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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 QUARTER ENDED SEPTEMBER 30, 2002
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: 001-16107
MIRANT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 58-2056305
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1155 Perimeter Center West, Suite 100, Atlanta, Georgia 30338
(Address of Principal Executive Offices) (Zip Code)
(678) 579-5000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, at December 16, 2002 was 403,910,772.
MIRANT CORPORATION AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Page
Number
------
DEFINITIONS 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 2
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Condensed Consolidated Statements of Income 4
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statement of Stockholders' Equity 7
Condensed Consolidated Statements of Cash Flows 8
Notes to the Condensed Consolidated Financial Statements 9
Independent Accountants' Review Report 50
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 51
Item 3. Quantitative and Qualitative Disclosures about Market Risk 80
Item 4. Controls and Procedures 83
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 85
Item 2. Changes in Securities and Use of Proceeds Inapplicable
Item 3. Defaults Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders Inapplicable
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 85
Signatures
Certifications
i
DEFINITIONS
TERM MEANING
- ---- -------
APB Accounting Principles Board
AQC Allied Queensland Coalfields Pty Ltd.
Bewag Bewag AG
BP BP p.l.c.
CAISO California Independent System Operator
CEMIG Companhia Energetica de Minas Gerais
Cleco Cleco Midstream Resources, LLC
the Company Mirant Corporation and its subsidiaries
CPUC California Public Utilities Commission
DWR California Department of Water Resources
EITF Emerging Issues Task Force
Enron Enron Corporation and its affiliates
EPA U. S. Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fitch Fitch, Inc.
GAAP Generally accepted accounting principles
Hyder Hyder Limited
IPP Independent Power Producers
JPSCo Jamaica Public Service Company Limited
Kogan Creek MAP Australia (BVI) Limited
LIBOR London Interbank Offering Rate
Mirant Americas Mirant Americas, Inc.
Mirant Americas Energy Marketing Mirant Americas Energy Marketing, L. P.
Mirant Americas Energy Capital Mirant Americas Energy Capital, LP
Mirant Americas Generation Mirant Americas Generation, LLC
Mirant Asia-Pacific Mirant Asia-Pacific Ventures, Inc.
Mirant Canada Energy Marketing Mirant Canada Energy Marketing, Ltd.
Mirant Mirant Corporation and its subsidiaries
Mirant Delta Mirant Delta, LLC
Mirant Mid-Atlantic Mirant Mid-Atlantic, LLC and its subsidiaries
Mirant New England Mirant New England, LLC
Mirant New York Mirant New York, Inc., Mirant New York
Investments, Inc., and subsidiaries
Mirant Potrero Mirant Potrero, LLC
Moody's Moody's Investors Service
MW Megawatts
Neenah Mirant Corporation's Neenah generating facility
NPC National Power Corporation
OCI Other comprehensive income
OTC Over-the-counter
Pacific Gas and Electric Pacific Gas and Electric Co.
PEPCO Potomac Electric Power Company
Perryville Perryville Energy Partners, LLC
PX California Power Exchange Corporation
RMR Reliability-Must-Run
SCE Southern California Edison
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
Shajiao C Guangdong Guanghope Power Company Limited
SIPD Shandong International Power Development
Company Limited
Southern Southern Company
S&P Standard & Poor's
State Line State Line Energy, L.L.C.
Vastar Vastar Resources Inc.
WPD Western Power Distribution group headed by
WPD 1953 Limited
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The information presented in this quarterly report on Form 10-Q includes
forward-looking statements, in addition to historical information. These
statements involve known and unknown risks and relate to future events, Mirant's
future financial performance or projected business results. In some cases,
forward-looking statements by terminology may be identified by statements such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "targets," "potential" or "continue" or the negative of
these terms or other comparable terminology.
Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors, which include:
- - legislative and regulatory initiatives regarding deregulation, regulation
or restructuring of the electric utility industry;
- - the extent and timing of the entry of additional competition in the
markets of our subsidiaries and affiliates;
- - our pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;
- - political, legal and economic conditions and developments and state,
federal and other rate regulations in the United States and in foreign
countries in which our subsidiaries and affiliates operate;
- - changes in or application of environmental and other laws and regulations
to which we and our subsidiaries and affiliates are subject;
- - financial market conditions and the results of our financing or
refinancing efforts;
- - changes in market conditions, including developments in energy and
commodity supply, volume and pricing and interest rates;
- - weather and other natural phenomena;
- - developments in the California power markets, including, but not limited
to, governmental intervention, deterioration in the financial condition of
our counterparties, default on receivables due and adverse results in
current or future litigation;
- - the direct or indirect effects on our business, including the availability
of insurance, resulting from the terrorist actions on September 11, 2001
or any other terrorist actions or responses to such actions, including,
but not limited to, acts of war;
- - the direct or indirect effects on our business resulting from the
financial difficulties of competitors of Mirant, including, but not
limited to, their effects on liquidity in the trading and power industry,
and their effects on the capital markets views of the energy or trading
industry and our ability to access the capital markets on the same
favorable terms as in the past;
- - the direct or indirect effects on our business of a further lowering of
our credit rating (or actions we may take in response to changing credit
ratings criteria), including increased collateral requirements to execute
our business plan, demands for increased collateral by our current
counterparties, refusal by our current or potential counterparties to
enter into transactions with us and our inability to obtain credit or
capital in amounts or on terms favorable to us;
- - the disposition of the pending litigation described in our Form 10-K/A
filed on March 11, 2002, our Form 10-Q filed on May 13, 2002, as amended
on November 7, 2002, our Form 10-Q filed on November 7, 2002, our Form 8-K
filed on June 27, 2002 and this Form 10-Q;
- - the direct or indirect effects of the accounting issues discussed in Note
A in the notes to the unaudited condensed consolidated financial
statements included in this Form 10-Q and the additional issues arising
from the weaknesses identified by the internal control and procedures
review discussed in Item 4 of Part I of this Form 10-Q;
- - the direct or indirect ramifications of the results of the reaudit of our
2000 and 2001 financial statements and the restatements that will be
required as a result of these reaudits including potential effects on our
financing arrangements and refinancing efforts;
- - the direct or indirect effects of inquiries by the U.S. Securities &
Exchange Commission and the U.S. Department of Justice and the Commodities
Futures Trading Commission regarding, among other things, the accounting
issues described in the Company's July 30 and August 14, 2002 press
releases and energy trading issues;
2
- - the direct or indirect effects on our business of our or our subsidiaries'
failure to timely file our or their Form 10-Q for the quarters ended June
30, 2002 and September 30, 2002; and
- - other factors discussed in this Form 10-Q and in our reports filed from
time to time with the SEC (including our Form 10-K filed on March 11, 2002,
as amended by Form 10-K/A, filed on March 11, 2002, our Form 10-Q filed on
May 13, 2002, as amended by Form 10-Q/A, filed on November 7, 2002 and our
Form 10-Q filed on November 7, 2002).
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We expressly disclaim a duty to update
any of the forward-looking statements contained herein.
3
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
------- ------- ------- -------
(in millions, except per share data)
OPERATING REVENUES (NOTE A): $ 2,258 $ 2,484 $ 4,981 $ 7,049
------- ------- ------- -------
OPERATING EXPENSES (NOTE A):
Cost of fuel, electricity and other products, excluding
depreciation 1,473 1,611 3,027 4,593
------- ------- ------- -------
GROSS MARGIN 785 873 1,954 2,456
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Depreciation and amortization 82 98 236 275
Maintenance 31 30 92 98
Selling, general and administrative 172 178 479 653
Impairment loss (Note D) 204 3 204 96
Restructuring charges (Note H) 8 -- 598 --
Gain on sales of assets, net (Note H) (5) -- (33) --
Other 137 116 363 370
------- ------- ------- -------
Total other operating expenses 629 425 1,939 1,492
------- ------- ------- -------
OPERATING INCOME 156 448 15 964
------- ------- ------- -------
OTHER (EXPENSE) INCOME, NET:
Interest income 28 29 60 117
Interest expense (128) (141) (354) (423)
Gain/(loss) on sales of assets, net (Note H) (4) (1) 276 1
Equity in income of affiliates 25 38 145 164
Impairment loss on minority owned affiliates (Note D) (18) -- (335) --
Receivables recovery (Note A) -- -- 29 10
Other, net (4) 10 (1) 10
------- ------- ------- -------
Total other expense, net (101) (65) (180) (121)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST 55 383 (165) 843
PROVISION FOR INCOME TAXES 38 135 19 276
MINORITY INTEREST 20 18 54 48
------- ------- ------- -------
(LOSS) INCOME FROM CONTINUING OPERATIONS (3) 230 (238) 519
------- ------- ------- -------
INCOME FROM DISCONTINUED OPERATIONS, NET
OF TAX PROVISION OF $3 AND $2 FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001, AND $8 FOR BOTH THE NINE
MONTHS ENDED SEPTEMBER 30, 2002 AND 2001,
RESPECTIVELY 2 4 11 19
------- ------- ------- -------
NET (LOSS) INCOME $ (1) $ 234 $ (227) $ 538
======= ======= ======= =======
(LOSS) EARNINGS PER SHARE:
Basic $ -- $ 0.69 $ (0.56) $ 1.58
Diluted $ -- $ 0.67 $ (0.56) $ 1.55
The accompanying notes are an integral part of these condensed
consolidated statements.
