MIRANT CORP - 10-Q Quarterly Report

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

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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 MARCH 31, 2003

OR

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

FOR THE TRANSITION PERIOD FROM __________ TO __________

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MIRANT CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 001-16107 58-2056305
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification No.)

1155 PERIMETER CENTER WEST, SUITE 100, 30338
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)

(678) 579-5000 WWW.MIRANT.COM
(Registrant's Telephone Number, (Web Page)
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 by Rule 12b-2 of the Act). [X] Yes [ ] No

The number of shares outstanding of the Registrant's Common Stock, par
value $0.01 per share, at August 27, 2003 was 405,468,084.
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TABLE OF CONTENTS

DEFINITIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The information presented in this Form 10-Q includes forward-looking
statements in addition to historical information. These statements involve known
and unknown risks and relate to future events, our future financial performance
or our projected business results. In some cases, you can identify forward-
looking statements by terminology 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:

GENERAL FACTORS

- legislative and regulatory initiatives regarding deregulation, regulation
or restructuring of the electric utility industry; changes in state,
federal and other regulations (including rate and other regulations);
changes in, or application of, environmental and other laws and
regulations to which we and our subsidiaries and affiliates are subject;

- the failure of our assets to perform as expected;

- our pursuit of potential business strategies, including the disposition
of assets, termination of construction of certain projects or internal
restructuring;

- changes in market conditions, including developments in energy and
commodity supply, demand, volume and pricing or the extent and timing of
the entry of additional competition in the markets of our subsidiaries
and affiliates;

- weather and other natural phenomena;

- war, terrorist activities or the occurrence of a catastrophic loss;

- deterioration in the financial condition of our counterparties and the
resulting failure to pay amounts owed to us or perform obligations or
services due to us; and

- the disposition of the pending litigation described in this Form 10-Q as
well as the Company's Form 10-K filed on April 30, 2003;

BANKRUPTCY-RELATED FACTORS

- the actions and decisions of creditors of Mirant and of other third
parties with interests in the voluntary petitions for reorganization
filed on July 14, 2003 by Mirant Corporation and substantially all of its
wholly-owned U.S. subsidiaries under Chapter 11 of the Bankruptcy Code;

1

- the ability of Mirant to reach agreements with lenders, creditors and
other stakeholders regarding a comprehensive restructuring and to
continue as a going concern;

- the effects of the Chapter 11 filings on our liquidity and results of
operations;

- the instructions, orders and decisions of the bankruptcy court and other
effects of legal and administrative proceedings, settlements,
investigations and claims;

- the ability of Mirant to reach final agreement and close on the committed
debtor-in-possession financing, then operate pursuant to the terms
thereof;

- the ability of Mirant to obtain and maintain normal terms with vendors
and service providers and to maintain contracts that are critical to our
operations; and

- the direct or indirect effects on our business of a lowering of our
credit rating or that of Mirant Americas Generation, Mirant Mid-Atlantic
or Mirant Americas Energy Marketing (or actions taken by us or our
affiliates in response to changing credit ratings criteria), including,
increased collateral requirements to execute our business plan, demands
for increased collateral by our current counterparties, curtailment of
certain business operations in order to reduce the amount of required
collateral, refusal by our current or potential counterparties or
customers to enter into transactions with us and our inability to obtain
credit or capital in amounts needed or on terms favorable to us.

The ultimate results of the forward looking statements and the terms of any
reorganization plan ultimately confirmed, can affect the value of our various
pre-petition liabilities, common stock and/or other securities. No assurance can
be given as to what values, if any, will be ascribed in the bankruptcy
proceedings to each of these constituencies. A plan of reorganization could
result in holders of the liabilities and/or securities of the Company, Mirant
Americas Generation and Mirant Mid-Atlantic receiving no value for their
interests. Because of such possibilities, the value of these liabilities and/or
securities is highly speculative. Accordingly, we urge that caution be exercised
with respect to existing and future investments in any of these liabilities
and/or securities.

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.

2

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated
financial statements.
3

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated
statements.
4

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated
statements.
5

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated
statements.
6

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002

A. DESCRIPTION OF CHAPTER 11 PROCEEDINGS AND BUSINESS

PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

On July 14 and July 15, 2003 ("Petition Date"), Mirant Corporation and
substantially all of its wholly-owned subsidiaries in the United States
(collectively, the "Mirant Debtors") filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern
District of Texas, Fort Worth Division ("Bankruptcy Court"). The Chapter 11
cases are being jointly administered for procedural purposes only under case
caption In re Mirant Corporation et al., Case No. 03-46590 (DML). Additionally,
certain of Mirant Corporation's Canadian subsidiaries have filed an application
for creditor protection under the Companies Creditors' Arrangement Act in
Canada, which, like Chapter 11, allows for reorganization under the protection
of the court system. Mirant Canada Energy Marketing, Ltd., Mirant Canada
Marketing Investments, Inc., and Mirant Canada Energy Trading Partnership are
included in the application. Mirant Corporation and its subsidiaries'
(collectively, "Mirant" or the "Company") operations in the Philippines and the
Caribbean were not included in the Chapter 11 filings.

The Mirant Debtors are continuing to operate their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure, applicable court orders, as well as other
applicable laws and rules. In general, a debtor-in-possession is authorized
under the Bankruptcy Code to continue to operate as an ongoing business, but may
not engage in transactions outside the ordinary course of business without the
prior approval of the Bankruptcy Court.

In connection with the Chapter 11 filings, the Mirant Debtors secured a
commitment, subject to approval of the Bankruptcy Court, final documentation and
closing conditions, for $500 million in debtor-in-possession financing. This
commitment expires on September 5, 2003. The Company is currently working with
the lender to finalize the facility, however, there can be no assurance that
Mirant will be able to close this facility by the expiration date. As of August
15, 2003, Mirant had approximately $1.29 billion in total cash, approximately
$351 million of which was legally restricted and $125 million of which was held
for operating, working capital or other purposes at various subsidiaries.

