**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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Form 10-K

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Fiscal Year Ended December 31, 2004**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Transition Period from              to              **

**Mirant Americas Generation, LLC**

(Exact name of registrantas specified in its charter)
| **Delaware**                                                      | **N/A**                   | **51-0390520**                        |
|-------------------------------------------------------------------|---------------------------|---------------------------------------|
| (State or other  jurisdiction of  Incorporation or Organization)  | (Commission File  Number) | (I.R.S. Employer  Identification No.) |
| **1155 Perimeter Center West,  Suite 100, Atlanta, Georgia** | **30338**                 |
| (Address of  Principal Executive Offices)                         | (Zip Code)                |
| **(678) 579-5000**                                                | **www.mirant.com**        |
| (Registrant’s  Telephone Number, Including Area Code)        | Web Page                  |
|                                                                   |                           |                                       |  |

 

**Securities registered pursuant toSection 12(b) of the Act:**

**None**

**Securities registered pursuant toSection 12(g) of the Act:**

**None**

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. o  Yes  x  No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrants’knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is an accelerated filer (as defined by Rule 12b-2of the Act). o  Yes  x  No

All of our outstandingmembership interests are held by our parent, Mirant Americas, Inc., so wehave no membership interests held by nonaffiliates.

Wehave not incorporated by reference any information into this Form 10-Kfrom any annual report to securities holders, proxy statement or registrationstatement.

 

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**TABLE OF CONTENTS**
|               | ** ** | ** **                                                                                                          | ** ** | **Page** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **    |       | **PART I**                                                                                                     |       |     |   |
| Item 1.       |       | Business                                                                                                            |       | 6        |   |
| Item 2.       |       | Properties                                                                                                          |       | 25       |   |
| Item 3.       |       | Legal  Proceedings                                                                                                  |       | 25       |   |
| Item 4.       |       | Submission  of Matters to a Vote of Security Holders                                                                |       | 50       |   |
| ** **    |       | **PART II**                                                                                                    |       |     |   |
| Item 5.       |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 51       |   |
| Item 6.       |       | Selected  Financial Data                                                                                            |       | 51       |   |
| Item 7.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 52       |   |
| Item 7A. |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 71       |   |
| Item 8.       |       | Financial  Statements and Supplementary Data                                                                        |       | 73       |   |
| Item 9.       |       | Changes  In and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 74       |   |
| Item 9A.      |       | Controls  and Procedures                                                                                            |       | 74       |   |
| ** **    |       | **PART III**                                                                                                   |       |     |   |
| Item 10.      |       | Directors  and Executive Officers of the Registrant                                                                 |       | 75       |   |
| Item 11.      |       | Executive  Compensation                                                                                             |       | 77       |   |
| Item 12.      |       | Security  Ownership of Certain Beneficial Owners and Management                                                     |       | 77       |   |
| Item 13.      |       | Certain  Relationships and Related Transactions                                                                     |       | 77       |   |
| Item 14.      |       | Principal  Accountant Fees and Services                                                                             |       | 77       |   |
| ** **    |       | **PART IV**                                                                                                    |       |     |   |
| Item  15.     |       | Exhibits and Financial Statements                                                                                   |       | 78       |   |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGINFORMATION**

The information presented in this Form 10-Kincludes forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 in addition to historical information. These statements involveknown and unknown risks and uncertainties and relate to future events, ourfuture financial performance or our projected business results. In some cases,you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“target,” “potential” or “continue” or the negative of these terms or othercomparable terminology.

Forward-lookingstatements are only predictions. Actual events or results may differ materiallyfrom any forward-looking statement as a result of various factors, whichinclude:

**General Factors**

·       legislative and regulatoryinitiatives regarding deregulation, regulation or restructuring of the electricutility industry; changes in state, federal and other regulations (includingrate and other regulations); changes in, or changes in the application of,environmental and other laws and regulations to which we and our subsidiariesand affiliates are or could become subject;

·       failure of our assets toperform as expected;

·       our pursuit of potentialbusiness strategies, including the disposition or utilization of assets;

·       changes in marketconditions, including developments in energy and commodity supply, demand,volume and pricing or the extent and timing of the entry of additionalcompetition in our markets or those of our subsidiaries and affiliates;

·       marketvolatility or other market conditions that could increase our affiliates’obligations to post collateral beyond amounts which are expected;

·       our inabilityto access effectively the over-the-counter (“OTC”) and exchange-based commoditymarkets or changes in commodity market liquidity or other commodity marketconditions, which may affect our ability to engage in asset hedging activitiesas expected;

·       strikes, union activity orlabor unrest;

·       weather and other naturalphenomena;

·       war, terrorist activitiesor the occurrence of a catastrophic loss;

·       deterioration in thefinancial condition of our counterparties and the resulting failure to payamounts owed to us or to perform obligations or services due to us;

·       hazards customary to thepower generation industry and the possibility that we may not have adequateinsurance to cover losses as a result of such hazards;

·       price mitigation strategiesemployed by independent system operators that result in a failure to compensateour generation units adequately for all of their costs;

·       volatility in our financialresults as a result of our hedging activities;

·       our inability to enter intointermediate and long-term contracts to sell power and procure fuel on termsand prices acceptable to us;

·       the inability of ouroperating subsidiaries to generate sufficient cash flow and our inability toaccess that cash flow to enable us to make debt service and other payments;

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·       our substantialindebtedness and the possibility that we or our subsidiaries may incuradditional indebtedness in the future;

·       restrictions on the abilityof our subsidiaries to pay dividends, make distributions or otherwise transferfunds to us, including restrictions on Mirant Mid-Atlantic contained in itsleveraged lease financing agreements; and

·       thedisposition of the pending litigation described in this Form 10-K.

**Bankruptcy-Related Factors**

·       the lack of comparablefinancial data due to the restructuring of our business and the adoption offresh start reporting;

·       the actions and decisionsof our creditors and of other third parties with interests in the voluntarypetitions for reorganization filed with the U.S. Bankruptcy Court for theNorthern District of Texas, Fort Worth Division (the “Bankruptcy Court”), on July 14,2003, July 15, 2003, August 18, 2003, October 3, 2003 and November 18,2003, by Mirant Corporation (“Mirant”) and substantially all of itswholly-owned and certain non-wholly-owned U.S. subsidiaries (“Mirant Debtors”)under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “BankruptcyCode”), including actions taken by our creditors and other third parties withrespect to our proposed plan of reorganization, filed with the Bankruptcy Courton January 19, 2005 as amended on March 25, 2005 and any subsequentamendments thereto (the “Plan”);

·       the Mirant Debtors’ abilityto satisfy the conditions precedent to the effectiveness of the proposed Plan,including their ability to secure the necessary financing;

·       the effects of the Chapter11 proceedings on our liquidity and results of operations;

·        the instructions, ordersand decisions of the Bankruptcy Court, the U.S. District Court for the NorthernDistrict of Texas, the U.S. Court of Appeals for the Fifth Circuit and otherlegal and administrative proceedings, settlements, investigations and claims;

·       our ability to operatepursuant to the terms of our debtor-in-possession financing agreement;

·       our ability to successfullyreject unfavorable contracts;

·       thedisposition of unliquidated claims against us;

·       our ability to obtain andmaintain normal terms with vendors and service providers and to maintaincontracts that are critical to our operations;

·       possibledecisions by the Mirant Debtors’ pre-petition creditors who may receive Mirantcommon stock upon emergence from bankruptcy and therefore may have the right toselect Mirant’s board members and influence certain aspects of our businessoperations;

·       thepossibility that certain of our subsidiaries may remain in bankruptcy after ouremergence;

·       the effects of changes in our organizationalstructure in conjunction with our emergence from Chapter 11 protection, includingchanges resulting from our reorganization under a new parent entity formed in ajurisdiction outside the United States; and

·       the duration of our Chapter11 proceedings.

The ultimate outcome of matters with respect to whichwe make forward-looking statements and the terms of any reorganizationplan ultimately confirmed can affect the value of our various pre-petitionliabilities and other securities. No assurance can be given as to what values,if any, will be ascribed in the 

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bankruptcy proceedings toeach of these constituencies. Accordingly, we urge that caution be exercisedwith respect to existing and future investments in these liabilities and/orsecurities.

We undertake no obligationto publicly update or revise any forward looking statements to reflect eventsor circumstances that may arise after the date of this report.

**Factorsthat Could Affect Future Performance**

Other factors that could affect our future performance(business, financial condition or results of operations and cash flows) are setforth under “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Factors that Could Affect FuturePerformance.”

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**PART I**

**Item 1.   *Business***

**Overview**

We are an indirect wholly-owned subsidiary of MirantCorporation (“Mirant”). We were incorporated in Delaware on May 12, 1999and, effective November 1, 2001, we changed our form of organization froma corporation to a limited liability company. We own or lease approximately11,000 megawatts (“MW”) of electric generation capacity in the United States.We operate 56 generating units at 19 plants serving customers located nearmajor metropolitan load centers in Maryland, Virginia, California, New York,Massachusetts and Texas. Our portfolio of generating facilities is diversifiedby geographic regions, fuel types, power markets and dispatch types.

We are a national independent power provider thatproduces and sells electricity. We sell most of the output from our generatingfacilities to an affiliate, Mirant Americas Energy Marketing, L.P. (“MirantAmericas Energy Marketing”), and receive as proceeds the amount received byMirant Americas Energy Marketing from selling into the forward and spotmarkets. The remainder of our output is sold under contracts with thirdparties. Mirant Americas Energy Marketing arranges for the supply ofsubstantially all of the fuel used by our generating units and emissionsallowances which are utilized in connection with the business. We usederivative financial instruments, such as commodity forwards, futures, optionsand swaps, to manage our exposure to fluctuations in electric energy and fuelcommodity prices. We execute these transactions with Mirant Americas EnergyMarketing.

The annual, quarterly and current reports, and anyamendments to those reports, that we file with or furnish to the SEC areavailable free of charge on Mirant’s website at *www.mirant.com*as soon as reasonably practicable after they are electronically filed with orfurnished to the SEC. Information contained in this website is not incorporatedinto this Form 10-K.

As used in this report, “we,”“us,” “our,” the “Company” and “Mirant Americas Generation” refer to MirantAmericas Generation, LLC and its subsidiaries, unless the context requiresotherwise.

**Proceedingsunder Chapter 11 of the Bankruptcy Code**

On July 14, 2003 and July 15, 2003(collectively, the “Petition Date”), the Company and its subsidiaries wereamong the 74 wholly-owned Mirant subsidiaries in the United States that, alongwith Mirant (collectively, the “Original Debtors”), filed voluntary petitionsfor relief under Chapter 11 of the Bankruptcy Code in the United StatesBankruptcy Court for the Northern District of Texas, Fort Worth Division (“BankruptcyCourt”). On August 18, 2003, October 3, 2003 and November 18,2003, four additional wholly-owned subsidiaries and four affiliates of Mirantcommenced Chapter 11 cases under the Bankruptcy Code (together with theOriginal Debtors, the “Mirant Debtors”). The Chapter 11 cases of the MirantDebtors are being jointly administered for procedural purposes only under casecaption *In re Mirant Corporation et al.,* Case No. 03-46590(DML).

We, along with the other Mirant Debtors, are operatingour business as debtors-in-possession under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Code,the Federal Rules of Bankruptcy Procedure and applicable court orders, aswell as other applicable laws and rules. In general, each of the MirantDebtors, as a debtor-in-possession, is authorized under the Bankruptcy Code tocontinue to operate as an ongoing business, but may not engage in transactionsoutside the ordinary course of business without the prior approval of theBankruptcy Court.

The Office of the United States Trustee hasestablished a committee of unsecured creditors for Mirant and a committee ofunsecured creditors for Mirant Americas Generation (collectively, the “CreditorCommittees”). The Office of the United States Trustee also has established acommittee of 

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equity security holders ofMirant (the “Equity Committee” and, collectively with the Creditor Committees,the “Statutory Committees”). Pursuant to an order of the Bankruptcy Court, theOffice of the United States Trustee appointed an examiner (the “Examiner”) inthese cases to analyze certain potential causes of action and to act as amediator with respect to certain disputes that may arise among the MirantDebtors, the Statutory Committees and other parties in interest.

Subject to certain exceptions in the Bankruptcy Code,the Chapter 11 proceedings automatically stayed the initiation orcontinuation of most actions against the Mirant Debtors, including most actionsto collect pre-petition indebtedness or to exercise control over the propertyof the bankruptcy estates. As a result, absent an order of the BankruptcyCourt, creditors of the Mirant Debtors are precluded from collectingpre-petition debts and substantially all pre-petition liabilities are subjectto compromise under a plan or plans of reorganization currently being developedby the Mirant Debtors in the bankruptcy proceedings. One exception to this stayof litigation is for an action or proceeding by a governmental agency toenforce its police or regulatory power.

Under the Bankruptcy Code, the Mirant Debtors have theright to assume, assign or reject certain executory contracts and unexpiredleases, subject to the approval of the Bankruptcy Court and satisfaction ofcertain other conditions. The Mirant Debtors are continuing to evaluate theirexecutory contracts, including our operating leases, in order to determinewhich contracts will be assumed, assigned, recharacterized or rejected.

On August 21, 2003 and September 8, 2003,the Bankruptcy Court entered orders establishing a December 16, 2003 bardate (the “Bar Date”) for filing proofs of claim against the MirantDebtors’ estates. As of December 31, 2004, approximately 775 proofs ofclaim were filed against our Chapter 11 estates. Those claims totalapproximately $90 billion. Of this amount, approximately $87 billion representsclaims to which the Mirant Debtors have objected or redundant claims, which areprimarily similar claims filed against multiple Mirant Debtors. We have notfully analyzed the validity and enforceability of the remaining $3 billionof submitted proofs of claim or whether such claims should ultimately beallowed in the Chapter 11 proceedings. In addition, there areapproximately $1.2 billion of estimated liabilities for which claims eitherhave not been filed or have been filed with an undetermined amount primarilyrelated to our operating leases. As such, the amounts of distributions receivedby claimants under the plan or plans of reorganization may substantially varyfrom the amounts of the proofs of claim filed against the Chapter 11estates. There were no claims for which an allowed claim was probable andestimable and exceeded liabilities previously recorded as a liability subject tocompromise on our consolidated balance sheet as of December 31, 2004.

In response to a motionfiled under section 502(c) of the Bankruptcy Code (the “Estimation Motion”)by the Mirant Debtors, the Bankruptcy Court entered an order establishingprocedures for estimating proofs of claim under section 502(c) of theBankruptcy Code that are binding for all purposes, including voting on,feasibility of and distribution under a Chapter 11 plan for the MirantDebtors. As a result, the Mirant Debtors filed approximately 60 material claimobjections and three notices of intent to contest claims.

***Plan of Reorganization***

On January 19, 2005, the Mirant Debtors filed aproposed Plan of Reorganization (as amended, the “Plan”) and DisclosureStatement (as amended, the “Disclosure Statement”) with the Bankruptcy Court. AFirst Amended Plan and a First Amended Disclosure Statement were filed on March 25,2005. The proposed Plan sets forth the proposed structure of the Mirant Debtorsat emergence and outlines how the claims of creditors and stockholders areproposed to be treated. If the Disclosure Statement is found by the BankruptcyCourt to contain adequate information, then the Mirant Debtors will solicitvotes on the 

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proposed Plan from thosecreditors, security holders and interest holders who are entitled to vote onthe proposed Plan.

Under the proposed Plan, (1) the intermediateholding company subsidiaries of Mirant Americas Generation (excluding MirantMid-Atlantic and, absent a resolution of certain outstanding property taxdisputes, Mirant New York) will be merged and consolidated to form Mirant NorthAmerica, LLC (“Mirant North America”), a single intermediate holding companysubsidiary of Mirant Americas Generation; (2) Mirant Mid-Atlantic will bemerged into a subsidiary of Mirant North America and (3) in the event itis excluded from the Plan, the capital stock of Mirant New York will becontributed to Mirant North America. Mirant North America will directly orindirectly own 100% of the equity interests in the operating subsidiaries ofMirant Americas Generation, including Mirant Mid-Atlantic.

The proposed Planimplements and is built around the following key elements:

·       the business of the MirantDebtors will continue to be operated in substantially its current form, subjectto (1) certain internal structural changes that the Mirant Debtors believewill improve operational efficiency, facilitate and optimize their ability tomeet financing requirements and accommodate their debt structure ascontemplated at emergence and (2) organizing the new parent entity for theMirant Debtors’ ongoing business operations (“New Mirant”) in a jurisdictionoutside the United States;

·       the estates of the MirantDebtors (excluding Mirant Americas Generation and its debtor subsidiaries) (collectively,the “Consolidated Mirant Debtors”) will be substantively consolidated solelyfor purposes of voting on the Plan (except as set forth in Section 7.3 ofthe Plan), confirmation of the Plan and determining the treatment of claimsagainst and equity interests in such Consolidated Mirant Debtors under theproposed Plan;

·       the estates of MirantAmericas Generation and its debtor subsidiaries (collectively, the “MirantAmericas Generation Debtors”) will be substantively consolidated solely forpurposes of voting on the Plan (except as set forth in Section 7.3 of thePlan), confirmation of the Plan and determining the treatment of claims againstand equity interests in the Mirant Americas Generation Debtors under theproposed Plan;

·       the holders of unsecuredclaims against the Consolidated Mirant Debtors will receive a pro rata share of100% of the shares of New Mirant common stock, except for: (1) certainshares to be issued to the holders of certain claims against Mirant AmericasGeneration Debtors, as described below, and (2) the shares reserved forissuance pursuant to the New Mirant employee stock programs;

·       the unsecured claimsagainst the Mirant Americas Generation Debtors will be paid in full through (1) theissuance to general unsecured creditors and holders of the Mirant AmericasGeneration revolving credit facilities and senior notes maturing in 2006 and2008 of (a) new debt securities of Mirant North America or, at the optionof the Mirant Debtors, cash proceeds from third-party financing transactions,in an amount equal to 90% of the full amount owed to such creditors (asdetermined by the Bankruptcy Court) and (b) common stock in New Miranthaving a value equal to 10% of such amount owed; and (2) thereinstatement of Mirant Americas Generation senior notes maturing in 2011, 2021and 2031;

·       allowed convenience claims(unsecured claims up to $25,000 in amount) shall receive a single cash paymentequal to the claim amount;

·       the intercompany claimsbetween and among the Consolidated Mirant Debtors and the Mirant AmericasGeneration Debtors will be resolved as part of a global settlement under theproposed Plan whereby intercompany claims will not receive a distribution underthe proposed Plan;

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·       the prospective workingcapital requirements of Mirant Americas Generation and its subsidiaries areexpected to be met with a new senior secured revolving credit facility ofMirant North America in the amount of $750 million to $1 billion. In additionthe Mirant Americas Generation consolidated business will have approximately$3.05 billion of debt (as compared to approximately $2.8 billion of debt at thecommencement of the Chapter 11 cases) comprised of $1.7 billion of reinstateddebt at Mirant Americas Generation and $1.35 billion of new debt incurred by MirantNorth America in partial satisfaction of certain existing Mirant AmericasGeneration debt, which amount does not include the Mirant Mid-Atlanticoperating leases related to the Morgantown Station and Dickerson Station;

·       to help support thefeasibility of the proposed Plan with respect to the Mirant Americas GenerationDebtors, Mirant shall contribute value to Mirant North America, includingMirant’s trading and marketing business (subject to an obligation to return aportion of the embedded cash collateral in the trading and marketing businessto Mirant provided that, under certain circumstances, the Mirant Debtors mayelect to satisfy this obligation by transferring $250 million to MirantAmericas, Inc (“Mirant Americas”) from Mirant North America), the MirantPeaker, LLC (“Mirant Peaker”), Mirant Potomac River, LLC (“Mirant Potomac River”)and Mirant Zeeland, LLC generating facilities and commitments to makeprospective capital contributions of $150 million to Mirant Americas Generation(for refinancing) and, under certain circumstances, up to $265 million toMirant North America (for sulfur dioxide (“SO2”) capital expenditures). Underthe proposed Plan, Mirant Peaker and Mirant Potomac River will becomesubsidiaries of Mirant Mid-Atlantic;

·       the disputes regarding theMirant Debtors’ ad valorem real property taxes for the Bowline and Lovettfacilities will be settled and resolved on terms that permit the feasibleoperation of these assets, or the Mirant Debtors that own such assets willremain in Chapter 11 until such matters are resolved by settlement or throughlitigation;

·       the bulk of the contingentliabilities of the Mirant Debtors associated with the California energy crisisand certain related matters are resolved pursuant to a global settlement asdescribed in “Item 3. Legal Proceedings” contained elsewhere in thisreport;

·       substantially all of theassets of Mirant will be transferred to New Mirant, which will serve as thecorporate parent of the Mirant Debtors’ business enterprise on and after theeffective date of the proposed Plan; similarly, the Mirant trading andmarketing business of Mirant Americas Energy Marketing shall be substantiallytransferred to Mirant Energy Trading, LLC (a subsidiary of Mirant NorthAmerica); and

·       the outstanding commonstock in Mirant will be cancelled and the holders thereof will receive anysurplus value after creditors are paid in full, plus the right to receive a prorata share of warrants issued by New Mirant if they vote to accept the proposedPlan.

The Mirant AmericasGeneration Creditor Committee, together with Wells Fargo Bank, NationalAssociation and the Ad Hoc Committee of Bondholders of Mirant AmericasGeneration, have objected to the reinstatement of the Mirant AmericasGeneration senior notes maturing in 2011, 2021 and 2031 and filed a motionrequesting an order determining that these long-term noteholders are impairedunder the Plan and thus entitled to vote on the Plan. The Bankruptcy Courtissued an opinion on May 24, 2005 denying their motion and finding thatthe treatment under the Plan of the long-term notes did not impair the holdersthereof and, therefore, the holders of the Mirant Americas Generation long-termnotes may not vote on the Plan. TheCommittees have sought leave from the United States District Court for theNorthern District of Texas to appeal the Bankruptcy Court’s order, which is nota final order that is appealable as a matter of right.

At present, the proposedPlan has not been approved by any of the Statutory Committees. As such, theMirant Debtors anticipate that negotiations will continue between the MirantDebtors and each of the 

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StatutoryCommittees. Negotiations with the Statutory Committees, whether or notsuccessful, could lead to material changes to certain components of theproposed Plan.

Since April 2005, theMirant Debtors, the Statutory Committees and representatives of certain otherinterests have been party to proceedings before the Bankruptcy Court withrespect to the valuation of the Mirant Debtors. Pursuant to a letter datedJune 30, 2005, the Bankruptcy Court instructed the Mirant Debtors andtheir financial advisors, The Blackstone Group, to make certain modificationsto the 2005 business plan of the Mirant Debtors and the valuation reportprepared by The Blackstone Group. The Bankruptcy Court indicated that itintends to use the modified business plan and valuation report to generate anenterprise value for the Mirant Debtors which can be used for all purposes forconfirmation of a plan of reorganization for the Mirant Debtors. Absent asettlement among the Mirant Debtors, the Statutory Committees and the otherparties, the Mirant Debtors do not expect that they and The Blackstone Groupwill complete the modifications ordered by the Bankruptcy Court before the endof September 2005.

At this time, it is notpossible to accurately predict if or when the proposed Plan will be approved bythe creditors and security holders and confirmed by the Bankruptcy Court, or ifand when some or all of the Mirant Debtors may emerge from Bankruptcy Courtprotection under Chapter 11.

**Mirant Mid-AtlanticLeases**

In conjunction with MirantMid-Atlantic’s acquisition of certain assets from Potomac Electric PowerCompany (“PEPCO”), Mirant Mid-Atlantic leased the Morgantown and the Dickersonbaseload units and associated property for terms of 33.75 and 28.5 years,respectively. Mirant Mid-Atlantic has an option to renew the leases for aperiod that would cover up to 75% of the economic useful life of the facility,as measured from the beginning of the original lease term through the end ofthe proposed renewal lease term. Mirant Mid-Atlantic is accounting for theseleases as operating leases. Rent expenses associated with the Morgantown andDickerson operating leases totaled approximately $103 million for the yearended December 31, 2004 and $96 million for each of the years ended December 31,2003 and 2002 and are recorded as generation facilities rent expense in theaccompanying consolidated statements of operations. Because of the variabilityin the scheduled payment amounts over the lease term, Mirant Mid-Atlanticrecords rental expense for these leases on a straight-line basis. As of December 31,2004 and 2003, Mirant Mid-Atlantic paid approximately $285 million and $260million, respectively, of actual operating lease payments in accordance withthe lease agreements in excess of rent expense recognized, and reported theseamounts as prepaid rent in the accompanying consolidated balance sheets. Inaddition to the regularly-scheduled rent payments, Mirant Mid-Atlantic paid anadditional $11 million and $13 million as of December 31, 2004 and 2003,respectively, as required by the lease agreements. Of the $11 million paymentmade in 2004, $8 million is included in the long-term prepaid rent balance andthe remaining $3 million is included in the current portion of the prepaidrent balance.

As of December 31,2004, the total notional minimum lease payments for the remaining term of theleases aggregated approximately $2.5 billion and the aggregate terminationvalue for the leases was approximately $1.4 billion and generally decreasesover time. Mirant Mid-Atlantic leases the Morgantown and the Dickerson baseloadunits from third party owner lessors that purchased the baseload units from PEPCO.Theseowner lessors each own the undivided interests in these baseload generatingfacilities. The subsidiaries of the institutional investors who hold themembership interests in the owner lessors are called owner participants. Equityfunding by the owner participants plus transaction expenses paid by the ownerparticipants totaled $299 million. The issuance and sale of pass throughcertificates raised the remaining $1.2 billion needed for the owner lessors toacquire the undivided interests.

The pass throughcertificates are not direct obligations of Mirant Mid-Atlantic. Each passthrough certificate represents a fractional undivided interest in one of threepass through trusts formed pursuant to three separate pass through trustagreements between Mirant Mid-Atlantic and State Street Bank and 

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TrustCompany of Connecticut, National Association, as pass through trustee. Theproperty of the pass through trusts consists of lessor notes. The lessor notesissued by an owner lessor are secured by that owner lessor’s undivided interestin the lease facilities and its rights under the related lease and otherfinancing documents.

The operative documentsrelating to the leveraged lease contain certain covenants that restrict MirantMid-Atlantic and its “designated subsidiaries”- which term includes MirantChalk Point, LLC (“Mirant Chalk Point”), Mirant Peaker and Mirant PotomacRiver- including the following:

*Restrictedpayments*.   Mirant Mid-Atlantic cannot make any of thefollowing restricted payments:

·       distributions in respect ofequity interests in Mirant Mid-Atlantic (in cash, property, securities orobligations other than additional equity interests of the same type);

·       payments or distributionson account of payments of interest, set apart money for a sinking or analogousfund for, or purchase or redeem any portion of, any equity interest in MirantMid-Atlantic or of any warrants, options or other rights to acquire anysuch equity interest (or make payments to any person such as phantom stockpayments, where the amount of the payment is calculated with reference to itsfair market or equity value); or

·       payments on or with respectto, the purchase, redemption, defeasance or other acquisition or retirement forvalue of any subordinated indebtedness;

unless, at the time of the restricted payment, each ofthe following conditions is satisfied:

·       MirantMid-Atlantic’s fixed charge coverage ratio for the most recently ended periodof four full fiscal quarters equals at least:

(1)          1.7 to 1.0; or

(2)          1.6 to 1.0, 1.45 to 1.0,1.3 to 1.0, or 1.2 to 1.0 if, as of the last day of the most recently completedfiscal quarter, Mirant Mid-Atlantic and its designated subsidiaries haveentered into power sales agreements (meeting certain criteria, includinginvestment grade ratings criteria) covering, in the aggregate, at least 25%,50%, 75%, or 100%, respectively, of the projected total consolidated operatingrevenue for the consecutive period of eight full fiscal quarters following thatdate; and

·       Theprojected fixed charge coverage ratio for Mirant Mid-Atlantic (determined on apro forma basis after giving effect to any such dividend) for each of the twofollowing periods of four fiscal quarters commencing with the fiscal quarter inwhich the restricted payment is proposed to be made equals at least:

(1)          1.7 to 1.0; or

(2)          1.6 to 1.0, 1.45 to 1.0,1.3 to 1.0, or 1.2 to 1.0, if, as of the last day of the most recentlycompleted fiscal quarter, Mirant Mid-Atlantic and its designated subsidiarieshave entered into power sales agreements (meeting certain criteria, includinginvestment grade ratings criteria) covering, in the aggregate, at least 25%,50%, 75%, or 100%, respectively, of the projected total consolidated operatingrevenue for the consecutive period of eight full fiscal quarters following thatdate; and

·       Before and immediatelyafter the making of the distribution, no significant lease default or event ofdefault has occurred and is continuing.

In accordance with the terms of the leases, MirantMid-Atlantic calculates the projected fixed charge coverage ratio based onprojections prepared in good faith based upon assumptions consistent in allmaterial respects with the relevant contracts and agreements, historicaloperations and Mirant Mid-Atlantic’s good faith projections of futurerevenue and projections of operating and maintenance 

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expenses in light of thenexisting or reasonably expected regulatory and market environments in themarkets in which the leased facilities or other assets owned by it will beoperated.

Our ability to pay our obligations may be adverselyaffected in the event that Mirant Mid-Atlantic is unable to pay dividends to MirantNorth America.

*Additional indebtedness*.   NeitherMirant Mid-Atlantic nor any of its subsidiaries (including any designatedsubsidiary) can incur or assume any indebtedness, except (1) MirantMid-Atlantic and any subsidiary (including any designated subsidiary) canincur:

·       any indebtedness, if, afterincurring such indebtedness, no lease default or lease event of default hasoccurred and both S&P and Moody’s confirm the ratings of the pass throughcertificates prior to incurring the indebtedness. However, if either rating isbelow investment grade, the indebtedness cannot be incurred unless the fixedcharge coverage ratio for the previous four quarters and the projected fixedcharge coverage ratios for the following eight fiscal quarters are each atleast 2.5 to 1.0;

·       any letters of credit,surety bonds or guarantees issued in the ordinary course of business;

·  any indebtedness secured by a pre-existinglien on any assets acquired by Mirant Mid-Atlantic or a designated subsidiary,so long as the indebtedness has recourse only to those assets;

·  any intercompany loans;

·  any indebtedness incurred to finance capitalexpenditures made to comply with law or to finance required improvements toeither of the leased facilities covered by the leveraged lease; or

·  any indebtedness incurred by MirantMid-Atlantic and its subsidiaries (including any designated subsidiary) in anaggregate principal amount not to exceed $100 million (and with respect to anyindividual designated subsidiary, in an aggregate principal amount not toexceed $50 million).

and (2) MirantMid-Atlantic and any subsidiary other than a designated subsidiary can incur:

·       any indebtedness incurredto refinance indebtedness secured by a pre-existing lien on acquired assets;

·       any indebtedness guaranteedby a parent of Mirant Mid-Atlantic that has a credit rating of BBB/Baa2 orhigher;

·       any working capitalindebtedness;

·       any interest rate hedgingtransactions entered into in the ordinary course of business; or

·       any subordinatedindebtedness.

*Merger and consolidation*.   NeitherMirant Mid-Atlantic nor any of its designated subsidiaries can consolidate ormerge with or into any other entity or sell or otherwise transfer all orsubstantially all of its properties or assets to any person or entity except,among other conditions, that the resulting entity or transferee of assets isorganized under the laws of the United States or any state, assumes theobligations of Mirant Mid-Atlantic or the designated subsidiary obligations andhas a credit rating of BBB-/Baa3 after the merger or transfer.

*Sale of assets*.   MirantMid-Atlantic cannot sell any of its assets other than certain limited permittedasset sales including sales of assets that do not exceed, in the aggregate,fifteen percent (15%) of the consolidated book value of Mirant Mid-Atlantic andits designated subsidiaries.

*Liens*.   Mirant Mid-Atlanticcannot, and cannot permit any designated subsidiary to, create, incur, assumeor otherwise suffer to exist any liens on its interest under a facility lease,other than certain limited permitted encumbrances.

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*Assignment and sublease*.   Withoutthe consent of other parties to the operative documents, Mirant Mid-Atlanticcannot assign or sublease its interest under a facility lease unless certainrequirements are met including the requirement that the assignee or itsguarantor has a credit rating of at least BBB/Baa2.

Under the terms of thelease, Mirant Mid-Atlantic is responsible for the payment of rent to theindenture trustee, which in turn makes payments of principal and interest tothe pass through trust and any remaining balance to the owner lessors for thebenefit of the owner participants. Mirant Mid-Atlantic’s lease obligations arenot obligations of its parent, Mirant Americas Generation, or, its indirectparent, Mirant, or any of its other affiliates. However, Mirant has arranged aguarantee and letter of credit to provide for the rent payment reserve requiredin connection with this lease transaction in the event that Mirant Mid-Atlanticis unable to pay its lease payment obligations.

Significant disputes havearisen between the Mirant Debtors, on the one hand, and the owner lessors andthe indenture trustee for the Mirant Mid-Atlantic leveraged leases, on theother hand, regarding, among other things, whether or not the leveraged leasetransactions constitute a “lease” (or “leases”) within the meaning of section365 of the Bankruptcy Code, or instead evidence a financing or otherarrangement. In April 2005, the Bankruptcy Court dismissed therecharacterization claim, ruling that, based upon the current posture of theChapter 11 cases, a determination on the merits was not presently warranted. Inits ruling, the Bankruptcy Court reserved the right to reconsider the merits ofrecharacteriaztion in the event that facts and circumstances changed in amanner such that further consideration would be warranted.

At this time, the MirantDebtors maintain that the leases are not true leases for bankruptcy purposes.However, based on the Bankruptcy Court’s comments in its April 2005ruling, the Mirant Debtors may determine to modify their proposed Plan (andrelated Disclosure Statement) to propose that the leases be assumed conditionedupon certain provisions in the leases—including the limitations on restrictedpayments and the restrictions on the incurrence of indebtedness and liens—beingmodified, stricken or determined to be unenforceable and certain allegeddefaults determined as not requiring “cure” as a condition to assumption. Inorder to assume leases, a debtor-lessee must obtain bankruptcy court approvaland, subject to certain exceptions set forth in the Bankruptcy Code, must cureany existing defaults under the applicable leases (unless such defaults areduly waived). It would be the Mirant Debtors’ objective that assumption wouldbe approved at or before confirmation of the Plan, and that as part of theassumption or confirmation order, Mirant Mid-Atlantic would be relieved of theobligation to cure certain defaults and of the obligation to perform certaincovenants. If it is not feasible for Mirant Mid-Atlantic to assume the leasesbecause relief from certain defaults and/or covenants is not available, the tworemaining alternatives are rejection and revisiting the issue ofrecharacterization. In the latter circumstance, if the Bankruptcy Courtrecharacterizes the leases as indebtedness, Mirant Mid-Atlantic may be requiredto re-evaluate the accounting for the leases. If, on the other hand,recharacterization is not sought or is not available, and/or MirantMid-Atlantic cannot or does not assume the leases, then the leases will berejected. In that event, the owner lessors would be entitled to a return of theleased assets and would have a claim for damages, if any, arising from suchrejection, subject to the limitation on allowed claims under section 502(b)(6) ofthe Bankruptcy Code applicable to leases of real property. Any claims arisingon account of rejection would be subject to compromise in Mirant Mid-Atlantic’sChapter 11 case. The impact of any of these events would be reflected in MirantMid-Atlantic’s and the Company’s consolidated financial statements if and whenthe events occur.

As a result of MirantMid-Atlantic’s bankruptcy filing, a lease event of default has occurred underthe leases. The leases provide that, upon a lease event of default, the ownerlessors’ remedies include (1) terminating the leases and repossessing theleased assets, (2) selling their interests in the leased assets, (3) demandingpayment by Mirant Mid-Atlantic of the excess, if any, of the termination valueover the fair market sales value of the leased assets or the discounted fairmarket rental value of the leased assets and (4) demanding payment of thetermination value mitigated by a sale of the leased assets for the account ofMirant Mid-Atlantic. The termination value for the leases approximated$1.4 billion at December 31, 2004 

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andgenerally decreases over time. The ability of the owner lessors to exercisetheir remedies under the leases is currently stayed as a result of MirantMid-Atlantic’s Chapter 11 filing.

See Note 12 to ourconsolidated financial statements for further discussion.

**Competition**

The power industry is oneof the largest industries in the United States and has an influence onpractically every aspect of the U.S. economy. Historically, the powergeneration industry in the United States was characterized by electric utilitymonopolies selling to franchised customer bases. In response to increasingcustomer demand for access to low-cost electricity and enhanced services,regulatory initiatives were adopted, primarily to increase wholesale and retailcompetition in the power industry. Following the resulting industryrestructuring, merchant companies purchased plants from regulated utilities,built new capacity and began marketing to customers. At the same time,independent system operators (“ISOs”) and/or regional transmissionorganizations (“RTOs”) were created to administer the new markets whilemaintaining system reliability. In recent years, state and federalrestructuring efforts have stalled, primarily in response to the Californiaenergy crisis and financial troubles of many merchant energy companies. Inaddition, ISOs have begun exerting more control over market prices. The resultis a blend of competitive and regulatory constructs, often different by state,under which merchant generators must compete with each other and with regulatedutilities.

The substantial increasein new generation capacity that followed the restructuring of the U.S. powermarkets, utility capital investments to extend lives of older units, and theinability to decommission plants for reliability reasons have created aprolonged oversupply situation. We do not expect our primary markets to reachtarget reserve margins until 2008 to 2010. The market oversupply situation,price controls during periods of high demand or local transmission constraint,and lack of appropriate compensation for locational capacity value currentlylimit fixed cost recovery for merchant generators.

With the expansion of thePennsylvania-New Jersey-Maryland Interconnection, LLC (“ PJM”) market and theongoing development of Midwest Independent System Operators (“MISO”), themarkets themselves continue to evolve. This evolution has changed not only theutilization of generation and transmission resources, but also the votinginterests among market participants.

Recently, natural gas hasbeen the fuel of choice for new power generation facilities for economic,operational and environmental reasons. While this trend is expected tocontinue, some regulated utilities are now seeking to construct clean coalunits and renewable resources, often with subsidies or under legislativemandate. These utilities enjoy a lower cost of capital than most merchants andoften are able to recover fixed costs through rate base mechanisms, allowingthem to build, buy and upgrade generation without relying exclusively on marketclearing prices to recover their investments.

Market liquiditystabilized or improved in most regions in 2004, as compared to 2003, allowingus to economically hedge portions of our expected electricity production up to24 months in advance, primarily through exchange-traded contracts.

**Operating Regions**

*Mid-Atlantic Region*

We and our subsidiaries,along with two of our affiliates, Mirant Potomac River and Mirant Peaker, ownor lease four generation facilities comprising 5,256 MW of generation capacityin the Mid-Atlantic region: Chalk Point, Morgantown, Dickerson and PotomacRiver Station. Our Mid-Atlantic facilities were acquired from PEPCO in December 2000.Our largest facility in the region, the Chalk Point facility, has two coalfired baseload units, two oil and gas fired intermediate units and seven eitheroil fired or oil and gas fired peaking units, totaling 2,429 MW of capacity.The next largest facility, the Morgantown facility, consists of two coal andoil fired baseload units and six oil fired peaking units, totaling 1,492 MW ofcapacity. The Dickerson facility has three coal fired baseload units and threeoil and gas fired peaking 

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units,totaling 853 MW of capacity, and the Potomac River Station, a coal firedfacility, has three baseload and two intermediate units, totaling 482 MW ofcapacity.

Power generated by ourMid-Atlantic facilities is sold into the PJM market. For a discussion of thePJM market, see Regulatory Environment*—U.S. Public UtilityRegulation* below.

*Northeast Region*

We directly own or operategenerating facilities in the Northeast region consisting of approximately 3,063MW of capacity. The Northeast region is comprised of the New York and NewEngland sub-regions.

Our New York facilitieswere acquired from Orange and Rockland Utilities, Inc. and ConsolidatedEdison Company of New York, Inc. in June 1999. The New Yorkgenerating facilities consist of the Bowline and Lovett facilities and varioussmaller generating facilities comprising a total of approximately 1,675 MW ofcapacity. The Bowline facility is a 1,133 MW dual fueled (natural gas and oil)facility comprised of two intermediate units. The Lovett facility consists oftwo baseload units capable of burning coal and gas comprising a total of 348 MWand a peaking unit capable of burning gas or oil comprising 63 MW. Thesmaller New York plant operations include two peaking units (the Hillburn gasturbine station and the Shoemaker gas turbine station), three hydroelectricstations (Mongaup 1-4, Swinging Bridge 1-2 and Rio 1-2) andan operational interest in the Grahamsville Hydroelectric Station comprising atotal of 131 MW. An expansion at the Bowline facility, a 750 MW natural gas anddistillate oil fired combined cycle unit, is currently suspended.

Our New Englandfacilities, with a total capacity of 1,388 MW, were acquired from subsidiariesof Commonwealth Energy System and Eastern Utilities in December 1998. TheNew England generating facilities consist of the Canal station, the Kendallstation, the Martha’s Vineyard diesels and the Wyman Unit 4 interest. The Canaland Kendall facilities, consisting of approximately 1,109 MW and 256 MW ofgenerating capacity, respectively, are designed to operate during periods ofintermediate and peak demand, and are located in close proximity to Boston. TheKendall facility has been repowered since its acquisition and is now a naturalgas combined cycle facility capable of producing both steam and electricity.The Canal and Kendall facilities possess the ability to burn both natural gasand fuel oil. The Martha’s Vineyard diesels, with 14 MW of capacity, supplyelectricity on the island of Martha’s Vineyard during periods of high demand orin the event of a transmission interruption. The Wyman Unit 4 interest is anapproximate 1.4% ownership interest (equivalent to 8.8 MW) in the 614 MW WymanUnit 4 located on Cousin’s Island, Yarmouth, Maine. It is primarily owned andoperated by the Florida Power and Light Group.

Generation is sold fromour Northeast assets through a combination of bilateral contracts and spotmarket transactions, as well as structured transactions. Our New York plantsparticipate in a market operated by the Independent System Operator of New York(“NYISO”). The capacity, energy and ancillary services from our New Englandgenerating units are sold into the New England Power Pool (“NEPOOL”) throughour commercial operations. NEPOOL is administered by RTO New England (“RTO-NE”).For a discussion of the NYISO, NEPOOL, ISO-NE and RTO-NE, see RegulatoryEnvironment*—U.S. Public Utility Regulation* below.

Marketfundamentals in the NYISO do not permit us to operate the Lovett facility on aneconomic basis as a merchant generation facility because of upcoming requiredenvironmental capital expenditures and property taxes associated with thefacility. Our current plan is to retire the Lovett facility, starting with Unit5 in 2007 and Units 3 and 4 in 2008. Market fundamentals in NEPOOL do notpermit us to operate the Kendall facility on an economic basis as a merchantfacility. Our plan has been to shutdown, at least temporarily, the Kendallfacility from January 2006 through December 2007, with thepossibility of restarting operations as early as January 2008. However,RTO-NE has determined that a small part of the capacity of the Kendall facilityis needed for reliability and has negotiated a Reliability-Must-Run (“RMR”)contract with respect to the Kendall facility with a term of approximately oneyear. We filed this 

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contract with the Federal Energy Regulatory Commission (“FERC”)for RMR status under the existing tariff on October 7, 2004 and arecurrently waiting for FERC approval or acceptance of the agreement and therevenue requirements contained within it. We and the other parties in thisproceeding are currently in settlement negotiations. We and NStar Electric &Gas Corp., the local contracting utility, have reached a preliminary agreementthat, once finalized and accepted or approved by the FERC, will resolvevirtually all of the issues raised in this proceeding.

*West Region*

Our West region facilitiesconsist of a net equity interest in 2,885 MW of gas fired generating capacityin California and Texas.

The generating assets inCalifornia provide a total capacity of 2,347 MW and consist of the Pittsburg,Contra Costa and Potrero plants, which include facilities operating atintermediate, baseload and peak demand levels located in, or in close proximityto, San Francisco. The Pittsburg and Contra Costa plants consist of fiveintermediate natural gas fired steam generating units with approximately 1,985MW of generating capacity located approximately ten miles apart along theSacramento/San Joaquin River Delta. The Potrero plant has one baseload naturalgas fired conventional steam generating unit and three peaking distillatefueled combustion turbines with a combined capacity of 362 MW.

The majority of ourCalifornia assets are subject to RMR agreements with the California Independent System Operator (“CAISO”).These agreements are described further under Regulatory Environment*—U.S. Public Utility Regulation* below. Our Californiasubsidiaries currently have the largest portfolio of units which operate underRMR contracts, reflecting the fact that the location of these units is key tothe electric system reliability. Contra Costa Unit 6 is not a party to an RMRagreement, and thus functions solely as a merchant facility in the CAISO. Wesell the output of Contra Costa Unit 6 to Mirant Americas Energy Marketingwhich then sells into the market through bilateral transactions with utilitiesand other merchant players.

In October 2004,the CAISO notified us that the RMRcontract for Pittsburg Unit 7 would not be renewed for 2005. On January 3,2005, we announced that we were seeking proposals for a one-, two- orthree-year tolling arrangement for Pittsburg Unit 7 and Contra Costa Unit 6. OnApril 29, 2005, tolling arrangements with Pacific Gas and Electric wereexecuted for Pittsburg 7 that will run from May 1, 2005—December 31,2005 and for Contra Costa 6 that will run from May 1, 2005—August 31,2005.

We operate one facility inTexas, the Bosque facility, which consists of a gas fired combustion turbinewith a corresponding steam turbine (combined cycle unit) with a capacity of 230MW that is available to serve baseload and intermediate demand. Additionally,Bosque Units 1 and 2 are gas fired peakers with a capacity of 154 MW each.

Our Bosque facilityoperates in the Electric Reliability Council of Texas (“ERCOT”) market. For adiscussion of ERCOT, see Regulatory Environment—*U.S. PublicUtility Regulation* below.

**RegulatoryEnvironment**

***U.S. Public UtilityRegulation***

The U.S. electricityindustry is subject to comprehensive regulation at the federal, state and locallevels. At the federal level, the FERC has exclusive jurisdiction under theFederal Power Act (the “Federal Power Act”) over sales of electricity atwholesale and the transmission of electricity in interstate commerce. We mustcomply with certain FERC reporting requirements and the FERC-approved market rules andare subject to the FERC oversight of mergers and acquisitions, the dispositionof the FERC-jurisdictional facilities, and the issuance of securities,for which blanket authority has been granted. In addition, under the NaturalGas Act (“NGA”), the FERC has limited jurisdiction over certain sales forresale of natural gas, but does not regulate the prices received.

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The FERC has authorizedMirant Americas Generation’s public utility subsidiaries to sell energy andcapacity at wholesale market-based rates and has authorized some of thesubsidiaries to sell certain ancillary services at wholesale market-basedrates. The majority of the output of the generation facilities owned by MirantAmericas Generation’s public utility subsidiaries in the United States is soldpursuant to this authorization. The FERC may revoke or limit our market-basedrate authority if it determines that we possess market power. The FERC requiresthat our subsidiaries with market-based rate authority, as well as those withblanket certificate authorization permitting market-based sales of natural gas,adhere to certain market behavior rules and codes of conduct, respectively.If any of our subsidiaries violates the market behavior rules or codes ofconduct, the FERC may require a disgorgement of profits or revoke its market-basedrate authority or blanket certificate authority. If the FERC were to revokemarket-based rate authority, the Mirant Americas Generation subsidiarywould have to file a cost-based rate schedule for all or some of its sales ofelectricity at wholesale. If the FERC revoked the blanket certificate authorityof a Mirant Americas Generation subsidiary, it would no longer be able to makecertain sales of natural gas.

In an effort to promotegreater competition in wholesale electricity markets, the FERC has encouragedthe formation of ISOs and RTOs. In those areas where ISOs or RTOs control theregional transmission systems, market participants have expanded access totransmission service. ISOs and RTOs also may operate real-time and day-aheadenergy and ancillary services markets, which are governed by FERC-approvedtariffs and market rules. Some RTOs and ISOs also operate capacity markets.Changes to the applicable tariffs and market rules may be requested bymarket participants, state regulatory agencies and the system operator, andsuch proposed changes, if approved by the FERC, could have a material impact onour operations and business plan. While participation by transmission-owningpublic utilities in ISOs and RTOs has been and is expected to continue to bevoluntary, the majority of such public utilities in New England, New York, the Mid-Atlantic, the Midwest and California havejoined the existing ISO/RTO for their respective region. All of ourfacilities outside of Texas operate in these ISO/RTO regions.

We are not subject to thePublic Utility Holding Company Act of 1935, as amended (“PUHCA”), and do notanticipate becoming so unless we or one of our affiliates acquire thesecurities of a public-utility company or public utility facility that does notqualify as an exempt wholesale generator, a foreign utility company, or aqualifying small power production or cogeneration facility. Currently, oursubsidiaries owning generation are exempt wholesale generators under PUHCA.

At the state and locallevels, regulatory authorities have historically overseen the distribution andsale of retail electricity to the ultimate end user, as well as the siting,permitting and construction of generating and transmission facilities. Ourexisting generation may be subject to a variety of state and local regulations,including regulations regarding the environment, health and safety,maintenance, and expansion of generation facilities.

*Mid-Atlantic Region**—*Our Mid-Atlantic assets sell power into the marketsoperated by PJM, which the FERC approved to operate as an ISO in 1997 and as anRTO in 2002. We have access to the PJM transmission system pursuant to PJM’sOpen Access Transmission Tariff. PJM operates the PJM Interchange EnergyMarket, which is the region’s spot market for wholesale electricity, providesancillary services for its transmission customers and performs transmissionplanning for the region. To account for transmission congestion and losses, PJMcalculates electricity prices using a locational marginal pricing model anddispatches electricity on a security constrained least cost basis. On January 24,2005, the FERC issued an order changing PJM’s mitigation rules forfrequently mitigated units (those mitigated in excess of 80% of annual runninghours), as well as the retirement policy rules. The revised policy providessome opportunity for increased compensation for frequently mitigated units.Under the old rules, such units were restricted to bidding variable costs plus10% when a transmission constraint caused the unit to be selected out ofeconomic merit order. Under the new rules, the restriction is variable costsplus 

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$40/megawatt hour (“MWh”).Generally, units mitigated less than 80% of the time remain under the old “costplus 10%” policy. PJM also proposed a revised generation retirement policy thatsets forth a process by which PJM will address a request by a generation ownerto deactivate a unit, determine whether established reliability criteria wouldbe violated if the unit were deactivated, and provide compensation to thegeneration owner when a unit proposed for deactivation is required to continueoperating for reliability. This proposal was also approved. Both changes arecurrently effective, although possibly subject to revision via requests forre-hearing. The PJM Board continues to evaluate a redesign of the PJM capacitymarket structure, called the Reliability Pricing Model (“RPM”). Following aFERC technical conference in June, 2005 the PJM Board is consideringstakeholder comments and may approve filing a version of the RPM with the FERCby mid-August, 2005. If ultimately filed at the FERC in a form resemblingstakeholder discussions to date, and ultimately approved by the FERC, thisproposal also would provide some opportunity for an improved revenue stream forMirant Americas Generation owned and leased capacity. However, the FERC’sresponse to these issues and the final impact, if any, on our facilities cannotbe determined at this time.

PJM hasgreatly expanded its system over the last two years with the addition of the serviceareas of Allegheny Power, Commonwealth Edison, AEP, Duquesne Light, DaytonPower & Light (“DP&L”) and Dominion-Virginia Power. In the fall of 2004, PJM completed itsintegration of AEP and DP&L into the PJM RTO. For purposes of determiningdeliverability to the unforced capacity market (“UCAP market”), AEP andDP&L were deemed to be capable of providing capacity to all areas of PJM.This effectively provided the same comparability of delivery for a generator inwestern Ohio to deliver capacity to the PEPCO zone where our assets arelocated. The deliverability standard and the additional capacity that the newentrants are now capable of providing to the UCAP market in PJM has severelydepressed forward pricing for capacity. PJM has proposed a new RPM that willprovide for recognition of locational deliverability zones. The model proposesa phase in to locational zones over a four-year period. In addition, PJM and the MISO have been directed by the FERC toestablish a common and seamless market, an effort that is largely dependentupon MISO’s ability to first establish and operate its markets.

*Northeast Region**—*Our New York plants participate in a market controlled byNYISO, which replaced the New York Power Pool (“NYPP”). NYISO providesstatewide transmission service under a single tariff and interfaces withneighboring market control areas. To account for transmission congestion andlosses, NYISO calculates energy prices using a locational marginal pricingmodel that is similar to that used in the PJM and ISO-NE. NYISO alsoadministers a spot market for energy, as well as markets for installedcapacity, operating reserves and regulation service. NYISO employs an AutomatedMitigation Procedure (“AMP”) in its day-ahead market that automatically capsenergy bids when certain established bid screens indicate a bidder may havemarket power.****On January 14,2005, the U.S. Court of Appeals for the D.C. Circuit vacated and remanded theFERC’s orders approving the AMP. The AMP provisions of the NYISO’s tariffremain in effect pending further proceedings. In addition, the NYISO’slocational capacity market rules use a “demand curve” mechanism to determinefor every month the required amount of installed capacity as well as installedcapacity prices for three locational zones: New York City, Long Island and therest of New York. Our facilities operate outside of New York City and LongIsland. The demand curve is derived for each of the three zones by setting theprice of installed capacity for 118% of peak load (peak load plus an 18%reserve margin) at the assumed price for a new generating plant to serve peakdemand (“new entrant”) and then sloping the “demand curve” for installedcapacity downward to reflect additional amounts of capacity beyond the 118%.The FERC approved the new entrant price for use from the summer of 2003 to thespring of 2005, and required NYISO to file three proposed new entrant pricesthat would be applicable from the summer of 2005 through the spring of 2008. OnJanuary 7, 2005, NYISO filed revisions to its services tariff to definethe demand curves for capability years 2005/2006, 2006/2007 and 2007/2008.AFERC order was issued in April, 2005 that essentially accepted the filing aftermaking an upward adjustment in the rates.

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Our New England plants participate in a marketadministered by RTO-NE, under contract to NEPOOL, which is a voluntaryassociation of electric utilities and other market participants in Connecticut,Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. RTO-NE utilizesa locational-based marginal pricingmodel, with a price mitigation method similar to NYISO’s AMP. In 2004,the FERC approved a locational installed capacity market which is used byRTO-NE and is based on the “demand curve” concept also used by NYISO, to beimplemented in January 2006. A hearing on the demand curve parameters washeld in late February and early March and a FERC order on theseproposals is expected in mid to late 2005.

*WestRegion—*Our West plants are located in the WesternInterconnection and the ERCOT market in Texas. California accounts for roughly40% of the energy consumption in the Western Interconnection. Approximately 75%of California’s demand is served from facilities in the CAISO control area,which includes our California facilities. The CAISO schedules transmissiontransactions, arranges for necessary ancillary services and administers areal-time balancing energy market. The CAISO has proposed changes to its marketdesign to more closely mirror the eastern RTO markets. The market redesign hasbeen delayed several times, with full implementation now expected in 2007 or2008. The California Public Utility Commission (“CPUC”) has taken the lead rolefor establishing capacity requirements in California and has ordered California’sload-serving entities to meet specific load and reserve requirements beginningin the summer of 2006. The CAISO has not proposed a capacity market mechanismin its market redesign.

The majority of our assetsin California are subject to RMR agreements with the CAISO. These agreementsrequire certain of our facilities, under certain conditions and at the CAISO’srequest, to operate at specified levels in order to support grid reliability.Under the RMR agreements, we recover through fixed charges either a portion(RMR Contract Condition 1) or all (RMR Contract Condition 2) of theannual fixed revenue requirement of the generation assets as approved by theFERC (the “Annual Requirement”). Our California generation assets operatingunder RMR Contract Condition 1 depend on revenue from sales of the output ofthe plants at market prices to recover the portion of the plant’s fixed costsnot recovered in RMR payments. For these generation assets, only a percentageof the Annual Requirement, as approved by the FERC, can be recovered throughRMR payments, whereas RMR Contract Condition 2 Units recover 100%. Thecontracts require yearly filings for FERCapproval of the Annual Fixed Revenue Requirement for the following calendaryear. Currently all of our California generation assets that are subject to theRMR agreements operate under contracts with Pacific Gas & ElectricCompany (“PG&E”) in effect through 2012 that allow it to dispatch andpurchase the output of each unit designated annually as an RMR unit by theCAISO. Those units operate under RMR Contract Condition 1, but PG&E paysthe Company’s subsidiaries that own those units the difference between the RMRContract Condition 1 rates and the RMR Contract Condition 2 rates in effect forthose units during 2004 reduced on an annual basis by $5 million. Under thosecontracts with PG&E, those rates will remain in effect through 2008.

