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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 June 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_____
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___
__________
The number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, at October 30, 2002 was 402,923,915.
Mirant Corporation and Subsidiaries
INDEX
For the Quarterly Period Ended June 30, 2002
Page
Number
DEFINITIONS 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 3
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Condensed Consolidated Statements of Income 5
Condensed Consolidated Balance Sheets 6
Condensed Consolidated Statement of Stockholders' Equity 8
Condensed Consolidated Statements of Cash Flows 9
Notes to the Condensed Consolidated Financial Statements 10
Independent Accountants' Review Report 47
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 48
Item 3. Quantitative and Qualitative Disclosures about Market Risk 73
Item 4. Controls and Procedures 76
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 79
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 79
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 79
Signatures
Certifications
i
DEFINITIONS
TERM MEANING
- ---- -------
APB Accounting Principles Board
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
JPSCo Jamaica Public Service Company Limited
Kogan Creek MAP Australia (BVI) Limited
LIBOR London Interbank Offering Rate
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 Americas Mirant Americas, Inc.
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
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
1
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
2
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:
o legislative and regulatory initiatives regarding deregulation, regulation
or restructuring of the electric utility industry;
o the extent and timing of the entry of additional competition in the markets
of our subsidiaries and affiliates;
o our pursuit of potential business strategies, including
acquisitions or dispositions of assets or internal restructuring;
o 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;
o changes in or application of environmental and other laws and regulations
to which we and our subsidiaries and affiliates are subject;
o financial market conditions and the results of our financing or refinancing
efforts;
o changes in market conditions, including developments in energy and
commodity supply, volume and pricing and interest rates;
o weather and other natural phenomena;
o 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;
o 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;
o 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;
o 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;
o 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 8-K filed on June 27, 2002 and this Form 10-Q;
o the direct or indirect effects of the accounting issues discussed in Notes
A and L 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 this Form 10-Q;
o 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;
o the direct or indirect effects of informal 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;
3
o 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 quarter ended June
30, 2002; and
o 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 and our Form 10-Q filed
on May 13, 2002, as amended by Form 10-Q/A, 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.
4
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----------- ------------ ------------- ------------
(in millions, except per share data)
Operating Revenues: $6,134 $7,915 $13,042 $16,083
----------- ------------ ------------- ------------
Operating Expenses:
Cost of fuel, electricity and other products 5,554 7,127 11,852 14,508
----------- ------------ ------------- ------------
Gross Margin 580 788 1,190 1,575
----------- ------------ ------------- ------------
Other Operating Expenses:
Depreciation and amortization 79 94 156 179
Maintenance 29 41 61 68
Selling, general and administrative 168 187 316 483
Impairment loss (Note D) - 89 - 93
Restructuring charge (Note H) 28 - 590 -
Gain on sales of assets, net (Note H) (27) - (27) -
Other 119 129 226 228
----------- ------------ ------------- ------------
Total operating expenses 396 540 1,322 1,051
----------- ------------ ------------- ------------
Operating Income (Loss) 184 248 (132) 524
----------- ------------ ------------- ------------
Other Expense, net:
Interest income 15 36 32 88
Interest expense (107) (143) (226) (286)
Gain/(loss) on sales of assets, net (Note H) (9) 2 282 2
Equity in income of affiliates 42 47 120 126
Impairment loss on minority owned affiliates (Note D) (317) - (317) -
Receivables recovery (Note A) - - 29 10
Other, net 4 3 (1) -
----------- ------------ ------------- ------------
Total other expense, net (372) (55) (81) (60)
----------- ------------ ------------- ------------
(Loss) Income From Continuing Operations
Before Income Taxes and Minority Interest (188) 193 (213) 464
Provision (Benefit) for Income Taxes 16 54 (17) 142
Minority Interest 18 16 34 30
----------- ------------ ------------- ------------
(Loss) Income From Continuing Operations (222) 123 (230) 292
----------- ------------ ------------- ------------
Income from Discontinued Operations, net of tax provision
of $1 for both the three months ended June 30, 2002 and
2001, and $3 and $2 for the six months ended June 30,
2002 and 2001, respectively 2 1 4 12
----------- ------------ ------------- ------------
Net (Loss) Income $(220) $ 124 $ (226) $ 304
=========== ============ ============= ============
(Loss) Earnings Per Share:
Basic $ (0.55) $ 0.36 $ (0.56) $ 0.90
Diluted $ (0.55) $ 0.36 $ (0.56) $ 0.88
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 June 30, At December 31,
ASSETS: 2002 2001
----------------- -------------------
(in millions)
Current Assets:
Cash and cash equivalents $ 957 $ 860
Receivables:
Customer accounts, less provision for uncollectibles
of $154 and $159 for 2002 and 2001, respectively 1,605 1,957
Other, less provision for uncollectibles
of $26 and $32 for 2002 and 2001, respectively 370 774
Notes receivable 30 24
Energy marketing and risk management assets (Note G) 1,106 911
Derivative hedging instruments (Notes C and G) 167 253
Deferred income taxes 453 405
Inventories 344 363
Assets held for sale (Note J) - 193
Other 305 380
----------------- -------------------
Total current assets 5,337 6,120
----------------- -------------------
Property, Plant and Equipment:
Property, plant and equipment 4,601 4,356
Less accumulated provision for depreciation and depletion (424) (333)
----------------- -------------------
4,177 4,023
Leasehold interest, net of accumulated amortization
of $338 and $297 for 2002 and 2001, respectively 1,721 1,751
Construction work in progress 1,664 1,921
Investment in suspended construction 509 -
----------------- -------------------
Total property, plant and equipment, net 8,071 7,695
----------------- -------------------
Noncurrent Assets:
Investments (Note H) 731 2,247
Notes and other receivables, less provision for uncollectibles
of $125 and $116 for 2002 and 2001, respectively 377 287
Energy marketing and risk management assets (Note G) 735 508
Goodwill, net of accumulated amortization
of $293 and $275 for 2002 and 2001, respectively (Notes A and B) 3,445 3,195
Other intangible assets, net of accumulated amortization
of $57 and $70 for 2002 and 2001, respectively (Notes A and B) 583 865
Derivative hedging instruments (Notes C and G) 132 95
Deferred income taxes 202 423
Other 214 252
----------------- -------------------
Total noncurrent assets 6,419 7,872
----------------- -------------------
Total assets $ 19,827 $ 21,687
================= ===================
The accompanying notes are an integral part of these
condensed consolidated statements.