4
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Note A)
(Restated)
AT SEPTEMBER 30, At December 31,
2002 2001
--------------- ---------------
(in millions)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 2,283 $ 856
Receivables:
Customer accounts, less provision for uncollectibles
of $153 and $159 for 2002 and 2001, respectively 1,852 1,954
Other, less provision for uncollectibles
of $34 and $32 for 2002 and 2001, respectively 204 773
Notes receivable 4 24
Energy marketing and risk management assets (Note G) 1,186 911
Derivative hedging instruments (Notes C and G) 145 253
Deferred income taxes 363 405
Inventories 326 362
Assets held for sale (Note J) 105 323
Other 305 377
-------- --------
Total current assets 6,773 6,238
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 5,127 4,241
Less accumulated provision for depreciation and depletion (469) (326)
-------- --------
4,658 3,915
Leasehold interest, net of accumulated amortization
of $356 and $297 for 2002 and 2001, respectively 1,697 1,751
Construction work in progress 1,044 1,921
Investment in suspended construction (Note H) 732 --
-------- --------
Total property, plant and equipment, net 8,131 7,587
-------- --------
NONCURRENT ASSETS:
Investments (Note H) 522 2,247
Notes and other receivables, less provision for uncollectibles
of $131 and $116 for 2002 and 2001, respectively 462 287
Energy marketing and risk management assets (Note G) 747 508
Goodwill, net of accumulated amortization
of $293 and $275 for 2002 and 2001, respectively (Notes A and B) 3,422 3,190
Other intangible assets, net of accumulated amortization
of $63 and $70 for 2002 and 2001, respectively (Notes A and B) 581 865
Derivative hedging instruments (Notes C and G) 110 95
Deferred income taxes 342 423
Other 285 247
-------- --------
Total noncurrent assets 6,471 7,862
-------- --------
TOTAL ASSETS $ 21,375 $ 21,687
======== ========
The accompanying notes are an integral part of these condensed
consolidated statements.
5
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Note A)
(Restated)
AT SEPTEMBER 30, At December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: 2002 2001
---------------- ---------------
(in millions, except share data)
CURRENT LIABILITIES:
Short-term debt $ 109 $ 55
Current portion of long-term debt (Note F):
Mirant Corporation term loan 1,125 --
Sual and Pagbilao project loans 163 1,201
Mirant Asia-Pacific 34 792
Mirant Holdings Beteiligungsgesellschaft (Note H) -- 566
Other 224 45
Accounts payable and accrued liabilities 2,381 2,580
Taxes accrued 56 150
Energy marketing and risk management liabilities (Note G) 1,140 862
Obligations under energy delivery and purchase commitments (Note I) 598 635
Derivative hedging instruments (Notes C and G) 91 232
Accrued restructuring charges 197 --
Liabilities related to assets held for sale (Note J) 12 37
Other 182 151
-------- --------
Total current liabilities 6,312 7,306
-------- --------
NONCURRENT LIABILITIES:
Notes payable (Note F) 5,066 3,751
Other long-term debt (Note F) 1,848 2,068
Energy marketing and risk management liabilities (Note G) 700 633
Deferred income taxes 113 72
Obligations under energy delivery and purchase commitments (Note I) 976 1,376
Derivative hedging instruments (Notes C and G) 96 47
Other 384 354
-------- --------
Total noncurrent liabilities 9,183 8,301
-------- --------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 304 281
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF A
SUBSIDIARY HOLDING SOLELY PARENT COMPANY DEBENTURES 345 345
COMMITMENTS AND CONTINGENT MATTERS (NOTES I AND L)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, per share 4 4
Authorized -- 2,000,000,000 shares
Issued -- September 402,585,030 shares;
-- December 31, 2001: 400,880,937 shares
Treasury -- September 30, 2002: 100,000 shares
-- December 31, 2001: 100,000 shares
Additional paid-in capital 4,901 4,886
Retained earnings 451 678
Accumulated other comprehensive loss (123) (112)
Treasury stock, at cost (2) (2)
-------- --------
Total stockholders' equity 5,231 5,454
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,375 $ 21,687
======== ========
The accompanying notes are an integral part of these condensed
consolidated statements.
6
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS STOCK LOSS
----- ------- -------- ---- ----- ----
(in millions)
BALANCE, DECEMBER 31, 2001, AS
PREVIOUSLY REPORTED $4 $4,886 $ 729 $ (119) $ (2)
Restatement adjustments (Note A) -- -- (51) 7 --
-- ------ ------ ------ ------
BALANCE, DECEMBER 31, 2001, AS
RESTATED 4 4,886 678 (112) (2)
Net loss -- -- (227) -- -- $ (227)
Other comprehensive loss (Note C) -- -- -- (11) -- (11)
------
Comprehensive loss $ (238)
======
Issuance of common stock -- 15 -- -- --
-- ------ ------ ------ ------
BALANCE, SEPTEMBER 30, 2002 $4 $4,901 $ 451 $ (123) $ (2)
== ====== ====== ====== ======
The accompanying notes are an integral part of these condensed
consolidated statements.
7
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
-------------------
2002 2001
---- ----
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (227) $ 538
------- -------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Equity in income of affiliates (145) (162)
Dividends received from equity investments 29 81
Depreciation and amortization 258 306
Amortization of obligations under energy delivery and purchase commitments:
Power purchase agreements (42) (19)
Transition power agreements (320) (322)
Other agreements (74) 38
Impairment loss 539 96
Energy marketing and risk management activities, net (169) 23
Restructuring charge, net of amounts paid 541 --
Deferred income taxes 101 92
Gain on sales of assets (309) (1)
Minority interest 38 48
Other, net 65 14
Changes in operating assets and liabilities, excluding effects
from acquisitions:
Receivables, net 609 1,946
Other current assets 106 (121)
Other assets (72) (32)
Accounts payable and accrued liabilities (200) (2,375)
Taxes accrued (52) 188
Other current liabilities 23 30
Other liabilities (16) 16
------- -------
Total adjustments 910 (154)
------- -------
Net cash provided by operating activities 683 384
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,111) (1,183)
Cash paid for acquisitions (94) (864)
Issuance of notes receivable (329) (116)
Repayments on notes receivable 142 511
Disposal of Southern Company affiliates and other companies -- (77)
Proceeds from the sale of assets 242 --
Proceeds from the sale of minority owned investments 1,987 --
Property insurance proceeds 7 13
Other (18) --
------- -------
Net cash provided by (used in) investing activities 826 (1,716)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,562 3,200
Repayment of long-term debt (2,765) (2,341)
Proceeds from issuance of common stock 15 28
Capital contributions from minority interests 17 31
Payment of dividends to minority interests (17) (2)
Purchase of treasury stock -- (2)
Issuance of short-term debt, net 52 607
Change in debt service reserve fund 47 138
------- -------
Net cash (used in) provided by financing activities (89) 1,659
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 7 18
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,427 345
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 856 1,049
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,283 $ 1,394
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized $ 294 $ 409
Refunds received for income taxes $ 276 $ 11
BUSINESS ACQUISITIONS:
Fair value of assets acquired $ 97 $ 1,530
Less cash paid 94 864
------- -------
Liabilities assumed $ 3 $ 666
======= =======
The accompanying notes are an integral part of these
condensed consolidated statements.
8
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING AND REPORTING POLICIES
GENERAL
Mirant Corporation (formerly Southern Energy, Inc.) was incorporated in
Delaware in 1993. Mirant Corporation and its subsidiaries (collectively,
"Mirant" or the "Company") are a global competitive energy company that delivers
value primarily by producing and selling electricity in the U.S., Philippines,
China and the Caribbean. Mirant's business includes independent power projects,
integrated utilities and energy marketing and risk management operations.
ADJUSTMENTS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS. Prior to filing its
second quarter 2002 Form 10-Q, the Company identified accounting errors in its
previously issued financial statements, primarily related to its risk management
and marketing operations. The Company restated its December 31, 2001 balance
sheet, reducing retained earnings for after tax charges totaling approximately
$51 million. The principal reasons and effects of the adjustments on the
accompanying 2001 balance sheet from amounts previously reported on the
Company's Form 10-K/A are summarized below (in millions):
INCREASE (DECREASE)
DECEMBER 31, 2001
RETAINED EARNINGS
-----------------
Receivables - Other (a) $(117)
Current deferred income tax assets (b) 47
Non-current deferred income tax liabilities (c) 25
Other, net (6)
-----
$ (51)
=====
a) reflects the correction of the overstatement of a natural gas asset and
the correction of accrued revenues at December 31, 2001.
b) reflects the income tax benefits related to the corrections discussed in
(a) above.
c) reflects the correction of $42 million of excess income tax provisions
recorded in Asia, offset by $17 million of additional income tax expenses
related to WPD.