The CAISO imposes a$250/MWh cap on prices for energy and capacity and has implemented an AMPsimilar to that used by NYISO. Owners of non-hydroelectric generation inCalifornia, including certain of our facilities, must offer power in the CAISO’sspot markets if the output is not scheduled for delivery within the hour. Forthe remaining units located outside of California, but within the WesternInterconnection, there is no single entity responsible for a centralizedbid-based market. Outside of California, the primary markets in the West todayare bilateral and adhere to the reliability standards of the WesternElectricity Coordinating Council (“WECC”). Although we are active participantsin initiatives to establish new ISOs or RTOs in the West, we can neitherpredict when, nor if, such entities will emerge nor if market developments willhave a positive or negative impact on future earnings from our Western assets.

Our Texas plants participate in a market administeredby the ERCOT ISO, which manages a major portion of the state’s electric powergrid. The ERCOT ISO oversees competitive wholesale and retail 

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marketsresulting from electricity restructuring in Texas and protects the overallreliability of the ERCOT grid. ERCOT ISO, the only ISO that manages bothwholesale and retail market operations, is regulated by the Public UtilityCommission of Texas (“PUCT”). The PUCT conducts market monitoring within ERCOT.Price mitigation measures in ERCOT include a $1,000 per MWh price cap andRMR-type contracts for congested areas. To improve congestion management, thePUCT recently established a rulemaking proceeding on wholesale market designissues that will focus on adding a congestion management mechanism based onlocational pricing, similar to that used in PJM, and a day-ahead market. Arevised market design is expected to be in place during 2005 but, as with otherevolving market structures, we cannot provide assurance as to when theenhancements will be completed and implemented, or what the impact on earningsin the ERCOT market will be.

***Environmental Regulation***

*Air Emissions Regulations:  *Ourbusiness is subject to extensive environmental regulation by federal, state andlocal authorities, which requires continuous compliance with regulations andconditions established by their operating permits. Our most significantenvironmental requirements in the United States arise under the federal CleanAir Act (the “Clean Air Act”) and similar state laws. Under the Clean Air Act,we are required to comply with a broad range of requirements and restrictionsconcerning air emissions, operating practices and pollution control equipment.Several of our facilities are located in or near metropolitan areas, such asNew York City, Boston, San Francisco and Washington, D.C., which are classifiedby the United States Environmental Protection Agency (the “EPA”) as notachieving certain federal ambient air quality standards. The regulatoryclassification of these areas subjects our operations in these areas to morestringent air regulation requirements, potentially including, in some cases,required emissions reductions. Also, states are required by Section 185 ofthe Clean Air Act to impose additional fees for air emissions from majorsources in areas that are classified as severe non-attainment for ozone andthat fail to meet the attainment deadline. For example, the Virginia andMaryland suburbs of Washington, D.C. are part of the Washington, D.C.non-attainment area and currently are classified as severe non-attainment forozone, applying a one-hour ozone standard. The EPA has designated this area asmoderate non-attainment applying a new eight-hour standard and has indicatedthat it may rescind the one-hour ozone standard in June 2005. If it doesnot rescind the one-hour standard and the November 2005 attainmentdeadline under the one hour standard is not met, Section 185 of the CleanAir Act would require Virginia and Maryland to begin imposing additional feeson major sources of ozone beginning in 2006.**The formulafor determining this fee has not been finally established, but is likely to bea significant cost for our Mid-Atlantic plants.******OnSeptember 27, 2004, we entered into a conditional consent decree resolvingan enforcement proceeding with the State of Virginia and the EPA. The consentdecree was also entered into by the State of Maryland and the Department ofJustice (the “DOJ”). The consent decree creates annual and ozone season caps onnitrogen oxide (“NOx”) emissions, provides for certain additional pollutioncontrols, supplemental environmental projects to be done at the Potomac RiverStation and a $500,000 fine. Approvals of the consent decree by the UnitedStates District Court for the Eastern District of Virginia and the BankruptcyCourt are being sought.

In the future, we anticipate increased regulation ofgeneration facilities under the Clean Air Act and applicable state laws andregulations concerning air quality. The EPA and several states in which weoperate are in the process of enacting more stringent air quality regulatoryrequirements.

For example, the EPA promulgated regulations (referredto as the “NOx SIP Call”), which establish emissions cap and trade programs forNOx emissions from electric generating units in most of the Eastern states.These programs were implemented beginning May 2003 in the Northeast and May 2004in the rest of the region. Under these regulations, a plant receives anallocation of NOx emissions allowances. If a plant exceeds its allocatedallowances, the plant must purchase additional, unused allowances from otherregulated plants or reduce emissions, which could require the installation ofemissions controls. Our plants 

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in Maryland, New York andMassachusetts complied with similar state and regional NOx emissions cap andtrade programs from 1999 to 2002, which have been superseded by the EPA NOx capand trade program. Some of the plants in these states are required to purchaseadditional NOx allowances to cover their emissions and maintain compliance. Thecost of these allowances may increase in future years and may result in plantsreducing NOx emissions through additional controls, the cost of which could besignificant but would be offset in part by the avoided cost of purchasing NOxallowances to operate the plant.

The EPA also has promulgated regulations thatestablish emissions cap and trade programs for sulfur dioxide (“SO2”) emissions(the “Acid Rain Program”) from electric generating units in the United States.This Acid Rain Program was implemented in two phases. Phase I began in 1995 andaffected 263 units at 110 mostly coal-burning electric utility plants locatedin 21 Eastern and Midwestern states. Phase II, which began in 2000, tightenedthe annual emissions limits imposed on Phase I plants and also set restrictionson smaller, cleaner plants fired by coal, oil and gas encompassing over 2,000units in all. The Acid Rain Program affects existing utility units servinggenerators with an output capacity of greater than 25 MW and all new utilityunits. The Acid Rain Program represents a dramatic departure from traditionalcommand and control regulatory methods, which establish specific, inflexibleemissions limitations with which all affected sources must comply. Instead, theAcid Rain Program introduces an allowance trading system that harnesses theincentives of the free market to reduce pollution. Under this system, affectedutility units were allocated allowances based on their historic fuelconsumption and a specific emissions rate. Each allowance permits a unit toemit one ton of SO2 during or after a specified year. Allowances may be bought,sold or banked. Anyone may acquire allowances and participate in the tradingsystem. The Acid Rain Program set a permanent ceiling (or cap) of 8.95 millionallowances for total annual allowance allocations to utilities. All of ourfacilities are in compliance with the requirements of the Acid Rain Program.Some of our plants have surplus allowances and some are required to purchaseadditional SO2 allowances to cover their emissions and maintain compliance. Thecosts of these allowances may increase in future years and may result in someof our plants reducing SO2 emissions through additional controls, the cost ofwhich could be significant but would be offset in part by the avoided cost ofpurchasing SO2 allowances to operate the plant.

The Acid Rain Program also has a NOx emissionsreduction program. This program only affects coal fired units and also wasimplemented in a two-phase approach in 1995 and 2000. This program is not a capand trade program but identifies specific emissions rates and/or controltechnology requirements. We have installed the NOx control technology and/orare meeting applicable emissions rates. All of our coal units are in compliancewith requirements of the Acid Rain Program’s NOx emissions reduction program.We foresee no additional expense to comply with this program.

The EPA promulgated the Clean Air Mercury Rule (“CAMR”)on March 15, 2005, which utilizes a market-based cap and trade approachunder Section III of the Clean Air Act. It requires emissions reductionsin two phases, with the first phase going into effect in 2010 and the morestringent cap going into effect in 2018. The EPA has stated that regulation ofnickel emissions from oil fired plants is not appropriate and necessary at thistime. The cost to comply with such requirements could be significant.

During the course of this decade, the EPA will beimplementing new, more stringent ozone and particulate matter ambient airquality standards. It will also address regional haze visibility issues, whichwill result in new regulations that will likely require further emissionsreductions from power plants, along with other emissions sources such asvehicles. To implement these air quality standards, the EPA promulgated theClean Air Interstate Rule (“CAIR”) on March 10, 2005. The CAIR establishesin the eastern United States a more stringent SO2 cap and allowance tradingprogram and a year round NOx cap and allowance trading program applicable topower plants. These cap and trade programs will be implemented in two phases,with the first phase going into effect in 2010 and more stringent caps goinginto effect in 2015.

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The mercury regulations and the CAIR will increasecompliance costs for our operations and would likely require emissionsreductions from some of our power plants, which would necessitate significantexpenditures on emissions controls or have other impacts on operations.

In addition to implementation of statutes already inexistence, there are additional environmental requirements under strongconsideration by the federal and various state legislatures. The BushAdministration has submitted Clean Air Act multi-emissions reformlegislation to Congress, which would promulgate a new emissions cap and tradeprogram for NOx, SO2 and mercury emissions from power plants. This legislationwould require overall reductions in these pollutants from national power plantemissions of approximately 50-75% phased in during the 2008 - 2018timeframe, which is similar to the types of overall reductions required underthe EPA regulations discussed above. Other more stringent multi-emissionsreform legislation also has been proposed in Congress by some lawmakers. Thereare many political challenges to the passage of multi-emissions reformlegislation through Congress, and it is unclear whether any of this legislationultimately will be enacted into law.

Various states where we do business also have otherair quality laws and regulations with increasingly stringent limitations andrequirements that may become applicable in future years to our plants andoperations. We may incur additional compliance costs as a result of additionalstate requirements, which could include significant expenditures on emissionscontrols or have other impacts on operations.

For example, the Commonwealth of Massachusetts has finalizedregulations to further reduce NOx and SO2 emissions from certain power plantsand to regulate carbon dioxide (“CO2”) and mercury (“Hg”) emissions for thefirst time. Mercury emissions reductions will be required exclusively from coalfired facilities. These regulations, which become effective in the 2004-2008timeframe, will apply to our oil fired Canal plant in the state, will increaseour operating costs and will likely necessitate the installation of additionalemissions control technology.

Another example is in the San Francisco Bay Area,where we own power plants. NOx emissions standards have become increasinglystringent on a specified schedule over a several year period, culminating in2005. We will continue to apply our NOx implementation plan for these plants,which includes the installation of emissions controls as well as the gradualcurtailment and phasing out of one or more of our higher NOx emitting units.

Additionally, in 2003, the State of New York finalizedair regulations that significantly reduced allowances for NOx and SO2 emissionsfrom power plants through a state emissions cap and allowance trading program,which will become effective during the 2004-2008 timeframe. This regulationwill necessitate that we act on one, or a combination of the following options:install emissions controls at some of our units to reduce emissions, purchaseadditional state NOx and SO2 allowances under the regulatory program or reducethe number of hours that units operate. We expect to incur additionalcompliance costs as a result of these additional state requirements, whichcould include significant expenditures on emissions controls or have otherimpacts on operations.

These examples are illustrative but not a completediscussion of the additional federal and state air quality laws and regulationsthat we expect to become applicable to our plants and operations in the comingyears. We will continue to evaluate these requirements and attempt to developcompliance plans that enable us to appropriately manage the costs and impacts.

*Other Environmental Regulations:  *Thereare other environmental laws, in addition to air quality laws, that also affectour operations. We are required under the Clean Water Act to comply witheffluent and intake requirements, technological controls and operatingpractices. Our wastewater discharges are permitted under the Clean Water Act,and our permits under the Clean Water Act are subject to review every fiveyears. As with air quality regulations, federal and state water regulations areexpected to increase and impose additional and more stringent requirements orlimitations in the future. For example, in 2004, 

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the EPA issued a new rule thatimposes more stringent standards on the cooling water intakes for power plants.We expect to incur additional compliance costs to comply with this new rule. Wedo not expect these costs to be material.

Our facilities also are subject to several wastemanagement laws and regulations. The Resource Conservation and Recycling Actsets forth comprehensive requirements for the handling of solid and hazardouswastes. The generation of electricity produces non-hazardous and hazardousmaterials, and we incur substantial costs to store and dispose of wastematerials from these facilities. The EPA may develop new regulations thatimpose additional requirements on facilities that store or dispose of fossilfuel combustion materials, including types of coal ash. If so, we may berequired to change the current waste management practices at some facilitiesand incur additional costs for increased waste management requirements.

Additionally, the Federal Comprehensive EnvironmentalResponse, Compensation and Liability Act, known as the Superfund, establishes aframework for dealing with the cleanup of contaminated sites. Many states haveenacted state superfund statutes. We do not expect any corrective actions torequire significant expenditures.

*Regional Greenhouse Gas Initiative:  *NineNortheast and Mid-Atlantic states created a cooperative to discuss the designof a regional cap and trade program initially covering carbon dioxide emissionsfrom power plants in the region, the Regional Greenhouse Gas Initiative (“RGGI”).In the future, RGGI may be extended to include other sources of greenhouse gasemissions, and greenhouse gases other than carbon dioxide.

*Clean Water Act:  *The CleanWater Act and renewal of National and State Pollution Discharge EliminationSystem will require additional investment at many of our facilities. In thenext year we expect draft permits to be issued for our Canal and Bowlinefacilities that require additional capital investment and operational changes. TheKendall facility is in advanced stages of the permitting process and the UnitedStates Environmental Protection Agency is reviewing the response received fromthe draft permit issues in 2004. The effects of new Clean Water Act regulationsand permit renewal process at other facilities is currently under review.

*Maryland 4 Pollutant Legislation:  *TheMaryland State Legislature introduced a “multi-pollutant” bill during the 2005session, which sought to reduce emissions of NOx, SO2, mercury (“Hg”) and CO2from the seven coal fired generating stations in Maryland. The Morgantownplant, Chalk Point plant, and Dickerson plant were included in the list ofaffected facilities. The bill set forth strict plant-specific emissions limitswith no opportunity to purchase or trade emissions allowances to comply.Ultimately, the bill did not reach the House floor for a full vote, howeverlegislation of this kind gains increasing support each year it is introduced.If a multi-pollutant bill were to be passed into law in Maryland, actionsrequired to comply could include material modifications to the plants locatedin the state.

*Current Enforcement Issues:  *In**1999, the EPA commenced enforcement actions in federalcourts against seven major electric generating companies, alleging violationsof the new source review regulations promulgated under the Clean Air Act (“NSR”).Since the initial action, the EPA has reached settlements with a number ofadditional electric generating companies and continues to pursue enforcementagainst others. In addition, some state attorneys general and environmentalgroups have launched private enforcement actions against power companiesalleging the same types of violations.

The NSR regulations require power plants (and othermajor sources of pollutants) to obtain permits and install state-of-the-artpollution control technology when they undertake a “major modification” of thepower plants. The NSR regulations are not triggered by the routine maintenancerepair and replacement projects (“RMRR”) and projects that do not cause anemissions increase. Thus the central debate over whether a violation occurredcenters on whether work the industry undertook should be considered 

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RMRR and whether the workcaused emissions to increase so as to trigger the NSR requirements. Courts indifferent jurisdictions have reached very different conclusions about when theNSR requirements are triggered. Most recently, the U.S. Court of Appeals forthe 4th Circuit issued a ruling upholding a lower courtdetermination that was very favorable to the industry’s view of when NSR istriggered. District courts in other circuits have reached the oppositeconclusion.

To date, no lawsuits or administrative actionsalleging NSR violations have been brought by the EPA against us or our powerplants. However, in 2001 the EPA requested information concerning some of ourplants covering a time period that predates our ownership and leases.

In addition, there were two regulatory developmentsconcerning NSR in 2003 that will affect the EPA’s application of NSR in thefuture and, potentially, the NSR enforcement actions. In a new NSR rule, theEPA promulgated an exemption from NSR for MRR work that does not exceed 20% ofthe replacement value of a unit, which is generally consistent with power plantMRR work practices. In the rulemaking, the EPA also announced a policy ofinterpreting NSR in a way that seems generally consistent with reasonableindustry practices. The new rule is being challenged in federal court andhas been stayed pending judicial review, and most recently, the EPAreconsidered the 20% replacement value portion of the rule but recentlycompleted the reconsideration and retained the 20% replacement threshold in therule. The U.S. Circuit Court for the District of Columbia Circuit must now rule onthe reform rule.

We cannot provideassurance that lawsuits or other administrative actions against the powerplants under NSR will not be filed or taken in the future. If an action isfiled against us or our power plants and we are judged to not be in compliance,we could be required to make substantial expenditures to bring the power plantsinto compliance, which could have a material adverse effect on our financialcondition, results of operations or cash flows.

**Employees**

As of December 31,2004, we employed through contracts with Mirant Services, LLC (“Mirant Services”),a direct subsidiary of Mirant, approximately 1,240 people, of whomapproximately 1,140 were employed at our power plants. Approximately 73% of theemployees at our power plants were represented by the following unions:

·       Utility Worker’s Union ofAmerica, A.F.L.-C.I.O., Local #369 in Cambridge, Massachusetts. The currentcollective bargaining agreement expires on February 28, 2009.

·       Utility Worker’s Union ofAmerica, A.F.L.-C.I.O., Local #480 in Sandwich, Massachusetts. The currentcollective bargaining agreement expires on February 28, 2006.

·       Local Union 503,International Brotherhood of Electrical Workers (“I.B.E.W.”) in New York. Thecurrent collective bargaining agreement expires on June 1, 2008.

·       Local Union 1900, I.B.E.W.in Maryland and Virginia. The current collective bargaining agreement expireson June 10, 2010.

·       Local Union 1245, I.B.E.W.in California. The current collective bargaining agreement expires on October 31,2005.

When we enter into and conduct labor negotiations, weengage in contingency planning to mitigate and reduce the risk of disruption,and ensure continuation of our generation activities to the maximum extentpossible in the event of an adverse collective action by the union with whom weare negotiating.

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**Item 2.**                        *Properties*

Thefollowing properties were owned or leased as of December 31, 2004:
| **Power   Generation  Business**      | ** ** | ** **          | ** ** | **Location**                      | ** ** | **Plant Type**             | ** ** | **Primary Fuel** | ** ** | **Mirant’s %  Leasehold/   Ownership   Interest** | ** ** | **Total   MW(1)** | ** ** | **Net Equity   Interest/   Lease in   Total MW(1)** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-----------------------------------|------------|---------------------------------|------------|-----------------------|------------|------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **West Region:**                           |       |                |       |                              |       |                            |       |                  |       |                                                             |       |                   |       |                                                                              |       |   |   |
| Mirant California                          |       | California          |       | Peaking/  Intermediate/  Baseload |       | Natural  Gas                    |       |                  | 100        |                                                             |       | 2,347                  |       |                                                                              | 2,347      |   |   |
| Mirant Texas                               |       | Texas               |       | Peaking/  Baseload                |       | Natural  Gas                    |       |                  | 100        |                                                             |       | 538                    |       |                                                                              | 538        |   |   |
| Subtotal                                   |       |                |       |                              |       |                            |       |                  |       |                                                             |       | 2,885                  |       |                                                                              | 2,885      |   |   |
| **Northeast  Region:**                     |       |                |       |                              |       |                            |       |                  |       |                                                             |       |                   |       |                                                                              |       |   |   |
| Mirant New  England(2)                |       | Massachusetts       |       | Intermediate/  Peaking            |       | Natural Gas/  Oil               |       |                  | 100        |                                                             |       | 1,993                  |       |                                                                              | 1,388      |   |   |
| Mirant New York                            |       | New  York           |       | Intermediate/  Peaking/  Baseload |       | Natural  Gas/  Hydro/  Coal/Oil |       |                  | 100        |                                                             |       | 1,675                  |       |                                                                              | 1,675      |   |   |
| Subtotal                                   |       |                |       |                              |       |                            |       |                  |       |                                                             |       | 3,668                  |       |                                                                              | 3,063      |   |   |
| **Mid-Atlantic  Region:**                  |       |                |       |                              |       |                            |       |                  |       |                                                             |       |                   |       |                                                                              |       |   |   |
| Mirant Mid-Atlantic                        |       | Maryland            |       | Intermediate/  Peaking/  Baseload |       | Natural  Gas/  Coal/Oil         |       |                  | 100        |                                                             |       | 4,252                  |       |                                                                              | 4,252      |   |   |
| Mirant Peaker and  Mirant Potomac River(3) |       | Maryland/  Virginia |       | Intermediate/  Peaking/  Baseload |       | Natural Gas/  Coal/Oil          |       |                  | 100        |                                                             |       | 1,004                  |       |                                                                              | 1,004      |   |   |
| Subtotal                                   |       |                |       |                              |       |                            |       |                  |       |                                                             |       | 5,256                  |       |                                                                              | 5,256      |   |   |
| Total                                      |       |                |       |                              |       |                            |       |                  |       |                                                             |       | 11,809                 |       |                                                                              | 11,204     |   |   |

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(1)          MWamounts reflect net dependable capacity.

(2)          TotalMW reflects a 1.4% ownership interest, or 8.8 MW, in the 614 MW Wyman plant.

(3)          Assetsowned or leased by affiliates (a total of 1,004 MW) that are subject to capitalcontribution agreements between Mirant and us.

We also own an oilpipeline, which is approximately 51.5 miles long and serves the Chalk Point andMorgantown generating facilities.

**Item 3.**                        *Legal Proceedings*

As debtors-in-possession,the Mirant Debtors are authorized under Chapter 11 to continue to operate as anongoing business, but may not engage in transactions outside the ordinarycourse of business without the prior approval of the Bankruptcy Court. As ofthe Petition Date, most pending litigation (including some of the actionsdescribed below) is stayed, and absent further order of the Bankruptcy Court,no party, subject to certain exceptions, may take any action, again subject tocertain exceptions, to recover on pre-

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petitionclaims against the Mirant Debtors. One exception to this stay of litigation isfor an action or proceeding by a governmental agency to enforce its police orregulatory power. The claims asserted in litigation and proceedings to whichthe stay applies may be fully and finally resolved in connection with theadministration of the bankruptcy proceedings and, to the extent not resolved,will need to be addressed in the Plan. On November 19, 2003, theBankruptcy Court entered an order staying most litigation pending againstcurrent or former officers, directors and managers of the Mirant Debtorsarising out of the performance of their duties and against certain potentialindemnitees of the Mirant Debtors. The Bankruptcy Court took that action toavoid the risk that the continuation of such litigation would impede the MirantDebtors’ ability to reorganize or would have a negative impact upon the assetsof the Mirant Debtors. At this time, it is not possible to predict the outcomeof the Chapter 11 proceedings or their effect on the business of the MirantDebtors or outstanding legal proceedings. The Mirant Debtors intend to resolve asmany of these claims as possible through the claims resolution process in thebankruptcy proceeding or the Plan.

***California Litigation by Governmental Units andCertain Other Parties***

*General.  *The high pricesfor wholesale electricity and natural gas experienced in the western marketsduring 2000 and 2001 prompted several governmental entities to investigate thewestern power markets, including activities by Mirant, Mirant Americas EnergyMarketing and several of the Company’s wholly owned subsidiaries. Thesegovernmental entities include the FERC, the DOJ, CPUC, the California Senate,the California State Auditor, California’s Electricity Oversight Board (the “EOB”),the General Accounting Office of the United States Congress, the San JoaquinDistrict Attorney and the Attorney General’s offices of the States ofWashington, Oregon and California. These investigations, some of which arecivil and some criminal, resulted in the issuance of civil investigativedemands, subpoenas, document requests, requests for admission andinterrogatories directed to several Mirant entities.

*General FERC Investigation.  *OnFebruary 13, 2002, the FERC directed its staff to undertake a fact-findinginvestigation into whether any entity manipulated short-term prices in electricenergy or natural gas markets in the West or otherwise exercised undueinfluence over wholesale prices in the West, for the period January 1,2000 and forward. On March 26, 2003, the FERC staff issued its finalreport regarding its investigation. Although the staff reaffirmed the FERC’sconclusion set forth in an order issued December 15, 2000 that significantsupply shortfalls and a fatally flawed market design were the root causes ofthe problems that occurred in the California wholesale electricity market in2000 and 2001, the staff also found that significant market manipulation hadoccurred in both the gas and electricity markets. The staff concluded thattrading strategies of the type engaged in by Enron Corporation and itsaffiliates (“Enron”) as described in certain Enron memos released by the FERCin May 2002 violated provisions of the CAISO and the California PowerExchange Corporation (“Cal PX”) tariffs that prohibited gaming. It identifiedMirant, without being specific as to the particular Mirant entities involved,as being one of a number of entities that had engaged in one or more of thosepractices. The FERC staff also found that bidding generation resources to theCal PX and CAISO at prices unrelated to costs constituted economic withholdingand violated the antigaming provisions of the CAISO and Cal PX tariffs. Mirantwas one of the entities identified as engaging in that bidding practice, withthe FERC staff again not being specific as to the Mirant entities involved.

On March 26, 2003, the FERC staff issued aseparate report addressing allegations of physical withholding by Mirant andfour other out of state owners of generation assets in California made by theCPUC in reports issued in September 2002 and January 2003. The CPUCasserted that on days in the fall of 2000 through the spring of 2001 duringwhich the CAISO had to declare a system emergency requiring interruption ofinterruptible load or imposition of rolling blackouts, Mirant and four otherout of state owners of generation assets in California had generating capacitythat either was not operated or was out of service due to an outage and thatcould have avoided the problem if operated. The CPUC reports 

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identified the Mirantentity discussed in the reports as Mirant Americas Energy Marketing, althoughMirant’s generating facilities in California are owned by subsidiaries of theCompany. The FERC staff concluded that the CPUC’s contention that thirty-eightservice interruptions could have been avoided had those five generatorsproduced all of their available power was not supported by the evidence. Thestaff also indicated, however, that the FERC was continuing to investigatewhether withholding by generators had occurred during 2000 and 2001.

As discussed below under *CaliforniaSettlement*, on January 14, 2005,**Mirantand certain of its subsidiaries, including the Company, entered into aSettlement and Release of Claims Agreement (the “California Settlement”) withPacific Gas and Electric Company (“PG&E”), Southern California EdisonCompany (“SCE”), San Diego Gas and Electric Company, the CPUC, the CaliforniaDepartment of Water Resources (“DWR”), the EOB and the Attorney General of theState of California (collectively, the “California Parties”) and with theOffice of Market Oversight and Investigations of the FERC. The CaliforniaSettlement was approved by the FERC on April 13, 2005 and became effective onApril 15, 2005, resulting in the termination of the FERC’s investigation ofpotential withholding by generators (the “FERC Withholding Investigation”) asto Mirant and its subsidiaries, including the Company.

*FERC Bidding Investigation.  *OnJune 25, 2003, the FERC issued an order (the “Bidding Order”) initiatingan investigation by its staff into bidding practices in the Cal PX and CAISOmarkets between May 1, 2000 and October 1, 2000 of more than 50parties, including Mirant Americas Energy Marketing. The entities subject toinvestigation under the Bidding Order were previously identified in the reportissued by the FERC Staff on March 26, 2003 as having bid generationresources to the Cal PX and CAISO at prices unrelated to costs. Under thecontractual arrangements pursuant to which Mirant Americas Energy Marketingbought and resold electricity produced by the Company’s California generationassets, the Company’s subsidiaries could have had to reimburse Mirant AmericasEnergy Marketing for the amount of any disgorgement of profits required orother remedy imposed by the FERC upon Mirant Americas Energy Marketing. Asdiscussed below under *California Settlement*,on April 15, 2005 the California Settlement became effective, and it hasresulted in the termination of the FERC Staff’s investigation of MirantAmericas Energy Marketing’s bidding practices that was initiated under theBidding Order.

*FERC Show Cause Proceeding Relating to TradingPractices.  *On June 25, 2003, the FERC issued ashow cause order (the “Trading Practices Order”) to more than 50 parties,including Mirant Americas Energy Marketing and subsidiaries of the Company,that a FERC staff report issued on March 26, 2003 identified as havingpotentially engaged in one or more trading strategies of the type employed byEnron, as described in the Enron memos released by the FERC in May 2002.The Trading Practices Order identified certain specific trading practices thatthe FERC indicated could constitute gaming or anomalous market behavior inviolation of the CAISO and Cal PX tariffs. The Trading Practices Order requiresthe CAISO to identify transactions between January 1, 2000 andJune 20, 2001 that may involve the identified trading strategies, and thenrequires the applicable sellers involved in those transactions to demonstratewhy such transactions were not violations of the CAISO and Cal PX tariffs. OnSeptember 30, 2003, the Mirant entities filed with the FERC for approvalof a settlement agreement (the “Trading Settlement Agreement”) entered intobetween certain Mirant entities and the FERC Trial Staff, under which MirantAmericas Energy Marketing would pay $332,411 to settle the show causeproceeding, except for an issue related to selling of ancillary services, whichis discussed below. In a November 14, 2003 order in a differentproceeding, the FERC ruled that certain allegations of improper trading conductwith respect to the selling of ancillary services during 2000 should beresolved in the show cause proceeding. On December 19, 2003, the Mirantentities filed with the FERC for approval of an amendment to the TradingSettlement Agreement reached with the FERC Trial Staff with respect to the saleof ancillary services. Under the proposed amendment the FERC would have anallowed unsecured claim in Mirant Americas Energy Marketing’s bankruptcyproceeding for $3.67 million in settlement of the allegations with respect

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to the sale of ancillaryservices (the “Ancillary Amount”). The Trading Settlement Agreement, asamended, must be approved by the FERC and the Bankruptcy Court to becomeeffective. 

As discussed below under *CaliforniaSettlement*, on April 15, 2005 the California Settlement becameeffective, and, as a result, the California Parties withdrew their oppositionto the Trading Settlement Agreement as amended and supported approval of theTrading Settlement Agreement as proposed by the Mirant entities that areparties to the Trading Settlement Agreement and the FERC Trial Staff withoutchange or modification. The FERC approved the Trading Settlement Agreement, asamended, on June 27, 2005, and the Mirant entities will now seek approval fromthe Bankruptcy Court.

*California Receivables.  *In2001, SCE and PG&E suspended payments to the Cal PX and the CAISO forcertain power purchases, including purchases from Mirant Americas EnergyMarketing. Both the Cal PX and PG&E filed for bankruptcy protection in2001. On April 15, 2005, the California Settlement became effective, and itresulted in Mirant Americas Energy Marketing assigning to the CaliforniaParties its outstanding receivables for sales made in the Cal PX and CAISOmarkets from January 1, 2000 through June 20, 2001. Underintercompany agreements between the Company’s subsidiaries and Mirant AmericasEnergy Marketing, this assignment of receivables by Mirant Americas EnergyMarketing may result in the termination of Mirant Americas Energy Marketing’sliability on receivables held by those subsidiaries against Mirant AmericasEnergy Marketing related to the sales made by Mirant Americas Energy Marketingin the Cal PX and CAISO markets.

*FERC Refund Proceedings.  *Asa result of the increase in electricity prices in 2000 and 2001, the CaliforniaParties have pursued litigation at the FERC, claiming that the prices chargedby Mirant Americas Energy Marketing and other market participants in theCalifornia energy markets during certain periods in 2000 and 2001 wereexcessive. On July 25, 2001 the FERC issued an order requiring proceedings(the “FERC Refund Proceedings”) to determine the amount of any refunds andamounts owed for sales made to the CAISO or the Cal PX from October 2,2000 through June 20, 2001 (the “Refund Period”). Various parties haveappealed these FERC orders to the United States Court of Appeals for the NinthCircuit (the “Ninth Circuit”) seeking review of a number of issues, includingchanging the Refund Period to include periods prior to October 2, 2000 andexpanding the sales of electricity subject to potential refund to includebilateral sales made to the DWR. Any such expansion of the Refund Period or thetypes of sales of electricity potentially subject to refund could significantlyincrease the refund exposure of Mirant Americas Energy Marketing in thisproceeding. Although Mirant Americas Energy Marketing is the Mirant entity thatengaged in transactions with the CAISO and the Cal PX, the orders issued by theFERC in the refund proceedings, and the filings made by other parties in thoseproceedings, generally refer to the Mirant entity involved as Mirant withoutbeing more specific. Mirant believes that the Mirant entity that would actuallybe liable to third parties for any refunds determined by the FERC to be owed,or that would be due any receivables found to be owed to Mirant, is MirantAmericas Energy Marketing. Agreements that were in effect at the time of thetransactions at issue between Mirant Americas Energy Marketing and theCompany’s subsidiaries that own generating facilities in California would shiftsome of the economic burden of such refunds or the benefit of such receivablesfrom Mirant Americas Energy Marketing to those subsidiaries. 

In the July 25, 2001 order, the FERC also orderedthat a preliminary evidentiary proceeding be held to develop a factual recordon whether there had been unjust and unreasonable charges for spot marketbilateral sales in the Pacific Northwest from December 25, 2000 throughJune 20, 2001. In that proceeding, the California Attorney General, theCPUC and the EOB filed to recover certain refunds from parties, includingMirant Americas Energy Marketing, for bilateral sales of electricity to the DWRat the California/Oregon border, claiming that such sales took place in thePacific Northwest. In an order issued June 25, 2003, the FERC ruled thatno refunds were owed and terminated the proceeding. On November 10, 2003,the FERC denied requests for rehearing filed by various parties. Various partieshave appealed the FERC’s decision to the Ninth Circuit.

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On September 9, 2004, the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed**in 2002 by theCalifornia Attorney General that sought refunds for transactions conducted inmarkets administered by the CAISO and the Cal PX outside the Refund Periodset by the FERC and for transactions between the DWR and various owners ofgeneration and power marketers, including Mirant Americas Energy Marketing andsubsidiaries of the Company. The Ninth Circuit remanded the proceeding to theFERC for it to determine what remedies, including potential refunds, areappropriate where entities, including Mirant Americas Energy Marketing andsubsidiaries of the Company, purportedly did not comply with certain filingrequirements for transactions conducted under market-based rate tariffs. MirantAmericas Energy Marketing and other parties have filed a petition for rehearingwith the Ninth Circuit.

As discussed below under *CaliforniaSettlement*, the California Settlement became effective April 15,2005. The California Settlement results in the release of most of MirantAmericas Energy Marketing’s and therefore the Company’s potential liability in(1) the FERC Refund Proceedings for sales made in the CAISO or the Cal PXmarkets, (2) the proceeding also initiated by the FERC in July 2001 todetermine whether there had been unjust and unreasonable charges for spotmarket bilateral sales in the Pacific Northwest from December 25, 2000 throughJune 20, 2001, and (3) any proceedings at the FERC resulting from the NinthCircuit’s reversal of the FERC’s dismissal of the complaint filed in 2002 bythe California Attorney General. Under the California Settlement, theCalifornia Parties and those other market participants who have opted into thesettlement have released Mirant and its subsidiaries from any liability forrefunds related to sales of electricity and natural gas in the western marketsfrom January 1, 1998 through July 14, 2003. Also, the California Partieswill assume the obligation of Mirant Americas Energy Marketing to pay anyrefunds determined by the FERC to be owed by Mirant Americas Energy Marketingto other parties that do not opt into the settlement for transactions in theCAISO and Cal PX markets during the Refund Period, with the liability of theCalifornia Parties for such refund obligation limited to the amount of thereceivables assigned by Mirant Americas Energy Marketing to the CaliforniaParties under the California Settlement. Subject to applicable bankruptcy law, however, Mirant Americas EnergyMarketing will continue to be liable for any refunds that FERC determines it toowe (1) to participants in the Cal PX and CAISO markets that are notCalifornia Parties (or that do not elect to opt into the settlement) forperiods outside of the Refund Period and (2) to participants in bilateraltransactions with Mirant Americas Energy Marketing that are notCalifornia Parties (or that do not elect to opt into the settlement). Thisliability of Mirant Americas Energy Marketing could result in additionalliability of the Company’s subsidiaries to Mirant Americas Energy Marketingunder the intercompany agreements referred to above.

*DWR Power Purchases Proceedings.  *OnMay 22, 2001, Mirant Americas Energy Marketing entered into a 19-monthagreement with the DWR to provide the State of California with approximately500 MW of electricity during peak hours through December 31, 2002 (the“DWR Contract”). On February 25, 2002, the CPUC and the EOB filed separatecomplaints at the FERC against Mirant Americas Energy Marketing and othersellers of electricity under long-term agreements with the DWR, alleging thatthe terms of these contracts were unjust and unreasonable and that thecontracts should be abrogated or the prices under the contracts should bereduced. On June 26, 2003, the FERC issued an order dismissing thecomplaints filed by the CPUC and the EOB against Mirant Americas EnergyMarketing. On November 10, 2003, the FERC denied motions for rehearingfiled by the CPUC and the EOB. The CPUC and EOB appealed the FERC’s decision tothe Ninth Circuit. As discussed below under *California Settlement*,the California Settlement became effective on April 15, 2005. Under thatsettlement the DWR and the other California Parties have released MirantAmericas Energy Marketing from any liability with respect to the DWR Contractand the CPUC and the EOB are to dismiss their appeal of the FERC’s decisiondismissing their complaints.

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*Reliability Must Run Agreements Proceeding*.   Certainof the generating facilities acquired by subsidiaries of the Company fromPG&E are operated subject to reliability-must-run agreements (“RMRAgreements”), which those subsidiaries assumed from PG&E. These agreementsallow the CAISO to require the Company’s subsidiaries, under certainconditions, to operate these facilities to support the California electrictransmission system. The rates that the Company’s subsidiaries could charge theCAISO under those agreements, where they were also making sales into the marketand were retaining the revenues from those sales, were the subject of anongoing disputed rate proceeding before the FERC at the time of the acquisitionof the plants from PG&E and were being collected subject to refund. Priorto 2005, for the plants that are subject to the RMR Agreements and from whichthe Company’s subsidiaries have exercised their rights to also make marketsales, the Company’s subsidiaries collected from the CAISO an amount equal to50% of the annual fixed revenue requirement (the “Annual Requirement”) of thoseplants. The amounts the Company’s subsidiaries collected from the CAISO weresubject to refund pending final review and approval by the FERC. While theCAISO is the party to the RMR Agreements with the Company’s subsidiaries, theCAISO’s obligations under those agreements are funded by PG&E, and PG&Eis the real party in interest with respect to any refunds owed by the Company’ssubsidiaries for sales made previously under those agreements. InJune 2000, the ALJ issued a decision finding that the amount the Company’ssubsidiaries should be allowed to charge the CAISO for such plants wasapproximately 31¤2%on average of the Annual Requirement. In July 2000, the Company’s subsidiariessought review by the FERC of the ALJ decision.

As discussed below under *CaliforniaSettlement*, the California Settlement became effective onApril 15, 2005. Under that settlement, PG&E has released the Company’ssubsidiaries that own generating facilities subject to the RMR Agreements fromany potential refund liability under the RMR Agreements for the period throughSeptember 30, 2004 in return for the consideration provided to PG&Eunder the California Settlement. In addition, the CAISO separately agreed withMirant to release its claims for refunds with respect to the RMR Agreements forthe period through September 30, 2004 upon the California Settlementbecoming effective. In its order issued April 13, 2005 approving the CaliforniaSettlement, the FERC also dismissed as moot the pending proceeding regardingthe rates that the Company’s subsidiaries could charge for plants subject tothe RMR Agreements from which those subsidiaries were also making market sales.The Company’s subsidiaries on May 13, 2005 filed with the FERC a request forrehearing of the FERC’s dismissal of that proceeding for the purpose of havingthe FERC determine the rate that would apply for periods subsequent toSeptember 30, 2004 where those subsidiaries are making sales into the marketfrom units designated by the CAISO under the RMR Agreements as RMR units. OnJune 3, 2005, the FERC denied that request for rehearing, concluding that theterms of the California Settlement and power purchase agreements entered intobetween the Company’s subsidiaries and PG&E under the terms of thatsettlement caused no issues to remain as to what payments would effectively bemade to the Company’s subsidiaries under the RMR Agreements during the periodthose power purchase agreements are in effect, which is potentially through2012.

*California Attorney General Litigation.  *OnMarch 11, 2002, the California Attorney General filed a civil suit againstMirant, Mirant Americas, Inc., Mirant Americas Energy Marketing andseveral Company subsidiaries (the “Mirant Defendants”). The lawsuit allegedthat, between 1998 and 2001, the Mirant Defendants effectively double-soldcapacity by selling both ancillary services and energy from the same generatingunits in violation of the CAISO tariff and the California Unfair CompetitionAct. The suit seeks both restitution and penalties in unspecified amounts. TheMirant Defendants removed this suit from the state court in which it wasoriginally filed to the United States District Court for the Northern Districtof California. The district court, on March 25, 2003, granted the MirantDefendants’ motion seeking dismissal of this suit. The California AttorneyGeneral appealed that dismissal to the Ninth Circuit. On July 6, 2004, theNinth Circuit affirmed the dismissal of the suit by the district court. OnJuly 27, 2004, the California Attorney General filed a petition with theNinth Circuit seeking rehearing of the July 6, 2004 decision, and theNinth Circuit denied that request on October 29, 2004. On January 27,2005, the California Attorney 

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General filed a petitionfor writ of certiorari with the United States Supreme Court seeking to appealthe Ninth Circuit’s decision. The Supreme Court denied that petition on April18, 2005.

On March 20, 2002, the California AttorneyGeneral filed a complaint with the FERC against certain power marketers andtheir affiliates, including Mirant Americas Energy Marketing and subsidiariesof the Company, alleging that market based sales of energy made by such generatorsto the CAISO and the Cal PX and in bilateral transactions with the DWRwere in violation of the Federal Power Act, in part because such transactionswere not filed appropriately with the FERC. The complaint requests, among otherthings, refunds for any prior short-term sales of energy that are found not tobe just and reasonable along with interest on any such refunded amounts. TheFERC dismissed the California Attorney General’s complaint and denied theCalifornia Attorney General’s request for rehearing. On September 9, 2004,the Ninth Circuit reversed the FERC’s dismissal of the California AttorneyGeneral’s complaint and remanded the case back to the FERC for furtherproceedings. The Ninth Circuit found that while the FERC has the authority toallow market based rates, the alleged failure of certain entities sellingelectric energy at market-based rates, including the Mirant parties, to complywith reporting regulations established by the FERC for entities with authorityto sell at market-based rates was more than a technical compliance issue as theFERC had found. Mirant Americas Energy Marketing and other parties have filed apetition with the Ninth Circuit seeking rehearing of the September 9, 2004ruling. This ruling could result in the expansion of the Refund Period toinclude dates from January 1, 2000 through June 20, 2001, and couldresult in refunds being ordered for transactions outside the CAISO and Cal PXmarkets.

On April 9, 2002, the California Attorney Generalfiled a second civil suit against the Mirant Defendants. That lawsuit allegesthat the Mirant Defendants violated the California Unfair Competition Act byfailing to properly file their rates, prices, and charges with the FERC asrequired by the Federal Power Act, and by charging unjust and unreasonableprices in violation of the Federal Power Act. The complaint seeks unspecifiedpenalties, costs and attorney fees. The Mirant Defendants removed this suitfrom the state court in which it was originally filed to the United StatesDistrict Court for the Northern District of California. The district court, onMarch 25, 2003, granted the Mirant Defendant’s motion seeking dismissal ofthis suit. On October 12, 2004, the Ninth Circuit affirmed the districtcourt’s dismissal of the suit.

On April 15, 2002, the California AttorneyGeneral filed a third civil lawsuit against the Mirant Defendants in the UnitedStates District Court for the Northern District of California. The lawsuitalleges that the acquisition and possession of the Potrero and Delta powerplants by subsidiaries of the Company has substantially lessened, and willcontinue to substantially lessen, competition in violation of the Clayton Act,as amended (the “Clayton Act”) and the California Unfair Competition Act. Thelawsuit seeks equitable remedies in the form of divestiture of the plants andinjunctive relief, as well as monetary damages in unspecified amounts toinclude disgorgement of profits, restitution, treble damages, statutory civilpenalties and attorney fees. On March 25, 2003, the court dismissed theCalifornia Attorney General’s state law claims and his claim for damages underthe Clayton Act, but did not dismiss the California Attorney General’s claimsfor divestiture. On December 3, 2003, the district court stayed the suitduring the pendency of the Company’s bankruptcy proceedings. The CaliforniaAttorney General appealed that ruling to the Ninth Circuit, and onFebruary 10, 2005, the Ninth Circuit vacated the stay and remanded theproceeding to the district court.

On August 18, 2004, the California AttorneyGeneral filed a fourth civil suit in the Superior Court of California, SanFrancisco County, against the Mirant Defendants. The suit asserts claims underthe California Unfair Competition Act and the California Commodity Law of 1990.The California Attorney General alleges that beginning in 1999 and continuingthrough 2001, the Mirant Defendants engaged in manipulative and fraudulentschemes in the California wholesale electricity markets, including allegedlyobtaining congestion relief payments for actions that did not relieve anycongestion, receiving payment for excessive generation through the submissionof false schedules, circumventing price caps by falsely 

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representing the source ofenergy, receiving payment for ancillary services they did not and could notprovide, and falsely reporting generating units as unavailable to produceelectricity when they were available. The suit seeks damages, restitution,disgorgement of profits, civil penalties and injunctive relief. The MirantDefendants removed the suit to the United States District Court for the NorthernDistrict of California and filed a motion seeking dismissal of the claimsasserted on the grounds that they are barred by the doctrine of preemption andthe filed rate doctrine.

The California Settlement became effective on April15, 2005. In accordance with that settlement, the California Attorney Generalhas dismissed with prejudice the civil suits filed against the MirantDefendants that had not been previously dismissed by final orders. TheCalifornia Attorney General has also released all claims against Mirantentities asserted in the complaint filed with the FERC on March 20, 2002.

*California-Related Claims in the BankruptcyProceedings*.   Various entities have filed proofs ofclaim in bankruptcy proceedings in undetermined amounts against Mirant, MirantAmericas Energy Marketing, the Company and other Mirant subsidiaries, includingsubsidiaries of the Company, on account of the various proceedings describedabove. Those entities include the California Attorney General, the DWR, theCPUC, PG&E, SCE, San Diego Gas & Electric Company, the Cal PX andthe CAISO. In addition, the FERC has filed proofs of claim concerning the FERCRefund Proceedings, the proceedings related to the RMR Agreements and theproceedings and investigationsdescribed above in *General FERC Investigation*,*FERC Bidding Investigation* and *FERC Show Cause Proceeding Related to Trading Practices*.Some of these claims also assert a right to set off the amount of any refundsowed by Mirant Americas Energy Marketing to the claimant against any amountsowed by such claimant to Mirant Americas Energy Marketing.

The California Settlement became effective on April15, 2005, resulting in the withdrawal with prejudice of the claims filed in theMirant Debtors’ bankruptcy proceedings by the California Attorney General(excluding certain claims filed on behalf of state agencies unrelated to thewholesale electricity or natural gas markets), the DWR, the CPUC, PG&E, SCEand San Diego Gas & Electric Company in return for the specificallowed claims and other consideration provided for in the CaliforniaSettlement. Also, although the CAISO and the Cal PX were not parties to theCalifornia Settlement, under its terms the FERC’s order of April 13, 2005approving the settlement constitutes its direction to the CAISO and Cal PX toconform their books and records to the terms of the California Settlement andto withdraw with prejudice all claims filed by them in the bankruptcyproceedings that seek to recover amounts or otherwise obtain relief on behalfof or for the benefit of any of the California Parties or any other marketparticipants that opt into the settlement. In addition, the CAISO separatelyagreed with Mirant to release its claims upon the California Settlementbecoming effective. The order entered by the Bankruptcy Court on April 15,2005 approving the California Settlement provides for the Mirant Debtors andthe Cal PX to cooperate to establish a procedure by which the claims filed bythe Cal PX that are not to be withdrawn as a result of the CaliforniaSettlement will be assigned to the non-settling market participants who are thereal parties in interest with respect to such claims.

*California Settlement.  *OnJanuary 14, 2005,**Mirant andcertain of its subsidiaries entered into the California Settlement with theCalifornia Parties and the Office of Market Oversight and Investigations of theFERC settling a variety of disputed matters. The Mirant entities that areparties to the California Settlement are Mirant, Mirant Americas, MirantAmericas Energy Marketing, Mirant Americas Energy Marketing Investments, Inc.,the Company, Mirant California Investments, Inc., Mirant California, LLC,Mirant Delta, LLC, Mirant Potrero, LLC, Mirant Special Procurement, Inc.,Mirant Services and Mirant Americas Development, Inc. (collectively, the“Mirant Settling Parties”). The “California Parties” are PG&E, SCE, SanDiego Gas and Electric Company, the CPUC, the DWR, the EOB and the AttorneyGeneral of the State of California. The effectiveness of the CaliforniaSettlement was conditioned upon its approval by the CPUC, the Bankruptcy Court,the bankruptcy court having jurisdiction over PG&E’s bankruptcy proceedingsinitiated in 2001 and the FERC. The CPUC’s execution of the California 

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Settlement signified itsapproval. The PG&E bankruptcy court approved the California Settlement onMarch 24, 2005, the FERC approved it on April 13, 2005, and the BankruptcyCourt approved it by order entered April 15, 2005, causing the settlement tobecome effective April 15, 2005.

Under the California Settlement, (1) MirantAmericas Energy Marketing and the other Mirant Settling Parties have assignedto the California Parties all receivables owed to Mirant Americas EnergyMarketing for transactions in the markets administered by the Cal PX or theCAISO for the period January 1, 2000 through June 20, 2001, which arecurrently estimated by the parties to the California Settlement to be approximately$283 million, and (2) the California Parties received an allowed,unsecured claim against Mirant Americas Energy Marketing in its Chapter 11 casefor $175 million and the DWR received an additional allowed, unsecured claimagainst Mirant Americas Energy Marketing of $2.25 million. In return, theCalifornia Parties released all claims they may have against the MirantSettling Parties related to sales of electricity or natural gas at wholesale inwestern markets in the period from January 1, 1998 through July 14,2003, including all such claims filed by the California Parties in the MirantDebtors’ Chapter 11 cases, in proceedings before the FERC, or in the four suitsfiled against Mirant, the Company and certain of its subsidiaries by theCalifornia Attorney General in March and April 2002 and August 2004. TheCompany estimates that, excluding duplicative claims, this settlement hascompromised the bulk of the California energy market claims against MirantAmericas Energy Marketing at issue in the FERC Refund Proceedings. Also, theCalifornia Parties have assumed Mirant Americas Energy Marketing’s obligationto pay any refunds determined by the FERC to be owed by Mirant Americas EnergyMarketing to other parties for transactions in the CAISO and Cal PX markets duringthe Refund Period, with the liability of the California Parties for such refundobligation limited to the amount of the receivables assigned by Mirant AmericasEnergy Marketing to the California Parties under the California Settlement.Subject to applicable bankruptcy law, Mirant Americas Energy Marketingcontinues to be liable for any refunds that the FERC determines it to owe to(1) participants in the Cal PX or CAISO markets other than the CaliforniaParties (or other parties that have opted into the California Settlement) forperiods outside the Refund Period or (2) parties with which MirantAmericas Energy Marketing engaged in bilateral electricity or natural gastransactions other than the California Parties (or other parties that have optedinto the California Settlement). This liability of Mirant Americas EnergyMarketing could result in additional liability of the Company’s subsidiaries toMirant Americas Energy Marketing under intercompany agreements between thosesubsidiaries and Mirant Americas Energy Marketing.

Some of the consideration to be received by theCalifornia Parties under the California Settlement is available to other marketparticipants that choose to opt into the California Settlement, and severalhave done so. Those market participants that have elected to opt into theCalifornia Settlement have, as a result, given releases of liability to theMirant Settling Parties that are the same as those given by the CaliforniaParties. In addition to the claims filed by the California Parties seeking torecover refunds from Mirant Americas Energy Marketing and other Mirant entitiesfor sales of electricity made by Mirant Americas Energy Marketing into theCAISO and Cal PX markets in 2000 and 2001, the CAISO and the Cal PX have filedclaims against Mirant Americas Energy Marketing and other Mirant SettlingParties seeking to recover refunds on behalf of participants in the markets forwhich they were responsible. While the CAISO and the Cal PX are not parties tothe California Settlement, the FERC’s approval of the California Settlementconstitutes its direction to the CAISO and the Cal PX to conform their booksand records to the terms of the settlement and to withdraw with prejudice allclaims filed by them in the Chapter 11 cases that seek to recover amounts orotherwise obtain relief on behalf of, or for the benefit of, any of theCalifornia Parties or any other market participants that opt into theCalifornia Settlement. In addition, the CAISO separately agreed with Mirant torelease its claims upon the California Settlement becoming effective. TheCalifornia Parties also released the Mirant Settling Parties from any liabilityor refund claims related to the DWR Contract, including claims asserted in thecomplaints filed by CPUC and EOB with the FERC in February 2002. TheFERC’s approval of the California Settlement, under its terms, also 

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had the effect ofterminating any pending investigations by the FERC of the conduct of the MirantSettling Parties in the western energy markets in 2000 and 2001.

The California Settlement also resolved all claimsasserted by PG&E against the Company’s subsidiaries, Mirant Delta andMirant Potrero, and the other Mirant Settling Parties in the Chapter 11 casesor in proceedings before the FERC that related to refunds potentially owedunder the RMR Agreements between Mirant Delta and the CAISO and Mirant Potreroand the CAISO. Under the California Settlement, PG&E released Mirant Deltaand Mirant Potrero from any potential refund liability under the RMR Agreementsfor the period prior to September 30, 2004, and the claims filed byPG&E in the Chapter 11 cases seeking to recover refunds from Mirant Deltaand Mirant Potrero for sales made under the RMR Agreements have been withdrawnwith prejudice. Although the CAISO was not a party to the California Settlement,under the terms of the California Settlement the FERC’s approval of thesettlement constitutes its direction to the CAISO to conform its books andrecords to the terms of the California Settlement and to withdraw withprejudice all claims filed by it in the Chapter 11 cases that seek to recoveramounts related to sales made under the RMR Agreements in the period prior toSeptember 30, 2004. In addition, the CAISO separately agreed with Mirantto release its claims upon the California Settlement becoming effective.

In return for the releases it granted to the MirantSettling Parties described in the previous paragraph, PG&E receivedallowed, unsecured claims against the Company’s subsidiary Mirant Delta thatwill receive a distribution of proceeds of $63 million, and either (1) thepartially constructed Contra Costa 8 project, which is a planned 530 MWcombined cycle generating facility, and related equipment (collectively, the“CC8 Assets”) will be transferred to PG&E or (2) PG&E will receiveadditional alternative consideration in the amount of $70 million (the “CC8Alternative Consideration”).

To fund the CC8 Alternative Consideration, PG&Ereceived an allowed, unsecured claim against Mirant Delta that will receive adistribution of $70 million. PG&E will liquidate any securities received aspart of such distribution and place the net resulting amount plus any cashreceived into an escrow account. To the extent that the net amount resultingfrom the liquidation of the securities received by PG&E plus any cashreceived by it is less than the CC8 Alternative Consideration, the differencewill be made up by PG&E withholding and paying into the escrow accountamounts it owes to Mirant Delta over a three month period under the powerpurchase agreements described below or by payments from Mirant Delta or theCompany. If the transfer of the CC8 Assets to PG&E does not occur on orbefore June 30, 2008, or if certain specified events occur prior to thatdate, such as the failure of the CPUC to approve PG&E’s acquisition of theCC8 Assets, then the CC8 Alternative Consideration is to be paid to PG&Eand the Mirant Settling Parties will retain the CC8 Assets. If PG&E closeson its acquisition of the CC8 Assets, the funds in the escrow account will bepaid to Mirant Delta.

PG&E also has entered into two power purchaseagreements with Mirant Delta and Mirant Potrero that will allow PG&E todispatch and purchase the power output of all units of the generating plantsowned by those entities that have been designated by the CAISO as RMR unitsunder the RMR Agreements. The first agreement is for 2005. The second agreementwill be for 2006 through 2012.

Under the California Settlement, PG&E and MirantDelta also are to negotiate by September 30, 2005 (extended by the parties fromthe original date of April 30, 2005) an agreement (the “Option Agreement”)under which PG&E would have separate options to purchase each of MirantDelta’s existing Contra Costa generating plant and its existing Pittsburggenerating plant, in both cases once no unit at the plant has operated for acertain period of years. The price at which each plant could be purchasedpursuant to the option would be equal to the amount of certain capital costsnot recovered by Mirant Delta under the terms of the RMR Agreement applicableto that plant at the time of the exercise of the option. If Mirant Delta andPG&E do not reach agreement on the Option Agreement by September 30, 2005,or if PG&E cannot obtain CPUC approval of the Option Agreement or its exercise of its rightsthereunder, 

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MirantDelta and the other Mirant Settling Parties will have no further obligations toPG&E with respect to the Option Agreement or the rights it was to provideto PG&E.

The California Settlementresulted in a non-cash gain to the Company of approximately $161 million, to berecorded in the second quarter of 2005.