6
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Note A)
(Restated)
At June 30, At December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: 2002 2001
----------------- -------------------
(in millions, except share data)
Current Liabilities:
Short-term debt $ 94 $ 55
Current portion of long-term debt (Note F):
Sual and Pagbilao project loans 1,117 1,201
Mirant Asia-Pacific 14 792
Mirant Holdings Beteiligungsgesellschaft (Note H) - 566
Other 39 45
Accounts payable and accrued liabilities 2,101 2,586
Taxes accrued 11 152
Energy marketing and risk management liabilities (Note G) 1,136 862
Obligations under energy delivery and purchase commitments (Note I) 608 635
Derivative hedging instruments (Notes C and G) 117 232
Accrued restructuring charges 248 -
Liabilities related to assets held for sale (Note J) - 25
Other 151 151
----------------- -------------------
Total current liabilities 5,636 7,302
----------------- -------------------
Noncurrent Liabilities:
Notes payable (Note F) 3,988 3,751
Other long-term debt (Note F) 1,976 2,068
Energy marketing and risk management liabilities (Note G) 640 633
Deferred income taxes 105 76
Obligations under energy delivery and purchase commitments (Note I) 1,141 1,376
Derivative hedging instruments (Notes C and G) 55 47
Other 369 354
----------------- -------------------
Total noncurrent liabilities 8,274 8,305
----------------- -------------------
Minority Interest in Subsidiary Companies 293 281
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 -- June 30, 2002: 402,084,743 shares;
-- December 31, 2001: 400,880,937 shares
Treasury -- June 30, 2002: 100,000 shares
-- December 31, 2001: 100,000 shares
Additional paid-in capital 4,900 4,886
Retained earnings 452 678
Accumulated other comprehensive loss (75) (112)
Treasury stock, at cost (2) (2)
----------------- -------------------
Total stockholders' equity 5,279 5,454
----------------- -------------------
Total liabilities and stockholders' equity $ 19,827 $ 21,687
================= ===================
The accompanying notes are an integral part of these
condensed consolidated statements.
7
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS 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 - - (226) - - $ (226)
Other comprehensive income (Note C) - - - 37 - 37
-----------------
Comprehensive loss $ (189)
=================
Issuance of common stock - 14 - - -
------------- ------------- ------------- ----------------- -----------
Balance, June 30, 2002 $ 4 $ 4,900 $ 452 $ (75) $ (2)
============= ============= ============= ================= ===========
The accompanying notes are an integral part of these
condensed consolidated statements.