Subject to certain exceptions in the Bankruptcy Code, the Chapter 11
filings automatically stayed the initiation or continuation of most actions
against the Mirant Debtors, including most actions to collect pre-petition
indebtedness or to exercise control over the property of the bankruptcy estates.
As a result, absent an order of the Bankruptcy Court, creditors are precluded
from collecting pre-petition debts and substantially all pre-petition
liabilities are subject to compromise under the plan of reorganization.

Under the Bankruptcy Code, Mirant also has the right to assume, assume and
assign, or reject certain executory contracts and unexpired leases, subject to
the approval of the Bankruptcy Court and certain other conditions. Generally,
the assumption of an executory contract or unexpired lease requires a debtor to
cure certain existing defaults under the contract, including the payment of
accrued but unpaid pre-petition liabilities. Rejection of an executory contract
or unexpired lease is typically treated as a breach of the contract or lease, as
of the moment immediately preceding the Chapter 11 filing. Subject to certain
exceptions, this rejection relieves the debtor of performing its future
obligations under that contract but entitles the other party to the contract to
assert a pre-petition general unsecured claim for damages. Parties to executory
contracts or unexpired leases rejected by the debtor may file proofs of claim
against the estate for damages. Due to the uncertain nature of many of the
potential claims for damages, Mirant is unable to project the magnitude of these
claims at this time.

On the Petition Date, the Bankruptcy Court granted the Company permission
to implement a Counterparty Assurance Program. Historically, Mirant Americas
Energy Marketing, one of Mirant's U.S.

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsidiaries that has filed a voluntary petition for reorganization under
Chapter 11, has engaged in trading and marketing activities including
proprietary trading activities for its own account and trading activities to
economically hedge Mirant's generation assets, from which Mirant has derived
value. Mirant currently contemplates risk management services for the
procurement of fuel and energy and the continued generation of revenue from
Mirant Americas Energy Marketing's prospective proprietary trading and asset
hedging activities as well as the recognition of value from Mirant Americas
Energy Marketing's existing trading positions. Mirant Americas Energy Marketing
conducts a substantial portion of its business through the use of derivative
contracts that may fall within the "safe-harbor" protections set forth in
Sections 556 and 560 as well as other sections of the Bankruptcy Code. The safe
harbor provisions permit non-debtor parties to, among other things, exercise
certain contractual termination rights and remedies notwithstanding the
commencement of a Chapter 11 case. Although case law surrounding the scope of
the Bankruptcy Code's safe harbor provisions remains unsettled, if a contract
qualifies for safe harbor protection, a non-debtor party may be permitted to
terminate or liquidate the contract upon a commencement of a bankruptcy
proceeding. In addition, in certain circumstances, commencement of a bankruptcy
proceeding may cause automatic termination or liquidation of the contract in
accordance with the contractual terms. The Counterparty Assurance Program
approved by the Bankruptcy Court supports the Company's ability to continue
activities designed to maximize the value of its assets without interruption.
The Bankruptcy Court order authorized immediate relief to honor any and all
obligations under existing and future trading and marketing contracts (i.e.,
safe harbor contracts) that support Mirant's asset base.

Pursuant to the general terms of Mirant Americas Energy Marketing's
derivative trading contracts, upon early termination, settlement payments are
determined by the non-defaulting counterparty using mark-to-market valuation
methodologies. Given the inherent uncertainties in mark-to-market valuation,
Mirant may not be able to realize the net current value of any existing
derivative trading contracts that are terminated early as a result of the
Chapter 11 filings or other event of default due to a potential increase in
mark-to-market liabilities and a potential decrease in mark-to-market assets
upon settlement. A number of counterparties have exercised early termination
rights which will result in a loss of value to Mirant. The ultimate impact of
these early terminations is not known at this time. In addition, although the
terms of most of Mirant Americas Energy Marketing's derivative contracts do not
relieve the non-defaulting party of the obligation to pay settlement amounts
owing, some of Mirant Americas Energy Marketing's counterparties owing
settlement payments may refuse to make such payments absent litigation, further
reducing the value of Mirant Americas Energy Marketing's existing trading
positions.

On July 24, 2003, the Bankruptcy Court approved an interim procedure
requiring certain holders of claims, preferred securities, and common stock to
provide at least ten days advance notice of their intent to buy or sell claims
against the Mirant Debtors or shares in Mirant Corporation. The notice procedure
is limited to only those transactions with a person or entity owning (or,
because of the transaction, resulting in ownership of) an aggregate amount of
claims equal to or in excess of $250 million and, with respect to shares, only
those persons or entities owning or acquiring 4.75% or more of any class of
outstanding shares. In addition, each entity or person that owns at least $250
million of claims or certain preferred securities must, within fifteen days of
the entry of the order, provide the Mirant Debtors with notice of ownership
information. The Court's order also provides for expedited procedures to impose
sanctions for a violation of its order, including monetary damages and the
avoidance of any such transactions that violate the order.

The emergency relief was sought to prevent potential trades of claims of
stock that could negatively impact the Mirant Debtors' United States net
operating losses carryforward and other tax attributes. The U.S. net operating
losses are currently approximately $1 billion and could reach $2.5 billion by
the end of 2003. The emergency relief provides immediate assistance in
preserving the U.S. net operating losses and other tax attributes until parties
in interest can appear and be heard regarding the notice procedure requested by
Mirant. Even with the emergency relief that has been granted, Mirant cannot
guarantee that it will be able to realize any portion, or all, of the U.S. net
operating losses and other tax carryforwards.
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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At this time, it is not possible to accurately predict the effect of the
Chapter 11 reorganization process on the Company's business or if and when the
Company may emerge from Chapter 11. The Company's future results depend on the
timely and successful confirmation and implementation of a plan of
reorganization. There can be no assurance that a successful reorganization plan
will be proposed by the Company or confirmed by the Bankruptcy Court, or that
any such plan will be consummated. The rights and claims of various creditors
and security holders will be determined by the plan as well. Under the priority
scheme established by the Bankruptcy Code, certain post-petition and
pre-petition liabilities need to be satisfied before security holders are
entitled to any distributions. The ultimate recovery to creditors and security
holders, if any, will not be determined until confirmation of a plan or plans of
reorganization. No assurance can be given as to what values, if any, will be
ascribed in the bankruptcy proceedings to the interests of each of these
constituencies, and it is possible that the Company's equity or other securities
will be restructured in a manner that will reduce substantially or eliminate any
remaining value. If no plan of reorganization is approved, it is possible that
Mirant's assets may be liquidated.