***Rate Payer Litigation***

*California Rate Payer Litigation.*Variouslawsuits were filed in 2000 through 2003 that assert claims under Californialaw based on allegations that certain owners of electric generation facilitiesin California and energy marketers, including Mirant, Mirant Americas EnergyMarketing and several Mirant Americas Generation subsidiaries, engaged invarious unlawful and anti-competitive acts that served to manipulate wholesalepower markets and inflate wholesale electricity prices in California.

Sixsuch suits were filed between November 27, 2000 and May 2, 2001 invarious California Superior Courts. Three of these suits seek class actionstatus, while two of the suits are brought on behalf of all citizens ofCalifornia. One lawsuit alleges that, as a result of the defendants’ conduct,customers paid approximately $4 billion more for electricity than theyotherwise would have and seeks an award of treble damages as well as otherinjunctive and equitable relief. One lawsuit also names certain of Mirant’sofficers individually as defendants and alleges that the state had to spendmore than $6 billion purchasing electricity. The other suits likewise seektreble damages and equitable relief. One such suit names Mirant itself as adefendant. A listing of these six cases is as follows:
| **Caption**                                                | ** ** | ** **              | ** ** | **Date Filed**                                         | ** ** | **Court of Original Filing** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|------------------------------|
| People of the State of  California v.  Dynegy, et al.      |       | January 18, 2001   |       | Superior Court of California—  San Francisco County    |
| Gordon v. Reliant  Energy, Inc., et al.               |       | November 27,  2000 |       | Superior Court of  California—  San Diego County       |
| Hendricks v. Dynegy  Power Marketing, Inc., et al.    |       | November 29, 2000  |       | Superior Court of California—  San Diego County        |
| Sweetwater Authority, et  al. v. Dynegy, Inc., et al. |       | January 16, 2001   |       | Superior Court of California—  San Diego County        |
| Pier 23 Restaurant v.  PG&E Energy Trading, et al.     |       | January 24, 2001   |       | Superior Court of California—San Francisco County |
| Bustamante, et al. v. Dynegy, Inc.,  et al.      |       | May 2, 2001        |       | Superior Court of California—Los Angeles County        |

 

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These six suits (the “Six Coordinated Suits”) werecoordinated for purposes of pretrial proceedings before the Superior Court forSan Diego County. In the spring of 2002, two of the defendants filedcrossclaims against other market participants who were not parties to theactions. Some of those crossclaim defendants then removed the Six CoordinatedSuits to the United States District Court for the Southern District ofCalifornia. The plaintiffs filed a motion seeking to have the actions remandedto the California state court, and the defendants filed motions seeking to havethe claims dismissed. On December 13, 2002, the United States DistrictCourt for the Southern District of California granted the plaintiffs’ motionseeking to have the six cases remanded to the California state court. Thedefendants that filed the crossclaims appealed that decision remanding the SixCoordinated Suits to the California state court to the Ninth Circuit. On December 8,2004, the Ninth Circuit affirmed the district court’s remand decision. Theseactions are stayed with respect to the Mirant entities that are defendants bythe filing of the Chapter 11 proceedings of those entities, but are proceedingwith respect to the other defendants. On June 29, 2005 the plaintiffsfiled to dismiss Mirant as a defendant.

Two plaintiffs in the Six Coordinated Suits, Oscar’sPhoto Lab and Mary L. Davis (the “Claimants”), filed proofs of claim (the “OscarClaims”) in the bankruptcy proceedings against Mirant, Mirant Americas EnergyMarketing, the Company and subsidiaries of the Company on behalf of themselvesand a purported class of all persons or entities in California who purchasedelectricity or natural gas for purposes other than resale or distribution atany time since January 1, 1999. Claimants alleged that various misconductby Mirant and several of its subsidiaries caused inflated prices in theCalifornia wholesale power markets. Claimants listed the damage amount of theirclaims as “unliquidated.” On October 18, 2004, the Mirant Debtors filedan objection to the Oscar Claims. On November 5, 2004, the Mirant Debtorsfiled a motion requesting that the Bankruptcy Court strike the portions of theOscar Claims that purported to have been filed on behalf of unnamed absentmembers of a purported class. On January 26, 2005, the Bankruptcy Courtissued an order embodying a ruling made orally on December 1, 2004granting this motion and disallowing the Oscar Claims with prejudice to theextent they sought to recover on account of any claims other than the claims ofOscar Photo Labs and Mary L. Davis in their individual capacities. TheClaimants have filed a motion to amend their claims to add allegations ofimproper conduct by Mirant entities with respect to the reporting ofinformation about natural gas transactions to trade publications that publishprice indices, and the Mirant Debtors have also filed a motion to disallow theOscar Claims. The Bankruptcy Court has not acted upon either motion. The MirantDebtors have entered into a stipulation with the Claimants entitling eachplaintiff to receive an allowed, general, pre-petition unsecured claim againstMirant Americas Energy Marketing in the amount of $1,000 without the MirantDebtors’ admission of the validity of the Oscar Claims or any of the factual orlegal assertions of these Claimants and with a full reservation of any rights,claims and defenses any of the Mirant Debtors may have against any personasserting the same or similar factual or legal assertions as those contained inthe Oscar Claims. On March 9, 2005, the Bankruptcy Court approved thestipulation.

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Eightadditional rate payer lawsuits were filed between April 23, 2002 and October 18,2002 alleging that certain owners of electric generation facilities inCalifornia, as well as certain energy marketers, including Mirant, MirantAmericas Energy Marketing and several subsidiaries of the Company, engaged invarious unlawful and fraudulent business acts that served to manipulatewholesale markets and inflate wholesale electricity prices in California during1999 through 2002. Each of the complaints alleges violation of California’sUnfair Competition Act. One complaint also alleges violation of California’santitrust statute. Each of the plaintiffs seeks class action status for theirrespective case. Some of these suits also allege that contracts between the DWRand certain marketers of electricity, including a nineteen month power salesagreement entered into by Mirant Americas Energy Marketing with the DWR in May 2001that terminated in December 2002, contain terms that were unjust andunreasonable. The actions seek, among other things, restitution, compensatoryand general damages, and to enjoin the defendants from engaging in illegalconduct. The captions of each of these eight cases follow:
| **Caption**                                                                                                | ** ** | ** **            | ** ** | **Date Filed**                                      | ** ** | **Court of Original Filing** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------------------------|------------|------------------------------|
| T&E Pastorino  Nursery, et al. V. Duke  Energy Trading and Marketing, LLC, et al                       |       | April 23, 2002   |       | Superior Court of California—  San Mateo County     |
| RDJ Farms, Inc., et  al. v. Allegheny Energy Supply Company, LLC, et al                          |       | May 10, 2002     |       | Superior Court of California—  San Joaquin County   |
| Century  Theatres, Inc., et al. v. Allegheny Energy Supply Company, LLC, et  al                  |       | May 14, 2002     |       | Superior Court of California—  San Francisco County |
| El Super  Burrito, Inc., et al. v. Allegheny Energy Supply Company, LLC, et al                        |       | May 15, 2002     |       | Superior Court of California—  San Mateo County     |
| Leo’s Day and Night  Pharmacy, et al. v. Duke Energy Trading and Marketing, LLC, et al                |       | May 21, 2002     |       | Superior Court of California—Alameda County         |
| J&M Karsant Family  Limited Partnership, et al. v. Duke Energy Trading and  Marketing, LLC, et al |       | May 21, 2002     |       | Superior Court of California—Alameda County         |
| Bronco Don Holdings,  LLP, et al. v. Duke Energy Trading and Marketing, LLC, et al                    |       | May 24, 2002     |       | Superior Court of California—  San Francisco County |
| Kurtz v. Duke Energy Trading et al                                                                         |       | October 18, 2002 |       | Superior Court of  California—  Los Angeles County  |

 

These suits were initially filed in California statecourts by the plaintiffs and removed to United States district courts. Theseeight cases were consolidated for purposes of pretrial proceedings with the SixCoordinated Suits described above. On August 28, 2003, the district courtgranted the motions to dismiss filed by the defendants in the Pastorino, RDJFarms, Century Theatres, El Super Burrito, Leo’s Day and Night Pharmacy,J&M Karsant and Bronco Don Holdings suits, finding that the plaintiffs’claims were barred by the filed rate doctrine and federal preemption. The NinthCircuit affirmed that dismissal on February 25, 2005. The plaintiff in theKurtz suit voluntarily dismissed his case without prejudice on February 18,2004.

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On July 15, 2002, an additional rate payerlawsuit, Public Utility District No. 1 of Snohomish Co. v. DynegyPower Marketing, et al., was filed in the United States District Court for theCentral District of California against various owners of electric generationfacilities in California, including Mirant, by Public Utility District No. 1of Snohomish County, which is a municipal corporation in the State ofWashington that provides electric and water utility service. The plaintiffpublic utility district alleges that defendants violated California’s antitruststatute by conspiring to raise wholesale power prices, injuring plaintiffthrough higher power purchase costs. The plaintiff also alleges that defendantsacted both unfairly and unlawfully in violation of California’s UnfairCompetition Act through various unlawful and anticompetitive acts, includingthe purportedly wrongful acquisition of plants, engagement in “Enron-style”trading and withholding power from the market. The plaintiff seeks restitution,disgorgement of profits, injunctive relief, treble damages and attorney’s fees.The Snohomish suit was consolidated for purposes of pretrial proceedings withthe other rate payer suits pending before the United States District Court forthe Southern District of California. On January 6, 2003, the districtcourt granted a motion to dismiss filed by the defendants. On September 10,2004, the United States Court of Appeals for the Ninth Circuit upheld thedismissal of the suit by the district court. The court of appeals ruled thatthe plaintiff’s claims under California’s antitrust statute and UnfairCompetition Act are barred by the doctrine of preemption and the filed ratedoctrine, concluding that if prices in the California wholesale electricitymarkets were not just and reasonable or if the defendants sold electricity inviolation of the applicable tariffs, the plaintiff’s only option was to seek aremedy before the FERC under the Federal Power Act. On June 27, 2005 theUnited States Supreme Court denied a petition for writ of certiorari filed bythe plaintiff seeking to appeal the Ninth Circuit’s decision.

On November 20, 2002, a class action suit,Bustamante v. The McGraw-Hill Companies, Inc., et al., was filed in theSuperior Court for the County of Los Angeles against certain publishers ofindex prices for natural gas, gas distribution or marketing companies, ownersof electric generation facilities in California and energy marketers, includingMirant, Mirant Americas Energy Marketing and subsidiaries of Mirant AmericasGeneration. The plaintiff in the Bustamante suit alleged that the defendantsviolated California Penal Code sections 182 and 395 and California’s UnfairCompetition Act by reporting false information about natural gas transactionsto the defendants that published index prices for natural gas causing theprices paid by Californians for natural gas and for electricity to beartificially inflated. The suit sought, among other things, disgorgement ofprofits, restitution, and compensatory and punitive damages. On July 8,2003, the Superior Court for the County of Los Angeles dismissed the suit, findingthat the plaintiffs had failed to allege facts sufficient to warrant relief.The court granted the plaintiffs leave to file an amended complaint, and on August 13,2003, the plaintiff filed an amended complaint asserting claims underCalifornia’s Unfair Competition Act and state antitrust statute against gasdistribution or marketing companies, owners of electric generation facilitiesin California and energy marketers, including the Company and various of itssubsidiaries. The amended complaint alleged that the defendants engaged in ascheme to report false gas prices and volumes to companies that published indexprices for natural gas in order to manipulate the price indices to benefitthemselves. This conduct, the plaintiff asserted, violated California PenalCode section 395 and caused the prices paid by Californians for natural gas tobe artificially inflated. The suit was brought as a representative action onbehalf of all similarly situated persons, the general public and all taxpayers.The suit sought, among other things, disgorgement of profits, restitution,treble damages and injunctive relief. In November 2003, the plaintiffdismissed the Mirant entities identified as defendants in the amended complaintfiled in August 2003.

On December 15, 2003, the plaintiff in theBustamante suit filed proofs of claim in the bankruptcy proceedings on behalfof a putative class (the “Bustamante Claims”) listing the total amount claimedas $500 million and attaching the original and first amended complaints. On October 18,2004, the Debtors filed an objection to the Bustamante Claims. On November 19,2004, the Debtors filed a motion requesting that the Bankruptcy Court strikethe portions of the Bustamante Claims that purported to have been filed onbehalf of unnamed absent members of a purported class. On January 26,2005, the 

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Bankruptcy Court enteredan order embodying a ruling made orally on December 1, 2004 granting themotion and striking the Bustamante Claims to the extent they sought to recoveron account of any claims other than the claim of Bustamante, in his individualcapacity. The Mirant Debtors have also filed a motion to disallow the remainingBustamante Claims. The Mirant Debtors have entered into a stipulation withBustamante entitling him to receive an allowed, general, pre-petition unsecuredclaim against Mirant Americas Energy Marketing in the amount of $1,000 withoutthe Mirant Debtors’ admission of the validity of the Bustamante Claims or anyof the factual or legal assertions made in the Bustamante Claims and with afull reservation of any rights, claims and defenses any of the Mirant Debtorsmay have against any person asserting the same or similar factual or legalassertions as those contained in the Bustamante Claims. That stipulation was approvedby the Bankruptcy Court on July 11, 2005.

On April 28, 2003, a purported class action suit,Egger et al. v. Dynegy, Inc. et al., was filed in the Superior Court forthe County of San Diego, California, against various owners of electricgeneration facilities in California and marketers of electricity and naturalgas, including Mirant and various subsidiaries of Mirant Americas Generation,on behalf of all persons who purchased electricity in Oregon, Washington, Utah,Nevada, Idaho, New Mexico, Arizona and Montana from January 1, 1999. Theplaintiffs allege that the defendants engaged in unlawful, unfair, anddeceptive practices in the California and western wholesale electricitymarkets, including withholding energy from the market to create artificialshortages, creating artificial congestion over transmission lines, sellingelectricity bought in California to out of state affiliates to createartificial shortages and then selling the electricity back into the state athigher prices. The plaintiffs contend that the defendants conspired amongthemselves and with subsidiaries of Enron Corporation to withhold electricityfrom the Cal PX and CAISO markets and to manipulate the price of electricitysold at wholesale in the California and western markets. The defendants’unlawful manipulation of the wholesale energy market, the plaintiffs allege,resulted in supply shortages and skyrocketing energy prices in the westernUnited States, which in turn caused drastic rate increases for retailconsumers. The plaintiffs assert claims under California’s antitrust statuteand its Unfair Competition Act. The plaintiffs contend that the defendants’alleged wrongful conduct has caused damages in excess of $1 billion and seektreble damages, injunctive relief, restitution, and an accounting of thewholesale energy transactions entered into by the defendants from 1998. Thedefendants removed the suit to the United States District Court for theSouthern District of California. The plaintiffs filed an amended complaint in October 2003that did not include any Mirant entities as defendants due to the stay oflitigation resulting from the filing of the Mirant Chapter 11 proceedings, butidentified them as “relevant actors.”

Five plaintiffs in theEgger suit (the “Proposed Representatives”) filed proofs of claim (the “EggerClaims”) in the bankruptcy proceedings purportedly on behalf of a class of “allpersons and businesses residing in Oregon, Washington, Utah, Nevada, Idaho, NewMexico, Arizona and Montana who were purchasers of electrical energy during theperiod beginning January 1, 1999 to the present.” Claimants allegedthat various misconduct by Mirant and several of its subsidiaries, includingsubsidiaries of the Company, caused inflated prices in wholesale power markets.Claimants listed the damage amount of their claims as “TBD/in excess of $100million.” Claimants attached the first amended complaint to their proofs ofclaims. On October 18, 2004, the Mirant Debtors filed an objection tothe Egger Claims. On November 10, 2004, the parties jointly presentedto the Bankruptcy Court a scheduling order in which they agreed that the EggerClaims were sufficiently similar to the Oscar Claims so that the BankruptcyCourt’s ruling on the Mirant Debtor’s motion to strike the Oscar Claims wouldalso be dispositive as to the Egger Claims. Thus, the Egger Claims weredisallowed with prejudice to the extent they sought to recover on account ofany claims other than those of the Proposed Representatives in their individualcapacities. On January 19, 2005, the Bankruptcy Court approved asettlement agreement with the Proposed Representatives pursuant to which eachof the Proposed Representatives will be entitled to receive an allowed, generalunsecured claim against Mirant Americas Energy Marketing in the amount of$1,000 in full and final satisfaction of the Egger Claims.

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***Mirant AmericasGeneration Bondholder Suit***

On June 10, 2003,certain holders of senior notes of the Company maturing after 2006 filed acomplaint in the Court of Chancery of the State of Delaware*, CaliforniaPublic Employees’ Retirement System, et al. v. Mirant Corporation, et al.,*that named as defendants Mirant, Mirant Americas, the Company, certain past andpresent Mirant directors, and certain past and present Company managers. Amongother claims, the plaintiffs assert that a restructuring plan pursued by theCompany prior to its filing a petition for reorganization under Chapter 11 ofthe Bankruptcy Code was in breach of fiduciary duties allegedly owed to them byMirant, Mirant Americas and the Company’s managers. In addition, plaintiffschallenge certain dividends and distributions made by the Company prior to thePetition Date. Plaintiffs seek damages in excess of $1 billion. Mirant hasremoved this suit to the United States District Court for the District ofDelaware. This action is stayed with respect to the Mirant entities that aredefendants by the filing of the Chapter 11 proceedings of these entities. On November 19,2003, the Bankruptcy Court entered an order staying this action also withrespect to the individual defendants to avoid the suit impeding the ability ofthe Mirant Debtors to reorganize or having a negative effect upon the assets ofthe Mirant Debtors. The Mirant Americas Generation Creditor Committee in 2003filed a motion in Mirant’s bankruptcy proceedings seeking to pursue claimsagainst Mirant, Mirant Americas, certain past and present Mirant directors, andcertain past and present managers of the Company similar to those asserted inthis suit. The Bankruptcy Court ruled that while the committee has standing toassert claims on behalf of the estate of the Company, no such claims could befiled without the Bankruptcy Court’s approval and no motions seeking suchapproval could be filed at least through April 2004. On June 15,2005, the Mirant Americas Generation Creditor Committee again filed a motion inMirant’s bankruptcy proceedings seeking to pursue claims against Mirant, MirantAmericas, certain past and present Mirant directors, and certain past andpresent managers of the Company similar to those asserted in this suit. On June 30,2005, the Bankruptcy Court issued an oral ruling that if the Mirant Debtors hadnot by July 8, 2005 entered into agreements with the individual defendantsin this action tolling the running of any statute of limitations, then theMirant Americas Generation Creditor Committee would be authorized to fileclaims against those defendants on behalf of the estate of Mirant AmericasGeneration. The Mirant Debtors did obtain tollingagreements from each of the individual defendants.

On December 15, 2003,Lehman Commercial Paper Inc. (“Lehman”), as agent for various lenders undercertain pre-petition credit agreements, filed a claim against the Company inthe bankruptcy proceedings. On December 15, 2003, Wells Fargo Bank,N.A. (“Wells Fargo”) also filed claims in the bankruptcy proceedings assuccessor indenture trustee for bond indebtedness under a certain indentureagainst the Company. In addition to their original claims, on that samedate, Lehman and Wells Fargo filed supplemental claims against the Company,Mirant and a number of other subsidiaries of Mirant (the “Supplemental Claims”)seeking recovery of principal, interest, fees, and costs under the MirantAmericas Generation loan documents and bond documents, respectively. Intheir Supplemental Claims, Lehman and Wells Fargo essentially seek to preservefor themselves the claims previously sought to be asserted by the MirantAmericas Generation Creditor Committee.

On November 3, 2004,the Mirant Debtors objected to the Supplemental Claims against the Company andthe other Mirant entities on the grounds that: (1) Lehman and Wells Fargolack standing to pursue the Supplemental Claims, which are derivative claimsbelonging to each respective Mirant Debtor’s estate; (2) there is nofactual basis for any of the “potential” causes of action against the Companyand no basis whatsoever for the claims against any other Mirant entities; and (3) theSupplemental Claims are duplicative and contingent. In addition to theobjection, the Mirant Debtors also filed a motion to dismiss the SupplementalClaims on the basis that the Supplemental Claims do not allege any independentharm to Lehman and Wells Fargo and assert nothing more than derivative claimsbelonging to the Mirant Debtors’ estates that cannot be asserted by Lehman andWells Fargo. The Bankruptcy Court issued an order on April 12, 2005,ruling that (A) the Supplemental Claims will be withdrawn, (B) thewithdrawal of the Supplemental Claims, to the extent that they are not propertyof the estates or derivative of a Mirant 

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Debtor(the “Withdrawn Claims”), will be without prejudice and the Bar Date shall beextended through the date of confirmation of a plan in the Mirant Debtors Chapter11 proceedings, and (C) the withdrawal of the Supplemental Claims does notimpair the ability of Lehman or Wells Fargo to raise those claims as issues inthe plan confirmation process.

***Mirant Americas Generation Securities Class Action***

On June 11, 2003, a purported class actionlawsuit alleging violations of Sections 11 and 15 of the Securities Act of 1933was filed in the Superior Court of Fulton County, Georgia entitled *Wisniak v. Mirant Americas Generation, LLC, et al*. Thelawsuit names as defendants the Company and certain current and former officersand managers of the Company. The plaintiff seeks to represent a putative classof all persons who purchased debt securities of the Company pursuant to ortraceable to an exchange offer completed by the Company in May 2002 inwhich $750 million of bonds registered under the Securities Act wereexchanged for $750 million of previously issued senior notes of theCompany. The plaintiff alleges, among other things, that the Company’srestatement in April 2003 of prior financial statements rendered theregistration statement filed for the May 2002 exchange offer materiallyfalse. The complaint seeks damages, interest and attorneys’ fees. Thedefendants have removed the suit to the United States District Court for theNorthern District of Georgia. This action is stayed as to the Company by thefiling of its Chapter 11 proceeding. On November 19, 2003, theBankruptcy Court entered an order staying this action also with respect to theindividual defendants to avoid the suit impeding the ability of the Company toreorganize or having a negative effect upon its assets. On December 8,2003, the district court took notice of the Bankruptcy Court’s order dated November 19,2003 staying the litigation and administratively closed the action. On December 16,2003, the plaintiff dismissed the Company as a defendant, without prejudice,and filed a proof of claim against the Company in the bankruptcy proceedingsasserting the same claims set forth in the lawsuit.

The Company and theplaintiff have entered into a stipulation of settlement of the Wisniak suit andthe claim filed against the Company that was approved by the Bankruptcy Courton January 19, 2005. Under the terms of the stipulation of settlement, theplaintiff will seek certification of a class by the district court that willreceive $2.25 million to be paid by insurers for the Company and an allowed,unsecured claim for $2 million against Mirant subordinated to the claims of itsother unsecured creditors. Members of the plaintiff class will have theopportunity to opt out of the settlement, and if class members who choose toopt out own in the aggregate more than 1% of the Company’s bonds that are thesubject of the suit, then the Mirant defendants have the option to withdrawfrom the settlement. The stipulation of settlement must also be approved by thedistrict court to become effective. On June 27, 2005 the district courtentered an order granting preliminary approval to the settlement, certifying asettlement class, and scheduling a hearing for final approval of the settlementfor September 6, 2005.

***Operating Leases***

Significant disputes have arisenbetween the Mirant Debtors, on the one hand, and the owner lessors and theindenture trustee for the Mirant Mid-Atlantic leveraged leases, on the otherhand, regarding, among other things, whether or not the leveraged leasetransactions constitute a “lease” (or “leases”) within the meaning of section365 of the Bankruptcy Code, or instead evidence a financing or other arrangement.In April 2005, the Bankruptcy Court dismissed the recharacterizationclaim, ruling that, based upon the current posture of the Chapter 11 cases, adetermination on the merits was not presently warranted. In its ruling, theBankruptcy Court reserved the right to reconsider the merits ofrecharacterization in the event that facts and circumstances changed in amanner such that further consideration would be warranted.

At this time, the MirantDebtors maintain that the leases are not true leases for bankruptcy purposes.However, based on the Bankruptcy Court’s comments in its April 2005ruling, the Mirant Debtors may 

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determineto modify their proposed Plan (and related Disclosure Statement) to proposethat the leases be assumed conditioned upon certain provisions in the leases—includingthe limitations on restricted payments and the restrictions on the incurrenceof indebtedness and liens—being modified, stricken or determined to beunenforceable and certain alleged defaults determined as not requiring “cure”as a condition to assumption. In order to assume leases, a debtor-lessee mustobtain bankruptcy court approval and, subject to certain exceptions set forthin the Bankruptcy Code, must cure any existing defaults under the applicableleases (unless such defaults are duly waived). It would be the Mirant Debtors’objective that assumption would be approved at or before confirmation of thePlan, and that as part of the assumption or confirmation order, MirantMid-Atlantic would be relieved of the obligation to cure certain defaults andof the obligation to perform certain covenants. If it is not feasible forMirant Mid-Atlantic to assume the leases because relief from certain defaultsand/or covenants is not available, the two remaining alternatives are rejectionand revisiting the issue of recharacterization. In the latter circumstance, ifthe Bankruptcy Court recharacterizes the leases as indebtedness, MirantMid-Atlantic may be required to re-evaluate the accounting for the leases. If,on the other hand, recharacterization is not sought or is not available, and/orMirant Mid-Atlantic cannot or does not assume the leases, then the leases willbe rejected. In that event, the owner lessors would be entitled to a return ofthe leased assets and would have a claim for damages, if any, arising from suchrejection, subject to the limitation on allowed claims under section 502(b)(6) ofthe Bankruptcy Code applicable to leases of real property. Any claims arisingon account of rejection would be subject to compromise in Mirant Mid-Atlantic’sChapter 11 case. The impact of any of these events would be reflected in MirantMid-Atlantic’s and the Company’s consolidated financial statements if and whenthe events occur.

***PEPCO Litigation***

In 2000, Mirant purchased certain power generatingassets and certain other assets from PEPCO, including certain power purchaseagreements (“PPAs”). Under the terms of the Asset Purchase and Sale Agreement(the “APSA”) Mirant and PEPCO entered into a contractual arrangement (the “Back-to-BackAgreement”) with respect to certain PPAs, including PEPCO’s long-term PPAs withOhio Edison Company (“Ohio Edison”) and Panda-Brandywine L.P. (“Panda”),under which (1) PEPCO agreed to resell to Mirant all capacity, energy,ancillary services and other benefits to which it is entitled under thoseagreements; and (2) Mirant agreed to pay PEPCO each month all amounts duefrom PEPCO to the sellers under those agreements for the immediately precedingmonth associated with such capacity, energy, ancillary services and otherbenefits. The Panda and Ohio Edison PPAs run until 2021 and 2005 respectively.Under the Back-to-Back Agreement, Mirant is obligated to purchase power fromPEPCO at prices that are significantly higher than existing market prices forpower. In the Chapter 11 cases of the Mirant Debtors, PEPCO has asserted thatan Assignment and Assumption Agreement dated December 19, 2000 thatincludes as parties PEPCO, various subsidiaries of the Company, Mirant PotomacRiver, and Mirant Americas Energy Marketing, causes the Company’s subsidiariesthat are parties to the agreement to be jointly and severally liable to PEPCOfor various obligations, including the obligations under the Back-to-BackAgreement. PEPCO also asserts that the Assignment and Assumption Agreementcauses the Company’s subsidiaries to be jointly and severally liable for aclaim of $105 million filed by PEPCO in the Chapter 11 cases related tomodifications agreed to between Mirant Americas Energy Marketing and PEPCOrelated to the Transition Power Agreements in place between PEPCO and MirantAmericas Energy Marketing through January 2005. The Company is disputingthis interpretation of the Assignment and Assumption Agreement in proceedingsbefore the Bankruptcy Court, but the outcome of those proceedings is uncertain.If the Company’s subsidiaries are determined to be jointly and severally liablefor the obligations of Mirant and Mirant Americas Energy Marketing to PEPCOunder the Assignment and Assumption Agreement, then the claim related to theTransition Power Agreements and the proceedings described below involving theBack-to-Back Agreement could have an adverse effect upon 

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the Company’s financialcondition, although such an effect would be mitigated by Mirant and MirantAmericas Energy Marketing also having responsibility for those obligations.

*Back-to-Back Agreement Litigation.  *OnAugust 28, 2003, the Mirant Debtors filed a motion in the bankruptcyproceedings to reject the Back-to-Back Agreement (the “Rejection Motion”),along with an adversary proceeding to enjoin PEPCO and the FERC from takingcertain actions against the Mirant Debtors (the “Injunction Litigation”). On October 9,2003, the United States District Court for the Northern District of Texasentered an order that had the effect of transferring to that court from theBankruptcy Court the Rejection Motion and the Injunction Litigation. In December 2003,the district court denied the Rejection Motion and, thereafter, dismissed theInjunction Litigation. The district court ruled that the Federal Power Actpreempts the Bankruptcy Code and that a bankruptcy court cannot affect a matterwithin the FERC’s jurisdiction under the Federal Power Act, including therejection of a wholesale power purchase agreement regulated by the FERC.

The Mirant Debtors appealed the district court’sorders to the United States Court of Appeals for the Fifth Circuit (the “FifthCircuit”). The Fifth Circuit reversed the district court’s decision, holdingthat the Bankruptcy Code authorizes a district court (or bankruptcy court) toreject a contract for the sale of electricity that is subject to the FERC’sregulation under the Federal Power Act as part of a bankruptcy proceeding andthat the Federal Power Act does not preempt that authority. The Fifth Circuitremanded the proceeding to the district court for further action on thatmotion. The Fifth Circuit indicated that on remand the district court couldconsider applying a more rigorous standard than the business judgment standardtypically applicable to contract rejection decisions by debtors in bankruptcy,which more rigorous standard would take into account the public interest in thetransmission and sale of electricity.

On December 9, 2004, the district court held thatthe Back-to-Back Agreement was a part of and not severable from, and thereforecould not be rejected apart from, the APSA. The district court also noted thatif the Fifth Circuit overturned the district court’s ruling with respect toseverability, the Back-to-Back Agreement should be rejected only if Mirant canprove that the Back-to-Back Agreement burdens the bankrupt estates; that, afterscrutiny and giving significant weight to the comments of the FERC relative tothe effect of rejection on the public interest, the equities balance in favorof rejecting the Back-to-Back Agreement; and that rejection of the Back-to-BackAgreement would further the Chapter 11 goal of permitting the successfulrehabilitation of the Mirant Debtors. The Mirant Debtors have appealed thedistrict court’s December 9, 2004 decision to the Fifth Circuit andrequested that the Fifth Circuit hear this appeal on an expedited basis. On March 8,2005, the Fifth Circuit denied the Mirant Debtor’s request to have the appealexpedited.

On January 21, 2005, the Mirant Debtors filed amotion in the bankruptcy proceedings to reject the APSA, including theBack-to-Back Agreement but not including other agreements entered into betweenMirant and its subsidiaries and PEPCO under the terms of the APSA (the “SecondRejection Motion”). On February 10, 2005, PEPCO filed a motion requestingthe district court to assert jurisdiction over and rule upon the SecondRejection Motion rather than having the Bankruptcy Court rule on thatmotion. On March 1, 2005, the district court ruled that it would withdrawthe reference to the Bankruptcy Court of the Mirant Debtors’ January 21,2005 motion seeking to reject the APSA and would itself hear that motion.

*Suspension of PEPCO Back-to-Back Payments.  *OnDecember 9, 2004, in an effort to halt further out-of-marketpayments under the Back-to-Back Agreement while awaiting resolution of issuesrelated to the potential rejection of the Back-to-Back Agreement (but prior tonotice of entry of the district court’s order of December 9, 2004), Mirantfiled a notice in the Bankruptcy Court that Mirant was suspending furtherpayments to PEPCO under the Back-to-Back Agreement absent further order of thecourt (the “Suspension Notice”). On December 10, 2004, in response to theSuspension Notice, PEPCO filed a motion in the district court seeking atemporary restraining order and injunctive relief to require Mirant to performunder the Back-to-Back Agreement (the “Injunctive Relief Motion”). On December 13,2004, the 

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district court issued anorder referring the Injunctive Relief Motion to the Bankruptcy Court. On December 21,2004, the Bankruptcy Court issued an order denying the temporary restrainingorder sought by PEPCO.

On December 14, 2004, PEPCO filed the followingadditional litigation: (1) a motion seeking relief from the automatic stayprovision of Bankruptcy Code section 362(a) to permit PEPCO to terminateperformance under the APSA (the “Lift Stay Motion”); (2) a motion tocompel the Mirant Debtors to pay, as administrative expenses, payments that hadbeen suspended under the Back-to-Back Agreement (the “Administrative ExpenseMotion”); and (3) an adversary proceeding seeking to compel the MirantDebtors to make payments under the Back-to-Back Agreement (the “PEPCO Lawsuit”).On December 16, 2004, PEPCO filed a motion requesting the district courtto withdraw the reference to the Bankruptcy Court with respect to thelitigation filed by PEPCO on December 14, 2004, as well as the InjunctiveRelief Motion (the “Second Withdrawal Motion”). On January 4, 2005, thedistrict court denied the Second Withdrawal Motion in its entirety.

On January 19, 2005, the Bankruptcy Court enteredan order embodying a ruling made orally by the court on January 14, 2005,in which it denied the Lift Stay Motion and the Administrative Expense Motion,but required the Mirant Debtors to pay amounts due under the Back-to-BackAgreement in January 2005 and thereafter until (1) the Mirant Debtorsfiled a motion to reject the APSA, (2) the Fifth Circuit issued an orderreversing the district court’s order of December 9, 2004 denying themotion to reject the Back-to-Back Agreement, or (3) the MirantDebtors were successful in having the obligations under the Back-to-BackAgreement recharacterized as debt obligations. PEPCO filed an appeal of theBankruptcy Court’s January 19, 2005 order. On January 21, 2005, theMirant Debtors filed the Second Rejection Motion.

On March 1, 2005, the district court withdrew thereference to the Bankruptcy Court of the Second Rejection Motion and theAdministrative Expense Motion, ordered the Mirant Debtors to pay PEPCO allpast-due, unpaid obligations under the Back-to-Back Agreement by March 10,2005 and dismissed as moot PEPCO’s appeal of the January 19, 2005 orderdenying the Administrative Expense Motion. The Mirant Debtors on March 4,2005 filed a motion requesting the district court to reconsider its order of March 1,2005 or alternatively to stay that order while the Mirant Debtors appeal it tothe Fifth Circuit. On March 7, 2005, the district court modified the March 1,2005 order to require PEPCO to file a response to the Mirant Debtors’ motionfor reconsideration by March 14, 2005 and to delay until March 18,2005, the date by which the Mirant Debtors were to pay past-due, unpaidobligations under the Back-to-Back Agreement.

On March 16, 2005, the Mirant Debtors filed apetition for writ of mandamus with the Fifth Circuit asking it to order thedistrict court to vacate the March 1, 2005 order, as modified, and toreinstate PEPCO’s appeal of the Bankruptcy Court’s order of January 19,2005 denying the Administrative Expense Motion. The petition asked the FifthCircuit alternatively to stay the March 1, 2005 order until the MirantDebtors’ appeal of that order was resolved. Also on March 16, 2005 thedistrict court further modified its order of March 1, 2005 to clarify thatthe amounts to be paid by the Mirant Debtors by March 18, 2005 did notinclude any amounts that became due prior to the filing of the Chapter 11 caseson July 14, 2003. On March 16, 2005, the Mirant Debtors also appealedthe district court’s March 1, 2005 order, as modified, to the FifthCircuit. On March 17, 2005, the Fifth Circuit issued a temporary stay ofthe March 1, 2005 order, as modified. On April 11, 2005, the FifthCircuit vacated the temporary stay entered on March 17, 2005, denied thepetition for writ of mandamus and denied the Mirant Debtors’ request for a staypending appeal. In its order the Fifth Circuit concluded that the MirantDebtors’ challenges to the district court’s order of March 1, 2005, asmodified, could be remedied in their pending appeals and that the MirantDebtors had not shown they would suffer irreparable harm if the order was notstayed pending appeal. On April 20, 2005, the district court entered anorder directing the Mirant Debtors to pay PEPCO by April 25, 2005 allunpaid amounts due under the Back-to-Back Agreement accruing since the PetitionDate to the extent they had not already done so, and to continue performance ofall obligations under the agreement 

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until further order of thedistrict court. The Mirant Debtors have paid all amounts due under theBack-to-Back Agreement accruing since the Petition Date.

*Potential Adjustment Related to Panda Power PurchaseAgreement.  *At the time of the acquisition of the MirantMid-Atlantic assets from PEPCO, Mirant also entered into an agreement withPEPCO that, as subsequently modified, provided that the price paid by Mirantfor its December 2000 acquisition of PEPCO assets would be adjusted if by April 8,2005 a binding court order had been entered finding that the Back-to-BackAgreement violated PEPCO’s power purchase agreement with Panda (the “Panda PPA”)as a prohibited assignment, transfer or delegation of the Panda PPA or becauseit effected a prohibited delegation or transfer of rights, duties orobligations under the Panda PPA that was not severable from the rest of theBack-to-Back Agreement. Panda initiated legal proceedings in 2000 assertingthat the Back-to-Back Agreement violated provisions in the Panda PPAprohibiting PEPCO from assigning the Panda PPA or delegating its duties underthe Panda PPA to a third party without Panda’s prior written consent. On June 10,2003, the Maryland Court of Appeals, Maryland’s highest court, ruled that theassignment of certain rights and delegation of certain duties by PEPCO toMirant did violate the non-assignment provision of the Panda PPA and wasunenforceable. The court, however, left open the issues whether the provisionsfound to violate the Panda PPA could be severed and the rest of theBack-to-Back Agreement enforced and whether Panda’s refusal to consent to theassignment of the Panda PPA by PEPCO to Mirant was unreasonable and violatedthe Panda PPA. The Company believes that the June 10, 2003 decision by theMaryland Court of Appeals does not suffice to trigger a purchase priceadjustment under the agreement between Mirant and PEPCO. If that court orderwere found to have triggered the purchase price adjustment, the agreement betweenMirant and PEPCO provides that the amount of the adjustment would be negotiatedin good faith by the parties or determined by binding arbitration so as tocompensate PEPCO for the termination of the benefit of the Back-to-BackAgreement while also holding Mirant economically indifferent from such courtorder.

*PEPCOAvoidance Action.  *OnJuly 13, 2005, Mirant and several of its subsidiaries, including MirantMid-Atlantic and Mirant Americas Generation, filed a lawsuit against PEPCObefore the Bankruptcy Court to avoid and recover fraudulent transfers under 11U.S.C. §§ 544 and 550 and applicable state law in connection with theacquisition of PEPCO’s assets by Mirant in December 2000 and disallowPEPCO’s proofs of claim. The suit asserts that Mirant did not receive fairvalue in return for the PEPCO assets and that the acquisition occurred at atime when Mirant was either insolvent or was rendered insolvent as a result ofthe transaction. The likely outcome of this proceeding cannot now bedetermined, and the Company cannot estimate what recovery, if any, it mayobtain in this action.

***City of Alexandria Zoning Action***

On December 18, 2004, the City Council for theCity of Alexandria, Virginia (the “City Council”) adopted certain zoningordinance amendments recommended by the City Planning Commission that result inthe zoning status of Mirant Potomac River’s generating plant being changed from“noncomplying use” to “nonconforming use subject to abatement.” Under thenonconforming use status, unless Mirant Potomac River applies for and isgranted a special use permit for the plant during the seven-year abatementperiod, the operation of the plant must be terminated within a seven-yearperiod, and no alterations that directly prolong the life of the plant will bepermitted during the seven-year period. Typically, the City Council grantsspecial use permits with various conditions and stipulations as to thepermitted use.

At its December 18, 2004 meeting, the CityCouncil also approved revocation of two special use permits issued in 1989 (the“1989 SUPs”), one applicable to the administrative office space at MirantPotomac River’s plant and the other for the plant’s transportation managementplan. Under the terms of the approved action, the revocation of the 1989 SUPswas to take effect 120 days after the City Council revocation, provided,however, that if Mirant Potomac River within such 120-day period filed an

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application for thenecessary special use permits to bring the plant into compliance with thezoning ordinance provisions then in effect, the effective date of therevocation of the 1989 SUPs would be stayed until final decision by the CityCouncil on such application. The approved action further provides that if suchspecial use permit application is approved by the City Council, revocation ofthe 1989 SUPs will be dismissed as moot, and if the City Council does notapprove the application, the revocation of the 1989 SUPs will become effectiveand the plant will be considered a nonconforming use subject to abatement. TheCity of Alexandria and Mirant Potomac River have agreed to a consent order tobe entered by the Circuit Court for the City of Alexandria in the suitdescribed in the next paragraph that extends through October 17, 2005 theperiod within which Mirant Potomac River may file an application for thenecessary special use permits.

On January 18, 2005,Mirant Potomac River and Mirant Mid-Atlantic filed a complaint against the Cityof Alexandria and the City Council in the Circuit Court for the City ofAlexandria. The complaint seeks to overturn the actions taken by the CityCouncil on December 18, 2004 changing the zoning status of Mirant PotomacRiver’s generating plant and approving revocation of the 1989 SUPs, on thegrounds that those actions violated federal, state and city laws. The complaintasserts, among other things, that the actions taken by the City Councilconstituted unlawful spot zoning, were arbitrary and capricious, constituted anunlawful attempt by the City Council to regulate emissions from the plant, andviolated Mirant Potomac River’s due process rights. Mirant Potomac River andMirant Mid-Atlantic request the court to enjoin the City of Alexandria and theCity Council from taking any enforcement action against Mirant Potomac River orfrom requiring it to obtain a special use permit for the continued operation ofits generating plant.

***New York Tax Proceedings***

The Company’s subsidiaries that own generating plantsin New York are or were (in the settled proceedings discussed below) thepetitioners in forty-one proceedings (“Tax Certiorari Proceedings”) initiallybrought in various New York state courts challenging the assessed value ofthose generating plants determined by their respective local taxingauthorities. Mirant Bowline has challenged the assessed value of the Bowlinegenerating facility and the resulting local tax assessments paid for tax years1995 through 2003. Mirant Bowline succeeded to rights held by Orange &Rockland Utilities, Inc. (“Orange & Rockland”) for the tax yearsprior to its acquisition of the Bowline Plant in 1999 under its agreement withOrange & Rockland for the purchase of that plant. Mirant Lovett hasinitiated proceedings challenging the assessed value of the Lovett facility foreach of the years 2000 through 2003. Mirant NY-Gen, LLC (“Mirant NY-Gen”) and,collectively with Mirant Bowline and Mirant Lovett, (the “New York Debtors”)has settled its tax certiorari proceedings with respect to the combustionturbine and hydroelectric facilities it owns for each of the years 2000 through2003. If the remaining Tax Certiorari Proceedings result in a reduction of theassessed value of the generating facility at issue in each proceeding, the NewYork Debtor owning the facility would be entitled to a refund with interest ofany excess taxes paid for those tax years.

On September 30, 2003, the Mirant Debtors filed amotion (the “Tax Determination Motion”) with the Bankruptcy Court requestingthat it determine what the property tax liability should have been for theBowline generating facility in each of the years 1995 through 2003, for theLovett generating facility in each of the years 2000 through 2003, and for thegenerating facilities owned by Mirant NY-Gen in each of the years 2000 through2003. The bases for the relief requested in the Tax Determination Motion onbehalf of each of the New York Debtors were that the assessed values ofgenerating facilities located in New York made by the relevant taxingauthorities had no justifiable basis and were far in excess of their actualvalue. The local taxing authorities have opposed the Tax Determination Motion,arguing that the Bankruptcy Court either lacks jurisdiction over the mattersaddressed by the Tax Determination Motion or should abstain from addressingthose issues so that they can be addressed by the state courts in which the TaxCertiorari Proceedings described in the preceding paragraph were originallyfiled.

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Collectively, the New York Debtors have not paidapproximately $62 million assessed by local taxing authorities on the Bowlineand Lovett generating facilities for 2003, which fell due on September 30,2003 and January 30, 2004, and approximately $53 million assessed by localtaxing authorities on the generating facilities for 2004 that fell due on September 30,2004 and January 30, 2005, in order to preserve their respective rights tooffset the overpayments of taxes made in earlier years against the sums payableon account of current taxes. The failure to pay the taxes due on September 30,2003, January 30, 2004, September 30, 2004, and January 30, 2005could subject Mirant Bowline and Mirant Lovett to additional penalties andinterest.

All of the tax certiorariproceedings related to the generating facilities owned by Mirant NY-Gen havebeen resolved on terms favorable to the New York Debtors, but the taxcertiorari proceedings related to the Bowline and Lovett generating facilitiesremain unresolved.

***Utility Choice and Cirro Group Claims***

On February 18, 2005, two providers ofelectricity at retail in Texas, Utility Choice, L.P. and CirroGroup, Inc., filed a suit in the United States District Court for theSouthern District of Texas, entitled Utility Choice, L.P., et al. v. TXU Corp.,et al., against numerous owners of generating facilities and power marketers inTexas, including Mirant Americas Energy Marketing, Mirant Americas Development, Inc.,and two subsidiaries of the Company owning generating facilities in Texas. Theplaintiffs allege that the defendants, including the Mirant defendants, actingindividually and in collusion with each other, engaged in various types ofunlawful manipulation of the short-term and bilateral wholesale power marketsin the ERCOT region beginning in 2001 and continuing to the period immediatelyprior to the filing of the suit that caused the plaintiffs to pay significantlyhigher prices for power they purchased and to incur other significant costs.The types of conduct that the plaintiffs allege were engaged in by thedefendants, including the Mirant defendants, include submitting false schedulesand bids, “hockey stick” bidding, withholding generation resources from themarket and bidding generation resources at artificially high prices, in eachcase with the intent to create artificially high market prices. The complaintasserts various causes of action, including without limitation claims under thefederal and Texas antitrust acts and the federal Racketeer Influenced andCorrupt Organizations (“RICO”) Act, as well as state law claims for fraud,negligent misrepresentation, and promissory estoppel. The plaintiffs seek lostprofits and other compensatory damages of an unspecified amount, trebledamages, exemplary damages and attorneys’ fees.

On March 21, 2005,the plaintiffs filed a motion with the district court seeking to dismisswithout prejudice the Mirant defendants, noting that those Mirant defendantsare the subject of pending bankruptcy proceedings. The district court grantedthat motion on March 21, 2005. On April 1, 2005, the plaintiffs fileda motion with the Bankruptcy Court seeking leave to file claims in the Chapter11 cases against Mirant Americas Energy Marketing, Mirant AmericasDevelopment, Inc., and the two subsidiaries of the Company based upon thesame allegations made in the suit filed February 18, 2005 and seeking toassert claims in excess of $100 million. The Mirant Debtors are opposing thatmotion. On June 29, 2005, Mirant Americas Energy Marketing entered into asettlement agreement with the plaintiffs under which the plaintiffs agreed torelease all claims against the Mirant Debtors in return for allowed claimsagainst Mirant Americas Energy Marketing totaling $20,000. The settlementagreement is subject to the approval of the Bankruptcy Court.

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***Environmental Matters***

*EPA Information Request*.   InJanuary 2001, the EPA issued a request for information to Mirantconcerning the air permitting and air emissions control implications under theEPA’s new source review regulations promulgated under the Clean Air Act (“NSR”)of past repair and maintenance activities at Mirant Potomac River’s plant inVirginia and Mirant Mid-Atlantic’s Chalk Point, Dickerson and Morgantown plantsin Maryland. The requested information concerns the period of operations thatpredates Mirant Mid-Atlantic’s ownership and lease of the plants. Mirant hasresponded fully to this request. Under the sales agreement with PEPCO for thoseplants, PEPCO is responsible for fines and penalties arising from any violationassociated with historical operations prior to the Company’s acquisition orlease of the plants. If a violation is determined to have occurred at any ofthe plants, the Mirant entity owning or leasing the plant may be responsiblefor the cost of purchasing and installing emissions control equipment, the costof which may be material. If such violation is determined to have occurredafter the Company acquired or leased the plants or, if occurring prior to theacquisition or lease, is determined to constitute a continuing violation, theMirant entity owning or leasing the plant at issue would also be subject tofines and penalties by the state or federal government for the period subsequentto its acquisition or lease of the plant, the cost of which may be material.

*Mirant Potomac River Notice of Violation.  *OnSeptember 10, 2003, the Virginia Department of Environmental Quality (“VirginiaDEQ”) issued a Notice of Violation (“NOV”) to Mirant Potomac River allegingthat it violated its Virginia Stationary Source Permit to Operate by emittingNOx in excess of the “cap” established by the permit for the 2003 summer ozoneseason. Mirant Potomac River responded to the NOV, asserting that the cap isunenforceable, noting that it can comply through the purchase of emissionsallowances and raising other equitable defenses. Virginia’s civil enforcementstatute provides for injunctive relief and penalties. On January 22, 2004,the EPA issued an NOV to Mirant Potomac River alleging the same violation ofits Virginia Stationary Source Permit to Operate as set out in the NOV issuedby the Virginia DEQ.

On September 27, 2004, Mirant Potomac River,Mirant Mid-Atlantic, the Virginia DEQ, the Maryland Department of theEnvironment, the DOJ and the EPA entered into, and filed for approval with theUnited States District Court for the Eastern District of Virginia, a consentdecree that, if approved, will resolve Mirant Potomac River’s potentialliability for matters addressed in the NOVs previously issued by the VirginiaDepartment of Environmental Quality and the EPA. The consent decree requiresMirant Potomac River and Mirant Mid-Atlantic to (1) install pollutioncontrol equipment at the Potomac River plant and at the Morgantown plant leasedby Mirant Mid-Atlantic in Maryland, (2) comply with declining system-wideozone season NOx emissions caps from 2004 through 2010, (3) comply withsystem-wide annual NOx emissions caps starting in 2004, (4) meet seasonalsystem average emissions rate targets in 2008 and (5) pay civil penaltiesand perform supplemental environmental projects in and around the Potomac Riverplant expected to achieve additional environmental benefits. Except for theinstallation of the controls planned for the Potomac River units and theinstallation of selective catalytic reduction (“SCR”) or equivalent technologyat Mirant Mid-Atlantic’s Morgantown Units 1 and 2 in 2007 and 2008, the consentdecree does not obligate the Mirant entities to install specifically designatedtechnology, but rather to reduce emissions sufficiently to meet the various NOxcaps. Moreover, as to the required installations of SCRs at Morgantown, MirantMid-Atlantic may choose not to install the technology by the applicabledeadlines and leave the units off either permanently or until such time as theSCRs are installed. The aggregate amount of the civil penalties to be paid andcosts to be incurred by Mirant Potomac River for the supplemental environmentalprojects is $1.5 million. The consent decree is subject to the approval of thedistrict court and the Bankruptcy Court.

*Mirant Potomac River Downwash Study*.   OnSeptember 23, 2004, the Virginia DEQ and Mirant Potomac River entered intoan order by consent with respect to the Potomac River plant under which MirantPotomac River agreed to perform a modeling analysis to assess the potential effectof “downwash” 

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from the plant (1) onambient concentrations of SO2, nitrogen dioxide (“NO2”), carbon monoxide (“CO”)and particulate matter less than or equal to 10 micrometers (“PM10”) forcomparison to the applicable national ambient air quality standards (“NAAQS”)and (2) on ambient concentrations of mercury for comparison to VirginiaStandards of Performance for Toxic Pollutants. Downwash is the effect thatoccurs when aerodynamic turbulence induced by nearby structures causespollutants from an elevated source, such as a smokestack, to be mixed rapidlytoward the ground resulting in higher ground level concentrations ofpollutants. If the modeling analysis indicates that emissions from the facilitymay cause exceedances of the NAAQS for SO2, NO2, CO or PM10, or exceedances ofmercury compared to Virginia Standards of Performance for Toxic Pollutants, theconsent order requires Mirant Potomac River to submit to the Virginia DEQ aplan and schedule to eliminate and prevent such exceedances on a timely basis.Upon approval by the Virginia DEQ of the plan and schedule, the approved planand schedule is to be incorporated by reference into the consent order. To theextent that the downwash study indicates that emissions from the Potomac Riverplant exceed either the NAAQS or the Virginia Standards of Performance forToxic Pollutants, the remedial actions required could include materialmodifications to the plant or to its operation. The financial and operationalimplications of any such remedial actions are not known at this time. MirantPotomac River received the Virginia DEQ’s approval of the modeling protocol on June 20,2005 and has 60 days from that date to complete the modeling analysis.

*New York Opacity.  *On October 20,2004, the New York State Department of Environmental Affairs Region 3 Stafffiled a complaint against Mirant Bowline, Mirant Lovett and Mirant New Yorkwith the New York State Department of Environmental Conservation (“NYSDEC”).The complaint alleges that the generating facilities owned by Mirant Bowlineand Mirant Lovett violated Article 19 of New York’s EnvironmentalConservation Law and regulations promulgated pursuant to that law by violatingopacity standards set for smoke emissions on more than 100 occasions betweenthe second quarter of 2002 and the first quarter of 2004. The complaint seeks acease and desist order and fines of $1.96 million against the Mirantdefendants. On June 8, 2005, the NYSDEC entered an order agreed to by theMirant defendants that set penalty amounts for future violations of opacitystandards by Mirant Bowline and Mirant Lovett and required the Mirantdefendants to pay a penalty of $44,100 for emissions violations occurring priorto January 1, 2005. The agreed to order does not become effective until ithas been approved by the Bankruptcy Court. 

*Mirant NY-Gen Pipeline Leak.  *Inthe fall of 2003, Mirant NY-Gen discovered a leaking underground pipelineat the Hillburn generating facility in Ramapo, New York. The underground linewas used for supplying kerosene fuel to the gas turbines located on site. Afterconfirmatory testing revealed a potential leak, the line was removed fromservice and plans were undertaken to excavate and sample portions of the lineto determine the extent of the line damage and the possible soil contamination.Upon initial discovery the leak was reported to the NYSDEC and the RocklandCounty Health Department. In the summer of 2004 soil contamination wasdiscovered and a subsequent testing of portions of the line revealed a smallhole. Currently, investigations are continuing to determine the extent of contaminationand possible remedial activities to clean up the area. Additionally, MirantNY-Gen is working under the direction of the NYSDEC to remove all free productcontamination from the groundwater and undertake remediation actions foradditional on-site and off-site contamination. The current estimate of the costof cleanup is greater than $3 million; however, due to the ongoingevaluation to determine the extent of the contamination, the exact cost ofremediation is unknown at this time.

On May 19, 2005, the NYSDEC issued a Notice ofHearing and Complaint to Mirant NY-Gen seeking an order requiring Mirant NY-Gento implement its approved remediation plan, payment of all costs relating tothe cleanup (including all costs incurred by the NYSDEC) and payment of a civilpenalty in the amount of $100,000. The outcome of this proceeding cannot now bedetermined.

*Riverkeeper Suit Against Mirant Lovett.  *OnMarch 11, 2005, Riverkeeper, Inc. filed suit against Mirant Lovett inthe United States District Court for the Southern District of New York underthe Federal 

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Water Pollution ControlAct (the “Clean Water Act”). The suit alleges that Mirant Lovett’s failure toimplement a marine life exclusion system at its Lovett generating plant and toperform monitoring for the exclusion of certain aquatic organisms from theplant’s cooling water intake structures violated Mirant Lovett’s waterdischarge permit issued by the State of New York. The plaintiff requests thecourt to enjoin Mirant Lovett from continuing to operate the Lovett generatingplant in a manner that allegedly violates the Clean Water Act, to impose civilpenalties of $32,500 per day of violation, and to award the plaintiff attorney’sfees. On April 20, 2005, the district court approved a stipulation agreedto by the plaintiff and Mirant Lovett that stays the suit until 60 days afterentry of an order by the Bankruptcy Court confirming a plan of reorganizationfor Mirant Lovett becomes final and non-appealable.

*Mirant Lovett CAMF.  *On July 8, 2004, as supplemented on January 19,2005, the NYSDEC issued a notice of violation to Mirant Lovett for allegedimproper closure techniques used for the coal ash management facility locatedat the Lovett generating facility. On May 16, 2005 the NYSDEC Staff fileda complaint with the NYSDEC against Mirant Lovett and Mirant New York, Inc.(“Mirant New York”) based on the allegations of improper closure techniques.The complaint seeks a civil penalty of $100,000 and an order requiring MirantLovett to make certain equipment enhancements and to provide a letter of creditto cover estimated closure and post closure costs and to make certain informationalfilings. The outcome of this proceeding cannot now be determined.

