencement of operations
in our Ceredo facility in June 2001. Another component of the increase was
higher labor costs due to new labor agreements with several of our represented
workforces that became effective in mid 2000. Other costs included in operations
and maintenance expenses are for maintenance projects performed in conjunction
with scheduled capital improvements or forced outages. These costs may be
incurred at different times during the operating cycle as a result of system
planning, forced outages, energy needs, and other external factors. These costs,
as they relate to maintenance projects, follow the seasonal patterns of the
energy industry with a higher concentration of costs in the early part of the
second and fourth quarters of a fiscal year, traditionally the slower periods of
energy demand.

Our
general and administrative expenses were $15.2 million and $43.4 million for the
three months and nine months ended September 30, 2001, respectively, as compared
to $9.8 million and $24.3 million for the three months and nine months ended
September 30, 2000, respectively. The increase was the result of expanded
corporate and regional infrastructure to support our growth.

Taxes other than income taxes amounted to $10.5 million and $46.4 million for
the three months and nine months ended September 30, 2001, respectively,
compared to $18.3 million and $45.4 million for the three months and nine months
ended September 30, 2000, respectively. The decrease for the three months ended
September 30, 2001 compared to the three months ended September 30, 2000 was due
to several property tax refunds received and the settlement of a pending
assessment case from one of our hydroelectric generation facilities. The
majority of these taxes stem from property taxes related to our facilities and
their locations. A number of our facilities have come under reassessment which
is customary following a transfer of ownership. We continue to attempt to
control these costs through assessment hearings and negotiations with the
appropriate authorities.

Depreciation and amortization expense was $34.4 million and $99.6 million for
the three months and nine months ended September 30, 2001, respectively, as
compared to $33.1 million and $75.4 million for the three months and nine months
ended September 30, 2000, respectively. The increase for the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000, was in
part a result of the acquisition in April 2000 of our assets located in
Cleveland, Pittsburgh, West Pittsburg and Youngstown. We have also completed
several major capital projects in a number of our facilities, specifically our
assets located in New York City during 2001, that led to increases in property
and equipment costs and, accordingly, in depreciation expense. Capital projects
and future acquisitions will continue to determine the amount and growth of
these costs.

Operating Income. As a result of the above factors, our operating income was
$139.0 million and $295.3 million for the three months and nine months ended
September 30, 2001, respectively, as compared to operating income of $59.6
million and $135.2 million for the three months and nine months ended September
30, 2000, respectively.

Interest Expense. Our interest expense was $50.8 million and $154.7 million for
the three months and nine months ended September 30, 2001, respectively, as
compared to $56.5 million and $113.0 million for the three months and nine
months ended September 30, 2000, respectively. The reduction in interest expense
for the three months ended September 30, 2001 compared to the same period in
2000 was due to decreased interest rates thus reducing the costs of our floating
rate debt. The increase in interest expense for the nine months ended September
30, 2001 compared to the same period in 2000 was due to our new bank credit
agreement for the acquisition of our assets located in Cleveland, Pittsburgh,
West Pittsburg and Youngstown, the $400 million senior notes issued in April and
May 2000, the revolving credit facility we entered into in July 2000 and the $200
million convertible senior notes issued in June 2001. Interest expense also
includes amortization of deferred financing costs from the establishment of and
any substantial modifications to our senior notes or credit facilities. We are
currently contemplating refinancing the debt of our operating subsidiaries.

Interest Income. Our interest income was $6.4 million and $17.4 million for the
three months and nine months ended September 30, 2001, respectively, as compared
to $3.6 million and $7.8 million for the three months and nine months ended
September 30, 2000, respectively. The increase is due to the increase in cash on
hand raised as part of our public offerings in November 2000 and June 2001.

Income Tax Provision. Our income tax provision was $29.8 million and $56.7
million for the three months and nine months ended September 30, 2001,
respectively, as compared to $2.8 million and $12.4 million for the three months
and nine months ended September 30, 2000, respectively. The increase was due to
higher taxable income for the equivalent periods. Our effective tax rate
decreased to 31.4% from 41.9% and 35.9% from 41.2% for the three and nine months
ended September 30, 2001 and 2000, respectively, due to the implementation of
several strategies to reduce our taxable income in high tax jurisdictions.

Net Income. As a result of the above factors, our net income was $64.9 million
and $101.3 million for the three months and nine months ended September 30,
2001, respectively, as compared to $3.9 million and $17.7 million for the three
months and nine months ended September 30, 2000, respectively.