The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company's unaudited condensed consolidated financial statements
do not reflect adjustments that might be required if the Company is unable to
continue as a going concern.

OVERVIEW

Mirant (formerly Southern Energy, Inc.) and its subsidiaries is an
international energy company, incorporated in Delaware on April 20, 1993. Prior
to April 2, 2001, Mirant was a subsidiary of Southern Company ("Southern").

Mirant's revenues are generated through the production of electricity in
the United States, the Philippines and the Caribbean. In addition, in North
America Mirant trades and markets commodities to optimize the financial
performance of its power generation business and to take proprietary commodity
trading positions, primarily in regions where it owns generating facilities or
other physical assets. In the Philippines, over 80% of the Company's generation
output is sold under long-term contracts. The Company's operations in the
Caribbean include fully integrated electric utilities, which generate power sold
to residential, commercial and industrial customers. As of March 31, 2003,
Mirant owned or controlled through lease or operating agreements more than
21,000 MW of electric generating capacity. In North America, the Company also
had rights to approximately 2.4 billion cubic feet per day of natural gas
production, more than 1.8 billion cubic feet per day of natural gas
transportation and approximately 12.7 billion cubic feet of natural gas storage
as of March 31, 2003.

Mirant manages its business through two principal operating segments. The
Company's North America segment consists of power generation and commodity
trading operations managed as an integrated business. The International segment
includes power generation businesses in the Philippines, Curacao and Trinidad,
and integrated utilities in the Bahamas and Jamaica.

B. ACCOUNTING AND REPORTING POLICIES

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements (unaudited) of
Mirant Corporation and its wholly owned subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and with the instructions for
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 2002.

The financial statements include the accounts of Mirant and its wholly
owned as well as controlled majority owned subsidiaries and have been prepared
from records maintained by Mirant and its subsidiaries in their respective
countries of operation. All significant intercompany accounts and transactions
have been eliminated in consolidation. Investments in companies in which Mirant
exercises significant influence over operating and financial policies are
accounted for using the equity method. Majority or jointly owned affiliates,
which Mirant does not control, are also accounted for using the equity method of
accounting.

Certain prior period amounts have been reclassified to conform to the
current year financial statement presentation. The results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the results
to be expected for the full year.

ACCOUNTING FOR REORGANIZATION

The Company has not made any adjustments or reclassifications that may be
required in future filings related to the American Institute of Certified Public
Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code." Under SOP 90-7, the
Company will report separately pre-petition liabilities that are subject to
compromise, pre-petition liabilities that are not subject to compromise, and
post-petition liabilities. In addition, the Chapter 11 filings represent a
triggering event that will require an evaluation of long-lived assets, goodwill,
intangibles and other assets that may be impaired in a post-petition operating
environment. Asset and liability carrying amounts do not purport to represent
realizable or settlement values as contemplated by the Bankruptcy Code.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"). The Company adopted this
statement effective January 1, 2003. SFAS No. 143 provides accounting
requirements for costs associated with legal obligations to retire tangible,
long-lived assets. Under SFAS No. 143, the asset retirement obligation is
recorded at fair value in the period in which it is incurred by increasing the
carrying amount of the related long-lived asset. In each subsequent period, the
liability is accreted to its fair value and the capitalized costs are
depreciated over the useful life of the related asset. In the three months ended
March 31, 2003, Mirant recorded a charge as a cumulative effect of change in
accounting principle of approximately $3 million, net of taxes, related to its
adoption of SFAS No. 143. Mirant also recorded property, plant and equipment of
$6 million and noncurrent asset retirement obligations of $9 million as of
January 1, 2003. Mirant's asset retirement obligations are associated primarily
with the proper closure or removal of its fuel oil storage tanks, removal of
generation facilities and the capping of its ash landfills. The net asset
retirement liability as of January 1, 2003 and March 31, 2003, which is reported
in other noncurrent liabilities in the Company's condensed consolidated balance

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sheet, and the changes in the net liability for the three months ended March 31,
2003 were as follows (in millions):

Liability at January 1, 2003................................ $ 9
Liability settled in 2003................................... --
Accretion expense in 2003................................... *
---
NET LIABILITY AT MARCH 31, 2003............................. $ 9
===

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* Less than $1 million.

Had Mirant adopted SFAS No. 143 as of January 1, 2002, its noncurrent asset
retirement liabilities would have been approximately $7 million, and its income
from continuing operations and net income for the three months ended March 31,
2002 would have been lower by less than $1 million.

In October 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 02-03, "Issues Related to Accounting for Contracts
Involved in Energy Trading and Risk Management Activities," to rescind EITF
Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." Accordingly, energy-related contracts that are not
accounted for pursuant to SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," such as transportation contracts, storage contracts and
tolling agreements, are required to be accounted for as executory contracts
using the accrual method of accounting and not at fair value. Energy-related
contracts that meet the definition of a derivative pursuant to SFAS No. 133
continue to be carried at fair value. In addition, the Task Force observed that
accounting for energy-related inventory at fair value by analogy to the
consensus on EITF Issue 98-10 is not appropriate and that inventory is not to be
recognized at fair value. As a result of the consensus on EITF Issue 02-03, all
non-derivative energy trading contracts on the Consolidated Balance Sheet as of
January 1, 2003 that existed on October 25, 2002 and inventories that were
recorded at fair value have been adjusted to historical cost resulting in a
cumulative effect adjustment of $25 million, net of taxes, that reduced first
quarter 2003 earnings.