*New York Dissolved Oxygen.  *On September 29, 2003, the NYSDEC issued acomplaint to Mirant New York for alleged failure to comply with stateregulatory standards for minimum dissolved oxygen in the Mongaup River at theSwinging Bridge, Mongaup Falls and Rio hydroelectric projects owned by MirantNY-Gen. The complaint sought a civil penalty of $120,000 and an order requiringMirant New York to upgrade the three hydroelectric projects to prevent furtherdischarges that do not meet the standards for minimum dissolved oxygen. In itscomplaint the NYSDEC proposed that $100,000 of the $120,000 penalty it wasseeking be suspended on the condition that Mirant New York complete correctiveactions for each facility by a certain schedule it proposed. On June 1,2004, Mirant New York filed an answer and motion to dismiss on groundsincluding that Mirant New York is not the owner of the hydroelectric projects. MirantNew York granted an extension of time to allow the NYSDEC to respond, and theNYSDEC has not yet responded.

***Other Governmental Proceedings***

*Department of Justice Inquiries*.   InNovember 2002, Mirant received a subpoena from the DOJ, acting through theUnited States Attorney’s office for the Northern District of California,requesting information about the activities of Mirant and its subsidiaries,including the Company and its subsidiaries, for the period since January 1,1998. The subpoena requested information related to the California energymarkets and other topics, including the reporting of inaccurate information tothe trade press that publish natural gas or electricity spot price data. Thesubpoena was issued as part of a grand jury investigation. Mirant has continuedto receive additional requests for information from the United States Attorney’soffice, and it intends to continue to cooperate fully with the United StatesAttorney’s office in this investigation.

***Other Legal Matters***

The Company is involved invarious other claims and legal actions arising in the ordinary course ofbusiness. In the opinion of management, the ultimate disposition of thesematters will not have a material adverse effect on the Company’s financialposition, results of operations or cash flows.

**Item 4.**                        *Submission of Matters to a Vote of Security Holders*

None.

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**PART II**

**Item 5.**                        *Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities*

We are an indirectwholly-owned subsidiary of Mirant. Our membership interests are not publiclytraded and all of our membership interests are held by our parent MirantAmericas, Inc. Since filing for protection under Chapter 11, we have notpaid dividends. We have no equity compensation plans under which we issue ourmembership interests.

**Item 6.**                        *Selected Financial Data*

The information set forthbelow should be read together with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our historical consolidatedfinancial statements and the notes thereto, which are included elsewhere inthis Form 10-K. The selected financial data has been derived from ourconsolidated financial statements.

**SelectedFinancial Data**
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                  | ** ** | **(in millions)**                      | ** ** |
| **Statement of Operations Data:**           |       |                                        |       |   |   |   |   |   |   |   |   |
| Operating revenues                          |       | $                                           | 2,114      |   | $ | 2,015 |   | $ | 1,939 |   | $ | 4,489 |   | $ | 2,153 |   |
| Net income (loss)                           |       | 22                                          |       | (2,989 | ) | 78 |   | 414 |   | 153 |   |
| **Balance Sheet Data (at end of  period):** |       |                                        |       |   |   |   |   |   |   |   |   |
| Total assets                                |       | 4,030                                       |       | 3,903 |   | 6,996 |   | 7,065 |   | 6,262 |   |
| Member’s equity                        |       | 194                                         |       | 172 |   | 3,125 |   | 3,019 |   | 2,913 |   |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item7.**        *Management’sDiscussion and Analysis of Financial Condition and Results of Operations*

**Executive Summary**

*Overview*

We operate as adebtor-in-possession under the jurisdiction of the Bankruptcy Court inaccordance with Chapter 11 of the Bankruptcy Code. As a result, our financialstatements include the results of Bankruptcy Court actions, probable claimsagainst our estate and professional and administrative costs related to thebankruptcy process. On January 19,2005, the Mirant Debtors filed a Plan of Reorganization with the BankruptcyCourt, which was amended on March 25, 2005. For further discussion of ourproposed Plan, see Item 1 contained elsewhere in this report.

In general, it is our currentview that the U.S. electricity markets have excess generation capacity.Additionally, generation capacity is expected to exceed combined demand levelsand reserve generation targets through 2008 to 2010 for most major markets.This market situation has the potential to result in continued narrow fuel toelectricity conversion spreads. In this environment, customers typicallytransact over shorter durations and rely more heavily on spot markets to meettheir energy needs, thus making it more difficult for us to sell our power forlonger-term durations and at prices that provide a reasonable return, mostnotably on our gas fired units.

For our business, changingcommodity prices can result in volatile financial results as our derivativeinstruments do not currently receive cash flow hedge accounting treatment inour financial statements. Instead, these derivative instruments are reflectedin our financial statements at fair value, resulting in volatility in our grossmargin. Our unrealized gains and losses for each period reflect changes in fairvalue of commodity contracts not yet settled and the reversal of unrealizedgains and losses recognized in previous periods that settled in the currentreporting period.

Our gross margin increased $148million in 2004 compared to 2003.  Thisincrease was driven primarily by the termination of the Energy and CapacitySales Agreement (“ECSA”) with Mirant Americas Energy Marketing in May 2003,along with higher market prices for power, capacity and ancillaryservices received by our Mid-Atlantic assets, increased volumes of generationproduced by our New England assets and reduced unrealized losses on derivativefuel contracts for future periods, partially offset by an increase inunrealized losses on derivative power contracts for future periods due toincreased forward power prices. Our cashflows from operating activities increased $27 million in 2004 compared to 2003,which reflects a significant increase in working capital requirements primarilyas a result of an increase in accounts receivable in 2004 as compared to adecrease in 2003.

We and our subsidiarieshave entered into a number of service agreements with other Mirant subsidiariesfor the procurement of fuel, labor and administrative services essential tooperating our business. These agreements are primarily with Mirant, MirantAmericas Energy Marketing and Mirant Services. See Note 5 to our consolidatedfinancial statements for a description of these agreements.

***Bankruptcy Considerations***

While in bankruptcy, weexpect our financial results to continue to be volatile as asset impairments,asset dispositions, restructuring activities, contract terminations andrejections, and claims assessments may significantly impact our consolidatedfinancial statements. As a result, our historical financial performance islikely not indicative of our financial performance post-bankruptcy.

In addition, upon emergence from Chapter 11, theamounts reported in subsequent consolidated financial statements may materiallychange relative to historical consolidated financial statements as a result ofrevisions to our operating plans set forth in the Plan and, if required, theimpact of revaluing our assets and liabilities by applying fresh startaccounting in accordance with Statement of Position 90-7, “Financial Reportingby Entities in Reorganization under the Bankruptcy Code.”

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As part of the bankruptcyprocess, claims are filed with the Bankruptcy Court related to amounts thatclaimants believe we owe them. These claims, except for claims by certaingovernmental agencies, were required to be filed with the Court by December 16,2003. In the absence of a specific Bankruptcy Court order providing otherwise,all governmental agencies were required to file claims with the BankruptcyCourt by January 12, 2004. See “Critical Accounting Policies and Estimates”for additional information.

**Results of Operations**

Ouroperating revenues and expenses from affiliates and nonaffiliates aggregated byclassification are as follows (in millions):
| ** **                                           | ** ** | **Years Ended December 31,**                          | ** **                  |
|------------------------------------------------------|------------|----------------------------------------------------------------------|-----------------------------|
| ** **                                           | ** ** | **     2004     ** | ** **                  | **2003** | ** ** | **Increase/  Decrease** | ** ** | **2003** | ** ** | **     2002     ** | ** ** | **Increase/  Decrease** | ** ** |
| Operating Revenues:                                  |       |                                                                 |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                            |       |                                                                 | $ 1,795                |   |   | $ 1,681 |   | $    114 |   | $ 1,681 |   |   | $ 1,706 |   |   | $    (25 | ) |
| Nonaffiliate                                         |       |                                                                 | 319                         |   |   | 334 |   | (15 | ) | 334 |   |   | 233 |   |   | 101 |   |
| Total operating  revenues                            |       |                                                                 | 2114                        |   |   | 2015 |   | 99 |   | 2015 |   |   | 1939 |   |   | 76 |   |
| Cost of fuel,  electricity and other products:       |       |                                                                 |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                            |       |                                                                 | 1094                        |   |   | 1174 |   | (80 | ) | 1174 |   |   | 890 |   |   | 284 |   |
| Nonaffiliate                                         |       |                                                                 | 195                         |   |   | 164 |   | 31 |   | 164 |   |   | 88 |   |   | 76 |   |
| Total cost of  fuel, electricity and other products  |       |                                                                 | 1289                        |   |   | 1338 |   | (49 | ) | 1338 |   |   | 978 |   |   | 360 |   |
| Gross Margin                                         |       |                                                                 | 825                         |   |   | 677 |   | 148 |   | 677 |   |   | 961 |   |   | (284 | ) |
| Operating Expenses:                                  |       |                                                                 |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Generation facilities rent                           |       |                                                                 | 103                         |   |   | 96 |   | 7 |   | 96 |   |   | 96 |   |   | — |   |
| Depreciation and amortization                        |       |                                                                 | 89                          |   |   | 121 |   | (32 | ) | 121 |   |   | 110 |   |   | 11 |   |
| Operations and  maintenance                          |       |                                                                 |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                            |       |                                                                 | 260                         |   |   | 194 |   | 66 |   | 194 |   |   | 190 |   |   | 4 |   |
| Nonaffiliate                                         |       |                                                                 | 218                         |   |   | 236 |   | (18 | ) | 236 |   |   | 272 |   |   | (36 | ) |
| Loss (gain) on sales of assets, net                  |       |                                                                 | 65                          |   |   | (3 | ) | 68 |   | (3 | ) |   | — |   |   | (3 | ) |
| Impairment loss                                      |       |                                                                 | —                      |   |   | 2715 |   | (2,715 | ) | 2,715 |   |   | 20 |   |   | 2,695 |   |
| Total operating  expenses                            |       |                                                                 | 735                         |   |   | 3359 |   | (2,624 | ) | 3359 |   |   | 688 |   |   | 2,671 |   |
| Operating Income  (loss)                             |       |                                                                 | 90                          |   |   | (2682 | ) | 2,772 |   | (2,682 | ) |   | 273 |   |   | (2,955 | ) |
| Other income (expense),  net:                        |       |                                                                 |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                            |       |                                                                 | (5                          | ) |   | 20 |   | (25 | ) | 20 |   |   | 41 |   |   | (21 | ) |
| Nonaffiliate                                         |       |                                                                 | 7                           |   |   | (193 | ) | 200 |   | (193 | ) |   | (194 | ) |   | 1 |   |
| Reorganization  items, net                           |       |                                                                 | 89                          |   |   | 25 |   | 64 |   | 25 |   |   | — |   |   | 25 |   |
| (Benefit)  provision for income taxes                |       |                                                                 | (19                         | ) |   | 113 |   | (132 | ) | 113 |   |   | 56 |   |   | 57 |   |
| Income from  discontinued  operations                |       |                                                                 | —                      |   |   | 7 |   | (7 | ) | 7 |   |   | 14 |   |   | (7 | ) |
| Cumulative effect  of change in accounting principle |       |                                                                 | —                      |   |   | (3 | ) | 3 |   | (3 | ) |   | — |   |   | (3 | ) |
| Net income (loss)                                    |       |                                                                 | $    22 |   |   | $ (2,989 | ) | $ 3,011 |   | $ (2,989 | ) |   | $    78 |   |   | $ (3,067 | ) |

 

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Thefollowing table summarizes gross margin by region for the years ended December 31,2004, 2003 and 2002 (in millions):
| ** **   | ** ** | **Years Ended December 31,** | ** ** |
|--------------|------------|---------------------------------------------|------------|
| ** **   | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **Increase/  (Decrease)** | ** ** | **2003** | ** ** | **2002** | ** ** | **Increase/  (Decrease)** | ** ** |
| Northeast    |       | $ 238                                  |       | $ 143 |   |   | $ 95 |   |   | $ 143 |   | $ 163 |   |   | $ (20 | ) |   |
| Mid-Atlantic |       | 424                                         |       | 352 |   |   | 72 |   |   | 352 |   | 469 |   |   | (117 | ) |   |
| West         |       | 164                                         |       | 183 |   |   | (19 | ) |   | 183 |   | 334 |   |   | (151 | ) |   |
| Other        |       | (1                                          | )          | (1 | ) |   | — |   |   | (1 | ) | (5 | ) |   | 4 |   |   |
| Total        |       | $ 825                                  |       | $ 677 |   |   | $ 148 |   |   | $ 677 |   | $ 961 |   |   | $ (284 | ) |   |

 

Thefollowing table summarizes capacity factor (average percentage of full capacityused over a year) by region for the years ended December 31, 2004 and2003:
| ** **   | ** ** | **Years Ended December 31,** | ** ** |
|--------------|------------|---------------------------------------------|------------|
| ** **   | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **Increase/  (Decrease)** | ** ** |
| Northeast    |       |                                        | 33         | % |   |   | 31 | % |   |   | 2 | % |   |
| Mid-Atlantic |       |                                        | 44         | % |   |   | 45 | % |   |   | (1 | )% |   |
| West         |       |                                        | 19         | % |   |   | 9 | % |   |   | 10 | % |   |

 

Thefollowing table summarizes power generation volumes by region for the yearsended December 31, 2004 and 2003 (in gigawatt hours):
| ** **   | ** ** | **Years Ended December 31,** | ** ** |
|--------------|------------|---------------------------------------------|------------|
| ** **   | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **Increase/  (Decrease)** | ** ** |
| Northeast    |       | 8,797                                       |       | 8,492 |   |   | 305 |   |   |
| Mid-Atlantic |       | 16,461                                      |       | 16,884 |   |   | (423 | ) |   |
| West         |       | 4,880                                       |       | 4,062 |   |   | 818 |   |   |
| Total        |       | 30,138                                      |       | 29,438 |   |   | 700 |   |   |

 

***2004 versus 2003***

*Gross Margin.  *Grossmargin increased $148 million in 2004, primarily due to the following:

·       Northeast operations gross margin increased $95million primarily due to the following:

·        An increase of $43 million related to net unrealized gains on derivativeinstruments of approximately $31 million in 2004 compared to $12 million in netunrealized losses in 2003;

·        An increase of $27 million due to certain events that occurred in thefirst half of 2003, such as certain forced outages and transmission lineproblems that did not recur in 2004; and

·        An increase of $22 million in our realizedeconomic hedging margin due to the impact of 2003 short positions on power in amarket where prices for power were rising.

·       Mid-Atlantic operationsgross margin increased $72 million primarily due to the termination of theECSA with Mirant Americas Energy Marketing in May 2003. Revenues receivedunder the ECSA in 2003 were $94 million less than what would have beenreceived from the Pennsylvania-New Jersey-Maryland Interconnection, LLC (“PJM”)spot market. Excluding the impact of theECSA, Mid-Atlantic gross margin would have been $22 million lower in 2004 thanin 2003, primarily due to the following:

·        An increase ofapproximately $46 million driven by higher market prices for power;

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·        An increase of $46 millionrelated to an increase in prices for capacity and ancillary services;

·        A decrease ofapproximately $69 million related to net unrealized losses on derivativecontracts for future periods. Of these contracts, $59 million related to powerand $10 million related to oil and gas, and were entered into to economicallyhedge a portion of the energy and fuel price risk related to futureMid-Atlantic operations. The decrease in value of these energy and fuelderivative contracts is due to an increase in forward power prices and adecrease in forward fuel prices;

·        A decrease of $18 millionrelated to higher emissions expense due mainly to higher prices for SO2emissions allowances. In order for us to meet our current needs to operate ourgeneration facilities we had to purchase additional emissions allowances. Theaverage price of emissions allowances increased 140% from $180 per ton in 2003to $431 per ton in 2004;

·        A decrease of $14 millionrelated to a reduction in realized gains on economic fuel hedges; and

·        A decrease of $11 millionrelated to the termination of contracts in 2004.

·       West operations grossmargin decreased $19 million. In California, gross margin decreased byapproximately $3 million primarily due to a decrease in gains on realizedeconomic hedges of $22 million as a result of reduced economic hedgingactivity offset by $18 million of savings on gas reservation charges followinga contract rejection. In Texas, gross margin decreased by $16 million primarilydue to lower energy prices and a new tolling agreement that began in August 2004with a third party that is at lower prices than what these units received undera prior agreement with Mirant Americas Energy Marketing.

*Operating expenses.  *Operatingexpenses decreased $2,624 million primarily due to the following:

·  A decrease of $1,625 million for goodwillimpairment charges related to the impairment of goodwill in 2003. For furtherdiscussion, see “Critical Accounting Policies and Estimates” and Note 7 to ourconsolidated financial statements contained elsewhere in this report;

·       A decrease of $1,090million for long-lived asset impairment losses due to an impairment recorded in2003 for several of our assets. For further discussion, see “CriticalAccounting Policies and Estimates” and Note 6 to our consolidated financialstatements contained elsewhere in this report;

·  A decrease of $18 million in operations andmaintenance—nonaffiliate primarily related to a reduction in the allowancerelated to receivables from Enron of $5 million and $8 million lower propertytaxes due to settlements related to certain California and New York generationassets;

·  A decrease of $32 million in depreciation andamortization expense primarily due to lower depreciation expense related to ourproperty, plant and equipment after our $1,090 million impairment oflong-lived assets in the fourth quarter of 2003;

·       An increase of $68 millionin loss on sales of assets, net primarily relates to a loss on the sale ofthree natural gas combustion turbines at Bowline 3 in 2004;

·       An increase of $66 millionin operations and maintenance—affiliate primarily due to a change in the Mirantcorporate allocation methodology that was implemented January 1, 2004. SeeNote 5 to our consolidated financial statements contained elsewhere in thisreport for further discussion; and

·       An increase of $7 millionin generation facilities rent related to the additional rent expense for ourMorgantown and Dickerson baseload units as a result of the Bankruptcy Court’sgranting the motion compelling us to pay incremental rent in 2004. See Note 12contained elsewhere in this report for further discussion.

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*Other income (expense), net.  *Otherincome (expense), net decreased $175 million primarily due to the Chapter 11proceedings. The accrual of interest expense associated with pre-petition debtwas suspended subsequent to the Petition Date, and no interest expense relatedto pre-petition debt was recorded. Contractual interest on liabilities subjectto compromise in excess of reported interest was approximately$238 million and $110 million for the years ended December 31,2004 and 2003, respectively. Contractual interest on liabilities subject tocompromise in excess of reported interest for the period from the Petition Datethrough December 31, 2004 is approximately $348 million. This amountincludes approximately $225 million of interest related to Mirant AmericasGeneration long dated bonds that would be reinstated under the proposed Plan.

***2003 versus 2002***

*Gross Margin.  *Grossmargin decreased by $284 million primarily due to the following:

·       Northeast operations grossmargin decreased $20 million primarily due to an unsuccessful economic hedgingstrategy related to a short position for power as power prices increased in2003.

·  Mid-Atlanticoperations gross margin decreased $117 million primarily due to thefollowing:

·        A decrease of $79 millionin revenues primarily due to the termination of the ECSA in May 2003.During 2002, revenues under the ECSA were $179 million higher than what wouldhave been received from the PJM spot market. From January 1, 2003 to May 1,2003 the revenue received under the agreement was $94 million less than whatwould have been received from the PJM spot market. For the remainder of 2003,we received market prices for power;

·        A decrease of $41 millionrelated primarily to higher fuel prices of approximately $29 million andemissions allowances of $12 million; and

·        An increase of $6 millionrelated to $38 million of realized margin on economic fuel hedges offset by $32million in net unrealized losses on contracts for future periods.

·       Gross margin in our California operationsdecreased $151 million primarily related to reduced profitability due tothe expiration of our power sales agreement with DWR in December 2002. In2003, we converted the units that were contracted under the DWR agreement toRMR Contract Condition 2 of approximately 1,700 MW out of 2,000 MW. Revenuesunder the DWR agreement were based on the market prices at the time we enteredinto the agreement of approximately $150/MWh. Under the RMR Contract Condition2 contracts, revenues are based on a fixed rate of return and the costs ofoperating the unit.

*Operating expenses.  *Operatingexpenses increased $2,671 million primarily due to the following:

·       An increase of $1,625million for goodwill impairment charges related to the impairment of goodwillin 2003;

·  An increase of $1,070 million for long-livedasset impairment losses in 2003; and

·  A decrease of $36 million in operations andmaintenance—nonaffiliate primarily due to cost reduction initiatives as part ofour effort to downsize our organization. Operations and maintenance expenseincludes such costs as plant operations and maintenance, administrativeexpenses, such as consulting, accounting and legal fees, and property taxes.

*Other income (expense), net.  *Otherincome (expense), net decreased $20 million primarily due to the Chapter 11proceedings. As a result of the bankruptcy proceedings, no intercompanyinterest income or expense was recorded on affiliate pre-petition balancessubsequent to the Petition Date.

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**Financial Condition**

***Liquidity and Capital Resources***

The matters described in this section relate to futureevents or expectations and may be significantly affected by the Chapter 11proceedings. The Chapter 11 proceedings have resulted in various restrictionson our activities including limitations on financing, the need to obtainBankruptcy Court approval for various matters and uncertainty as torelationships with vendors, suppliers, customers and others with whom we mayconduct or seek to conduct business. Upon exiting from bankruptcy we will nolonger be subject to these restrictions.

During the pendency of the Chapter 11 proceedings,Mirant and certain of its subsidiaries, including us, are participating in anintercompany cash management program approved by the Bankruptcy Court pursuantto which cash balances at Mirant and the participating subsidiaries aretransferred to central concentration accounts and, if necessary, lent to Mirantor any participating subsidiary to fund working capital and other needs,subject to the intercompany borrowing limits approved by the Bankruptcy Court.Under the intercompany cash management program, the Bankruptcy Court imposedborrowing limits for intercompany loans among the respective subsidiarysub-groups. In December 2004, the Bankruptcy Court amended theintercompany cash management program to exclude from the intercompany borrowinglimits amounts borrowed by Mirant Americas Energy Marketing from the non-MirantAmericas Energy Marketing sub-groups to fund cash collateral posted and cashprepayments made to third parties on account of transactions entered into byMirant Americas Energy Marketing for the benefit of the members of thenon-Mirant Americas Energy Marketing sub-groups. All intercompany transfers bysuch Mirant entities are recorded as intercompany loans on a juniorsuperpriority administrative basis and are secured by junior liens on theassets of the relevant borrowing group. Additionally, the Company and itssubsidiaries are subject to maximum intercompany borrowing limits under the DIPFacility of $200 million at Mirant Mid-Atlantic and an additional $150 millionfor the remaining Mirant Americas Generation subsidiaries. Upon entering intothe debtor-in-possession credit facility described below, the cash balances ofthe participating Mirant Debtors became subject to security interests in favorof the debtor-in-possession lenders and, upon certain conditions, such cashbalances are swept into concentration accounts controlled by thedebtor-in-possession lenders.

On November 5, 2003, certain of the MirantDebtors (the “DIP Borrowers”) entered into a two-year debtor-in-possessioncredit facility (the “DIP Facility”) providing for borrowings or the issuanceof letters of credit in an amount not to exceed the lesser of $500 millionor the then-existing “borrowing base.” The borrowing base is the aggregatevalue assigned to specified power generation assets of the DIP Borrowers thatserve as collateral for the DIP Facility. However, upon the occurrence of certaintriggering events, including the sale of borrowing base assets or an event thathas a material adverse effect on the business, operations or value of a powergeneration facility, the borrowing base may be revalued or reserves against theborrowing base may be imposed, thus lowering the borrowing base amount. Theborrowing base as of December 31, 2004 was $724 million. Theborrowing base decreased $48 million in January and will decrease another$37 million following the consummation of the pending sale of certain Mirantassets. The orders entered by the Bankruptcy Court approving the DIP Facilitypermit up to $300 million of borrowings, which amount may be increased to$500 million upon written approval of each of the Statutory Committees orfurther order of the Bankruptcy Court. The DIP Facility also contains anoption, exercisable by Mirant or us, to remove us and our subsidiaries asborrowers and obligors under the DIP Facility and reduce the DIP Facilitycommitment to a maximum of $200 million of borrowings. Borrowings underthe DIP Facility are secured by substantially all of the assets of the DIPBorrowers, including the assets of our subsidiaries.

Pursuant to the DIP Facility, the DIP Borrowers aresubject to a number of affirmative and restrictive covenants, reportingrequirements, and, subject to usage, financial covenants. The DIP borrowers, 

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including the Company,were in compliance with the DIP Facility covenants, or had received affirmativewaivers of compliance where compliance was not attained, as ofDecember 31, 2004.

After we emerge from bankruptcy, we expect to satisfyour liquidity and capital requirements with cash generated by operations andletters of credit and borrowings under a new revolving credit facility ascontemplated by the Plan.

We are a holding company and as a result, we aredependent upon dividends and other payments from our subsidiaries to generatethe funds necessary to meet our outstanding debt service and other obligations.In particular, a substantial portion of our cash provided by operatingactivities is generated by Mirant Mid-Atlantic. The Mirant Mid-Atlanticleveraged leases as currently constituted contain a number of covenants,including limitations on dividends, distributions and other restrictedpayments. Under the leveraged leases, Mirant Mid-Atlantic is not permitted tomake any dividends, distributions and other restricted payments unless (1) itsatisfies the fixed charge coverage ratio on a historical basis for the lastperiod of four fiscal quarters, (2) it is projected to satisfy the fixedcharge coverage ratio for the next two periods of four fiscal quarters, and (3) nosignificant lease default or event of default has occurred and is continuing.See Note 12 for a further description of the restricted payments test under theleveraged leases. In the event of a default under the leveraged leases or ifthe restricted payments test is not satisfied, the cash of Mirant Mid-Atlanticwould not be available for distribution to us. During the bankruptcy, cashmovements among the Mirant Debtors have been made pursuant to intercompanyloans as described above and the Mirant Debtors have not made dividends,distributions or capital contributions. The projected fixed charge coverageratios are based on projections that were not prepared to conform to theguidelines established by the American Institute of Certified PublicAccountants regarding forecasts, and were not audited, reviewed, or compiled byour independent registered public accounting firm. It should be noted that theforecasts, market assumptions and many other factors are inherently inaccurateand should not be relied on. If Mirant Mid-Atlantic were to calculate the fixedcharge coverage ratio under the leveraged leases as of June 30, 2005, weexpect that it would meet the required 1.7 to 1.0 ratio for restrictedpayments, both on a historical and projected basis. However, the expectedhistorical ratio for June 30, 2005 and the projected historical ratio for September 30,2005 are close to the required ratio. Further, the calculation of the fixedcharge coverage ratio requires the determination of the “Consolidated EBITDA”,as defined in the lease documentation, of Mirant Mid-Atlantic exclusive ofdepreciation, amortization and similar non-cash charges. Management hascalculated the fixed charge coverage ratio excluding certain non-cash chargesthat management believes to be reasonable and appropriate. The relevance of therestricted payments test under the leveraged leases post-bankruptcy is uncleargiven the potential determination of the Mirant Debtors to modify theirproposed Plan to provide for the assumption of the leveraged leases conditionedupon certain provisions thereof being determined to be unenforceable—includingthe limitations on restricted payments. In the event the resolution of theoutstanding litigation with respect to the treatment of the leveraged leasesresults in Mirant Mid-Atlantic assuming the leases with the same or similarlimitations on restricted payments, Mirant Mid-Atlantic intends to seekconfirmation of its application of the calculation of the fixed charge coverageratio.

The proposed Plan provides for the organization ofMirant North America as an intermediate holding company that would be our subsidiaryand the parent of our indirect subsidiaries, including Mirant Mid-Atlantic. Theproposed Plan provides for Mirant North America to incur certain indebtednessto be issued in connection with the Plan and to enter into a revolving creditfacility for working capital and other purposes and secured by the assets ofMirant North America and its subsidiaries other than Mirant Mid-Atlantic andits subsidiaries. We expect that any such revolving credit facility willinclude certain covenants typical in such credit facilities, includingrestrictions on dividends, distributions and other restricted payments. Further,we expect that any such revolving credit facility will include financialcovenants that will exclude from the calculation of compliance with suchcovenants the financial results of any subsidiary that is unable to makedistributions or dividends at the time of such calculation. Thus, the abilityof Mirant 

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Mid-Atlantic to makedistributions to Mirant North America under the leveraged lease transaction isexpected to have a material impact on the calculation of the financialcovenants under the revolving credit facility and other debt of Mirant NorthAmerica and on its ability to make distributions to us. The availability of theMirant North America revolving credit facility, an important source ofliquidity for our subsidiaries post-bankruptcy, and our ability to pay ourobligations may be adversely affected in the event that Mirant Mid-Atlantic isunable to make distributions to Mirant North America.

See Note 12 to our consolidatedfinancial statements for a summary of the covenants under the MirantMid-Atlantic lease financing documents and the expected covenants in theanticipated Mirant North America indebtedness.

***Off-Balance Sheet Arrangements and ContractualObligations***

We are in the process of evaluating the Mirant Debtors’executory contracts in order to determine which contracts will be assumed,assumed and assigned, or rejected. See “Item 1.Business—Overview—Proceedings under Chapter 11 of the Bankruptcy Code.”The table presented below does not include contracts that we have successfullyrejected through the bankruptcy process.

As of December 31,2004 our off-balance sheet arrangements and contractual obligations are asfollows (in millions):
| ** **                                      | ** ** | **Off-Balance Sheet Arrangements and Contractual Obligations by Year** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Total**                                                                                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **More than  5 years** | ** ** |
| Operating  leases(1)                            |       | $                                                                                                         | 2,483      |   | $ | 111 |   | $ | 108 |   | $ | 113 |   | $ | 122 |   | $ | 143 |   |   | $ | 1,886 |   |   |
| Purchase  commitments:                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fuel purchase and transportation commitments(2) |       | 360                                                                                                       |       | 139 |   | 113 |   | 108 |   | — |   | — |   |   | — |   |   |
| Long-term service agreements(3)                 |       | 266                                                                                                       |       | 8 |   | 12 |   | 14 |   | 22 |   | 22 |   |   | 188 |   |   |
| Coal purchases—affiliate(4)                |       | 463                                                                                                       |       | 224 |   | 135 |   | 104 |   |   |   |   |   |   |   |   |   |
| Other(5)                                        |       | 52                                                                                                        |       | 52 |   | — |   | — |   | — |   | — |   |   | — |   |   |
| Total excluding pre-petition debt.              |       | 3,624                                                                                                     |       | $ | 534 |   | $ | 368 |   | $ | 339 |   | $ | 144 |   | $ | 165 |   |   | $ | 2,074 |   |   |
| Liabilities  subject to compromise(6)           |       | 3,438                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total**                                       |       | $                                                                                                         | 7,062      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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(1)          Operatingleases are off-balance sheet arrangements and are discussed in Note 12 toour consolidated financial statements contained elsewhere in this report. Theseamounts primarily relate to our minimum lease payments associated with ourlease of the Morgantown and Dickerson baseload units.

(2)          Fuelpurchase and transportation commitments are discussed in Note 12 to ourconsolidated financial statements contained elsewhere in this report. Theseamounts primarily relate to the minimum fuel purchase and transportationcommitments at the Morgantown facility which became effective in July 2002,and the commitments at the Lovett facility.

(3)          Long-termservice agreements are discussed in Note 12 to our consolidated financialstatements and represent our total estimated commitments under long-termservice agreements associated with turbines installed or in storage.

(4)          Coalpurchases—affiliate are discussed in Note 12 to our consolidated financialstatements contained elsewhere in this report. These amounts relate to our coalpurchase commitments with Mirant Americas Energy Marketing.

(5)          Otherpurchase commitments represent open purchase orders less invoices received oraccrued related to open purchase orders for general procurement and servicespurchased in the ordinary 

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course of business. Theseinclude construction, maintenance and labor activities at our generationfacilities. The estimated walk away cost related to our construction activitiesis approximately $1 million as of December 31, 2004.

(6)          Liabilities subject tocompromise represent liabilities incurred prior to the Petition Date. Asdiscussed in Note 2 to our consolidated financial statements containedelsewhere in this report, the amounts of liabilities subject to compromiserepresent our estimate of known or potential pre-petition claims that we expectwill be resolved in the bankruptcy process. Adjustments to liabilities subjectto compromise may result from negotiations with the respective creditors,actions of the Bankruptcy Court, rejection of executory contracts and thedetermination as to the value of any such claim or the value of the respectiveobligor.

***Cash Flows***

Our cash flows related to revenues recognized from ouraffiliates and nonaffiliates, and the related capital contribution receivedpursuant to the ECSA, generally were received in the month followingrecognition in the income statement. Our cash payments related to servicesrendered by our affiliates and nonaffiliates generally are paid in the monthfollowing the month the services are recorded as an expense.

*OperatingActivities.  *Net cash provided by operating activitieswas $131 million in 2004 as compared to $104 million in 2003. The $27 millionincrease is detailed as follows (in millions):
| ** **                                                                                                   | ** ** | **Years Ended  December 31,** | ** ** | **Increase** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                                                                   | ** ** | **2004**                                | ** ** | **2003**     | ** ** | **(Decrease)** | ** ** |
| Cash provided by  (used in) operating activities excluding working capital and other assets and  liabilities |       | $                                       | 266        |         | $          | (4 | ) |   | $ | 270 |   |   |
| Cash (used in)  provided by working capital and other assets and liabilities                                 |       | (135                                    | )          | 108          |       |   | (243 | ) |   |
| Net cash provided  by operating activities                                                                   |       | $                                       | 131        |         | $          | 104 |   |   | $ | 27 |   |   |

 

Net cash provided by operating activities, excludingthe effects of working capital, was $266 million in 2004 compared tonet cash used in operating activities of $4 million in 2003. Our gross marginincreased $148 million, which included an increase of $18 million of unrealizedlosses on derivative instruments. The increase in cash related to the $166million increase in realized gross margin is primarily due to the terminationof the ECSA, higher market prices for power, capacity and ancillary servicesfor our Mid-Atlantic assets, and an increase in generation volumesproduced by our New England assets. Cash provided by operating activities alsoimproved as a result of lower interest expense associated with the suspensionof payments on our bonds due to the Chapter 11 proceedings.

In 2004, working capital changes, which are reflectedas changes in operating assets and liabilities, required $135 million incash compared to providing $108 million of cash in 2003. Decreases in cashfrom working capital changes were a result of the change in inventory of $74million which was primarily due to increased prices on SO2 allowances and thechange in customer accounts receivable and affiliate receivable of $399 millionwhich was primarily due to intercompany cash management activity. This wasoffset by increases in cash primarily due to the changes in payables toaffiliate and accounts payable and accrued liabilities of $93 million,accrued taxes of $79 million and prepaid rent of $45 million.

*Investing activities:  *Netcash used in investing activities totaled $41 million in 2004, as compared to$24 million in 2003. In 2004, the proceeds from the sale of the Bowline unit 3turbines were $42 million offset by capital expenditures of $83 million. In2003, the proceeds from the sale of our Neenah plant in Wisconsin were $109million offset by $118 million of capital expenditures and a net increase innotes receivable from affiliate of $19 million.

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*Financing activities:  *Netcash provided in financing activities had no activity in 2004, as compared tonet cash used of $11 million in 2003. In 2003, we received $55 million incapital contributions pursuant to the ECSA prior to the termination of the ECSAin May 2003. In 2003 capital contributions received and dividends paid were$78 million and $150 million, respectively, prior to the suspension of suchactivities due to the bankruptcy proceedings in 2003. Additionally, we received$6 million net from the issuance of notes payable to affiliate in 2003.

**CriticalAccounting Policies and Estimates**

The accounting policiesdescribed below are considered critical to obtaining an understanding of ourconsolidated financial statements because their application requiressignificant estimates and judgments by management in preparing our consolidatedfinancial statements. Management’s estimates and judgments are inherentlyuncertain and may differ significantly from actual results achieved. We believethat the following critical accounting policies and the underlying estimatesand judgments involve a higher degree of complexity than others do. Wediscussed the selection of and application of these accounting policies withour Board of Managers and our independent auditors.

***Potential Applicability of Fresh Start Accounting***

We may be required, as part of our emergence frombankruptcy protection, to adopt fresh start accounting in a future period. Iffresh start accounting is applicable, our assets and liabilities will berecorded at fair value as of the fresh start reporting date. The fair value ofour assets and liabilities may differ materially from the recorded values ofassets and liabilities on our consolidated balance sheets. In addition if freshstart accounting is required, our financial results after the application offresh start accounting will be different than historical trends and thosedifferences may be material.

See Note 2 to ourconsolidated financial statements for further information on our accountingwhile in bankruptcy.

***Accounting for Price Risk Management Activities***

See Note 8 to our consolidated financial statementsfor further information on financial instruments related to price riskmanagement activities.

Our business uses derivatives and other energycontracts to economically hedge our electricity generation assets. We use avariety of derivative contracts, such as futures, swaps and option contracts,in the management of our business. Such derivative contracts have varying termsand durations, or tenors, which range from a few days to a number of years,depending on the instrument.

Most of these activities are reflected in ourfinancial statements at fair value, with changes in fair value recognizedcurrently in earnings. The fair value of these contracts is included in pricerisk management assets and liabilities—affiliate in our consolidated balancesheets. Certain transactions do not meet the definition of a derivative or areconsidered normal purchases or normal sales and, therefore, qualify for the useof accrual accounting.

The fair value amounts contained within ourconsolidated financial statements are estimates based largely on the mid-pointof quoted market prices. The mid-point may vary significantly from the bid orask price for some delivery points. If no active market exists, we estimate thefair value of certain derivative contracts using quantitative pricing models.Our modeling techniques include assumptions for market prices, correlation andvolatility, such as using the prices of one delivery point to calculate theprice of the contract’s delivery point. The degree of complexity of our pricingmodels increases for longer duration contracts, contracts with multiple pricingfeatures and off-hub delivery points.

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The fair value of price risk management assets—affiliateand price risk management liabilities—affiliate in our consolidated balancesheets are also impacted by our assumptions regarding interest rate andcounterparty credit risk. The nominal value of the contracts is discountedusing a forward interest rate curve based on the London InterBank Offered Rate(“LIBOR”). In addition, the fair value of our derivative contracts is reducedto reflect the estimated risk of default of counterparties on their contractualobligations to us.

The amounts recorded asrevenues—affiliate and as cost of fuel, electricity and other products—affiliatechange as estimates are revised to reflect actual results and changes in marketconditions or other factors, many of which are beyond our control. Because weuse derivatives that do not qualify for cash flow or fair value hedgeaccounting under Statement of Financial Accounting Standard (“SFAS”) 133, ourfinancial statements—including gross margin, operating income and balance sheetratios—are, at times, volatile and subject to fluctuations in value primarilydue to changes in energy and fuel prices.

***Bankruptcy Claims Assessment***

See Note 2 to our consolidated financial statementsfor further information on our bankruptcy proceedings and liabilities subjectto compromise.

Our consolidated financial statements include, asliabilities subject to compromise, our estimated pre-petition liabilitiesand settlements approved by the Bankruptcy Court prior to December 31,2004. In addition, we also reflect as liabilities subject to compromise theprobable claim amounts relating to liabilities for rejected contracts,litigation, accounts payable and accrued liabilities, and debt and otherliabilities (the “Probable Claims Estimates”). These Probable Claims Estimatesrequire management to estimate the likely claim amount that will be allowed bythe Bankruptcy Court prior to the Bankruptcy Court’s ruling on the individualclaims. These estimates are based on reviews of claimants’ supporting materialand assessments by management and outside experts. We expect that ourestimates, although based on the best available information, will change as theclaims are resolved in the Bankruptcy Court.

Thefollowing table summarizes the claims filed in our Chapter 11 case as of December 31,2004:
| ** **                       | ** ** | **Total Number  of Claims** | ** ** | **Total Claims  Exposure** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                            | ** ** | **(in millions)**          | ** ** |
| Total claims  filed              |       |                                  | 775        |                            |       |   | $ | 89,933 |   |   |
| Less:                            |       |                                  |       |                            |       |   |   |   |   |
| Redundant claims                 |       |                                  | 53         |                            |       |   | 1,036 |   |   |
| Claims with basis  for objection |       |                                  | 304        |                            |       |   | 85,918 |   |   |
| Total claims                     |       |                                  | 418        |                            |       |   | 2,979 |   |   |
| Additional scheduled liabilities |       |                                  |       |                            |       |   | 6 |   |   |
| Total claims  exposure           |       |                                  |       |                            |       |   | $ | 2,985 |   |   |

 

The amount of the claims, net of redundancies andamounts for which we have identified a basis for objection, totalsapproximately $3 billion, as summarized above. This amount plus approximately$1.2 billion of estimated liabilities for which claims either have notbeen filed or have been filed with an undetermined amount represents the totalestimate of current claims exposure as of December 31, 2004. The $1.2billion of estimated liabilities is mainly related to our operating leases. Our estimates may be materially different than theamounts ultimately allowed in the Chapter 11 proceedings. The following is asummary of the procedures we performed to calculate the probable claim amountfor each type of claim.

*Contract Rejections:  *Werecorded an estimated damage claim amount for those contracts that we havesuccessfully rejected through the Bankruptcy Court process. We calculated theestimated claim 

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amount as the fair valueof the rejected contract based on what we believe a willing third party wouldpay to us to step into the contract. For certain contracts, these estimatesinvolve long-range commodity price assumptions that are difficult to predict.

*Litigation:  *We assessed ourlegal exposure through discussions with legal counsel and analysis ofapplicable case law and legal precedents. We recorded our best estimate of aloss, or the low end of our range if no estimate was better than anotherestimate within a range of estimates, when the loss was considered probable.For matters that are not probable and/or estimable, we have recorded noliability. Our estimates do not include amounts related to the PEPCOBack-to-Back Agreement. See Note 13 to our consolidated financial statementsfor further discussion.

*Accounts Payable—Affiliate and Nonaffiliate:  *Forall invoiced claims for services performed but not reflected in ourpre-petition accounts payable on our consolidated balance sheets, we recorded aliability subject to compromise equal to the claim amount. For claims relatedto services that we cannot verify were performed or claims related to allegeddamages resulting from our bankruptcy proceedings, we have not recorded anyliability.

*Debt:  *We compared estimateddamage claim amounts for our debt and pre-petition accrued interest obligationsto our records and accrued additional administrative and interest expenses forproperly supported claims.

*Other:  *Otherclaims include claims filed across multiple categories such as taxes andemployee claims. We recorded our best estimate of the probable allowed claimamount for these claims.

***Income Taxes***

See Note 11 to our consolidated financial statementsfor further information on income taxes.

At December 31, 2004, we had a valuationallowance of approximately $666 million primarily related to our U.S. netdeferred tax assets. In assessing the recoverability of our deferred taxassets, we consider whether it is more likely than not that some portion or allof the deferred tax assets will be realized. The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences will be deductible.

As of December 31, 2004, we have approximately$170 million of federal income tax operating loss carryforwards and $300million of net operating loss carryforwards for state income tax purposes.These net operating loss carryforwards are available to offset future federaland state income taxes. The ultimate utilization of our net operating losscarryforwards will depend on several factors, such as the amount of our debtthat is cancelled through the bankruptcy proceedings and the financial plancontained in the proposed Plan. If a portion of our debt is cancelled inbankruptcy, the amount of the cancelled debt will reduce tax attributes such asour NOLs and tax basis on fixed assets which, depending on our proposed Planand certain tax elections, could partially or fully utilize the available NOLs.We intend to include an indication in a later amendment to our Disclosure Statementregarding whether NOLs will be available post-bankruptcy and the projectedtimeframe for utilizing the available NOLs.

We have negotiated,through Mirant, a settlement agreement with the Internal Revenue Service (“IRS”)for certain tax liabilities arising from their audit of our federal income taxreturns for tax years when we were a subsidiary of Southern Company. Thisagreement resulted in an assessment of $14 million including interest. We haveprovided adequate tax provisions in prior years for the recognition of thisliability.

***Long-Lived Assets***

See Note 6 to our consolidated financial statementsfor further information on long-lived assets.

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We evaluate our long-livedassets (property, plant and equipment) and definite-lived intangibles forimpairment whenever indicators of impairment exist or when we commit to sellthe asset. The accounting standards require that if the sum of the undiscountedexpected future cash flows from a long-lived asset or definite-livedintangible is less than the carrying value of that asset, an asset impairmentcharge must be recognized. The amount of an impairment charge is calculated asthe excess of the asset’s carrying value over its fair value, which generallyrepresents the discounted expected future cash flows from that asset or, in thecase of assets we expect to sell, at fair value less costs to sell.

Our evaluations forimpairment require us to apply judgment in estimating future energy prices,environmental and other maintenance expenditures and other cash flows. Ourestimates of the fair value of the assets require estimating useful lives andselecting a discount rate that reflects the risk inherent in future cash flows.

At December 31, 2003,our impairment analysis was prepared incorporating the most recent assumptionsas to future operations and opportunities in connection with Mirant’s and theCompany’s 2004 10-year business plans. The results of the analysisindicated a substantial decrease in nominal cash flows over Mirant’s 10 yearplanning horizon and, in certain cases, an impairment of certain of our long-livedasset and definite-lived intangible asset balances. As a result of thisanalysis we recorded an impairment charge of $1,090 million in 2003.

If actual results are notconsistent with our assumptions used in estimating future cash flows and assetfair values, we may be exposed to additional losses that could be material toour results of operations.

**Goodwilland Other Intangible Assets**

See Note 7 to ourconsolidated financial statements for further information on goodwill and otherintangible assets.

We evaluate our goodwilland indefinite-lived intangible assets for impairment at least annuallyand periodically if indicators of impairment are present. An impairment occurswhen the fair value of a reporting unit is less than its carrying valueincluding goodwill (Step I). For this test our business constitutes a singlereporting unit. The amount of the impairment charge, if an impairment exists, iscalculated as the difference between the implied fair value of the reportingunit goodwill and its carrying value (Step II). We perform our annualassessment of goodwill at October 31 and whenever contrary evidence existsas to the recoverability of goodwill.

The accounting estimatesrelated to determining the fair value of goodwill require management to makeassumptions about future revenues, operating costs and forward commodity pricesover the life of the assets. Our assumptions about future revenues, costs andforward prices require significant judgment because such factors havefluctuated in the past and will continue to do so in the future.

Theresults of our 2003 analysis indicated that goodwill was impaired and werecorded an impairment charge of $1,625, representing the entire balance ofgoodwill. Our fair value was determined using discounted cash flow techniquesand assumptions as to business prospects using the best information available.

The critical assumptionsused in our impairment analysis included the following: assumptions as to thefuture electricity and fuel prices; future levels of gross domestic productgrowth; levels of supply and demand; future operating expenditures and capitalexpenditure requirements; and estimates of our weighted average cost ofcapital.

The above assumptions werecritical to the Company’s determination of the fair value of its goodwill. Thecombined subjectivity and sensitivity of the assumptions and estimates used inthe goodwill impairment analysis could result in a reasonable person concludingdifferently on those critical assumptions and estimates, possibly resulting inan impairment charge having been required for a lesser amount.

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***Litigation***

See “Item 3. Legal Proceedings” and Note 13 toour consolidated financial statements for further information related to ourlegal proceedings.

We are currently involvedin certain legal proceedings. We estimate the range of liability through discussionswith legal counsel and analysis of applicable case law and legal precedents. Werecord our best estimate of a loss, if estimable, or the low end of our rangeif no estimate is better than another estimate within a range of estimates,when the loss is considered probable. As additional information becomesavailable, we reassess the potential liability related to our pendinglitigation and revise our estimates. Revisions in our estimates of thepotential liability could materially impact our results of operations, and theultimate resolution may be materially different from the estimates that wemake.

**Factorsthat Could Affect Future Performance**

***We are a holding company and may not have access tosufficient cash to meet our obligations.***

We are a holding company and as a result, we aredependent upon dividends and other payments from our subsidiaries to generatethe funds necessary to meet our debt service and other obligations. Oursubsidiaries may not generate sufficient cash from operations to enable us tomake principal and interest payments on our indebtedness. In addition, paymentsto us by our subsidiaries will be contingent upon our subsidiaries’ earnings.Our subsidiaries are permitted under the terms of our indebtedness to incuradditional indebtedness that may restrict payments from those subsidiaries tous. We cannot assure you that agreements governing current and futureindebtedness of our subsidiaries will permit those subsidiaries to provide uswith sufficient cash to fund our obligations.

Our subsidiaries are separate and distinct legalentities and they will have no obligation, contingent or otherwise, to pay ourobligations or to make any funds available to pay those obligations, whether bydividend, distribution, loan or other payment. In addition, our obligationswill be effectively subordinated to the obligations or indebtedness of any ofour subsidiaries.

A substantial portion of our cash provided byoperating activities is generated by Mirant Mid-Atlantic. In the event it weresubject to the leveraged leases as currently constituted after it emerged frombankruptcy, Mirant Mid-Atlantic would not be permitted to make any dividends,distributions and other restricted payments unless (1) it satisfies thefixed charge coverage ratio on a historical basis for the last period of fourfiscal quarters, (2) it is projected to satisfy the fixed charge coverageratio for the next two periods of four fiscal quarters, and (3) nosignificant lease default or event of default has occurred and is continuing.If Mirant Mid-Atlantic were to calculate the fixed charge coverage ratio underthe leveraged leases as of June 30, 2005, we expect that it would meet therequired 1.7 to 1.0 ratio for restricted payments, both on an historical andprojected basis. However, the expected historical ratio for June 30, 2005and the projected historical ratio for September 30, 2005 are close to therequired ratio. In the event of a default under the leveraged leases or if therestricted payments test is not satisfied, the cash of Mirant Mid-Atlanticwould not be available for distribution.

***Our revenues are unpredictable because our facilitiesoperate without long-term power purchase agreements, and our revenues andresults of operations depend on market and competitive forces that are beyondour control.***

We sell capacity, energy and ancillary services fromour generating facilities into competitive power markets to Mirant AmericasEnergy Marketing under the Power and Fuel Agreement. The prices for wholesaleelectric energy and energy services are largely based on prevailing marketforces, subject to regulatory caps and therefore, we are not guaranteed anyreturn on our capital investments through mandated rates. The price at which wecan sell our output may fluctuate on a day-to-day basis. However, there are rules suchas price and bid caps that limit the absolute movement of prices, as wouldoccur in a 

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truly deregulated market.Our revenues and results of operations are likely to depend upon prevailingmarket prices, which are influenced by factors that are beyond our control,including:

·       the failure of market rules todevelop mechanisms that provide for capacity compensation in markets where themechanisms do not currently exist;

·       actions by regulators, ISOsand other bodies that could prevent capacity and energy prices from rising tothe level sufficient for full recovery of long run marginal costs of newentrants when supply/demand equilibrium is reached;

·       prevailing market pricesfor fuel oil, coal, natural gas and emissions;

·       the extent of additionalsupplies of electric energy and energy services from our current competitors ornew market entrants, including the development of new generating facilitiesthat may be able to produce electricity less expensively than our generatingfacilities;

·       the extended operation ofnuclear generating plants and other older power plants beyond their presentlyexpected dates of decommissioning;

·       prevailing regulations thataffect our markets and govern the ISOs that oversee these markets, includingany price limitations and other mechanisms to address some of the volatility orilliquidity in these markets or the physical stability of the system;

·       weather conditions; and

·       changes in the rate ofgrowth in electricity usage as a result of such factors as regional economicconditions and implementation of conservation programs.

In addition, unlike mostother commodities, power can only be stored on a very limited basis andgenerally must be produced concurrently with its use. As a result, thewholesale power markets are subject to significant price fluctuations overrelatively short periods of time and can be unpredictable.

***Changes in commodity prices may negatively impact ourfinancial results by increasing the cost of producing power or lowering theprice at which we are able to sell our power, and we may be unsuccessful atmanaging this risk.***

Our generation business is subject to changes in powerprices and fuel costs, which may impact our financial results and financialposition by increasing the cost of producing power and decreasing the amountswe receive from the sale of power. In addition, actual power prices and fuelcosts may differ from our expectations.

We engage in price risk management activities relatedto the sales of electricity and purchases of fuel and we receive income andincur losses from these activities. We may use forward contracts and derivativefinancial instruments, such as futures contracts and options, to manage marketrisks and exposure to fluctuating electricity, coal, natural gas and oilprices. We cannot provide assurance that these strategies will be successful inmanaging our price risks, or that they will not result in net losses to us as aresult of future volatility in electricity and fuel markets.

Additionally, we expect tohave an open position in the market, within our established guidelines,resulting from the management of our portfolio. To the extent open positionsexist, fluctuating commodity prices can impact financial results and financialposition, either favorably or unfavorably. Furthermore, the risk managementprocedures we have in place may not always be followed or may not always workas planned. As a result of these and other factors, we cannot predict withprecision the impact that risk management decisions may have on our businesses,operating results or financial position. Although management devotes aconsiderable amount of attention to these issues, their outcome is uncertain.

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***The accounting for our hedging activities may increasethe volatility in our quarterly and annual financial results.***

We engage incommodity-related marketing and price risk management activities in order toeconomically hedge our exposure to market risk with respect to (1) electricitysales from our generation assets, (2) fuel utilized by those assets and (3) emissionsallowances. We generally attempt to balance our fixed-price physical andfinancial purchases and sales commitments in terms of contract volumes and thetiming of performance and delivery obligations, through the use of financialand physical derivative contracts. These derivatives are accounted for inaccordance with SFAS No. 133 Accounting for Derivative Instruments andHedging Activities, as amended by SFAS No. 137, SFAS No. 138 and SFASNo. 139. SFAS No. 133 requires us to record all derivatives on thebalance sheet at fair value with changes in the fair value resulting fromfluctuations in the underlying commodity prices immediately recognized inearnings, unless the derivative qualifies for hedge accounting treatment.Whether a derivative qualifies for hedge accounting depends upon its meetingspecific criteria used to determine if hedge accounting is and will remainappropriate for the term of the derivative. Economic hedges will not necessarilyqualify for hedge accounting treatment and currently we do not use hedgeaccounting. As a result, we are unable to predict the impact that our riskmanagement decisions may have on our operating results or financial position.

***Operation of our generating facilities involves risksthat may have a material adverse impact on our cash flows and results ofoperations.***

The operation ofour generating facilities involves various operating risks, including:

·       the outputs and efficiencylevels at which those generating facilities perform;

·       interruptions in fuelsupplies;

·       disruptions in thedeliveries of electricity;

·       breakdowns or equipmentfailures (whether due to age or otherwise) or processes;

·       violations of our permitrequirements or revocations of permits;

·       shortages of equipment orspare parts;

·       labor disputes;

·       operator errors;

·       curtailment of operationsdue to transmission constraints;

·       restrictions on emissions;

·       implementation of unproventechnologies in connection with environmental improvements; and

·       catastrophic events such asfires, explosions, floods, earthquakes or other similar occurrences.

A decrease or eliminationof revenues generated by our facilities or an increase in the costs ofoperating such facilities could materially impact our cash flows and results ofoperations, including cash flows available to us to make payments on our debtor our other obligations.

***Our level of indebtedness could adversely affect ourability to raise additional capital to fund our operations, limit our abilityto react to changes in the economy or our industry and prevent us from meetingour obligations under the notes.***

Upon emergencefrom bankruptcy, we will be significantly leveraged and our total indebtednesswill be approximately $3.05 million based on the amount of debt we expect tohave outstanding upon 

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emergence, approximately $1.35 million of which is structurallysenior to any obligations incurred directly by us. This amount does not includeany potential working capital draws under the $750 million to $1 billionsenior secured revolving credit facility. In addition, the Mirant Mid-Atlanticleverage lease has a termination value of approximately $1.4 billion, which isstructurally senior to our obligations with respect to the assets of MirantMid-Atlantic and its subsidiaries.

Our substantial degree of leverage could have importantconsequences for holders of our debt, including the following:

·       it may limit our ability toobtain additional debt or equity financing for working capital, capital expenditures,product development, debt service requirements, acquisitions and generalcorporate or other purposes;

·       a substantial portion ofour cash flows from operations must be dedicated to the payment of principaland interest on our indebtedness and will not be available for other purposes,including our operations, capital expenditures and future businessopportunities;

·       the debt servicerequirements of our other indebtedness could make it more difficult for us tosatisfy our financial obligations;

·       it may limit our ability toadjust to changing market conditions and place us at a competitive disadvantagecompared to our competitors that have less debt; and

·       wemay be vulnerable in a downturn in general economic conditions or in ourbusiness, or we may be unable to carry out capital spending that is importantto our growth.

***We are exposed to the risk of fuel and fueltransportation cost increases and volatility and interruption in fuel supplybecause our facilities generally do not have long-term natural gas, coal andoil fuel supply agreements.***

Many of our powergeneration facilities purchase their fuel requirements under short-termcontracts or on the spot market, either under the Power and Fuel Agreement withMirant Americas Energy Marketing or from third parties. Although we attempt topurchase fuel based on our known fuel requirements, we still face the risks ofsupply interruptions and fuel price volatility as fuel deliveries may notexactly match energy sales due in part to our need to prepurchase inventoriesfor reliability and dispatch requirements. The price we can obtain for the saleof energy may not rise at the same rate, or may not rise at all, to match arise in fuel costs. This may have a material adverse effect on our financialperformance. The volatility of fuel prices could adversely affect our financialresults and operations.