The Company also reduced both energy marketing and risk management assets
and liabilities in its December 31, 2001 consolidated balance sheets from
amounts previously reported in its Form 10-K/A by $820 million to eliminate
intracompany transactions. These adjustments do not have any effect on the
Company's consolidated results of operations or cash flows.
The Company has engaged its independent auditors to reaudit the Company's
2000 and 2001 financial statements to address these and other accounting errors
that have been identified, which are expected to result in a restatement of its
statement of income for either or both of 2000 and 2001 and potentially for
interim periods in 2001 and 2002. In addition, the Company would have been
required to have its independent auditors reaudit the Company's 2000 and 2001
financial statements as a result of the Company's adoption of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and the change
in reporting energy trading activities required by EITF Issue 02-3, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities," both
of which require significant modifications to the Company's previously issued
financial statements.
The specific interim periods within previous years to which $70 million of
the charges (described in (a) and (b) above) relate have not been determined at
this time; accordingly, their effect has not been reflected in the accompanying
2001 interim condensed consolidated statements of income. The interim periods to
which the $70 million relates will be determined in connection with the reaudit.
Rather than correct the 2001 results of operations and cash flows to reflect a
portion of these accounting errors, the Company has
9
presented the comparative 2001 amounts as previously reported until the review
of accounting issues is resolved and the reaudit is completed. The Company
expects to correct the financial statements, as needed, for each reporting
period in 2000 or 2001. Until the reaudit is completed, the Company does not
believe it is appropriate to revise the historical results for the interim
periods. There may be significant changes in previously reported amounts of
operating revenues, operating income, equity in income of affiliates, provision
for income taxes, net income and operating cash flows.
In its first quarter 2002 Form 10-Q/A, the Company also restated its
previously reported results of operations for the first quarter of 2002 to a net
loss of $6 million from an originally reported net loss of $42 million. These
corrections have been reflected in the accompanying 2002 unaudited condensed
consolidated statements of income. The Company also restated its previously
reported first quarter 2002 statement of cash flows, increasing originally
reported cash provided from operations by $46 million to reflect cash receipts
and disbursements in the appropriate period, and increasing cash provided by
investing activities by $11 million.
A summary comparison of the previously reported on Form 10-Q and restated
on Form 10-Q/A first quarter 2002 unaudited condensed consolidated statements of
income follows (in millions):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002, AS MARCH 31, 2002,
PREVIOUSLY REPORTED AS RESTATED
------------------- -----------
Operating revenues $ 7,037 $ 6,908
Operating expenses 6,465 6,298
------- -------
Gross margin 572 610
Other (614) (616)
------- -------
Net loss $ (42) $ (6)
======= =======
BASIS OF ACCOUNTING. These unaudited condensed consolidated financial statements
should be read in conjunction with Mirant's audited 2000 and 2001 consolidated
financial statements and the accompanying footnotes which are contained in the
Company's annual report on Form 10-K, as amended on Form 10-K/A, for the year
ended December 31, 2001. As previously discussed, the Company has engaged its
independent auditors to reaudit its 2000 and 2001 financial statements. As
discussed below, in the quarter ended September 30, 2002, the Company adopted
the June 2002 consensus reached by the EITF related to EITF Issue 02-3. This
effect of the consensus significantly reduces the amounts of revenues and costs
of sales in the accompanying financial statements, but has no impact on gross
margin or net income.
The results for interim periods are not necessarily indicative of the
results for the entire year. Specifically, Mirant has sold its investments in
Bewag and WPD, which contributed substantial earnings to the Company's
historical results of operations in the first and fourth fiscal quarters.
Management believes that the accompanying unaudited condensed consolidated
financial statements as of September 30, 2002 and 2001 and for the three and
nine months then ended reflect adjustments, consisting of normal recurring
items, necessary for a fair presentation of results for those interim periods
presented.
Certain prior-year amounts have been reclassified to conform with
current-year financial statement presentation.
REVENUE RECOGNITION. Mirant recognizes revenue from the sale of energy
commodities when it is earned and reasonably assured of collection. The
Company's wholesale electric generating operations record revenue when the
electric power is delivered to the customer pursuant to contractual commitments
that specify volume, price and delivery requirements. When the contractual sales
agreement includes formula pricing, Mirant recognizes revenues at the lower of
the amount of the formula pricing or the amount billable under the contract.
When a long-term electric power agreement conveys the right to use the
generating
10
capacity of Mirant's plant to the buyer of the electric power, that agreement is
evaluated to determine if it is a lease of the generation asset rather than a
sale of electric power.
When Mirant hedges the forward sale of electricity produced by its
generation assets, the settlement of that hedging derivative is netted against
the hedged revenue. When economical, the Company may choose to not operate its
plants and, alternatively, purchase electric power in the wholesale power
markets to physically meet its sales commitments. The resale of electric power
purchased is reflected as revenue and the cost of power purchased is reflected
as operating expense.
The Company, through its energy marketing and risk management operations
(see Note G), engages in risk management activities with counterparties. All
such transactions and related expenses are recorded on a trade-date basis.
Financial instruments and contractual commitments related to these activities,
which includes energy related contracts for storage and transportation, are
accounted for using the mark-to-market method of accounting. Under the
mark-to-market method of accounting, financial instruments and contractual
commitments are recorded at fair value in the accompanying unaudited condensed
consolidated balance sheets. The determination of fair value considers various
factors, including closing exchange or over-the-counter market price quotations,
time value and volatility factors underlying options and contractual
commitments. The net gain or loss resulting from the change in the fair value of
these energy trading contracts and derivative instruments are reported as
operating revenues.
ACCOUNTING CHANGES. In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These
pronouncements significantly change the accounting for business combinations,
goodwill and intangible assets. SFAS No. 141 establishes that all business
combinations will be accounted for using the purchase method; use of the
pooling-of-interests method is no longer allowed. The statement further
clarifies the criteria to recognize intangible assets separately from goodwill.
The provisions of SFAS No. 141 are effective for all business combinations
initiated after June 30, 2001 and for business combinations accounted for using
the purchase method for which the acquisition date was before July 1, 2001. SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and, generally, adopts a non-amortization and periodic
impairment-analysis approach to goodwill and indefinitely-lived intangibles
(Note H). SFAS No. 142 is effective for the Company's 2002 fiscal year or for
business combinations initiated after June 30, 2001. Mirant adopted these
statements on January 1, 2002.
Upon initial application of SFAS No. 141, Mirant reassessed the
classification of its intangible assets and determined that trading rights
resulting from business combinations did not meet the new criteria for
recognition apart from goodwill. Effective January 1, 2002, trading rights
related to business combinations were reclassified to goodwill as required by
the Statement. The reclassification increased goodwill by $194 million, net of
accumulated amortization of $18 million.
As a result of the adoption of SFAS No. 142, Mirant discontinued
amortization of goodwill effective January 1, 2002. During the first quarter of
2002, Mirant completed the transitional impairment test required by SFAS No. 142
and did not record any impairments of goodwill (Note H). Net income and earnings
per share (basic and diluted) for the three and nine months ended September 30,
2001 have been adjusted below to exclude amortization related to goodwill and
trading rights recognized in business combinations (in millions, except per
share data).
11
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
Earnings Per Share Earnings Per Share
------------------ ------------------
Net Income Basic Diluted Net Income Basic Diluted
---------- ----- ------- ---------- ----- -------
As reported $ 234 $ 0.69 $ 0.67 $ 538 $ 1.58 $ 1.55
Effect of goodwill and trading rights 17 0.05 0.05 55 0.16 0.15
amortization --------- --------- --------- --------- --------- ---------
As adjusted $ 251 $ 0.74 $ 0.72 $ 593 $ 1.74 $ 1.70
========= ========= ========= ========= ========= =========
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of SFAS No. 143
are effective for the Company's 2003 fiscal year. Mirant has not yet determined
the financial statement impact of this statement.
In October 2001, the FASB issued SFAS No. 144 which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 amends accounting and reporting standards for the disposal of segments
of a business and addresses various issues related to the accounting for
impairments or disposals of long-lived assets (Note H). Mirant adopted SFAS No.
144 on January 1, 2002. Prior to SFAS No. 144, the dispositions of State Line,
AQC and Neenah would not have been classified as discontinued operations.
Because SFAS No. 144 expanded the breadth of transactions subject to
discontinued operations classification, the dispositions of State Line, AQC and
Neenah are now required to be presented as a discontinued operations (Note J).
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize certain costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. Mirant will adopt SFAS No. 146 on January
1, 2003 and management has not determined the impact on its consolidated
financial statements.
In June 2002, the EITF reached consensus on certain issues related to EITF
Issue 02-3. The Task Force reached a consensus that gains and losses on energy
trading contracts (accounted for pursuant to SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, and EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities,") should be reported net in the statements of income.
In October 2002, the Task Force reached the following additional consensus
related to EITF Issue 02-3:
- EITF Issue 98-10 was rescinded. Accordingly, energy-related
contracts that are not accounted for pursuant to SFAS No. 133 such
as transportation contracts, storage contracts and tolling
agreements, should be accounted for as executory contracts using the
accrual method of accounting and not at fair value. Energy-related
contracts that do meet the definition of a derivative pursuant to
SFAS No. 133 should continue to be carried at fair value.
Additionally, the Task Force observed that accounting for
energy-related inventory at fair value by analogy to the consensus
in EITF Issue 98-10 was no longer appropriate and that such
inventory should be carried at the lower of cost or market in
accordance with Accounting Research Bulletin ("ARB") No. 43,
"Restatement and Revision of Accounting Research Bulletins," and not
at fair value.
- The consensus reached as part of the rescission of EITF Issue 98-10
above is required to be applied prospectively to energy trading
contracts entered into after October 25, 2002. Additionally, the
12
consensus should be applied to all energy trading contracts and
energy related inventory that existed on October 25, 2002 in periods
beginning after December 15, 2002. Changes to the accounting for
existing contracts as a result of the rescission of EITF Issue 98-10
will be reported as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, ("Accounting
Changes"). Changes in accounting for energy-related inventory will
also be reported as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20 unless information
to calculate the impact of the change is not available. In that
case, the carrying value of the energy-related inventory becomes the
cost basis of the inventory at the effective date.
- The Task Force also reached a consensus that its previous conclusion
on reporting gains and losses on derivatives in the statements of
income should be expanded to include all trading activities. That
is, gains and losses on any derivative contracts within the scope of
SFAS No. 133 that are held for trading purposes should be reported
net in the statements of income. The original (June 2002) consensus
on net reporting of gains and losses on energy trading contracts is
required for financial statements for periods ending after July 15,
2002.
- The Task Force agreed to rescind its previous consensus on EITF
Issue 02-3 that required additional disclosures for energy trading
contracts and activities and asked the FASB to reconsider the
disclosures required by SFAS No. 133.
The implementation of the EITF consensus with respect to netting revenues
and expenses on energy trading activities has been reflected in the accompanying
condensed consolidated statements of income/(loss) and has reduced revenues and
cost of fuel, electricity and other products for all periods presented. The
reclassification did not impact Mirant's gross margin or net income. The
following table reconciles gross revenues from generation and energy marketing
products and cost of fuel, electricity and other products to revenues from
generation and energy marketing products and cost of fuel, electricity and other
products reported after the effects of the adoption of EITF Issue 02-3 (in
millions).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
------- ------- ------- -------
Gross revenues from generation and energy
marketing products $ 8,893 $ 8,012 $21,684 $23,897
Costs from generation and energy marketing
products netted per EITF Issue 02-3 6,793 5,695 17,122 17,206
------- ------- ------- -------
Reported net revenues from generation and
energy marketing products $ 2,100 2,317 $ 4,562 $ 6,691
======= ===== ======= =======
Gross cost of fuel, electricity and other
products $ 8,266 $ 7,306 $20,149 $21,799
Cost of fuel, electricity and other products
netted per EITF Issue 02-3 6,793 5,695 17,122 17,206
------- ------- ------- -------
Reported net cost of fuel, electricity and
other products $ 1,473 $ 1,611 $ 3,027 $ 4,593
======= ======= ======= =======
The Company has not yet determined the impact of ceasing use of the fair
value (or mark-to-market) method of accounting for non-derivative energy trading
contracts and energy-related inventory held for trading purposes. The Company
currently has certain storage and transportation agreements accounted for under
the mark-to-market method of accounting under EITF Issue 98-10, which will be
required to be accounted for as executory contracts and not mark-to-market upon
adoption of EITF Issue 02-3. The Company does not have long-term tolling
agreements accounted for under the mark-to-market method of accounting under
EITF Issue 98-10.
CONCENTRATION OF REVENUES AND CREDIT RISK. For the three and nine months ended
September 30, 2002, revenues earned from a single customer did not exceed 10% of
Mirant's total operating revenues.
13
For the three and nine months ended September 30, 2001, gross operating revenues
earned from Enron, through energy marketing and risk management operations,
approximated 19% for both periods of Mirant's total gross operating revenues,
prior to netting of gains and losses under EITF Issue 02-03.
As of September 30, 2002, the CAISO owed Mirant approximately $238
million, which represented more than 10% of Mirant's total credit exposure. The
Company's total credit exposure is computed as total accounts and notes
receivable, adjusted for energy marketing and risk management and derivative
hedging activities and netted against offsetting payables and posted collateral,
as appropriate.
RECEIVABLES RECOVERY. During the nine months ended September 30, 2002, Mirant
received $29 million as final payment related to receivables that were assumed
in conjunction with the Mirant Asia-Pacific Limited business acquisition. During
the nine months ended September 30, 2001 Mirant received $10 million related to
these receivables. At the time of the Mirant Asia-Pacific Limited business
acquisition, Mirant did not place value on the receivables due to the uncertain
credit standing of the party from whom the receivables were due.
CAPITALIZATION OF INTEREST COST. Mirant capitalizes interest on projects during
the advanced stages of development and the construction period, in accordance
with SFAS No. 34, "Capitalization of Interest Cost," as amended by SFAS No. 58,
"Capitalization of Interest Cost in Financial Statements That Include
Investments Accounted for by the Equity Method." The Company determines which
debt instruments represent a reasonable measure of the cost of financing
construction assets in terms of interest cost incurred that otherwise could have
been avoided. These debt instruments and associated interest cost are included
in the calculation of the weighted average interest rate used for determining
the capitalization rate. Upon commencement of commercial operations of the plant
or project, capitalized interest, as a component of the total cost of the plant,
is amortized over the estimated useful life of the plant or the life of the
cooperation period of the various energy conversion agreements ("ECAs"). For the
three and nine months ended September 30, 2002, the Company incurred $152
million and $445 million, respectively, in interest costs, of which $24 million
and $91 million, respectively, were capitalized and included in construction
work in process. For the three and nine months ended September 30, 2001, the
Company incurred $155 million and $457 million, respectively, in interest costs,
of which $14 million and $34 million were capitalized and included in
construction work in progress. The remaining interest was expensed during the
periods.
As part of Mirant's operational restructuring plan announced in March of
2002 (the "March 2002 Plan"), Mirant suspended construction on several projects
and no longer capitalizes interest on these projects. The construction cost
related to these projects is shown as "Investment in suspended construction" on
the unaudited condensed consolidated balance sheet.
INVESTMENT IN SUSPENDED CONSTRUCTION. Mirant reviews suspended construction
projects for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires long-lived
assets that are held and used to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset might
not be recoverable. If changes in circumstances or events suggest that an
impairment may exist, an impairment loss is recognized if the sum of the
estimated future undiscounted cash flows is less than the carrying value of the
assets. During the nine months ended September 30, 2002, Mirant postponed
construction on certain plants which it intends to resume construction on at a
later date. Upon a determination that the plants will not be completed, the
carrying value of the projects would be assessed for impairment.
B. GOODWILL AND OTHER INTANGIBLE ASSETS
During the nine months ended September 30, 2002, goodwill was increased by
$58 million related to purchase accounting adjustments for JPSCo and reduced by
$23 million related to tax adjustments in the International Group and Mirant
Americas Energy Marketing. Management currently believes there is no impairment
of goodwill and is in the process of completing its annual planning process for
2003, from which
14
the carrying value of goodwill can be assessed. This plan should be completed in
early 2003. Mirant's announced asset sale program and the overall conditions
impacting the energy sector may materially impact the book value of goodwill in
future periods (Note H). As of September 30, 2002, the North America Group's
goodwill was $2.01 billion and the International Group's goodwill was $1.41
billion.
Substantially all of Mirant's other intangible assets are subject to
amortization and are being amortized on a straight-line basis over their
estimated useful lives, up to 40 years. There were no material acquisitions of
intangible assets during the third quarter of 2002. Effective January 1, 2002,
trading rights related to business combinations were reclassified to goodwill.
The reclassification decreased other intangible assets by $227 million, net of
accumulated amortization of $18 million. These provisions of SFAS No. 141 do not
apply to asset acquisitions, therefore trading rights resulting from asset
acquisitions continue to be recognized apart from goodwill. The trading rights
represent Mirant's ability to create additional cash flows by incorporating
Mirant's trading organization activities with generation assets. In a
deregulated marketing structure, trading rights are the ability to create value
beyond that of the tangible assets through developing markets. During the three
and nine months ended September 30, 2002, Mirant transferred $0 and $36 million,
net of accumulated amortization of $4 million, in development rights to
construction work in process. Development rights represent the ability to expand
capacity at certain acquired generation facilities. The existing infrastructure,
including storage facilities, transmission interconnections, and fuel delivery
systems, and contractual rights acquired by Mirant provide the opportunity to
expand or repower generation facilities. This ability to repower or expand is at
significant cost savings compared to greenfield construction. Intangible asset
amortization expense was approximately $6 million for the third quarter and $18
million for the nine months ended September 30, 2002. The components of other
intangible assets as of September 30, 2002 and December 31, 2001 were as follows
(in millions):
SEPTEMBER 30, 2002 DECEMBER 31, 2001 (AS RESTATED)
------------------ -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Trading rights $ 207 $ (28) $ 453 $ (45)
Development rights 252 (16) 292 (9)
Emissions allowances 131 (7) 131 (4)
Other intangibles 54 (12) 59 (12)
--------- --------- --------- ---------
Total other intangible assets $ 644 $ (63) $ 935 $ (70)
========= ========= ========= =========
Assuming no future acquisitions, dispositions or impairments of intangible
assets, amortization expense is estimated to be $25 million for the year ending
December 31, 2002 and for each of the following four years.
C. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes unrealized gains and losses on
certain derivatives that qualify as cash flow hedges and hedges of net
investments, as well as the translation effects of foreign net investments. The
following table sets forth the comprehensive income (loss) for the three and
nine months ended September 30, 2002 and 2001 (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income $ (1) $ 234 $(227) $ 538
Other comprehensive loss (48) (61) (11) (11)
----- ----- ----- -----
Comprehensive (loss) income $ (49) $ 173 $(238) $ 527
===== ===== ===== =====
Components of accumulated other comprehensive loss consisted of the following
(in millions):
BALANCE, DECEMBER 31, 2001, AS RESTATED $ (112)
Other comprehensive income (loss) for the period:
Net change in fair value of derivative hedging instruments,
net of tax effect of $25 18
Reclassification to earnings, net of tax effect of $41 (Note G) (48)
Cumulative translation adjustment 32
Share of affiliates' OCI (13)
-------
Other comprehensive loss (11)
-------
BALANCE, SEPTEMBER 30, 2002 $ (123)
=======
15
The $123 million balance of accumulated other comprehensive loss as of
September 30, 2002 includes the impact of $43 million related to interest rate
hedges, $78 million related to interest rate swap breakage costs, $87 million of
foreign currency translation losses and $8 million representing Mirant's share
of accumulated other comprehensive loss of unconsolidated affiliates, offset
by $93 million of net gains on commodity price management hedges.
Mirant estimates that $25 million ($51 million of commodity hedging gains
and $26 million of interest rate hedging losses) of net derivative after-tax
gains included in OCI as of September 30, 2002 will be reclassified into
earnings or otherwise settled within the next twelve months as certain
transactions relating to commodity contracts, foreign denominated contracts and
interest payments are realized. Mirant is exposed to currency risks with its
investment in CEMIG in Brazil. These risks have not been hedged due to the high
cost and the uncertain effectiveness of implementing such a hedge. In December
2002, management committed to a plan to divest its investment in CEMIG. As a
result, currency translation losses of approximately $84 million included in OCI
will be recognized in the statement of income when evaluating the investment for
impairment in the fourth quarter of 2002.
D. WRITE-DOWN OF ASSETS
As part of its strategic restructuring, Mirant sold its 49% ownership
interest in WPD in September 2002. Mirant had recorded a write-down of
approximately $304 million, including $13 million of related income tax
benefits, during the second quarter of 2002 to reflect the difference between
the carrying value of its investment and its estimated fair value. In the third
quarter, Mirant recorded an additional write-down of approximately $8 million
offsetting the net income recognized from its equity investment in WPD for that
quarter prior to closing the sale. In the second quarter of 2001, Mirant wrote
off its remaining investment in EDELNOR of $88 million ($57 million after-tax).
In September 2002, Mirant recorded a write down of $61 million ($37 million
after-tax) reflecting the fair market value of Mirant Americas Production
Company. In November 2002, Mirant entered into an agreement to sell the assets
of Mirant Americas Production Company for $150 million and in December 2002, the
sale of these assets was completed. Mirant Americas Production Company is an oil
and gas exploration, development and production company reported in Mirant's
North America Group operations. The table below represents the components of
Mirant Americas Production Company's balance sheet accounts as of September 30,
2002 (in millions):
CURRENT ASSETS:
Risk management assets $ 2
PROPERTY, PLANT AND EQUIPMENT 149
-------
Total assets $ 151
=======
CURRENT LIABILITIES:
Risk management liabilities $ 1
-------
Total liabilities $ 1
=======
In the quarter ended September 30, 2002, the Company assessed for
impairment certain costs associated with two power islands related to its
proposed development project in Europe and one power island that the Company
originally intended to use as part of a development project in Korea. Based on
management's current estimate of recoverability of the costs of these power
islands and the related projects, an impairment loss of $153 million ($98
million after-tax) was recorded in the quarter ended September 30, 2002 (which
includes the $132 million impairment loss on turbines/power islands disclosed in
Note I). Approximately $6
16
million of project cost remains on the Company's condensed consolidated balance
sheet as of September 30, 2002, which reflects management's estimate of the fair
market value of these projects.
E. EARNINGS (LOSS) PER SHARE
Mirant calculates basic earnings (loss) per share by dividing the income
(loss) available to common stockholders by the weighted average number of common
shares outstanding. The following table shows the computation of basic earnings
(loss) per share for the three and nine months ended September 30, 2002 and 2001
(in millions, except per share data). Diluted earnings (loss) per share gives
effect to stock options, as well as the assumed conversion of convertible trust
preferred securities and related after-tax interest expense addback to net
income of approximately $4 million for the three months ended September 30, 2001
and $11 million for the nine months ended September 30, 2001. Because of the net
loss for the three and nine months ended September 30, 2002, the anti-dilution
provisions of SFAS No. 128, "Earnings per Share," preclude stating diluted loss
per share above basic loss per share.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
-------- -------- -------- --------
(Loss) Income from continuing operations $ (3) $ 230 $ (238) $ 519
Discontinued operations 2 4 11 19
-------- -------- -------- --------
Net (loss) income $ (1) $ 234 $ (227) $ 538
======== ======== ======== ========
Basic
Weighted average shares outstanding 402.3 340.4 401.8 339.7
(Loss) earnings per share from:
Continuing operations $ (0.01) $ 0.68 $ (0.59) $ 1.53
Discontinued operations 0.01 0.01 0.03 0.05
-------- -------- -------- --------
Net (loss) income $ (0.00) $ 0.69 $ (0.56) $ 1.58
======== ======== ======== ========
Diluted
Weighted average shares outstanding 340.4 339.7
Shares due to assumed exercise of stock
options and equivalents 2.8 2.9
Shares due to assumed conversion of trust
preferred securities 12.5 12.5
-------- --------
Adjusted shares 355.7 355.1
======== ========
Earnings per share from:
Continuing operations $ 0.66 $ 1.49
Discontinued operations 0.01 0.06
-------- --------
Net income $ 0.67 $ 1.55
======== ========
F. DEBT
The following table sets forth Mirant's short-term and long-term debt as
of September 30, 2002 and December 31, 2001 (in millions):
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
SHORT-TERM DEBT
Recourse short-term debt $ 44 $ 26
Non-recourse short-term debt 65 29
------ ------
Total short-term debt 109 55
------ ------
CURRENT PORTION OF LONG-TERM DEBT
Recourse current portion of
long-term debt 1,312 21
Non-recourse current portion
of long-term debt 234 2,583
------ ------
Total current portion of long-term debt 1,546 2,604
------ ------
NOTES PAYABLE
Recourse notes payable 895 895
Non-recourse notes payable 4,171 2,856
------ ------
Total notes payable 5,066 3,751
------ ------
OTHER LONG-TERM DEBT
Recourse other long-term debt 1,582 1,825
Non-recourse other long-term debt 266 243
------ ------
Total other long-term debt 1,848 2,068
------ ------
TOTAL DEBT $8,569 $8,478
====== ======
TOTAL RECOURSE DEBT $3,833 $2,767
TOTAL NON-RECOURSE DEBT 4,736 5,711
------ ------
TOTAL DEBT $8,569 $8,478
====== ======
17
CREDIT FACILITIES
At September 30, 2002, Mirant and its subsidiaries had revolving credit
facilities, included in the table above, with various lending institutions
totaling approximately $3.19 billion of commitments. At September 30, 2002,
commitment amounts utilized under such facilities (including drawn amounts and
letters of credit) totaled $3.09 billion and were comprised of the following:
commitments of $1.17 billion drawn or utilized under facilities expiring in 2003
and commitments of $1.92 billion drawn or utilized under the facilities expiring
in 2004 and beyond.
In July 2002, Mirant Corporation fully drew the commitments under its
$1.125 billion 364-Day Credit Facility, and elected to convert all advances
outstanding into a term loan maturing in July 2003. The outstanding balance was
reclassified to short-term debt. The Company is evaluating various potential
financing transactions to repay and/or refinance the Facility prior to its
maturity. As a result of present market conditions and other factors, including
the reaudit of its historical financial statements, Mirant cannot provide
assurance that it will be successful in entering into a new credit facility. If
Mirant is successful in entering into a new credit facility, it expects the
facility will likely be smaller and will have higher pricing and more
restrictive terms than the current facility.
Except for the credit facility of Mirant Canada Energy Marketing, an
indirect, wholly owned subsidiary of Mirant Corporation and the $1.125 billion
364-Day Credit Facility, which was converted into a term loan maturing in July
2003, borrowings under these facilities are recorded as long-term debt in the
accompanying unaudited condensed consolidated balance sheets. The credit
facilities generally require payment of commitment fees based on the unused
portion of the commitments. The schedule below summarizes the revolving credit
facilities held by Mirant Corporation and its subsidiaries as of September 30,
2002 (in millions).
UTILIZED AMOUNT LETTERS OF
FACILITY EXCLUDING LETTERS CREDIT AMOUNT
COMPANY AMOUNT OF CREDIT OUTSTANDING AVAILABLE
------- ------ --------- ----------- ---------
Mirant Corporation $ 2,700 $ 1,551(1) $ 1,048 $ 101
Mirant Americas Generation 300 300 -- --
Mirant Canada Energy Marketing 44 44 -- --
Mirant Americas Energy Capital 150 150 -- --
--------- ------- --------- ---------
Total $ 3,194 $ 2,045 $ 1,048 $ 101
========= ======= ========= =========
(1) Amount includes fully drawn commitments under Mirant's $1.125 billion
364-Day Credit Facility that was converted in July 2002 to a term loan
maturing in July 2003.
Each of Mirant's credit facilities contain various covenants including,
among other things, (i) limitations on (a) dividends, redemptions and
repurchases of capital stock, (b) the incurrence of indebtedness and liens and
(c) the sale of assets, and (ii) affirmative covenants to (a) provide annual
audited and quarterly unaudited financial statements prepared in accordance with
US and local GAAP and (b) comply with legal
18
requirements in the conduct of its business. In addition to other covenants and
terms, each of Mirant's credit facilities includes minimum debt service coverage
and a maximum leverage covenant. As of September 30, 2002, there were no events
of default under such credit facilities.
In connection with its review of the previously disclosed accounting
issues, the Company identified various errors affecting the Company's historical
financial statements. The Company believes that the errors it has identified do
not constitute a breach of a covenant or an event of default under its credit
facilities. If the Company were in default, or the type or amount of any
adjustments arising from the announced reaudit of the Company's historical
financial statements were to result in an event of default under its credit
facilities, the lenders would have the right to accelerate the Company's
obligations under its credit facilities. Any such acceleration would trigger
cross-acceleration provisions in a substantial portion of the Company's other
consolidated indebtedness. In such event, the Company would be required to seek
waivers or other relief from its lenders and, absent such relief, approximately
$4.5 billion of the Company's consolidated debt would be classified as
short-term debt and could be accelerated. Further, in the event that its lenders
accelerated such indebtedness, the Company can provide no assurances that it
would be able to refinance such indebtedness in the existing credit markets and
would likely have to seek bankruptcy court or other protection from its
creditors.
Mirant Canada Energy Marketing has extended its credit facility to June
30, 2003. The revolving credit facility of approximately $44 million
(denominated as 70 million Canadian dollars) had outstanding borrowings of $44
million, at an interest rate of 3.64% at September 30, 2002. The credit facility
is guaranteed by Mirant Corporation and is secured by a letter of credit in the
amount of $46 million and security interests in the real and personal property
of Mirant Canada Energy Marketing.
In February 2002, Mirant, Mirant Americas Energy Marketing, Perryville and
the lenders under its credit facility entered into the following transactions:
(i) an indirect, wholly owned subsidiary of Mirant Corporation made a
subordinated loan of $48 million to Perryville, (ii) Mirant Corporation agreed
to guarantee the obligations of Mirant Americas Energy Marketing under the
tolling agreement, (iii) Perryville (with the consent of its lenders) and Mirant
Americas Energy Marketing lowered the ratings threshold in the tolling agreement
with respect to Mirant Corporation, relating to the ratings below which Mirant
Americas Energy Marketing agreed to post a letter of credit or other credit
support, and (iv) the parties agreed to certain additional terms in support of
the syndication of the credit facility. In June 2002, Mirant completed the sale
of its 50% ownership interest in Perryville to Cleco, which holds the remaining
50% ownership interest in Perryville. Cleco assumed Mirant's $13 million future
equity commitment to Perryville and paid approximately $55 million in cash to
Mirant as repayment of its subordinated loan, invested capital to date and other
miscellaneous costs. In connection with the existing project financing, Mirant
agreed to make a $25 million subordinated loan to the project. In addition,
Mirant retains certain obligations as a project sponsor, some of which are
subject to indemnification by Cleco. Effective August 23, 2002, Mirant Americas
Energy Marketing and Perryville, with the consent of the project lenders,
restructured the tolling agreement between the parties to remove the requirement
to post a letter of credit or other credit support in the event of a downgrade
from S&P or Moody's. In connection with its operational restructuring, Mirant
Americas made a $100 million subordinated loan to Perryville, the proceeds of
which were used to repay the existing $25 million subordinated loan owed to a
Mirant subsidiary and to repay $75 million of senior debt of the project. In
addition, Mirant Americas guaranteed the obligations of Mirant Americas Energy
Marketing under the tolling agreement up to the amount of the subordinated loan.
The obligations of Mirant Americas Energy Marketing under the tolling agreement
continue to be guaranteed by Mirant Corporation.
As discussed below in Note I "Commitments and Contingent Matters - Turbine
Purchases and Other Construction-Related Commitments" Mirant negotiated
deferrals of the shipment dates of certain turbines under both equipment
procurement facilities as part of the March 2002 Plan, and additionally made
unreimbursed direct payments to vendors related to certain turbines/power
islands in the equipment procurement facilities. Consequently, Mirant has
included a $225 million liability for these turbines (equal to the costs
incurred to date in constructing these turbines) as of September 30, 2002, of
which $40 million
19
is reported as "Other long-term debt" and $185 million is reported in "Current
portion of long-term debt" on the accompanying unaudited condensed consolidated
balance sheet at September 30, 2002.
In the fourth quarter of 2002, Mirant has negotiated deferrals of the
shipment dates and made unreimbursed direct payments to vendors for certain
other turbines, and will be recognizing approximately $79 million additional
"Current portion of long-term debt" and approximately $31 million additional
"Other long-term debt" on its balance sheet as of December 31, 2002.
On January 23, 2002, Mirant Asia-Pacific, an indirect, wholly owned
subsidiary of Mirant Corporation, borrowed $192 million under a new credit
facility to repay, in part, its prior $792 million credit facility. The
repayment of the balance of the prior credit facility was funded by Mirant
Corporation. In March 2002, Mirant Asia-Pacific secured a second tranche of $62
million which has been used to repay part of the funding from Mirant
Corporation. The new credit facility contains various business and financial
covenants including, among other things, (i) limitations on dividends and
distributions, including a prohibition on dividends if Mirant ceases to be rated
investment grade by at least two of Fitch, S&P and Moody's, (ii) mandatory
prepayments upon the occurrence of certain events, including certain asset sales
and certain breaches of the Sual and the Pagbilao energy conversion agreements,
(iii) limitations on the ability to make investments and to sell assets, (iv)
limitations on transactions with affiliates of Mirant and (v) maintenance of
minimum debt service coverage ratios. As a result of the October 2002 downgrades
by Fitch and Moody's, Mirant Asia-Pacific is prohibited under the terms of its
credit facility from making distributions to Mirant Corporation. However, in
connection with the sale of the Shajiao C power project discussed in Note H, the
Company expects to repay the Mirant Asia-Pacific credit facility.
CONVERTIBLE SENIOR NOTES
In July 2002, Mirant Corporation completed the issuance of $370 million of
convertible senior notes. The net proceeds from the offering, after deducting
underwriting discounts and commissions payable by Mirant, were $361 million.
The notes mature on July 15, 2007 with an annual interest rate of 5.75%.
Holders of the notes may convert their notes into 131.9888 shares of Mirant
common stock for each $1,000 principal amount of the notes at any time prior to
July 15, 2007. This conversion rate is equivalent to the initial conversion
price of $7.58 per share based on the issue price of the notes. Mirant has the
right to redeem for cash, some or all of the notes at any time on or after July
20, 2005, upon not less than 30 nor more than 60 days' notice by mail to holders
of the notes, for a price equal to 100% of the principal amount of the notes to
be redeemed plus any accrued and unpaid interest to the redemption date.
G. FINANCIAL INSTRUMENTS
ENERGY MARKETING AND RISK MANAGEMENT ACTIVITIES
Mirant provides energy marketing and risk management services to its
customers in the North American markets. These services are provided through a
variety of exchange-traded and OTC energy and energy-related contracts, such as
forward contracts, futures contracts, option contracts and financial swap
agreements.
These contractual commitments are presented as energy marketing and risk
management assets and liabilities in the accompanying unaudited condensed
consolidated balance sheets and are accounted for using the mark-to-market
method of accounting in accordance with SFAS No. 133 and EITF Issue 98-10.
Accordingly, they are reflected at fair value in the accompanying unaudited
condensed consolidated balance sheets. The net changes in their market values
are recognized in income in the period of change. Attention is drawn to
"Accounting Changes" in Note A - Accounting and Reporting Policies, where the
EITF reached consensus on certain issues related to EITF Issue 02-3, under EITF
Issues 98-10 and 00-17, "Measuring the
20
Fair Value of Energy-Related Contracts in Applying Issue 98-10." EITF Issues
98-10 and 00-17 address various aspects of the accounting for contracts involved
in energy trading and risk management activities.
The Company, through its energy marketing and risk management operations,
engages in risk management activities with counterparties. All such transactions
and related expenses are recorded on a trade-date basis. Financial instruments
and contractual commitments related to these activities are accounted for using
the mark-to-market method of accounting. Under the mark-to-market method of
accounting, financial instruments and contractual commitments are recorded at
fair value in the accompanying unaudited condensed consolidated balance sheets.
The determination of fair value considers various factors, including closing
exchange or over-the-counter market price quotations, time value and volatility
factors underlying options and contractual commitments.
During the first quarter of 2002, Mirant substantially exited its European
trading and marketing business. The volumetric weighted average maturity, or
weighted average tenor of the North American portfolio, at September 30, 2002
was 2.9 years. The net notional amount, or net open position, of the energy
marketing and risk management assets and liabilities at September 30, 2002 was
approximately 3 million equivalent megawatt-hours. The notional amount is
indicative only of the volume of activity and not of the amount exchanged by the
parties to the financial instruments. Consequently, these amounts are not a
measure of market risk.
Certain financial instruments that Mirant uses to manage risk exposure to
energy prices for its North American generation portfolio do not meet the hedge
criteria under SFAS No. 133 and therefore, the fair values of these instruments
are included in energy marketing and risk management assets and liabilities in
the accompanying unaudited condensed consolidated balance sheets.
The fair values and average values of Mirant's energy marketing and risk
management assets and liabilities as of September 30, 2002, net of credit
reserves, are included in the following table (in millions). The average values
are based on a monthly average for 2002.
ENERGY MARKETING AND RISK ENERGY MARKETING AND RISK
MANAGEMENT ASSETS MANAGEMENT LIABILITIES
----------------- ----------------------
VALUE AT VALUE AT
AVERAGE SEPTEMBER 30, AVERAGE SEPTEMBER 30,
VALUE 2002 VALUE 2002
----- ---- ----- ----
Energy commodity instruments:
Electricity $ 479 $ 345 $ 388 $ 285
Natural gas 1,121 1,559 1,235 1,519
Crude oil 20 32 15 30
Other 51 (3) 32 6
--------- --------- --------- ---------
Total $ 1,671 $ 1,933 $ 1,670 $ 1,840
========= ========= ========= =========
In October 2001, the Company entered into a prepaid gas transaction with a
counterparty and a simultaneous natural gas swap with a third-party independent
to the prepaid gas transaction. The prepaid gas transaction resulted in the
receipt of payments in 2001 in exchange for financial settlements to be made
over a future three-year period. Approximately 10% of the contract notional
quantity will settle in 2002, 10% in 2003 and the remaining 80% will settle in
2004 based on fixed notional quantities of gas defined in the agreement at the
natural gas index prices on the date of each settlement. The natural gas swap
served to fix the price of the gas to be settled under the prepaid gas
agreement. At the date the transaction was consummated, the notional fixed
future natural gas settlements totaled approximately $250 million and the fair
value of such gas settlements was approximately $225 million.
DERIVATIVE HEDGING INSTRUMENTS
Mirant uses derivative instruments to manage exposures arising from
changes in interest rates, commodity prices and foreign currency exchange rates.
Mirant's objectives for holding derivatives are to
21
minimize these risks using the most effective methods to eliminate or reduce the
impacts of these exposures and to provide a measure of stability to the
Company's cash flows in a time of volatile changes.
Derivative gains and losses arising from cash flow hedges that are
included in OCI are reclassified into earnings in the same period as the
settlement of the underlying transaction. After-tax derivative net gains of $18
million and $48 million during the three and nine months ended September 30,
2002, respectively, were reclassified as follows (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
---- ----
Reclassified to operating income $ 48 $ 119
Reclassified to interest expense (9) (30)
Tax provision (21) (41)
----------- -----------
Net reclassification to earnings (Note C) $ 18 $ 48
=========== ===========
The derivative gains and losses reclassified to earnings were partly
offset by realized gains and losses arising from the settlement of the
underlying physical transactions being hedged. Under SFAS No. 133, transactions
may meet the requirements for hedge treatment but may be less than 100%
effective. For example, a derivative instrument specifying one commodity
delivery location may be used to hedge a risk at a different commodity delivery
location. The price differential between the two locations is considered the
ineffective portion of the hedge. Any changes in the fair value of the
ineffective portion must be recorded currently in earnings. During the three and
nine months ended September 30, 2002, $1 million of pre-tax losses and $9
million of pre-tax losses, respectively, arising from hedge ineffectiveness were
recognized in other expense. In addition, a $4 million pre-tax loss in both the
three and nine months ended September 30, 2002 arising from hedge
ineffectiveness was recognized in "Cost of fuel, electricity and other products,
excluding depreciation." The maximum term over which Mirant is hedging exposures
to the variability of cash flows is through 2012.
Interest Rate Hedging
Mirant's policy is to manage its exposure to interest rates by using a
combination of fixed- and variable-rate debt. To manage this mix in a
cost-efficient manner, Mirant enters into interest rate swaps in which it agrees
to exchange, at specified intervals, the difference between fixed- and
variable-interest amounts calculated by reference to agreed-upon notional
principal amounts. Swaps that fix the interest rate exposure of variable-rate
debt and qualify for hedge treatment are treated as cash flow hedges, where the
changes in the fair value of gains and losses of the swaps are deferred in OCI,
net of tax, and the interest rate differential is reclassified from OCI to
interest expense over the life of the swaps. Gains and losses resulting from the
termination of qualifying cash flow hedges prior to their stated maturities are
recognized ratably over the original remaining life of the hedging instrument,
provided the underlying hedged transactions are still probable. Otherwise, the
gains and losses will be recorded currently in earnings. Swaps that hedge
underlying fixed-rate debt and qualify for hedge treatment are treated as fair
value hedges, where the changes in the fair value of gains and losses of the
swaps are recognized currently in interest expense together with the changes in
the fair value of the hedged debt. Mirant currently only utilizes cash flow
hedges.
Commodity Price Hedging
Mirant enters into commodity financial instruments and other contracts in
order to hedge its exposure to market prices for electricity expected to be
produced by its generation assets. These contracts are primarily physical
forward sales but may also include options and other financial instruments.
Mirant also uses commodity financial instruments and other contracts to hedge
its exposure to market prices for natural gas, coal and other fuels expected to
be utilized by its generation assets. These contracts primarily include futures,
options, and swaps. Where these contracts are derivatives and are designated as
cash flow hedges,
22
the gains and losses are deferred in OCI and are then recognized in earnings in
the same period as the settlement of the underlying physical transaction.
At September 30, 2002, Mirant had a net commodity derivative hedging asset
of approximately $142 million. The fair value of its commodity derivative
hedging instruments is determined using various factors, including closing
exchange or over-the-counter market price quotations, time value and volatility
factors underlying options and contractual commitments.
At September 30, 2002, these contracts relate to periods through 2010. The
net notional amount, or net open position, of the derivative hedging instruments
at September 30, 2002 was 3 million equivalent megawatt-hours. The notional
amount is indicative only of the volume of activity and not of the amount
exchanged by the parties to the financial instruments. Consequently, this amount
is not a measure of market risk.
Power sales agreements and other contracts that are used to mitigate
exposure to commodity prices but which either do not meet the definition of a
derivative or are excluded under certain exceptions under SFAS No. 133 are not
included in derivative hedging instruments in the accompanying unaudited
condensed consolidated balance sheets.
Foreign Currency Hedging
From time to time, Mirant uses cross-currency swaps and currency forwards
to hedge its net investments in certain foreign subsidiaries. Gains or losses on
these derivatives designated as hedges of net investments are reflected in OCI,
net of tax, and net of the translation effects.
Mirant also utilizes currency forwards intended to offset the effect of
exchange rate fluctuations on forecasted transactions arising from contracts
denominated in a foreign currency. From time to time, Mirant utilizes
cross-currency swaps that not only offset the effect of exchange rate
fluctuations on the hedged principal amount of the foreign currency denominated
debt, but also fix the interest expense arising from that hedged debt. Mirant
designates currency forwards as hedging instruments used to hedge the impact of
the variability in exchange rates on accounts receivable denominated in certain
foreign currencies. When these hedging strategies qualify as cash flow hedges,
the gains and losses on the derivatives are deferred in OCI, net of tax, until
the forecasted transaction affects earnings. The reclassification is then made
from OCI to earnings to the same revenue or expense category as the hedged
transaction.
Interest Rate and Currency Derivatives
The interest rates noted in the following table represent the range of
fixed interest rates that Mirant pays on the related interest rate swaps. On all
of these interest rate swaps, Mirant receives floating interest rate payments at
LIBOR. The currency derivatives mitigate Mirant's exposure arising from certain
foreign currency transactions, such as cross border sales.
YEAR OF MATURITY NUMBER OF NOTIONAL UNREALIZED
TYPE OR TERMINATION INTEREST RATES COUNTERPARTIES AMOUNT (LOSS) GAIN
---- -------------- -------------- -------------- ------ -----------
(IN MILLIONS)
Interest rate swaps 2003-2012 3.85%-7.12% 3 $549 $ (74)
Currency swaps 2003 -- 1 CAD$8 (1)
--------
$ (75)
=======
CAD - Denotes Canadian dollar
23
Canadian dollar contracts with a notional amount of CAD$266 million are
included in fair value of energy marketing and risk management liabilities
because hedge accounting criteria are not met. As of September 30, 2002, the
unrealized loss was $3 million.
The unrealized gain/loss for interest rate swaps is determined based on
the estimated amount that Mirant would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The unrealized
gain/loss for currency forwards is determined based on current foreign exchange
rates.
H. BUSINESS DEVELOPMENTS
MODIFICATION OF BUSINESS STRATEGY
As a result of the ongoing downward trend in market conditions, the
Company has modified its business strategy to focus on its North American,
Caribbean and Philippines operations. As part of this new focus, the Company
will continue to reduce the level of its trading and marketing activity,
particularly with respect to physical natural gas, as well as continue its asset
sales program. As a result of this contraction, the Company expects to record
additional restructuring charges upon completion of the next phase of the
restructuring plan.
Additionally, in 2002, the Company adopted SFAS No.'s 141, 142 and 144.
These new pronouncements, among other things, change the accounting model for
recognizing impairments of the carrying value of assets held for use and held
for sale, as well as the carrying value of goodwill and other intangible assets.
The Company's announced asset sale program, as well as overall conditions
affecting the Company and its sector, may materially impact the fair values of
its property plant and equipment, its construction work in progress, its
investment in suspended construction, its goodwill and its other intangible
assets. Management does not currently believe that this reduction in fair value
will result in an impairment of its goodwill. The Company will complete the
annual assessment of the carrying values of its goodwill in early 2003, after
completing its annual planning process for 2003. This process provides
management with the best information from which to analyze the goodwill for
impairment. Currently, Mirant does not believe that its "Investment in suspended
construction" is subject to an impairment loss under SFAS No. 144.
Asset Sales
In February 2002, Mirant completed the sale of its 44.8% interest in Bewag
for approximately $1.63 billion. Mirant received approximately $1.06 billion in
net proceeds after repayment of approximately $550 million in related debt. The
gain on the sale of Mirant's investment in Bewag was $290 million ($167 million
after-tax) and is included in "Other (expense) income, net -- Gain/(loss) on
sales of assets, net" on Mirant's accompanying unaudited condensed consolidated
statements of income. The net proceeds were used for general corporate purposes,
capital expenditures and repayment of certain drawn balances on revolving credit
facilities.
In May 2002, Mirant completed the sale of its 60% ownership interest in
the Kogan Creek power project, located near Chinchilla in southeast Queensland,
Australia, and associated coal deposits for approximately $29 million. The gain
on the sale of Mirant's investment in Kogan Creek was approximately $26 million
($17 million after-tax) and is included in "Gain on sales of assets, net" on
Mirant's accompanying unaudited condensed consolidated statements of income.
In May 2002, Mirant completed the sale of its 9.99% ownership interest in
SIPD, located in the Shandong Province, China, for approximately $120 million.
The loss on the sale of Mirant's investment in SIPD was approximately $10
million ($9 million after-tax) and is included in "Other (expense) income, net
- -- Gain/(loss) on sales of assets, net" on Mirant's accompanying unaudited
condensed consolidated statements of income.
24
In June 2002, Mirant completed the sale of its State Line generating
facility for approximately $181 million plus an adjustment for working capital.
The asset was sold at approximately book value.
In June 2002, Mirant completed the sale of its 50% ownership interest in
Perryville to Cleco, which holds the remaining 50% ownership interest in
Perryville. Cleco assumed Mirant's $13 million future equity commitment to
Perryville and paid approximately $55 million in cash to Mirant as repayment of
its subordinated loan, invested capital to date and other miscellaneous costs.
The investment was sold at approximately book value based on the value of the
investment at the date of sale. At such time, in connection with the existing
project financing, Mirant agreed to make a $25 million subordinated loan to the
project. In addition, Mirant retains certain obligations as a project sponsor,
some of which are subject to indemnification by Cleco. The obligations retained
by Mirant and not subject to indemnity relate primarily to the existing 20-year
tolling agreement with Mirant Americas Energy Marketing as described in Note I.
Effective August 23, 2002, Mirant Americas Energy Marketing and Perryville, with
the consent of the project lenders, restructured the tolling agreement between
the parties to remove the requirement to post a letter of credit or other credit
support in the event of a downgrade from S&P or Moody's. In connection with the
restructuring, Mirant Americas made a $100 million subordinated loan to
Perryville, the proceeds of which were used to repay the existing $25 million
subordinated loan owed to a Mirant subsidiary and to repay $75 million of senior
debt of the project. In addition, Mirant Americas guaranteed the obligations of
Mirant Americas Energy Marketing under the tolling agreement up to the amount of
the subordinated loan. The obligations of Mirant Americas Energy Marketing under
the tolling agreement are guaranteed by Mirant Corporation.
In July 2002, Mirant announced that it had entered into an agreement to
sell its Neenah generating facility to Alliant Energy Resources, Inc. for
approximately $109 million. The sale of Mirant's investment in Neenah will
approximate book value. The sale is expected to close in the first quarter of
2003.
In August 2002, Mirant completed the sale of its wholly owned subsidiary
MAP Fuels Limited, which wholly owned AQC, in Queensland, Australia, for
approximately $21 million. The asset was sold at approximately book value. The
sale included both the Wilkie Creek Coal Mine and the Horse Creek coal deposits.
In September 2002, Mirant completed the sale of its 49% economic interest
in Western Power Distribution Holdings Limited and WPD Investment Holdings (both
identified jointly as WPD) for approximately $235 million. As a result of the
announced sale in the second quarter of 2002, Mirant recorded a write-down of
its investment in WPD by approximately $317 million ($304 million after-tax)
which is included in "Impairment loss on minority owned affiliates" on Mirant's
accompanying unaudited condensed consolidated statements of income. Upon
completion of the sale, in the third quarter of 2002, Mirant recorded a loss of
$4 million ($1 million after-tax) on the sale of this investment. The WPD assets
include the electricity distribution networks for Southwest England and South
Wales.
In November 2002, Mirant entered into an agreement to sell the assets of
Mirant Americas Production Company for $150 million and in December 2002, the
sale of these assets was completed. Mirant Americas Production Company is an oil
and gas exploration, development and production company reported in Mirant's
North America Group operations.
On December 20, 2002, certain subsidiaries of Mirant entered into a share
sale agreement with China Resources Power Holdings Co. Ltd, to sell its indirect
33% interest in the 1,980 MW Shajiao C power project (Guangdong Province, China)
for $300 million. Mirant expects to record a gain on the sale. The transaction
is expected to close by the end of 2002. In