NEW ACCOUNTING STANDARDS

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 clarifies (1) under what circumstances a contract with an initial net
investment meets the characteristics of a derivative, (2) when a derivative
contains a financing component that should be reflected as a financing on the
balance sheet and the statement of cash flows and (3) the definition of the term
underlying in SFAS No. 133 to conform to language used in FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." In addition, SFAS No.
149 also incorporates certain Derivative Implementation Group Implementation
Issues. The provisions of SFAS No. 149 are effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The guidance is applied to hedging relationships on a prospective
basis.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses issues regarding the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that were previously accounted
for pursuant to the guidance in EITF Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Mirant adopted SFAS No. 146 on January 1, 2003 with no financial statement
impact.
11

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

Mirant recognizes generation revenue from the sale of energy and integrated
utilities and distribution revenue from the sale and distribution of energy when
earned and collection is probable. The Company recognizes revenue when electric
power is delivered to a customer pursuant to contractual commitments that
specify volume, price and delivery requirements. When a long-term electric power
agreement conveys the right to use the generating 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 generating facility rather than a sale of electric power.

COMMODITY TRADING ACTIVITIES

Commodity trading activities are accounted for under the mark-to-market
method of accounting. Under the mark-to-market method of accounting, energy
trading contracts 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 OTC market price quotations, time
value and volatility factors underlying options and contractual commitments,
price activity for equivalent or synthetic instruments in markets located in
different time zones and counterparty credit quality. The net realized gain or
loss and net unrealized gain or loss resulting from the change in the fair value
of energy trading contracts are reported as "net trading revenues." Prior to the
effective date of EITF Issue 02-03, all energy trading contracts including
transportation and storage contracts and inventory held for trading purposes
were marked-to-market under the provisions of EITF Issue 98-10.

Subsequent to the rescission of EITF Issue 98-10 the mark-to-market method
is used to account for energy trading contracts entered into after October 25,
2002 that meet the criteria of derivative financial instruments pursuant to SFAS
No. 133. These criteria require such contracts to be related to future periods,
to contain one or more underlyings and one or more notional amounts, require
little or no initial net investment and to have terms that require or permit net
settlement of the contract in cash or its equivalent. As such transactions may
be settled in cash, the fair value of the assets and liabilities associated with
these transactions is reported at estimated settlement value based on current
prices and rates as of each balance sheet date. The net unrealized gains or
losses resulting from the revaluation of such contracts during the period are
recognized currently in net trading revenues in the accompanying unaudited
condensed consolidated statements of operations. Assets and liabilities
associated with energy trading activities are reflected in Mirant's unaudited
condensed consolidated balance sheet as price risk management assets and
liabilities, classified as short-term (i.e., current) or long-term based on the
term, or tenor, of the contracts.

DERIVATIVE FINANCIAL INSTRUMENTS

SFAS No. 133 requires that derivative financial instruments be recorded in
the balance sheet at fair value as either assets or liabilities, and that
changes in fair value be recognized currently in earnings, unless specific hedge
accounting criteria are met. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized currently in earnings. If the
derivative is designated as a cash flow hedge, the changes in the fair value of
the derivative are recorded in other comprehensive income ("OCI") and the
realized gains and losses related to these derivatives are recognized in
earnings in the same period as the settlement of the underlying hedged
transaction. Any ineffectiveness relating to cash flow hedges is recognized
currently in earnings. The assets and liabilities related to derivative
instruments for which hedge accounting criteria are met are reflected within
other current and non-current assets and liabilities in the accompanying
unaudited condensed consolidated balance sheets. The assets and liabilities
related to derivative instruments that do not qualify for hedge accounting
treatment are included in price risk management

12

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assets and liabilities. The assets and liabilities related to derivative
instruments that are associated with assets and liabilities held for sale are
presented net within those captions on our accompanying unaudited condensed
consolidated balance sheets. Many of Mirant's power sales and fuel supply
agreements that otherwise would be required to follow derivative accounting
qualify as normal purchases and normal sales under SFAS No. 133 and are
therefore exempt from fair value accounting treatment. The majority of the
Company's commodity derivative financial instruments do not qualify for hedge
accounting and therefore changes in such instruments' fair value are recognized
currently in earnings.

STOCK-BASED COMPENSATION

Mirant accounts for its stock-based employee compensation plans under the
intrinsic-value method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Under this method, compensation expense for employee stock
options is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation" established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income (loss) if the fair-
value-based method had been applied to all outstanding and unvested awards in
each period (in millions, except per share data). See also Note 12 to Mirant's
Form 10-K for the year ended December 31, 2002 for further information regarding
its stock-based compensation plans and the assumptions used to compute pro forma
amounts.

C. RESTATEMENT AND RECLASSIFICATIONS

The unaudited condensed consolidated financial statements of the Company as
of March 31, 2002 and for the three months ended March 31, 2002 have been
restated to correct certain accounting errors made in preparing those financial
statements as well as other reclassifications and adjustments.

13

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DISCONTINUED OPERATIONS

The financial statements for prior periods have been restated to report the
revenues and expenses of the components of the Company that were disposed of
separately as discontinued operations. Income (loss) from discontinued
operations for the three months ended March 31, 2003 and 2002 includes the
following components of the Company that have been disposed of: Mirant Americas
Energy Capital, LP ("Mirant Americas Energy Capital"), Mirant Canada Energy
Capital, Ltd. ("Mirant Canada Energy Capital"), Mirant Europe B.V., the Neenah
generating facility in Wisconsin and the Tanguisson power plant in Guam. Income
(loss) from discontinued operations for the three months ended March 31, 2002
also includes the operations of Mirant Americas Production Company in Louisiana,
MAP Fuels Limited in Queensland, Australia and the State Line generating
facility in Indiana.

A summary of the operating results for these discontinued operations for
the three months ended March 31, 2003 and 2002 follows (in millions):

The table below presents the components of the balance sheet accounts
classified as current assets and liabilities held for sale as of March 31, 2003
and December 31, 2002 (in millions):

Total current liabilities related to assets held for sale are included in
other current liabilities in the condensed consolidated balance sheets.

14

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

In addition to the changes to the Company's previously issued financial
statements required by the adoption of SFAS No. 144, management has identified
certain errors which necessitated a restatement of the Company's first quarter
2002 consolidated financial statements. The reclassifications also include the
net presentation of revenues and expenses associated with energy trading
activities required by EITF Issue 02-03. The following tables and discussion
highlight the effects of the restatement adjustments and reclassifications on
the previously reported unaudited condensed consolidated statements of
operations for the three months ended March 31, 2002 (in millions).