***Our credit ratings impact our ability to access thecapital markets for new borrowings on acceptable terms and our collateralrequirements with counterparties. If we are not able to achieve our anticipatedrating levels after emergence from Chapter 11 and maintain those levels, ourfinancial condition may be materially adversely affected.***

If we are not able toachieve our anticipated credit ratings after emergence from Chapter 11 orif our ratings are lowered significantly from these levels, our business couldbe materially adversely impacted. For example, significant downgrades couldincrease negative sentiment and reactions from our customers, regulators, investors,suppliers, lenders or other credit rating agencies, increase pressure on ourliquidity and reduce our ability to raise capital on acceptable terms. Thesereactions could impair our ability to achieve our business plan.

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***We are exposed to credit risk from Mirant AmericasEnergy Marketing and third parties under contracts and in market transactions.***

Our operations are exposed to the risk thatcounterparties that owe money as a result of market transactions will notperform their obligations. Our results may be materially adversely affected ifany one customer fails to fulfill its contractual obligations and we are unableto find other customers to produce the same level of profitability. As a resultof the failure of a major customer to meet its contractual obligations, we maybe unable to repay obligations under our debt agreements.

Pursuant to servicesagreements with Mirant Americas Energy Marketing, the financial performance ofour generating facilities is dependent on the continued performance by MirantAmericas Energy Marketing of its obligations under this agreement and, inparticular, on its credit. If Mirant Americas Energy Marketing fails to meetits contractual obligations, we may be unable to meet our obligations.

***Certain participants in the wholesale power marketsare able to recover fixed costs through rate base mechanisms, allowing them tobuild, buy and upgrade generation assets without relying exclusively on marketclearing prices to recover their investments, which may give them a competitiveadvantage to us.***

Certain participants in the wholesale markets, including manyregulated utilities, enjoy a lower cost of capital than most merchantgenerators and often are able to recover fixed costs through rate basemechanisms, allowing them to build, buy and upgrade generation assets withoutrelying exclusively on market clearing prices to recover their investments. Thiscould impact our ability to compete effectively and could have an adverseimpact on the revenues generated by our facilities.

***Our operations and activities are subject to extensiveenvironmental regulation and permitting requirements and could be adverselyaffected by our future inability to comply with environmental laws andrequirements or changes in environmental laws and requirements.***

Our business is subject to extensive environmentalregulation by federal, state and local authorities, which requires continuouscompliance with conditions established by our operating permits. To comply withthese legal requirements, we must spend significant sums on environmentalmonitoring, pollution control equipment and emissions allowances. We may alsobe exposed to compliance risks from plants we have acquired. Although we havebudgeted for significant expenditures to comply with these requirements, actualexpenditures may be greater than budgeted amounts. If we were to fail to complywith these requirements, we could be subject to civil or criminal liability andthe imposition of liens or fines. With the trend toward stricter standards,greater regulation, more extensive permitting requirements and an increase inthe number and types of assets operated by us subject to environmentalregulation, we expect our environmental expenditures to be substantial in thefuture. Our business, operations and financial condition could be adverselyaffected by this trend.

In general, environmental laws, particularly withrespect to air emissions, are becoming more stringent, which may require us toinstall expensive plant upgrades or restrict our operations to meet morestringent standards and in some instances could cause us to shut downoperations at a plant. We cannot always predict the level of capitalexpenditures that will be required due to changing environmental and safetylaws and regulations, deteriorating facility conditions and unexpected events(such as natural disasters or terrorist attacks). The unexpected requirement oflarge capital expenditures could have a material adverse effect on ourfinancial performance and condition.

We may not be able to obtain from time to time desiredenvironmental regulatory approvals. Such approvals could be delayed or subjectto onerous conditions. If there is a delay in obtaining any environmentalregulatory approvals or if onerous conditions are imposed, the operation of ourgenerating facilities or the sale of electricity to third parties could beprevented or become subject to additional costs.

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Except for environmentalliability relating to an oil release from the Piney Point oil pipeline whichoccurred in April 2000, and for which PEPCO has agreed to indemnify Mirantand its subsidiaries, including us, we are generally responsible for allon-site liabilities associated with the environmental condition of ourgenerating facilities, regardless of when such liabilities arose and whetherthey are known or unknown.

***Our business is subject to complex government energylaws and regulations. Changes in these laws by legislatures, or in theiradministration by state and federal regulatory agencies may affect the costs ofoperating our facilities or our ability to operate our facilities. Such costimpacts, in turn, may negatively impact our financial condition and results ofoperations.***

Currently, our facilities are Exempt WholesaleGenerators (“EWGs”) that sell electricity into the wholesale market. Generally,we are subject to regulation by the FERC regarding the terms and conditions ofwholesale service and rates, as well as by state agencies regarding physicalaspects of the generating facilities. The majority of our generation is sold atmarket prices under the market based rate authority granted by the FERC. Ifcertain conditions are not met, the FERC has the authority to withhold orrescind market based rate authority and require sales to be made based on costof service rates. Such cases are typically settled rather than litigated tocompletion, adding additional uncertainty to the process. A loss of our marketbased rate authority could have a materially negative impact on our generationbusiness.

Even where market based rate authority has beengranted, the FERC frequently imposes various forms of price and operatingrestrictions where it determines that market power exists and that the publicinterest requires such market power to be mitigated. These restrictions arefrequently administered via bidding and scheduling rules administered byISOs and RTOs. In the fall of 2004, PJM completed its integration of AEP andDP&L into the PJM RTO, and AEP and DP&L were deemed to be capable ofproviding capacity to all areas of PJM. This has severely depressed forwardpricing for capacity.

Certain of our assets are located in the ERCOT region.Such assets are not generally subject to regulation by the FERC, but aresubject to similar types of regulation by agencies of the State of Texas. Inaddition to direct regulation by the FERC and ERCOT, most of our assets aresubject to rules and terms of participation imposed and administered byvarious RTOs and ISOs. While these entities are themselves ultimately regulatedby the FERC, they can impose rules, restrictions and terms of service that arequasi-regulatory in nature and can have a material adverse impact on ourbusiness.

To conduct our business, we must obtain licenses,permits and approvals for our plants. These licenses, permits and approvals canbe in addition to any environmental permits required. No assurance can beprovided that we will be able to obtain and comply with all necessary licenses,permits and approvals for these plants. If we cannot comply with all applicableregulations, our business, results of operations and financial condition couldbe adversely affected.

Currently, the state of California is assertingjurisdiction over EWGs to impose operating and maintenance standards. Includedin these standards are certain provisions that would restrict our ability tocontrol economic decisions with regard to the use, ownership transfer andretirement of our assets in California. The state’s ability to legally imposesuch restrictions is uncertain. However, if the regulations are imposed intheir current form, and such imposition withstands any legal challenge thatmight be undertaken, then our business, financial condition and results ofoperation may be materially adversely affected.

We cannot predict whetherthe federal or state legislatures will adopt legislation relating to therestructuring of the energy industry. There are proposals in many jurisdictionsto both advance and to roll back the movement toward competitive markets forsupply of electricity, at both the wholesale and retail level. In particular,the 109th United States Congress is considering legislation thatcould contain provisions 

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thatcould impair competition in existing or evolving power markets in which weoperate, including restrictions on the authority of the FERC under the FederalPower Act. To date, the House of Representatives and the Senate have eachpassed an energy bill. This has resulted in the formation of a conferencecommittee tasked with reaching consensus on a bill to be returned to each bodyfor approval. However, there are several contentious issues to be walkedthrough including the MBTE Liability Waiver, Energy Tax Incentives andRenewable Portfolio Standards. Hence, it is unclear what form the final versionof the bill will take, and if enacted into law the material impact, if any, itwill have on our business activities. In addition, any legislation that wouldlead to an environment dominated by large, vertically integrated utilities anda concentration of ownership of such utilities could impact our ability tocompete successfully, and our business and results of operations could suffer.We cannot provide assurance that the introductions of new laws, or other futureregulatory developments, will not have a material adverse impact on ourbusiness, operations or financial condition.

***Changes in technology may significantly impact ourgeneration business by making our power plants less competitive.***

A basic premise of ourgeneration business is that generating power at central plants achieveseconomies of scale and produces electricity at a low price. There are othertechnologies that can produce electricity, most notably fuel cells,microturbines, windmills and photovoltaic solar cells. It is possible thatadvances in technology will reduce the cost of alternative methods ofelectricity production to levels that are equal to or below that of mostcentral station electric production, which could have a material impact on ourresults of operations.

***Terrorist attacks, future war or risk of war mayadversely impact our results of operations, our ability to raise capital or ourfuture growth.***

As power generators, weface above-average risk of an act of terrorism, either a direct act against oneof our generating facilities or an inability to operate as a result of systemicdamage resulting from an act against the transmission and distributioninfrastructure that we use to transport our power. If such an attack were tooccur, our business, financial condition and results of operations could bematerially adversely impacted. In addition, such an attack could impact ourability to service our indebtedness, our ability to raise capital and ourfuture growth opportunities.

***Our operations are subject to hazards customary to thepower generation industry. We may not have adequate insurance to cover all ofthese hazards.***

Our operations are subjectto many hazards associated with the power generation industry, which may exposeus to significant liabilities for which we may not have adequate insurancecoverage. Power generation involves hazardous activities, including acquiring,transporting and unloading fuel, operating large pieces of rotating equipmentand delivering electricity to transmission and distribution systems. Inaddition to natural risks such as earthquake, flood, lightning, hurricane andwind, hazards such as fire, explosion, collapse and machinery failure areinherent risks in our operations. These hazards can cause significant personalinjury or loss of life, severe damage to and destruction of property, plant andequipment, contamination of, or damage to, the environment and suspension ofoperations. The occurrence of any one of these events may result in our beingnamed as a defendant in lawsuits asserting claims for substantial damages,environmental cleanup costs, personal injury and fines and/or penalties. Wemaintain an amount of insurance protection that we consider adequate, but wecannot assure that our insurance will be sufficient or effective under allcircumstances and against all hazards or liabilities to which we may besubject. A successful claim for which we are not fully insured could hurt ourfinancial results and materially harm our financial condition.

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**Item 7A.**                *Quantitative and Qualitative Disclosures about Market Risk*

We are exposed to marketrisks associated with changes in commodity prices and to credit risks.

**Commodity Price Risk**

In connection with our power generating business, weenter into a variety of short and long-term agreements with Mirant AmericasEnergy Marketing and third parties to acquire the fuel for generatingelectricity. A portion of our fuel is also purchased in the spot market. Theelectricity we produce is sold to Mirant Americas Energy Marketing under thePower and Fuel Agreement and third parties at market prices. As a result, ourfinancial performance varies depending on changes in the prices of thesecommodities.

The financial performance of our power generatingbusiness is influenced by the difference between the cost of converting sourcefuel, such as natural gas or coal, into electricity, and the revenue we receivefrom the sale of that electricity. The difference between the cost of aspecific fuel used to generate one MWh of electricity and the market value ofthe electricity generated is commonly referred to as the “spark spread.” Absentthe impacts of our asset management activities, the operating margins that werealize are equal to the difference between the spark spread and the cost ofoperating the plants that produce the electricity sold.

Spark spreads are dependent on a variety of factorsthat influence the cost of fuel and the sales price of the electricitygenerated over the longer-term, including spark spreads of additional plantgenerating capacity in the regions in which we operate, plant outages, weatherand general economic conditions. As a result of these influences, the cost offuel and electricity prices do not always change by the same magnitude ordirection, which results in spark spreads widening or narrowing over time.

Through our asset management activities, we enter intoa variety of exchange-traded and over the counter (“OTC”) energy andenergy-related derivative contracts, such as forward contracts, futurescontracts, option contracts and financial swap agreements to manage ourexposure to commodity price risk and changes in spark spreads. Thesederivatives have varying terms and durations, or tenors, which range from a fewdays to a number of years, depending on the instrument. Derivative energycontracts required to be reflected at fair value are presented as price riskmanagement assets and liabilities-affiliate in the accompanying consolidatedbalance sheets. The net changes in their market values are recognized in incomein the period of change. The determination of fair value considers variousfactors, including closing exchange or OTC market price quotations, time value,credit quality, liquidity and volatility factors underlying options andcontracts.

The volumetric weighted average maturity, or weightedaverage tenor, of the price risk management portfolio at December 31, 2004was approximately six months. The net notional amount, or net short position,of the price risk management assets and liabilities-affiliate at December 31,2004 was approximately 11 million equivalent MWh.

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Thefair values of our price risk management assets and liabilities- affiliate, netof credit reserves, as of December 31, 2004 are included in the followingtable (in millions):
| ** **     | ** ** | **Current Price Risk  Management Assets,  net Asset (Liability)** | ** ** | **Noncurrent Price Risk  Management Assets,  net Asset (Liability)** | ** ** | **Current Price Risk  Management Liabilities,  net Asset (Liability)** | ** ** | **Noncurrent Price Risk  Management Liabilities,  net Asset (Liability)** | ** ** |
|----------------|------------|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| Electricity    |       |                                                                                       | $          | (17                                                                                           | )          |                                                                                            |       | $                                                                                                  | —     |   |   |   | $ | (61 | ) |   |   | $ | (5 | ) |   |
| Natural gas    |       |                                                                                       | 3          |                                                                                          |       |                                                                                            | 1          |                                                                                               |       |   | 2 |   |   |   | 3 |   |   |
| Crude oil      |       |                                                                                       | 22         |                                                                                          |       |                                                                                            | —     |                                                                                               |       |   | — |   |   |   | 1 |   |   |
| Residual/other |       |                                                                                       | 3          |                                                                                          |       |                                                                                            | —     |                                                                                               |       |   | (3 | ) |   |   | — |   |   |
| Total          |       |                                                                                       | $          | 11                                                                                            |       |                                                                                            |       | $                                                                                                  | 1          |   |   |   | $ | (62 | ) |   |   | $ | (1 | ) |   |

 

**Value at Risk**

Effective November 5, 2003, the Risk ManagementPolicy was amended to change or clarify limits related to our asset managementactivities. There is now no value at risk (“VaR”) limit with respect to ourasset management activities, as these activities are only allowable if theyreduce the commodity price exposure of our generation assets. We manage themarket risks associated with our asset management activities in conjunctionwith the physical generation assets that they are designed to economicallyhedge.

We manage the price riskassociated with asset management activities through a variety of methods. Toensure that economic hedge positions are risk reducing in nature, we measurethe impact of each asset management transaction executed relative to theoverall asset position, including previously executed economic hedge transactions,that it is designed to economically hedge. See “Critical Accounting PoliciesEstimates” for accounting treatment for asset management activities.

*Credit andCollection Risk*

We are exposed to creditrisk from Mirant Americas Energy Marketing to the extent that Mirant AmericasEnergy Marketing is unable to collect amounts owed from third parties for theresale of our energy products.

**Item 8.**                        *Financial Statements and Supplementary Data*

The information required hereunder is included in thisreport as set forth in the “Index to Financial Statements” on page F-1.

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**INDEX TO FINANCIAL STATEMENTSMIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)**
|                                                                                                                   | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report  of Independent Registered Public Accounting Firm                                                          |       | F-2      |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2004, 2003 and  2002                 |       | F-3      |   |
| Consolidated  Balance Sheets as of December 31, 2004 and 2003                                                |       | F-4      |   |
| Consolidated  Statements of Member’s Equity for the Years Ended December 31, 2004,  2003 and 2002  |       | F-5      |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and  2002                 |       | F-6      |   |
| Notes to Consolidated Financial  Statements                                                                       |       | F-8      |   |

 

F-1

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**Reportof Independent Registered Public Accounting Firm**

The MemberMirant Americas Generation, LLC:

We have audited the accompanying consolidated balancesheets of Mirant Americas Generation, LLC (a wholly-owned indirect subsidiaryof Mirant Corporation) and subsidiaries (the “Company”) as of December 31,2004 and 2003, and the related consolidated statements of operations, member’sequity, and cash flows for each of the years in the three-year period ended December 31,2004. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Mirant Americas Generation, LLC and subsidiaries as of December 31,2004 and 2003, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2004,in conformity with U.S. generally accepted accounting principles.

The consolidated financial statements have beenprepared assuming that the Company will continue as a going concern. TheCompany incurred a loss of $3.0 billion from operations during 2003, and, asdiscussed in Note 2 to the consolidated financial statements, filed voluntarypetitions, along with Mirant Corporation, the Company’s ultimate parent, andother Mirant Corporation subsidiaries, seeking to reorganize under Chapter 11of the federal bankruptcy laws. Mirant Corporation incurred losses of $476 million,$3.8 billion and $2.4 billion from operations during 2004, 2003 and 2002,respectively, sold significant assets during 2003 and 2002, and has anaccumulated deficit at December 31, 2004 and 2003. All of these conditionsraise substantial doubt about the Company’s ability to continue as a goingconcern. Management’s plans in regard to these matters are also described inNote 2. The financial statements do not include any adjustments that mightresult from the outcome of these uncertainties.

Asdiscussed in Note 2 to the consolidated financial statements, in 2003 theCompany adopted the provisions of Statement of Position 90-7, *Financial Reporting by Entities in Reorganization Under the BankruptcyCode* and as discussed in Note 3 to the consolidated financialstatements, in 2003 the Company changed its method of accounting for assetretirement obligations.
|                    | KPMG LLP |
|--------------------|----------|
| Atlanta, GA        |
| July 26, 2005 |

 

F-2

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-In-Possession)CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                                                                                                        | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2004**                                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                        | ** ** | **(in millions)**                                    | ** ** |
| **Operating Revenue:**                                                                                                                            |       |                                                      |       |   |   |   |   |
| Affiliate                                                                                                                                         | ** ** | **$**                                                     | **1,795**  |   | $ | 1,681 |   | $ | 1,706 |   |
| Nonaffiliate                                                                                                                                      | ** ** | **319**                                                   |       | 334 |   | 233 |   |
| Total operating revenue                                                                                                                           | ** ** | **2,114**                                                 |       | 2,015 |   | 1,939 |   |
| Cost of fuel,  electricity and other products—affiliate                                                                                      | ** ** | **1,094**                                                 |       | 1,174 |   | 890 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                                                                                   | ** ** | **195**                                                   |       | 164 |   | 88 |   |
| Total cost of fuel,  electricity and other products                                                                                               | ** ** | **1,289**                                                 |       | 1,338 |   | 978 |   |
| **Gross  Margin**                                                                                                                                 | ** ** | **825**                                                   |       | 677 |   | 961 |   |
| **Operating Expenses:**                                                                                                                           |       |                                                      |       |   |   |   |   |
| Generation facilities  rent                                                                                                                       | ** ** | **103**                                                   |       | 96 |   | 96 |   |
| Depreciation and  amortization                                                                                                                    | ** ** | **89**                                                    |       | 121 |   | 110 |   |
| Operations and  maintenance—affiliate, including restructuring charges of $4, $6  and $8 in 2004, 2003 and 2002, respectively | ** ** | **260**                                                   |       | 194 |   | 190 |   |
| Operations and  maintenance—nonaffiliate, including restructuring charges of $4 and  $11 in 2003 and 2002, respectively            | ** ** | **218**                                                   |       | 236 |   | 272 |   |
| Loss (gain) on sales of  assets, net                                                                                                              | ** ** | **65**                                                    |       | (3 | ) | — |   |
| Impairment losses                                                                                                                                 | ** ** | **—**                                                |       | 2,715 |   | 20 |   |
| Total operating expenses                                                                                                                          | ** ** | **735**                                                   |       | 3,359 |   | 688 |   |
| **Operating  Income (Loss)**                                                                                                                      | ** ** | **90**                                                    |       | (2,682 | ) | 273 |   |
| **Other Income (Expense), net:**                                                                                                                  |       |                                                      |       |   |   |   |   |
| Interest  income—affiliate                                                                                                                   | ** ** | **—**                                                | ** ** | 20 |   | 51 |   |
| Interest  income—nonaffiliate                                                                                                                | ** ** | **—**                                                |       | 2 |   | 1 |   |
| Interest  expense—affiliate                                                                                                                  | ** ** | **(5**                                                    | **)**      | — |   | (10 | ) |
| Interest  expense—nonaffiliate                                                                                                               | ** ** | **(1**                                                    | **)**      | (204 | ) | (210 | ) |
| Other, net                                                                                                                                        | ** ** | **8**                                                     |       | 9 |   | 15 |   |
| Total other income, net                                                                                                                           | ** ** | **2**                                                     |       | (173 | ) | (153 | ) |
| **Income  (Loss) from Continuing Operations Before Reorganization Items and Income  Taxes**                                        | ** ** | **92**                                                    |       | (2,855 | ) | 120 |   |
| Reorganization items,  net                                                                                                                        | ** ** | **89**                                                    |       | 25 |   | — |   |
| (Benefit) provision for  income taxes                                                                                                             | ** ** | **(19**                                                   | **)**      | 113 |   | 56 |   |
| **Income  (Loss) from Continuing Operations**                                                                                                     | ** ** | **22**                                                    |       | (2,993 | ) | 64 |   |
| **Income from Discontinued Operations,  net of tax provision of $1 and $10 for 2003 and 2002, respectively**                                 | ** ** | **—**                                                | ** ** | 7 |   | 14 |   |
| **Income  (Loss) before Cumulative Effect of Change in Accounting Principle**                                                                     | ** ** | **22**                                                    |       | (2,986 | ) | 78 |   |
| **Cumulative  Effect of Change in Accounting Principle, net of taxes**                                                                            | ** ** | **—**                                                |       | (3 | ) | — |   |
| **Net Income (Loss)**                                                                                                                             | ** ** | **$**                                                     | **22**     |   | $ | (2,989 | ) | $ | 78 |   |

 

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

F-3

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                      | ** ** | **December 31,**  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                      | ** ** | **2004**               | ** ** | **2003** | ** ** |
| ** **                                                                                      | ** ** | **(in millions)** | ** ** |
| **Assets**                                                                                      |       |                   |       |   |   |
| **Current Assets:**                                                                             |       |                   |       |   |   |
| Cash and cash equivalents                                                                       | ** ** | **$**                  | **414**    |   | $ | 324 |   |
| Receivables:                                                                                    |       |                   |       |   |   |
| Affiliate, less allowance  for uncollectibles of $123 for 2004 and 2003, respectively | ** ** | **246**                |       | 200 |   |
| Customer accounts                                                                               | ** ** | **11**                 |       | 13 |   |
| Price risk management  assets—affiliate                                                    | ** ** | **11**                 |       | 7 |   |
| Prepaid rent and other  payments                                                                | ** ** | **133**                |       | 152 |   |
| Inventory                                                                                       | ** ** | **162**                |       | 96 |   |
| Other current assets                                                                            | ** ** | **35**                 |       | 17 |   |
| Total current assets                                                                            | ** ** | **1,012**              |       | 809 |   |
| **Property,  Plant, and Equipment, net**                                                        | ** ** | **2,109**              |       | 2,214 |   |
| **Noncurrent Assets:**                                                                          |       |                   |       |   |   |
| Other intangible assets,  net                                                                   | ** ** | **207**                |       | 215 |   |
| Notes receivable from  affiliate                                                                | ** ** | **478**                |       | 478 |   |
| Price risk management  assets—affiliate                                                    | ** ** | **1**                  |       | 2 |   |
| Prepaid rent                                                                                    | ** ** | **197**                |       | 177 |   |
| Other, less allowance for  uncollectibles of $49 and $54 for 2004 and 2003                      | ** ** | **26**                 |       | 8 |   |
| Total noncurrent assets                                                                         | ** ** | **909**                |       | 880 |   |
| **Total  Assets**                                                                               | ** ** | **$**                  | **4,030**  |   | $ | 3,903 |   |
| **Liabilities  and Member’s Equity**                                                       |       |                   |       |   |   |
| **Current Liabilities:**                                                                        |       |                   |       |   |   |
| Accounts payable and  accrued liabilities                                                       | ** ** | **$**                  | **51**     |   | $ | 38 |   |
| Payable to affiliates                                                                           | ** ** | **52**                 |       | 82 |   |
| Price risk management  liabilities—affiliate                                               | ** ** | **62**                 |       | 8 |   |
| Revenue subject to refund                                                                       | ** ** | **5**                  |       | 5 |   |
| Accrued taxes—affiliate                                                                    | ** ** | **51**                 |       | 79 |   |
| Accrued taxes                                                                                   | ** ** | **122**                |       | 30 |   |
| Other current liabilities                                                                       | ** ** | **8**                  |       | — |   |
| Total current liabilities                                                                       | ** ** | **351**                |       | 242 |   |
| **Noncurrent  Liabilities:**                                                                    |       |                   |       |   |   |
| Price risk management  liabilities—affiliate                                               | ** ** | **1**                  |       | 11 |   |
| Other noncurrent  liabilities                                                                   | ** ** | **46**                 |       | 60 |   |
| Total noncurrent  liabilities                                                                   | ** ** | **47**                 |       | 71 |   |
| **Liabilities  Subject to Compromise**                                                          | ** ** | **3,438**              |       | 3,418 |   |
| **Commitments  and Contingencies**                                                              |       |                   |       |   |   |
| **Member’s  Equity:**                                                                      |       |                   |       |   |   |
| Member’s interest                                                                          | ** ** | **3,853**              |       | 3,853 |   |
| Accumulated deficit                                                                             | ** ** | **(3,659**             | **)**      | (3,681 | ) |
| Total member’s equity                                                                      | ** ** | **194**                |       | 172 |   |
| **Total Liabilities and Member’s Equity**                                                  | ** ** | **$**                  | **4,030**  |   | $ | 3,903 |   |

 

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

F-4

----

**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY**
| ** **                                                           | ** ** | ** **                    | ** ** | **Capital**             | ** ** | **Retained**     | ** ** | **Accumulated**   | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                           | ** ** | ** **                    | ** ** | **Contribution**        | ** ** | **Earnings**     | ** ** | **Other**         | ** ** | **Comprehensive** | ** ** |
| ** **                                                           | ** ** | ** Member’s ** | ** ** | **Receivable**          | ** ** | **(Accumulated** | ** ** | **Comprehensive** | ** ** | **Income**        | ** ** |
| ** **                                                           | ** ** | **Interest**                  | ** ** | **from Affiliate** | ** ** | **Deficit)**     | ** ** | **Loss**          | ** ** | **(Loss)**        | ** ** |
| ** **                                                           | ** ** | **(in millions)**        | ** ** |
| **Balance,  December 31, 2001**                                 |       |                          | $          | 3,008                   |       |             |       | $                 | (91        | )                 |       |   | $ | 177 | ** ** |   |   | $ | (75 | ) |   |   |   |   |   |
| Net income                                                           |       |                          | —     |                    |       |             | —     |              |       |              | 78         | ** ** |   |   | — |   |   |   | 78 |   |   |
| Other comprehensive loss                                             |       |                          | —     |                    |       |             | —     |              |       |              | —     | ** ** |   |   | 23 |   |   |   | 23 |   |   |
| Comprehensive income                                                 |       |                          |       |                    |       |             |       |              |       |              |       | ** ** |   |   |   |   |   |   | 101 |   |   |
| Dividends                                                            |       |                          | —     |                    |       |             | —     |              |       |              | (797       | ) |   |   | — |   |   |   |   |   |   |
| Capital contributions—cash                                      |       |                          | 186        |                    |       |             | —     |              |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| Capital contributions—noncash                                   |       |                          | 524        |                    |       |             | —     |              |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| Capital contributions receivable pursuant to ECSA                    |       |                          | 174        |                    |       |             | (174       | )                 |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| Capital contribution received pursuant to ECSA                       |       |                          | —     |                    |       |             | 129        |              |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| Pushdown of tax effects of the implementation of   SFAF No. 142 |       |                          | (37        | )                       |       |             | —     |              |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| **Balance, December 31, 2002**                                  |       |                          | 3,855      |                    |       |             | (136       | )                 |       |              | (542       | ) |   |   | (52 | ) |   |   |   |   |   |
| Net loss                                                             |       |                          | —     |                    |       |             | —     |              |       |              | (2,989     | ) |   |   | — |   |   |   | (2,989 | ) |   |
| Other comprehensive income                                           |       |                          | —     |                    |       |             | —     |              |       |              | —     |   |   |   | 52 |   |   |   | 52 |   |   |
| Comprehensive income                                                 |       |                          |       |                    |       |             |       |              |       |              |       | ** ** |   |   |   |   |   |   | (2,937 | ) |   |
| Dividends                                                            |       |                          | —     |                    |       |             | —     |              |       |              | (150       | ) |   |   | — |   |   |   |   |   |   |
| Capital contributions—cash                                      |       |                          | 78         |                    |       |             | —     |              |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| Capital contributions adjustment pursuant to ECSA  termination       |       |                          | (81        | )                       |       |             | 81         |              |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| Capital contribution received pursuant to ECSA                       |       |                          | —     |                    |       |             | 55         |              |       |              | —     | ** ** |   |   | — |   |   |   |   |   |   |
| Capital contribution—net state   taxes                          |       |                          | 1          |                    |       |             | —     |              |       |              |       | ** ** |   |   | — |   |   |   |   |   |   |
| **Balance, December 31, 2003**                                  |       |                          | 3,853      |                    |       |             | —     |              |       |              | (3,681     | ) |   |   | — |   |   |   |   |   |   |
| Net income                                                           |       |                          | —     |                    |       |             | —     |              |       |              | 22         | ** ** |   |   | — |   |   |   |   |   |   |
| **Balance,  December 31, 2004**                                 | ** ** | ** **                    | **$**      | **3,853**               |       | ** **       | ** ** | **$**             | **—** |              | ** ** | ** ** | **$** | **(3,659** | **)** | ** ** | ** ** | **$** | **—** |   |   |   |   |   |   |

 

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

F-5

----

**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES (Wholly-Owned Indirect Subsidiary of Mirant Corporation) (Debtor-in-Possession) CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                | ** ** | **For the Years ended**   December 31 | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                | ** ** | **(in millions)**                                    | ** ** |
| **Cash Flows from Operating  Activities:**                                                |       |                                                      |       |   |   |   |   |
| Net income (loss)                                                                         | ** ** | **$ 22**                                             |       | $ (2,989 | ) | $   78 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                                      |       |   |   |   |   |
| Cumulative effect of change in accounting principle                                       | ** ** | **—**                                                |       | 3 |   | — |   |
| Depreciation and amortization                                                             | ** ** | **89**                                                    |       | 121 |   | 117 |   |
| Amortization of losses on interest rate swaps                                             | ** ** | **—**                                                |       | 81 |   | 9 |   |
| Unrealized losses (gains) on price risk management  assets and liabilities—affiliate | ** ** | **41**                                                    |       | 22 |   | 85 |   |
| Deferred income taxes                                                                     | ** ** | **1**                                                     |       | 57 |   | (81 | ) |
| Impairment losses                                                                         | ** ** | **—**                                                |       | 2,715 |   | 20 |   |
| Restructuring charges, net of amounts paid                                                | ** ** | **48**                                                    |       | 10 |   | 2 |   |
| Loss on sales of assets                                                                   | ** ** | **65**                                                    |       | — |   | — |   |
| Other, net                                                                                | ** ** | **—**                                                |       | (24 | ) | (25 | ) |
| Changes in  certain assets and liabilities:                                               |       |                                                      |       |   |   |   |   |
| Affiliate receivables                                                                     | ** ** | **(43**                                                   | **)**      | 258 |   | 12 |   |
| Customer accounts receivable                                                              | ** ** | **(16**                                                   | **)**      | 82 |   | (28 | ) |
| Prepaid rent                                                                              | ** ** | **(23**                                                   | **)**      | (68 | ) | 3 |   |
| Other assets                                                                              | ** ** | **3**                                                     |       | 19 |   | (49 | ) |
| Inventory                                                                                 | ** ** | **(65**                                                   | **)**      | 8 |   | 143 |   |
| Accounts payable and accrued liabilities                                                  | ** ** | **(28**                                                   | **)**      | 17 |   | 96 |   |
| Payables to affiliate                                                                     | ** ** | **8**                                                     |       | (130 | ) | (2 | ) |
| Accrued taxes-affiliate                                                                   | ** ** | **(21**                                                   | **)**      | (148 | ) | 139 |   |
| Accrued taxes                                                                             | ** ** | **50**                                                    |       | 98 |   | 6 |   |
| Other liabilities                                                                         | ** ** | **—**                                                |       | (28 | ) | (6 | ) |
| Total adjustments                                                                         | ** ** | **109**                                                   |       | 3,093 |   | 441 |   |
| Net cash provided by operating activities                                                 | ** ** | **131**                                                   |       | 104 |   | 519 |   |
| **Cash  Flows from Investing Activities:**                                                |       |                                                      |       |   |   |   |   |
| Capital expenditures                                                                      | ** ** | **(83**                                                   | **)**      | (118 | ) | (353 | ) |
| Advances to affiliate                                                                     | ** ** | **—**                                                |       | — |   | (8 | ) |
| Repayments of advances to affiliate                                                       | ** ** | **—**                                                |       | — |   | 8 |   |
| Issuance of notes receivables from affiliate                                              | ** ** | **(33**                                                   | **)**      | (139 | ) | (701 | ) |
| Repayments on notes receivable from affiliate                                             | ** ** | **33**                                                    |       | 120 |   | 961 |   |
| Proceeds received from the sale of assets, net                                            | ** ** | **42**                                                    |       | 109 |   | 183 |   |
| Insurance proceeds received                                                               | ** ** | **—**                                                |       | 4 |   | 11 |   |
| Net cash (used  in) provided by investing activities                                      | ** ** | **(41**                                                   | **)**      | (24 | ) | 101 |   |

F-6

----

**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES (Wholly-Owned Indirect Subsidiary of Mirant Corporation) (Continued) (Debtor-in-Possession) CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Cash Flows from Financing Activities:**                                    |       |                     |   |                                               |   |                      |   |
|------------------------------------------------------------------------------|------------|--------------------------|--------|----------------------------------------------------|--------|---------------------------|--------|
| Proceeds from issuance  of debt                                              | ** ** | **—**               |   | —                                             |   | 427                       |   |
| Repayment of debt                                                            | ** ** | **—**               |   | —                                             |   | (200                      | )      |
| Advances from affiliate                                                      | ** ** | **—**               |   | —                                             |   | 60                        |   |
| Repayments of advances  from affiliate                                       | ** ** | **—**               |   | —                                             |   | (60                       | )      |
| Proceeds from issuance  of notes payable to affiliate                        | ** ** | **—**               |   | 54                                                 |   | 220                       |   |
| Repayment of notes  payable to affiliate                                     | ** ** | **—**               |   | (48                                                | )      | (345                      | )      |
| Capital contributions                                                        | ** ** | **—**               |   | 78                                                 |   | 179                       |   |
| Payment of dividends                                                         | ** ** | **—**               |   | (150                                               | )      | (797                      | )      |
| Capital contributions  received from affiliate pursuant to ECSA              | ** ** | **—**               |   | 55                                                 |   | 129                       |   |
| Cash received from  contribution of Mirant New England, LLC                  | ** ** | **—**               |   | —                                             |   | 7                         |   |
| Net cash used in  financing activities                                       | ** ** | **—**               |   | (11                                                | )      | (380                      | )      |
| **Net Increase in Cash and Cash  Equivalents**                               | ** ** | **90**                   |   | 69                                                 |   | 240                       |   |
| **Cash and Cash Equivalents,  beginning of year**                            | ** ** | **324**                  |   | 255                                                |   | 15                        |   |
| **Cash and Cash Equivalents, end  of year**                                  | ** ** | **$ 414**           |   | $    324                       |   | $ 255                |   |
| **Supplemental Cash Flow  Disclosures:**                                     |       |                     |   |                                               |   |                      |   |
| Cash paid for interest,  net of amounts capitalized                          | ** ** | **$   6** |   | $    119                       |   | $ 220                |   |
| Refunds received for  income taxes                                           | ** ** | **$  (2**      | **)**  | $      —        |   | $ (40                | )      |
| Cash paid for  reorganization items                                          | ** ** | **$ 60**            |   | $      —        |   | $   — |   |
| **Noncash Financing Activities:**                                            |       |                     |   |                                               |   |                      |   |
| Contribution of notes  payable to Mirant Americas to equity                  | ** ** | **$ —**        |   | $      —        |   | $ 217                |   |
| Capital contribution of  Mirant New England, LLC                             | ** ** | **$ —**        |   | $      —        |   | $ 287                |   |
| Capital contribution  from forgiveness of tax liability from Mirant Americas | ** ** | **$ —**        |   | $      —        |   | $   20     |   |
| Capital contributions  receivable from affiliate pursuant to ECSA            | ** ** | **$ —**        |   | $      —        |   | $ 174                |   |
| Capital contributions  adjustment pursuant to ECSA termination               | ** ** | **$ —**        |   | $    (81                       | )      | $   — |   |
| Capital contribution—net  state taxes                                   | ** ** | **$ —**        |   | $        1 |   | $   — |   |

 

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

F-7

----

**MIRANT AMERICASGENERATION AND SUBSIDIARIES(Debtor-in-Possession)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002**

**1.   Backgroundand Description of Business**

Mirant Americas Generation, LLC, including itssubsidiaries (collectively, the “Company” or “ Mirant Americas Generation”), isa national independent power provider and an indirect wholly-owned subsidiaryof Mirant Corporation (“Mirant”). The Company produces and sells electricity inthe United States under fixed price contracts and on the spot market to itsenergy marketing affiliate Mirant Americas Energy Marketing L.P. (“MirantAmericas Energy Marketing”), utilities and energy merchants. The Company sellssubstantially all of the output from its generating facilities in the forwardand spot markets and the remainder under contracts with third parties. Inaddition, Mirant Americas Energy Marketing arranges for the supply ofsubstantially all of the fuel used by the Company’s generating units andemissions allowances which are utilized in connection with the business. TheCompany uses derivative financial instruments, such as commodity forwards,futures, options and swaps to manage its exposure to fluctuations in electricenergy and fuel prices. The Company is a Delaware limited liability company andowns or leases approximately 11,000 megawatts (“MW”) of electric generationcapacity in the United States. The Company operates 56 generating units at19 plants serving customers located near major metropolitan load centersin Maryland, Virginia, California, New York, Massachusetts and Texas.

The Company has enteredinto a number of service agreements with subsidiaries of Mirant related tosales of its electric power and the procurement of fuel, and labor andadministrative services essential to operating its business. These relatedparties are primarily Mirant, Mirant Americas Energy Marketing and MirantServices, LLC (“Mirant Services”). The arrangements with these companies arediscussed in Note 5.

**2.   ProceedingsUnder Chapter 11 of the Bankruptcy Code**

On July 14, 2003 and July 15, 2003(collectively, the “Petition Date”), the Company and its subsidiaries wereamong the 74 wholly-owned Mirant subsidiaries in the United States that, alongwith Mirant (collectively, the “Original Debtors”), filed voluntary petitionsfor relief under Chapter 11 of the Bankruptcy Code in the United StatesBankruptcy Court for the Northern District of Texas, Fort Worth Division (“BankruptcyCourt”). On August 18, 2003, October 3, 2003 and November 18,2003, four additional wholly-owned subsidiaries and four affiliates of Mirantcommenced Chapter 11 cases under the Bankruptcy Code (together with theOriginal Debtors, the “Mirant Debtors”). The Chapter 11 cases of the MirantDebtors are being jointly administered for procedural purposes only under casecaption *In re Mirant Corporation**et al*., Case No. 03-46590 (DML).

The Company, along with the other Mirant Debtors, isoperating its business as debtors-in-possession under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicablecourt orders, as well as other applicable laws and rules. In general, each ofthe Mirant Debtors, as a debtor-in-possession, is authorized under theBankruptcy Code to continue to operate as an ongoing business, but may notengage in transactions outside the ordinary course of business without theprior approval of the Bankruptcy Court.

The Office of the United States Trustee hasestablished a committee of unsecured creditors for Mirant and a committee ofunsecured creditors for Mirant Americas Generation (collectively, the “CreditorCommittees”). The Office of the United States Trustee also has established acommittee of 

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equity security holders ofMirant (the “Equity Committee” and, collectively with the Creditor Committees,the “Statutory Committees”). Pursuant to an order of the Bankruptcy Court, theOffice of the United States Trustee appointed an examiner (the “Examiner”) inthese cases to analyze certain potential causes of action and to act as amediator with respect to certain disputes that may arise among the MirantDebtors, the Statutory Committees and other parties in interest.

Subject to certain exceptions in the Bankruptcy Code,the Chapter 11 proceedings automatically stayed the initiation orcontinuation of most actions against the Mirant Debtors, including most actionsto collect pre-petition indebtedness or to exercise control over the propertyof the bankruptcy estates. As a result, absent an order of the BankruptcyCourt, creditors of the Mirant Debtors are precluded from collectingpre-petition debts and substantially all pre-petition liabilities are subjectto compromise under a plan or plans of reorganization currently being developedby the Mirant Debtors in the bankruptcy proceedings. One exception to this stayof litigation is for an action or proceeding by a governmental agency toenforce its police or regulatory power.

Under the Bankruptcy Code, the Mirant Debtors have theright to assume, assign or reject certain executory contracts and unexpiredleases, subject to the approval of the Bankruptcy Court and satisfaction ofcertain other conditions. The Mirant Debtors are continuing to evaluate theirexecutory contracts including the Company’s operating leases in order todetermine which contracts will be assumed, assigned, recharacterized orrejected.

On August 21, 2003 and September 8, 2003,the Bankruptcy Court entered orders establishing a December 16, 2003 bardate (the “Bar Date”) for filing proofs of claim against the MirantDebtors’ estates. As of December 31, 2004, approximately 775 proofs ofclaim were filed against the Company’s Chapter 11 estates. Those claimstotal approximately $90 billion. Of this amount, approximately $87 billionrepresents claims to which the Mirant Debtors have objected or redundantclaims, which are primarily similar claims filed against multiple MirantDebtors. The Company has not fully analyzed the validity and enforceability ofthe remaining $3 billion of submitted proofs of claim or whether suchclaims should ultimately be allowed in the Chapter 11 proceedings. Inaddition, there are approximately $1.2 billion of estimated liabilities forwhich claims either have not been filed or have been filed with an undeterminedamount primarily related to our operating leases. As such, the amounts ofdistributions received by claimants under the plan or plans of reorganizationmay substantially vary from the amounts of the proofs of claim filed againstthe Chapter 11 estates. There were no claims for which an allowed claimwas probable and estimable and exceeded liabilities previously recorded as aliability subject to compromise on our consolidated balance sheet as of December 31,2004.

In response to a motionfiled under section 502(c) of the Bankruptcy Code (the “Estimation Motion”)by the Mirant Debtors, the Bankruptcy Court entered an order establishingprocedures for estimating proofs of claim under section 502(c) of theBankruptcy Code that are binding for all purposes, including voting on,feasibility of and distribution under a Chapter 11 plan for the MirantDebtors. As a result, the Mirant Debtors filed approximately 60 material claimobjections and three notices of intent to contest claims.

***Plan of Reorganization***

On January 19, 2005, the Mirant Debtors filed aproposed Plan of Reorganization (as amended, the “Plan”) and DisclosureStatement (as amended, the “Disclosure Statement”) with the Bankruptcy Court. AFirst Amended Plan and a First Amended Disclosure Statement were filed on March 25,2005. The proposed Plan sets forth the proposed structure of the Mirant Debtorsat emergence and outlines how the claims of creditors and stockholders areproposed to be treated. If the Disclosure Statement is found by the BankruptcyCourt to contain adequate information, then the Mirant Debtors will solicitvotes on the 

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proposed Plan from thosecreditors, security holders and interest holders who are entitled to vote onthe proposed Plan.

Under the proposed Plan, (1) the intermediateholding company subsidiaries of Mirant Americas Generation (excluding MirantMid-Atlantic and, absent a resolution of certain outstanding property taxdisputes, Mirant New York) will be merged and consolidated to form Mirant NorthAmerica, LLC (“Mirant North America”), a single intermediate holding companysubsidiary of Mirant Americas Generation; (2) Mirant Mid-Atlantic will bemerged into a subsidiary of Mirant North America and (3) in the event itis excluded from the Plan, the capital stock of Mirant New York will becontributed to Mirant North America. Mirant North America will directly orindirectly own 100% of the equity interests in the operating subsidiaries ofMirant Americas Generation, including Mirant Mid-Atlantic.

The proposed Planimplements and is built around the following key elements:

·  the business of the Mirant Debtors willcontinue to be operated in substantially its current form, subject to (1) certaininternal structural changes that the Mirant Debtors believe will improveoperational efficiency, facilitate and optimize their ability to meet financingrequirements and accommodate their debt structure as contemplated at emergenceand (2) organizing the new parent entity for the Mirant Debtors’ ongoingbusiness operations (“New Mirant”) in a jurisdiction outside the United States;

·  the estates of the Mirant Debtors (excludingMirant Americas Generation and its debtor subsidiaries) (collectively, the “ConsolidatedMirant Debtors”) will be substantively consolidated solely for purposes ofvoting on the Plan (except as set forth in Section 7.3 of the Plan),confirmation of the Plan and determining the treatment of claims against andequity interests in such Consolidated Mirant Debtors under the proposed Plan;

·  the estates of Mirant Americas Generation andits debtor subsidiaries (collectively, the “Mirant Americas Generation Debtors”)will be substantively consolidated solely for purposes of voting on the Plan(except as set forth in Section 7.3 of the Plan), confirmation of the Planand determining the treatment of claims against and equity interests in theMirant Americas Generation Debtors under the proposed Plan;

·  the holders of unsecured claims against theConsolidated Mirant Debtors will receive a pro rata share of 100% of the sharesof New Mirant common stock, except for: (1) certain shares to be issued tothe holders of certain claims against Mirant Americas Generation Debtors, asdescribed below, and (2) the shares reserved for issuance pursuant to theNew Mirant employee stock programs;

·  the unsecured claims against the MirantAmericas Generation Debtors will be paid in full through (1) the issuanceto general unsecured creditors and holders of the Mirant Americas Generationrevolving credit facilities and senior notes maturing in 2006 and 2008 of (a) newdebt securities of Mirant North America or, at the option of the MirantDebtors, cash proceeds from third-party financing transactions, in an amountequal to 90% of the full amount owed to such creditors (as determined by theBankruptcy Court) and (b) common stock in New Mirant having a value equalto 10% of such amount owed; and (2) the reinstatement of Mirant AmericasGeneration senior notes maturing in 2011, 2021 and 2031;

·  allowed convenience claims (unsecured claimsup to $25,000 in amount) shall receive a single cash payment equal to the claimamount;

·  the intercompany claims between and among theConsolidated Mirant Debtors and the Mirant Americas Generation Debtors will beresolved as part of a global settlement under the proposed Plan wherebyintercompany claims will not receive a distribution under the proposed Plan;

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·  the prospective working capital requirementsof Mirant Americas Generation and its subsidiaries are expected to be met witha new senior secured revolving credit facility of Mirant North America in theamount of $750 million to $1 billion. In addition the Mirant AmericasGeneration consolidated business will have approximately $3.05 billion of debt(as compared to approximately $2.8 billion of debt at the commencement of theChapter 11 cases) comprised of $1.7 billion of reinstated debt at MirantAmericas Generation and $1.35 billion of new debt incurred by Mirant NorthAmerica in partial satisfaction of certain existing Mirant Americas Generationdebt, which amount does not include the Mirant Mid-Atlantic operating leasesrelated to the Morgantown Station and Dickerson Station;

·  to help support the feasibility of theproposed Plan with respect to the Mirant Americas Generation Debtors, Mirantshall contribute value to Mirant North America, including Mirant’s trading andmarketing business (subject to an obligation to return a portion of theembedded cash collateral in the trading and marketing business to Mirant providedthat, under certain circumstances, the Mirant Debtors may elect to satisfy thisobligation by transferring $250 million to Mirant Americas, Inc (“MirantAmericas”) from Mirant North America), the Mirant Peaker, LLC (“Mirant Peaker”),Mirant Potomac River, LLC (“Mirant Potomac River”) and Mirant Zeeland, LLCgenerating facilities and commitments to make prospective capital contributionsof $150 million to Mirant Americas Generation(for refinancing) and, undercertain circumstances, up to $265 million to Mirant North America (for sulfurdioxide (“SO2”) capital expenditures). Under the proposed Plan, Mirant Peakerand Mirant Potomac River will become subsidiaries of Mirant Mid-Atlantic;

·  the disputes regarding the Mirant Debtors’ advalorem real property taxes for the Bowline and Lovett facilities will besettled and resolved on terms that permit the feasible operation of theseassets, or the Mirant Debtors that own such assets will remain in Chapter 11until such matters are resolved by settlement or through litigation;

·  the bulk of the contingent liabilities of theMirant Debtors associated with the California energy crisis and certain relatedmatters are resolved pursuant to a global settlement as described in “Item 3.Legal Proceedings” contained elsewhere in this report;

·  substantially all of the assets of Mirant willbe transferred to New Mirant, which will serve as the corporate parent of theMirant Debtors’ business enterprise on and after the effective date of theproposed Plan; similarly, the Mirant trading and marketing business of MirantAmericas Energy Marketing shall be substantially transferred to Mirant EnergyTrading, LLC (a subsidiary of Mirant North America); and

·  the outstanding common stock in Mirant will becancelled and the holders thereof will receive any surplus value aftercreditors are paid in full, plus the right to receive a pro rata share ofwarrants issued by New Mirant if they vote to accept the proposed Plan.

The Mirant Americas Generation Creditor Committee,together with Wells Fargo Bank, National Association and the Ad Hoc Committeeof Bondholders of Mirant Americas Generation, have objected to thereinstatement of the Mirant Americas Generation senior notes maturing in 2011,2021 and 2031 and filed a motion requesting an order determining that theselong-term noteholders are impaired under the Plan and thus entitled to vote onthe Plan. The Bankruptcy Court issued an opinion on May 24, 2005 denyingtheir motion and finding that the treatment under the Plan of the long-term notesdid not impair the holders thereof and, therefore, the holders of the MirantAmericas Generation long-term notes may not vote on the Plan. The Committeeshave sought leave from the United States District Court for the NorthernDistrict of Texas to appeal the Bankruptcy Court’s order, which is not a finalorder that is appealable as a matter of right.

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Since April 2005, the Mirant Debtors, theStatutory Committees and representatives of certain other interests have beenparty to proceedings before the Bankruptcy Court with respect to the valuationof the Mirant Debtors. Pursuant to a letter dated June 30, 2005, theBankruptcy Court instructed the Mirant Debtors and their financial advisors,The Blackstone Group, to make certain modifications to the 2005 business planof the Mirant Debtors and the valuation report prepared by The Blackstone Group.The Bankruptcy Court indicated that it intends to use the modified businessplan and valuation report to generate an enterprise value for the MirantDebtors which can be used for all purposes for confirmation of a plan ofreorganization for the Mirant Debtors. Absent a settlement among the MirantDebtors, the Statutory Committees and the other parties, the Mirant Debtors donot expect that they and The Blackstone Group will complete the modificationsordered by the Bankruptcy Court before the end of September 2005.

At present, the proposed Plan has not been approved byany of the Statutory Committees. As such, the Mirant Debtors anticipate thatnegotiations will continue between the Mirant Debtors and each of the StatutoryCommittees. Negotiations with the Statutory Committees, whether or notsuccessful, could lead to material changes to certain components of theproposed Plan.

At this time, it is notpossible to accurately predict if or when the proposed Plan will be approved bythe creditors and security holders and confirmed by the Bankruptcy Court, or ifand when some or all of the Mirant Debtors may emerge from Bankruptcy Courtprotection under Chapter 11.

***Accounting for Reorganization***

The accompanyingconsolidated financial statements of Mirant Americas Generation have beenprepared in accordance with Statement of Position 90-7, *Financial Reporting by Entities in Reorganization Under the BankruptcyCode*, and on a going concern basis, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business. However, as a result of the bankruptcy proceedings, suchrealization of assets and satisfaction of liabilities are subject to asignificant number of uncertainties. The Company’s consolidated financialstatements do not reflect adjustments that might be required if the Company (oreach of the Mirant Debtors) is unable to continue as a going concern.

***Interest Expense***

The Mirant Debtors havediscontinued recording interest on liabilities subject to compromise.Contractual interest on liabilities subject to compromise in excess of reportedinterest was approximately $251 million and $114 million for theyears ended December 31, 2004 and 2003, respectively. Contractual intereston liabilities subject to compromise in excess of reported interest for theperiod from the Petition Date through December 31, 2004 is approximately $365 million.This amount includes approximately $225 million of interest related to MirantAmericas Generation long-dated bonds, which would be reinstated under theproposed Plan.

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***Reorganization Items***

Reorganizationitems, net represents expense or income amounts that were recorded in theconsolidated financial statements as a result of the bankruptcy proceedings.For the years ended December 31, 2004 and 2003, the following were thesignificant items within this category (in millions): 
| ** **                                                     | ** ** | **Years Ended**                         | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                     | ** ** | **December 31,**                        | ** ** |
| ** **                                                     | ** ** | **   2004   ** | ** ** | **   2003   ** | ** ** |
| Estimated claims  and losses on rejected and amended contracts |       |                                         | $          | 48 |   |   |   | $ | 5 |   |   |
| Professional fees  and administrative expenses                 |       |                                         | 47         |   |   |   | 21 |   |   |
| Interest income,  net                                          |       |                                         | (6         | ) |   |   | (1 | ) |   |
| Total                                                          |       |                                         | $          | 89 |   |   |   | $ | 25 |   |   |

 

***Liabilities Subject to Compromise***

Liabilities subject to compromise include certainliabilities incurred prior to the Petition Date. The amounts of the variouscategories of liabilities that are subject to compromise are set forth below.These amounts represent the Company’s estimates of known or potential claimsthat are likely to be resolved in connection with the bankruptcy proceedings.Such claims remain subject to future adjustments. Adjustments may result fromnegotiations, actions of the Bankruptcy Court, rejections of executorycontracts and unexpired leases, and determinations as to the value of anycollateral securing claims, proofs of claim or other events. The fair value ofthe Company’s assets may be lower than its liabilities. This fact could resultin liabilities being settled at less than 100% of their face value and themember’s equity being diluted or eliminated entirely.

Liabilities not subject to compromise include: (1) liabilitiesincurred after the Petition Date; (2) liabilities incurred prior to thePetition Date that the Company expects to pay in full, even though certain ofthese amounts may not be paid until a plan of reorganization is approved; (3) liabilitiesrelated to pre-petition contracts that have not been rejected; and (4) liabilitiesincurred prior to the Petition Date that have been approved for payment by theBankruptcy Court and that the Company expects to pay (in advance of a plan ofreorganization) in the ordinary course of business.

The classification of liabilities not subject tocompromise versus liabilities subject to compromise is based on currentlyavailable information and analysis. As the bankruptcy cases proceed andadditional information and analysis is completed or, as the Bankruptcy Court rules onrelevant matters, the classification of amounts between these two categoriesmay change. The amounts of any such changes could be significant. Under theproposed Plan, intercompany claims will be resolved pursuant to a globalsettlement whereby intercompany claims will not receive a distribution.

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Theamounts subject to compromise at December 31, 2004 and 2003, consisted ofthe following items (in millions):
| ** **                                                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Items, absent the  bankruptcy filings, that would have been considered current at  December 31: |       |     |       |     |       |
| Accounts payable and accrued liabilities—affiliate                                                   |       | $        | 169        |     | $          | 138 |   |
| Accounts payable and accrued  liabilities—nonaffiliate                                               |       | 498      |       | 506      |       |
| Current portion of long-term debt                                                                         |       | 300      |       | 300      |       |
| Items, absent the bankruptcy filings, that would  have been considered noncurrent at December 31:    |       |     |       |     |       |
| Long-term debt                                                                                            |       | 2,470    |       | 2,470    |       |
| Other noncurrent liabilities                                                                              |       | 1        |       | 4        |       |
| Total                                                                                                     |       | $        | 3,438      |     | $          | 3,418 |   |

 

**3.   Accountingand Reporting Policies**

***Basis of Presentation***

The accompanying consolidated financial statements ofMirant Americas Generation and its wholly-owned subsidiaries have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America (“GAAP”).

The financial statementsinclude the accounts of Mirant Americas Generation and its wholly-ownedsubsidiaries and have been prepared from records maintained by Mirant AmericasGeneration and its subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation. Certain prior periodamounts have been reclassified to conform to the current year financialstatement presentation.

***Use of Estimates***

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make a number of estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the period. Actual results could differ fromthose estimates. The Company’s significant estimates include: determining thefair value of certain derivative contracts; estimating liabilities resultingfrom the bankruptcy, including the effect of bankruptcy claims and rejectedcontracts; estimating future cash flows and fair values in recordingimpairments of long-lived assets, goodwill and indefinite-livedintangible assets; and estimating losses to be recorded for contingentliabilities.

***New AccountingStandard***

In December 2003, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46(revised December 2003), *Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin (“ARB”) No. 51*(“FIN 46R”). FIN 46R addresses the consolidation by business enterprises ofvariable interest entities (“VIEs”), as defined in FIN 46R. FIN 46R expandsexisting accounting guidance regarding when a company should consolidate in itsfinancial statements the assets, liabilities and activities of another entity.The consolidation requirements applied immediately to Special Purpose Entities(“SPEs”) in 2003 and to all other VIEs no later than the end of the firstreporting period ending after March 15, 2004. At December 31, 2004,the Company determined that the provisions of 

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FIN 46Rdid not have any impact on its consolidated results of operations, cash flowsor financial position as the Company does not have any interests in any VIE.

***New Accounting Standard Not Yet Adopted***

In March 2005, theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations* (“FIN 47”). Theinterpretation requires companies to recognize a liability for the fair valueof a legal obligation to perform asset retirement activities that areconditional on a future event if the amount can be reasonably estimated. FIN 47is effective for the fiscal years ending after December 15, 2005. TheCompany will adopt the provisions of FIN 47 on the earlier of its emergencefrom bankruptcy or the effective date. The Company has not yet determined theimpact, if any, of FIN 47 on its financial statements.

***Cumulative Effect of Changes in Accounting Principle***

The Company adoptedStatement of Financial Accounting Standard (“SFAS”) No. 143, *Accounting for Asset Retirement Obligations* effective January 1,2003, relating to costs associated with legal obligations to retire tangible,long-lived assets, referred to as asset retirement obligations. Assetretirement obligations are recorded at fair value in the period in which theyare incurred by increasing the carrying amount of the related long-lived asset.In each subsequent period, the liability is accreted to its fair value and thecapitalized costs are depreciated over the useful life of the related asset.The cumulative effect of the change in accounting principle related to theadoption of this accounting standard resulted in the Company recording a$3 million charge, net of taxes, in the consolidated statements ofoperations. If this accounting standard were required to be followed in periodsprior to January 1, 2003, the effect on the Company’s consolidatedfinancial statements would have been insignificant.

***Cash and Cash Equivalents***

Mirant Americas Generationconsiders all short-term investments with an original maturity of threemonths or less to be cash equivalents.

***Fuel Stock and Materials and Supplies***

Fuel stock and materialsand supplies are recorded at the lower of cost or market. Cost is computed onan average cost basis. Fuel stock is removed from the inventory account as itis used in the production of electricity. Materials and supplies are removedfrom the inventory account when they are used for repairs, maintenance orcapital projects.

***Emissions Allowances***

Purchased emissions allowances are recorded at thelower of cost or market. Cost is computed on an average cost basis. Purchasedemissions allowances for SO2 and nitrogen oxide (“NOx”) are removed from theinventory account and charged to cost of fuel, electricity and other products—affiliatein the accompanying consolidated statements of operations as they are utilizedagainst emissions volumes that exceed the allowances granted to the Company bythe Environmental Protection Agency (“EPA”).

Emissions allowances granted by the EPA related togeneration facilities acquired by the Company are recorded at fair value at theacquisition date and are included in property, plant and equipment. Theseemissions allowances are depreciated on a straight- line basis over theestimated useful life of the respective generation facility, which range from 8to 40 years, and are charged to depreciation and amortization expense in theaccompanying consolidated statements of operations.

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Emissions allowancesgranted by the EPA related to generation facilities leased by the Company arerecorded at fair value at the commencement of the lease in other intangibleassets. These emissions allowances are amortized on a straight-line basis overthe term of the lease, and are charged to depreciation and amortization expensein the accompanying consolidated statements of operations.

***Derivative Financial Instruments***

A majority of the Company’sderivative financial instruments are recorded in the accompanying consolidatedbalance sheets at fair value, as either price risk management assets—affiliateor price risk management liabilities—affiliate, with changes in fair valuerecognized currently in earnings as required by SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended. Electricity sales and fuel supply derivative financial instrumentsthat qualify as normal purchases and normal sales transactions pursuant to SFASNo. 133 are exempt from fair value accounting treatment and are accountedfor on the accrual method of accounting. Although all of the Company’sderivative financial instruments manage the price risk related to fuelpurchases and electricity sales, none of the Company’s derivative financialinstruments qualify for hedge accounting pursuant to SFAS No. 133 as thesederivative financial instruments are not designated as hedges or the changes infair value of these derivative instruments do not adequately correlate tochanges in fair value or the cash flows of the item being hedged. Changes inthe fair value of these derivative financial instruments are recognizedcurrently in earnings as unrealized gains or losses. These unrealized gains andlosses as well as settlements of amounts receivable or payable under allderivative financial instruments utilized to manage the price risk of energysold or fuel purchased are recorded as an adjustment of operating revenue—affiliate,or the cost of fuel, electricity and other products—affiliate, as applicable,in the accompanying consolidated statements of operations.

***Property, Plant and Equipment***

Property, plant andequipment are recorded at cost, which includes materials, labor and associatedpayroll-related and overhead costs and the cost of financing construction. Thecost of routine maintenance and repairs, such as inspections and corrosionremoval and the replacement of minor items of property are charged to expenseas incurred. Certain expenditures incurred during a major maintenance outage ofa generating plant are capitalized, including the replacement of majorcomponent parts and labor and overhead incurred to install the parts.Depreciation of the recorded cost of depreciable property, plant and equipmentis recognized on a straight-line basis over the estimated useful life of theasset. Upon the retirement or sale of property, plant and equipment the cost ofsuch assets and the related accumulated depreciation are removed from theconsolidated balance sheets. No gain or loss is recognized for ordinary retirementsin the normal course of business since the depreciation rates used by theCompany take into account the effect of interim retirements.

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***Capitalization of Interest Cost***

TheCompany capitalizes interest on projects during the advanced stages of developmentand during the construction period. The Company determines which debtinstruments represent a reasonable measure of the cost of financingconstruction assets in terms of interest cost incurred that otherwise couldhave been avoided. These debt instruments and associated interest costs areincluded in the calculation of the weighted average interest rate used fordetermining the capitalization rate. Upon commencement of commercial operationsof the plant or project, capitalized interest, as a component of the total costof the plant, is depreciated over the estimated useful life of the plant. Forthe years ended December 31, 2004, 2003 and 2002, the Company incurred thefollowing interest costs on debt to nonaffiliates (in millions):
| ** **                                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total interest  costs                                               |       | $        | 1          |     | $          | 206      |       | $ | 238 |   |
| Interest  capitalized and included in construction work in progress |       | —   |       | (2       | )          | (28      | )          |
| Interest expense—nonaffiliates                                 |       | $        | 1          |     | $          | 204      |       | $ | 210 |   |

 

As part of Mirant’srestructuring plan announced in March 2002, the Company suspendedconstruction on certain projects and no longer capitalizes interest on theseprojects.

***Goodwill and Intangible Assets***

Goodwill represents the excess of costs over fairvalue of assets of businesses acquired. Goodwill and intangible assets acquiredin a purchase business combination that are determined to have an indefiniteuseful life are not amortized, but instead tested for impairment at leastannually. An impairment occurs when the fair value of a reporting unit is lessthan its carrying value including goodwill. The Company has determined that itsoperations constitute a single reporting unit. The amount of the impairmentcharge, if an impairment exists, is calculated as the difference between theimplied fair value of the reporting unit goodwill and its carrying value. TheCompany is required to test goodwill each year at October 31 and whenevercontrary evidence exists as to the recoverability of goodwill. The fair valueof the reporting unit is calculated using discounted cash flow techniques andassumptions as to business prospects using the best information available. TheCompany recognized a full impairment of goodwill in 2003. See Note 7 foradditional information.

Intangible assets,excluding emissions allowances, with definite useful lives are amortized on astraight-line basis over their respective useful lives ranging up to 40 yearsto their estimated residual values. The costs of certain rights acquired, suchas operating permits, are included in property, plant and equipment in the consolidatedbalance sheets as they are considered an integral part of the tangible assets.

***Impairment of Long-Lived Assets***

The Company evaluateslong-lived assets, such as property, plant and equipment, and purchasedintangible assets subject to amortization, for impairment whenever events orchanges in circumstances indicate that the carrying amount of the asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the estimated undiscountedfuture cash flows expected to be generated by the asset. If the carrying amountof an asset exceeds its estimated discounted future cash flows, an impairmentcharge is recognized as the amount by which the carrying amount of the assetexceeds the fair value of the asset.

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***Fair Value of Financial Instruments***

SFAS No. 107, *Disclosures About Fair Value of Financial Instruments*,requires the disclosure of the fair value of all financial instruments that arenot otherwise recorded at fair value in the financial statements. At December 31,2004 and 2003, financial instruments recorded at contractual amounts thatapproximate market or fair value include cash and cash equivalents, receivablesfrom affiliate, excluding pre-petition amounts discussed below, and customeraccounts, accounts payable and accrued liabilities, and payables to affiliate.The market values of such items are not materially sensitive to shifts inmarket interest rates because of the short term to maturity of theseinstruments. As of December 31, 2004, the Company’s receivables fromaffiliate include $222 million of pre-petition amounts for which the fairvalue is not readily determinable because of their intercompany nature and thestatus of the bankruptcy cases. As of December 31, 2004, the Company’slong-term notes receivable from affiliate had a carrying value of$478 million. The fair value of Mirant Americas Generation’s long-termnotes receivable from affiliate is not readily determinable because of theirintercompany nature and the status of the bankruptcy cases. Under the proposedPlan, the pre-petition receivables from affiliate and long-term receivablesfrom affiliate will be resolved pursuant to a global settlement wherebyintercompany claims will not receive any distribution.

***Revenue Recognition***

The Company recognizesaffiliate and nonaffiliate revenue when electric power is delivered, capacityis made available or ancillary services are provided to an affiliate orcustomer pursuant to contractual commitments that specify volume, price anddelivery requirements, and collection of such revenue is probable. 

***Rent Expense***

Rent expense related tothe Company’s operating leases is recognized on a straight-line basisover the terms of the leases. Rent expense for generation facilities isreported separately as generation facilities rent expense in the accompanyingconsolidated statements of operations. Payments made under the terms of thelease agreement in excess of the amount of lease expense recognized arerecorded as prepaid rent in the accompanying consolidated balance sheets.Prepaid rent attributable to periods beyond one year is included in noncurrentassets.

***Income Taxes***

The Company is a limited liability company and istreated as a branch for income tax purposes. As a result, Mirant Americas, theCompany’s immediate parent, has sole direct liability for the majority of thefederal and state income taxes relating to the Company’s operations. TheCompany allocates current and deferred taxes to each tax regarded member of itsconsolidated group as if each member were a single taxpayer utilizing the assetand liability method to account for income taxes except with respect torecognizing certain current period tax benefits. Specifically, the Company hasnot recorded current period tax benefits based on a member’s ability to carryback its separate company current period net operating loss as the realizationof such current period tax benefits are dependent on reimbursements fromMirant, at Mirant’s discretion under the tax sharing agreement. Deferred taxassets and liabilities are recognized for future tax consequences attributableto differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases and operating losses andtax carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enacted change. 

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SFAS No. 109, *Accounting for IncomeTaxes*, requires that a valuation allowance be established when it ismore likely than not that all or a portion of a deferred tax asset will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences are deductible. In making this determination, management considersall available positive and negative evidence affecting specific deferred taxassets, including the Company’s past and anticipated future performance, thereversal of deferred tax liabilities, the implementation of tax planningstrategies and management’s expectations of future reimbursements of netoperating loss carryforwards from Mirant. 

Objective positiveevidence is necessary to support a conclusion that a valuation allowance is notneeded for all or a portion of deferred tax assets when significant negativeevidence exists. Cumulative losses in recent years are the most compelling formof negative evidence considered by management in this determination.Additionally, management considered the fact that Mirant has not reimbursed theCompany for current period net operating losses since the Petition Date and theuncertainty regarding future reimbursements from Mirant given the MirantDebtors’ ongoing bankruptcy proceedings. In 2004 and 2003, the Companyrecognized increases in its valuation allowance of $1 million and $656 million,respectively, related to its net deferred tax assets. 

**4.   DiscontinuedOperations and Disposition of Assets**

***Discontinued Operations***

Income from discontinued operations for 2003 and 2002includes the following components of the Company that have been disposed of:the State Line generating facility in Indiana and the Neenah generatingfacility in Wisconsin.

*State Line*.   In June 2002,the Company completed the sale of its State Line generating facility forapproximately $180 million plus an adjustment for working capital. Theasset was sold at approximately book value.

*Neenah*.   In July 2002,the Company entered into an agreement to sell the Company’s Neenah, Wisconsingenerating facility for approximately $109 million. This sale closed in January 2003.The asset was sold at approximately book value. 

Asummary of operating results for these discontinued operations for the yearsended December 31, 2003 and 2002 follows (in millions):
| ** **                                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Operating revenue                                          |       |     | $          | 1        |       |   | $ | 39 |   |
| Operating  expenses, including other income (expense), net |       |     | 7          |     |       | (15 | ) |
| Income before income taxes                                 |       |     | 8          |     |       | 24 |   |
| Income taxes                                               |       |     | 1          |     |       | 10 |   |
| Net income                                                 |       |     | $          | 7        |       |   | $ | 14 |   |

 

***Disposition of Assets***

During 2004, the Companycommitted to dispose of three natural gas turbines related to a suspendedconstruction project. On October 6, 2004, the Company entered into anagreement to sell these turbines, subject to Bankruptcy Court approval. TheBankruptcy Court approved the sale on December 10, 2004. On December 30,2004, the Company received $42 million related to the sale and collected theremaining $4 million in March 2005. In the year ended December 31,2004, the Company recognized a loss related to 

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thedisposition of these turbines of $65 million in loss on sales of assets,net in the accompanying consolidated statements of operations.

**5.   RelatedParty Arrangements and Transactions**

***Mirant Mid-Atlantic Power Sales Agreement with MirantAmericas Energy Marketing***

From August 1, 2001 to April 30, 2003,Mirant-Mid Atlantic, a wholly-owned subsidiary, supplied all of the capacityand energy of its facilities to Mirant Americas Energy Marketing under theterms of the Energy and Capacity Sales Agreement (“ECSA”). Mirant AmericasEnergy Marketing exercised its option to purchase 100% of the output of MirantMid-Atlantic’s facilities through December 31, 2003 and had the option topurchase up to 100% (in increments of 25%) of the output of Mirant Mid-Atlantic’sfacilities for the period from January 1, 2004 to June 30, 2004,extendable through December 31, 2004. Mirant Mid-Atlantic subsequentlyagreed to terminate the ECSA effective May 1, 2003 and sell all of itscapacity and energy to Mirant Americas Energy Marketing under a Power and FuelAgreement at market prices through December 31, 2003, renewable annuallythereafter. The Power and Fuel Agreement for 2003 expired on December 31,2003. A new Power Sale, Fuel Supply and Services Agreement was negotiated for2004 but not executed. The parties operated under the unexecuted 2004 Power andFuel Agreement and all of Mirant Mid-Atlantic’s capacity and energy was sold toMirant Americas Energy Marketing under a Power and Fuel Agreement in 2004.Amounts due to Mirant Americas Energy Marketing for fuel purchases and due fromMirant Americas Energy Marketing for power sales are recorded as a net payable—affiliateor accounts receivable—affiliate in the accompanying consolidated balancesheets because of the Company’s legal right to offset such amounts. 

Mirant Mid-Atlantic’s affiliated companies, MirantPeaker and Mirant Potomac River, also entered into fixed rate power purchaseagreements with Mirant Americas Energy Marketing in August 2001 on thesame terms and effective over the same period as the ECSA outlined above.Mirant Potomac River and Mirant Peaker also subsequently terminated their ECSAseffective May 1, 2003 and have also entered into new power sales, fuelsupply and services agreements on the same terms and for the same period asMirant Mid-Atlantic’s Power and Fuel Agreement with Mirant Americas EnergyMarketing. As discussed in this Note under “Capital Contribution Agreement withMirant”, the excess cash available from the operations of these affiliatedcompanies is paid as a dividend to Mirant, which in turn makes a capitalcontribution to Mirant Mid-Atlantic for the same amount. 

At the inception date of the ECSA, the pricing underthe ECSA was favorable to Mirant Mid-Atlantic and its affiliate when comparedto estimated market rates in the Pennsylvania-New Jersey-MarylandInterconnection Market (“PJM”) for power to be delivered over the initial termof the agreement. The estimated market rates were based on quoted market pricesin the PJM, as adjusted upwards by approximately 12% for what MirantMid-Atlantic believed, at the time, to be temporary anomalies in the quotedmarket prices based on projected demand growth and other factors expected toaffect demand and supply in the PJM market through 2002. The market hadexperienced unusual fluctuations in market prices because of low prices fornatural gas which is generally the fuel used to set prices in the PJM. MirantMid-Atlantic did not believe that natural gas prices would remain depressedthrough the end of 2002.

At inception of the ECSA, the aggregate value toMirant Mid-Atlantic, Mirant Peaker and Mirant Potomac River attributable to thefavorable pricing variance was approximately $167 million. The amount relatedspecifically to Mirant Mid-Atlantic’s owned or leased facilities of $120million was accounted for as both an addition to member’s interest and anoffsetting capital contribution receivable pursuant to the ECSA in the Company’sconsolidated financial statements. At inception, Mirant Mid-Atlantic hadassumed that in 2002 Mirant Americas Energy Marketing would elect to take thecontracted minimum 75% of the capacity and output of Mirant Mid-Atlantic’sfacilities and that in 2003 and 2004 Mirant 

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Americas Energy Marketingwould not elect to purchase output from Mirant Mid-Atlantic’s facilities, sincethe contract provided for no minimum commitment for these years.

In January 2002, Mirant Americas Energy Marketingexercised its option to increase its committed capacity to 100% of the totaloutput of Mirant Mid-Atlantic’s facilities for 2002. Therefore, MirantMid-Atlantic recorded an additional equity contribution of $53 million in 2002to reflect the favorable pricing terms related to the additional 25% capacityand energy that Mirant Americas Energy Marketing committed to take in 2002.This adjustment amount was based on estimated market rates in the PJM. Thisadjustment is also reflected as both an addition to member’s interest and anoffsetting capital contribution receivable pursuant to the ECSA.

In November 2002, Mirant Americas EnergyMarketing exercised its option to purchase 100% of the output of MirantMid-Atlantic’s facilities for 2003. Accordingly, an adjustment of $121 millionto member’s equity and an offsetting capital contribution receivable pursuantto the ECSA was recorded in 2002 to reflect the favorable pricing terms of thisagreement. This adjustment amount was also based on estimated market rates inthe PJM as adjusted upwards by approximately 9% for management’s considerationof the value available to a purchaser of Mirant Mid-Atlantic’s capacity andenergy, incremental to the quoted spot market prices. This incremental value iscomprised mainly of the option available to Mirant Americas Energy Marketing toextend its commitment to 2004, the capabilities associated with load managementand with power and fuel trading and the value of fixed transmission rights.

The contractual amounts payable under the ECSA inexcess of the amount of affiliate revenue recognized due to the favorablepricing terms of the ECSA were $39 million and $139 million in the years ended December 31,2003 and 2002, respectively. These amounts were generally received in the monthfollowing the month the related affiliate revenue was recognized and wererecorded as a reduction in the capital contribution receivable pursuant to theECSA when received. During the years ended December 31, 2003 and 2002,Mirant Mid-Atlantic received $55 million and $129 million, respectively, whichwere applied as a reduction to the capital contribution receivable pursuant tothe ECSA. At December 31, 2002, the capital contribution receivablepursuant to the ECSA was $136 million, of which $15 million represents amountsreceived subsequent to December 31, 2002 related to the affiliate revenuerecognized prior to that date and $121 million relates to the favorable pricingvariance for 2003.

The favorable pricing variance accounted for as acapital contribution receivable from affiliate was not adjusted for subsequentchanges in energy prices. As a result, amounts recognized as affiliate revenueunder the ECSA did not necessarily reflect market prices at the time the energywas delivered. Amounts based on current market prices exceeded amountsrecognized as affiliate revenue for capacity and energy delivered under theECSA by approximately $94 million for the four months ended April 30,2003. Amounts recognized as affiliate revenue for capacity and energy deliveredunder the ECSA exceeded the amounts based on current market prices byapproximately $179 million for the year ended December 31, 2002.

Effective May 1, 2003, Mirant Mid-Atlantic agreedto terminate the ECSA and sell all of its capacity and energy under the Powerand Fuel Agreement to Mirant Americas Energy Marketing at market prices. As aresult, a reduction of $81 million to member’s interest and an offsettingreduction in the capital contribution receivable from affiliate pursuant to theECSA were recorded to reflect the termination of the ECSA. Under the Power andFuel Agreements for 2003 and 2004, Mirant Americas Energy Marketing resellsMirant Mid-Atlantic’s energy products in the PJM spot and forward markets andto other third parties. Mirant Mid-Atlantic is paid the amount received byMirant Americas Energy Marketing for such capacity and energy. MirantMid-Atlantic is exposed to credit risk from Mirant Americas Energy Marketing tothe extent that Mirant Americas Energy Marketing is unable to collect amountsowed from third parties for the resale of Mirant Mid-Atlantic’s energyproducts. Thus, Mirant Mid-Atlantic is exposed to market price and credit risksthat it was not previously subject to under the ECSA.

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MirantAmericas Energy Marketing was party to transition power agreements with PotomacElectric Power Company (“PEPCO”). The firstagreement expired in June 2004 and the second expired January 2005.Under these agreements, PEPCO had an option to purchase energy with respect toPEPCO’s load requirements at fixed rates. Since the expiration of thetransition power agreements, Mirant Mid-Atlantic has been economically hedgingits capacity and energy, through physical bilateral transactions as well asfinancial hedges with Mirant Americas Energy Marketing. In addition, MirantMid-Atlantic enters into structured transactions with Mirant Americas EnergyMarketing who has similar transactions with entities serving load in thegreater Washington, D.C. area. By entering into structured transactions, MirantMid-Atlantic looks to extract value for its generation facilities that is overthe mid-point of the market for such transactions. The contracted terms forthese transactions extend into 2007. 

**MirantTexas Tolling Arrangements with Mirant Americas Energy Marketing**

Mirant Texas Investments, Inc.and Mirant Texas Management, Inc. (collectively “Mirant Texas”),wholly-owned subsidiaries, and Mirant Americas Energy Marketing entered intotwo tolling agreements, under which Mirant Americas Energy Marketing paidMirant Texas annual capacity based payments on the guaranteed capacity ofMirant Texas’ generating units in Texas. Mirant Americas Energy Marketing paidMirant Texas a fee for each megawatt-hour (“MWh”) of energy generated. Oneagreement expired on December 31, 2003. The other agreement expired on May 27,2005. For the years ended December 31, 2004, 2003 and 2002, revenue fromMirant Americas Energy Marketing under the two tolling agreements wasapproximately $9 million, $34 million and $37 million,respectively. Mirant Americas EnergyMarketing filed a motion with the Bankruptcy Court to reject the existingtolling agreement. The Bankruptcy Court allowed Mirant Americas EnergyMarketing to reject that agreement but has not determined what amounts, if any,Mirant Americas Energy Marketing owes to Mirant Texas as a result of therejection. In August 2004, Mirant Texas entered into a tollingagreement with a third party through December 2006. For the year ended December 31,2004, revenue under this third party tolling agreement was $7 million.

***Services and Administration Arrangements***

TheCompany and its subsidiaries utilize the services of Mirant, Mirant AmericasEnergy Marketing and Mirant Services. The significant arrangements with theseaffiliated companies are described below. The following table summarizes theamounts incurred under the arrangements that are recorded in the accompanyingconsolidated statements of operations as operations and maintenance—affiliate(in millions):
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Management,  personnel and services agreement |       | $        | 129        |     | $          | 135      |       | $ | 139 |   |
| Services  agreements                          |       | 57       |       | 22       |       | 21       |       |
| Administration  arrangement                   |       | 73       |       | 34       |       | 22       |       |
| Other                                         |       | 1        |       | 3        |       | 8        |       |
| Total                                         |       | $        | 260        |     | $          | 194      |       | $ | 190 |   |

 

***Management, Personnel and Services Agreement withMirant Services***

Mirant Services provides the Company with variousmanagement, personnel and other services. The Company reimburses MirantServices for amounts equal to Mirant Services’ direct costs of providing suchservices.

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Thetotal costs incurred under the Management, Personnel and Services Agreementwith Mirant Services have been included in the accompanying consolidatedstatements of operations for the years ended December 31, 2004, 2003 and2002 as follows (in millions):
| ** **                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost of fuel,  electricity and other products—affiliate |       | $        | 8          |     | $          | 5        |       | $ | 5 |   |
| Operations and  maintenance—affiliate                   |       | 129      |       | 135      |       | 139      |       |
| Total                                                        |       | $        | 137        |     | $          | 140      |       | $ | 144 |   |

 

***Services Agreements with Mirant Americas EnergyMarketing***

The Company, through its subsidiaries, is a party toseparate services agreements with Mirant Americas Energy Marketing. MirantAmericas Energy Marketing is responsible for fuel procurement for the Company’sfacilities, as well as for executing contracts, including economic hedges, toreduce price risk. Each subsidiary of the company records amounts due to MirantAmericas Energy Marketing and due from Mirant Americas Energy Marketing undertheir respective service agreements as a net payable-affiliate orreceivable-affiliate because of each subsidiaries legal right of offset. Duringthe period of the ECSA, services to Mirant Mid-Atlantic were provided underseparate services and risk management agreements. Since May 1, 2003, theseservices have been provided under the Power and Fuel Agreements for 2003 and2004. Beginning January 1, 2004, Mirant changed its allocation methodologyrelated to its energy marketing overhead expenses. Under the new methodology,substantially all energy marketing overhead costs are now allocated to Mirant’soperating subsidiaries. During the years ended December 31, 2004, 2003 and2002, the Company incurred approximately $57 million, $22 million and$21 million, respectively, in costs under these agreements. These costsare included in operations and maintenance—affiliate in the accompanyingconsolidated statements of operations.

Effective April 1, 2002, the Company’s operatingsubsidiaries, except Mirant Mid-Atlantic, entered into new servicesagreements with Mirant Americas Energy Marketing covering the period through December 31,2002. These agreements were extended through December 31, 2003. The termsof these new services agreements were similar to the terms under the agreementsin effect during 2001 and the first quarter of 2002 except that the newagreements did not contain a bonus provision. The previous agreements providedthat Mirant Americas Energy Marketing was to be paid a bonus based on thepercentage by which revenue exceeded costs under the agreement. There was nobonus expense during the year ended December 31, 2002. Under the newagreements, the various operating subsidiaries of the Company, except forMirant Mid-Atlantic, paid Mirant Americas Energy Marketing a fixedadministrative fee of approximately $13 million for the year ending December 31,2003 and $10 million for the period from April 1, 2002 through December 31,2002. These amounts are included in operations and maintenance—affiliate in theaccompanying consolidated statements of operations.

Effective July 1,2002, the Company and Mirant Americas Energy Marketing amended the services andrisk management agreement with regard to the provision of the residual fuel oilrequirements at the Company’s Bowline, Lovett, Canal, Chalk Point and certainother facilities. The revised agreement is an all-requirements contractwith pricing based on the daily Platts New York Harbor mean index for residualfuel oil plus a delivery charge. Pursuant to the revised agreement, MirantAmericas Energy Marketing also manages the fuel oil storage associated withthese facilities. In connection with this agreement, the Company sold fuel oilinventory at its book value of approximately $15 million to MirantAmericas Energy Marketing in 2002.

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***Administration Arrangements with Mirant Services***

Prior to May 2002, administrative services werecharged by Mirant Services to the Company based on incremental costs directlyattributable to the Company as part of the management, personnel and servicesagreement described above.

Beginning in May 2002, Mirant Servicesimplemented a fixed administration charge to various subsidiaries of Mirant,including the Company, which served to reimburse Mirant Services for variousindirect administrative services performed on the subsidiaries’ behalf,including information technology services, regulatory support, consulting,legal and accounting and financial services. The fixed charge was approximately$2.7 million per month through December 31, 2002. The agreement wasautomatically extended through December 31, 2003 and the fixed charge wasincreased to $2.8 million per month. Beginning January 1, 2004,Mirant changed its allocation methodology related to the allocation of itscorporate overhead expenses. Under the new methodology, substantially all ofMirant’s corporate overhead costs are now allocated to Mirant’s operatingsubsidiaries.

For the years ended December 31,2004, 2003 and 2002, the Company incurred expense of $73 million,$34 million and $22 million, respectively, in costs under thesearrangements, which are included in operations and maintenance—affiliate in theaccompanying consolidated statements of operations. 

***Restructuring Charges***

In 2002, Mirant adopted arestructuring plan in response to constrained access to capital markets thatresulted from Moody’s December 2001 downgrade of Mirant’s credit rating,the Enron bankruptcy and other changes in market conditions. This plan wasdesigned to restructure operations by exiting certain business operations,canceling and suspending planned power plant developments, closing businessdevelopment offices and severing employees. During the years ended December 31,2004, 2003 and 2002, the Company recorded restructuring charges of $4 million,$6 million and $8 million, respectively, for severance costs andother charges, which are included in operations and maintenance—affiliate inthe accompanying consolidated statements of operations. During the years ended December 31,2003 and 2002, the Company recorded restructuring charges of $4 million and $11million, respectively, for severance costs and costs related to suspendingplanned power plant developments, which are included in operations andmaintenance—nonaffiliate in the accompanying consolidated statements ofoperations. The severance costs and other employee termination-relatedcharges associated with the restructuring at the Company’s locations were paidby Mirant Services and billed to the Company.

***Notes Receivable from and Notes Payable to Affiliate***

At December 31,2004 and 2003, unsecured noncurrent notes receivable from affiliate consistedof the following (in millions):
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|
| **Borrower**                                       | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**     | ** ** | **Rate**   | ** ** | **Maturity** | ** ** |
| Mirant Potomac  River                              |       | $          | 152        |       | $          | 152          |       |       | 10         | % |   | 12/30/2028 |   |
| Mirant Peaker                                      |       | 71         |       | 71         |       |         | 10         | %          |       | 12/30/2028 |   |
| Mirant Americas                                    |       | 255        |       | 255        |       |         | 6          | %          |       | on  demand |   |
| Total noncurrent  notes receivable—affiliates |       | $          | 478        |       | $          | 478          |       |       |       |   |   |   |   |
|                                                    |            |            |            |            |            |              |            |            |            |  |  |  |  |  |  |

 

Mirant Peaker and Mirant Potomac River borrowed fundsin December 2000 from Mirant Mid-Atlantic to finance in part theirrespective acquisitions of generation facilities. Principal is due on maturitywith interest due semiannually, in arrears, on June 30 and December 30.Any amount not paid when due bears interest thereafter at 12% per annum. MirantPotomac River and Mirant Peaker may 

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prepay up to$5 million and $3 million per year, respectively. Interest earned byMirant Mid-Atlantic from Mirant Potomac River and Mirant Peaker wasapproximately $12 million and $23 million for the years ended December 31,2003 and 2002, respectively. Mirant Mid-Atlantic has not recorded anyinterest income on these notes since the Petition Date. Interest earned wouldhave been $23 million for the years ended December 31, 2004 and 2003if not for the bankruptcy proceedings. Under the proposed Plan, the equityinterests of Mirant Potomac River and Mirant Peaker will be contributed toMirant Mid-Atlantic effectively eliminating the respective notes receivables.

Under the Facility Lease Agreements, it is a leaseevent of default if Mirant Peaker and Mirant Potomac River fail to makepayments under the respective notes in favor of Mirant Mid-Atlantic. However,the Chapter 11 proceedings automatically stay the initiations or continuationof actions to exercise control over the property of the Debtors.

The note receivable from Mirant Americas wascontributed to the Company effective January 1, 2002 (see below), ispayable on demand and bears interest at 6%, which is payable monthly. Interestearned by the Company from Mirant Americas was approximately $8 millionand $15 million for the years ended December 31, 2003 and 2002,respectively. The Company has not recorded any interest income on this notesince the Petition Date and due to the bankruptcy proceedings the Company hasclassified the note receivable as long-term notes receivable fromaffiliate at December 31, 2004 and 2003, respectively. Interest earnedwould have been $15 million for each of the years ended December 31, 2004and 2003, if not for the bankruptcy proceeding. Under the proposed Plan, thislong-term receivable from affiliate will be resolved pursuant to a global settlementwhereby intercompany claims will not receive any distribution.

During 2004, Mirant AmericasEnergy Marketing borrowed $33 million from Mirant Mid-Atlantic under Mirant’scash management program in order to meet its working capital needs. Mirant AmericasEnergy Marketing repaid the $33 million to Mirant Mid-Atlantic in 2004. Theinterest rate was calculated based on the daily money market interest rates.Mirant Mid-Atlantic recognized a nominal amount of interest income on theborrowed funds for the year ended December 31, 2004.

During 2002, Mirant Americas made capitalcontributions to the Company of $357 million consisting of cash and notespayable by certain operating subsidiaries of the Company to Mirant Americas,and in turn, the Company made subsequent capital contributions to therespective intermediate and ultimate operating subsidiaries that were obligatedwith respect to such notes payable.

During 2002, the Companymade noncash capital contributions to Mirant Mid-Atlantic of$130 million of unsecured notes payable.

***Mirant Mid-Atlantic Capital ContributionAgreement with Mirant***

The purchases of the Potomac River generating facilityand the Chalk Point combustion turbines by Mirant Potomac River and MirantPeaker, respectively, which are both wholly-owned subsidiaries of Mirant, werefunded by a capital contribution from Mirant and loans from Mirant Mid-Atlanticas evidenced by notes. Under a capital contribution agreement, Mirant PotomacRiver and Mirant Peaker are to make distributions to Mirant at least once perquarter, if funds are available, in amounts equal to all cash available aftertaking into account projected cash requirements, including mandatory debtservice, prepayments permitted under the Mirant Potomac River and the MirantPeaker notes, and maintenance reserves, as reasonably determined by Mirant.Mirant is to contribute or cause these amounts to be contributed to Mirant Mid-Atlantic.For the years ended December 31, 2003 and 2002, total capitalcontributions received by Mirant Mid-Atlantic under this agreementtotaled $6 million and $39 million, respectively. Subsequent to thePetition Date, none of the Mirant Debtors, including Mirant Mid-Atlantic,have made any capital contributions or paid any dividends.

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Under the capitalcontribution agreement with Mirant, no amendment to the capital contributionagreement that would adversely affect the holders of the lessor notes shall beeffective without the consent of the indenture trustee and no amendment thatwould adversely affect the owner lessors shall be effective without the consentof the owner lessors. Further, under theFacility Lease Agreements, it is a lease event of default if Mirant fails tomake payments under the capital contribution agreement. However, the Chapter 11proceedings automatically stay the initiations or continuation of actions toexercise control over the property of the Mirant Debtors.

***Contribution of Mirant New England, LLC to MirantAmericas Generation***

Effective January 1, 2002, Mirant Americastransferred its ownership interest in Mirant New England, LLC (“Mirant NewEngland”), a wholly-owned subsidiary of Mirant Americas, to the Company. Thetransfer was accounted for as cash and noncash capital contributions ofapproximately $7 million and $287 million, respectively, to theCompany in 2002. The assets and liabilities of Mirant New England weretransferred at their historical cost.

At January 1, 2002,Mirant New England’s significant assets consisted of $7 million cash, a$255 million note receivable from Mirant Americas (see above), interestreceivable from Mirant Americas of $37 million, derivative financialinstrument assets of $16 million, goodwill of $14 million and othercurrent assets of $27 million. Mirant New England’s liabilities consistedprimarily of accounts payable of $44 million, deferred tax liabilities of$11 million and other current liabilities of $10 million.

***Mirant Guarantees***

In 2004 and 2003 Mirant New England was required tosell electricity at fixed prices to Cambridge Electric Light Company (“Cambridge”)and Commonwealth Electric Company (“Commonwealth”) in order for them to meettheir supply requirements to certain retail customers. In April 2002,Mirant issued a guarantee in the amount of $188 million for any obligationsMirant New England may incur under its Wholesale Transition Service Agreementwith Cambridge and Commonwealth. Both the guarantee and the agreement expiredin February 2005.

Mirant entered into pre-petition letters of credit onbehalf of subsidiaries of the Company relating to lease obligations and othercontractual agreements. In July 2004, the $4 million pre-petition letterof credit related to other contractual agreements on behalf of Mirant Lovettwas drawn by the New York Department of Environmental Conservation. In February 2003,the $11 million pre-petition letter of credit related to the power salesagreements was terminated in conjunction with the sale of the Neenah generatingfacility. At December 31, 2004 the balance of the pre-petition letter ofcredit and guarantee related to lease obligations were each approximately $61million. In the event of a draw on such letters of credit, Mirant would beobligated to repay the amounts drawn.

Mirant entered into apost-petition letter of credit on behalf of Mirant Texas as of December 31,2004 relating to a tolling agreement totaling $5 million. This post-petitionletter of credit expires in August 2005.

***Purchased Emissions Allowances from Mirant AmericasEnergy Marketing***

The Company purchasesemissions allowances from Mirant Americas Energy Marketing at Mirant AmericasEnergy Marketing’s original cost to purchase the emissions allowances. Whereallowances have been purchased by Mirant Americas Energy Marketing from aMirant affiliate, the price paid by Mirant Americas Energy Marketing isdetermined by market indices. For the years ended December 31, 2004, 2003and 2002, the Company purchased $105 million, $34 million and $33 million,respectively, of emissions allowances from Mirant Americas Energy Marketing.Emissions allowances purchased from Mirant Americas Energy Marketing that wereutilized in the years ended December 31, 2004, 2003 and 2002 were $47million, $38 million and $26 million, respectively, and are recorded in cost offuel, electricity 

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andother products—affiliate in the accompanying consolidated statements ofoperations. As of December 31, 2004 and 2003, the Company had emissionsallowances purchased from Mirant Americas Energy Marketing of $58 million and$0, respectively, which are reflected in inventory in the accompanyingconsolidated balance sheets.

***Fuel Oil Sales to Mirant Peaker***

During the years ended December 31,2004, 2003 and 2002, Mirant Mid-Atlantic sold $16 million, $12 million and $1million, respectively, of fuel oil inventory from its Chalk Point facility toMirant Peaker which approximated book value.

**6.   Property, Plant and Equipment**

Property,plant and equipment consisted of the following at December 31, 2004 and2003 (in millions):
| ** **                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Production                          |       | $        | 2,136      |     | $          | 2,087 |   |
| Land                                |       | 39       |       | 39       |       |
| Oil pipeline                        |       | 25       |       | 25       |       |
| Other                               |       | 3        |       | 3        |       |
| Less accumulated  depreciation      |       | (332     | )          | (251     | )          |
| Total                               |       | 1,871    |       | 1,903    |       |
| Construction work in progress       |       | 64       |       | 30       |       |
| Suspended  construction projects    |       | 174      |       | 281      |       |
| Property, plant  and equipment, net |       | $        | 2,109      |     | $          | 2,214 |   |

 

Depreciation of the recorded cost of depreciableproperty, plant and equipment is recognized on a straight-line basis overthe estimated useful lives of the assets which range from 5 to 42 years. TheCompany received emissions allowances in the acquisition of its assets for bothSO2 and NOx emissions and the right to future allowances. The acquiredallowances related to owned facilities are included in production assets above,and are depreciated over the average life of the related assets, which rangefrom 8 to 40 years.

The Company does not expect to independently completeits suspended construction projects. The Company plans to either pursuepartnerships to complete one or more of the projects, sell the projects orabandon the projects. In the year ended December 31, 2004 the Companycompleted the sale of turbines that had been part of a suspended constructionproject at its Bowline facility. These turbines had a book value of $107million. The proceeds received in 2004 were $42 million and the Companycollected an additional $4 million in March 2005.

The Company evaluates its long-lived assets(property, plant and equipment) and definite-lived intangibles forimpairment whenever events or changes in circumstances indicate that the Companymay not be able to recover the carrying amount of the asset. As a result of twocredit rating downgrades, public opposition to Mirant’s and the Company’srestructuring proposals, material unfavorable variances to prior business plansthrough the second quarter of 2003 and a lawsuit filed against Mirant’s and theCompany’s restructuring proposals by the Company’s bondholders, the Companyreassessed its long-lived assets for impairment at June 30, 2003.The results of the analysis indicated no impairments of its property, plant andequipment existed at June 30, 2003. At December 31, 2003, anadditional impairment analysis was prepared incorporating the most recentassumptions as to future operations and opportunities in connection with Mirant’sand the Company’s 2004 10-year business plans. The results of the analysisindicated a substantial decrease in nominal cash flows over the Company’s10-year planning horizon and, 

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in certain cases, animpairment of certain of the Company’s long-lived asset and definite-livedintangible asset balances.

An asset impairment charge must be recognized if thesum of the undiscounted expected future cash flows from a long-livedasset or definite-lived intangible is less than the carrying value ofthat asset. The amount of impairment charge is calculated as the excess of thecarrying value of the asset over its fair value. Fair value is estimated basedon the discounted future cash flows from that asset or determined by othervaluation techniques. In the case of assets that the Company expects to sell,the impairment charge is based on the estimated fair value less costs to sell.

Followingis a summary of long-lived asset impairment charges recorded for the yearended December 31, 2003 (in millions):
| Property, plant  and equipment, in service |   | $   | 726    |   |
|--------------------------------------------|--------|-----|--------|--------|
| Suspended  construction projects           |   | 132 |   |
| Trading rights                             |   | 145 |   |
| Development  rights                        |   | 81  |   |
| Emissions  allowances                      |   | 6   |   |
| Total                                      |   | $   | 1,090  |   |

 

For purposes of testing for impairment losses, theCompany grouped long-lived assets and definite-lived intangibleassets at the lowest level at which separate cash flows can be identified,which generally was determined to be the individual generating assets orseveral generating assets operated as a group. The long-lived assetsevaluated for impairment consist of property, plant and equipment, constructionwork in progress, development rights, acquired emissions allowances and otherdefinite-lived intangible assets.

For the year ended December 31,2004, there were no events or changes in circumstances indicating that theCompany may not be able to recover the carrying values of its long-livedassets.

**7.   Goodwilland Other Intangible Assets**

***Goodwill***

Upon the adoption of SFAS No. 142, *Goodwill and Other Intangible Assets,* the Companydiscontinued amortization of goodwill effective January 1, 2002. TheCompany evaluates goodwill and indefinite-lived intangible assets forimpairment at least annually and periodically if indicators of impairment arepresent. An impairment occurs when the fair value of a reporting unit is lessthan its carrying value including goodwill (Step I). For this test, theCompany has determined that its operations constitute a single reporting unit.The amount of the impairment charge, if an impairment exists, is calculated asthe difference between the implied fair value of the reporting unit goodwilland its carrying value (Step II). This test is required each year at October 31and whenever contrary evidence exists as to the recoverability of goodwill.

The accounting estimates related to determining thefair value of goodwill require management to make assumptions about futurerevenue, operating costs and forward commodity prices over the life of theassets. Assumptions about future revenue, costs and forward prices require significantjudgment because such factors have fluctuated in the past and will continue todo so in the future.

As a result of two credit rating downgrades,opposition to Mirant’s and the Company’s restructuring proposals, materialunfavorable variances to its prior business plan through the second quarter2003 and a lawsuit filed against Mirant’s and the Company’s restructuringproposals by the Company’s bondholders, the Company assessed goodwill forimpairment at June 30, 2003. Additionally, the Company considered 

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the Mirant Debtors’ andthe Company’s bankruptcy proceedings on July 14, 2003, as events thatconfirmed the Company’s conclusion that a significant adverse change in Mirant’sand the Company’s business climate had occurred and was continuing. As a resultof the foregoing factors, the Company performed a goodwill impairmentassessment at June 30, 2003.

In performing the Company’s impairment analysis in2003, the fair value of the Company was determined using discounted cash flowtechniques and assumptions as to business prospects using the best informationavailable. The results of the Company’s analysis indicated that goodwill wasimpaired and the Company recorded an impairment charge of $1.6 billion,representing the entire balance of goodwill, in the accompanying consolidatedstatements of operations for the year ended December 31, 2003.

The critical assumptions used in the Company’simpairment analysis included the following: assumptions as to the futureelectricity and fuel prices; future levels of gross domestic product growth;levels of supply and demand; future operating and capital expenditures; andestimates of the Company’s weighted average cost of capital.

The above assumptions werecritical to the Company’s determination of the fair value of its goodwill. Thecombined subjectivity and sensitivity of the assumptions and estimates used inthe goodwill impairment analysis could result in a reasonable person concludingdifferently on those critical assumptions and estimates, possibly resulting in animpairment charge having been required for a lesser amount.

***Other Intangible Assets***

Followingis a summary of other intangible assets as of December 31, 2004 and 2003(in millions):
| ** **                     | ** ** | **Weighted**     | ** ** | **2004**     | ** ** | **2003**         | ** ** |
|--------------------------------|------------|------------------|------------|--------------|------------|------------------|------------|
| ** **                     | ** ** | **Average**      | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Amortization** | ** ** | **Carrying** | ** ** | **Accumulated**  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                     | ** ** | **Lives**        | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Trading rights                 |       |             | 26 years   |         |       |             | $          | 27 |   |   |   | $ | (1 | ) |   |   | $ | 27 |   |   |   | $ | — |   |   |
| Development  rights            |       |             | 40 years   |         |       |             | 62         |   |   |   | (7 | ) |   |   | 62 |   |   |   | (4 | ) |   |
| Acquired  emissions allowances |       |             | 32 years   |         |       |             | 131        |   |   |   | (15 | ) |   |   | 131 |   |   |   | (12 | ) |   |
| Other intangibles              |       |             | 30 years   |         |       |             | 12         |   |   |   | (2 | ) |   |   | 12 |   |   |   | (1 | ) |   |
| Total other  intangible assets |       |             |       |         |       |             | $          | 232 |   |   |   | $ | (25 | ) |   |   | $ | 232 |   |   |   | $ | (17 | ) |   |

 

All of Mirant Americas Generation’s other intangibleassets are subject to amortization and are being amortized on a straight-linebasis over their estimated useful lives, ranging from 26 to 40 years.Amortization expense for the years ended December 31, 2004, 2003 and 2002was approximately $8 million, $17 million and $17 million, respectively.Assuming no future acquisitions, dispositions or impairments of intangibleassets, amortization expense is estimated to be $8 million for each of thefollowing five years.

During 2003, the Company evaluated its definite-livedintangible assets for impairment as discussed in Note 6. As a result of thisevaluation, the Company recorded impairment charges of $232 millionrelated to its intangible assets. The carrying value of the intangible assetsabove may be further impaired in future periods as a result of changes to theCompany’s strategy in implementing its plan or plans of reorganization.

Development rights represent the right to expandcapacity at certain acquired generation facilities. The existinginfrastructure, including storage facilities, transmission interconnections andfuel delivery systems, and contractual rights acquired by the Company, providethe opportunity to expand or repower certain generation facilities. Thisability to expand or repower is estimated to be at significant cost savingscompared to greenfield construction.

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Mirant Mid-Atlanticacquired emissions allowances related to leased facilities in the acquisitionof the PEPCO assets for both SO2 and NOx emissions and the right to futureallowances.

**8.   DerivativeFinancial Instruments**

The Company usesderivative financial instruments to manage cash flow and operating incomeexposures arising from changes in commodity market prices, principally forenergy sales and fuel requirements, and in the past has used derivativeinstruments to manage these exposures arising from variable interest rates. TheCompany’s objective for holding derivative financial instruments is to providea degree of stability to the Company’s cash flows during periods of significantvolatility in commodity prices. All price risk management activities areentered into with Mirant Americas Energy Marketing under an affiliate agreementdiscussed in Note 5.

***Interest Rate Hedging***

Historically, the Companyhas entered into interest rate swaps in which it agreed to exchange, atspecified intervals, the difference between fixed and variable interest amountscalculated by reference to agreed-upon notional amounts. These interestrate swaps were designated to hedge the variable interest rate risk in theunderlying debt obligations. For swaps that qualify as cash-flow hedges, thechanges in the fair value of the swaps are deferred in other comprehensiveincome (“OCI”), and reclassified from OCI as an adjustment to interest expenseover the term of the hedged instruments. Gains and losses resulting from thetermination of qualifying hedges prior to their stated maturities wererecognized ratably over the remaining term of the hedged instruments. At December 31,2004 and 2003, the Company was not a party to any interest rate swaps. Pursuantto the bankruptcy proceedings, interest payments have been suspended on thedebt associated with the Company’s interest rate swaps accounted for asqualifying hedges that had previously been settled. Therefore, the remaininglosses related to these interest rate hedges totaling $52 million, aftertax, were reclassified from OCI to earnings in 2003, effective with theChapter 11 filing.

***Price Risk Management Activities***

The Company enters into commodity forward physicaltransactions as well as derivative financial instruments with Mirant AmericasEnergy Marketing to manage the Company’s market risk and exposure to marketprices for electricity and natural gas, oil and other fuels utilized by theCompany’s generation facilities under an affiliate agreement discussed inNote 5. Mirant Americas Energy Marketing normally enters into anoffsetting third-party derivative contract. The physical transactions includeforward contracts for physical sales and purchases of electricity and naturalgas. The derivative financial instruments primarily include forwards, futures,options and swaps, and may include instruments whose underlying commodity ishighly correlated to the electricity produced or to the fuels utilized by theCompany’s generation facilities, although the underlying fuel commodity itselfis not a component fuel used to produce electricity.

Power sales agreements, such as the ECSA, the Powerand Fuel Agreement, and other contracts that are used to mitigate exposure tocommodity prices but which either do not meet the definition of a derivative orare excluded under certain exceptions under SFAS No.133, are accounted for onthe accrual basis of accounting and are not included in price risk managementassets—affiliate or price risk management liabilities—affiliate in theaccompanying consolidated balance sheets.

As discussed in Note 3, a majority of the Company’sderivative financial instruments are recorded in the accompanying consolidatedbalance sheets at fair value under the netting provisions of the Power and FuelAgreement with Mirant Americas Energy Marketing. All realized and unrealizedgains or losses associated with these derivative financial instruments havebeen recognized in earnings in the period incurred.

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At December 31,2004, the Company’s derivative financial instruments represent net price riskmanagement liabilities—affiliate totaling $51 million and have termsextending through 2010. The net notional amount, or net short position, of theCompany’s derivative financial instruments at December 31, 2004 wasapproximately 11 million equivalent MWh. The fair values of MirantAmericas Generation’s price risk management assets—affiliate and price riskmanagement liabilities—affiliate as of December 31, 2004 are included inthe following table (in millions):
| ** **     | ** ** | **Current Price**     | ** ** | **Noncurrent Price**  | ** ** | **Current Price**     | ** ** | **Noncurrent Price**  | ** ** |
|----------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **     | ** ** | **Risk Management**   | ** ** | **Risk Management**   | ** ** | **Risk Management**   | ** ** | **Risk Management**   | ** ** |
| ** **     | ** ** | **Assets, net**       | ** ** | **Assets, net**       | ** ** | **Liabilities, net**  | ** ** | **Liabilities, net**  | ** ** |
| ** **     | ** ** | **Asset (Liability)** | ** ** | **Asset (Liability)** | ** ** | **Asset (Liability)** | ** ** | **Asset (Liability)** | ** ** |
| Electricity    |       |                       | $          | (17                        | )          |                       |       | $                          | —     |   |   |   | $ | (61 | ) |   |   | $ | (5 | ) |   |
| Natural gas    |       |                       | 3          |                       |       |                       | 1          |                       |       |   | 2 |   |   |   | 3 |   |   |
| Crude oil      |       |                       | 22         |                       |       |                       | —     |                       |       |   |   |   |   |   | 1 |   |   |
| Residual/other |       |                       | 3          |                       |       |                       | —     |                       |       |   | (3 | ) |   |   | — |   |   |
| Total          |       |                       | $          | 11                         |       |                       |       | $                          | 1          |   |   |   | $ | (62 | ) |   |   | $ | (1 | ) |   |

 

**9.   Other Comprehensive Loss**

Othercomprehensive loss includes unrealized gains and losses on certain derivativesthat qualified as cash flow hedges. Changes in accumulated othercomprehensive loss, net of tax, are as follows (in millions):
| Balance,  December 31, 2001                          |   | $      | (75    | )      |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Other  comprehensive income for the period:               |   |   |   |
| Reclassification to earnings, net of tax effect of  $(15) |   | 23     |   |
| Balance, December 31, 2002                           |   | (52    | )      |
| Other  comprehensive income for the period:               |   |   |   |
| Reclassification to earnings, net of tax effect of  $(29) |   | 52     |   |
| Balance,  December 31, 2003                          |   | $      | — |   |

 

The $52 million in accumulated othercomprehensive loss at December 31, 2002 is associated with deferredinterest rate swap hedging losses accounted for as qualifying hedges that hadbeen previously settled.

Pursuant to the bankruptcyproceedings, interest payments have been suspended on the debt associated withthe Company’s interest rate swaps. Therefore, the deferred interest rate swaphedging losses were reclassified from other comprehensive losses to earnings in2003, effective with the Chapter 11 filing.

**10.   Debt**

***Debtor-in-Possession Financing***

On November 5, 2003, certain of the MirantDebtors (the “DIP Borrowers”) (including the Company and its subsidiaries) enteredinto a two-year debtor-in-possession credit facility (the “DIP Facility”)providing for borrowings or the issuance of letters of credit in an amount notto exceed the lesser of $500 million or the then existing “borrowing base”.The borrowing base is the aggregate value assigned to specified powergeneration assets of the DIP Borrowers that serve as collateral for the DIPFacility. However, upon the occurrence of certain triggering events, includingthe sale of borrowing base assets or an event that has a material adverseeffect on the business, operations or value of a power generation facility, theborrowing base may be revalued or reserves against the borrowing base may beimposed, thus 

F-31

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lowering the borrowingbase amount. The borrowing base as of December 31, 2004 was$724 million. The borrowing base decreased $48 million in January 2005and will decrease another $37 million following the consummation of the pendingsale of certain assets of Mirant. The orders entered by the Bankruptcy Courtapproving the DIP Facility permit up to $300 million of borrowings, whichamount may be increased to $500 million upon written approval of each ofthe Statutory Committees or further order of the Bankruptcy Court. The DIPFacility also contains an option, exercisable by Mirant or Mirant AmericasGeneration, to remove Mirant Americas Generation and its subsidiaries asborrowers and obligors under the DIP Facility and reduce the DIP Facilitycommitment to a maximum of $200 million of borrowings. Borrowings underthe DIP Facility are secured by substantially all of the assets of the DIPBorrowers.

Pursuant to the DIPFacility, the DIP Borrowers are subject to a number of affirmative andrestrictive covenants, reporting requirements, and, subject to usage, financialcovenants. Additionally, the Company and its subsidiaries are subject tomaximum intercompany borrowing limits under the order approving the DIPFacility of $200 million at Mirant Mid-Atlantic and an additional $150 millionfor the remaining Mirant Americas Generation subsidiaries. The Mirant Debtorsand the Company were in compliance with the DIP Facility covenants, or hadreceived affirmative waivers of compliance where compliance was not attained,as of December 31, 2004.