8
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2002 2001
--------------- --------------
(in millions)
Cash Flows from Operating Activities:
Net (loss) income $ (226) $ 304
--------------- --------------
Adjustments to reconcile net (loss) income to net cash
provided by (used in)operating activities:
Equity in income of affiliates (120) (123)
Dividends received from equity investments 20 75
Depreciation and amortization 171 194
Obligations under energy delivery and purchase commitments (261) (148)
Impairment loss 317 93
Energy marketing and risk management activities, net (141) (28)
Restructuring charge 555 -
Deferred income taxes 142 183
Gain on sales of assets (309) (2)
Minority interest 23 31
Other, net 31 29
Changes in certain assets and liabilities, excluding effects
from acquisitions:
Receivables, net 666 1,665
Other current assets 122 (95)
Other assets 6 13
Accounts payable and accrued liabilities (466) (2,028)
Taxes accrued (146) 77
Other current liabilities (2) 32
Other liabilities (29) (32)
--------------- ---------------
Total adjustments 579 (64)
--------------- ---------------
Net cash provided by operating activities 353 240
--------------- ---------------
Cash Flows from Investing Activities:
Capital expenditures (811) (650)
Cash paid for acquisitions (68) (651)
Issuance of notes receivable (177) (103)
Repayments on notes receivable 107 377
Disposal of Southern Company affiliates and other companies - (77)
Proceeds from the sale of investments, net 1,968 -
Property insurance proceeds 7 -
Other (18) -
--------------- ---------------
Net cash provided by (used in) investing activities 1,008 (1,104)
--------------- ---------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 1,322 3,044
Repayment of long-term debt (2,653) (2,193)
Proceeds from issuance of common stock 14 27
Capital contributions from minority interests 17 11
Payment of dividends to minority interests (7) (1)
Issuance of short-term debt, net 37 130
Change in debt service reserve fund 7 12
--------------- ---------------
Net cash (used in) provided by financing activities (1,263) 1,030
--------------- ---------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (1) 19
--------------- ---------------
Net Increase in Cash and Cash Equivalents 97 185
Cash and Cash Equivalents, beginning of period 860 1,049
--------------- ---------------
Cash and Cash Equivalents, end of period $ 957 $ 1,234
=============== ===============
Supplemental Cash Flow Disclosures:
Cash paid for interest, net of amounts capitalized $ 209 $ 244
Refunds received for income taxes $ (84) $ (27)
Business Acquisitions:
Fair value of assets acquired $ 71 $ 1,002
Less cash paid 68 651
--------------- ---------------
Liabilities assumed $ 3 $ 351
=============== ===============
The accompanying notes are an integral part of these condensed consolidated statements.
9
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
Adjustments to Previously Issued Financial Statements. The Company has
identified accounting errors in its previously issued financial statements,
primarily related to its risk management and marketing operations and has
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 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 has also reduced both energy marketing and risk management
assets and liabilities in the accompanying 2001 consolidated balance sheets 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 statement 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 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.
10
The Company has 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 has 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 and restated first quarter
2002 unaudited condensed consolidated statement of income follows (in millions):
Three Months Ended March Three Months Ended March 31,
31, 2002, as Previously 2002, as Restated
Reported
----------------------------- ------------------------------
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.
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.
Certain prior-year amounts have been reclassified to conform with current-year
financial statement presentation.
Management believes that the accompanying unaudited condensed consolidated
financial statements as of June 30, 2002 and for the three and six months then
ended reflect adjustments, consisting of normal recurring items, necessary for a
fair presentation of results for those interim periods presented.
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.
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.
11
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. Net income and earnings per
share (basic and diluted) for the three and six months ended June 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).
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
--------------------------------- --------------------------------
Earnings Per Share Earnings Per Share
Net Income Basic Diluted Net Income Basic Diluted
---------- ------ ------- ---------- ----- -------
As reported..................................... $ 124 $ 0.36 $ 0.36 $ 304 $0.90 $ 0.88
Effect of goodwill and trading rights
Amortization.................................... 19 0.06 0.05 38 0.11 0.10
------- ------- ------ ------- ------ -------
As adjusted..................................... $ 143 $ 0.42 $ 0.41 $ 342 $1.01 $ 0.98
===== ======= ====== ====== ===== ======
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. Mirant adopted SFAS No. 144 on January 1, 2002.
Prior to SFAS No. 144, the disposition of State Line would not have been
classified as a discontinued operation. Because SFAS No. 144 expanded the
breadth of transactions subject to discontinued operations classification, the
disposition of State Line is now required to be presented as a discontinued
operation (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 does not believe that it will have a material impact on its
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. Upon
application of the consensus, comparative financial statements for prior periods
are required to be reclassified. The reclassification will not impact Mirant's
gross margin or net income, but rather will reduce equally, operating revenues
and cost of fuel, electricity and other products line items in the consolidated
statements of income.
12
In October 2002, the Task Force reached the following consensus related to
EITF Issue 02-3:
o 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.
o The consensus reached is required to be applied prospectively to energy
trading contracts entered into after October 25, 2002.
Additionally, the 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 should be reported as a cumulative effect of a change in
accounting principle in accordance with APB 20. Changes in accounting
for energy-related inventory should also be reported as a cumulative
effect of a change in accounting principle in accordance with APB
Opinion No. 20, "Accounting Changes," 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.
o 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 consensus on net reporting of gains
and losses on energy trading contracts is required for financial
statements for periods ending after July 15, 2002.
o 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.
Mirant estimates that the implementation of the EITF consensus in respect
of netting all revenues and expenses on energy trading activities, would have
reduced revenues and cost of fuel, electricity and other products by
approximately $5 billion and $10 billion for the three and six months ended June
30, 2002, respectively and approximately $6 billion and $13 billion for the
three and six months ended June 30, 2001, respectively.
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 98-10, for which such
accounting will cease upon adoption of EITF 02-3. The Company does not have
long-term tolling agreements accounted for under the mark-to-market method of
accounting under EITF 98-10.
Concentration of Revenues and Credit Risk. For the three and six months ended
June 30, 2002, revenues earned from a single customer did not exceed 10% of
Mirant's total operating revenues. For the three and six months ended June 30,
2001, revenues earned from Enron through energy marketing and risk management
operations approximated 24% and 19%, respectively, of Mirant's total operating
revenues.
As of June 30, 2002, no amounts owed from a single customer 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.
13
Receivables Recovery. During the six months ended June 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 six months ended June 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 with whom the receivables were secured.
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 six months ended June 30, 2002, the Company incurred $137 million and
$294 million, respectively, in interest costs, of which $30 million and $68
million, respectively, were capitalized and included in construction work in
process. For the three and six months ended June 30, 2001, the Company incurred
$154 million and $305 million, respectively, in interest costs, of which $11
million and $19 million were capitalized and included in construction work in
process. The remaining interest was expensed during the periods.
As part of Mirant's restructuring plan announced in March of 2002, 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.
B. Goodwill and Other Intangible Assets
During the six months ended June 30, 2002, goodwill was increased by $58
million related to purchase accounting adjustments for JPSCo. Management
currently believes there is no impairment of goodwill; however, 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. As of
June 30, 2002, the North America Group's goodwill was $2.01 billion and the
International Group's goodwill was $1.44 billion.
Substantially all of Mirant's other intangible assets are subject to
amortization. Other intangible assets are being amortized on a straight-line
basis over the related useful lives, up to 40 years. There were no material
acquisitions of intangible assets during the second 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. During the three and six months ended June 30, 2002, Mirant
transferred $0 and $36 million, net of accumulated amortization of $4 million,
in development rights to construction work in process. Intangible asset
amortization expense was approximately $6 million for the
14
second quarter and $13 million for the six months ended June 30, 2002. The
components of other intangible assets as of June 30, 2002 and December 31, 2001
were as follows (in millions):
June 30, 2002 December 31, 2001(as restated)
-------------------------------- -------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------- -------------- ----------------- -------------------
Trading rights................. .. $ 207 $ (31) $ 453 $ (45)
Development rights.............. 252 (9) 292 (9)
Emissions allowances............ 131 (6) 131 (4)
Other intangibles............... 50 (11) 59 (12)
--------- ---------- ---------- -------
Total other intangible assets. $ 640 $ (57) $ 935 $ (70)
======= ========= ======= ======
Assuming no future acquisitions, dispositions or impairments of intangible
assets, amortization expense is estimated to be $25 million for the year ended
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 six months ended
June 30, 2002 and 2001 (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------
2002 2001 2002 2001
------------- ----------- ------------- --------
Net (loss) income................. $(220) $ 124 $ (226) $ 304
Other comprehensive income....... 27 441 37 50
--------- --------- ------------ --------
Comprehensive (loss) income...... $(193) $ 565 $ (189) $ 354
========= ========= =========== ========
Components of accumulated other comprehensive loss consisted of the following
(in millions):
Balance, December 31, 2001, as restated.............................. $ (112)
Other comprehensive income for the period:
Net change in fair value of derivative hedging instruments, net
of tax effect of $30............................................. 44
Reclassification to earnings, net of tax effect of $20 (Note G) (30)
Cumulative translation adjustment ................................. 22
Share of affiliates' OCI........................................... 1
--------------
Other comprehensive income........................................... 37
--------------
Balance, June 30, 2002......................................... $ (75)
==============
The $75 million balance of accumulated other comprehensive loss at June 30,
2002 includes the impact of $106 million related to interest rate hedges and
interest rate swap breakage costs and $96 million of foreign currency
translation losses, offset by $120 million of gains on commodity price
management hedges and $7 million representing Mirant's share of accumulated
other comprehensive income of unconsolidated affiliates.
Mirant estimates that $39 million ($62 million of commodity hedge gains,
$24 million of interest related losses and $1 million of currency gains) of net
derivative after-tax gains included in OCI as of June 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.
15
D. Write-Down of Assets
As part of its strategic restructuring, Mirant sold its 49% ownership
interest in WPD in September 2002. As a result, Mirant recorded a write-down of
approximately $306 million, including $11 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 fair value. In the second quarter
of 2001, Mirant wrote off its remaining investment in EDELNOR of $88 million
($57 million after tax).