CONSOLIDATED STATEMENTS OF OPERATIONS

15

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Operating revenue for the three months ended March 31, 2002 was adjusted by
$246 million primarily as a result of the following restatement adjustments:

- a decrease due to the reclassification of $230 million to properly
eliminate intercompany revenues;

- an increase of $15 million for certain power purchase agreements
previously accounted for as executory contracts that are now reflected at
fair value under SFAS No. 133;

- a decrease of $2 million of mark-to-market gains on energy loans held by
Mirant's Energy Capital business, which were previously accounted for at
fair value;

- a decrease of $30 million to record a full requirements contract in Texas
at fair value;

- an increase of $5 million to reflect the fair value of certain commodity
financial instruments previously accounted for as cash flow hedges under
SFAS No. 133;

- a decrease to reclassify liquidation damages by $20 million related to
Enron; and

- an increase of $16 million as a result of mark-to-market adjustments in
Mirant's natural gas trading business.

Cost of fuel, electricity and other products, excluding depreciation, for
the three months ended March 31, 2002 was adjusted by $238 million primarily as
a result of the reclassification of $230 million of trading expenses to
intercompany trading expenses and the liquidation damages of $20 million related
to Enron, offset by the reversal of $17 million of power purchase agreement
contra-expense amortization

16

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during the three months ended March 31, 2002 due to the change in the accounting
for these power purchase agreements to fair value accounting.

Gain on sale of investments, net was adjusted by $41 million, as a result
of changes in the calculation of the gain recognized from the Company's sale of
its Bewag investment in the first quarter of 2002.

The provision for income tax for the three months ended March 31, 2002 was
adjusted primarily as a result of $22 million due to the reduction of the gain
recognized from the sale of the Company's investment in Bewag in the first
quarter of 2002 and as a result of the tax effect of the other restatement
adjustments described above.

CONSOLIDATED STATEMENTS OF CASH FLOWS

17

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

* Classification of certain amounts has changed in the current year.

Operating cash flows in the three months ended March 31, 2002 increased by
$26 million primarily as a result of the restatement of our cash balances at
both December 31, 2001 and March 31, 2002, and the reclassification of certain
expenditures relating to capital items from operating activities to investing
activities.

D. PRICE RISK MANAGEMENT ASSETS AND LIABILITIES

As of March 31, 2003, the fair value, net of credit reserves, of Mirant's
price risk management portfolio is presented in the table below. Excluding
certain long-term power purchase agreements included in price risk management
liabilities, the volumetric weighted average maturity, or weighted average
tenor, of the North American portfolio at March 31, 2003 was 1.1 years. The net
notional amount, or net long

18

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(short) position, of the price risk management assets and liabilities at March
31, 2003 was approximately 7 million equivalent MWh.

Power sales agreements and contracts that are used to mitigate exposure to
commodity prices but do not meet the definition of a derivative or are excluded
from fair value accounting under certain exceptions in SFAS No. 133 are
accounted for as executory contracts.

The tenor of the long-term power purchase agreements excluded from the
North American portfolio, as discussed above, at March 31, 2003 is presented
below.

E. DISPOSITIONS AND ACQUISITIONS

DISPOSITIONS

Neenah: In January 2003, Mirant completed the sale of its Neenah
generating facility for approximately $109 million resulting in a gain of
approximately $4 million.

Mirant Americas Energy Capital: In March 2003, Mirant completed the sale
of the majority of the investments held by Mirant Americas Energy Capital for
approximately $160 million. In the first quarter of 2003, the Company recorded
additional losses of $26 million, primarily related to warrants and royalty
payments receivable, foregone as a result of the investment sales. These charges
are reflected as a component of loss from discontinued operations in the
accompanying condensed consolidated statement of operations.

Navotas 1: In March 2003, the energy conversion agreement ("ECA") for
Navotas 1 expired, and the plant was transferred to National Power Corporation
pursuant to the terms of the ECA.

The following events occurred subsequent to March 31, 2003:

Tanguisson: In April 2003, Mirant completed the sale of its Tanguisson
power plant in Guam for approximately $16 million, which approximated book
value.

Mirant Americas Energy Capital: In May and August 2003, Mirant completed
the sale of the two remaining investments held by Mirant Americas Energy Capital
for approximately $41 million and $3 million, respectively, which approximated
book value.

Mirant Canada operations: In May 2003, Mirant announced that it had
entered into agreements to sell its Canadian natural gas aggregator services
contracts, a significant portion of its natural gas transportation contracts and
a portion of its storage contracts. The contracts included in the sale represent

19

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

380 million cubic feet per day of natural gas transportation assets and
approximately 1.3 billion cubic feet of natural gas storage, as well as Mirant's
"netback pool." The netback pool represents natural gas marketing contracts that
aggregate and market the supply of natural gas from over 500 Canadian natural
gas producers associated with the former TransCanada pool business. The sale
closed in July 2003.

Birchwood: In May 2003, Mirant announced that it had entered an agreement
to sell all but one half of one percent of its 50% ownership interest in the
Birchwood generating plant located near Fredricksburg, Virginia for
approximately $71 million resulting in an estimated after-tax gain of
approximately $41 million. Due to the uncertainty of when this sale will close,
the gain may be adjusted upon close of the sale. The sale, which is subject to
bankruptcy court approval, is expected to close during 2003.