Accounting Change

Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (the "Statement") as amended by SFAS Nos. 137 and 138. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a cash flow hedge, the
effective portions of the changes in fair value of the derivative are recorded
in other comprehensive income and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in fair value
of cash flow hedges are recognized into earnings.

The
adoption of the Statement resulted in a pre-tax reduction to other comprehensive
income of $57.0 million ($33.3 million after taxes). The reduction to other
comprehensive income for the nine months ended September 30, 2001, is mostly
attributable to valuation losses of approximately $29.0 million on our interest
rate swaps and reclassifications out of other comprehensive income of $4.7
million in gains, respectively. The net derivative losses included in other
comprehensive income will be reclassified into earnings as these derivative
contracts settle.

Liquidity and Capital Resources

During the nine months ended September 30, 2001, we obtained cash from
operations, from borrowings under the credit facilities of our subsidiaries and
from the public offerings of equity and debt. This cash was used to fund
operations, service debt obligations, fund construction of our Ceredo, Liberty
Electric and Kelson Ridge generating stations, and meet other cash and liquidity
requirements.

Operating activities for the nine months ended September 30, 2001, provided
$198.9 million of cash compared to $22.9 million of cash used for the nine
months ended September 30, 2000. The change in restricted cash was $32.9 million
for the nine months ended September 30, 2001, compared to a change of $(101.0)
for the nine months ended September 30, 2000. Investing activities for the nine
months ended September 30, 2001, used $357.8 million of cash for facilities'
upgrades and improvements as well as continued construction of our Ceredo,
Liberty Electric and Kelson Ridge generating stations as compared to $67.9
million of cash used for similar upgrades and improvements in the nine months
ended September 30, 2000, net of disposals of $5.6 million for the same period.
Additionally, for the nine months ended September 30, 2000, investing activities
used $1.7 billion for assets purchased through an acquisition. Financing
activities for the nine months ended September 30, 2001, provided $443.0 million
of cash, primarily through additional borrowings and issuance of common stock as
compared to providing $1.8 billion in the nine months ended September 30, 2000.

As
of September 30, 2001, cash and cash equivalents were $420.0 million and working
capital was $780.3 million. Of this working capital, we had restricted cash of
$250.5 million that can only be used pursuant to our credit facilities in
certain circumstances to fund the business activities of our
subsidiaries.

We
will require cash to meet the debt service obligations under our notes and
credit facilities. Debt service obligations will fluctuate depending on
variations in the interest rate and the balance on the working capital portion
of the facilities. We are restricted in our ability to incur additional
indebtedness and make acquisitions and capital expenditures by the terms and
conditions of our senior notes, our revolving credit facility and the credit
facilities of our subsidiaries. However, we may incur additional indebtedness
under a variety of scenarios.

We
will need to refinance our indebtedness under the Orion Power New York credit
facility, which becomes due in December 2002, and the Orion Power MidWest credit
facility, which becomes due in October 2002. We believe we are currently in
compliance with all of the covenants under our credit facilities and senior
notes.

In
addition, we plan to improve the operational efficiency of our generating
facilities and, in some cases, to expand our facilities on-site. We anticipate
maintenance capital expenditures of between $30 and $40 million annually for the
next several years in connection with our assets. Additionally, we expect that
capital expenditures on environmental projects will total approximately $350
million over the next seven years, the majority of which is expected to be
expended between 2002 and 2006. We believe a substantial portion of this will be
funded out of operating cash flow.

We
will fund our operating activities, construction and maintenance and debt
service requirements through a combination of operating cash flows, financing
arrangements and the proceeds from our debt and equity offerings. We expect our
future cash flows and cash sources will increase as a result of the new power
supply agreement we entered into with Niagara Mohawk Power Corporation in March
2001, the revisions and extension to the provider of last resort contract agreed
to with Duquesne Light Company in February 2001, the addition of Ceredo, which
began commercial operations on June 14, 2001, and the proceeds from the equity
and debt offerings completed in June 2001.

We
expect our financing requirements beyond the offerings described above, will be
driven by the refinancing of our operating subsidiaries credit facilities and
additional acquisitions or development projects.

Recent Accounting Pronouncements

In
June 2001, the FASB issued SFAS No. 141, "Business Combinations." This standard
prohibits the use of pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and applies to all business
combinations accounted for under the purchase method that are completed after
June 30, 2001. We do not expect that implementation of this standard will have a
significant impact on our financial statements.