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 six months ended June 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 $3 million for the three months ended June 30, 2001 and
$7 million for the six months ended June 30, 2001. Because of the net loss for
the three and six months ended June 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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Loss) Income from continuing operations........... $(222) $ 123 $ (230) $ 292
Discontinued operations............................ 2 1 4 12
------- --------- ---------- -------
Net (loss) income.................................. (220) $ 124 $ (226) $ 304
------- ======== ========== =======
Basic
Weighted average shares outstanding ............... 401.9 340.1 401.5 339.4
(Loss) earnings per share from:
Continuing operations....................... $ (0.55) $ 0.36 $ (0.57) $ 0.86
Discontinued operations..................... 0.00 0.00 0.01 0.04
------- -------- ---------- ----------
Net (loss) income........................... $ (0.55) $ 0.36 $ (0.56) $ 0.90
========= ======= =========== =========
Diluted
Weighted average shares outstanding .............. 340.1 339.4
Shares due to assumed exercise of stock
options and equivalents ........................ 4.2 2.9
Shares due to assumed conversion of trust
preferred securities............................ 12.5 12.5
----- ------
Adjusted shares................................... 356.8 354.8
===== ======
(Loss) earnings per share from:
Continuing operations $ (0.55) $ 0.36 $ (0.57) $ 0.85
Discontinued operations 0.00 0.00 0.01 0.03
---------- -------- --------- --------
Net (loss) income $ (0.55) $ 0.36 $ (0.56) $ 0.88
========= ======== ========= =======
F. Debt
At June 30, 2002, Mirant and its subsidiaries had revolving credit
facilities with various lending institutions totaling approximately $3.20
billion of commitments. At June 30, 2002, commitment amounts utilized under such
facilities (including drawn amounts and letters of credit) totaled $2.26 billion
and were comprised of the following: commitments of $42 million drawn under the
facility expiring in 2002, commitments of $775 million drawn or utilized under
facilities expiring in 2003 (which included amounts outstanding under Mirant
Corporation's 364-Day Credit Facility with an initial termination date of July
2002) and commitments of $1.45 billion drawn or utilized under the facilities
expiring in 2004 and beyond. Under its $1.125 billion 364-Day Credit Facility,
Mirant Corporation elected in July 2002 to convert all revolving credit advances
16
outstanding into a term loan maturing not later than the first anniversary of
the termination date (See Note L - Subsequent Events). Except for the credit
facility of Mirant Canada Energy Marketing, an indirect, wholly owned subsidiary
of Mirant Corporation, 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 June 30, 2002 (in millions).
Utilized Amount Letters of
Facility Excluding Letters Credit Amount
Company Amount of Credit Outstanding Available
------------ ------------------- ------------- --------------
Mirant Corporation ................ $ 2,700 $ 925 $1,074 $ 701
Mirant Americas Generation......... 300 73 - 227
Mirant Canada Energy Marketing..... 46 42 - 4
Mirant Americas Energy Capital..... 150 150 - -
------------ ------------------- ------------- --------------
Total............................ $ 3,196 $ 1,190 $1,074 $ 932
============ =================== ============= ==============
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) limitations on the sale of assets, and (ii) affirmative covenants to (a)
provide annual audited and quarterly unaudited financial statements prepared in
accordance with US GAAP and (b) comply with legal 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 June 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 $46 million (denominated as
70 million Canadian dollars) had outstanding borrowings of $42 million, at an
interest rate of 4.06% at June 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
17
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 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 continue to be
guaranteed by Mirant Corporation.
West Georgia Generating Company, LLC ("West Georgia"), a wholly owned
subsidiary acquired by Mirant in August 2001, has an approximately $144 million
project finance credit facility ($144 million drawn balance at June 30, 2002).
Under the terms of that credit facility, West Georgia is required to deliver
audited financial statements to the lenders thereunder within 120 days of fiscal
year end. On May 24, 2002, within the thirty day cure period under the credit
agreement, the agent under the credit facility extended the period for delivery
of such audited financial statements until the end of July. In July 2002, the
required audited financial statements were delivered to the lenders as required
under the terms of the credit facility.
In February 2002, Mirant completed the sale of its 44.8% indirect 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 net proceeds were used for general corporate purposes, capital
expenditures and repayment of certain drawn balances on revolving credit
facilities.
In March 2002, Mirant Americas Energy Capital transferred the borrowing
base assets under its credit facility to a special purpose vehicle and granted
security interests in such assets. The special purpose vehicle is consolidated
with Mirant.
As part of its strategic restructuring, Mirant negotiated certain deferrals
under its equipment purchase facility. Because the term of the deferred
fabrication period for certain turbines exceeds the agreed fabrication period as
permitted within the equipment procurement facilities, the Company will not have
the option to enter into a lease arrangement for this equipment, thereby forcing
Mirant to exercise its purchase option. Consequently, Mirant has included a $35
million liability for these turbines in "Other long-term debt" on its unaudited
condensed consolidated balance sheet.
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 recent downgrades by
Fitch and S&P, Mirant Asia-Pacific is prohibited under the terms of its credit
facility from making distributions to Mirant Corporation.
18
Each of the lenders under the Sual and Pagbilao facilities has executed
temporary waivers of default with respect to the obligations to provide specific
levels of insurance coverage which extend to the insurance renewal date of
November 1, 2002. Effective as of October 24 and 28, 2002 for the Sual and
Pagbilao facilities, respectively, each of the lenders has agreed to amend the
insurance provisions of the loan agreements. The amendments state that, in the
event Sual and Pagbilao do not obtain the levels of insurance specified in the
loan agreements, Sual and Pagbilao will not be held in breach of the agreements
provided they obtain all of the insurance coverage that is reasonably available
and commercially feasible in the insurance market for similarly situated
facilities, as certified by the lenders' insurance advisor. To avoid breaching
the agreements, the coverage obtained must further be in amounts above threshold
levels defined in the amendments. The Company believes that with these
amendments (and the levels of minimum thresholds defined in the amendments) it
will be able to obtain insurance coverage in the future that will allow it to
remain in continued compliance with the loan agreements. The insurance coverage
obtained for the November 1, 2002 renewal satisfies the amended terms of the
loan agreements.
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 No. 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 No. 98-10 and No. 00-17, 'Measuring the Fair Value of Energy-Related
Contracts in Applying Issue No. 98-10.'" EITF Issues No. 98-10 and No. 00-17
address various aspects of the accounting for contracts involved in energy
trading and risk management activities(See Note A).
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 June 30, 2002 was 3.3
years. The net notional amount, or net open position, of the energy marketing
and risk management assets and liabilities at June 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.
19
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 June 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
---------------------------- -----------------------------
Average Value at Average Value at
Value June 30, 2002 Value June 30, 2002
-------------- -------------- -------------- -------------
Energy commodity instruments:
Electricity..................... $ 503 $ 492 $ 403 $ 389
Natural gas..................... 1,033 1,306 1,148 1,347
Crude oil....................... 11 19 11 18
Other........................... 36 24 36 22
---------- -------------- ------------- --------------
Total......................... 1,583 1,841 1,598 1,776
========== ============== ============= ==============
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 and 2003, respectively, and the remaining 80% will
settle in 2004 based on fixed notional quantities of gas defined in the
agreement at 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. Since this
transaction results in fixed payments through 2004 and no market price risk to
the Company, its impact has been disclosed separately above.
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 minimize these risks using
the most effective methods to eliminate or reduce the impacts of these
exposures.
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 losses of $3 million and
net gains of $30 million during the three and six months ended June 30, 2002,
respectively, were reclassified as follows (in millions):
Three Months Six Months
Ended June 30, Ended June 30,
2002 2002
------------------ -----------------
Reclassified to operating income....... $ 6 $ 71
Reclassified to interest expense....... (10) (21)
Tax benefit (provision)................ 1 (20)
------- --------
Net reclassification to earnings (Note C) $ (3) $ 30
======= ========
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 six months ended June 30,
2002, an immaterial amount of pre-tax gains and $8 million of pre-tax losses
arising from hedge ineffectiveness were recognized in other expense. 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 interest expense 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. These swaps
20
are designated to hedge underlying debt obligations. For qualifying hedges, 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 as an adjustment over the life of the swaps. Gains and losses
resulting from the termination of qualifying 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.
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, 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 June 30, 2002, Mirant had a net commodity derivative hedging asset of
approximately $182 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 June 30, 2002, these contracts relate to periods through 2010. The net
notional amount, or net open position, of the derivative hedging instruments at
June 30, 2002 was 9 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 offset the effect of exchange rate fluctuations on
foreign currency denominated debt and fixes the interest rate exposure. Certain
other assets are exposed to foreign currency risk. 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.
21
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
virtually 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
and foreign equity investments.
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 $ (48)
Currency forwards...... 2002-2004 -- 3 1CAD163 (1)
2003 -- 1 (pound)58 (8)
2002-2003 -- 1 2$13 1
-----------
$ (56)
==========
(pound) - Denotes British pounds sterling
CAD - Denotes Canadian dollar
1 CAD contracts with a notional amount of CAD153 million are included in fair
value of energy marketing and risk management liabilities because hedge
accounting criteria are not met. 2 USD based contracts are utilized by a foreign
subsidiary to hedge U.S. dollar denominated sales contracts.
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
Asset Sales
In February 2002, Mirant completed the sale of its 44.8% indirect 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 after-tax gain on the sale of Mirant's investment in Bewag was $167
million. 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
750 MW Kogan Creek power project, located near Chinchilla in southeast
Queensland, Australia, and associated coal deposits for approximately $29
million. The after-tax gain on the sale of Mirant's investment in Kogan Creek
was approximately $17 million.
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 after-tax loss on the sale of Mirant's investment in SIPD was approximately
$9 million.
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.
22
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.
Commencement of Operation
In June 2002, the Ilijan facility located in the Philippines, in which
Mirant has a 20% ownership interest, commenced commercial operations.
Restructuring Charge
As a result of changing market conditions including constrained access to
capital markets attributable primarily to the Enron bankruptcy and Moody's
December 2001 downgrade of Mirant's credit rating, Mirant adopted a plan to
restructure its operations by exiting certain business operations (including its
European trading and marketing business), canceling and suspending planned power
plant developments, closing business development offices and severing employees.
During the three and six months ended June 30, 2002, Mirant recorded pre-tax
restructuring charges of $28 million and $590 million, respectively.
During the three and six months ended June 30, 2002, Mirant recorded the
following components of the restructuring charge, respectively (in millions):
Three Months Six Months Ended
Ended June 30, June 30, 2002
2002*
------------------ ------------------
Write-downs of capital previously invested, either directly into
Construction or in progress payments on equipment........... $ -- $ 285
Costs to cancel equipment orders and service agreements per
Contract terms.............................................. -- 246
Severance of approximately 500 employees worldwide and other
Employee termination-related charges ....................... 26 57
Costs incurred to suspend construction projects in progress.... 2 2
---------- ---------
Total ..................................................... $ 28 $ 590
======== ======
* Net of adjustments
Mirant anticipates that it will record additional pre-tax restructuring
charges of approximately $90 million in future periods, primarily over the next
two quarters. These costs are associated with the cancellation of additional
power plant developments, additional employee severance and related costs to be
incurred in the near future. As of June 30, 2002, Mirant has terminated 451
employees as part of its restructuring. At June 30, 2002, Mirant's restructuring
accrual balance was approximately $247 million. During the three months ended
June 30, 2002, Mirant adjusted the accrual as a result of revisions to
restructuring estimates (primarily relating to severance for U.S. expatriates,
European office closures and pension costs) and utilized the accrual as
summarized in the following table. Mirant made net adjustments to the accrual
balance of less than $1 million that offset the original restructuring expense.
Balance at Adjustments' P&L Impact Balance at
March 31, 2002 Increases Decreases Utilization June 30, 2002
------------------------------------------------------------------
(in millions)
Costs to cancel equipment and projects....... $256 $ -- $ -- $(22) $234
Costs to sever employees and other
Employee-termination related costs........ 24 10 (10) (11) 13
------------------------------------------------------------------
Total1................................... $280 $10 $(10) $(33) $247
==================================================================
1Beginning accrual balance includes $13 million of long-term accruals
previously included in other long-term liabilities at March 31, 2002, that
were reclassified as short-term accruals during the second quarter.
23
I. Commitments and Contingent Matters
Litigation and Other Contingencies
With respect to each of the following matters, the Company cannot
currently determine the outcome of the proceedings or the amounts of any
potential losses from such proceedings. Refer to Note L - Subsequent Events for
recent litigation and other contingencies occurring after June 30, 2002.
Western Power Markets Investigations: Several governmental entities have
launched investigations into the western power markets, including activities by
Mirant and several of its wholly owned subsidiaries. Those governmental entities
include the FERC, the U.S. Department of Justice, the CPUC, the California
Senate, the California State Auditor, California's Electricity Oversight Board,
the General Accounting Office of the U.S. Congress, the San Joaquin District
Attorney and the Attorney General's offices of Washington, Oregon and
California. These investigations, some of which are civil and some criminal,
have resulted in the issuance of civil investigative demands, subpoenas,
document requests, requests for admission, and interrogatories directed to
several of Mirant's entities. In addition, the CPUC has had personnel onsite on
a periodic basis at Mirant's California generating facilities since December
2000. Each of these civil investigative demands, subpoenas, document requests,
requests for admission, and interrogatories, as well as the plant visits, could
impose significant compliance costs on Mirant or its subsidiaries. Despite the
various measures taken to protect the confidentiality of sensitive information
provided to these agencies, there remains a risk of governmental disclosure of
the confidential, proprietary and trade secret information obtained by these
agencies throughout this process.
In September 2002, the CPUC issued a report that purported to show that on
days in the fall of 2000 through the spring of 2001 during which the CAISO had
to declare a system emergency requiring interruption of interruptible load or
imposition of rolling blackouts, Mirant and the other four out of state
purchasers of generation in California had generating capacity that either was
not operated or was out of service due to an outage and that could have avoided
the problem if operated. The report identified two specific days on which Mirant
allegedly had capacity available that was not used or that was on outage and
that if operated could have avoided the system emergency. Mirant has publicly
responded to the report pointing out a number of material inaccuracies and
errors that it believes cause the CPUC's conclusions to be wrong with respect to
Mirant.
California Attorney General Litigation: On March 11, 2002, the California
Attorney General filed a civil suit against Mirant and several of its wholly
owned subsidiaries in San Francisco Superior Court. The lawsuit alleges that
between 1998 and 2001 the companies effectively double-sold their capacity by
selling both ancillary services and energy from the same generating units, such
that if called upon, the companies would have been unable to perform their
contingent obligations under the ancillary services contracts. The California
Attorney General claims that this alleged behavior violated both the tariff of
the CAISO and, more importantly, the California Unfair Competition Act. The suit
seeks both restitution and penalties in unspecified amounts. Mirant removed this
suit to United States District Court for the Northern District of California.
This suit has been consolidated for joint administration with the California
Attorney General suits filed on April 9, 2002, and April 15, 2002. Mirant has
filed a motion seeking dismissal of the claims.
On March 20, 2002, the California Attorney General filed a complaint with
the FERC against certain power marketers and their affiliates, including Mirant
and several of its wholly owned subsidiaries, alleging that market-based sales
of energy made by such generators were in violation of the Federal Power Act
because such transactions were not appropriately filed with the FERC. The
24
complaint requests, among other things, refunds for any prior short-term sales
of energy that are found to not be just and reasonable along with interest on
any such refunded amounts. On May 31, 2002, the FERC issued an order dismissing
the California Attorney General's complaint, and the FERC denied the California
Attorney General's request for rehearing on September 23, 2002. The California
Attorney General has appealed that dismissal to the United States Court of
Appeals for the Ninth Circuit.