Perryville Tolling Agreement: In May 2003, Mirant entered into an
agreement (the "Termination Agreement") to terminate the tolling agreement with
Perryville Energy Partners, LLC ("Perryville"), provided the sale of the
Perryville Power Station facility to Entergy Services, Inc. ("Entergy") closes.
The Termination Agreement, by its terms, automatically expired on August 15,
2003 in the event Perryville and Entergy had not executed a binding purchase and
sale agreement for the facility by that date. Perryville and Entergy have not
executed a binding purchase and sale agreement. Mirant and Perryville have
extended the expiration date to August 27, 2003. Because of the Mirant Chapter
11 filing, Perryville and Entergy may not execute a binding purchase and sale
agreement by the August 27, 2003 and further extensions of the expiration date
of the Termination Agreement may not occur. If the termination of the tolling
agreement occurs pursuant to the terms of the Termination Agreement, Mirant
agreed it will pay Perryville approximately $35 million and forgive a $99
million subordinated loan made to Perryville. In the second quarter of 2003,
Mirant posted a letter of credit of $35 million with Perryville to secure its
obligations under the Termination Agreement. Mirant estimates that it will
recognize a pre-tax loss of approximately $131 million related to this
transaction. If the Termination Agreement expires, the $35 million letter of
credit will be returned to Mirant and Mirant will continue to be obligated to
perform under the tolling agreement.

The financial statements for current and prior years have been reclassified
to report the revenues and expenses separately as discontinued operations for
the asset sales of Neenah, Mirant Americas Energy Capital and Tanguisson. (See
Note C.)

JOINT VENTURE ACTIVITY

Toledo and Panay: In June 2003, Mirant Toledo Holdings Corporation
("MTHC"), a wholly owned subsidiary of Mirant (Philippines) Corporation ("MPC"),
entered into an agreement with the First Metro Investment Corporation Group
("the FMIC Group") to pursue business opportunities in power generation in the
Visayas region of the Philippines. The FMIC Group agreed to acquire the entire
equity interest in Panay Power Corporation, a 72 MW power generation company on
the island of Panay and a 22.8 MW generation asset of the Sunrise Power Company
located in the island of Luzon. The total acquisition cost of these two projects
is approximately $64 million in addition to the assumption of the project debt
at Panay Power Corporation of $35.8 million. Also, a new project debt of
approximately $2.9 million is to be raised for the 22.8 MW generation asset on
the island of Panay. The transaction is expected to close during 2003. The FMIC
Group has agreed to contribute its equity interest in Panay Power Corporation
and the 22.8 MW generation asset to MTHC in exchange for a 50% ownership
interest in MTHC. MTHC will become a 50/50 joint venture company between the
FMIC Group and MPC after completion of the transaction. The Company's investment
in MTHC at March 31, 2003, aggregated $21.7 million. The FMIC Group and MPC have
agreed not to transfer all or any of their shares in MTHC for a period of three
years.

20

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACQUISITION

Pagbilao: In March 2003, Mirant Asia-Pacific Limited's subsidiary paid
approximately $30 million to acquire a 4.26% ownership interest in the Pagbilao
project. Subsequent to March 31, 2003, Mirant Asia-Pacific Limited's subsidiary
paid approximately $30 million to acquire a further 4.26% ownership interest in
the Pagbilao project. The remaining minority interest of the Pagbilao project
subject to the put agreement is 4.26%.

F. GOODWILL

Following is a summary of the changes in goodwill for the three months
ended March 31, 2003 (in millions):

Upon the adoption of SFAS No. 141, Mirant reclassified its intangible
assets relating to trading rights resulting from business combinations, to
goodwill effective January 1, 2002. The reclassification increased goodwill by
$149 million, net of accumulated amortization of $13 million and decreased
intangible assets by a corresponding amount. During the three months ended March
31, 2003, no event or circumstance indicated that it is more likely than not
that an impairment loss has been incurred. Therefore, the Company did not
perform a reassessment of the carrying value of its goodwill during the three
months ended March 31, 2003. During the three months ended March 31, 2003,
Mirant finalized its purchase accounting adjustments for West Georgia and
TransCanada, resulting in reclassifications among deferred taxes, prepaid assets
and goodwill.

OTHER INTANGIBLE ASSETS

Following is a summary of intangible assets as of March 31, 2003 and
December 31, 2002 (in millions):

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, ranging up to 40 years. Amortization expense for each of
the three months ended March 31, 2003 and 2002 was approximately $4 million.
Assuming no future acquisitions, dispositions or impairments of intangible
assets, amortization expense is estimated to be $19 million for each of the
following five years.

The trading rights represent intangible assets recognized in connection
with asset purchases that represent the Company's ability to generate additional
cash flows by incorporating Mirant's trading activities with the acquired
generating facilities. Development rights represent the right to expand capacity
at certain acquired generating facilities. The existing infrastructure,
including storage facilities, transmission interconnections, and fuel delivery
systems, and contractual rights acquired by Mirant provide the

21

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

opportunity to expand or repower certain generation facilities. This ability to
repower or expand is expected to be at significant cost savings compared to
greenfield construction.

G. RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES

Mirant adopted a plan in March 2002 to restructure its operations by
exiting certain activities (including its European trading and marketing
business), canceling and suspending planned power plant developments, closing
business development offices, and severing employees in an effort to better
position the Company to operate in the current business environment. During the
three months ended March 31, 2003, Mirant recorded additional restructuring
charges of $7 million. Additional impairment losses of approximately $5 million
for the three months ended March 31, 2003 were incurred as a result of Mirant's
restructuring efforts to reduce costs and sell non-strategic assets. Components
of the restructuring charges for the three months ending March 31, 2003 and 2002
are as follows (in millions):

During the three months ended March 31, 2003, Mirant terminated
approximately 77 employees as part of its restructuring. For the three months
ended March 31, 2003, Mirant paid $4 million related to restructuring charges
recorded in that period. As of March 31, 2003, Mirant had approximately $3
million accrued for restructuring, as follows (in millions):

H. DEBT

The following developments have occurred in the Company's debt structure
since December 31, 2002.

MIRANT CORPORATION AND MIRANT AMERICAS GENERATION, LLC

Due to the proceedings under Chapter 11, Mirant Corporation and Mirant
Americas Generation are in default under approximately $3.9 billion and $2.8
billion of currently outstanding debt, respectively.