Also
in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This standard eliminates the amortization of goodwill, and requires
goodwill to be reviewed periodically for impairment. This standard also requires
the useful lives of previously recognized intangibles assets to be reassessed
and the remaining amortization periods to be adjusted accordingly. This standard
is effective for fiscal years beginning after December 15, 2001, for all
goodwill and other intangibles assets recognized on our statement of financial
position at that date, regardless of when the assets were initially recognized.
We have not yet determined the effects of this standard on our financial
statements.

In
July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard is effective for fiscal years beginning after June
15, 2002, and provides accounting requirements for asset retirement obligations
associated with tangible long-lived assets. We have not yet determined the
effects of this standard on our financial statements.

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

We
attempt to hedge some aspects of our operations against the effects of
fluctuations in inflation, interest rates, and commodity prices. Because of the
complexity and potential cost of hedging strategies and the diverse nature of
our operations, our results, although hedged, will likely be somewhat materially
affected by fluctuations in these variables and these fluctuations may result in
material improvement or deterioration of operating results. Results would
generally improve with lower interest rates and fuel costs, and with higher
prices for energy, capacity, and ancillary services, except where we are subject
to fixed price agreements such as the provider of last resort contract. Our
operating results are also sensitive to the difference between inflation and
interest rates, and would generally improve when increases in inflation are
higher than increases in interest rates. We do not use derivative financial
instruments for speculative or trading purposes.

As
of September 30, 2001, we were party to four interest rate swap agreements
designed to fix the variable rate of interest on $350 million of the credit
facility of Orion Power New York, L.P. The weighted average fixed rate of
interest for the related swap agreements is approximately 6.95%. In addition, we
were party to four interest rate swap agreements designed to fix the variable
rate of interest on $600 million of the credit facility of Orion Power MidWest,
L.P. The weighted average fixed rate of interest for the related swap agreement
is approximately 7.42%. As of September 30, 2001, if we sustained a 100 point
basis change in interest rates for all variable rate debt, the change would have
affected net pretax income by $8.0 million.

As
of September 30, 2001, the fair value of our financial instruments, except for
the fixed rate component of the Liberty Credit Facility, the senior notes, the
convertible senior notes and our derivative financial instruments approximates
their carrying value due to their short-term nature or due to the fact the
interest rate paid on the debt is variable. The fair value of the senior notes,
the fixed portion of the Liberty debt and the convertible senior notes was
estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rate and the approximate carrying value based on the
quoted market prices for similar types of borrowing arrangements. The fair value
of the derivatives was determined using published market rates as of the nearest
business day prior to September 30, 2001. The carrying values and fair values of
these financial instruments are as follows as of September 30, 2001 (in
thousands):

`Carrying          Fair
                                                     Value           Value
                                            ----------------------------------
     Senior Notes                                    $400,000        $485,500
     Liberty Debt - fixed portion                     160,200         210,907
     Convertible Senior Notes                         200,000         196,760
     Derivative Instruments:
                         Interest Rate Swaps             --         (106,696)
                                Energy Sales             --            22,613
                                         Oil             --           (4,430)
                           Financial Tolling             --             5,968`

As
of September 30, 2001, we had sold forward 1.1 million total megawatt hours for
2001 - 2002, which we expect will produce a net margin of $35.7 million. We have
entered into these financial derivative contracts to hedge our exposure to the
impact of price fluctuations related to the forward price of power. We also
enter into derivative commodity instruments to hedge our exposure to the impact
of price fluctuations on gas and oil prices. While these derivative instruments
related to the price of gas and oil do not qualify for hedge treatment under
generally accepted accounting principles, we believe they provide a strong
economic hedge of this risk. All hedge transactions are subject to our risk
management policy, which does not permit speculative or trading positions.

|PART II.Item 6. | OTHER INFORMATION.Exhibits and Reports on Form 8-K.
|--------------- | ---------------------------------------------------

| | (b) | The Company filed a Current Report on Form 8-K reporting on Items 5 and 7 an
event which occurred on September 26, 2001.
| | --- | ------------------------------------------------------------------------------------------------------------------------

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

| | ORION POWER HOLDINGS, INC.
By: /s/ Scott B. Helm
       Scott B. Helm
       Executive Vice President and Chief Financial Officer
       (principal financial officer of registrant)
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: November 14, 2001