On April 9, 2002, the California Attorney General filed a second civil suit
against Mirant and several of its wholly owned subsidiaries in San Francisco
Superior Court. The lawsuit alleges that the companies violated the California
Unfair Competition Act by failing to properly file their rates, prices, and
charges with the Federal Energy Regulatory Commission as required by the Federal
Power Act, and by charging unjust and unreasonable prices in violation of the
Federal Power Act. The complaint seeks unspecified penalties, costs and attorney
fees. Mirant removed this suit to United States District Court for the Northern
District of California. This suit has been consolidated for joint administration
with the California Attorney General suits filed on March 11, 2002 and April 15,
2002. Mirant has filed a motion seeking dismissal of the claims.
On April 15, 2002, the California Attorney General filed a third civil
lawsuit against Mirant and several of its wholly owned subsidiaries in the U.S.
District Court for the Northern District of California. The lawsuit alleges that
Mirant's acquisition and possession of its Potrero and Delta power plants has
substantially lessened, and will continue to substantially lessen, competition
in violation of the Clayton Act and the California Unfair Competition Act. The
lawsuit seeks equitable remedies in the form of divestiture of the plants and
injunctive relief, as well as monetary damages in unspecified amounts to include
disgorgement of profits, restitution, treble damages, statutory civil penalties
and attorney fees. This suit has been consolidated for joint administration with
the California Attorney General suits filed on March 11, 2002 and April 9, 2002.
Mirant has filed a motion seeking dismissal of the claims.
Defaults by SCE and Pacific Gas and Electric, and the Bankruptcies of Pacific
Gas and Electric and the PX: On January 16 and 17, 2001, the credit and debt
ratings of SCE and Pacific Gas and Electric were lowered by Moody's and S&P to
"junk" status. On January 16, 2001, SCE suspended indefinitely certain payment
obligations to the PX and to the CAISO. Pacific Gas and Electric similarly
suspended payments. The failure of SCE and Pacific Gas and Electric to make
these payments prevented the PX and CAISO from making payments to Mirant. As of
June 30, 2002, the total amount owed to Mirant by the CAISO and the PX as a
result of these defaults was $352 million. During 2000 and 2001, Mirant took
provisions in relation to these and other uncertainties arising from the
California power markets of $295 million pre-tax.
On March 9, 2001, as a result of the nonpayments of SCE and Pacific Gas and
Electric, the PX ceased operation and filed for bankruptcy protection. Mirant
Americas Energy Marketing was appointed as a member of the official Participants
Committee in the PX bankruptcy proceeding. The PX's ability to repay its debt is
directly dependent on the extent to which it receives payment from Pacific Gas
and Electric and SCE and on the outcome of its litigation with the California
State government.
On April 6, 2001, Pacific Gas and Electric filed a voluntary petition under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of California in San Francisco. It is not known at this time
what effect the bankruptcy filing will have on the ultimate recovery of amounts
owed to Mirant. On September 20, 2001, Pacific Gas and Electric filed a proposed
plan of reorganization. Subsequently the CPUC proposed a competing plan.
Although the plans differ in material respects, each contemplates payment of one
hundred percent of all approved claims. Regardless of which plan gets approved,
Mirant does not expect any payment to be made to it for power sold by it into
the PX or CAISO markets and repurchased by Pacific Gas and Electric until the
FERC issues a final ruling in the Western Power Markets Price Mitigation and
Refund Proceedings.
On March 1, 2002, SCE paid approximately $870 million to the PX in
satisfaction of all claims of or through the PX and the CAISO through
approximately January 18, 2001. The PX is not expected to make any payment to
25
Mirant until the bankruptcy judge so orders, and the judge is not expected to
rule until after the FERC issues a final ruling in the refund proceeding. Mirant
cannot now determine the timing of such payment or the extent to which such
payment would satisfy its claims.
RMR Agreements: Mirant's subsidiaries acquired generation assets from Pacific
Gas and Electric in April 1999, subject to RMR agreements. These agreements
allow the CAISO, under certain conditions, to require certain of Mirant's
subsidiaries to run the acquired generation assets in order to support the
reliability of the California electric transmission system. Under the RMR
agreements, Mirant recovers a portion of the annual fixed revenue requirement
(the "Annual Requirement") of the generation assets through fixed charges to the
CAISO, and Mirant depends on revenues from sales of the output of the units at
market prices to recover the remainder. The portion of the Annual Requirement
that can be recovered through fixed charges to the CAISO is subject to the
FERC's review and approval both as to the percentage and the amount of the
Annual Requirement to which the percentage is applied.
Mirant assumed the RMR agreements from Pacific Gas and Electric prior to the
outcome of a FERC proceeding initiated in October 1997 (the "Fixed Portion
Proceeding"). The Fixed Portion Proceeding will determine the percentage to be
paid to Mirant by the CAISO under the RMR agreements of a $159 million Annual
Requirement that was in effect through December 31, 2001, as well as any future
Annual Requirement in effect through the final disposition of the Fixed Portion
Proceeding. This $159 million Annual Requirement was negotiated as part of a
prior settlement of a FERC rate proceeding. In the Fixed Portion Proceeding,
Mirant contended that the amount paid by the CAISO should reflect an allocation
based on the CAISO's right to call on the units (as defined by the RMR
agreements) and the CAISO's actual calls, which would have resulted in the CAISO
paying approximately $120 million, or 75% of the settled An