**11.   Income Taxes**

Theincome tax (benefit) provision from continuing operations for the years ended December 31,2004, 2003 and 2002 is as follows (in millions):
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                              |       |     |       |     |       |     |       |
| Federal                               |       | $        | (12        | )        | $          | 77       |       | $ | 135 |   |
| State                                 |       | (8       | )          | 3        |       | 2        |       |
| Deferred:                             |       |     |       |     |       |     |       |
| Federal                               |       | 2        |       | 6        |       | (79      | )          |
| State                                 |       | (1       | )          | 27       |       | (2       | )          |
| (Benefit)  provision for income taxes |       | $        | (19        | )        | $          | 113      |       | $ | 56 |   |

 

Areconciliation of the Company’s federal statutory income tax (benefit)provision to the effective income tax provision for the years ended December 31,2004, 2003 and 2002 is as follows (in millions):
| ** **                                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **  2002  ** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------------------------------|------------|
| U.S. federal  statutory income tax (benefit) provision     |       | $        | 1          |     | $          | (1008                            | )          |   | $ | 42 |   |   |
| State and local  income taxes, net of federal income taxes |       | (2       | )          | (72      | )          |                             | 2          |   |   |
| LLC income not  subject to federal taxation                |       | (12      | )          | 39       |       |                             | 12         |   |   |
| Change in  deferred tax asset valuation allowance          |       | 1        |       | 656      |       |                             | 9          |   |   |
| Impact of non-deductible  goodwill impairment              |       |     |       | 465      |       |                             |       |   |   |
| Other, net                                                 |       | (7       | )          | 33       |       |                             | (9         | ) |   |
| Tax (benefit)  provision                                   |       | $        | (19        | )        | $          | 113                              |       |   | $ | 56 |   |   |

 

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Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and liabilities are as follows at December 31, 2004and 2003 (in millions):
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                            |       |     |       |     |       |
| Revenue subject to refund                        |       | $        | 154        |     | $          | 155 |   |
| Property and intangible assets                   |       | 415      |       | 458      |       |
| Price risk management assets—affiliate      |       | —   |       | 14       |       |
| Net operating loss carryforwards                 |       | 81       |       | 16       |       |
| Other, net                                       |       | 31       |       | 38       |       |
| Deferred tax assets                              |       | 681      |       | 681      |       |
| Valuation allowance                              |       | (666     | )          | (665     | )          |
| Net deferred tax assets                          |       | 15       |       | 16       |       |
| Deferred tax  liabilities:                       |       |     |       |     |       |
| Price risk management liabilities—affiliate |       | (10      | )          | —   |       |
| Other, net                                       |       | (15      | )          | (25      | )          |
| Total                                            |       | (25      | )          | (25      | )          |
| Net deferred tax  assets                         |       | $        | (10        | )        | $          | (9 | ) |

 

SFAS No. 109, *Accounting for IncomeTaxes*, requires that a valuation allowance be established when it ismore likely than not that all or a portion of a deferred tax asset will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences are deductible. In making this determination, management considersall available positive and negative evidence affecting specific deferred taxassets, including the Company’s past and anticipated future performance, thereversal of deferred tax liabilities, the implementation of tax planningstrategies and management’s expectations of future reimbursements of netoperating loss carryforwards from Mirant.

Objective positive evidence is necessary to support aconclusion that a valuation allowance is not needed for all or a portion ofdeferred tax assets when significant negative evidence exists. Cumulativelosses in recent years are the most compelling form of negative evidenceconsidered by management in this determination. Additionally, managementconsidered the fact that Mirant has not reimbursed the Company for currentperiod net operating losses since the Petition Date and the uncertaintyregarding future reimbursements from Mirant given the Mirant Debtors’ ongoingbankruptcy proceedings. In 2004 and 2003, the Company recognized increases inits valuation allowance of $1 million and $656 million, respectively, relatedto its net deferred tax assets.

At December 31, 2004, the Company hasapproximately $170 million of federal income tax operating loss carryforwardsand $300 million of net operating loss carryforwards for state income taxpurposes. These net operating loss carryforwards are available to offset futurefederal and state income taxes. Net operating loss carryforwards are determinedbased on the ability of each member of the consolidated group to utilize thelosses as if they were a separate taxpayer, excluding amounts previouslyreimbursed by Mirant under the tax sharing agreement.

The Company, through its parent Mirant, negotiated asettlement agreement with the Internal Revenue Service (“IRS”) for certain taxliabilities arising from their audit of the Company’s federal income taxreturns for tax years the Company was a subsidiary of Southern Company (“Southern”).This agreement resulted in an assessment of $14 million including interest. TheCompany has provided adequate tax provisions in prior years for the recognitionof this liability.

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The Company also has contingent liabilities related totax uncertainties arising in the ordinary course of business in otherjurisdictions. We periodically assess our contingent liabilities in connectionwith these uncertainties based upon the latest information available. For thoseuncertainties where it is probable that a loss has been incurred and the lossor range of loss can be reasonably estimated, a liability is recorded on theconsolidated financial statements. As additional information becomes available,the assessment and estimates of such liabilities are adjusted accordingly.

The Company had beenincluded in Mirant’s consolidated federal income tax return with Southern forthe period from January 1, 2001 through April 2, 2001. Under Mirant’sincome tax sharing agreement with Southern, the Company’s current and deferredtaxes were computed on a stand-alone basis, and tax payments and refundswere allocated to the Company based on this computation. Under this tax sharingarrangement, in 2002 the Company reimbursed Mirant for its U.S. federal stand-alonetaxable income in the amount of $37 million for the period ended April 2,2001.

***Pro Forma Income Tax Disclosures***

The Company is not subject to income taxes except forthose subsidiaries of the Company that are separate taxpayers. Mirant Americasis otherwise directly responsible for income taxes related to the Company’soperations. The following reflects a pro forma disclosure of the income taxprovision (benefit) that would be reported if the Company were to be allocatedincome taxes related to its operations.

Proforma income tax provision (benefit) attributable to income before tax wouldconsist of the following for the years ended December 31, 2004, 2003 and2002 (in millions):
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current provision  (benefit):         |       |     |       |     |       |     |       |
| Federal                               |       | $        | (12        | )        | $          | (15      | )          | $ | 74 |   |
| State                                 |       | (2       | )          | —   |       | 10       |       |
| Deferred provision (benefit):         |       |     |       |     |       |     |       |
| Federal                               |       | 19       |       | (181     | )          | (30      | )          |
| State                                 |       | —   |       | (18      | )          | (5       | )          |
| Total income tax  provision (benefit) |       | $        | 5          |     | $          | (214     | )          | $ | 49 |   |

 

Thefollowing table presents the pro forma reconciliation of the Company’s federalstatutory income tax provision (benefit) to the effective tax provision(benefit) for the years ended December 31, 2004, 2003 and 2002 (inmillions):
| ** **                                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **  2002  ** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------------------------------|------------|
| U.S. federal  statutory income tax (benefit) provision     |       | $        | 1          |     | $          | (1,008                           | )          |   | $ | 42 |   |   |
| State and local  income taxes, net of federal income taxes |       | 3        |       | (80      | )          |                             | 6          |   |   |
| Impact of  non-deductible goodwill impairment              |       | —   |       | 465      |       |                             | —     |   |   |
| Change in  deferred tax asset valuation allowance          |       | 10       |       | 428      |       |                             | —     |   |   |
| Other, net                                                 |       | (9       | )          | (19      | )          |                             | 1          |   |   |
| Tax provision  (benefit)                                   |       | $        | 5          |     | $          | (214                             | )          |   | $ | 49 |   |   |

 

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Thetax effects of temporary differences that give rise to significant portions ofthe pro forma deferred tax assets and liabilities would be as follows at December 31,2004 and 2003 (in millions):
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                             |       |     |       |     |       |
| Revenue subject to refund                        |       | $        | 110        |     | $          | 155 |   |
| Net operating loss carryforwards                 |       | 23       |       | 10       |       |
| Property and intangible assets                   |       | 245      |       | 285      |       |
| Other, net                                       |       | 89       |       | 62       |       |
| Deferred tax assets                              |       | 467      |       | 512      |       |
| Valuation allowance                              |       | (438     | )          | (428     | )          |
| Net deferred tax assets                          |       | 29       |       | 84       |       |
| Deferred tax  liabilities:                       |       |     |       |     |       |
| Price risk management liabilities—affiliate |       | (10      | )          | (31      | )          |
| Other, net                                       |       | (15      | )          | (30      | )          |
| Total                                            |       | (25      | )          | (61      | )          |
| Net deferred tax  assets                         |       | $        | 4          |     | $          | 23 |   |

 

**12.   Commitments**

**Operating Leases**

In conjunction with the acquisition of certain assetsfrom PEPCO, Mirant Mid-Atlantic leased the Morgantown and the Dickersonbaseload units and associated property for terms of 33.75 and 28.5 yearsrespectively. Mirant Mid-Atlantic has an option to renew the leases for aperiod that would cover up to 75% of the economic useful life of the facility,as measured from the beginning of the original lease term through the end ofthe proposed remaining lease term. Mirant Mid-Atlantic is accounting for theseleases as operating leases. Rent expenses associated with the Morgantown andDickerson operating leases totaled approximately $103 million for the yearended December 31, 2004 and $96 million for each of the years ended December 31,2003 and 2002 and are recorded as generation facilities rent expense in theaccompanying consolidated statements of operations. Because of the variabilityin the scheduled payment amounts over the lease term, Mirant Mid-Atlanticrecords rental expense for these leases on a straight-line basis. As of December 31,2004 and 2003, Mirant Mid-Atlantic paid approximately $285 million and $260 million,respectively, of actual operating lease payments in accordance with the leaseagreements in excess of rent expense recognized, and reported these amounts asprepaid rent in the accompanying consolidated balance sheets. In addition tothe regularly scheduled rent payments, Mirant Mid-Atlantic paid an additional$11 million and $13 million as of December 31, 2004 and 2003,respectively, as required by the lease agreements. Of the $11 million paymentmade in 2004, $8 million is included in the long-term prepaid rent balance andthe remaining $3 million is included in the current portion of the prepaid rentbalance in the accompanying consolidated balance sheets.

As of December 31, 2004, the total notionalminimum lease payments for the remaining term of the leases aggregatedapproximately $2.5 billion and the aggregate termination value for the leaseswas approximately $1.4 billion and generally decreases over time. MirantMid-Atlantic leases the Morgantown and the Dickerson baseload units from thirdparty owner lessors that purchased the baseload units from PEPCO. These ownerlessors each own the undivided interests in these baseload generatingfacilities. The subsidiaries of the institutional investors who hold themembership interests in the owner lessors are called owner participants. Equityfunding by the owner participants plus transaction expenses paid by the ownerparticipants totaled $299 million. The issuance and sale of pass through certificatesraised the remaining $1.2 billion needed for the owner lessors to acquire theundivided interests.

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The pass through certificates are not directobligations of Mirant Mid-Atlantic. Each pass through certificate represents afractional undivided interest in one of three pass through trusts formedpursuant to three separate pass through trust agreements between MirantMid-Atlantic and State Street Bank and Trust Company of Connecticut, NationalAssociation, as pass through trustee. The property of the pass through trustsconsists of lessor notes. The lessor notes issued by an owner lessor aresecured by that owner lessor’s undivided interest in the lease facilities andits rights under the related lease and other financing documents.

The operative documents relating to the leveragedlease contain certain covenants that restrict Mirant Mid-Atlantic and its “designatedsubsidiaries”—which term includes Mirant Chalk Point, Mirant Peaker and MirantPotomac River - including the following:

*Restricted payments*.   MirantMid-Atlantic cannot make any of the following restricted payments:

·       distributions in respect ofequity interests in Mirant Mid-Atlantic (in cash, property, securities orobligations other than additional equity interests of the same type);

·       payments or distributionson account of payments of interest, set apart money for a sinking or analogousfund for, or purchase or redeem any portion of, any equity interest in MirantMid-Atlantic or of any warrants, options or other rights to acquire any suchequity interest (or make payments to any person such as phantom stock payments,where the amount of the payment is calculated with reference to its fair marketor equity value); or

·       payments on or with respectto, the purchase, redemption, defeasance or other acquisition or retirement forvalue of any subordinated indebtedness;

unless,at the time of the restricted payment, each of the following conditions issatisfied:

·       MirantMid-Atlantic’s fixed charge coverage ratio for the most recently ended periodof four full fiscal quarters equals at least:

(1)   1.7 to 1.0;or

(2)          1.6to 1.0, 1.45 to 1.0, 1.3 to 1.0, or 1.2 to 1.0 if, as of the last day of themost recently completed fiscal quarter, Mirant Mid-Atlantic and its designatedsubsidiaries have entered into power sales agreements (meeting certaincriteria, including investment grade ratings criteria) covering, in theaggregate, at least 25%, 50%, 75%, or 100%, respectively, of the projectedtotal consolidated operating revenue for the consecutive period of eight fullfiscal quarters following that date; and

·       Theprojected fixed charge coverage ratio of Mirant Mid-Atlantic (determined on apro forma basis after giving effect to any such dividend) for each of the twofollowing periods of four fiscal quarters commencing with the fiscal quarter inwhich the restricted payment is proposed to be made equals at least:

(1)          1.7to 1.0; or

(2)          1.6to 1.0, 1.45 to 1.0, 1.3 to 1.0, or 1.2 to 1.0, if, as of the last day of themost recently completed fiscal quarter, Mirant Mid-Atlantic and its designatedsubsidiaries have entered into power sales agreements (meeting certaincriteria, including investment grade ratings criteria) covering, in theaggregate, at least 25%, 50%, 75%, or 100%, respectively, of the projectedtotal consolidated operating revenue for the consecutive period of eight fullfiscal quarters following that date; and

·       Before and immediatelyafter the making of the distribution, no significant lease default or event ofdefault has occurred and is continuing.

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In accordance with the terms of the leases, MirantMid-Atlantic calculates the projected fixed charge coverage ratio based onprojections prepared in good faith based upon assumptions consistent in allmaterial respects with the relevant contracts and agreements, historicaloperations and Mirant Mid-Atlantic’s good faith projections of futurerevenue and projections of operating and maintenance expenses in light of thenexisting or reasonably expected regulatory and market environments in themarkets in which the leased facilities or other assets owned by it will beoperated.

*Additional indebtedness*.   NeitherMirant Mid-Atlantic nor any of its subsidiaries (including any designatedsubsidiary) can incur or assume any indebtedness, except (1) MirantMid-Atlantic and any subsidiary (including any designated subsidiary) canincur:

·       any indebtedness, if, afterincurring such indebtedness, no lease default or lease event of default hasoccurred and both S&P and Moody’s confirm the ratings of the pass throughcertificates prior to incurring the indebtedness. However, if either rating isbelow investment grade, the indebtedness cannot be incurred unless the fixedcharge coverage ratio for the previous four quarters and the projected fixedcharge coverage ratios for the following eight fiscal quarters are each atleast 2.5 to 1.0;

·       any letters of credit,surety bonds or guarantees issued in the ordinary course of business;

·       any indebtedness secured bya pre-existing lien on any assets acquired by Mirant Mid-Atlantic or adesignated subsidiary, so long as the indebtedness has recourse only to thoseassets;

·       any intercompany loans;

·       any indebtedness incurredto finance capital expenditures made to comply with law or to finance requiredimprovements to either of the leased facilities covered by the leveraged lease;or

·       any indebtedness incurredby Mirant Mid-Atlantic and its subsidiaries (including any designatedsubsidiary) in an aggregate principal amount not to exceed $100 million (andwith respect to any individual designated subsidiary, in an aggregate principalamount not to exceed $50 million).

and (2) MirantMid-Atlantic and any subsidiary other than a designated subsidiary can incur:

·       any indebtedness incurredto refinance indebtedness secured by a pre-existing lien on acquired assets;

·       any indebtedness guaranteedby a parent of Mirant Mid-Atlantic that has a credit rating of BBB/Baa2 orhigher;

·       any working capitalindebtedness;

·       any interest rate hedgingtransactions entered into in the ordinary course of business; or

·       any subordinatedindebtedness.

*Merger and consolidation*.   NeitherMirant Mid-Atlantic nor any of its designated subsidiaries can consolidate ormerge with or into any other entity or sell or otherwise transfer all orsubstantially all of its properties or assets to any person or entity except,among other conditions, that the resulting entity or transferee of assets isorganized under the laws of the United States or any state, assumes theobligations of Mirant Mid-Atlantic or the designated subsidiary obligations andhas a credit rating of BBB-/Baa3 after the merger or transfer.

*Sale of assets*.   MirantMid-Atlantic cannot sell any of its assets other than certain limited permittedasset sales including sales of assets that do not exceed, in the aggregate,fifteen percent (15%) of the consolidated book value of Mirant Mid-Atlantic andits designated subsidiaries.

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*Liens*.   Mirant Mid-Atlanticcannot, and cannot permit any designated subsidiary to, create, incur, assumeor otherwise suffer to exist any liens on its interest under a facility lease,other than certain limited permitted encumbrances.

*Assignment and sublease*.   Withoutthe consent of other parties to the operative documents, Mirant Mid-Atlanticcannot assign or sublease its interest under a facility lease unless certainrequirements are met including the requirement that the assignee or itsguarantor has a credit rating of at least BBB/Baa2.

The lease payment obligations of Mirant Mid-Atlanticare senior unsecured obligations and rank equally in right of payment with allof its other existing and future senior unsecured obligations. Under the termsof the lease, Mirant Mid-Atlantic is responsible for the payment of rent to theindenture trustee, which in turn makes payments of principal and interest tothe pass through trust and any remaining balance to the owner lessors for thebenefit of the owner participants. The lease obligations of Mirant Mid-Atlanticare not obligations of its parent, Mirant Americas Generation, or, its indirectparent, Mirant, or any of its other affiliates. However, Mirant has arranged aletter of credit to provide for the rent payment reserve required in connectionwith this lease transaction in the event that Mirant Mid-Atlantic is unable topay its lease payment obligations.

Significant disputes have arisen between the MirantDebtors, on the one hand, and the owner lessors and the indenture trustee forthe Mirant Mid-Atlantic leveraged leases, on the other hand, regarding, amongother things, whether or not the leveraged lease transactions constitute a “lease”(or “leases”) within the meaning of section 365 of the Bankruptcy Code, orinstead evidence a financing or other arrangement. In April 2005, theBankruptcy Court dismissed the recharacterization claim, ruling that, basedupon the current posture of the Chapter 11 cases, a determination on the meritswas not presently warranted. In its ruling, the Bankruptcy Court reserved theright to reconsider the merits of recharacterization in the event that factsand circumstances changed in a manner such that further consideration would bewarranted.

At this time, the Mirant Debtors maintain that theleases are not true leases for bankruptcy purposes. However, based on theBankruptcy Court’s comments in its April 2005 ruling, the Mirant Debtorsmay determine to modify their proposed Plan (and related Disclosure Statement)to propose that the leases be assumed conditioned upon certain provisions inthe leases—including the limitations on restricted payments and therestrictions on the incurrence of indebtedness and liens—being modified,stricken or determined to be unenforceable and certain alleged defaultsdetermined as not requiring “cure” as a condition to assumption. In order toassume leases, a debtor-lessee must obtain bankruptcy court approval and,subject to certain exceptions set forth in the Bankruptcy Code, must cure anyexisting defaults under the applicable leases (unless such defaults are dulywaived). It would be the Mirant Debtors’ objective that assumption would beapproved at or before confirmation of the Plan, and that as part of theassumption or confirmation order, Mirant Mid-Atlantic would be relieved of theobligation to cure certain defaults and of the obligation to perform certaincovenants. If it is not feasible for Mirant Mid-Atlantic to assume the leasesbecause relief from certain defaults and/or covenants is not available, the tworemaining alternatives are rejection and revisiting the issue ofrecharacterization. In the latter circumstance, if the Bankruptcy Court recharacterizesthe leases as indebtedness, Mirant Mid-Atlantic may be required to re-evaluatethe accounting for the leases. If, on the other hand, recharacterization is notsought or is not available, and/or Mirant Mid-Atlantic cannot or does notassume the leases, then the leases will be rejected. In that event, the ownerlessors would be entitled to a return of the leased assets and would have aclaim for damages, if any, arising from such rejection, subject to thelimitation on allowed claims under section 502(b)(6) of the BankruptcyCode applicable to leases of real property. Any claims arising on account ofrejection would be subject to compromise in Mirant Mid-Atlantic’s Chapter 11case. The impact of any of these events would be reflected our consolidatedfinancial statements if and when the events occur.

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As a result of Mirant Mid-Atlantic’s bankruptcyfiling, a lease event of default has occurred under the leases. The leasesprovide that, upon a lease event of default, the owner lessors’ remedies include(1) terminating the leases and repossessing the leased assets, (2) sellingtheir interests in the leased assets, (3) demanding payment by MirantMid-Atlantic of the excess, if any, of the termination value over the fairmarket sales value of the leased assets or the discounted fair market rentalvalue of the leased assets and (4) demanding payment of the terminationvalue mitigated by a sale of the leased assets for the account of MirantMid-Atlantic. The termination value for the leases approximated $1.4 billionat December 31, 2004 and generally decreases over time. The ability of theowner lessors to exercise their remedies under the leases is currently stayedas a result of Mirant Mid-Atlantic’s Chapter 11 filing.

The Company has additionalcommitments under operating leases with various terms and expiration dates.Expenses associated with these additional operating leases totaledapproximately $5 million for the year ended December 31, 2004 and$4 million for the years ended December 31, 2003 and 2002. Theaggregate minimum lease payments for the remaining life of these leases as of December 31,2004 was approximately $25 million. Minimum lease payments undernoncancelable operating leases will approximate $4 million in 2005, $2 millionin 2006, $1 million in 2007, 2008 and 2009, and $16 millionthereafter.

**Fuel Purchase Commitments**

In April 2002, Mirant Mid-Atlantic enteredinto a long-term synthetic fuel purchase agreement. The fuel supplierconverts coal feedstock received at Mirant Mid-Atlantic’s Morgantownfacility into a synthetic fuel. Under the terms of the agreement, Mirant Mid-Atlanticis required to purchase a minimum of 2.4 million tons of synthetic fuelper annum through December 2007. Minimum purchase commitments becameeffective upon the commencement of the synthetic fuel plant operation at theMorgantown facility in July 2002. The purchase price of the synthetic fuelvaries with the delivered cost of the coal feedstock. Expenses associated withthis agreement totaled approximately $141 million, $115 million and $51million for years ended December 31, 2004, 2003 and 2002, respectively,and are recorded in cost of fuel, electricity and other products—nonaffiliateon the accompanying consolidated statements of operations. Based on currentcoal prices, it is expected that as of December 31, 2004, total estimatedminimum commitments under this agreement were $320 million. In July 2002,Mirant Mid-Atlantic sold its coal inventory at the Morgantown facility to thesynthetic fuel supplier for approximately $10 million, which approximatedits book value.

Additionally, Mirant Mid-Atlantic has approximately$463 million in purchase commitments-affiliate related to an arrangementbetween Mirant Americas Energy Marketing and the synthetic fuel supplierwhereby the synthetic fuel supplier is required to purchase coal directly fromthe coal supplier. Mirant Americas Energy Marketing’s minimum coal purchasecommitments, and thereby Mirant Mid-Atlantic’s commitments, are reduced to theextent that the synthetic fuel supplier purchases coal under this arrangement. During the first quarter of 2005, MirantMid-Atlantic recognized a $12 million gain due to a cash settlement in lieu ofreceiving certain volumes of coal from the coal supplier as a result of railcar transportation scheduling issues which resulted in lower cost offuel-affiliate.

The Company has also entered into a fuel supplyagreement with an independent third party to provide approximately 90% of theestimated coal to be burned at one of the New York facilities through 2005.Substantially all of the Company’s fuel requirements are fulfilled throughthese agreements and arrangements with Mirant Americas Energy Marketing forfuel supply discussed in Note 5.

The Company has total minimum commitments under fuelpurchase and transportation agreements of $360 million at December 31,2004.

This supplierconcentration could adversely affect the Company’s financial position orresults of operations should these parties default under the provisions of theagreements.

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**Long-Term Service Agreements**

As of December 31, 2004, the total estimatedcommitments for long-term service agreements (“LTSAs”) associated with turbinesinstalled or in storage were approximately $266 million. These commitments arepayable over the terms of the respective agreements, which range from ten totwenty years. These agreements have terms that allow for cancellation of thecontract by the Company upon the occurrence of several major events during theterm of the contracts. Estimates for future commitments for the LTSAs are basedon the stated payment terms in the contracts at the time of execution. Thesepayments are subject to an annual inflationary adjustment. If the Company wereto cancel these contracts due to the aforementioned major events, the estimatedcommitments for the remaining LTSAs would be reduced.

As part of the Chapter 11process, the Company rejected its LTSAs and entered into new agreements on June 16,2004 related to certain of its combustion turbine generation facilities. Thenew agreements provide more favorable terms, including reduced pricing andincreased flexibility to modify terms based upon market conditions. Under theterms of the previous LTSAs, the Company had prepaid future maintenanceservices at certain generating facilities. The Company recognized an$11 million charge in reorganization items, net in the consolidatedstatement of operations for the year ended December 31, 2004 as a resultof forfeited prepayments and impairments of certain purchased intangible assetsrelated to the previous LTSAs.

**Other Purchase Commitments**

Other purchase commitments represent open purchaseorders less invoices received or accrued related to open purchase orders forgeneral procurement and services purchased in the ordinary course of business.These include construction, maintenance and labor activities at our generationfacilities and approximate $52 million as of December 31, 2004.

TheCompany has the following annual amounts committed for long-term serviceagreements, fuel purchase and transportation commitments, operating leasecommitments, other purchase commitments and coal purchase commitments-affiliate(in millions):
| ** **                  | ** ** | ** **     | ** ** | **Fuel Purchase** | ** ** | ** **      | ** ** | ** **      | ** ** | ** **             | ** ** |
|-----------------------------|------------|----------------|------------|------------------------|------------|-----------------|------------|-----------------|------------|------------------------|------------|
| ** **                  | ** ** | **Long-Term**  | ** ** | **and**                | ** ** | **Operating**   | ** ** | **Other**       | ** ** | **Coal Purchase** | ** ** |
| ** **                  | ** ** | **Service**    | ** ** | **Transportation**     | ** ** | **Lease**       | ** ** | **Purchase**    | ** ** | **Commitments**        | ** ** |
| ** **                  | ** ** | **Agreements** | ** ** | **Commitments**        | ** ** | **Commitments** | ** ** | **Commitments** | ** ** | **to Affiliate**  | ** ** |
| Fiscal year  ended:         |       |           |       |                   |       |            |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| 2005                        |       |           | $          | 8                      |       |            |       | $               | 139        |                   |       |   | $ | 111 |   |   |   | $ | 52 |   |   |   | $ | 224 |   |   |
| 2006                        |       |           | 12         |                   |       |            | 113        |            |       |                   | 108        |   |   |   | — |   |   |   | 135 |   |   |
| 2007                        |       |           | 14         |                   |       |            | 108        |            |       |                   | 113        |   |   |   | — |   |   |   | 104 |   |   |
| 2008                        |       |           | 22         |                   |       |            | —     |            |       |                   | 122        |   |   |   | — |   |   |   | — |   |   |
| 2009                        |       |           | 22         |                   |       |            | —     |            |       |                   | 143        |   |   |   | — |   |   |   | — |   |   |
| Thereafter                  |       |           | 188        |                   |       |            | —     |            |       |                   | 1,886      |   |   |   | — |   |   |   | — |   |   |
| Total minimum payments |       |           | $          | 266                    |       |            |       | $               | 360        |                   |       |   | $ | 2,483 |   |   |   | $ | 52 |   |   |   | $ | 463 |   |   |

 

The Company is in theprocess of evaluating all of its executory contracts in order to determinewhich contracts will be assumed, assigned, recharacterized or rejected. TheCompany expects to assume or reject each contract as part of the existingprocess with the Bankruptcy Court or in its plan of reorganization.

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**13.   Litigationand Other Contingencies**

The Company is involved ina number of significant legal proceedings. Some matters may be unresolved forseveral years. The Company cannot currently determine the outcome of theproceedings described below or the ultimate amount of potential losses andtherefore has not made any material provision for such matters unlessspecifically noted below. Pursuant to SFAS No. 5, *Accountingfor Contingencies*, management provides for estimated losses to theextent information becomes available indicating that losses are probable andthat the amounts are reasonably estimable. Additional losses could have amaterial adverse effect on the Company’s consolidated financial position,results of operations or cash flows.

***Effect of Chapter 11 Proceedings***

On the Petition Date, August 18,2003, October 3, 2003 and November 18, 2003, the Mirant Debtors filedvoluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Asof the Petition Date, most pending litigation (including some of the actionsdescribed below) is stayed, and absent further order of the Bankruptcy Court,no party, subject to certain exceptions, may take any action, again subject tocertain exceptions, to recover on pre-petition claims against the MirantDebtors. One exception to this stay of litigation is for an action orproceeding by a governmental agency to enforce its police or regulatory power.The claims asserted in litigation and proceedings to which the stay applies maybe fully and finally resolved in connection with the administration of thebankruptcy proceedings and, to the extent not resolved, will need to beaddressed in the Plan. On November 19, 2003, the Bankruptcy Court enteredan order staying most litigation pending against current or former officers,directors and managers of the Mirant Debtors arising out of the performance oftheir duties and against certain potential indemnitees of the Mirant Debtors.The Bankruptcy Court took that action to avoid the risk that the continuationof such litigation would impede the Mirant Debtors’ ability to reorganize orwould have a negative impact upon the assets of the Mirant Debtors. At thistime, it is not possible to predict the outcome of the Chapter 11 proceedingsor their effect on the business of the Mirant Debtors or outstanding legalproceedings. The Mirant Debtors intend to resolve as many of these claims aspossible through the claims resolution process in the bankruptcy proceeding orthe Plan.

***California and Western Power Markets***

The Company is subject to litigation related to itsactivities in California and the western power markets and the high prices forwholesale electricity experienced in the western markets during 2000 and 2001.Various lawsuits and complaints have been filed by the California AttorneyGeneral, the California Public Utility Commission (“CPUC”), the CaliforniaElectricity Oversight Board (“EOB”) and various states’ rate payers in stateand federal courts and with the Federal Energy Regulatory Commission (“FERC”).Most of the plaintiffs in the rate payer suits seek to represent a state-wideclass of retail rate payers. In addition, civil and criminal investigationshave been initiated by the United States Department of Justice (“DOJ”), theGeneral Accounting Office, the FERC and various states’ attorneys general.These matters involve claims that the Company engaged in unlawful businesspractices and generally seek unspecified amounts of restitution and penalties,although the damages alleged to have been incurred in some of the suits are inthe billions of dollars. In addition, the Company is subject to the proceedingsdescribed below in *FERC Refund Proceedings*,*FERC Show Cause Proceeding Relating to TradingPractices*, *FERC Bidding Investigation*,and *DWR Power Purchases Proceedings* relatingto its operations in California and the western power markets. Resolution ofthese matters, to the extent not fully and finally resolved through either thesettlement of certain claims described below in *CaliforniaSettlement* or the claims process, is subject to resolution of theongoing litigation for the matters pending in courts and for those matterspending at the FERC to the issuance of final decisions by the FERC.

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*CaliforniaReceivables:  *In 2001, Southern California EdisonCompany (“SCE”) and Pacific Gas and Electric Company (“PG&E”) suspendedpayments to the California Power Exchange Corporation (“Cal PX”) and theCalifornia Independent System Operator Corporation (“CAISO”) for certain powerpurchases, including purchases from Mirant Americas Energy Marketing. Both theCal PX and PG&E filed for bankruptcy protection in 2001. As discussed belowunder *California Settlement*, on January 14,2005,**Mirant and certain of its subsidiariesentered into a Settlement and Release of Claims Agreement (the “CaliforniaSettlement”) with PG&E, SCE, San Diego Gas and Electric Company, the CPUC,the California Department of Water Resources (“DWR”), the EOB and the AttorneyGeneral of the State of California (collectively, the “California Parties”) andwith the Office of Market Oversight and Investigations of the FERC. On April 15,2005, the California Settlement became effective, and it resulted in MirantAmericas Energy Marketing assigning to the California Parties its outstandingreceivables for sales made in the Cal PX and CAISO markets from January 1,2000 through June 20, 2001. Under intercompany agreements between theCompany’s subsidiaries and Mirant Americas Energy Marketing, this assignment ofreceivables by Mirant Americas Energy Marketing may result in the terminationof Mirant Americas Energy Marketing’s liability on receivables held by thosesubsidiaries against Mirant Americas Energy Marketing related to the sales madeby Mirant Americas Energy Marketing in Cal PX and CAISO markets.

*FERC Refund Proceedings:  *Asa result of the increase in electricity prices in 2000 and 2001, the CaliforniaParties have pursued litigation at the FERC, claiming that the prices chargedby Mirant Americas Energy Marketing and other market participants in theCalifornia energy markets during certain periods in 2000 and 2001 wereexcessive. On July 25, 2001, the FERC issued an order requiringproceedings (the “FERC Refund Proceedings”) to determine the amount of anyrefunds and amounts owed for sales made to the CAISO or the Cal PX from October 2,2000 through June 20, 2001 (the “Refund Period”). Various parties haveappealed these FERC orders to the United States Court of Appeals for the NinthCircuit (the “Ninth Circuit”) seeking review of a number of issues, includingchanging the Refund Period to include periods prior to October 2, 2000 andexpanding the sales of electricity subject to potential refund to includebilateral sales made to the DWR. Any such expansion of the Refund Period or thetypes of sales of electricity potentially subject to refund could significantlyincrease the refund exposure of Mirant Americas Energy Marketing in thisproceeding. Although Mirant Americas Energy Marketing is the Mirant entity thatengaged in transactions with the CAISO and the Cal PX, the orders issuedby the FERC in the refund proceedings, and the filings made by other parties inthose proceedings, generally refer to the Mirant entity involved as Mirantwithout being more specific. Mirant believes that the Mirant entity that wouldactually be liable to third parties for any refunds determined by the FERC tobe owed, or that would be due any receivables found to be owed to Mirant, isMirant Americas Energy Marketing. Agreements that were in effect at the time ofthe transactions at issue between Mirant Americas Energy Marketing and theCompany’s subsidiaries that own generating facilities in California would shiftsome of the economic burden of such refunds or the benefit of such receivablesfrom Mirant Americas Energy Marketing to those subsidiaries.

In the July 25, 2001 order, the FERC also orderedthat a preliminary evidentiary proceeding be held to develop a factual recordon whether there had been unjust and unreasonable charges for spot marketbilateral sales in the Pacific Northwest from December 25, 2000 through June 20,2001. In that proceeding, the California Attorney General, the CPUC and the EOBfiled to recover certain refunds from parties, including Mirant Americas EnergyMarketing, for bilateral sales of electricity to the DWR at theCalifornia/Oregon border, claiming that such sales took place in the PacificNorthwest. In an order issued June 25, 2003, the FERC ruled that norefunds were owed and terminated the proceeding. On November 10, 2003, theFERC denied requests for rehearing filed by various parties. Various partieshave appealed the FERC’s decision to the Ninth Circuit.

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On September 9, 2004, the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed**in 2002 by theCalifornia Attorney General that sought refunds for transactions conducted inmarkets administered by the CAISO and the Cal PX outside the Refund Period setby the FERC and for transactions between the DWR and various owners ofgeneration and power marketers, including Mirant Americas Energy Marketing and subsidiariesof the Company. The Ninth Circuit remanded the proceeding to the FERC for it todetermine what remedies, including potential refunds, are appropriate whereentities, including Mirant Americas Energy Marketing and subsidiaries of theCompany, purportedly did not comply with certain filing requirements fortransactions conducted under market-based rate tariffs. Mirant Americas EnergyMarketing and other parties have filed a petition for rehearing with the NinthCircuit.

As discussed below under *CaliforniaSettlement*, the California Settlement became effective April 15,2005. The California Settlement results in the release of most of MirantAmericas Energy Marketing’s and therefore the Company’s potential liability in (1) theFERC Refund Proceedings for sales made in the CAISO or the Cal PX markets, (2) theproceeding also initiated by the FERC in July 2001 to determine whetherthere had been unjust and unreasonable charges for spot market bilateral salesin the Pacific Northwest from December 25, 2000 through June 20,2001, and (3) any proceedings at the FERC resulting from the Ninth Circuit’sreversal of the FERC’s dismissal of the complaint filed in 2002 by theCalifornia Attorney General. Under the California Settlement, the CaliforniaParties and those other market participants who have opted into the settlementhave released Mirant and its subsidiaries from any liability for refundsrelated to sales of electricity and natural gas in the western markets from January 1,1998 through July 14, 2003. Also, the California Parties will assume theobligation of Mirant Americas Energy Marketing to pay any refunds determined bythe FERC to be owed by Mirant Americas Energy Marketing to other parties thatdo not opt into the settlement for transactions in the CAISO and Cal PX marketsduring the Refund Period with the liability of the California Parties for suchrefund obligation limited to the amount of the receivables assigned by MirantAmericas Energy Marketing to the California Parties under the CaliforniaSettlement. Subject to applicable bankruptcy law, however, Mirant AmericasEnergy Marketing will continue to be liable for any refunds that FERCdetermines it to owe (1) to participants in the Cal PX and CAISO marketsthat are not California Parties (or that do not elect to opt into thesettlement) for periods outside of the Refund Period and (2) toparticipants in bilateral transactions with Mirant Americas Energy Marketingthat are not California Parties (or that do not elect to opt into thesettlement). This liability of Mirant Americas Energy Marketing could result inadditional liability of the Company’s subsidiaries to Mirant Americas EnergyMarketing under the intercompany agreements referred to above.

*FERCShow Cause Proceeding Relating to Trading Practices:  *OnJune 25, 2003, the FERC issued a show cause order (the “Trading PracticesOrder”) to more than 50 parties, including Mirant Americas Energy Marketing andsubsidiaries of the Company, that a FERC staff report issued on March 26,2003 identified as having potentially engaged in one or more trading strategiesof the type employed by Enron Corporation and its affiliates (“Enron”), asdescribed in the Enron memos released by the FERC in May 2002. The TradingPractices Order identified certain specific trading practices that the FERCindicated could constitute gaming or anomalous market behavior in violation ofthe CAISO and Cal PX tariffs. The Trading Practices Order requires the CAISO toidentify transactions between January 1, 2000 and June 20, 2001 thatmay involve the identified trading strategies, and then requires the applicablesellers involved in those transactions to demonstrate why such transactionswere not violations of the CAISO and Cal PX tariffs. On September 30,2003, the Mirant entities filed with the FERC for approval of a settlementagreement (the “Trading Settlement Agreement”) entered into between certainMirant entities and the FERC Trial Staff, under which Mirant Americas EnergyMarketing would pay $332,411 to settle the show cause proceeding, except for anissue related to selling of ancillary services, which is discussed below. In a November 14,2003 order in a different proceeding, the FERC ruled that certain allegationsof improper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in 

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the show cause proceeding.On December 19, 2003, the Mirant entities filed with the FERC for approvalof an amendment to the Trading Settlement Agreement reached with the FERC TrialStaff with respect to the sale of ancillary services. Under that amendment theFERC would have an allowed unsecured claim in Mirant Americas Energy Marketing’sbankruptcy proceeding for $3.67 million in settlement of the allegationswith respect to the sale of ancillary services (the “Ancillary Amount”). TheTrading Settlement Agreement, as amended, must be approved by the FERC and theBankruptcy Court to become effective.

As discussed below under *CaliforniaSettlement*, on April 15, 2005 the California Settlement becameeffective, and, as a result, the California Parties withdrew their oppositionto the Trading Settlement Agreement as amended and supported approval of theTrading Settlement Agreement as proposed by the Mirant entities that areparties to the Trading Settlement Agreement and the FERC Trial Staff withoutchange or modification. The FERC approved the Trading Settlement Agreement, asamended, on June 27, 2005, and the Mirant entities will now seek approvalfrom the Bankruptcy Court.

*FERCBidding Investigation:  *On June 25, 2003,the FERC issued an order (the “Bidding Order”) initiating an investigation byits staff into bidding practices in the Cal PX and CAISO markets between May 1,2000 and October 1, 2000 of more than 50 parties, including MirantAmericas Energy Marketing. The entities subject to investigation under theBidding Order were previously identified in a report issued by the FERC Staffon March 26, 2003 as having bid generation resources to the Cal PX andCAISO at prices unrelated to costs. Under the contractual arrangements pursuantto which Mirant Americas Energy Marketing bought and resold electricityproduced by the Company’s California generation assets, the Company’ssubsidiaries could have had to reimburse Mirant Americas Energy Marketing for theamount of any disgorgement of profits required or other remedy imposed by theFERC upon Mirant Americas Energy Marketing. As discussed below under *California Settlement*, on April 15, 2005 the CaliforniaSettlement became effective, and it has resulted in the termination of the FERCStaff’s investigation of Mirant Americas Energy Marketing’s bidding practicesthat was initiated under the Bidding Order.

*DWRPower Purchases Proceedings:  *On May 22,2001, Mirant Americas Energy Marketing entered into a 19-month agreementwith the DWR to provide the State of California with approximately 500 MW ofelectricity during peak hours through December 31, 2002 (the “DWR Contract”).On February 25, 2002, the CPUC and the EOB filed separate complaints atthe FERC against Mirant Americas Energy Marketing and other sellers ofelectricity under long-term agreements with the DWR, alleging that the terms ofthese contracts were unjust and unreasonable and that the contracts should beabrogated or the prices under the contracts should be reduced. On June 26,2003, the FERC issued an order dismissing the complaints filed by the CPUC andthe EOB against Mirant Americas Energy Marketing. On November 10, 2003, theFERC denied motions for rehearing filed by the CPUC and the EOB. The CPUC andEOB appealed the FERC’s decision to the Ninth Circuit. As discussed below under*California Settlement*, the CaliforniaSettlement became effective on April 15, 2005. Under that settlement, theDWR and the other California Parties have released Mirant Americas EnergyMarketing from any liability with respect to the DWR Contract and the CPUC andthe EOB are to dismiss their appeal of the FERC’s decision dismissing theircomplaints.

*Reliability Must Run Agreements Proceeding*.   Certainof the generating facilities acquired by subsidiaries of the Company fromPG&E are operated subject to reliability-must-run agreements (“RMRAgreements”), which those subsidiaries assumed from PG&E. These agreementsallow the CAISO to require the Company’s subsidiaries, under certainconditions, to operate these facilities to support the California electrictransmission system. The rates that the Company’s subsidiaries could charge theCAISO under those agreements, where they were also making sales into the marketand were retaining the revenues from those sales, were the subject of anongoing disputed rate proceeding before the FERC at the time of the acquisitionof the plants from PG&E and were being collected subject to refund. Priorto 2005, for the plants that are subject to the RMR Agreements and from whichthe Company’s subsidiaries have exercised their rights to also make marketsales, the Company’s subsidiaries collected from the 

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CAISO an amount equal to50% of the annual fixed revenue requirement (the “Annual Requirement”) of thoseplants. The amounts the Company’s subsidiaries collected from the CAISO weresubject to refund pending final review and approval by the FERC. While theCAISO is the party to the RMR Agreements with the Company’s subsidiaries, theCAISO’s obligations under those agreements are funded by PG&E, and PG&Eis the real party in interest with respect to any refunds owed by the Company’ssubsidiaries for sales made previously under those agreements. In June 2000,the ALJ issued a decision finding that the amount the Company’s subsidiariesshould be allowed to charge the CAISO for such plants was approximately 31⁄2% onaverage of the Annual Requirement. In July 2000, the Company’s subsidiariessought review by the FERC of the ALJ decision.

As discussed below under *CaliforniaSettlement*, the California Settlement became effective on April 15,2005. Under that settlement, PG&E has released the Company’s subsidiariesthat own generating facilities subject to the RMR Agreements from any potentialrefund liability under the RMR Agreements for the period through September 30,2004 in return for the consideration provided to PG&E under the CaliforniaSettlement. In addition, the CAISO separately agreed with Mirant to release itsclaims for refunds with respect to the RMR Agreements for the period through September 30,2004 upon the California Settlement becoming effective. In its order issued April 13,2005 approving the California Settlement, the FERC also dismissed as moot thepending proceeding regarding the rates that the Company’s subsidiaries couldcharge for plants subject to the RMR Agreements from which those subsidiarieswere also making market sales. The Company’s subsidiaries on May 13, 2005filed with the FERC a request for rehearing of the FERC’s dismissal of thatproceeding for the purpose of having the FERC determine the rate that wouldapply for periods subsequent to September 30, 2004 where thosesubsidiaries are making sales into the market from units designated by theCAISO under the RMR Agreements as RMR units. On June 3, 2005, the FERCdenied that request for rehearing, concluding that the terms of the CaliforniaSettlement and power purchase agreements entered into between the Company’ssubsidiaries and PG&E under the terms of that settlement caused no issuesto remain as to what payments would effectively be made to the Company’ssubsidiaries under the RMR Agreements during the period those power purchaseagreements are in effect, which is potentially through 2012.

*California Settlement.  *On January 14,2005,**Mirant and certain of its subsidiariesentered into the California Settlement with the California Parties and theOffice of Market Oversight and Investigations of the FERC settling a variety ofdisputed matters. The Mirant entities that are parties to the CaliforniaSettlement are Mirant, Mirant Americas, Mirant Americas Energy Marketing,Mirant Americas Energy Marketing Investments, Inc., the Company, MirantCalifornia Investments, Inc., Mirant California, LLC, Mirant Delta, LLC,Mirant Potrero, LLC, Mirant Special Procurement, Inc., Mirant Services,and Mirant Americas Development, Inc. (collectively, the “Mirant SettlingParties”). The “California Parties” are PG&E, SCE, San Diego Gas andElectric Company, the CPUC, the DWR, the EOB and the Attorney General of theState of California. The effectiveness of the California Settlement wasconditioned upon its approval by the CPUC, the Bankruptcy Court, the bankruptcycourt having jurisdiction over PG&E’s bankruptcy proceedings initiated in2001, and the FERC. The CPUC’s execution of the California Settlement signifiedits approval. The PG&E bankruptcy court approved the California Settlementon March 24, 2005, the FERC approved it on April 13, 2005, and theBankruptcy Court approved it by order entered April 15, 2005, causing thesettlement to become effective April 15, 2005.

Under the California Settlement, (1) MirantAmericas Energy Marketing and the other Mirant Settling Parties have assignedto the California Parties all receivables owed to Mirant Americas EnergyMarketing for transactions in the markets administered by the Cal PX or theCAISO for the period January 1, 2000 through June 20, 2001, which arecurrently estimated by the parties to the California Settlement to beapproximately $283 million, and (2) the California Parties received anallowed, unsecured claim against Mirant Americas Energy Marketing in itsChapter 11 case for $175 million and the DWR received an additional allowed,unsecured claim against Mirant Americas Energy Marketing of 

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$2.25 million. Inreturn, the California Parties released all claims they may have against theMirant Settling Parties related to sales of electricity or natural gas atwholesale in western markets in the period from January 1, 1998 through July 14,2003, including all such claims filed by the California Parties in the MirantDebtors’ Chapter 11 cases, in proceedings before the FERC, or in the four suitsfiled against Mirant, the Company and certain of its subsidiaries by theCalifornia Attorney General in March and April 2002 and August 2004.The Company estimates that, excluding duplicative claims, this settlement hascompromised the bulk of the California energy market claims against MirantAmericas Energy Marketing at issue in the FERC Refund Proceedings. Also, theCalifornia Parties have assumed Mirant Americas Energy Marketing’s obligationto pay any refunds determined by the FERC to be owed by Mirant Americas EnergyMarketing to other parties for transactions in the CAISO and Cal PX marketsduring the Refund Period, with the liability of the California Parties for suchrefund obligation limited to the amount of the receivables assigned by MirantAmericas Energy Marketing to the California Parties under the CaliforniaSettlement. Subject to applicable bankruptcy law, Mirant Americas EnergyMarketing continues to be liable for any refunds that the FERC determines it toowe to (1) participants in the Cal PX or CAISO markets other than theCalifornia Parties (or other parties that have opted into the CaliforniaSettlement) for periods outside the Refund Period or (2) parties withwhich Mirant Americas Energy Marketing engaged in bilateral electricity ornatural gas transactions other than the California Parties (or other partiesthat have opted into the California Settlement). This liability of MirantAmericas Energy Marketing could result in additional liability of the Company’ssubsidiaries to Mirant Americas Energy Marketing under intercompany agreementsbetween those subsidiaries and Mirant Americas Energy Marketing.

Some of the consideration to be received by theCalifornia Parties under the California Settlement is available to other marketparticipants that choose to opt into the California Settlement, and severalhave done so. Those market participants that have elected to opt into theCalifornia Settlement have, as a result, given releases of liability to theMirant Settling Parties that are the same as those given by the CaliforniaParties. In addition to the claims filed by the California Parties seeking torecover refunds from Mirant Americas Energy Marketing and other Mirant entitiesfor sales of electricity made by Mirant Americas Energy Marketing into theCAISO and Cal PX markets in 2000 and 2001, the CAISO and the Cal PX have filed claimsagainst Mirant Americas Energy Marketing and other Mirant Settling Partiesseeking to recover refunds on behalf of participants in the markets for whichthey were responsible. While the CAISO and the Cal PX are not parties to theCalifornia Settlement, the FERC’s approval of the California Settlementconstitutes its direction to the CAISO and the Cal PX to conform their booksand records to the terms of the settlement and to withdraw with prejudice allclaims filed by them in the Chapter 11 cases that seek to recover amounts orotherwise obtain relief on behalf of, or for the benefit of, any of theCalifornia Parties or any other market participants that opt into theCalifornia Settlement. In addition, the CAISO separately agreed with Mirant torelease its claims upon the California Settlement becoming effective. TheCalifornia Parties also released the Mirant Settling Parties from any liabilityor refund claims related to the DWR Contract, including claims asserted in thecomplaints filed by CPUC and EOB with the FERC in February 2002. The FERC’sapproval of the California Settlement, under its terms, also had the effect ofterminating any pending investigations by the FERC of the conduct of the MirantSettling Parties in the western energy markets in 2000 and 2001.

The California Settlement also resolved all claimsasserted by PG&E against the Company’s subsidiaries, Mirant Delta andMirant Potrero, and the other Mirant Settling Parties in the Chapter 11 casesor in proceedings before the FERC that related to refunds potentially owedunder the RMR Agreements between Mirant Delta and the CAISO and Mirant Potreroand the CAISO. Under the California Settlement, PG&E released Mirant Deltaand Mirant Potrero from any potential refund liability under the RMR Agreementsfor the period prior to September 30, 2004, and the claims filed byPG&E in the Chapter 11 cases seeking to recover refunds from Mirant Deltaand Mirant Potrero for sales made under the RMR Agreements have been withdrawnwith prejudice. Although the CAISO was not a party to 

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the California Settlement,under the terms of the California Settlement, the FERC’s approval of thesettlement constitutes its direction to the CAISO to conform its books andrecords to the terms of the California Settlement and to withdraw withprejudice all claims filed by it in the Chapter 11 cases that seek to recoveramounts related to sales made under the RMR Agreements in the period prior to September 30,2004. In addition, the CAISO separately agreed with Mirant to release itsclaims upon the California Settlement becoming effective.

In return for the releases it granted to the MirantSettling Parties described in the previous paragraph, PG&E receivedallowed, unsecured claims against the Company’s subsidiary Mirant Delta thatwill receive a distribution of proceeds of $63 million, and either (1) thepartially constructed Contra Costa 8 project, which is a planned 530 MWcombined cycle generating facility, and related equipment (collectively, the “CC8Assets”) will be transferred to PG&E or (2) PG&E will receiveadditional alternative consideration in the amount of $70 million (the “CC8Alternative Consideration”).

To fund the CC8 Alternative Consideration, PG&Ereceived an allowed, unsecured claim against Mirant Delta that will receive adistribution of $70 million. PG&E will liquidate any securities received aspart of such distribution and place the net resulting amount plus any cashreceived into an escrow account. To the extent that the net amount resultingfrom the liquidation of the securities received by PG&E plus any cashreceived by it is less than the CC8 Alternative Consideration, the differencewill be made up by PG&E withholding and paying into the escrow accountamounts it owes to Mirant Delta over a three month period under the powerpurchase agreements described below or by payments from Mirant Delta or theCompany. If the transfer of the CC8 Assets to PG&E does not occur on orbefore June 30, 2008, or if certain specified events occur prior to thatdate, such as the failure of the CPUC to approve PG&E’s acquisition of theCC8 Assets, then the CC8 Alternative Consideration is to be paid to PG&Eand the Mirant Settling Parties will retain the CC8 Assets. If PG&E closeson its acquisition of the CC8 Assets, the funds in the escrow account will bepaid to Mirant Delta.

PG&E also has entered into two power purchaseagreements with Mirant Delta and Mirant Potrero that will allow PG&E todispatch and purchase the power output of all units of the generating plantsowned by those entities that have been designated by the CAISO as RMR unitsunder the RMR Agreements. The first agreement is for 2005. The second agreementwill be for 2006 through 2012.

Under the California Settlement, PG&E and MirantDelta also are to negotiate by September 30, 2005 (extended by the partiesfrom the original date of April 30, 2005) an agreement (the “OptionAgreement”) under which PG&E would have separate options to purchase eachof Mirant Delta’s existing Contra Costa generating plant and its existingPittsburg generating plant, in both cases once no unit at the plant hasoperated for a certain period of years. The price at which each plant could bepurchased pursuant to the option would be equal to the amount of certaincapital costs not recovered by Mirant Delta under the terms of the RMRAgreement applicable to that plant at the time of the exercise of the option.If Mirant Delta and PG&E do not reach agreement on the Option Agreement by September 30,2005, or if PG&E cannot obtain CPUC approval of the Option Agreement or itsexercise of its rights thereunder, Mirant Delta and the other Mirant SettlingParties will have no further obligations to PG&E with respect to the OptionAgreement or the rights it was to provide to PG&E.

*Accounting Impact of CaliforniaSettlement.**  ***At December 31,2004, the Company had recorded receivables and related reserves associated withamounts due to Mirant Americas Energy Marketing from the CAISO and Cal PXrelated to the period from October 2000 to June 2001 and reservesrelated to refunds under the RMR Agreements. The California Settlement resultedin a non-cash gain to the Company of approximately $161 million, to be recordedin the second quarter of 2005.

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***Mirant Americas Generation Bondholder Suit***

On June 10, 2003, certain holders of senior notesof the Company maturing after 2006 filed a complaint in the Court of Chanceryof the State of Delaware*, California PublicEmployees’ Retirement System, et al. v. Mirant Corporation, et al.,*that named as defendants Mirant, Mirant Americas, the Company, certain past andpresent Mirant directors, and certain past and present Company managers. Amongother claims, the plaintiffs assert that a restructuring plan pursued by theCompany prior to its filing a petition for reorganization under Chapter 11 ofthe Bankruptcy Code was in breach of fiduciary duties allegedly owed to them byMirant, Mirant Americas and the Company’s managers. In addition, plaintiffschallenge certain dividends and distributions made by the Company prior to thePetition Date. Plaintiffs seek damages in excess of $1 billion. Mirant hasremoved this suit to the United States District Court for the District ofDelaware. This action is stayed with respect to the Mirant entities that aredefendants by the filing of the Chapter 11 proceedings of these entities. On November 19,2003, the Bankruptcy Court entered an order staying this action also withrespect to the individual defendants to avoid the suit impeding the ability ofthe Mirant Debtors to reorganize or having a negative effect upon the assets ofthe Mirant Debtors. The Mirant Americas Generation Creditor Committee in 2003filed a motion in Mirant’s bankruptcy proceedings seeking to pursue claimsagainst Mirant, Mirant Americas, certain past and present Mirant directors, andcertain past and present managers of the Company similar to those asserted inthis suit. The Bankruptcy Court ruled that while the committee has standing toassert claims on behalf of the estate of the Company, no such claims could befiled without the Bankruptcy Court’s approval and no motions seeking suchapproval could be filed at least through April 2004. On June 15,2005, the Mirant Americas Generation Creditor Committee again filed a motion inMirant’s bankruptcy proceedings seeking to pursue claims against Mirant, MirantAmericas, certain past and present Mirant directors, and certain past andpresent managers of the Company similar to those asserted in this suit. On June 30,2005, the Bankruptcy Court issued an oral ruling that if the Mirant Debtors hadnot by July 8, 2005 entered into agreements with the individual defendantsin this action tolling the running of any statute of limitations, then theMirant Americas Generation Creditor Committee would be authorized to fileclaims against those defendants on behalf of the estate of Mirant AmericasGeneration. The Mirant Debtors did obtain tolling agreements from each of theindividual defendants.

On December 15, 2003, Lehman Commercial PaperInc. (“Lehman”), as agent for various lenders under certain pre-petition creditagreements, filed a claim against the Company in the bankruptcyproceedings. On December 15, 2003, Wells Fargo Bank, N.A. (“WellsFargo”) also filed claims in the bankruptcy proceedings as successor indenturetrustee for bond indebtedness under a certain indenture against theCompany. In addition to their original claims, on that same date, Lehmanand Wells Fargo filed supplemental claims against the Company, Mirant and anumber of other subsidiaries of Mirant (the “Supplemental Claims”) seekingrecovery of principal, interest, fees, and costs under the Mirant AmericasGeneration loan documents and bond documents, respectively. In theirSupplemental Claims, Lehman and Wells Fargo essentially seek to preserve forthemselves the claims previously sought to be asserted by the Mirant AmericasGeneration Creditor Committee.

On November 3, 2004,the Mirant Debtors objected to the Supplemental Claims against the Company andthe other Mirant entities on the grounds that: (1) Lehman and Wells Fargolack standing to pursue the Supplemental Claims, which are derivative claimsbelonging to each respective Mirant Debtor’s estate; (2) there is nofactual basis for any of the “potential” causes of action against the Companyand no basis whatsoever for the claims against any other Mirant entities; and (3) theSupplemental Claims are duplicative and contingent. In addition to theobjection, the Mirant Debtors also filed a motion to dismiss the SupplementalClaims on the basis that the Supplemental Claims do not allege any independentharm to Lehman and Wells Fargo and assert nothing more than derivative claimsbelonging to the Mirant Debtors’ estates that cannot be asserted by Lehman andWells Fargo. The Bankruptcy Court issued an order on April 12, 2005,ruling that (A) the Supplemental Claims will be withdrawn, (B) thewithdrawal of 

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theSupplemental Claims, to the extent that they are not property of the estates orderivative of a Mirant Debtor (the “Withdrawn Claims”), will be withoutprejudice and the Bar Date shall be extended through the date of confirmationof a plan in the Mirant Debtors Chapter 11 proceedings, and (C) thewithdrawal of the Supplemental Claims does not impair the ability of Lehman orWells Fargo to raise those claims as issues in the plan confirmation process.

***Mirant Americas Generation Securities Class Action.***

On June 11, 2003, a purported class actionlawsuit alleging violations of Sections 11 and 15 of the Securities Act of 1933was filed in the Superior Court of Fulton County, Georgia entitled *Wisniak v. Mirant Americas Generation, LLC, et al*. Thelawsuit names as defendants the Company and certain current and former officersand managers of the Company. The plaintiff seeks to represent a putative classof all persons who purchased debt securities of the Company pursuant to ortraceable to an exchange offer completed by the Company in May 2002 inwhich $750 million of bonds registered under the Securities Act wereexchanged for $750 million of previously issued senior notes of theCompany. The plaintiff alleges, among other things, that the Company’srestatement in April 2003 of prior financial statements rendered theregistration statement filed for the May 2002 exchange offer materiallyfalse. The complaint seeks damages, interest and attorneys’ fees. Thedefendants have removed the suit to the United States District Court for theNorthern District of Georgia. This action is stayed as to the Company by thefiling of its Chapter 11 proceeding. On November 19, 2003, theBankruptcy Court entered an order staying this action also with respect to theindividual defendants to avoid the suit impeding the ability of the Company toreorganize or having a negative effect upon its assets. On December 8,2003, the district court took notice of the Bankruptcy Court’s order dated November 19,2003 staying the litigation and administratively closed the action. On December 16,2003, the plaintiff dismissed the Company as a defendant, without prejudice,and filed a proof of claim against the Company in the bankruptcy proceedingsasserting the same claims set forth in the lawsuit.

The Company and theplaintiff have entered into a stipulation of settlement of the Wisniak suit andthe claim filed against the Company that was approved by the Bankruptcy Courton January 19, 2005. Under the terms of the stipulation of settlement, theplaintiff will seek certification of a class by the district court that willreceive $2.25 million to be paid by insurers for the Company and an allowed,unsecured claim for $2 million against Mirant, subordinated to the claims ofits other unsecured creditors. Members of the plaintiff class will have theopportunity to opt out of the settlement, and if class members who choose toopt out own in the aggregate more than 1% of the Company’s bonds that are thesubject of the suit, then the Mirant defendants have the option to withdrawfrom the settlement. The stipulation of settlement must also be approved by thedistrict court to become effective. On June 27, 2005, the district courtentered an order granting preliminary approval to the settlement, certifying asettlement class, and scheduling a hearing for final approval of the settlementfor September 6, 2005.

***PEPCO Litigation***

In 2000, Mirant purchased certain power generatingassets and certain other assets from PEPCO, including certain power purchaseagreements (“PPAs”). Under the terms of the Asset Purchase and Sale Agreement(the “APSA”), Mirant and PEPCO entered into a contractual arrangement (the “Back-to-BackAgreement”) with respect to certain PPAs, including PEPCO’s long-term PPAs withOhio Edison Company (“Ohio Edison”) and Panda-Brandywine L.P. (“Panda”),under which (1) PEPCO agreed to resell to Mirant all capacity, energy,ancillary services and other benefits to which it is entitled under thoseagreements; and (2) Mirant agreed to pay PEPCO each month all amounts duefrom PEPCO to the sellers under those agreements for the immediately precedingmonth associated with such capacity, energy, ancillary services and otherbenefits. The Panda and Ohio Edison PPAs run until 2021 and 2005 respectively.Under the Back-to-Back Agreement, Mirant is obligated to purchase power fromPEPCO at 

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prices that aresignificantly higher than existing market prices for power. In the Chapter 11cases of the Mirant Debtors, PEPCO has asserted that an Assignment andAssumption Agreement dated December 19, 2000 that includes as partiesPEPCO, various subsidiaries of the Company, Mirant Potomac River, and MirantAmericas Energy Marketing, LP, causes the Company’s subsidiaries that areparties to the agreement to be jointly and severally liable to PEPCO forvarious obligations, including the obligations under the Back-to-BackAgreement. PEPCO also asserts that the Assignment and Assumption Agreementcauses the Company’s subsidiaries to be jointly and severally liable for aclaim of $105 million filed by PEPCO in the Chapter 11 cases related tomodifications agreed to between Mirant Americas Energy Marketing and PEPCOrelated to the Transition Power Agreements in place between PEPCO and MirantAmericas Energy Marketing through January 2005. The Company is disputingthis interpretation of the Assignment and Assumption Agreement in proceedingsbefore the Bankruptcy Court, but the outcome of those proceedings is uncertain.If the Company’s subsidiaries are determined to be jointly and severally liablefor the obligations of Mirant and Mirant Americas Energy Marketing to PEPCOunder the Assignment and Assumption Agreement, then the claim related to theTransition Power Agreements and the proceedings described below involving theBack-to-Back Agreement could have an adverse effect upon the Company’sfinancial condition, although such an effect would be mitigated by Mirant andMirant Americas Energy Marketing also having responsibility for thoseobligations.

*Back-to-Back Agreement Litigation.  *OnAugust 28, 2003, the Mirant Debtors filed a motion in the bankruptcyproceedings to reject the Back-to-Back Agreement (the “Rejection Motion”),along with an adversary proceeding to enjoin PEPCO and the FERC from takingcertain actions against the Mirant Debtors (the “Injunction Litigation”). On October 9,2003, the United States District Court for the Northern District of Texasentered an order that had the effect of transferring to that court from theBankruptcy Court the Rejection Motion and the Injunction Litigation. In December 2003,the district court denied the Rejection Motion and, thereafter, dismissed theInjunction Litigation. The district court ruled that the Federal Power Actpreempts the Bankruptcy Code and that a bankruptcy court cannot affect a matterwithin the FERC’s jurisdiction under the Federal Power Act, including therejection of a wholesale power purchase agreement regulated by the FERC.

The Mirant Debtors appealed the district court’sorders to the United States Court of Appeals for the Fifth Circuit (the “FifthCircuit”). The Fifth Circuit reversed the district court’s decision, holdingthat the Bankruptcy Code authorizes a district court (or bankruptcy court) toreject a contract for the sale of electricity that is subject to the FERC’sregulation under the Federal Power Act as part of a bankruptcy proceeding andthat the Federal Power Act does not preempt that authority. The Fifth Circuitremanded the proceeding to the district court for further action on thatmotion. The Fifth Circuit indicated that on remand the district court couldconsider applying a more rigorous standard than the business judgment standardtypically applicable to contract rejection decisions by debtors in bankruptcy,which more rigorous standard would take into account the public interest in thetransmission and sale of electricity.

On December 9, 2004, the district court held thatthe Back-to-Back Agreement was a part of and not severable from, and thereforecould not be rejected apart from, the APSA. The district court also noted thatif the Fifth Circuit overturned the district court’s ruling with respect toseverability, the Back-to-Back Agreement should be rejected only if Mirant canprove that the Back-to-Back Agreement burdens the bankrupt estates; that, afterscrutiny and giving significant weight to the comments of the FERC relative tothe effect of rejection on the public interest, the equities balance in favorof rejecting the Back-to-Back Agreement; and that rejection of the Back-to-BackAgreement would further the Chapter 11 goal of permitting the successfulrehabilitation of the Mirant Debtors. The Mirant Debtors have appealed thedistrict court’s December 9, 2004 decision to the Fifth Circuit andrequested that the Fifth Circuit hear this appeal on an expedited basis. On March 8,2005, the Fifth Circuit denied the Mirant Debtor’s request to have the appealexpedited.

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On January 21, 2005, the Mirant Debtors filed amotion in the bankruptcy proceedings to reject the APSA, including theBack-to-Back Agreement but not including other agreements entered into betweenMirant and its subsidiaries and PEPCO under the terms of the APSA (the “SecondRejection Motion”). On February 10, 2005, PEPCO filed a motion requestingthe district court to assert jurisdiction over and rule upon the SecondRejection Motion rather than having the Bankruptcy Court rule on thatmotion. On March 1, 2005, the district court ruled that it would withdrawthe reference to the Bankruptcy Court of the Mirant Debtors’ January 21,2005 motion seeking to reject the APSA and would itself hear that motion.

*Suspension of PEPCO Back-to-Back Payments.  *OnDecember 9, 2004, in an effort to halt further out-of-marketpayments under the Back-to-Back Agreement while awaiting resolution of issuesrelated to the potential rejection of the Back-to-Back Agreement (but prior tonotice of entry of the district court’s order of December 9, 2004), Mirantfiled a notice in the Bankruptcy Court that Mirant was suspending furtherpayments to PEPCO under the Back-to-Back Agreement absent further order of thecourt (the “Suspension Notice”). On December 10, 2004, in response to the SuspensionNotice, PEPCO filed a motion in the district court seeking a temporaryrestraining order and injunctive relief to require Mirant to perform under theBack-to-Back Agreement (the “Injunctive Relief Motion”). On December 13,2004, the district court issued an order referring the Injunctive Relief Motionto the Bankruptcy Court. On December 21, 2004, the Bankruptcy Court issuedan order denying the temporary restraining order sought by PEPCO.

On December 14, 2004, PEPCO filed the followingadditional litigation: (1) a motion seeking relief from the automatic stayprovision of Bankruptcy Code section 362(a) to permit PEPCO to terminateperformance under the APSA (the “Lift Stay Motion”); (2) a motion tocompel the Mirant Debtors to pay, as administrative expenses, payments that hadbeen suspended under the Back-to-Back Agreement (the “Administrative ExpenseMotion”); and (3) an adversary proceeding seeking to compel the MirantDebtors to make payments under the Back-to-Back Agreement (the “PEPCO Lawsuit”).On December 16, 2004, PEPCO filed a motion requesting the district courtto withdraw the reference to the Bankruptcy Court with respect to thelitigation filed by PEPCO on December 14, 2004, as well as the InjunctiveRelief Motion (the “Second Withdrawal Motion”). On January 4, 2005, thedistrict court denied the Second Withdrawal Motion in its entirety.

On January 19, 2005, the Bankruptcy Court enteredan order embodying a ruling made orally by the court on January 14, 2005,in which it denied the Lift Stay Motion and the Administrative Expense Motion,but required the Mirant Debtors to pay amounts due under the Back-to-BackAgreement in January 2005 and thereafter until (1) the Mirant Debtorsfiled a motion to reject the APSA, (2) the Fifth Circuit issued an orderreversing the district court’s order of December 9, 2004 denying themotion to reject the Back-to-Back Agreement, or (3) the MirantDebtors were successful in having the obligations under the Back-to-BackAgreement recharacterized as debt obligations. PEPCO filed an appeal of theBankruptcy Court’s January 19, 2005 order. On January 21, 2005, theMirant Debtors filed the Second Rejection Motion.

On March 1, 2005, the district court withdrew thereference to the Bankruptcy Court of the Second Rejection Motion and theAdministrative Expense Motion, ordered the Mirant Debtors to pay PEPCO allpast-due, unpaid obligations under the Back-to-Back Agreement by March 10,2005 and dismissed as moot PEPCO’s appeal of the January 19, 2005 orderdenying the Administrative Expense Motion. The Mirant Debtors on March 4,2005 filed a motion requesting the district court to reconsider its order of March 1,2005 or alternatively to stay that order while the Mirant Debtors appeal it tothe Fifth Circuit. On March 7, 2005, the district court modified the March 1,2005 order to require PEPCO to file a response to the Mirant Debtors’ motionfor reconsideration by March 14, 2005 and to delay until March 18,2005, the date by which the Mirant Debtors were to pay past-due, unpaidobligations under the Back-to-Back Agreement.

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On March 16, 2005, the Mirant Debtors filed apetition for writ of mandamus with the Fifth Circuit asking it to order thedistrict court to vacate the March 1, 2005 order, as modified, and toreinstate PEPCO’s appeal of the Bankruptcy Court’s order of January 19,2005 denying the Administrative Expense Motion. The petition asked the FifthCircuit alternatively to stay the March 1, 2005 order until the MirantDebtors appeal of that order was resolved. Also on March 16, 2005 thedistrict court further modified its order of March 1, 2005 to clarify thatthe amounts to be paid by the Mirant Debtors by March 18, 2005 did notinclude any amounts that became due prior to the filing of the Chapter 11 caseson July 14, 2003. On March 16, 2005, the Mirant Debtors’ alsoappealed the district court’s March 1, 2005 order, as modified, to theFifth Circuit. On March 17, 2005, the Fifth Circuit issued a temporarystay of the March 1, 2005 order, as modified. On April 11, 2005, theFifth Circuit vacated the temporary stay entered on March 17, 2005, deniedthe petition for writ of mandamus and denied the Mirant Debtors’ request for astay pending appeal. In its order the Fifth Circuit concluded that the MirantDebtors’ challenges to the district court’s order of March 1, 2005, asmodified, could be remedied in their pending appeals and that the MirantDebtors had not shown they would suffer irreparable harm if the order was notstayed pending appeal. On April 20, 2005, the district court entered anorder directing the Mirant Debtors to pay PEPCO by April 25, 2005 allunpaid amounts due under the Back-to-Back Agreement accruing since the PetitionDate to the extent they had not already done so, and to continue performance ofall obligations under the agreement until further order of the district court.The Mirant Debtors have paid all amounts due under the Back-to-BackAgreement accruing since the Petition Date.

*Potential Adjustment Related to Panda PowerPurchase Agreement.  *At the time of the acquisition ofthe Mirant Mid-Atlantic assets from PEPCO, Mirant also entered into anagreement with PEPCO that, as subsequently modified, provided that the pricepaid by Mirant for its December 2000 acquisition of PEPCO assets would beadjusted if by April 8, 2005 a binding court order had been enteredfinding that the Back-to-Back Agreement violated PEPCO’s power purchaseagreement with Panda (the “Panda PPA”) as a prohibited assignment, transfer ordelegation of the Panda PPA or because it effected a prohibited delegation ortransfer of rights, duties or obligations under the Panda PPA that was notseverable from the rest of the Back-to-Back Agreement. Panda initiated legalproceedings in 2000 asserting that the Back-to-Back Agreement violatedprovisions in the Panda PPA prohibiting PEPCO from assigning the Panda PPA ordelegating its duties under the Panda PPA to a third party without Panda’sprior written consent. On June 10, 2003, the Maryland Court of Appeals,Maryland’s highest court, ruled that the assignment of certain rights anddelegation of certain duties by PEPCO to Mirant did violate the non-assignmentprovision of the Panda PPA and was unenforceable. The court, however, left openthe issues whether the provisions found to violate the Panda PPA could besevered and the rest of the Back-to-Back Agreement enforced andwhether Panda’s refusal to consent to the assignment of the Panda PPA by PEPCOto Mirant was unreasonable and violated the Panda PPA. The Company believes thatthe June 10, 2003 decision by the Maryland Court of Appeals does notsuffice to trigger a purchase price adjustment under the agreement betweenMirant and PEPCO. If that court order were found to have triggered the purchaseprice adjustment, the agreement between Mirant and PEPCO provides that theamount of the adjustment would be negotiated in good faith by the parties ordetermined by binding arbitration so as to compensate PEPCO for the terminationof the benefit of the Back-to-Back Agreement while also holding Miranteconomically indifferent from such court order.

*PEPCOAvoidance Action.  *OnJuly 13, 2005, Mirant and several of its subsidiaries, including MirantMid-Atlantic and Mirant Americas Generation, filed a lawsuit against PEPCObefore the Bankruptcy Court to avoid and recover fraudulent transfers under 11U.S.C. §§ 544 and 550 and applicable state law in connection with theacquisition of PEPCO’s assets by Mirant in December 2000 and disallowPEPCO’s proofs of claim. The suit asserts that Mirant did not receive fairvalue in return for the PEPCO assets and that the acquisition occurred at atime when Mirant was either insolvent or was rendered insolvent as a result ofthe transaction. The likely outcome of this proceeding cannot now bedetermined, and the Company cannot estimate what recovery, if any, it mayobtain in this action.

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***Environmental Matters***

*EPA Information Request.  *InJanuary 2001, the EPA issued a request for information to Mirantconcerning the air permitting and air emissions control implications under theEPA’s new source review regulations promulgated under the Clean Air Act (“NSR”)of past repair and maintenance activities at Mirant Potomac River’s plant inVirginia and Mirant Mid-Atlantic’s Chalk Point, Dickerson and Morgantown plantsin Maryland. The requested information concerns the period of operations thatpredates Mirant Mid-Atlantic’s ownership and lease of the plants. Mirant hasresponded fully to this request. Under the sales agreement with PEPCO for thoseplants, PEPCO is responsible for fines and penalties arising from any violationassociated with historical operations prior to the Company’s acquisition orlease of the plants. If a violation is determined to have occurred at any ofthe plants, the Mirant entity owning or leasing the plant may be responsiblefor the cost of purchasing and installing emissions control equipment, the costof which may be material. If such violation is determined to have occurredafter the Company acquired or leased the plants or, if occurring prior to theacquisition or lease, is determined to constitute a continuing violation, theMirant entity owning or leasing the plant at issue would also be subject tofines and penalties by the state or federal government for the periodsubsequent to its acquisition or lease of the plant, the cost of which may bematerial.

*Mirant Potomac River Notice of Violation.  *OnSeptember 10, 2003, the Virginia Department of Environmental Quality (“VirginiaDEQ”) issued a Notice of Violation (“NOV”) to Mirant Potomac River allegingthat it violated its Virginia Stationary Source Permit to Operate by emittingNOx in excess of the “cap” established by the permit for the 2003 summer ozoneseason. Mirant Potomac River responded to the NOV, asserting that the cap isunenforceable, noting that it can comply through the purchase of emissionsallowances and raising other equitable defenses. Virginia’s civil enforcementstatute provides for injunctive relief and penalties. On January 22, 2004,the EPA issued an NOV to Mirant Potomac River alleging the same violation ofits Virginia Stationary Source Permit to Operate as set out in the NOV issuedby the Virginia DEQ.

On September 27, 2004, Mirant Potomac River,Mirant Mid-Atlantic, the Virginia DEQ, the Maryland Department of theEnvironment, the DOJ and the EPA entered into, and filed for approval with theUnited States District Court for the Eastern District of Virginia, a consentdecree that, if approved, will resolve Mirant Potomac River’s potentialliability for matters addressed in the NOVs previously issued by the VirginiaDEQ and the EPA. The consent decree requires Mirant Potomac River and MirantMid-Atlantic to (1) install pollution control equipment at thePotomac River plant and at the Morgantown plant leased by Mirant Mid-Atlanticin Maryland, (2) comply with declining system-wide ozone season NOxemissions caps from 2004 through 2010, (3) comply with system-wide annualNOx emissions caps starting in 2004, (4) meet seasonal system averageemissions rate targets in 2008 and (5) pay civil penalties and performsupplemental environmental projects in and around the Potomac River plantexpected to achieve additional environmental benefits. Except for theinstallation of the controls planned for the Potomac River units and theinstallation of selective catalytic reduction (“SCR”) or equivalent technologyat Mirant Mid-Atlantic’s Morgantown Units 1 and 2 in 2007 and 2008, the consentdecree does not obligate the Mirant entities to install specifically designatedtechnology, but rather to reduce emissions sufficiently to meet the various NOxcaps. Moreover, as to the required installations of SCRs at Morgantown, MirantMid-Atlantic may choose not to install the technology by the applicabledeadlines and leave the units off either permanently or until such time as theSCRs are installed. The aggregate amount of the civil penalties to be paid andcosts to be incurred by Mirant Potomac River for the supplemental environmentalprojects is $1.5 million. The consent decree is subject to the approval of thedistrict court and the Bankruptcy Court.

*Mirant Potomac River Downwash Study.  *OnSeptember 23, 2004, the Virginia DEQ and Mirant Potomac River entered intoan order by consent with respect to the Potomac River plant under which MirantPotomac River agreed to perform a modeling analysis to assess the potentialeffect of “downwash” 

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from the plant (1) onambient concentrations of SO2, nitrogen dioxide (“NO2”), carbon monoxide (“CO”)and particulate matter less than or equal to 10 micrometers (“PM10”) forcomparison to the applicable national ambient air quality standards (“NAAQS”)and (2) on ambient concentrations of mercury for comparison to VirginiaStandards of Performance for Toxic Pollutants. Downwash is the effect thatoccurs when aerodynamic turbulence induced by nearby structures causespollutants from an elevated source, such as a smokestack, to be mixed rapidlytoward the ground resulting in higher ground level concentrations ofpollutants. If the modeling analysis indicates that emissions from the facilitymay cause exceedances of the NAAQS for SO2, NO2, CO or PM10, or exceedances ofmercury compared to Virginia Standards of Performance for Toxic Pollutants, theconsent order requires Mirant Potomac River to submit to the Virginia DEQ aplan and schedule to eliminate and prevent such exceedances on a timely basis.Upon approval by the Virginia DEQ of the plan and schedule, the approved planand schedule is to be incorporated by reference into the consent order. To theextent that the downwash study indicates that emissions from the Potomac Riverplant exceed either the NAAQS or the Virginia Standards of Performance forToxic Pollutants, the remedial actions required could include materialmodifications to the plant or to its operation. The financial and operationalimplications of any such remedial actions are not known at this time. Mirant PotomacRiver received the Virginia DEQ’s approval of the modeling protocol on June 20,2005 and has 60 days from that date to complete the modeling analysis.

*Mirant NY-Gen Pipeline Leak.  *Inthe fall of 2003, Mirant NY-Gen, LLC (“Mirant NY-Gen”) discovered aleaking underground pipeline at the Hillburn generating facility in Ramapo, NewYork. The underground line was used for supplying kerosene fuel to the gasturbines located on site. After confirmatory testing revealed a potential leak,the line was removed from service and plans were undertaken to excavate andsample portions of the line to determine the extent of the line damage and thepossible soil contamination. Upon initial discovery the leak was reported tothe New York State Department of Environmental Conservation (“NYSDEC”) and theRockland County Health Department. In the summer of 2004 soil contamination wasdiscovered and a subsequent testing of portions of the line revealed a smallhole. Currently, investigations are continuing to determine the extent ofcontamination and possible remedial activities to clean up the area.Additionally, Mirant NY-Gen is working under the direction of the NYSDEC toremove all free product contamination from the groundwater and undertakeremediation actions for additional on-site and off-site contamination. Thecurrent estimate of the cost of cleanup is greater than $3 million;however, due to the ongoing evaluation to determine the extent of thecontamination, the exact cost of remediation is unknown at this time.

On May 19, 2005, the NYSDEC issued a Notice ofHearing and Complaint to Mirant NY-Gen seeking an order requiring Mirant NY-Gento implement its approved remediation plan, payment of all costs relating tothe cleanup (including all costs incurred by the NYSDEC), and payment of acivil penalty in the amount of $100,000. The outcome of this proceeding cannotnow be determined.

*Riverkeeper Suit Against Mirant Lovett.  *OnMarch 11, 2005, Riverkeeper, Inc. filed suit against Mirant Lovett inthe United States District Court for the Southern District of New York underthe Federal Water Pollution Control Act (the “Clean Water Act”). The suitalleges that Mirant Lovett’s failure to implement a marine life exclusionsystem at its Lovett generating plant and to perform monitoring for theexclusion of certain aquatic organisms from the plant’s cooling water intakestructures violated Mirant Lovett’s water discharge permit issued by the Stateof New York. The plaintiff requests the court to enjoin Mirant Lovett fromcontinuing to operate the Lovett generating plant in a manner that allegedlyviolates the Clean Water Act, to impose civil penalties of $32,500 per day ofviolation, and to award the plaintiff attorney’s fees. On April 20, 2005,the district court approved a stipulation agreed to by the plaintiff and MirantLovett that stays the suit until 60 days after entry of an order by theBankruptcy Court confirming a plan of reorganization for Mirant Lovett becomesfinal and non-appealable.

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***New York Tax Proceedings***

The Company’s subsidiaries that own generating plantsin New York are or were (in the settled proceedings discussed below) thepetitioners in forty-one proceedings (“Tax Certiorari Proceedings”) initiallybrought in various New York state courts challenging the assessed value ofthose generating plants determined by their respective local taxingauthorities. Mirant Bowline has challenged the assessed value of the Bowlinegenerating facility and the resulting local tax assessments paid for tax years1995 through 2003. Mirant Bowline succeeded to rights held by Orange &Rockland Utilities, Inc. (“Orange & Rockland”) for the tax yearsprior to its acquisition of the Bowline Plant in 1999 under its agreement withOrange & Rockland for the purchase of that plant. Mirant Lovett hasinitiated proceedings challenging the assessed value of the Lovett facility foreach of the years 2000 through 2003. Mirant NY-Gen (collectively with MirantBowline and Mirant Lovett, the “New York Debtors”) has settled its taxcertiorari proceedings with respect to the combustion turbine and hydroelectricfacilities it owns for each of the years 2000 through 2003. If the remainingTax Certiorari Proceedings result in a reduction of the assessed value of thegenerating facility at issue in each proceeding, the New York Debtor owning thefacility would be entitled to a refund with interest of any excess taxes paidfor those tax years.

On September 30, 2003, the Mirant Debtors filed amotion (the “Tax Determination Motion”) with the Bankruptcy Court requestingthat it determine what the property tax liability should have been for theBowline generating facility in each of the years 1995 through 2003, for theLovett generating facility in each of the years 2000 through 2003, and for thegenerating facilities owned by Mirant NY-Gen in each of the years 2000 through2003. The bases for the relief requested in the Tax Determination Motion onbehalf of each of the New York Debtors were that the assessed values ofgenerating facilities located in New York made by the relevant taxingauthorities had no justifiable basis and were far in excess of their actualvalue. The local taxing authorities have opposed the Tax Determination Motion,arguing that the Bankruptcy Court either lacks jurisdiction over the mattersaddressed by the Tax Determination Motion or should abstain from addressingthose issues so that they can be addressed by the state courts in which the TaxCertiorari Proceedings described in the preceding paragraph were originallyfiled.

Collectively, the New York Debtors have not paidapproximately $62 million assessed by local taxing authorities on the Bowlineand Lovett generating facilities for 2003, which fell due on September 30,2003 and January 30, 2004, and approximately $53 million assessed by localtaxing authorities on the generating facilities for 2004 that fell due on September 30,2004 and January 30, 2005, in order to preserve their respective rights tooffset the overpayments of taxes made in earlier years against the sums payableon account of current taxes. The failure to pay the taxes due on September 30,2003, January 30, 2004, September 30, 2004, and January 30, 2005could subject Mirant Bowline and Mirant Lovett to additional penalties andinterest.

All of the tax certiorariproceedings related to the generating facilities owned by Mirant NY-Gen havebeen resolved on terms favorable to the New York Debtors, but the taxcertiorari proceedings related to the Bowline and Lovett generating facilitiesremain unresolved.

***Utility Choice and Cirro Group Claims***

On February 18, 2005, two providers ofelectricity at retail in Texas, Utility Choice, L.P. and Cirro Group, Inc.,filed a suit in the United States District Court for the Southern District ofTexas, entitled Utility Choice, L.P., et al. v. TXU Corp., et al., againstnumerous owners of generating facilities and power marketers in Texas,including Mirant Americas Energy Marketing, Mirant Americas Development, Inc.,and two subsidiaries of the Company owning generating facilities in Texas. Theplaintiffs allege that the defendants, including the Mirant defendants, actingindividually and in collusion with each other, engaged in various types ofunlawful manipulation of the short-term and bilateral wholesale power marketsin the Electric Reliability Council of Texas region beginning in 2001 andcontinuing to the period immediately 

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prior to the filing of thesuit that caused the plaintiffs to pay significantly higher prices for powerthey purchased and to incur other significant costs. The types of conduct thatthe plaintiffs allege were engaged in by the defendants, including the Mirantdefendants, include submitting false schedules and bids, “hockey stick”bidding, withholding generation resources from the market and bidding generationresources at artificially high prices, in each case with the intent to createartificially high market prices. The complaint asserts various causes ofaction, including without limitation claims under the federal and Texasantitrust acts and the federal Racketeer Influenced and Corrupt Organizations (“RICO”)Act, as well as state law claims for fraud, negligent misrepresentation, andpromissory estoppel. The plaintiffs seek lost profits and other compensatorydamages of an unspecified amount, treble damages, exemplary damages andattorneys’ fees.

On March 21, 2005,the plaintiffs filed a motion with the district court seeking to dismisswithout prejudice the Mirant defendants, noting that those Mirant defendantsare the subject of pending bankruptcy proceedings. The district court grantedthat motion on March 21, 2005. On April 1, 2005, the plaintiffs fileda motion with the Bankruptcy Court seeking leave to file claims in the Chapter11 cases against Mirant Americas Energy Marketing, Mirant Americas Development, Inc.,and the two subsidiaries of the Company based upon the same allegations made inthe suit filed February 18, 2005 and seeking to assert claims in excess of$100 million. The Mirant Debtors are opposing that motion. On June 29,2005, Mirant Americas Energy Marketing entered into a settlement agreement withthe plaintiffs under which the plaintiffs agreed to release all claims againstthe Mirant Debtors in return for allowed claims against Mirant Americas EnergyMarketing totaling $20,000. The settlement agreement is subject to the approvalof the Bankruptcy Court.

***Dick Corporation Litigation Regarding Kendall Upgrade***

On January 7, 2003, Dick Corporation (“Dick”)filed a suit against the Company’s subsidiary Mirant Kendall, LLC (“MirantKendall”) in the Superior Court for Middlesex County, Massachusetts, entitled *Dick Corporation v. Southern Energy Kendall, LLC aka Mirant Kendall,LLC* (the “Dick Suit”). Mirant Kendall had contracted with Dick forDick to engineer, procure and construct an upgrade of an existing power plantfacility owned by Mirant Kendall in Cambridge, Massachusetts, to acombined-cycle power plant. In its complaint, Dick asserts claims of breach ofcontract, quantum meruit, unjust enrichment and unfair business practices. Dickis seeking damages in excess of $33 million, plus interest and attorneys’ fees,and is seeking to have these damages trebled under Massachusetts’ unfairbusiness practices statute. On January 13, 2003, Mirant Kendall filed abreach of contract and declaratory judgment action against Dick in the UnitedStates District Court for the District of Massachusetts entitled *Mirant Kendall, LLC v. Dick Corporation* (the “Mirant Suit”).Mirant Kendall is seeking to recover an unspecified amount of damages, plusinterest and attorneys’ fees, and is seeking a declaration by the court of itsrights under the contract with Dick. Mirant Kendall removed the Dick Suit tothe federal district court, and on March 24, 2003 the district courtissued an order consolidating the Dick Suit with the Mirant Suit.

On December 11, 2002, a related suit (the “St.Paul Suit”) was filed by St. Paul Mercury Insurance Company (“St. Paul”)against Dick, Mirant Kendall, and CNA Insurance Companies in the Superior Courtfor Middlesex County, Massachusetts. St. Paul is the assignee and subrogee ofthe rights and remedies of Harding and Smith Corporation, a subcontractor toDick on the Kendall project. St. Paul has included Mirant Kendall in thelawsuit for the purpose of enforcing its mechanics’ lien filed on the Kendallproject in the approximate amount of $10 million. Under its contract with Dick,Mirant Kendall is entitled to be indemnified by Dick for the claim asserted bySt. Paul against Mirant Kendall. In the St. Paul Suit, Dick on February 24,2003 filed a cross-claim against Mirant Kendall asserting claims similar tothose it made in the Dick Suit. On June 19, 2003, the Middlesex SuperiorCourt stayed those claims against Mirant Kendall pending final resolution ofthe Dick Suit and the Mirant Suit by the federal district court.

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Mirant Kendall and DickCorporation have entered into a settlement agreement that resolves this disputeby giving Dick Corporation an allowed, secured claim against Mirant Kendall inthe Chapter 11 proceedings for $11.5 million. Under the settlement agreement,Dick Corporation is to liquidate in a commercially reasonable manner anysecurities it receives under the plan of reorganization for Mirant Kendallwithin the period that begins four weeks after its receipt of such securitiesand ends 180 days after such receipt. To the extent that the proceeds receivedby Dick Corporation as a result of such liquidation are less than $11.5million, then Mirant Kendall is to make up the difference in cash. Thesettlement was approved by the Bankruptcy Court on June 20, 2005. Pursuantto the terms of the settlement, Dick Corporation has caused St. Paul’s lien onthe Kendall generating facility to be removed. The Company has recorded $16million related to this claim in liabilities subject to compromise in theaccompanying consolidated balance sheets as of December 31, 2004.

***City of Alexandria Zoning Action***

On December 18, 2004, the City Council for theCity of Alexandria, Virginia (the “City Council”) adopted certain zoningordinance amendments recommended by the City Planning Commission that result inthe zoning status of Mirant Potomac River’s generating plant being changed from“noncomplying use” to “nonconforming use subject to abatement.” Under thenonconforming use status, unless Mirant Potomac River applies for and isgranted a special use permit for the plant during the seven-year abatementperiod, the operation of the plant must be terminated within a seven-yearperiod, and no alterations that directly prolong the life of the plant will bepermitted during the seven-year period. Typically, the City Council grantsspecial use permits with various conditions and stipulations as to thepermitted use.

At its December 18, 2004 meeting, the CityCouncil also approved revocation of two special use permits issued in 1989 (the“1989 SUPs”), one applicable to the administrative office space at MirantPotomac River’s plant and the other for the plant’s transportation managementplan. Under the terms of the approved action, the revocation of the 1989 SUPswas to take effect 120 days after the City Council revocation, provided,however, that if Mirant Potomac River within such 120-day period filed anapplication for the necessary special use permits to bring the plant intocompliance with the zoning ordinance provisions then in effect, the effectivedate of the revocation of the 1989 SUPs would be stayed until final decision bythe City Council on such application. The approved action further provides thatif such special use permit application is approved by the City Council,revocation of the 1989 SUPs will be dismissed as moot, and if the City Councildoes not approve the application, the revocation of the 1989 SUPs willbecome effective and the plant will be considered a nonconforming use subject toabatement. The City of Alexandria and Mirant Potomac River have agreed to aconsent order to be entered by the Circuit Court for the City of Alexandria inthe suit described in the next paragraph that extends through October 17,2005 the period within which Mirant Potomac River may file an application forthe necessary special use permits. 

On January 18, 2005,Mirant Potomac River and Mirant Mid-Atlantic filed a complaint against the Cityof Alexandria and the City Council in the Circuit Court for the City ofAlexandria. The complaint seeks to overturn the actions taken by the CityCouncil on December 18, 2004 changing the zoning status of Mirant PotomacRiver’s generating plant and approving revocation of the 1989 SUPs, on thegrounds that those actions violated federal, state and city laws. The complaintasserts, among other things, that the actions taken by the City Councilconstituted unlawful spot zoning, were arbitrary and capricious, constituted anunlawful attempt by the City Council to regulate emissions from the plant, andviolated Mirant Potomac River’s due process rights. Mirant Potomac River andMirant Mid-Atlantic request the court to enjoin the City of Alexandria and theCity Council from taking any enforcement action against Mirant Potomac River orfrom requiring it to obtain a special use permit for the continued operation ofits generating plant.

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***Asbestos Cases***

As a part of the PEPCOpurchase, Mirant Mid-Atlantic agreed to indemnify PEPCO for certain liabilitiesarising in lawsuits filed after December 19, 2000, even if they relate toincidents occurring prior to that date, with certain qualifications. Since theacquisition, PEPCO has notified Mirant Mid-Atlantic of more than100 asbestos cases, distributed among three Maryland jurisdictions (PrinceGeorge’s County, Baltimore City and Baltimore County), as to which it claims aright of indemnity. Based on information and relevant circumstances known atthis time, the Company does not believe these suits will have a materialadverse effect on its financial position, results of operations or cash flows.

***Other Governmental Proceedings***

*Department of Justice Inquiries.*   InNovember 2002, Mirant received a subpoena from the DOJ, acting through theUnited States Attorney’s office for the Northern District of California,requesting information about the activities of Mirant and its subsidiaries,including the Company and its subsidiaries, for the period since January 1,1998. The subpoena requested information related to the California energymarkets and other topics, including the reporting of inaccurate information tothe trade press that publish natural gas or electricity spot price data. Thesubpoena was issued as part of a grand jury investigation. Mirant has continuedto receive additional requests for information from the United States Attorney’soffice, and it intends to continue to cooperate fully with the United StatesAttorney’s office in this investigation.

***Other Legal Matters***

The Company is involved invarious other claims and legal actions arising in the ordinary course ofbusiness. In the opinion of management, the ultimate disposition of thesematters will not have a material adverse effect on the Company’s financialposition, results of operations or cash flows.

***EnvironmentalContingencies***

***Swinging Bridge Sinkhole***

On May 5, 2005, Mirantdiscovered a sinkhole at its Swinging Bridge dam, located in Sullivan County,New York. In response to finding the sinkhole, Mirant filled the sinkhole, inspectedthe dam’s penstock and slopes for damage, drew down the lake level by 40 feet,and cleaned the diversion tunnel. The dam is currently stabilized, but is inneed of additional repairs before lake levels can be restored to normal.

Mirant currently expects to spend approximately$5.6 million in order to properly repair the dam and expects these repairs tobe complete by the second quarter of 2006. The Company currently expects torecover insurance proceeds of $3.3 million with regard to theserepair costs.

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**Item9.**                        *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure*

Not applicable.

**Item9A.**                *Controls and Procedures*

**InherentLimitations in Control Systems**

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to their costs.Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within the Company have been detected. These inherentlimitations include the realities that judgments in decision-making canbe faulty, and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override of thecontrol. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under all potentialfuture conditions. Over time, controls may become inadequate because of changesin conditions, or the degree of compliance with the policies or procedures maydeteriorate. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected. As aresult, our management, including the Chief Executive Officer and ChiefFinancial Officer, does not expect that our disclosure controls and procedures,or our internal control over financial reporting, will prevent all error andall fraud.

**Effectiveness ofDisclosure Controls and Procedures**

As required by Exchange Act Rule 13a-15(b),our management, including our Chief Executive Officer and our Chief FinancialOfficer, conducted an assessment of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined byRules 13a-15(e) and 15d-15(e) under the ExchangeAct), as of December 31, 2004. Based upon this assessment, our managementconcluded that, as of December 31, 2004, the design and operation of thesedisclosure controls and procedures were effective in timely alerting us tomaterial information relating to the Company (including our consolidatedsubsidiaries) required to be included in our periodic SEC filings.

Appearing as exhibits tothis annual report are the certifications of the Chief Executive Officer andthe Chief Financial Officer required in accordance with Section 302 of theSarbanes-Oxley Act of 2002.

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**PART III**

**Item 10.**                 *Directors and Executive Officers of the Registrant*

Thefollowing table sets forth information with respect to our managers who are notalso executive officers as of January 1, 2005.
| **Name**         | ** ** | ** ** | ** ** | **Age**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Position** |
|------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| S. Marce Fuller  |       | 45         |       | Manager of Mirant Americas Generation, LLC since April,  2002 and President and Chief Executive Officer and Director of Mirant  Corporation since July 1999. Served as President and Chief Executive  Officer of Mirant’s Mirant Americas Energy Marketing subsidiary from  September 1997 to July 1999 and Executive Vice President of Mirant  from October 1998 to July 1999. She is a director of Curtiss-Wright  Corporation and EarthLink, Inc.                                                                                                                                                                                                                                                                         |
| M. Michele Burns |       | 47         |       | Manager of Mirant  Americas Generation, LLC since May 2004 and Executive Vice President,  Chief Financial Officer and Chief Restructuring Officer of Mirant  Corporation. Elected Executive Vice President and Chief Financial Officer in  May 2004 and Chief Restructuring Officer in August 2004. Prior to  joining Mirant she was Executive Vice President and Chief Financial Officer  of Delta Air Lines, Inc. from August 2000 to May 2004; Senior  Vice President—Finance and Treasurer from February 2000 to  August 2000; Vice President—Finance and Treasurer from  September 1999 to February 2000 and Vice President—Corporate Tax  from January 1999 to September 1999. |

 

Thefollowing table sets forth information with respect to our executive officersas of January 1, 2005.
| **Name**         | ** ** | ** ** | ** ** | **Age**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **Position** |
|------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Curtis A. Morgan |       | 44         |       | President , Chief Executive  Officer and Manager Mr. Morgan has served as President and Chief  Executive Officer since August 2003. He has served as Chief Operating  Officer of Mirant Mid-Atlantic, LLC since March 2004 and is also  Executive Vice President and Chief Operating Officer of Mirant Corporation.  Elected Executive Vice President, North America effective August 25,  2003 and Executive Vice President and Chief Operating Officer in  June 2004. Prior to joining Mirant, he was President, East Region,  Reliant Energy Wholesale Group, where he was responsible for Reliant assets  and markets in the mid-Western and Eastern United States from  September 2000 to July 2003. He was Senior Vice President,  Corporate Planning and Development, Reliant Energy from March 1998 to  September 2000. |

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| J. William Holden III |   | 44 |   | Senior Vice President, Chief  Financial Officer and Treasurer Mr. Holden has been a Senior Vice  President and Treasurer of Mirant Corporation since February 2002 and  has served as Senior Vice President, Chief Financial Officer and Treasurer of  Mirant Mid-Atlantic, LLC since November, 2002. Previously, he was Chief  Financial Officer for Mirant’s Europe group from 2001 to February 2002;  Vice President and Treasurer of Mirant from 1999 to 2001; Vice President,  Operations and Business Development for Mirant’s South American region from  1996 to 1999; and Vice President, Business Development for Mirant’s Asia  group from 1994 to 1995. He held various positions at Southern Company from  1985 to 1994 including Director of Corporate Finance. |
|-----------------------|--------|----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Dan Streek            |   | 43 |   | Vice President and  Principal Accounting Officer Elected Vice President and Principal Accounting  Officer effective February 20, 2003. Mr. Streek has also served as  Vice President and Controller of Mirant Corporation, and Vice President and  Principal Accounting Officer of Mirant Mid-Atlantic since February 2003.  Prior to joining Mirant, he served as Chief Financial Officer of  Aquila, Inc., a global energy company, from August 2001 to  November 2002; Senior Vice President, Finance of Aquila Merchant  Services, Inc. from January 2000 to August 2001 and Vice  President and Assistant Controller for Aquila, Inc. from July 1998  to January 2000.                                                                     |

 

The executive officers ofMirant Americas Generation, LLC were elected to serve until their successorsare elected and have qualified or until their removal, resignation, death ordisqualification.

*FamilyRelationships*

None

*Certain LegalProceedings*

On July 14, 2003,Mirant and most of its domestic subsidiaries filed for reorganization underChapter 11 of the United States Bankruptcy Code. Certain of the Company’sofficers are also officers or directors of other subsidiaries that filed forreorganization under Chapter 11. As such, each of the Company’s executiveofficers has been associated with a corporation that filed a petition under thefederal bankruptcy laws within the last five years.

*Audit Committee andAudit Committee Financial Expert*

We do not have aseparately designated standing Audit Committee. Because Mirant AmericasGeneration is an indirect wholly-owned subsidiary of Mirant Corporation, theBoard of Managers does not have independent members and therefore has notseparately designated a member as a financial expert.

*Section 16(a) BeneficialOwnership Reporting Compliance*

We do not have equitysecurities registered pursuant to Section 12 of the Exchange Act andtherefore do not have officers with Section 16 reporting obligations.

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*Code of Ethics forSenior Financial Officers*

The Code of Ethics thatapplies to Mirant’s senior financial officers also applies to the seniorfinancial officers of Mirant Americas Generation. A copy of the code is postedon Mirant’s website at *www.mirant.com*and also will be provided, without charge, upon request made in writing to theCorporate Secretary at 1155 Perimeter Center West, Atlanta, GA 30338. We intendto post any amendments and waivers to the Code of Ethics for senior financialofficers on this website.

*ShareholderNominees to Board of Directors*

We will not adoptprocedures by which shareholders may recommend manager candidates because weare a wholly-owned subsidiary of Mirant Americas, Inc.

**Item 11.**                 *Executive Compensation*

Our executives and managers are not compensatedseparately for their service as executive officers and managers of MirantAmericas Generation.

We are a limited liability company that is managed bya sole member, Mirant Americas, Inc. All members of Mirant America’s Boardof Managers are officers of Mirant or its subsidiaries, and they do not receiveany additional compensation for their services as managers. Mirant Services, adirect subsidiary of Mirant, directly pays the salaries of our officers listedin Item 10. A portion of those salaries are effectively reimbursed to Mirant byus through an administrative services agreement with Mirant Services.Consequently, we have no compensation committee and no direct employmentagreements.

None of our officers have any contracts or agreementsin their capacities as officers of Mirant Americas Generation.

All members of our management are eligible toparticipate in certain employee benefit plans and arrangements sponsored byMirant for its similarly situated employees. These may include the pensionplan, savings plan, long-term incentive compensation plan, annual incentivecompensation plan, health and welfare plans and other plans that may beestablished in the future.

All of our equity is heldby our direct parent, Mirant Americas, Inc. Therefore, our equity is notpublicly traded and there is no basis to compare the price performance of ourequity to the price performance of an index or peer group.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management*

We are a wholly-ownedsubsidiary of Mirant Americas; therefore, none of our managers or officersholds any equity interests in Mirant Americas Generation.

**Item 13.**                 *Certain Relationships and Related Transactions*

Our relationships withaffiliates and related transactions are described in Note 5 to our consolidatedfinancial statements.

**Item 14.**                 *Principal Accountant Fees and Services*

Not Applicable.

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**Item 15.**                 *Exhibits and Financial Statements*

(a)(1) and (2) *FinancialStatements.  *See “Index to Financial Statements” set forth on page F-1.

(a)(3) *Exhibit Index*
| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **Exhibit Name** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 1.1*             |       | Purchase Agreement,  dated as of October 2, 2001, among Mirant Americas Generation Inc. (the  “Company”) and Salomon Smith Barney Inc., Banc of America Securities LLC,  Blaylock & Partners, L.P., Scotia Capital (USA) Inc., TD Securities  (USA) Inc. and Tokyo-Mitsubishi International plc as “Initial  Purchasers” (designated in Mirant Americas Generation, Inc. Registration  Statement on Form S-4/A Amendment No. 1, Registration  No. 333-85124 as Exhibit 1.1) |
| 2.1*             |       | Joint Chapter 11 Plan of  Reorganization for Mirant Corporation and its Affiliated Debtors (Designated  on Form 8-K filed January 19, 2005 as Exhibit 2.1).                                                                                                                                                                                                                                                                                                                                                             |
| 3.1*             |       | Certificate of Formation  for Mirant Americas Generation, LLC, filed with the Delaware Secretary of  State on November 1, 2001(designated in Mirant Americas Generation, LLC  Form 10-Q for the Quarter Ended September 30, 2001 as  Exhibit 3.1)                                                                                                                                                                                                                                                                  |
| 3.2*             |       | Limited Liability  Company Agreement for Mirant Americas Generation, LLC dated October 31,  2001 (designated in Mirant Americas Generation, LLC Form 10-Q for the  Quarter Ended September 30, 2001 as Exhibit 3.2)                                                                                                                                                                                                                                                                                                |
| 4.1*             |       | Indenture between the  Company and Bankers Trust Company, as Trustee, relating to the Notes  (designated in Mirant Americas Generation, Inc. Registration Statement  on Form S-4, Registration No. 333-63240 as Exhibit 4.1)                                                                                                                                                                                                                                                                                       |
| 4.2*             |       | First Supplemental  Indenture (designated in Mirant Americas Generation, Inc. Registration  Statement on Form S-4, Registration No. 333-63240 as  Exhibit 4.2)                                                                                                                                                                                                                                                                                                                                                     |
| 4.3*             |       | Second Supplemental  Indenture (designated in Mirant Americas Generation, Inc. Registration  Statement on Form S-4, Registration No. 333-63240 as  Exhibit 4.3)                                                                                                                                                                                                                                                                                                                                                    |
| 4.4*             |       | Third Supplemental  Indenture (designated in Mirant Americas Generation, Inc. Registration  Statement on Form S-4, Registration No. 333-63240 as  Exhibit 4.4)                                                                                                                                                                                                                                                                                                                                                     |
| 4.5*             |       | Form of Notes  (included in Exhibits 4.2, 4.3, and 4.4) (designated in Mirant Americas  Generation, Inc. Registration Statement on Form S-4, Registration  No. 333-63240 as Exhibit 4.5)                                                                                                                                                                                                                                                                                                                      |
| 4.6*             |       | Registration Rights  Agreement, dated as of October 9, 2001, among the Company and the  Initial Purchasers (designated in Mirant Americas Generation, Inc.  Registration Statement on Form S-4/A Amendment No. 1,  Registration No. 333-85124 as Exhibit 4.8)                                                                                                                                                                                                                                            |
| 4.7*             |       | Fourth Supplemental  Indenture (designated in Mirant Americas Generation, Inc. Registration  Statement on Form S-4/A Amendment No. 1, Registration  No. 333-85124 as Exhibit 4.5)                                                                                                                                                                                                                                                                                                                             |
| 4.8*             |       | Fifth Supplemental  Indenture (designated in Mirant Americas Generation, Inc. Registration  Statement on Form S-4/A Amendment No. 1, Registration  No. 333-85124 as Exhibit 4.6)                                                                                                                                                                                                                                                                                                                              |
| 10.1*            |       | Form of  Administrative Services Agreement (designated in Mirant Americas  Generation, Inc. Registration Statement on Form S-4, Registration  No. 333-63240 as Exhibit 10.1)                                                                                                                                                                                                                                                                                                                                  |

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| 10.2*  |   | Services and Risk Management Agreement among Mirant  Americas Energy Marketing, L.P., Mirant Canal, LLC and Mirant Kendall LLC  (designated in Mirant Americas Generation, Inc. Registration Statement  on Form S-4, Registration No. 333-63240 as Exhibit 10.6)                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3*  |   | Services and Risk  Management Agreement among Mirant Americas Energy Marketing, L.P., Mirant  Bowline, LLC, Mirant Lovett LLC and Mirant NY-Gen, LLC (designated in Mirant  Americas Generation, Inc. Registration Statement on Form S-4,  Registration No. 333-63240 as Exhibit 10.7) |
| 10.4*  |   | Services and Risk  Management Agreement among Mirant Americas Energy Marketing, L.P., Mirant  Delta, LLC and Mirant Potrero, LLC (designated in Mirant Americas  Generation, Inc. Registration Statement on Form S-4, Registration  No. 333-63240 as Exhibit 10.8)                     |
| 10.5*  |   | First Amendment to  Service and Risk Management Agreement among Mirant Americas Energy Marketing,  L.P., Mirant Delta, LLC and Mirant Potrero, LLC (designated in Mirant  Americas Generation, Inc. Registration Statement on Form S-4,  Registration No. 333-63240 as Exhibit 10.9)   |
| 10.6*  |   | Credit Facility B  Credit Agreement Dated August 31, 1999 (designated as Exhibit 10.12  on Form 8-K filed February 12, 2003)                                                                                                                                                           |
| 10.7*  |   | Credit Facility C Credit  Agreement Dated August 31, 1999 (designated as Exhibit 10.13 on  Form 8-K filed February 12, 2003)                                                                                                                                                           |
| 10.8*  |   | Power Sale, Fuel Supply  and Services Agreement dated as of May 1, 2003 between Mirant Mid-Atlantic,  LLC and Mirant Americas Energy Marketing, LP (designated in Mirant Mid-Atlantic,  LLC Form 10-K for the year ended December 31, 2002 as  Exhibit 10.23)                          |
| 10.9*  |   | Power Sale, Fuel Supply  and Services Agreement dated as of May 1, 2003 between Mirant Chalk  Point, LLC and Mirant Americas Energy Marketing, LP (designated in Mirant Mid-Atlantic,  LLC Form 10-K for the year ended December 31, 2002 as  Exhibit 10.24)                           |
| 10.10* |   | Power Sale, Fuel Supply  and Services Agreement dated as of May 1, 2003 between Mirant Peaker,  LLC and Mirant Americas Energy Marketing, LP (designated in Mirant  Mid-Atlantic, LLC Form 10-K for the year ended December 31, 2002 as  Exhibit 10.25)                                |
| 10.11* |   | Power Sale, Fuel Supply  and Services Agreement dated as of May 1, 2003 between Mirant Potomac  River, LLC and Mirant Americas Energy Marketing, LP (designated in Mirant Mid-Atlantic,  LLC Form 10-K for the year ended December 31, 2002 as  Exhibit 10.26)                         |
| 10.12* |   | Form of Amended and  Restated Mirant Corporation Omnibus Incentive Compensation Plan (Designated  on Mirant Corporation Form 10-K filed March 11, 2002 as  Exhibit 10.29)                                                                                                              |
| 10.13* |   | Debtor-In-Possession  Credit Agreement (Designated on Mirant Corporation Form 10-Q filed  December 19, 2003 as Exhibit 10.88)                                                                                                                                                               |
| 10.14* |   | California Settlement  Agreement dated January 13, 2005 (Designated on Mirant Corporation  Form 10-K for the year ended December 31, 2004 as  Exhibit 10.39)                                                                                                                           |
| 10.15* |   | Power Sale, Fuel Supply  and Services Agreement dated January 1, 2004 among Mirant Americas  Energy Marketing, LP, Mirant Canal, LLC, and Mirant Kendall, LLC (unexecuted)                                                                                                                            |
| 10.16* |   | Power Sale, Fuel Supply  and Services Agreement dated January 1, 2004 among Mirant Americas  Energy Marketing, LP, Mirant Bowline, LLC, Mirant Lovett, LLC, and Mirant NY-Gen,  LLC (unexecuted)                                                                                                      |

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| 10.17* |   | Power Sale, Fuel Supply and Services Agreement dated  January 1, 2004 among Mirant Americas Energy Marketing, LP, Mirant  Delta, LLC, and Mirant Potrero, LLC (unexecuted)                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1*  |   | Statement regarding  ratio of earnings to fixed charges (designated in Mirant Americas  Generation, Inc. Registration Statement on Form S-4/A Amendment  No. 1, Registration No.333-85124 as Exhibit 12.1) |
| 16.1*  |   | Arthur Andersen LLP  letter to the Securities and Exchange Commission dated May 15, 2002  (designated as Exhibit 16 on Form 8-K filed May 16, 2002)                                                        |
| 21.1*  |   | Subsidiaries of Mirant  Americas Generation, LLC                                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of  Title 18, United States Code)                |
| 31.2   |   | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter  63 of Title 18, United States Code)                |
| 32.1   |   | Certification of  Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter  63 of Title 18, United States Code)                |
| 32.2   |   | Certification of  Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter  63 of Title 18, United States Code)                |

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*                    Asteriskindicates exhibits incorporated by reference.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on this 26 day of July 2005.
|          | MIRANT AMERICAS  GENERATION, LLC         |
|----------|------------------------------------------|
|     | By:                                      | /s/  CURTIS A. MORGAN |
| * * | *President  and Chief Executive Officer* |
| * * | *(Principal  Executive Officer)*         |

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**MIRANT AMERICAS GENERATION, LLC**

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below on July 26, 2005 by the following persons on behalf ofthe registrant and in the capacities indicated.
|                            | **Signatures** | ** **                                                      | ** ** |  | **Title** | ** ** |
|----------------------------|----------------|-----------------------------------------------------------------|------------|--|-----------|------------|
| /s/  CURTIS A. MORGAN      |           | President  and Chief Executive Officer of                       |
| Curtis A. Morgan           |           | Mirant Americas  Generation, LLC  (Principal Executive Officer) |
| /s/  J. WILLIAM HOLDEN III |           | Sr.  Vice President, Chief Financial Officer and                |
| J. William Holden  III     |           | Treasurer of  Mirant Americas Generation, LLC                   |
|                       |           | (Principal  Financial Officer)                                  |
| /s/  DAN STREEK            |           | Vice  President of Mirant Americas Generation, LLC              |
| Dan Streek                 |           | (Principal  Accounting Officer)                                 |

 

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