================================================================================
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, 2001
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 July 31, 2001, was 340,379,000.
Mirant Corporation
INDEX
For the Quarterly Period Ended June 30, 2001
Page
Number
-------
DEFINITIONS 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 4
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Condensed Consolidated Statements of Income 5
Condensed Consolidated Balance Sheets 6
Condensed Consolidated Statements of Stockholders' Equity 8
Condensed Consolidated Statements of Cash Flows 9
Notes to the Condensed Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 33
Item 3. Quantitative and Qualitative Disclosures about Market Risk 42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 44
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 47
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 47
Signatures
2
DEFINITIONS
TERM MEANING
Bewag Bewag AG
BNDES Banco Nacional de Desenvolvimento
Economico e Social
BP Amoco BP Amoco, plc
DWR California Department of Water Resources
CAISO California Independent System Operator
CEMIG Companhia Energetica de Minas Gerais
Clean Air Act Clean Air Act Amendments of 1990
CPUC California Public Utilities Commission
EDELNOR Empresa Electrica del Norte Grande S.A.
EPA U. S. Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Hyder Hyder 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, Inc.
Mirant or the Company Mirant Corporation and its subsidiaries
Mirant California Mirant California, LLC
Mirant Delta Mirant Delta, LLC
Mirant Potrero Mirant Potrero, LLC
MW Megawatt
NYISO New York Independent System Operator
OCI Other comprehensive income
PG&E Pacific Gas & Electric Co.
PEPCO Potomac Electric Power Company
PX California Power Exchange Corporation
RMR Reliability-Must-Run
SEB Southern Electric Brasil Participacoes Ltda
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933
SE Finance SE Finance Capital Corporation
SFAS Statement of Financial Accounting Standards
Southern Southern Company
SWALEC South Wales Electricity plc
Vastar Vastar Resources Inc.
WPD South Western Electricity plc trading as
Western Power Distribution
WPD Holdings WPD Holdings UK
WPDL WPD Limited
3
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: (i) legislative and regulatory initiatives regarding
deregulation, regulation or restructuring of the electric utility industry; (ii)
the extent and timing of the entry of additional competition in the markets of
Mirant's subsidiaries and affiliates; (iii) Mirant's pursuit of potential
business strategies, including acquisitions or dispositions of assets or
internal restructuring; (iv) state, federal and other rate regulations in the
United States and in foreign countries in which Mirant's subsidiaries and
affiliates operate; (v) changes in or application of environmental and other
laws and regulations to which Mirant and its subsidiaries and affiliates are
subject; (vi) political, legal and economic conditions and developments in the
United States and in foreign countries in which Mirant's subsidiaries and
affiliates operate; (vii) financial market conditions and the results of
Mirant's financing efforts; changes in market conditions, commodity prices and
interest rates; weather and other natural phenomena; (viii) performance of
Mirant's projects undertaken and the success of efforts to invest in and develop
new opportunities; (ix) unanticipated developments in the California power
markets, including, but not limited to, unanticipated governmental intervention,
deterioration in the financial condition of counterparties, default on
receivables due, adverse results in current or future litigation and adverse
changes in the tariffs of the California Power Exchange Corporation or
California Independent System Operator Corporation, and (x) other factors,
discussed elsewhere herein and in other reports (including Mirant's quarterly
report on Form 10-Q filed May 10, 2001, Mirant's annual report on Form 10-K
filed March 21, 2001; as amended by Form 10-K/A, filed on June 29, 2001 and
Mirant's Registration Statement on Form S-1 filed September 27, 2000) filed from
time to time by Mirant with the SEC.
Although Mirant believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
events, levels of activity, performance or achievements. Mirant does not
undertake a duty to update any of the forward-looking statements.
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,
2001 2000 2001 2000
----------- ---------- ------------ -----------
(in millions, except (in millions, except per
per share data) share data)
Operating Revenues: $7,928 $640 $16,110 $1,159
----------- ---------- ------------ -----------
Operating Expenses:
Cost of fuel, electricity and other products 7,127 241 14,508 396
Maintenance 43 38 71 68
Depreciation and amortization 96 72 184 155
Selling, general and administrative 214 84 539 114
Impairment loss (Note B) 89 10 93 14
Other 107 54 184 102
----------- ---------- ------------ -----------
Total operating expenses 7,676 499 15,579 849
----------- ---------- ------------ -----------
Operating Income 252 141 531 310
----------- ---------- ------------ -----------
Other Income (Expense):
Interest income 34 43 84 81
Interest expense (143) (153) (286) (299)
Equity in income of affiliates 47 36 126 63
Other, net 5 33 21 39
----------- ---------- ------------ -----------
Total other income (expense) (57) (41) (55) (116)
----------- ---------- ------------ -----------
Income From Continuing Operations Before
Income Taxes and Minority Interest 195 100 476 194
Provision (Benefit) for Income Taxes 55 1 147 (30)
Minority Interest 16 13 30 43
----------- ---------- ------------ -----------
Income From Continuing Operations 124 86 299 181
----------- ---------- ------------ -----------
Income from Discontinued Operations,
net of tax benefit of $3 for 2001 and $5
and $9 for the three and six months ended
June 30, 2000, respectively - 7 5 13
----------- ---------- ------------ -----------
Net Income $ 124 $ 93 $ 304 $ 194
=========== ========== ============ ===========
Earnings Per Share:
Basic:
From continuing operations $0.36 $ 0.32 $ 0.88 $0.67
From discontinued operations - 0.02 0.02 0.04
--------------------------------------------------
Net income $0.36 $ 0.34 $ 0.90 $0.71
==================================================
Diluted (Pro forma for 2000):
From continuing operations $0.36 $ 0.25 $ 0.86 $0.52
From discontinued operations - 0.02 0.02 0.03
----------- ---------- ------------ -----------
Net income $0.36 $ 0.27 $ 0.88 $0.55
=========== ========== ============ ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
5
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At June 30,
2001 At December 31,
ASSETS: (Unaudited) 2000
------------------- ---------------------
(in millions)
Current Assets:
Cash and cash equivalents $ 1,453 $ 1,280
Receivables:
Customer accounts, less provision for uncollectibles
of $149 and $72 for 2001 and 2000, respectively 1,927 3,399
Other, less provision for uncollectibles
of $31 and $22 for 2001 and 2000, respectively 445 629
Notes receivable 196 365
Assets from risk management activities (Note F) 2,591 2,678
Derivative hedging instruments (Notes A, C and F) 2,595 -
Deferred income taxes 290 275
Other 647 526
------------------- ---------------------
Total current assets 10,144 9,152
------------------- ---------------------
Property, Plant and Equipment:
Property, plant and equipment 4,205 3,648
Less accumulated provision for depreciation (350) (228)
------------------- ---------------------
3,855 3,420
Leasehold interest, net of accumulated amortization
of $256 and $216 for 2001 and 2000, respectively 1,805 1,843
Construction work in progress 699 418
------------------- ---------------------
Total property, plant and equipment, net 6,359 5,681
------------------- ---------------------
Noncurrent Assets:
Investments (Note G) 2,163 1,797
Notes and other receivables, less provision for uncollectibles
of $47 and $49 for 2001 and 2000, respectively 105 213
Notes receivable from related parties - 979
Assets from risk management activities (Note F) 1,686 1,230
Goodwill, net of accumulated amortization
of $233 and $184 for 2001 and 2000, respectively 3,326 3,292
Other intangible assets, net of accumulated amortization
of $51 and $34 for 2001 and 2000, respectively 673 738
Investment in leveraged leases - 596
Derivative hedging instruments (Notes A, C and F) 1,328 -
Deferred income taxes 341 334
Miscellaneous deferred charges 211 124
------------------- ---------------------
Total noncurrent assets 9,833 9,303
------------------- ---------------------
Total assets $ 26,336 $ 24,136
=================== =====================
The accompanying notes are an integral part of these condensed consolidated
statements.
6
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At June 30,
2001 At December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: (Unaudited) 2000
------------------- ---------------------
(in millions)
Current Liabilities:
Short-term debt $ 1,497 $ 1,289
Current portion of long-term debt 1,002 201
Accounts payable 2,295 4,240
Taxes accrued 285 216
Liabilities from risk management activities (Note F) 2,594 2,899
Obligations under energy delivery commitments 545 790
Derivative hedging instruments (Notes A, C and F) 2,424 -
Other 158 140
------------------- ---------------------
Total current liabilities 10,800 9,775
------------------- ---------------------
Noncurrent Liabilities:
Subsidiary obligated mandatorily redeemable preferred
securities - 950
Notes payable 4,305 5,206
Other long-term debt 1,188 390
Liabilities from risk management activities (Note F) 1,554 906
Deferred income taxes 151 53
Obligations under energy delivery commitments 1,611 1,514
Derivative hedging instruments (Notes A, C and F) 1,211 -
Miscellaneous deferred credits 330 307
------------------- ---------------------
Total noncurrent liabilities 10,350 9,326
------------------- ---------------------
Preferred Stock held by Southern Company - 242
Minority Interest in Subsidiary Companies 318 312
Company Obligated Mandatorily Redeemable Securities of a
Subsidiary Holding Solely Parent Company Debentures 345 345
Commitments and Contingent Matters (Notes I and K)
Stockholders' Equity:
Common stock, $.01 par value, per share
Authorized -- 2,000,000,000 shares
Issued -- June 30, 2001: 340,350,249 shares;
-- December 31, 2000: 338,701,000 shares 3 3
Additional paid-in capital 4,122 4,084
Accumulated other comprehensive income (loss) (67) (117)
Retained earnings 465 166
------------------- ---------------------
Total stockholders' equity 4,523 4,136
------------------- ---------------------
Total liabilities and stockholders' equity $ 26,336 $24,136
=================== =====================
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 Comprehensive
Stock Capital Earnings Income (Loss) Income (Loss)
--------------- -------------- --------------- ------------------- -------------------
(in millions)
Balance, December 31, 2000 $ 3 $ 4,084 $ 166 $ (117) -
Net income - - 304 - $ 304
Other comprehensive income - - - 50 50
-------------------
Comprehensive income - - - - $ 354
===================
Dividends and return of capital - - (5) -
Capital contributions - 38 - -
--------------- -------------- --------------- -------------------
Balance, June 30, 2001 $ 3 $ 4,122 $ 465 $ (67)
=============== ============== =============== ===================
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,
2001 2000
----------------- -----------------
(in millions)
Cash Flows from Operating Activities:
Net income $ 304 $ 194
----------------- -----------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in income of affiliates (123) (51)
Depreciation and amortization 194 175
Obligations under energy delivery commitments (148) -
Impairment loss (Note B) 93 -
Deferred income taxes 183 59
Minority interest 31 43
Other, net 27 (12)
Changes in certain assets and liabilities, excluding effects
from acquisitions:
Receivables, net 1,665 (205)
Risk management activities, net (28) -
Other current assets (95) 17
Accounts payable (2,028) 57
Taxes accrued 77 24
Other current liabilities 32 (37)
Other (19) (47)
----------------- -----------------
Total adjustments (139) 23
----------------- -----------------
Net cash provided by operating activities 165 217
----------------- -----------------
Cash Flows from Investing Activities:Capital expenditures (650) (225)
Cash paid for acquisitions (651) (61)
Issuance of notes receivable (103) (12)
Repayments on notes receivable 377 109
Disposal of Southern Company affiliates (77) -
Property insurance proceeds - 14
Dividends received from equity investments 75 11
Other - -
----------------- -----------------
Net cash used in investing activities (1,029) (164)
----------------- -----------------
Cash Flows from Financing Activities:
Payment of dividends to Southern Company - (450)
Proceeds from issuance of common stock 27 -
Proceeds from issuance of short-term debt, net 130 651
Proceeds from issuance of long-term debt 3,044 213
Repayment of long-term debt (2,193) (82)
Other 10 (11)
----------------- -----------------
Net cash provided by financing activities 1,018 321
----------------- -----------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 19 (6)
----------------- -----------------
Net Increase in Cash and Cash Equivalents 173 368
Cash and Cash Equivalents, beginning of period 1,280 323
----------------- -----------------
Cash and Cash Equivalents, end of period $ 1,453 $ 691
================= =================
Supplemental Cash Flow Disclosures:
Cash paid for interest, net of amounts capitalized $ 275 $ 317
Cash paid (refunds received) for income taxes $ (27) $ (53)
Business Acquisitions:
Fair value of assets acquired $ 1,002 $ 61
Less cash paid 651 61
----------------- -----------------
Liabilities assumed $ 351 $ -
================= =================
The accompanying notes are an integral part of these condensed consolidated
statements.
9
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
Basis of Accounting. These condensed consolidated financial statements
should be read in conjunction with Mirant's audited 2000 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, 2000. Management believes that the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring items, necessary for a fair statement of results for the interim
periods presented. The results for interim periods are not necessarily
indicative of the results for the entire year.
Accounting Changes. In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other 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 provisions of SFAS No. 141 are effective for all business
combinations initiated after June 30, 2001 and all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. 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 Mirant's 2002
fiscal year or for business combinations initiated after July 1, 2001. Mirant is
currently assessing the financial statement impact of both statements and has
not yet determined the final impact.
Effective January 1, 2001, Mirant adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
statement requires that certain derivative instruments be recorded in the
balance sheet as either assets or liabilities measured at fair value, and that
changes in the 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 and the gains and
losses related to these derivatives are recognized in earnings in the same
period as the settlement of the underlying hedged transaction. If the derivative
is designated as a net investment hedge, the changes in the fair value of the
derivative are also recorded in OCI. Any ineffectiveness relating to these
hedges is recognized currently in earnings. The assets and liabilities related
to derivative instruments for which hedge accounting criteria is met are
reflected as derivative hedging instruments in the accompanying condensed
consolidated balance sheet at June 30, 2001.