22

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mirant Corporation is also in default on obligations to cash collateralize
outstanding letters of credit of $991 million. Subject to certain exceptions in
the Bankruptcy Code, the Chapter 11 filings automatically stayed the
continuation of most actions against Mirant and Mirant Americas Generation,
including most actions to collect pre-petition indebtedness or to exercise
control over the property of the bankruptcy estate. As a result, absent an order
of the Bankruptcy Court, creditors are precluded from collecting pre-petition
debts and substantially all pre-petition liabilities are subject to compromise
under a plan of reorganization. Therefore, the amounts of outstanding debt shown
above may not reflect actual cash outlays in the future period.

WEST GEORGIA GENERATING COMPANY, LLC -- CREDIT FACILITY

Due the proceedings under Chapter 11, West Georgia Generating Company, LLC
is in default under its $140 million secured credit facility. As noted earlier,
the Chapter 11 filings automatically stayed the continuation of most actions
against Mirant and its subsidiaries that filed for protection under Chapter 11,
including West Georgia Generating Company, LLC, including any action to collect
pre-petition indebtedness or to exercise control over the property of the
bankruptcy estate.

MIRANT AMERICAS DEVELOPMENT CAPITAL, LLC -- DOMESTIC TURBINE LEASE FACILITY

On May 29, 2003, the commitment to fund the "true-funding" tranche of $500
million was reduced to $231 million. The amount outstanding under the Series A1
Notes, the Series B1 Notes and the Series C1 certificates was $214 million at
July 31, 2003, of which approximately $192 million was recourse to Mirant
Corporation pursuant to its guarantee of certain obligations of Mirant Americas
Development Capital. As noted above, the Chapter 11 filings automatically stayed
the continuation of most actions against Mirant and its subsidiaries that filed
for protection under Chapter 11, including Mirant Americas Development Capital,
including any action to collect pre-petition indebtedness or to exercise control
over the property of the bankruptcy estate.

MIRANT ASSET DEVELOPMENT AND PROCUREMENT B.V. -- EUROPE POWER ISLAND LEASE

In February 2003, Mirant Asset Development and Procurement B.V. repaid and
terminated its Power Island Acquisition Facility.

MIRANT AMERICAS ENERGY CAPITAL -- THREE YEAR CREDIT FACILITY

In March 2003, Mirant Americas Energy Capital terminated and repaid the
outstanding $50 million under its credit facility.

MIRANT CURACAO INVESTMENTS II -- CREDIT FACILITY

In October 2002, Mirant Curacao entered into a $20 million five-year
partial amortizing credit facility with RBTT Merchant Bank Limited, Trinidad.
The loan is guaranteed by Mirant Corporation and secured by the shares of the
issuer and the assets of Mirant Curacao Investments. Although Mirant Curacao is
not subject to the Chapter 11 proceedings, the filing by Mirant
Corporation -- the guarantor under the credit facility -- triggered a default
under the credit facility. Subsequent to the Chapter 11 filing, Mirant Curacao
was able to secure a waiver of the default and a release of the Mirant
Corporation guarantee.

JAMAICA PUBLIC SERVICE COMPANY -- CREDIT FACILITIES

In March 2003, Jamaica Public Service Company ("JPSCO"), in which Mirant
has an 80% ownership interest, entered into a $30 million 7 year amortizing
credit facility with RBTT Merchant Bank Limited, Trinidad. In May 2003, JPSCO
entered into a $45 million 11.5 year amortizing credit facility

23

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with International Finance Corporation. Principal payments for this facility
begin in 2007. The $30 million 7 year amortizing credit facility refinanced an
existing short-term loan that was used to finance the Bogue construction
facility. The $45 million 11.5 million amortizing credit facility was used to
finance the Bogue construction project. Both loans are non-recourse to Mirant.

I. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes: unrealized gains and losses on
certain derivatives that qualify as cash flow hedges, hedges of net investments,
and available for sale securities; the translation effects of foreign net
investments; adjustments for additional minimum pension liabilities; and the
Company's proportionate share of other comprehensive income or loss of
affiliates. The following table sets forth the comprehensive income (loss) for
the three months ended March 31, 2003 and 2002 (in millions):

Components of accumulated other comprehensive loss consisted of the
following (in millions):

BALANCE, DECEMBER 31, 2002.................................. $(102)
Other comprehensive income (loss) for the period:
Net change in fair value of derivative hedging
instruments, net of tax effect of less than $1
million................................................ (1)
Reclassification of derivative net gains to earnings, net
of tax effect of $(1).................................. 6
Cumulative translation adjustment......................... (14)
Unrealized gains on TIERS investments..................... 1
Other..................................................... (4)
-----
Other comprehensive (loss).................................. (12)
-----
BALANCE, MARCH 31, 2003..................................... $(114)
=====

The $114 million balance of accumulated other comprehensive loss as of
March 31, 2003 includes the impact of a $11 million loss related to interest
rate hedges, a $53 million loss related to deferred interest rate swap hedging
losses, $37 million of foreign currency translation losses, $7 million
representing Mirant's share of accumulated other comprehensive losses of
unconsolidated affiliates, $2 million of minimum pension liability and $4
million of other losses, offset by $1 million of gains related to its "available
for sale" securities described below.

During the three months ending March 31, 2003, Mirant purchased $51 million
of TIERS Fixed Rate Certificates that are secured by other underlying Mirant
bond instruments. Mirant may sell TIERS Certificates or extinguish the
underlying Mirant debt. Mirant treats the TIERS Certificates as "available for
sale" securities under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Consequently, Mirant marks the TIERS Certificates to
market and records gains or losses in OCI. For balance sheet presentation
purposes, the Company's investment in TIERS certificates is netted against its
long-term debt in the condensed consolidated balance sheets.

24

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mirant expects that as a result of the Chapter 11 filings, interest
payments will cease and the remaining interest rate hedging losses included in
OCI will be reclassified from OCI into earnings in the third quarter of 2003.

J. LITIGATION AND OTHER CONTINGENCIES

The Company is involved in a number of significant legal proceedings. In
certain cases, plaintiffs seek to recover large and sometimes unspecified
damages, and some matters may be unresolved for several years. The Company
cannot currently determine the outcome of the proceedings described below or the
ultimate amount of potential losses. Pursuant to SFAS No. 5, "Accounting for
Contingencies," management provides for estimated losses to the extent
information becomes available indicating that losses are probable and that the
amounts are reasonably estimable. Additional losses resulting from these legal
proceedings could have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.