Concentration of Revenues. Revenues earned from Enron Corporation through
the energy marketing and risk management operation approximated 24% and 19% of
Mirant's total revenues for the three and six months ended June 30, 2001,
respectively. Revenues earned from the California Department of Water Resources
approximated 18% and 11% of Mirant's total revenues for the three and six months
ended June 30, 2001, respectively. Revenues earned under Mirant's long-term
power sales agreements with the Philippines' National Power Corporation
approximated 19% and 21% of its total revenues for the three and six months
ended June 30, 2000, respectively.
B. Write-off of Assets
Mirant, through its subsidiaries, has an 82.3% ownership interest in
EDELNOR, a partially integrated electric utility engaged in the generation,
transmission and marketing of electric power in the interconnected power grid in
northern Chile. In December 1998, Mirant announced its intention to pursue the
sale of its interest in EDELNOR. Mirant is currently in advanced discussions
with interested parties with respect to a
10
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
sale transaction. Based on Mirant's current expectations as to the possible
outcome of these negotiations, in the second quarter of 2001, the Company wrote
off its remaining investment in EDELNOR of $88 million ($57 million after tax).
C. Comprehensive Income
Comprehensive income 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 for the three and six months ended June 30,
2001 and 2000 (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 124 $ 93 $ 304 $ 194
Other comprehensive
income (loss) 441 (16) 50 (19)
------ --------- ------ --------
Comprehensive income $ 565 $ 77 $ 354 $ 175
====== ========= ====== =======
Accumulated other comprehensive loss consisted of the following, net of tax
(in millions):
Balance, December 31, 2000 $ (117)
Other comprehensive income for the period:
Transitional adjustment from adoption of SFAS No. 133 (310)
Change in fair value of derivative instruments
280
Reclassification to earnings
131
Cumulative translation adjustment (56)
Share of affiliates OCI 5
--------
Other comprehensive income 50
--------
Balance, June 30, 2001 $ (67)
========
Mirant estimates that $88 million of net derivative after-tax gains
included in OCI as of June 30, 2001 will be reclassified into earnings or
otherwise settled within the next twelve months as certain forecasted
transactions relating to commodity contracts, foreign denominated contracts and
interest payments are realized. Included in this net $88 million amount is $115
million of derivative after-tax gains related to physical forward sales and
purchases of power that Mirant has entered into in order to hedge its North
American forecasted power sales. The fair value of these contracts represents
the difference between the prices at which the Company has contracted to sell
electricity and the forward market prices as of June 30, 2001.
D. Earnings Per Share
Mirant calculates basic earnings per share by dividing the income available
to common stockholders by the weighted average number of common shares
outstanding. The following table shows the computation of basic earnings per
share for the three and six months ended June 30, 2001 and 2000 (in millions,
except per share data) after giving effect to the stock split that occurred
prior to the offering of common stock during
11
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2000. Diluted earnings per share for 2001 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 and
$7 million for the three and six months ended June 30, 2001. Mirant had no
potentially dilutive securities outstanding during the first six months of 2000.
Pro forma earnings per share for the three and six months ended June 30,
2000 shown below gives effect to the Company's public offering of shares as
though it had occurred for all periods, as well as to the conversion of Mirant's
standard value creation plan ("VCP") units, the grant of new stock options and
issuance of convertible trust preferred securities as though potentially
dilutive for all periods. Net income has been increased by less than $1 million
to take into account the stock appreciation right ("SAR") conversion for the
three and six months ended June 30, 2000.
For the Three Months For the Six Months Ended
Ended June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Income from continuing operations $ 124 $ 86 $ 299 $ 181
Discontinued operations 0 7 5 13
------- ------- ------- -------
Net income $ 124 $ 93 304 $ 194
======= ======= ======= =======
Basic
-----
Weighted average shares outstanding 340.1 272.0 339.4 272.0
Earnings per share from:
Continuing operations $ 0.36 $ 0.32 $ 0.88 $ 0.67
Discontinued operations 0.00 0.02 0.02 0.04
------- ------- ------- ---------
Net income $ 0.36 $ 0.34 $ 0.90 $ 0.71
======= ======= ======= =========
Diluted
-------
Weighted average shares outstanding 340.1 272.0 339.4 272.0
Shares assumed due to conversion of stock
options and equivalents 4.2 - 2.9 -
Shares assumed due to conversion of trust
preferred securities 12.5 - 12.5 -
------- ------- ------- ---------
Adjusted shares 356.8 272.0 354.8 272.0
======= ======= ======= =========
Earnings per share from:
Continuing operations $ 0.36 $ 0.32 $ 0.86 $ 0.67
Discontinued operations 0.00 0.02 0.02 0.04
------- ------- ------- ---------
Net income $ 0.36 $ 0.34 $ 0.88 $ 0.71
======= ======= ======= =========
12
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
2000
-----------------------------------
Pro Forma Basic
Weighted average shares outstanding 338.7 338.7
Earnings per share from:
Continuing operations $ 0.25 $ 0.53
Discontinued operations 0.02 0.04
------- ---------
Net income $ 0.27 $ 0.57
======= =========
Pro Forma Diluted
Weighted average shares outstanding 338.7 338.7
Shares assumed due to conversion of stock
options and equivalents 1.0 1.0
Shares assumed due to conversion of trust
preferred securities 12.5 12.5
------- ---------
Adjusted shares 352.2 352.2
======= =========
Earnings per share from:
Continuing operations $ 0.25 0.52
Discontinued operations 0.02 $ 0.03
------- ---------
Net income $ 0.27 $ 0.55
======= =========
E. Debt
On May 31, 2001, Mirant completed the issuance of $750 million of convertible
senior debentures bearing an annual interest rate of 2.5%, subject to upward
adjustment, commencing on June 15, 2004, depending on the market price of its
common stock. The debentures mature on June 15, 2021 and have an initial
conversion price of $67.95 per share based on the issue price of the debentures.
Holders of the debentures have the right to require the Company to purchase all
or a portion of their debentures on June 15, 2004, June 15, 2006, June 15, 2011
and June 15, 2016. We may repurchase such securities with cash or common stock,
at our election, and intend to use cash for such purposes for securities of this
nature. The net proceeds of $738.8 million from the sale of the debentures were
used for general corporate purposes, including the repayment of short-term debt.
As of June 30, 2001, the Company had four credit facilities: a $450 million
revolving credit facility, a $100 million letter of credit facility, a $62
million term credit facility and a $426 million (initially $650 million) term
credit facility. As of June 30, 2001, the Company had issued letters of credit
in an aggregate amount of $221 million and $96 million, respectively, under the
$450 million revolving credit facility and the $100 million letter of credit
facility.
As of June 30, 2001, Mirant was pursuing $2,250 million of new corporate
revolving credit facilities, comprised of a $1,125 million 364-day credit
facility and a $1,125 million 4-year credit facility. Funds from these new
credit facilities will be used to finance interim working capital, support
letters of credit, provide for general corporate purposes and replace existing
credit facilities.
As of June 30, 2001, the Company had $1,453 million of cash and cash
equivalents. Of this amount, the parent level company held $401 million,
primarily to fund payments associated with transition power agreements with
PEPCO. The balance was held by various subsidiaries.
13
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In April 2001, Mirant Americas Energy Capital amended its existing
unsecured line-of-credit facility to reduce its borrowing capacity by $25
million to $25 million. The facility bears interest based on the LIBOR plus 200
basis points. Interest is payable based on maturity of the chosen interest
period. The outstanding borrowings were $25 million at an interest rate of 6.03%
at June 30, 2001. The facility matures in March 2003.
In May 2001, Mirant Americas Generation issued $1.75 billion in senior
unsecured notes under Rule 144A of the Securities Act. The notes issued included
$500 million of 7.625% senior notes due 2006, $850 million of 8.3% senior notes
due 2011, and $400 million of 9.125% senior notes due 2031. The net proceeds
from these notes were used to repay existing credit facilities as discussed in
the following paragraph. Interest on the notes is payable semiannually beginning
November 1, 2001. Mirant Americas Generation may redeem the notes, in whole or
in part, at any time at a redemption price equal to 100% of the principal amount
plus accrued interest, plus a make-whole premium, as defined in the note
agreements. Mirant Americas Generation has initiated an exchange offer under an
effective registration statement pursuant to which it will exchange the notes
for notes registered under the Securities Act.
In May 2001, Mirant Americas Generation repaid amounts under its existing
credit facilities with the proceeds of the issuance of the notes. Mirant
Americas Generation repaid in full its $1.15 billion credit facility, which was
scheduled to mature in October 2002. In addition, Mirant Americas Generation
repaid amounts outstanding under its $250 million and $50 million revolving
credit facilities. The commitments under its $250 million and $50 million
revolving credit facilities, with an annual commitment fee of 17.5 basis point
per annum, remain available through October 2004. Under the revolving credit
facilities, Mirant Americas Generation may elect to borrow at a base rate or at
LIBOR plus an applicable margin based on its credit rating at the date of
borrowing. Interest is payable on the maturity of the chosen interest period.
There were no outstanding borrowings under the revolving credit facilities at
June 30, 2001.
In addition, in May 2001, Mirant Americas Generation repaid $175 million on
the $870 million acquisition facility. The $150 million working capital facility
was also fully repaid although amounts have subsequently been drawn thereunder.
Under these facilities, Mirant Americas Generation may elect to borrow at a base
rate or at LIBOR plus an applicable margin based on its credit rating at the
date of borrowing. The outstanding borrowings under the acquisition credit
facility and the working capital facility were $695 million and $55 million, at
interest rates of 5.03% and 4.80%, respectively, at June 30, 2001. Both the
acquisition credit facility and the working capital facility mature in September
2002.
In connection with the acquisition of an additional 18.8% interest in
Bewag, one of Mirant's subsidiaries closed financing on approximately DM 1,350
million (approximately $587 million) of new bank credit facilities, the proceeds
of which were used for repayment of existing credit facilities of approximately
DM 1,015 million (approximately $441 million), to fund a portion of the purchase
price for the additional shares and for working capital requirements.
F. Financial Instruments
Risk Management Activities
Mirant provides risk management services associated with the energy
industry to its customers in the North American and European markets. These
services are provided through a variety of exchange-traded energy contracts,
forward contracts, futures contracts, option contracts and financial swap
agreements.
14
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
These contractual commitments are presented as risk management assets and
liabilities in the accompanying condensed consolidated balance sheet and are
accounted for using the mark-to-market method of accounting. Accordingly, they
are reflected at fair value in the accompanying condensed consolidated balance
sheet. The net changes in their market values are recognized in income in the
period of change.
The marketing operations engage in risk management activities. All such
transactions and related expenses are recorded on a trade-date basis. Financial
instruments and contractual commitments utilized in connection with 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, including derivatives used for these purposes, are
recorded at fair value. The determination of fair value considers various
factors, including closing exchange or over-the-counter ("OTC") market price
quotations, time value and volatility factors underlying options and contractual
commitments.
The volumetric weighted average maturities at June 30, 2001 were 1.5 years
and 2.5 years for the North American portfolio and European portfolio,
respectively. The net notional amount of the risk management assets and
liabilities at June 30, 2001 was approximately 500,000 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.
In addition, certain financial instruments that Mirant uses to manage risk
exposure to energy prices do not meet the hedge criteria under SFAS No. 133.
Therefore, the fair values of these instruments are included in risk management
assets and risk management liabilities. The fair values of Mirant's risk
management assets and liabilities recorded in the condensed consolidated balance
sheet as of June 30, 2001 are included in the following table (in millions):
Risk Management
Assets Liabilities
------- -----------
Energy commodity instruments:
Electricity $1,964 $1,819
Natural gas 2,118 2,110
Crude oil 70 70
Other 125 149
------- -----------
Total $4,277 $4,148
======= ===========
Derivative Hedging Instruments
Mirant uses derivative instruments to manage exposures arising from changes
in interest rates, commodity prices and foreign currency exchange. Mirant's
objectives for holding derivatives are to minimize the 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. During the three months ended June 30, 2001, $92
million of pre-tax derivative losses was reclassified to operating income, $5
million of pre-tax derivative losses was reclassified to interest expense, and
$1 million of pre-tax derivative gains was reclassified to other income, net.
During the six months ended June 30, 2001, $225 million of pre-tax derivative
losses was reclassified to operating income, $6 million of pre-tax derivative
losses was reclassified to interest expense, and $9 million of pre-tax
derivative gains was reclassified to other income, net. The derivative gains and
losses reclassified to earnings were partly offset by realized gains and losses
15
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
arising from the settlement of the underlying physical transactions being
hedged. During the three and six months ended June 30, 2001, $1 million of
pre-tax gains arising from hedge ineffectiveness was recognized in operating
income. The volatility and any ineffectiveness in these interim financial
results are due to technical compliance with SFAS No. 133. 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
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 remaining life of the hedged
instrument.
Commodity Price Management
Mirant enters into commodity financial instruments in order to hedge market
risk and exposure to electricity and to natural gas, coal and other fuels
utilized by its generation assets. These financial instruments primarily include
forwards, futures and swaps. Where these derivatives are designated as cash flow
hedges, the gains and losses are recognized in earnings in the same period as
the settlement of the underlying physical transaction. Where these derivatives
are not designated as cash flow hedges because they do not meet the hedge
criteria under SFAS No. 133, the gains and losses resulting from the net change
in market value are recognized in earnings in the period of change.
At June 30, 2001, Mirant had a net derivative hedging asset of
approximately $282 million related to these financial instruments. The fair
value of its non-trading commodity financial 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, 2001, Mirant had contracts that related to periods through
2003. The net notional amount of the commodity price management assets and
liabilities at June 30, 2001 was 5 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.
Foreign Currency Hedging
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 offset against the
translation effects reflected in OCI, net of tax.
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. In addition, Mirant also 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.
All of these hedging
16
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
strategies qualify as cash flow hedges, where 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.
G. Investments in Affiliates
The following table sets forth certain summarized income statement
information of Mirant's investments in 50% or less-owned investments accounted
for under the equity method for the three and six months ended June 30, 2001 and
2000 (in millions):
Three Months Six Months
Ended June 30, Ended June 30,
Combined Investments,
Excluding CEMIG: 2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 671 $ 995 $2,266 $ 2,196
Operating income 182 904 623 1,382
Net income from continuing operations 98 149 394 335
CEMIG:
CEMIG financial information has not been released and is not available at the
time of filing.
H. Business Developments
On May 16, 2001, Mirant's Lovett Unit 5 in New York experienced a boiler
explosion, which rendered the unit inoperable. An investigation is ongoing to
determine the cause and extent of the damage as well as an assessment of how
long it will take to repair or replace the unit.
On May 24, 2001, a subsidiary of Mirant entered into an agreement with the
DWR to provide the state of California with 500 MW of electricity. Under the
terms of the contract, which runs from June 1, 2001, to December 31, 2002,
Mirant's subsidiary will provide energy during peak demand directly to the DWR
from its energy portfolio.
On June 1, 2001, Mirant began commercial operation of a 298-MW natural
gas-fired unit, at its Zeeland, Michigan, power plant. Under the terms of an
agreement with Engage Energy America, Mirant will provide power from this unit
to that company to help meet growing electricity needs in Michigan and the upper
Midwest.
On June 13, 2001, Mirant began commercial operation of a 248-MW natural
gas-fired, combined-cycle unit at its Bosque County, Texas, power plant, marking
the second phase of the plant. The first phase of the plant, which includes two
simple-cycle peaking units, produces approximately 154 MW each and began
commercial operation in June 2000. The total output for the Bosque facility is
approximately 556 MW. Mirant will provide power from the new units to help meet
the growing electricity needs in north Texas and will market the electricity
through its risk management and marketing operation.
On June 29, 2001, Mirant completed the acquisition of a 40% stake in the
five-member Norwegian industrial consortium Industrikraft Midt-Norge. Through
this venture, Mirant plans to participate in the construction, financing and
operation of a proposed 800-MW power plant in Skogn, Norway. Construction
17
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
could begin as early as 2002, with anticipated start-up of the first turbine in
2004. Over time, Mirant's investment is expected to total approximately $80
million to $85 million U.S. dollars.
On June 28, 2001, Mirant purchased an additional 18.8% interest in Bewag
for approximately $448 million. Bewag is an electric utility serving over 2
million customers in Berlin, Germany. This additional purchase gives Mirant a
44.8% ownership position in Bewag and joint control of the company with
Hamburgische Electricitaets-Werke AG. A shareholders agreement is currently
being negotiated pursuant to the terms of the arbitration settlement that was
reached in May 2001. Mirant has also commenced discussions with Vattenfall and
the City of Hamburg on the possible combination of Bewag, Hamburgische
Electricitaets-Werke AG ("HEW"), Vereinigte Energiewerke AG ("VEAG") and
Lausitzer Braunkohle AG ("Laubag").
I. Commitments and Contingent Matters
Litigation and Other Contingencies
California:
Reliability-Must-Run Agreements: Mirant's subsidiaries acquired generation
assets from PG&E in April 1999, subject to reliability-must-run 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. Mirant
assumed these agreements from PG&E prior to the outcome of a FERC proceeding
initiated in October 1997 that will determine the percentage of a $158.8 million
annual fixed revenue requirement to be paid to Mirant by the CAISO under the
reliability-must-run agreements. This revenue requirement was negotiated as part
of a prior settlement of a FERC rate proceeding. Mirant contends 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 reliability-must-run agreements) and the
CAISO's actual calls. This approach would result in annual payments by the CAISO
of approximately $120 million, or 75% of the settled fixed revenue requirement.
The decision in this case will affect the amount the CAISO will pay to Mirant
for the period from June 1, 1999 through December 31, 2001. On June 7, 2000, the
administrative law judge presiding over the proceeding issued an initial
decision in which responsibility for payment of approximately 3% of the revenue
requirement was allocated to the CAISO. On July 7, 2000, Mirant appealed the
administrative law judge's decision to the FERC. The outcome of this appeal
cannot be determined. A final FERC order in this proceeding may be appealed to
the Ninth Circuit U.S. Court of Appeals.
If Mirant is unsuccessful in its appeal of the administrative law judge's
decision, it will be required to refund certain amounts of the revenue
requirement paid by the CAISO for the period from June 1, 1999 until the final
disposition of the appeal. The amount of this refund as of June 30, 2001 would
have been approximately $173 million; however, there would have been no effect
on net income for the periods under review as adequate reserves have been
recorded. This amount does not include interest that may be payable in the event
of a refund. If Mirant is unsuccessful in its appeal, Mirant plans to pursue
other options available under the reliability-must-run agreements to mitigate
the impact of the administrative law judge's decision upon its future
operations. The outcome of this appeal is uncertain, and Mirant cannot provide
assurance that it will be successful.
In 2001, the CAISO failed to pay a total of approximately $19.6 million to
Mirant's subsidiaries under the reliability-must-run agreements assumed by
Mirant from PG&E. Mirant has submitted notices of default
18
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
to the CAISO. Payments have been received for amounts that became due
following PG&E's April 6, 2001 petition for bankruptcy.
Defaults by SCE and PG&E: On January 16 and 17, 2001, Southern California
Edison's ("SCE") and PG&E's credit and debt ratings were lowered by Moody's and
S&P to "junk" or "near junk" status. On January 16, 2001, SCE indicated that it
would suspend indefinitely certain obligations including a $215 million payment
due to the PX and a $151 million payment due to a qualifying facility.
DWR Power Purchases: On January 17, 2001, the Governor of California issued an
emergency proclamation giving the DWR authority to enter into arrangements to
purchase power in order to mitigate the effects of electrical shortages in the
state. The DWR began purchasing power under that authority the next day. On
February 1, 2001, the Governor of California signed Assembly Bill No. 1X
authorizing the DWR to purchase power in the wholesale markets to supply retail
consumers in California on a long-term basis. The Bill became effective
immediately upon its execution by the Governor. The Bill did not, however,
address the payment of amounts owed for power previously supplied to the CAISO
or PX for purchase by SCE and PG&E. The CAISO and PX have not paid the full
amounts owed to Mirant's subsidiaries for power delivered to the CAISO and PX in
prior months; and the CAISO is expected to pay less than the full amount owed on
further obligations coming due in the future for power provided to the CAISO for
sales that were not arranged by the DWR. The ability of the DWR to make future
payments is subject to the DWR having a continued source of funding, whether
from legislative or other emergency appropriations, from a bond issuance or from
amounts collected from SCE and PG&E for deliveries to their customers. Mirant
bears the risk of nonpayment by the CAISO, the PX and the DWR for power
purchased by the CAISO, the PX or the DWR.
CAISO and PX Price Caps: Beginning in May 2000, wholesale energy prices in the
California markets increased to levels well above 1999 levels. In response, on
June 28, 2000, the CAISO Board of Governors reduced the price cap applicable to
the CAISO's wholesale energy and ancillary services markets from $750/MWh to
$500/MWh. The CAISO subsequently reduced the price cap to $250/MWh on August 1,
2000. During this period, however, the PX maintained a separate price cap set at
a much higher level applicable to the "day-ahead" and "day-of" markets
administered by the PX. On August 23, 2000, the FERC denied a complaint filed
August 2, 2000 by San Diego Gas & Electric Company ("SDG&E") that sought to
extend the CAISO's $250 price cap to all California energy and ancillary service
markets, not just the markets administered by the CAISO. However, in its order
denying the relief sought by SDG&E, the FERC instructed its staff to initiate an
investigation of the California power markets and to report its findings to the
FERC and held further hearing procedures in abeyance pending the outcome of this
investigation.
On November 1, 2000, the FERC released a Staff Report detailing the results
of the Staff investigation, together with an "Order Proposing Remedies for
California Wholesale Markets" ("November 1 Order"). In the November 1 Order, the
FERC found that the California power market structure and market rules were
seriously flawed, and that these flaws, together with short supply relative to
demand, resulted in unusually high energy prices. The November 1 Order proposed
specific remedies to the identified market flaws, including: (a) imposition of a
so-called "soft" price cap at $150/MWh to be applied to both the PX and CAISO
markets, which would allow bids above $150/MWh to be accepted, but would subject
such bids to certain reporting obligations requiring sellers to provide cost
data and/or identify applicable opportunity costs and specifying that such bids
may not set the overall market clearing price, (b) elimination of the
requirement that the California utilities sell into and buy from the PX, (c)
establishment of independent non-stakeholder governing boards for the CAISO and
the PX, and (d) establishment of penalty charges for scheduling deviations
outside of a prescribed range. In the November 1 Order, the FERC established
October 2, 2000, the date 60 days after the filing of the SDG&E complaint, as
the "refund effective date".
19
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under the November 1 Order, rates charged for service after that date through
December 31, 2002 would remain subject to refund if determined by the FERC not
to be just and reasonable. While the FERC concluded that the Federal Power Act
and prior court decisions interpreting that Act strongly suggested that refunds
would not be permissible for charges in the period prior to October 2, 2000, it
noted that it was willing to explore proposals for equitable relief with respect
to charges made in that period.
On December 15, 2000, the FERC issued a subsequent order that affirmed in
large measure the November 1 Order (the "December 15 Order"). The December 15
Order also required generators to provide weekly reports of sales above the
"soft" price cap of $150/MWh. Various parties filed requests for administrative
rehearing and for judicial review of aspects of the FERC's December 15 Order.
On March 9, March 16, April 16, May 16 and June 15, 2001, the FERC ordered
that certain transactions into the CAISO and California Power Exchange markets
have not been shown to be just and reasonable. The order determined that
potential refunds would be appropriate for certain transactions in these markets
above a "proxy market price" specified during a CAISO-declared Stage 3
Emergency, absent additional price or cost justification by jurisdictional
sellers. These sellers, including Mirant California, Mirant Delta and Mirant
Potrero were required to determine whether to provide refunds of costs above the
proxy market price or to provide justification of prices to the FERC. Various
parties have requested an administrative rehearing of the FERC March 9 order.
The FERC has issued proxy market price orders for the months of January,
February, March, April and May 2001. The potential refund exposure for Mirant
for January, February, March and May was approximately $3 million. The proxy
market price for April was not applicable to any sales made. Mirant has provided
additional price justification for the transactions in January, February and
March that were subject to refund. Mirant cannot give any assurances that the
FERC will accept the justification and decline to order refunds of some or all
of these amounts.
On April 6, 2001, the CAISO filed a proposed market stabilization plan at
the FERC. On April 11, 2001, Mirant California, Mirant Delta and Mirant Potrero
provided additional price justification for the transactions in January and
February that were subject to refund. Mirant cannot give assurances that the
FERC will accept the justification and decline to order refunds of some or all
of these amounts. On April 16, 2001, the FERC issued a proxy price for March
2001 of $300/MWh. The total refund exposure to Mirant for the month was less
than $100,000. On April 26, 2001, the FERC issued an order adopting a market
monitoring and price mitigation plan by its staff. The April 26 order provides
for price mitigation in all hours in which power reserves fall below 7.5
percent, a level that corresponds to the CAISO's Stage 1 emergency. In these
hours, the FERC will use a formula based on the marginal costs of the
highest-cost generator called on to run to determine the overall market-clearing
price. In the event that a generator sells power at prices higher than the
formula price set by the FERC, the generator is required to submit data to the
FERC within seven days to justify the higher price. The April 26 order also
provides for: (a) increased coordination and control of generation plan outages
by the CAISO, (b) all in-state generation, including generation owned by sellers
not subject to the FERC's jurisdiction, to offer all available power for sale in
real time, (c) load-serving public utilities to establish by June 1, 2001 demand
response mechanisms identifying the price at which load would be curtailed, (d)
the FERC to continue to monitor closely behavior of market participants,
including bidding behavior and plant outages, (e) interested parties to file
comments on whether the CAISO should be required to institute, on a prospective
basis, a surcharge on power sales to cover payments due to generators by the
California utilities, and (f) the FERC to institute an investigation under
Section 206 of the Federal Power Act into the rates, terms and conditions of
certain short-term wholesale power sales in the western markets outside of
California. According to the order, this mitigation program became effective on
May 29, 2001, and will terminate no later than one year after the effective
20
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
date. In addition, the order identified certain prohibited bidding practices by
entities having market rate authority (which would include certain of Mirant's
subsidiaries) and has stated that it would impose sanctions on entities that
engage in the prohibited practices. The effects of this FERC order are not yet
known by Mirant.
Western Power Market Investigations: The CPUC and the California Attorney
General's office have each launched investigations into the California energy
markets that have resulted in the issuance of subpoenas to several of Mirant's
entities. The CPUC issued one subpoena to Mirant's entities in mid-August 2000
and one in September 2000. In addition, the CPUC has had personnel onsite on a
periodic basis at Mirant's California generating facilities since December 2000.
The California Attorney General issued its subpoena to Mirant in February 2001
under the following caption: "In the Matter of the Investigation of Possibly
Unlawful, Unfair, or Anti-Competitive Behavior Affecting Electricity Prices in
California." Each of these subpoenas, as well as the plant visits, could impose
significant compliance costs on Mirant or its subsidiaries. Despite 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 the CPUC and
the Attorney General throughout this process.
On March 14, 2001, the California Senate announced the formation of a
committee to investigate alleged manipulation in the state electricity and
natural gas markets. Mirant has received document requests in this investigation
and has been asked to make a presentation to the committee.
On April 13, 2001, Reliant Energy, Inc. filed suit in the Los Angeles
Superior Court against the Attorney General regarding the confidentiality of the
sensitive information requested. Mirant joined that suit on April 18, 2001. Also
on April 18, 2001, the Attorney General filed suit against the Company in the
San Francisco Superior Court seeking to compel it to produce documents in the
investigation.
Additionally, investigations have also been launched by the Attorney
General's office for the State of Washington and the Oregon Department of
Justice. These offices issued subpoenas requesting information in connection
with their investigations on June 4 and 8, 2001, respectively. Each of these
subpoenas imposes additional compliance costs on Mirant or its subsidiaries.
Additionally, with regard to the California Senate investigation, Senator Dunn,
a California State Senator, announced on May 3, 2001 that he had invited the
California Attorney General, as well as the District Attorneys from across the
state to "collaborate" with the Senate Select Committee's investigation. To
Mirant's knowledge, only the San Joaquin District Attorney has accepted the
invitation, and the San Joaquin District Attorney's office used Dunn's
announcement as a venue to disclose that it had opened its own criminal
investigation into the wholesale energy markets on April 11, 2001. On June 12,
2001, Mirant received a subpoena from the California Senate formalizing its
earlier information request to it. Despite various measures taken to protect the
confidentiality of sensitive information produced to the various agencies
involved in western United States power market investigations, there remains a
risk of governmental disclosure of confidential, proprietary and trade secret
information obtained by these agencies throughout the investigative process.
While Mirant will vigorously defend against any claims of potential civil
liability or criminal wrongdoing asserted against the Company or its
subsidiaries, the results of such investigations cannot now be determined.
California Rate Payer Litigation: Six lawsuits have been filed in the superior
courts of California alleging that certain owners of electric generation
facilities in California and energy marketers, including Mirant, Mirant Americas
Energy Marketing, Mirant Delta, Mirant Potrero, and Southern, engaged in various
unlawful and anti-competitive acts that served to manipulate wholesale power
markets and inflate wholesale
21
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
electricity prices in California. Four of the suits seek class action status.
One lawsuit alleges that, as a result of the defendants' conduct, customers paid
approximately $4 billion more for electricity than they otherwise would have and
seeks an award of treble damages, as well as other injunctive and equitable
relief. One lawsuit also names certain of Mirant's officers individually as
defendants and alleges that the state had to spend more than $6 billion
purchasing electricity and that if an injunction is not issued, the state will
be required to spend more that $150 million per day purchasing electricity. The
other suits likewise seek treble damages and equitable relief. While two of the
suits name Southern as a defendant, it appears that the allegations, as they may
relate to Southern and its subsidiaries, are directed to activities of Mirant's
subsidiaries. One such suit names Mirant Corporation itself as a defendant.
Southern has notified Mirant of its claim for indemnification for costs
associated with these actions under the terms of the Master Separation Agreement
that governs Mirant's separation from Southern, and Mirant has undertaken the
defense of all of the claims. The final outcome of the lawsuits cannot now be
determined.
On June 8, 2001, the Judicial Panel on Multidistrict Litigation ruled that
People of the State of California v. Dynegy, et al, Gordon v. Reliant Energy,
Inc., et al, Hendricks v. Dynegy Power Marketing, Inc. et al, Sweetwater
Authority, et al v. Dynegy, Inc., et al Bustamante, et al v. Dynegy, Inc., et al
and Pier 23 Restaurant v. PG&E Energy Trading, et al should be consolidated for
purposes of pretrial proceedings. The final outcome of the lawsuits cannot now
be determined.
CAISO Claim before the FERC: The CAISO asserted in a March 22, 2001 filing at
the FERC that sellers in the California wholesale electricity market have, as a
group, charged amounts in the period from May 2000 through February 2001 that
exceeded just and reasonable charges by an amount in excess of $6 billion. The
CAISO also asserted that during that period generators in California bid prices
into the CAISO real time markets that exceeded just and reasonable amounts by
approximately $505 million in the aggregate, of which a single generator
(subsequently identified in a news report as Mirant Corporation) was alleged by
the CAISO to have overcharged by approximately $97 million.
On June 7, 2001, the CAISO filed a motion with the FERC to revoke the
market-based rate authority issued by the FERC to several of Mirant's
subsidiaries engaged in the California market. The CAISO also requested that the
FERC order refunds for sales dating back to May 1, 2000, and that the FERC
investigate whether Mirant exercised market power prior to May 1, 2000. If this
motion were to be fully approved, it would subject the applicable subsidiaries
to cost-based rates under the FERC's jurisdiction. While Mirant does not believe
that the CAISO will gain full approval of its motion, Mirant cannot currently
predict what action the FERC will take, if any or what impact the CAISO's motion
will have on its operations. Mirant cannot predict the outcome of these
proceedings at this time.
Consumers Union Complaint: On June 15, 2001, the Consumers Union of U.S., Inc.
filed a petition at the FERC requesting immediate action to protect consumers
against unjust and unreasonable charges for electricity in the western United
States, including (1) immediate suspension of market-based rate authority for
all sellers subject to the FERC's jurisdiction, (2) the requirement of seller to
make cost of service filings with the FERC, (3) the determination of just and
reasonable rates for sellers based on their cost of service and (4) the ordering
of refunds for any unjust or unreasonable rates and charges. On July 16, 2001,
several of Mirant's subsidiaries filed a response to the petition, arguing that
the petition should be dismissed. Mirant cannot determine at this time what
action, if any, the FERC will take with respect to this complaint.
Environmental Suit and Notice of Intent to File Suit: On June 19, 2001, a Clean
Air Act citizen suit was filed in the United States District Court for the
Northern District of California by Bayview Hunters Point Community Advocates,
Communities for a Better Environment and Our Children's Earth Foundation,
against Mirant and the Bay Area Air Quality Management District, alleging
violations of federal permitting
22
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
requirements resulting from Mirant's Potrero peaking units exceeding permit
limits on total annual hours of operation. The lawsuit also alleges that the
District's agreement with Mirant implementing Executive Orders of the Governor
of California and allowing operation of the Potrero peaking units beyond their
permitted operating hours (under limited conditions specified in the agreement)
violates the California Environmental Quality Act ("CEQA"). Also on June 19,
2001, the City and County of San Francisco filed a similar suit in the same
court against Mirant only, and excluding the CEQA allegations. EPA Region 9 has
issued an Administrative Order on Consent in recognition of Mirant's agreement
with the District and specifying a compliance schedule. The suits seek an
injunction preventing operation of the units, federal civil penalties of up to
$27,500 per day per violation, state civil penalties of $2,500 for each act of
unfair competition, disgorgement of any profits obtained through unfair business
practices and invalidation of the agreement between Mirant and the District.
On June 19, 2001, Bayview Hunters Point Community Advocates, Communities
for a Better Environment and Our Children's Earth Foundation, collectively, and
the City and County of San Francisco, each delivered to Mirant a Notice of
Intent to File Suit Under the Clean Air Act. These notices state that on 60 days
from June 19, the parties will file Clean Air Act citizen suits against Mirant
alleging violations of the California State Implementation Plan, the Title V
operating permit for the Potrero facility, and federal permitting requirements
for modified facilities. These violations are alleged to result from operation
of the Potrero peaking units beyond their permit limits on total annual hours of
operation. The parties state that they seek injunctive relief, penalties and
costs of litigation if the matters are not resolved within the 60-day period. On
June 26, 2001, Mirant filed with the FERC an Emergency Request for clarification
seeking confirmation by the FERC that the Potrero jets are exempt from the
FERC's "must run" requirements, once they exceed their permitted operating
limits.
FERC Settlement Conference: On June 19, 2001, the FERC issued an order on
rehearing of its April 26 order. The June 19 order affirmed many of the key
provisions of the April 26 order, but also broadened the scope of that order to
include all spot market sales in markets throughout the Western System
Coordinating Council ("WSCC"). The price mitigation plan to be implemented
pursuant to the June 19 order became effective June 20, 2000, and extends until
September 30, 2002. Under the June 19 order, the FERC retained the use of a
single market clearing price for sales in the CAISO's spot markets in reserve
deficiency hours (i.e., when reserves are below 7 percent in California), as
well as the requirement that all public and non-public utilities which own or
control non-hydroelectric generation in California must offer power in the
CAISO's spot markets, to the extent the output is not scheduled for delivery in
the hour. However, the FERC revised the method for calculating the market
clearing price, specifying that: (a) generation unit owners must submit bids
during reserve deficiencies that are no higher than the seller's marginal gas
costs plus variable O&M costs set at $6/MWh; (b) generation unit owners may not
reflect start-up fuel and emissions costs in the energy price, but must invoice
the CAISO separately for these costs, which the CAISO will recover through a
newly-imposed system-wide charge; (c) the ability to cost-justify a higher price
is available only to generation owners; marketers may not bid above the market
clearing price; and (d) the CAISO must add 10 percent (the "adder") to the
market clearing price paid to generators for all prospective sales in its
markets to reflect credit uncertainty. The adder will not be reflected in the
market price for the rest of the WSCC.
The June 19 order also extended the FERC's price mitigation regime to the
rest of the WSCC and to non-reserve deficiency hours. For spot market sales
outside the CAISO single price auction (i.e., bilateral sales in California and
sales in the balance of the WSCC), the June 19 order provides that sellers will
receive the price they negotiate, up to the CAISO spot market price, and that
all public and non-public utilities in the remainder of the WSCC must offer in
the spot market of their choosing any non-hydroelectric resource whether owned
or under contract to the extent the output is not scheduled for delivery in the
hour.
23
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In all non-reserve deficiency hours (i.e. when reserve levels in the CAISO
exceed 7 percent), the June 19 order provides that the market clearing price
within California and throughout the WSCC will be set at percent of the highest
CAISO hourly market clearing price established during the most recent reserve
deficiency period. This price will remain in place until reserves fall below 7
percent and a new price is set.
In addition, the June 19 order called for a settlement conference to
address any and all issues concerning the California markets, including payment
for past due amounts, refunds related to past periods, and creditworthiness
issues. In accordance with the June 19 order, the FERC's Chief Administrative
Law Judge convened a 15-day settlement conference on June 25. Parties in the
SDG&E complaint proceeding, the State of California and other interested parties
participated in the settlement conference. The parties were unable to reach
settlement on the issues at the settlement conference.
Proposed Windfall Profits Tax: Proposals for a windfall profits tax have been
introduced in the California Assembly and Senate and have been approved by the
Revenue and Taxation Committee of the State Senate. Mirant cannot predict the
outcome of this proposal at this time. Enactment of a windfall profit bill could
cause Mirant to reevaluate its business case in California.
Pacific Gas & Electric Bankruptcy: On April 6, 2001, PG&E filed a voluntary
petition under Chapter 11 of the Bankruptcy Code in the U.S. 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 by PG&E.
CARE Complaint: On April 16, 2001, Californians for Renewable Energy, Inc.
("CARE") filed a complaint at the FERC against Mirant and three other suppliers
alleging that those suppliers withheld power to contrive an energy shortage and
to test their market power in violation of the Federal Power Act, federal and
state anti-trust laws, Title VI of the Civil Rights Act of 1964 and the North
American Free Trade Agreement. The complaint seeks refunds of overcharges and
unspecified damages. Mirant cannot predict at this time the outcome of this
proceeding.
PX Bankruptcy: On March 8, 2001, the PX filed for bankruptcy. It is uncertain as
to what impact, if any, the PX's bankruptcy will have on the receivables owed to
Mirant.
As of June 30, 2001, the total amount owed to Mirant by the CAISO and the
PX was $353 million. The total amount of provisions made during 2000 and 2001 in
relation to uncertainties in the California power market was $295 million.
New York Independent System Operator Automatic Mitigation Plan:
On June 28, 2001, the FERC authorized the NYISO to implement a procedure
until October 31, 2001, that could result in the automated mitigation of bids in
the NYISO day-ahead market that exceed certain pre-defined thresholds (the
"AMP"). Bids subject to mitigation under the AMP could be replaced by
pre-determined reference bids determined by the NYSIO pursuant to its general
market monitoring and mitigation authority. The AMP could negatively impact
Mirant, though the nature and extent of possible harm to Mirant is currently not
known.
24
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Mobile Energy Services Company, L.L.C. ("Mobile Energy"):
Mobile Energy is the owner of a facility that generates electricity,
produces steam and in the past processed black liquor as part of a pulp and
paper complex in Mobile, Alabama. On January 14, 1999, Mobile Energy and Mobile
Energy Services Holdings, Inc., which guaranteed debt obligations of Mobile
Energy, filed voluntary petitions in the United States Bankruptcy Court for the
Southern District of Alabama, seeking protection under Chapter 11 of the United
States Bankruptcy Code. Southern has guaranteed certain potential environmental
and certain other obligations of Mobile Energy that represent a maximum
contingent liability of $19 million as of June 30, 2001. A major portion of the
maximum contingent liability escalates at the rate equal to the producer price
index. As part of its separation from Southern, Mirant has agreed to indemnify
Southern for any obligations incurred under such guarantees.
An amended plan of reorganization was filed by Mobile Energy and Mobile
Energy Services Holdings on February 21, 2001 and updated on April 25, 2001.
This amended plan proposes to cancel the existing taxable and tax-exempt bond
debt of Mobile Energy and transfer ownership of Mobile Energy and Mobile Energy
Services Holdings to the holders of that debt. Approval of that proposed plan of
reorganization would result in a termination of Southern's direct and indirect
ownership interests in both entities, but would not affect Southern's continuing
guarantee obligations that are described above. The final outcome of this matter
cannot now be determined.
State Line Energy, L.L.C. ("State Line"):
On July 28, 1998, an explosion occurred at State Line causing a fire and
substantial damage to the plant. The precise cause of the explosion and fire has
not been determined. Thus far, seven personal injury lawsuits have been filed
against Mirant, five of which were filed in Cook County, Illinois. Mirant filed
a motion to dismiss these five cases in 1998 for lack of "in personam"
jurisdiction. The motion was denied in August 1999. In October 1999, the
Appellate Court of Illinois granted Mirant's petition for leave to appeal. The
outcome of these proceedings cannot now be determined and an estimated range of
loss cannot be made.
Companhia Energetica de Minas Gerais ("CEMIG"):
In September 1999, the State of Minas Gerais, Brazil, filed a lawsuit in a
state court seeking temporary relief against exercising voting rights of SEB, of
which Mirant holds a 25% indirect economic interest, under the shareholders'
agreement, between the State and SEB regarding SEB's interest in CEMIG, as well
as a permanent rescission of the agreement. On March 23, 2000, a state court in
Minas Gerais ruled that the shareholders agreement was invalid. SEB has filed an
appeal to the State of Minas Gerais court of appeal. Mirant believes that this
is a temporary situation and expects that the shareholders agreement will be
fully restored. Failure to prevail in this matter has limited Mirant's influence
on the daily operations of CEMIG. However, SEB continues to have 33% of the
voting shares of CEMIG and holds 4 of 11 seats on CEMIG's Board of Directors.
The significant rights SEB would lose relate to supermajority rights and the
right to participate in the daily operations of CEMIG. SEB obtained financing
from BNDES for approximately 50% of the total purchase price of the CEMIG shares
which is secured by a pledge of its shares in CEMIG. The temporary suspension of
the shareholders agreement has adversely impacted SEB's influence over the
performance of the company and the remuneration of the shareholders.
In addition to the matters discussed above, Mirant is party to legal
proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on its results of operations or financial position.
25
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Commitments and Capital Expenditures
Mirant has made firm commitments to buy materials and services in
connection with its ongoing operations and planned expansion and has made
financial guarantees relative to some of its investments. The material
commitments are as follows:
Energy Marketing and Risk Management Activities
Mirant has approximately $421 million of trade credit support commitments
related to its energy marketing and risk management activities as of June 30,
2001, a decrease of $456 million from December 31, 2000.
Mirant has a guarantee related to Brazos Electric Power Cooperative, Inc. of $65
million at June 30, 2001, a decrease of $5 million from December 31, 2000. In
addition, it has a guarantee related to Pan Alberta Gas, Ltd. of $64 million as
of June 30, 2001.
Mirant along with Vastar has issued certain financial guarantees made in
the ordinary course of business, on behalf of the Mirant Americas Energy
Marketing's counterparties, to financial institutions and other credit grantors.
Mirant has agreed to indemnify BP Amoco, Vastar's parent company, against losses
under such guarantees in proportion to Vastar's former ownership percentage of
Mirant Americas Energy Marketing. At June 30, 2001, such guarantees amounted to
approximately $176 million.
Periodically, the Company's energy marketing and risk management
subsidiaries also grant options with terms of less than three days for
fixed-price, commodity-based contractual commitments. There is no market for
"firm quotes held open," and these options were issued without cost. The
Company's energy marketing and risk management subsidiaries had no such amounts
available under these quotes at June 30, 2001.
Turbine Purchases and Other Construction-Related Commitments
Mirant, along with its subsidiaries, has entered into agreements to
purchase 83 turbines and equipment packages to support ongoing and planned
construction efforts. Mirant also has options to purchase an additional 29
turbines and equipment packages. Minimum termination amounts under all purchase
contracts were $204 million at June 30, 2001. At June 30, 2001, total amounts to
be paid under the agreements if all turbines and equipment packages are
purchased as planned are estimated to be $1,798 million. At June 30, 2001, other
construction-related commitments totaled $502 million.
In addition to these commitments, certain of Mirant's subsidiaries have
assigned purchase contracts for ten turbines and nine engineered equipment
packages ("power islands") to two separate third-party owners. As part of these
assignments, Mirant's subsidiaries have entered into agency agreements with the
respective third-party owners whereby Mirant is required to manage procurement
of all of this equipment. Under the agency agreements, Mirant maintains purchase
options for each individual turbine and power island, which may be assigned to
other third parties. In addition to the purchase options under the agreements,
Mirant also maintains options to lease the turbines and the power islands. If
upon the end of the respective terms of the agreements Mirant has failed to
exercise either its purchase options or lease options for each turbine and power
island, Mirant may participate in the re-marketing of this equipment. In the
event that the equipment is remarketed, Mirant has guaranteed the recovery of
approximately 89.9 percent of certain equipment procurement costs, of which
approximately $77 million was incurred as of June 30, 2001. Additionally, if
Mirant had elected to exercise its purchase options with respect to all of the
turbines and power islands and
26
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
to terminate the procurement contracts at June 30, 2001, minimum termination
amounts under the turbine and power island procurement contracts would have been
$98 million.
In June 2001, Mirant entered into an air permit guarantee and a waste water
discharge permit guarantee in connection with a loan agreement between
Perryville Energy Partners, LLC ("Perryville") and a financial institution.
Under these guarantee agreements, the Company guaranteed the debt payments under
the loan agreement if Perryville does not obtain or achieve necessary air and
waste water discharge permit compliance. The Company has a 50% ownership
interest in Perryville. Perryville began to commercially operate a 157-megawatt,
natural gas-fired, simple-cycle unit in Louisiana in July 2001 and is
constructing a 568-megawatt natural gas-fired combined cycle unit that is
expected to be completed in 2002. At June 30, 2001, the outstanding balance
under the loan agreement was approximately $111 million. Mirant has entered into
a separate agreement with Cleco Midstream Resources, LLC ("Cleco"), who holds
the remaining 50% ownership interest in Perryville, under which it is
compensated for providing the loan agreement guarantees on behalf of Cleco.
Long-Term Service Agreements
The Company, through various subsidiaries, has entered into long-term
service agreements for the maintenance and repair by third parties of many of
its combustion-turbine or combined-cycle generating plants. These agreements may
be terminated in the event a planned construction project is cancelled. At June
30, 2001, the total estimated commitment for completed and in process
construction projects was $262 million, and the total estimated commitment if
all turbines are purchased as planned is $2,253 million.
Long-Term Purchase Power Agreement
In April 2001, the Company entered into a long-term power purchase
agreement with Perryville, which expires in December 2022, under which it will
receive all the generation output of the Perryville facility for a monthly
reservation charge. The total estimated minimum commitment under this agreement
over the life of the agreement is approximately $924 million.
Operating Leases
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $32 million and $4 million during the six months ended June 30,
2001 and 2000, respectively. As of June 30, 2001, estimated minimum rental
commitments for non-cancelable operating leases were $3,411 million.
27
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Segment Reporting
The Company's principal business segments primarily relate to the geographic
areas in which the Company conducts business: the Americas Group, the
Asia-Pacific Group and the Europe Group. The other reportable business segment
is Corporate.
Financial Data by Segment
For the Three Months Ended June 30, 2001 and 2000
Corporate and
Americas Europe Asia-Pacific Eliminations Consolidated
----------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
(in millions)
Operating Revenues:
Generation and energy marketing $7,605 $ 389 $ 46 $ (2) $ 126 $123 $ - $ - $ 7,777 $ 510
Distribution & integrated utility
revenues 144 43 - 81 - - - - 144 124
Other 2 - - - 5 3 - 3 7 6
--------- --------- ------- -------- --------- --------- ----- ------- ---------- -------
Total operating revenues 7,751 432 46 79 131 126 - 3 7,928 640
Operating Expenses:
Cost of fuel, electricity and
other products 7,079 235 46 6 2 - - - 7,127 241
Depreciation and amortization 63 23 - 17 32 32 1 - 96 72
Other operating expenses 378 90 13 46 34 32 28 18 453 186
--------- --------- ------- -------- --------- --------- ----- ------- ---------- -------
Total operating expenses 7,520 348 59 69 68 64 29 18 7,676 499
--------- --------- ------- -------- --------- --------- ----- ------- ---------- -------
Operating Income (Loss) 231 84 (13) 10 63 62 (29) (15) 252 141
Other Income (Expense):
Interest expense, net (47) (35) (5) (27) (24) (24) (33) (24) (109) (110)
Equity in income of affiliates 5 8 29 14 13 14 - - 47 36
Other (2) 3 3 7 1 19 3 4 5 33
Income (Loss) From Continuing
Operations
Before Income Taxes and Minority --------- --------- ------- -------- --------- --------- ----- ------- ---------- -------
Interest 187 60 14 4 53 71 (59) (35) 195 100
Provision (benefit) for income taxes 84 23 (10) (5) - (2) (19) (15) 55 1
Minority interest 3 6 - (3) 8 9 5 1 16 13
--------- --------- ------- -------- --------- --------- ----- ------- ---------- -------
Income (Loss) From Continuing
Operations 100 31 24 12 45 64 (45) (21) 124 86
Income From Discontinued Operations,
Net of Tax Benefit - - - - - - - 7 - 7
--------- --------- ------- -------- --------- --------- ----- ------- ---------- -------
Net Income (Loss) $ 100 $ 31 $ 24 $ 12 $ 45 $ 64 $(45) $(14) $ 124 $ 93
========= ========= ======= ======== ========= =============== ======= ========== =======
28
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial Data by Segment
For the Six Months Ended June 30, 2001 and 2000
Corporate and
Americas Europe Asia-Pacific Eliminations Consolidated
-------------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
(in millions)
Operating Revenues:
Generation and energy marketing $ 15,658 $ 629 $ 10 $ (2) $ 249 $ 246 $ - $ - $ 15,917 $ 873
Distribution & integrated utility
revenues 180 83 - 192 - - - - 180 275
Other 2 - - - 11 6 - 5 13 11
---------- -------- --------- -------- -------- ------ -------- ------- ---------- ------
Total operating revenues 15,840 712 10 190 260 252 - 5 16,110 1,159
Operating Expenses:
Cost of fuel, electricity and
other product 14,447 380 57 16 4 - - - 14,508 396
Depreciation and amortization 117 49 - 41 65 65 2 - 184 155
Other operating expenses 727 168 22 71 61 30 77 29 887 298
---------- -------- --------- -------- -------- ------ -------- ------- ---------- ------
Total operating expenses 15,291 597 79 128 130 95 79 29 15,579 849
---------- -------- --------- -------- -------- ------ -------- ------- ---------- ------
Operating Income (Loss) 549 115 (69) 62 130 157 (79) (24) 531 310
Other Income (Expense):
Interest expense, net (86) (69) (9) (54) (49) (52) (58) (43) (202) (218)
Equity in income of affiliates 11 4 92 28 23 31 - - 126 63
Other 6 8 1 8 11 19 3 4 21 39
Income (Loss) From Continuing
Operations Before Income Taxes
and Minority Interest ---------- -------- --------- -------- -------- ------ -------- ------- ---------- ------
480 58 15 44 115 155 (134) (63) 476 194
Provision (benefit) for income taxes 203 29 (33) (22) 3 (10) (26) (27) 147 (30)
Minority interest 4 1 - 23 16 18 10 1 30 43
---------- -------- --------- -------- -------- ------ -------- ------- ---------- ------
Income (Loss) From Continuing
Operations 273 28 48 43 96 147 (118) (37) 299 181
Income From Discontinued Operations,
Net of Tax Benefit - - - - - - 5 13 5 13
---------- -------- --------- -------- -------- ------ -------- ------- ---------- ------
Net Income (Loss) $ 273 $ 28 $ 48 $ 43 $ 96 $ 147 $(113) $ (24) $ 304 $ 194
========== ========= ======= ========== ======== ====== ======== ======= ========== =====
29
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Selected Balance Sheet Information by Segment
At June 30, 2001
Corporate and
Americas Europe Asia-Pacific Eliminations Total
--------- --------- --------------- ------------------ -------------
(in millions)
Current assets $9,024 $ 208 $ 864 $ 48 $ 10,144
Property, plant & equipment,
including leasehold interest 4,424 2 1,826 107 6,359
Total assets 20,233 2,032 4,627 (556) 26,336
Total debt 3,524 569 2,141 1,758 7,992
Common equity 3,625 1,224 1,824 (2,150) 4,523
30
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Subsequent Events
On July 1, 2001, the Company began commercial operation of a 157-MW natural
gas-fired simple-cycle unit at its Monroe, Louisiana power plant site. This is
the first phase of the project. The second phase, expected to begin commercial
operation in June 2002, includes a 568-MW combined-cycle unit. The project was
financed by a group of banks under a $300 million project financing which closed
on June 7, 2001. The project is jointly owned on a 50/50 basis with Cleco
Corporation.
On July 12, 2001, the Chief Judge issued a recommendation to the FERC,
which included a proposed methodology for the FERC to adopt to issue refunds for
sales into the CAISO and PX markets, as well as a 60-day hearing procedure to
determine the appropriate amount of refunds for each jurisdictional seller. On
July 12, Mirant filed comments on the Chief Judge's recommendation, and on July
19, also filed a request for rehearing of the June 19 order.
On July 12, 2001, as comments to the Chief Judge's recommendation, the
California Attorney General, the California Electricity Oversight Board, the
county of Los Angeles, the California Public Utilities Commission, and SDG&E
filed a Motion for Refunds at the FERC, requesting the FERC to order refunds for
the CAISO, PX, and bilateral markets back to May 1, 2000. On July 25, 2001, the
FERC ordered a hearing to be held to determine refund amounts (and offsets) for
certain sales into the CAISO and California PX from October 2, 2000 through June
20, 2001, based upon the methodology recommended by the presiding Administrative
Law Judge.
On July 19, 2001, SEB, of which Mirant owns a 25% indirect economic
interest, and BNDES executed an amendment revising the terms to the existing
loan agreement including a favorable adjustment to the payment terms for 2001
and 2002.
On July 20, 2001, the California Senate passed SB 78xx, which is intended
to restore the creditworthiness of SCE through various mechanisms, including the
issuance of bonds and a dedicated rate component for repayment. However, the
Bill does not provide for repayment of amounts owed to power suppliers in
California other than qualifying facilities. SB78xx and similar other forms of
legislation currently are pending at the California Assembly. Mirant cannot
predict whether, or in what form, legislation will be passed to affect SCE's
creditworthiness, or whether such legislation would provide for the payment of
amounts owed to power suppliers such as its subsidiaries.
On July 17, 2001, Mirant closed $2,250 million of new corporate revolving
credit facilities, comprised of a $1,125 million 364-day revolving credit
facility and a $1,125 million 4-year credit facility. Funds from the new
revolving credit facilities will be used to replace existing credit facilities,
finance interim working capital, support letters of credit and provide for
general corporate purposes.
On July 19, 2001, SEB, of which Mirant owns a 25% economic interest, and
BNDES executed an amendment revising the terms to the existing loan agreement,
including a favorable adjustment to the payment terms for 2001 and 2002.
Mirant has used the new revolving credit facilities to repay indebtedness
and to cancel certain other credit facilities. On July 20, 2001, Mirant repaid a
$62 million term loan facility. On July 23, 2001, Mirant repaid the balance of
$426 million plus interest and cancelled the commitment under its $650 million
credit facility. Additionally, Mirant expects to transfer letters of credit
totaling $96 million under an existing $100 million letter of credit facility to
the new 4-year credit facility. When these letters of credit are transferred,
Mirant anticipates canceling the $100 million letter of credit facility.
31
MIRANT CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In response to the Company's emergency request for clarification filed with
the FERC concerning the Potrero jets the FERC , on July 25, 2001, issued an
order confirming that Mirant is not required to run its Potrero jets if doing so
would cause it to not be in compliance with its environmental permits.
In July 2001, Mirant entered into an agreement to acquire a 97.5% ownership
interest in EcoElectrica Holdings Ltd. ("EcoElectrica"), a 540-MW, liquefied
natural gas ("LNG")-fired, combined-cycle cogeneration facility, a desalination
facility and a LNG facility located in Penuelas, Puerto Rico. The purchase price
is approximately $586 million plus the assumption of liabilities of
approximately $700 million subject to applicable regulatory approvals. The
acquisition is expected to be closed in the third quarter of 2001. The facility
began commercial operations in March 2000. The Puerto Rico Electric Power
Authority ("PREPA") purchases power from EcoElectrica pursuant to a long-term
power purchase agreement that extends through March 2022. Under this agreement,
PREPA is obligated to purchase up to 507 MW of energy and capacity from
EcoElectrica. The EcoElectrica facility has the ability to sell up to 46 MW of
its spinning reserve capacity and, in addition, may sell LNG that is in excess
of its requirements to other third parties. In addition, Mirant acquired the
rights to a twenty-year tolling services agreement for the unloading, storing,
redelivery and vaporization of LNG, as well as access to excess capacity in the
facility's LNG terminal, storage tank and vaporizers. EcoElectrica has also
entered into a LNG purchase agreement, which extends until 2019, which provides
for the purchase of an annual contract quantity equal to nine gamma standard
cargoes.
On July 30, 2001, the United States District Court for the Southern
District of San Diego remanded the California electricity cases currently
assigned to it (all of the cases except Bustamante, which is pending assignment
to the same judge) to the superior courts of the State of California based upon
an absence of federal question jurisdiction. Mirant cannot predict the outcome
of these cases.
On August 2, one of Mirant's subsidiaries repaid an existing loan, including
interest, of approximately DM62 million ($27 million) in connection with the
acquisition of an additional 18.8% interest in BEWAG.
32
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2001 vs. SECOND QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
OVERVIEW
We are a global competitive energy company with leading energy marketing
and risk management expertise. We have extensive operations in North America,
Europe and Asia. With an integrated business model, we develop, construct, own
and operate power plants, and sell wholesale electricity, gas and other
energy-related commodity products. We own or control more than 21,600 MW of
electric generating capacity around the world, with approximately another 9,000
MW under development. We consider a project under development when it has
contracted to purchase machinery for the project; we own or control the project
site and are in the permitting process. These projects may or may not have
received all of the necessary permits and approvals to begin construction. We
cannot provide assurance that these projects or pending acquisitions will be
completed. In North America, we also control access to approximately 3.0 billion
cubic feet per day of natural gas production, more than 2.9 billion cubic feet
per day of natural gas transportation and approximately 41 billion cubic feet of
natural gas storage.
Through our business development offices in the United States, Canada, The
Netherlands, Hong Kong, Singapore, Brazil, Italy, Switzerland, Germany, Mainland
China, The Philippines and others, we monitor U.S. and international economies
and energy markets to identify and capitalize on business opportunities. Through
construction and acquisition, we have built a portfolio of power plants,
electric distribution companies and electric utilities, giving us a net
ownership and leasehold interest of over 19,000 MW of electric generating
capacity around the world, and control of over 2,500 MW of additional generating
capacity through management contracts. Our business also includes managing risk
associated with market price fluctuations of energy and energy-linked
commodities for us and our customers. We use our risk management capabilities to
optimize the value of our generating and gas assets and offer risk management
services to others. We also own electric utilities with generation transmission
and distribution capabilities and electricity distribution companies.
33
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------
Second Quarter Year-To-Date
------------------------ --------------------------
(in millions)
Operating revenues........................................... $7,288 1139% $14,951 1290%
Expenses
Cost of fuel, electricity and other products................ 6,886 2857% 14,112 3564%
Maintenance................................................. 5 13% 3 4%
Depreciation and amortization............................... 24 33% 29 19%
Selling, general and administrative......................... 130 155% 425 373%
Impairment loss............................................. 79 790% 79 564%
Other operating............................................. 53 98% 82 80%
Other income (expense)
Interest expense, net....................................... (1) - (16) (7)%
Equity in income of affiliates.............................. 11 31% 63 100%
Other, net.................................................. (28) (85)% (18) (46)%
Provision (benefit) for income taxes......................... 54 5400% 177 590%
Minority interest............................................ 3 23% (13) (30)%
Operating revenues. Our operating revenues for the three and six months
ended June 30, 2001 were $7,928 million and $16,110 million, respectively, an
increase of $7,288 million and $14,951 million over the same periods in 2000.
The following factors were responsible for the increase in operating revenues:
o Revenues from generation and energy marketing products for the three and
six months ended June 30, 2001, were $7,777 million and $15,917 million,
respectively, compared to $510 million and $873 million for the same
periods in 2000. These increases of $7,267 million and $15,044 million
resulted primarily from our acquisition of Vastar's 40% interest in Mirant
Americas Energy Marketing effective on August 10, 2000, which is now
consolidated in our financial statements. The increases in revenues were
also attributable to the contribution of the plants we acquired in Maryland
and Virginia in December of 2000 and the commencement of operations at our
Wisconsin plant in May 2000, at our Michigan plant in June 2001 and for the
first and second phases of our Texas plant in June 2000 and 2001,
respectively. The year-to-date increases also resulted from increased
prices of and market demand for natural gas and power in the western U.S.
o Distribution and integrated utility revenues for the three and six months
ended June 30, 2001, were $144 million and $180 million, respectively,
compared to $124 million and $275 million for the same periods in 2000.
These variances were attributable to our acquisition of an 80% interest in
the Jamaican Public Service Company Limited in March 2001, and the
deconsolidation of WPD effective December 1, 2000.
Operating expenses. Operating expenses for the three and six months ended
June 30, 2001, were $7,676 million and $15,579 million, respectively, an
increase of $7,177 million and $14,730 million over the same periods in 2000.
The following factors were responsible for the increase in operating expenses:
34
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
o Cost of fuel, electricity and other products for the three and six months
ended June 30, 2001, was $7,127 million and $14,508 million, respectively,
compared to $241 million and $396 million for the same periods in 2000.
These increases of $6,886 million and $14,112 million resulted primarily
from our acquisition of the remaining 40% of Mirant Americas Energy
Marketing, which is now consolidated in our financial statements. This
increase was also attributable to additional costs from the plants we
acquired in Maryland and Virginia in December of 2000, our acquisition of
80% of the Jamaican Public Service Company Limited in March of 2001 and the
commencement of operations at our Wisconsin plant in May 2000, at our
Michigan plant in June 2001 and at our Texas plant for the first and second
phase in June 2000 and 2001, respectively. The year-to-date increases also
resulted from increased prices of and market demand for natural gas and
power in the western U.S.
o Maintenance expense and Depreciation and amortization expenses for the
three and six months ended June 30, 2001, were $139 million and $255
million, respectively, compared to $110 million and $223 million for the
same periods in 2000. These increases of $29 million and $32 million
resulted primarily from the plants we acquired in Maryland and Virginia in
December of 2000, our acquisition of 80% of the Jamaican Public Service
Company Limited in March of 2001and the commencement of operations at our
Wisconsin plant in May 2000, at our Michigan plant in June 2001 and at our
Texas plant for the first and second phase in June 2000 and 2001,
respectively. These increases were offset somewhat by the deconsolidation
of WPD effective December 1, 2000.
o Selling, general and administrative expense for the three and six months
ended June 30, 2001, was $214 million and $539 million, respectively,
compared to $84 million and $114 million for the same periods in 2000. The
majority of these increases of $130 million and $425 million resulted from
expenses associated with the operations of the plants we acquired in
Maryland and Virginia in December of 2000, our acquisition of 80% of the
Jamaican Public Service Company Limited in March of 2001 and our
acquisition of the remaining 40% of Mirant Americas Energy Marketing, which
is now consolidated in our financial statements. These increases were
offset partially by the deconsolidation of WPD effective December 1, 2000.
The year-to-date increases were also attributable to provisions taken in
relation to uncertainties in the California power market, an increase in
stock-related compensation expense during the first quarter of 2001 and a
reduction to bad debt expense in the first quarter of 2000 resulting from
proceeds related to the Shajiao C venture.
o Impairment loss for the three and six months ended June 30, 2001, was $89
million and $93 million, respectively, compared to $10 million and $14
million for the same periods in 2000. The write-off is primarily
attributable to the $88 million write-off of our investment in our Chilean
subsidiary, EDELNOR.
o Other operating expense for the three and six months ended June 30, 2001,
was $107 million and $184 million, respectively, compared to $54 million
and $102 million for the same periods in 2000. The majority of these
increases of $53 million and $82 million resulted from our acquisition of
the remaining 40% of Mirant Americas Energy Marketing, which is now
consolidated in our financial statements and the contribution of the plants
we acquired in Maryland and Virginia in December of 2000. These increases
were offset partially by the deconsolidation of WPD effective December 1,
2000.
Total Other Income (Expense). Other expense for the three and six months
ended June 30, 2001, was $57 million and $55 million, respectively, compared to
other expense of $41 million and $116 million from the same periods in 2000. The
increase of $16 million and decrease of $61 million were primarily due to:
35
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
o Interest expense, net for the three and six months ended June 30, 2001, was
$109 million and $202 million, respectively, compared to $110 million and
$218 million for the same periods in 2000. These decreases of $1 million
and $16 million were primarily due to the deconsolidation of WPD effective
December 1, 2000. This was offset by interest expense in 2001 related to
additional debt financings to fund acquisitions and working capital,
increased expense from the consolidation of the remaining 40% of Mirant
Americas Energy Marketing and greater use of lines of credit to support
growth in the energy marketing business.
o Equity in income of affiliates for the three and six months ended June 30,
2001, was $47 million and $126 million, respectively, an increase of $11
million and $63 million from the same periods in 2000. These increases were
due to income from WPD after the deconsolidation effective December 1,
2000, income from WPD Limited after our acquisition of Hyder and increased
earnings from Bewag. This was somewhat offset by losses from the Mirant
Americas Energy Marketing during the first half of 2000 prior to our
acquisition of the remaining 40% of Mirant Americas Energy Marketing.
o Other income for the three and six months ended June 30, 2001, was $5
million and $21 million, respectively, compared to $33 million and $39
million from the same periods in 2000. The decreases were primarily the
result of the partial settlement of a commercial dispute with an outside
advisor in the second quarter of 2000.
Provision (Benefit) for Income Taxes. The provision for income taxes for
the three and six months ended June 30, 2001, was $55 million and $147 million,
respectively, an increase of $54 million and $177 million for the same periods
in 2000. These increases are primarily due to the substantial increase in income
generated by the Americas Group, additional taxes related to a change in our
cash repatriation strategy for the Asian operations and additional provisions
related to our consolidated tax position taken in the first quarter of 2001.
Minority Interest. Minority interest for the three and six months ended
June 30, 2001, was $16 million and $30 million, respectively, an increase of $3
million and a decrease of $13 million for the same periods in 2000. These
variances were primarily due to accrued dividends on the trust preferred
securities in 2001 and income from our acquisition of 80% of the Jamaican Public
Service Company Limited in March of 2001, offset by the deconsolidation of WPD
effective December 1, 2000.
36
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Earnings
Our consolidated net income from continuing operations for the three and
six months ended June 30, 2001, was $124 million and $299 million, respectively.
Adjusting for the final write-off of our Chilean investment ($57 million net of
tax) our income from operations was $181 million and $356 million, respectively,
($0.53 and $1.05 basic earnings per share and $0.52 and $1.02 diluted earnings
per share) compared to $86 million and $181 million ($0.32 and $0.67 basic and
diluted earnings per share) for the corresponding periods of 2000. This excludes
the net income from our discontinued operations (SE Finance) of $7 million for
the three months ended June 30, 2000, and $5 million and $13 million for the six
months ended June 30, 2001 and 2000, respectively. The increases of $95 million
or 110% and $175 million or 97% from the same periods in 2000 are attributable
to our business segments as follows:
Americas
Net income from continuing operations for the Americas Group (excluding the
write-off of our investment in EDELNOR) totaled $157 million and $330 million
for the three and six months ended June 30, 2001. This represents an increase of
$126 million and $302 million from the same periods in 2000 and is primarily
attributable to the contribution of the plants we acquired in Maryland and
Virginia in December of 2000, our acquisition of 80% of the Jamaican Public
Service Company Limited in March of 2001 and the commencement of operations at
our Wisconsin plant in May 2000, our plant in Michigan in June 2001 and the
first and second phases of our Texas plant in June 2000 and 2001, respectively.
The year-to-date increase was also attributable to increased price volatility
and market demand for natural gas and power in the U.S. and natural gas in
Canada. This was partially offset by $147 million ($245 million pre-tax) which
was provided in relation to the uncertainties in the California power market in
the first quarter of 2001. The total amount of provisions made during 2000 and
2001 in relation to these uncertainties was $177 million ($295 million pre-tax).
As of June 30, 2001, the total amount owed to us by the CAISO and the PX was
$353 million pre-tax.
Europe
Net income from the Europe Group totaled $24 million and $48 million for
the three and six months ended June 30, 2001, an increase of $12 million and $5
million from the same periods in 2000. These increases for the second quarter
resulted primarily from the SWALEC electricity distribution business purchased
as part of the Hyder acquisition in the fourth quarter of 2000. The year-to-date
increase was also attributable to increased net earnings from WPD and Bewag.
This was offset by net losses from the energy marketing operations in the first
quarter and increased business development expenses.
Asia-Pacific
Net income from the Asia-Pacific Group totaled $45 million and $96 million
for the three and six months ended June 30, 2001, a decrease of $19 million and
$51 million from the same periods in 2000. The decreases in net income include
an increase in accrued income taxes in 2001 resulting from a change in our cash
repatriation strategy for our Asian operations and recognition in 2000 of
additional proceeds from settlements related to the Shajiao C venture.
Corporate
After-tax corporate expenses produced a net loss from continuing operations
of $45 million and $118 million for the three and six months ended June 30,
2001, an increase of $24 million and $81 million for the same period in 2000.
This excludes the net income from our discontinued operations. The increased
costs primarily reflect increased interest expense on corporate borrowings used
to fund acquisitions, working capital, stock-related compensation expense,
income tax expense and various other Corporate expenses.
37
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other 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 provisions of
SFAS No. 141 are effective for all business combinations initiated after June
30, 2001 and all business combinations accounted for using the purchase method
for which the date of acquisition is July 1, 2001 or later. 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 our 2002 fiscal year or for business combinations
initiated after July 1, 2001. We are currently assessing the financial statement
impact of both statements and have not yet determined the final impact.
Effective January 1, 2001, Mirant adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
statement requires that certain derivative instruments be recorded in the
balance sheet as either assets or liabilities measured at fair value, and that
changes in the 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, and the gains and
losses related to these derivatives are recognized in earnings in the same
period as the settlement of the underlying hedged transaction. If the derivative
is designated as a net investment hedge, the changes in the fair value of the
derivative are also recorded in OCI. Any ineffectiveness relating to these
hedges is recognized currently in earnings. The assets and liabilities related
to derivative instruments for which hedge accounting criteria is met are
reflected as derivative hedging instruments in the accompanying condensed
consolidated balance sheet at June 30, 2001.
FINANCIAL CONDITION
Cash provided by operating activities totaled approximately $165 million
for the six months ended June 30, 2001 as compared to approximately $217 million
for the same period last year. This decrease and the difference between net
income and cash from operations is primarily due to the payment of operating
costs related to amounts owed from the CAISO and California PX and obligations
under energy delivery contracts and power purchase agreements with PEPCO. In
addition, the cash flows of WPD are now reflected as cash flows from investing
activities as we receive dividends from this subsidiary. In the prior year,
these cash flows were reflected in cash flows from operating activities as we
were consolidating this subsidiary.
Cash used in investing activities totaled $1,029 million for the six months
ended June 30, 2001, as compared to $164 million for the same period in 2000.
The increase is primarily attributable to additional capital expenditures in
North America and to the acquisition of an additional 18.8% interest in Bewag
and our Jamaican investment in March of 2001. We used cash flows provided by
financing activities primarily to finance investments in our subsidiaries.
Cash provided from financing activities totaled approximately $1,018
million for the six months ended June 30, 2001, as compared to $321 million for
the same period in 2000. The increase is primarily attributable to proceeds of
$3,044 million from the issuance of short-term and long-term debt to fund
working capital, acquisitions and capital expenditures and to repay existing
debt. This increase was partially offset by $2,193 million in payments of
long-term debt.
38
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We expect our cash and financing needs over the next several years to be
met through a combination of cash flows from operations and debt and equity
financings. We have generally financed the operations of our project
subsidiaries primarily under financing arrangements requiring extensions of
credit to be repaid solely from each of our subsidiaries' cash flows. In
addition, subsidiaries financed in this manner are often restricted in their
ability to pay dividends and management fees periodically to us by their
respective project credit documents. These limitations usually require that debt
service payments be current, debt service coverage ratios be met and there be no
default or event of default under the relevant credit documents. There are also
additional limitations that are adapted to the particular characteristics of
each project affiliate.
On May 31, 2001, we completed the issuance of $750 million of convertible
senior debentures bearing an annual interest rate of 2.5%, subject to upward
adjustment, commencing on June 15, 2004, depending on the market price of our
common stock. The debentures mature on June 15, 2021 and have an initial
conversion price of $67.95 per share based on the issue price of the debentures.
Holders of the debentures have the right to require us to purchase all or a
portion of their debentures on June 15, 2004, June 15, 2006, June 15, 2011 and
June 15, 2016. We may repurchase such securities with cash or common stock, at
our election, and intend to use cash for such purposes for securities of this
nature. The net proceeds of $738.8 million from the sale of the debentures were
used for general corporate purposes, including the repayment of short-term debt.
As of June 30, 2001, we had four credit facilities: a $450 million
revolving credit facility, a $100 million letter of credit facility, a $62
million (initially $1.0 billion) term credit facility and $426 million
(initially $650 million) term credit facility. As of June 30, 2001, we had
issued letters of credit in an aggregate amount of $221 million and $96 million,
respectively, under the $450 million revolving credit facility and the $100
million letter of credit facility.
As of June 30, 2001, we were pursuing $2,250 million of new corporate
revolving credit facilities, comprised of a $1,125 million 364-day revolving
credit facility and a $1,125 million 4-year revolving credit facility. Funds
from the new revolving credit facilities will be used to finance interim working
capital, support letters of credit, provide for general corporate purposes and
replace existing credit facilities. These new facilities closed on July 17,
2001.
As of June 30, 2001, we and our subsidiaries had $1,453 million of cash and
cash equivalents. Of this amount, the parent company Mirant Corporation held
$401 million, primarily to fund payments associated with transition power
agreements with PEPCO.
In April 2001, Mirant Americas Energy Capital amended its existing
unsecured line-of-credit facility to reduce its borrowing capacity by $25
million to $25 million. The facility bears interest based on the LIBOR plus 200
basis points. Interest is payable based on maturity of the chosen interest
period. The outstanding borrowings were $25 million at an interest rate of 6.03%
at June 30, 2001. The facility matures in March 2003.
In May 2001, Mirant Americas Generation issued $1.75 billion in senior
unsecured notes under Rule 144A of the Securities Act. The notes issued included
$500 million of 7.625% senior notes due 2006, $850 million of 8.3% senior notes
due 2011, and $400 million of 9.125% senior notes due 2031. The net proceeds
from these notes were used to repay existing credit facilities as discussed in
the following paragraph. Interest on the notes is payable semiannually beginning
November 1, 2001. Mirant Americas Generation may redeem the notes, in whole or
in part, at any time at a redemption price equal to 100% of the principal amount
plus accrued interest, plus a make-whole premium, as defined in the note
agreements. Mirant
39
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Americas Generation has initiated an exchange offer under an effective
registration statement pursuant to which it will exchange the notes for notes
registered under the Securities Act.
In May 2001, Mirant Americas Generation repaid amounts under its existing credit
facilities with the proceeds of the issuance of the notes. Mirant Americas
Generation repaid in full its $1.15 billion credit facility, which was scheduled
to mature in October 2002. In addition, Mirant Americas Generation repaid
amounts outstanding under its $250 million and $50 million revolving credit
facilities. The commitments under its $250 million and $50 million revolving
credit facilities, with an annual commitment fee of 17.5 basis point per annum,
remain available through October 2004. Under the revolving credit facilities,
Mirant Americas Generation may elect to borrow at a base rate or at LIBOR plus
an applicable margin based on its credit rating at the date of borrowing.
Interest is payable on the maturity of the chosen interest period. There were no
outstanding borrowings under the revolving credit facilities at June 30, 2001.
In addition, in May 2001, Mirant Americas Generation repaid $175 million on
the $870 million acquisition facility. The $150 million working capital facility
was also fully repaid although amounts have subsequently been drawn thereunder.
Under these facilities, Mirant Americas Generation may elect to borrow at a base
rate or at LIBOR plus an applicable margin based on its credit rating at the
date of borrowing. The outstanding borrowings under the acquisition credit
facility and the working capital facility were $695 million and $55 million, at
interest rates of 5.03% and 4.80%, respectively, at June 30, 2001. Both the
acquisition credit facility and the working capital facility mature in September
2002.
In connection with the acquisition of an additional 18.8% interest in
Bewag, one of Mirant's subsidiaries closed financing on approximately DM 1,350
million ($587 million U.S. Dollar) of new bank credit facilities, the proceeds
of which were used for repayment of existing credit facilities of approximately
DM 1,015 million ($441 million U.S. Dollar), to fund a portion of the purchase
price for the additional shares and for working capital requirements. In
addition, an existing loan, including interest, of approximately DM62 million
($27 million) was also repaid.
The market price of our common stock at June 30, 2001 was $34.40 per share and
the book value was $13.29 per share based on the 340,350,249 million shares
outstanding at June 30, 2001, representing a market-to-book ratio of 259%.
Litigation and Other Contingencies
Reference is made to Note I to the financial statements filed as part of
this quarterly report on Form 10-Q relating to the following litigation matters
and other contingencies:
o Reliability-Must-Run Agreements
o Defaults by SCE and PG&E
o DWR Power Purchases
o CAISO and PX Price Caps
o Western Power Market Investigations
o California Rate Payer Litigation
o CAISO Claim before the FERC
o Consumers Union Complaint
o Environmental Suit and Notice of Intent to File Suit
o FERC Settlement Conference
o Proposed Windfall Profits Tax
40
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
o Pacific Gas & Electricity Bankruptcy
o CARE Complaint
o PX Bankruptcy
o New York Independent System Operator Automatic Mitigation Plan
o Mobile Energy
o State Line
o CEMIG
Additionally, for recent events occurring after June 30, 2001 reference is
made to Note K to the financial statements filed as part of this quarterly
report on Form 10-Q.
In addition to the proceedings described above, we experience routine
litigation from time to time in the normal course of our business, which is not
expected to have a material adverse effect on our financial condition or results
of operations.
41
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our energy marketing activities, our energy marketing and risk
management subsidiaries enter into a variety of contractual commitments, such as
swaps, swap options, cap and floor agreements, futures contracts, forward
purchase and sale agreements and option contracts. These contracts generally
require future settlement and are either executed on an exchange or traded as
OTC instruments. Contractual commitments have widely varying terms and have
durations that range from a few days to a number of years, depending on the
instrument.
The way in which we account for and present contractual commitments in our
financial statements depends on both the type and purpose of the contractual
commitment held or issued. As discussed in the summary of accounting policies,
we record all contractual commitments used for trading purposes, including those
used to hedge trading positions, at fair value. Consequently, changes in the
amounts recorded in our condensed consolidated balance sheets resulting from
movements in fair value are included in trading revenues in the period in which
they occur. Contractual commitments expose us to both market risk and credit
risk.
Market Risk
Market Risk is the potential loss that we may incur as a result of changes
in the fair value of a particular instrument or commodity. All financial and
commodities-related instruments, including derivatives, are subject to market
risk. Our exposure to market risk is determined by a number of factors,
including the size, duration, composition, and diversification of positions held
and the absolute and relative levels of interest rates, as well as market
volatility and liquidity. For instruments such as options, the time period
during which the option may be exercised and the relationship between the
current market price of the underlying instrument and the option's contractual
strike or exercise price also affects the level of market risk. The most
significant factor influencing the overall level of market risk to which we are
exposed is our use of various risk management techniques. We manage market risk
by actively monitoring compliance with stated risk management policies as well
as monitoring the effectiveness of our hedging policies and strategies through
our risk oversight committees. Our risk oversight committees review and monitor
compliance with risk management policies that limit the amount of total net
exposure and rolling net exposure during the stated periods. These policies,
including related risk limits, are approved by the Group Boards of Directors and
are regularly assessed by management to ensure their appropriateness given our
objectives. Our corporate risk control officer is a member of the Group risk
oversight committees to ensure that information is communicated to our senior
management and audit committee as needed.
We employ a systematic approach to the evaluation and management of the
risks associated with our energy marketing and risk management-related
contracts, including Value-at-Risk ("VaR"). VaR is defined as the maximum loss
that is not expected to be exceeded with a given degree of confidence and over a
specified holding period. We use a 95% confidence interval and holding periods
that vary by commodity and tenor, to evaluate our VaR exposure. Based on a 95%
confidence interval and employing a one-day holding period for all positions,
our portfolio of positions had a VaR of $16 million at June 30, 2001. During the
six months ending June 30, 2001, the actual daily change in fair value exceeded
the corresponding daily VaR calculation twice, which falls within our 95%
confidence interval. In addition to VaR, we utilize additional risk control
mechanisms such as commodity position limits and stress testing of the total
portfolio and its components.
The determination of net notional amounts does not consider any of the
market risk factors discussed above. Net notional amounts are indicative only of
the volume of activity and are not a measure of market risk. Market risk is also
influenced by the relationship among the various off-balance sheet categories,
as
42
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
well as by the relationship between off-balance sheet items and items recorded
in our condensed consolidated balance sheets. For all of these reasons, the
interpretation of net notional amounts as a measure of market risk could be
misleading.
The fair values of our assets from risk management activities recorded in
the condensed consolidated balance sheets at June 30, 2001, were comprised
primarily of approximately 46% electricity and 50% natural gas. The fair values
of the liabilities from risk management activities recorded in the condensed
consolidated balance sheets at June 30, 2001, were comprised primarily of
approximately 44% electricity and 51% natural gas.
Credit Risk
In conducting our energy marketing and risk management activities, we
regularly transact business with a broad range of entities and a wide variety of
end users, trading companies, and financial institutions. Credit risk is
measured by the loss we would record if our counterparties failed to perform
pursuant to the terms of their contractual obligations and the value of
collateral held, if any, were not adequate to cover such losses. We have
established controls to determine and monitor the creditworthiness of
counterparties, as well as the quality of pledged collateral, and uses master
netting agreements whenever possible to mitigate our exposure to counterparty
credit risk. Master netting agreements enable us to net certain assets and
liabilities by counterparty. We also net across product lines and against cash
collateral, provided such provisions are established in the master netting and
cash collateral agreements. Additionally, we may require counterparties to
pledge additional collateral when deemed necessary.
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. We
monitor credit risk on both an individual basis and a group counterparty basis.
As of June 30, 2001, our exposure to one counterparty, the California
Department of Water Resources, represented more than 10% of our total credit
exposure. Our overall exposure to credit risk may be impacted, either positively
or negatively, because our counterparties may be similarly affected by changes
in economic, regulatory or other conditions.
43
PART II OTHER INFORMATION
Item 1. Legal Proceedings
CEMIG. Reference is made to the "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Litigation and Other
Contingencies" section of our annual report on Form 10-K filed March 21, 2001,
as amended by Form 10-K/A, filed on June 29, 2001 and the "CEMIG" section of our
quarterly report on Form 10-Q filed May 10, 2001. On July 19, 2001, SEB, of
which we own a 25% economic interest, and BNDES executed an amendment revising
the terms to the existing loan agreement, including a favorable adjustment to
the payment terms for 2001 and 2002.
Western U.S. Power Market Investigations. Reference is made to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Litigation and Other Contingencies" section of our annual report on
Form 10-K filed March 21, 2001, as amended by Form 10-K/A, filed on June 29,
2001 and the "Attorney General, California Public Utilities Commission and State
Senate Investigations" section of our quarterly report on Form 10-Q filed May
10, 2001. Additionally, investigations have also been launched by the Attorney
General's office for the State of Washington and the Oregon Department of
Justice. These offices issued subpoenas requesting information in connection
with their investigations on June 4 and 8, 2001, respectively. Each of these
subpoenas imposes additional compliance costs on us or our subsidiaries.
Additionally, with regard to the California Senate investigation, Senator Dunn,
a California State Senator, announced on May 3, 2001 that he had invited the
California Attorney General, as well as the District Attorneys from across the
state to "collaborate" with the Senate Select Committee's investigation. To our
knowledge, only the San Joaquin District Attorney has accepted the invitation,
and the San Joaquin District Attorney's office used Dunn's announcement as a
venue to disclose that it had opened its own criminal investigation into the
wholesale energy markets on April 11, 2001. On June 12, 2001, we received a
subpoena from the California Senate formalizing its earlier information request
to us. Despite various measures taken to protect the confidentiality of
sensitive information produced to the various agencies involved in western
United States power market investigations, there remains a risk of governmental
disclosure of confidential, proprietary and trade secret information obtained by
these agencies throughout the investigative process.
While we will vigorously defend any claims of potential civil liability or
criminal wrongdoing asserted against us or our subsidiaries, the results of such
investigations cannot now be determined.
Reliability-Must-Run Agreements. Reference is made to the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Litigation and Other Contingencies" section of our annual report on
Form 10-K filed March 21, 2001, as amended by Form 10-K/A, filed on June 29,
2001. On June 7, 2000, the administrative law judge presiding over the
proceeding issued an initial decision in which responsibility for payment of
approximately 3% of the revenue requirement was allocated to the CAISO. On July
7, 2000, we appealed the administrative law judge's decision to the FERC. The
outcome of this appeal cannot be determined. A final FERC order in this
proceeding may be appealed to the U.S. Court of Appeals.
California Rate Payer Litigation. Reference is made to the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Litigation and Other Contingencies-California Class Action
Litigation" section of our annual report on Form 10-K filed March 21, 2001, as
amended by Form 10-K/A, filed on June 29, 2001, and the "California Rate Payer
Litigation" section of our quarterly report on Form 10-Q filed May 10, 2001. On
June 8, 2001, the Judicial Panel on Multidistrict Litigation ruled that People
of the State of California v. Dynegy, et al, Gordon v. Reliant Energy, Inc., et
al, Hendricks v. Dynegy Power Marketing, Inc. et al, Sweetwater Authority, et al
v. Dynegy, Inc., et al Bustamante, et al v. Dynegy, Inc., et al and Pier 23
Restaurant v. PG&E Energy Trading, et al should be consolidated for purposes of
pretrial proceedings.
On July 30, 2001, the United States District Court for the Southern
District of San Diego remanded the California electricity cases currently
44
assigned to it (all of the cases except Bustamante, which is pending assignment
to the same judge) to the superior courts of the State of California based upon
an absence of federal question jurisdiction. We cannot predict the outcome of
these cases.
Other California-Related Litigation. On June 19, 2001, a Clean Air Act
citizen suit was filed in the United States District Court for the Northern
District of California by Bayview Hunters Point Community Advocates, Communities
for a Better Environment and Our Children's Earth Foundation, against us and the
Bay Area Air Quality Management District, alleging violations of federal
permitting requirements resulting from our Potrero peaking units exceeding
permit limits on total annual hours of operation. The lawsuit also alleges that
the District's agreement with us implementing Executive Orders of the Governor
of California and allowing operation of the Potrero peaking units beyond their
permitted operating hours (under limited conditions specified in the agreement)
violates the California Environmental Quality Act ("CEQA"). Also on June 19,
2001, the City and County of San Francisco filed a similar suit in the same
court against us only, and excluding the CEQA allegations. EPA Region 9 has
issued an Administrative Order on Consent in recognition of our agreement with
the District and specifying a compliance schedule. The suits seek an injunction
preventing operation of the units, federal civil penalties of up to $27,500 per
day per violation, state civil penalties of $2,500 for each act of unfair
competition, disgorgement of any profits obtained through unfair business
practices and invalidation of the agreement between us and the District.
On June 19, 2001, Bayview Hunters Point Community Advocates, Communities
for a Better Environment and Our Children's Earth Foundation, collectively, and
the City and County of San Francisco, each delivered to us a Notice of Intent to
File Suit Under the Clean Air Act. These notices state that on 60 days from June
19, the parties will file Clean Air Act citizen suits against us alleging
violations of the California State Implementation Plan, the Title V operating
permit for the Potrero facility, and federal permitting requirements for
modified facilities. These violations are alleged to result from operation of
the Potrero peaking units beyond their permit limits on total annual hours of
operation. The parties state that they seek injunctive relief, penalties and
costs of litigation if the matters are not resolved within the 60-day period. On
June 26, 2001, we filed with the FERC an Emergency Request for clarification
seeking confirmation by the FERC that the Potrero jets are exempt from the
FERC's "must run" requirements, once they exceed their permitted operating
limits. On July 25, 2001, the FERC issued an order confirming that we are not
required to run our Potrero jets if doing so would cause us to not be in
compliance with our environmental permits.
FERC Developments Relating to the Western U.S. Power Markets. On June 7,
2001, the CAISO filed a motion with the FERC to revoke the market-based rate
authority issued by the FERC to several of our subsidiaries engaged in the
California market. The CAISO also requested that the FERC order refunds for
sales dating back to May 1, 2000, and that the FERC investigate whether we
exercised market power prior to May 1, 2000. If this motion were to be fully
approved, it would subject the applicable subsidiaries to cost-based rates under
the FERC's jurisdiction. While we do not believe that the CAISO will gain full
approval of its motion, we cannot currently predict what action the FERC will
take, if any, or what impact the CAISO's motion will have on our California
subsidiaries' operations.
On June 13, 2001, the FERC issued an order denying rehearing on its April
6, 2001 order rejecting the CAISO's request for a proposed amendment concerning
the creditworthiness of the CAISO's counterparties. Under the terms of the April
6, 2001 order, the CAISO must continue to provide a creditworthy counterparty
for all power transactions.
On June 15, 2001, the Consumers Union of U.S., Inc. filed a petition at the
FERC requesting immediate action to protect consumers against unjust and
unreasonable charges for electricity in the western United States, including (1)
immediate suspension of market-based rate authority for all sellers subject to
the FERC's jurisdiction, (2) the requirement of seller to make cost of service
filings with the FERC, (3) the determination of just and reasonable rates for
sellers based on their cost of service and (4) the ordering of refunds for any
unjust or unreasonable rates and charges. On July 16, 2001, several of our
subsidiaries filed a response to the petition, arguing that the petition should
be dismissed. We cannot determine at this time what action, if any, the FERC
will take with respect to this complaint.
45
On June 19, 2001, the FERC issued an order on rehearing of its April 26
order. The June 19 order affirmed many of the key provisions of the April 26
order, but also broadened the scope of that order to include all spot market
sales in markets throughout the WSCC. The price mitigation plan to be
implemented pursuant to the June 19 order became effective June 20, 2000, and
extends until September 30, 2002. Under to the June 19 order, the FERC retained
the use of a single market clearing price for sales in the CAISO's spot markets
in reserve deficiency hours (i.e., when reserves are below 7 percent in
California), as well as the requirement that all public and non-public utilities
which own or control non-hydroelectric generation in California must offer power
in the CAISO's spot markets, to the extent the output is not scheduled for
delivery in the hour. However, the FERC revised the method for calculating the
market clearing price, specifying that: (a) generation unit owners must submit
bids during reserve deficiencies that are no higher than the seller's marginal
gas costs plus variable O&M costs set at $6/MWh; (b) generation unit owners may
not reflect start-up fuel and emissions costs in the energy price, but must
invoice the CAISO separately for these costs, which the CAISO will recover
through a newly-imposed system-wide charge; (c) the ability to cost-justify a
higher price is available only to generation owners; marketers may not bid above
the market clearing price; and (d) the CAISO must add 10 percent to the market
clearing price paid to generators for all prospective sales in its markets to
reflect credit uncertainty. The adder will not be reflected in the market price
for the rest of the WSCC.
The June 19 order also extended the FERC's price mitigation regime to the
rest of the WSCC and to non-reserve deficiency hours. For spot market sales
outside the CAISO single price auction (i.e., bilateral sales in California and
sales in the balance of the WSCC), the June 19 order provides that sellers will
receive the price they negotiate, up to the CAISO spot market price, and that
all public and non-public utilities in the remainder of the WSCC must offer in
the spot market of their choosing any non-hydroelectric resource whether owned
or under contract to the extent the output is not scheduled for delivery in the
hour. In all non-reserve deficiency hours (i.e. when reserve levels in the CAISO
exceed 7 percent), the June 19 order provides that the market clearing price
within California and throughout the WSCC will be set at 85 percent of the
highest CAISO hourly market clearing price established during the most recent
reserve deficiency period. This price will remain in place until reserves fall
below 7 percent and a new price is set.
In addition, the June 19 order called for a settlement conference to
address any and all issues concerning the California markets, including payment
for past due amounts, refunds related to past periods, and creditworthiness
issues. In accordance with the June 19 order, the FERC's Chief Administrative
Law Judge convened a 15-day settlement conference on June 25. Parties in the
SDG&E complaint proceeding, the State of California, and other interested
parties participated in the settlement conference. The parties were unable to
reach settlement on the issues at the settlement conference. On July 12, 2001,
the Chief Judge issued a recommendation to the FERC, which included a proposed
methodology for the FERC to adopt to issue refunds for sales into the CAISO and
PX markets, as well as a 60 day hearing procedure to determine the appropriate
amount of refunds for each jurisdictional seller. On July 12, we filed comments
on the Chief Judge's recommendation, and on July 19, also filed a request for
rehearing of the June 19 order.
On July 12, as comments to the Chief Judge's recommendation, the California
Attorney General, the California Electricity Oversight Board, the county of Los
Angeles, the CPUC, and SDG&E filed a Motion for Refunds at the FERC, requesting
the FERC to order refunds for the CAISO, PX, and bilateral markets back to May
1, 2000. On July 25, 2001, the FERC ordered a hearing to be held to determine
refund amounts (and offsets) for certain sales in CAISO and California PX from
October 2, 2000 through June 20, 2001, based upon the methodology recommended by
the presiding Administrative Law Judge
On June 26, 2001, we filed with the FERC an Emergency Request for
clarification seeking confirmation by the FERC that the Potrero jets are exempt
from the FERC's "must run" requirements, once they exceed their permitted
operating limits. On July 25, 2001, the FERC issued an order confirming that we
are not required to run our Potrero jets if doing so would cause us to not be in
compliance with our environmental permits.
46
CAISO and PX Price Caps. Reference is made to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Litigation and
Other Contingencies" section of our annual report on Form 10-K filed March 21,
2001, as amended by Form 10-K/A, filed on June 29, 2001, and in our quarterly
report on Form 10-Q filed May 10, 2001. On May 16, 2001 and June 15, 2001, the
FERC issued its proxy price for April and May 2001, respectively. Our refund
exposure under the FERC's established methodology for these months was less than
$4,000. We have also provided additional price justification for our
transactions in March and May that were subject to refund, the aggregate of
which amounts to less than $100,000. There were no April transactions subject to
refund under the FERC's established methodology.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 17, 2001. The following
resolutions were voted upon at this meeting:
(1) A proposal to approve the Mirant Omnibus Incentive Compensation Plan was
adopted by a vote of 308,721,170 shares for; 15,097,451 shares against; and
58,761 shares abstaining.
(2) A proposal to approve the Mirant Employee Stock Purchase Plan was adopted
by a vote of 323,759,545 shares for; 94,708 shares against; and 23,129
shares abstaining.
(3) Each nominee for director of Mirant for the term ending in 2004 received
the requisite plurality of votes. The vote tabulation was as follows:
Nominees Shares For Shares Withheld
--------- ---------- ---------------
S. Marce Fuller 328,929,756 32,060
David J. Lesar 328,931,225 30,591
Ray M. Robinson 328,926,275 35,541
(4) Other directors whose term of office as director continued after our annual
meeting were A.W. Dahlberg, William M. Hjerpe, Stuart E. Eizenstat, A.D.
Correll, Carlos Ghosn and James F. McDonald.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
---------
(b) Reports on Form 8-K.
--------------------
During the quarter ended June 30, 2001, we filed a Current Report on Form
8-K dated May 31, 2001. Item 5 was reported and no financial statements were
filed.
During the quarter ended June 30, 2001, we filed a Current Report on Form
8-K dated April 3, 2001. Item 1 was reported and no financial statements were
filed.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MIRANT CORPORATION
By
------------------------------------------------
/s/James A. Ward
James A. Ward
Senior Vice President, Finance
And Accounting
(Principal Accounting Officer)
Date: August 10, 2001