EFFECT OF CHAPTER 11 FILINGS

As discussed above under Note A -- Proceedings under Chapter 11 of the
Bankruptcy Code, on the Petition Date, the Mirant Debtors filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code. Additionally,
certain of the Company's Canadian subsidiaries have filed an application for
creditor protection under the Companies Creditors' Arrangement Act in Canada,
which, like Chapter 11, allows for reorganization. The Company's businesses in
the Philippines and the Caribbean were not included in the Chapter 11 filings.

As a debtor-in-possession, Mirant is authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court. As of the Petition Date, most pending litigation (including
some of the actions described below) is stayed, and absent further order of the
Bankruptcy Court, no party, subject to certain exceptions, may take any action,
again subject to certain exceptions, to recover on pre-petition claims against
the Company. One exception to this stay of litigation is actions or proceedings
by a governmental agency to enforce its police or regulatory power. The claims
asserted in litigation and proceedings to which the stay applies may be fully
and finally resolved in connection with the administration of the bankruptcy
proceedings and, to the extent not resolved, will need to be addressed in the
context of any plan or plans of reorganization. At this time, it is not possible
to predict the outcome of the Chapter 11 filings or their effect on the
Company's business or outstanding legal proceedings.

CALIFORNIA AND WESTERN POWER MARKETS

The Company is subject to litigation related to its activities in
California and the western power markets and the high prices for wholesale
electricity experienced in the western markets during 2000 and 2001. Various
lawsuits and complaints have been filed by the California Attorney General, the
California Public Utility Commission ("CPUC"), the California Electricity
Oversight Board ("EOB") and various states' rate payers in state and federal
courts and with the Federal Energy Regulatory Commission (the "FERC"). Most of
the plaintiffs in the rate payer suits seek to represent a state-wide class of
retail rate payers. In addition, civil and criminal investigations have been
initiated by the Department of Justice, the General Accounting Office, the FERC
and various states' attorneys general. These matters involve claims that the
Company engaged in unlawful business practices and generally seek unspecified
amounts of restitution and penalties, although the damages alleged to have been
incurred in some of the suits are in the billions of dollars. One of the suits
brought by the California Attorney General seeks an order requiring the Company
to divest its California plants.

25

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, the Company is subject to the proceedings described below in
California Receivables, FERC Show Cause Proceedings Relating to Trading
Practices, FERC Investigation Related to Bidding, and DWR Power Purchases,
relating to its operations in California and the western power markets. The
Company has reserved approximately $295 million for losses related to the
Company's operations in California and the western power markets during 2000 and
2001. Resolution of these matters is subject to resolution of the ongoing
litigation for the matters pending in courts and for those matters pending at
the FERC to the issuance of final decisions by the FERC.

In an order issued July 25, 2001, the FERC initiated a proceeding to
determine whether there had been unjust and unreasonable charges for spot market
bilateral sales in the Pacific Northwest from December 25, 2000 through June 20,
2001. In an order issued June 25, 2003, the FERC ruled that no refunds were owed
and terminated the proceeding. Certain parties to the proceeding have filed a
request for rehearing by the FERC.

On May 19, 2003, the United States District Court for the Southern District
of California denied motions filed by the plaintiffs seeking to have the
Pastorino, RDJ Farms, Century Theatres, El Super Burrito, Leo's Day and Night
Pharmacy, J&M Karsant, and Bronco Don Holdings suits filed between April 23,
2002 and May 24, 2002 remanded to the California state courts in which they were
originally filed and from which they had been removed by the defendants. The
Mirant entities and the other defendants have filed motions to dismiss in those
cases.

On July 8, 2003, the Superior Court for the County of Los Angeles dismissed
the Bustamante v. The McGraw-Hill Companies, Inc., et al. suit that had been
filed November 20, 2002, finding that the plaintiffs had failed to allege facts
sufficient to warrant relief. The court did grant the plaintiffs leave to file
an amended complaint. On August 13, 2003, the plaintiff filed an amended
complaint asserting claims under California's Unfair Competition Act and state
antitrust statute against gas distribution or marketing companies, owners of
electric generation facilities in California and energy marketers, including the
Company and various of its subsidiaries. The amended complaint alleges that the
defendants engaged in a scheme to report false gas prices and volumes to
companies that published index prices for natural gas in order to manipulate the
price indices to benefit themselves. This conduct, the plaintiff asserts,
violated California Penal Code section 395 and caused the prices paid by
Californians for natural gas to be artificially inflated. The suit is brought as
a representative action on behalf of all similarly situated persons, the general
public and all taxpayers. The suit seeks, among other things, disgorgement of
profits, restitution, treble damages and injunctive relief.

On May 5, 2003, the United States District Court for the District of Oregon
granted a motion filed by the plaintiff seeking to dismiss the Lodewick suit
without prejudice. On June 2, 2003, the United States District Court for the
Western District of Washington granted a motion filed by the plaintiff seeking
to dismiss without prejudice the Symonds suit.

On April 28, 2003, a purported class action suit, Egger et al. v. Dynegy,
Inc. et al., was filed in the Superior Court for the County of San Diego,
California, against various owners of electric generation facilities in
California and marketers of electricity and natural gas, including Mirant and
various of its subsidiaries, on behalf of all persons who purchased electricity
in Oregon, Washington, Utah, Nevada, Idaho, New Mexico, Arizona and Montana from
January 1, 1999. The plaintiffs allege that defendants engaged in unlawful,
unfair, and deceptive practices in the California and western wholesale
electricity markets. The plaintiffs contend that the defendants conspired among
themselves and with subsidiaries of Enron Corporation to withhold electricity
from the California Power Exchange Corporation ("PX") and the California
Independent System Operator ("CAISO") markets and to manipulate the price of
electricity sold at wholesale in the California and western markets. The
plaintiffs assert that the defendants' alleged wrongful conduct has caused
damages in excess of one billion dollars and seek treble damages, injunctive
relief, restitution, and an accounting of the wholesale energy transactions
entered into
26

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLID