**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

----

**Form 10-K**
| **x** | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|------------|------------------------------------------------------------------------------------------------------|------------|

 

**For the Fiscal YearEnded December 31, 2006**

**Or**
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|------------|----------------------------------------------------------------------------------------------------------|------------|

 

**For the TransitionPeriodfrom              to              **

**Mirant Americas Generation, LLC**

(Exact name of registrant as specified in its charter)

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

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

----

Indicate by check mark whether the registrant is awell-known seasoned issuer (as defined by Rule 405 of the Securities Act).o Yes   x No

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. x Yes   o No

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. x Yes   o No

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of the registrants’ knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. o LargeAccelerated Filer   o AcceleratedFiler   x Non-acceleratedFiler

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act). o Yes   x No

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court. x Yes   o No

All of our outstanding membership interests are heldby our parent, Mirant Americas, Inc., so we have no membership interestsheld by nonaffiliates.

We have not incorporated by reference any informationinto this Form 10-K from any annual report to securities holders,proxy statement or registration statement.

 

----

**TABLEOF CONTENTS**
|               | ** ** | ** **                                                                                                          | ** ** | **Page** | ** ** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|          |       | Glossary of Certain Defined Terms                                                                                   |       |     | i-v        |   |   |
| ** **    | ** ** | **PART I**                                                                                                     |       |     |       |   |   |
| Item 1.       |       | Business                                                                                                            |       |     | 5          |   |   |
| Item 1A.      |       | Risk Factors                                                                                                        |       |     | 22         |   |   |
| Item 1B.      |       | Unresolved Staff  Comments                                                                                          |       |     | 31         |   |   |
| Item 2.       |       | Properties                                                                                                          |       |     | 32         |   |   |
| Item 3.       |       | Legal Proceedings                                                                                                   |       |     | 33         |   |   |
| Item 4.       |       | Submission of  Matters to a Vote of Security Holders                                                                |       |     | 43         |   |   |
| ** **    | ** ** | **PART II**                                                                                                    |       |     |       |   |   |
| Item 5.       |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |     | 44         |   |   |
| Item 6.       |       | Selected Financial  Data                                                                                            |       |     | 44         |   |   |
| Item 7.       |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition                         |       |     | 45         |   |   |
| Item 7A. |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |     | 75         |   |   |
| Item 8.       |       | Financial  Statements and Supplementary Data                                                                        |       |     | 78         |   |   |
| Item 9.       |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       |     | 137        |   |   |
| Item 9A.      |       | Controls and  Procedures                                                                                            |       |     | 137        |   |   |
| Item 9B.      |       | Other Information                                                                                                   |       |     | 137        |   |   |
| ** **    | ** ** | **PART III**                                                                                                   |       |     |       |   |   |
| Item 10.      |       | Directors and  Executive Officers of the Registrant                                                                 |       |     | 138        |   |   |
| Item 11.      |       | Executive  Compensation                                                                                             |       |     | 140        |   |   |
| Item 12.      |       | Security  Ownership of Certain Beneficial Owners and Management                                                     |       |     | 140        |   |   |
| Item 13.      |       | Certain  Relationships and Related Transactions                                                                     |       |     | 140        |   |   |
| Item 14.      |       | Principal  Accountant Fees and Services                                                                             |       |     | 140        |   |   |
| ** **    | ** ** | **PART IV**                                                                                                    |       |     |       |   |   |
| Item 15.      |       | Exhibits and  Financial Statements                                                                                  |       |     | 141        |   |   |

 

2

----

**Glossary of CertainDefined Terms**

**ACO**—Administrative ComplianceOrder.

**AEP**—American Electric Power, Inc.

**APB**—Accounting Principles Board.

**APB No. 22**—APB Opinion No. 22,Disclosure of Accounting Policies.

**APSA**—Asset Purchase and SaleAgreement.

**Bankruptcy Code**—United StatesBankruptcy Code.

**Bankruptcy Court**—United StatesBankruptcy Court for the Northern District of Texas, Fort Worth Division.

**Baseload Generating Units**—Unitsthat satisfy minimum baseload requirements of the system, produce electricityat an essentially constant rate and run continuously.

**CAIR**—Clean Air Interstate Rule.

**CAISO**—California IndependentSystem Operator.

**Cal DWR**—California Department ofWater Resources.

**Cal PX**—California PowerExchange.

**CAMR**—Clean Air Mercury Rule.

**CERCLA**—Federal ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980.

**CFTC**—Commodity Futures TradingCommission.

**Clean Air Act**—Federal Clean AirAct.

**Clean Water Act**—Federal WaterPollution Control Act.

**CO**—Carbon monoxide.

**CO2**—Carbon dioxide.

**Company**—Mirant AmericasGeneration, LLC and its subsidiaries.

**CPUC**—California Public UtilitiesCommission.

**DOE**—Department of Energy.

**DOJ**—Department of Justice.

**DP&L**—Dayton Power &Light.

**EBITDA**—Earnings before interest,taxes, depreciation and amortization.

**EITF**—The Emerging Issues TaskForce formed by the Financial Accounting Standards Board.

**EITF 02-3**—EITF Issue No. 02-3,*Issues Involved in Accounting for DerivativeContracts Held for Trading    Purposesand Contracts Involved in Energy Trading and Risk Management Activities.*

**EITF 04-13**—EITF Issue No. 04-13,*Accounting for Purchases and Sales of Inventorywith the Same Counterparty.*

**EITF 06-3**—EITF Issue No. 06-3,*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation).*

i

----

**EOB**—California ElectricityOversight Board.

**EPA**—Environmental ProtectionAgency.

**EPAct 2005**—Energy Policy Act of2005.

**ERCOT**—Electric ReliabilityCouncil of Texas.

**FASB**—Financial AccountingStandards Board.

**FERC**—Federal Energy RegulatoryCommission.

**FIN**—FASB Interpretation.

**FIN 46R**—FIN No. 46R, *Consolidation of Variable Interest Entities (revised December 2003)—anInterpretation of Accounting Research Bulletin No. 51.*

**FIN 47**—FIN No. 47, *Accounting for Conditional Asset Retirements—an interpretation of FASBStatement No. 143.*

**FIN 48**—FIN No. 48, *Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109.*

**FSP**—FASB Staff Position.

**FSP AUG AIR-1**—FSP AUGAIR-1, *Accounting for Planned Major MaintenanceActivities.*

**FSP FAS 13-2**—FSP FAS 13-2,*Accounting for a Change or Projected Change in theTiming of Cash Flows Relating to Income Taxes Generated by a Leveraged LeaseTransaction.*

**FSP FIN 46R-6**—FASB StaffPosition FASB Interpretation 46R-6, *Determining theVariability to Be Considered in Applying FASB Interpretation No. 46R.*

**GAAP**—Generally acceptedaccounting principles in the United States.

**Gross Margin**—Operating revenueless cost of fuel, electricity and other products.

**Hudson Valley Gas**—Hudson ValleyGas Corporation.

**IBEW**—International Brotherhoodof Electrical Workers.

**ICE**—InterContinental Exchange, Inc.

**Intermediate Generating Units**—Unitsthat meet system requirements that are greater than baseload and less thanpeaking.

**ISO**—Independent System Operator.

**ISO-NE**—Independent SystemOperator-New England.

**LIBOR**—London InterBank OfferedRate.

**LICAP**—Locational installedcapacity plan.

**LTSA**—Long term serviceagreement.

**Massachusetts DEP**—MassachusettsDepartment of Environmental Protection.

**MDE**—Maryland Department of theEnvironment.

**Mirant**—Old Mirant prior to January 3,2006, and New Mirant on or after January 3, 2006.

**Mirant Americas**—Mirant Americas, Inc.

ii

----

**Mirant Americas Energy Marketing**—MirantAmericas Energy Marketing, LP.

**Mirant Americas Generation**—MirantAmericas Generation, LLC.

**Mirant Bowline**—Mirant Bowline,LLC.

**Mirant Canal**—Mirant Canal, LLC.

**Mirant Chalk Point**—Mirant ChalkPoint, LLC.

**Mirant Delta**—Mirant Delta, LLC.

**Mirant Energy Trading**—MirantEnergy Trading, LLC.

**Mirant Kendall**—Mirant Kendall,LLC.

**Mirant Las Vegas**—Mirant LasVegas, LLC.

**Mirant Lovett**—Mirant Lovett,LLC.

**Mirant Mid-Atlantic**—MirantMid-Atlantic, LLC.

**Mirant New York**—Mirant New York, Inc.

**Mirant North America**—MirantNorth America, LLC and its subsidiaries.

**Mirant NY-Gen**—Mirant NY-Gen,LLC.

**Mirant Peaker**—Mirant Peaker,LLC.

**Mirant Potomac River**—MirantPotomac River, LLC.

**Mirant Potrero**—Mirant Potrero,LLC.

**Mirant Power Purchase**—MirantPower Purchase, LLC.

**Mirant Services**—Mirant Services,LLC.

**Mirant Sugar Creek**—Mirant SugarCreek, LLC.

**Mirant West Georgia**—Mirant WestGeorgia, LLC.

**Mirant Wichita Falls**—MirantWichita Falls, LLC.

**Mirant Zeeland**—Mirant Zeeland,LLC.

**MISO**—Midwest IndependentTransmission System Operator.

**MW**—Megawatt.

**MWh**—Megawatt hour.

**NAAQS**—National ambient airquality standards.

**NEPOOL**—New England Power Pool.

**New Mirant**—Mirant Corporation onor after January 3, 2006.

**NO2**—Nitrogen dioxide.

**NOL**—Net operating loss.

**NOV**—Notice of violation.

**NOx**—Nitrogen oxides.

iii

----

**NSR**—New source review.

**NSTAR**—NSTAR Electric and GasCorporation.

**NYISO**—Independent SystemOperator of New York.

**NYSDEC**—New York State Departmentof Environmental Conservation.

**OCI**—Other comprehensive income.

**Ohio Edison**—Ohio Edison Company.

**Old Mirant**—MC 2005, LLC, knownas Mirant Corporation prior to January 3, 2006.

**Orange and Rockland**—Orange andRockland Utilities, Inc.

**OTC**—Over-the-Counter.

**Panda**—Panda-Brandywine, LP.

**Peaking Generating Units**—Unitsused to meet requirements during the periods of greatest or peak load on thesystem.

**Pepco**—Potomac Electric PowerCompany.

**PG&E**—Pacific Gas &Electric Company.

**PILOT**—Payments in lieu of taxes.

**PJM**—Pennsylvania-NewJersey-Maryland Interconnection, LLC.

**PM10**—Particulate matter that is10 microns or less in size.

**PPA**—Power purchase agreement.

**PUHCA**—Public Utility HoldingCompany Act of 1935.

**PURPA**—Public Utility RegulatoryPolicies Act of 1978.

**Reserve Margin**—Excess capacityover peak demand.

**RMR**—Reliability-must-run.

**RPM**—Reliability Pricing Model.

**RTO**—Regional TransmissionOrganization.

**SAB**—SEC Staff AccountingBulletin.

**SAB No. 108**—SAB No. 108,*Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements.*

**SCE**—Southern California EdisonCompany.

**SEC**—U.S. Securities and ExchangeCommission.

**Securities Act**—The SecuritiesAct of 1933.

**SFAS**—Statement of FinancialAccounting Standards issued by the FASB.

**SFAS No. 5**—SFAS No. 5,*Accounting for Contingencies.*

**SFAS No. 107**—SFAS No. 107,*Disclosures About Fair Value of FinancialInstruments.*

**SFAS No. 109**—SFAS No. 109,*Accounting for Income Taxes.*

iv

----

**SFAS No. 133**—SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities.*

**SFAS No. 143**—SFASNo. 143, *Accounting for Asset Retirement Obligations.*

**SFAS No. 144**—SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets.*

**SFAS No. 153**—*SFAS No. 153*, *Exchanges of NonmonetaryAssets—an amendment of APB Opinion No. 29.*

**SFAS No. 155**—SFAS No. 155,*Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133and 140.*

**SFAS No. 156**—SFAS No. 156,*Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.*

**SFAS No. 157**—SFAS No. 157,*Fair Value Measurements.*

**SFAS No. 159**—SFAS No. 159,*The Fair Value Option for Financial Assets and FinancialLiabilities—Including an Amendment of FASB Statement No 115.*

**Shady Hills**—Shady Hills PowerCompany, L.L.C.

**SO2**—Sulfur dioxide.

**SOP 90-7**—Statement ofPosition 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code.*

**TPA**—Transition power agreement.

**UWUA**—Utility Workers Union ofAmerica.

**VaR**—Value-at-risk.

**VIE**—Variable interest entity.

**Virginia DEQ**—Virginia Departmentof Environmental Quality.

v

----

**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

The information presentedin this Form 10-K includes forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, in addition to historical information.These statements involve known and unknown risks and uncertainties and relateto future events, our future financial performance or our projected businessresults. In some cases, one can identify forward-looking statements byterminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “estimate,”“predict,” “target,” “potential” or “continue” or the negative of these termsor other comparable terminology.

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

·       legislativeand regulatory initiatives regarding deregulation, regulation or restructuringof the industry of generating, transmitting and distributing electricity;changes in state, federal and other regulations (including rate and otherregulations); changes in, or changes in the application of, environmental andother laws and regulations to which we and our subsidiaries and affiliates areor could become subject;

·       failureof our assets to perform as expected, including outages for unscheduledmaintenance or repair;

·       ourability to divest certain of our intermediate and peaking natural gas-firedplants at prices and on terms that we would be willing to accept and ourability to consummate the sale of our intermediate and peaking naturalgas-fired plants as well as any adverse impact on our debt rating that mayresult from such sales;

·       changesin market conditions, including developments in the supply, demand, volume andpricing of electricity and other commodities in the energy markets, or theextent and timing of the entry of additional competition in our markets orthose of our subsidiaries and affiliates;

·       increasedmargin requirements, market volatility or other market conditions that couldincrease our obligations to post collateral beyond amounts which are expected;

·       ourinability to access effectively the over-the-counter and exchange-basedcommodity markets or changes in commodity market liquidity or other commoditymarket conditions, which may affect our ability to engage in asset managementand proprietary trading activities as expected, or result in materialextraordinary gains or losses from open positions in fuel oil or othercommodities;

·       deteriorationin the financial condition of our counterparties and the resulting failure topay amounts owed to us or to perform obligations or services due to us beyondcollateral posted;

·       hazardscustomary to the power generation industry and the possibility that we may nothave adequate insurance to cover losses as a result of such hazards;

·       pricemitigation strategies employed by ISOs or RTOs that reduce our revenue and mayresult in a failure to compensate our generation units adequately for all oftheir costs;

·       volatilityin our gross margin as a result of our accounting for derivative financialinstruments used in our asset management activities and volatility in our cashflow from operations resulting from working capital requirements, includingcollateral, to support our asset management and proprietary trading activities;

·       ourinability to enter into intermediate and long-term contracts to sell power andprocure fuel, including its transportation, on terms and prices acceptable tous;

·       theinability of our operating subsidiaries to generate sufficient cash flow tosupport our operations;

3

----

·       ourability to borrow additional funds and access capital markets;

·       strikes,union activity or labor unrest;

·       weatherand other natural phenomena, including hurricanes and earthquakes;

·       thecost and availability of emissions allowances;

·       ourability to obtain adequate supply and delivery of fuel for our facilities;

·       curtailmentof operations due to transmission constraints;

·       environmentalregulations that restrict our ability or render it uneconomic to operate ourbusiness, including regulations related to the emission of carbon dioxide andother greenhouse gases;

·       ourinability to complete construction of emissions reduction equipment by January 2010to meet the requirements of the Maryland Healthy Air Act, which may result inreduced unit operations and reduced cash flows and revenues from operations;

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

·       thefact that our New York subsidiaries remain in bankruptcy;

·       oursubstantial consolidated indebtedness and the possibility that we or oursubsidiaries may incur additional indebtedness in the future;

·       restrictionson the ability of our subsidiaries to pay dividends, make distributions orotherwise transfer funds to us, including restrictions on Mirant North Americacontained in its financing agreements and restrictions on Mirant Mid-Atlanticcontained in its leveraged lease documents, which may affect our ability toaccess the cash flow of those subsidiaries to make debt service and otherpayments;

·       theresolution of claims and obligations that were not resolved during the Chapter11 process that may have a material adverse effect on our results ofoperations; and

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

Many of these risks arebeyond our ability to control or predict. All forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified intheir entirety by cautionary statements contained throughout this report.Because of these risks, uncertainties and assumptions, you should not placeundue reliance on these forward-looking statements. Furthermore,forward-looking statements speak only as of the date they are made.

**Factors that Could Affect Future Performance**

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

In addition to thediscussion of certain risks in Management’s Discussion and Analysis of Resultsof Operations and Financial Condition and the accompanying Notes to MirantAmericas Generation’s consolidated and combined financial statements, otherfactors that could affect our future performance (business, financial conditionor results of operations and cash flows) are set forth under “Item 1A. RiskFactors.”

**Certain Terms**

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.

4

----

**PART I**

**Item1.**                        *Business*

**Overview**

Mirant Americas Generationis a national independent power provider and an indirect wholly-ownedsubsidiary of Mirant. We generate revenue primarily through the production ofelectricity. Mirant was incorporated in Delaware on September 23, 2005,and is the successor to a corporation of the same name that was formed inDelaware on April 3, 1993. This succession occurred by virtue of thetransfer of substantially all of Old Mirant’s assets to New Mirant inconjunction with Mirant’s emergence from bankruptcy protection on January 3,2006. Old Mirant was then renamed and transferred to a trust, which is notaffiliated with New Mirant.

Pursuant to the Plan ofReorganization (the “Plan”) that was approved in conjunction with Mirant’semergence from bankruptcy, in December 2005 Mirant contributed itsinterest in Mirant Potomac River and Mirant Peaker to our indirect wholly-ownedsubsidiary, Mirant Mid-Atlantic, and its interest in Mirant Zeeland and inMirant Americas Energy Marketing, Mirant Americas Development, Inc.,Mirant Americas Production Company, Mirant Americas Energy Capital, LLC, MirantAmericas Energy Capital Assets, LLC, Mirant Americas Development Capital, LLC,Mirant Americas Retail Energy Marketing, LP, and Mirant Americas Gas MarketingI-XV, LLCs (collectively, the “Trading Debtors”) to Mirant North America. Allof the contributed subsidiaries were under the common control of Mirant and arecollectively referred to as the “Contributed Subsidiaries.” On January 31,2006, the trading and marketing business of the Trading Debtors was transferredto Mirant Energy Trading, a wholly-owned subsidiary of Mirant North America.After these transfers took place, the Trading Debtors were transferred to atrust created under the Plan that is not affiliated with us.

The accompanyingconsolidated financial statements include the accounts of Mirant AmericasGeneration. The accompanying 2005 and 2004 combined financial statementspresent the results of operations and cash flows of the Company based on theassets, liabilities and operations of the predecessor Mirant ContributedSubsidiaries. The effects of the Plan are reflected as of December 31,2005.

We produce and sellsubstantially all of the output from our generating facilities in the forwardand spot markets and the remainder under contracts with third parties. We usederivative financial instruments, such as commodity forwards, futures, optionsand swaps to manage our exposure to fluctuations in electric energy and fuelprices. We are a Delaware limited liability company that owns or leases 12,099MW of electric generation capacity. We operate 72 generating units at 20 plantsserving customers located near major metropolitan load centers in Maryland,California, New York, Michigan, Texas, Massachusetts and Virginia.

In the third quarter of2006, Mirant commenced auction processes to sell certain of its naturalgas-fired plants, including our Zeeland (903 MW) and Bosque (546 MW) plants. OnJanuary 15, 2007, we entered into a definitive purchase and sale agreementwith a subsidiary of LS Power Equity Partners I, L.P., LS Power Equity PartnersII, L.P. and certain other affiliated funds, (collectively, “LS Power”), forthe sale of our Zeeland and Bosque natural gas-fired plants. The net proceedsfrom the sales are expected to be approximately $500 million, after transactioncosts. The transaction is expected to close in the second quarter of 2007 afterthe satisfaction of certain customary conditions.

After giving effect to theaforementioned sales, our continuing operations of 10,650 MW will consist ofthe ownership, long-term lease and operation of power generation facilitieslocated in the Mid-Atlantic and Northeast regions of the United States and inCalifornia, and energy trading and marketing operations in Atlanta, Georgia.

We have a number ofservice agreements for labor and administrative services with Mirant Services.In addition, Mirant Energy Trading, and previously Mirant Americas EnergyMarketing, provides services 

5

----

to otherMirant affiliates related to the sale of electric power and the procurement offuel and emissions allowances. These agreements are discussed further in Note 9of our consolidated and combined financial statements.

The annual, quarterly andcurrent reports, and any amendments to those reports, that we file with orfurnish to the SEC are available free of charge on Mirant’s website atwww.mirant.com as soon as reasonably practicable after they are electronicallyfiled with or furnished to the SEC. Information contained in this website isnot incorporated into this Form 10-K.

**Competitive Environment**

Historically, verticallyintegrated electric utilities with monopolistic control over franchisedterritories dominated the power generation industry in the United States. Theenactment of the PURPA, and the subsequent passage of the Energy Policy Act of1992, fostered the growth of independent power producers. During the 1990s, aseries of regulatory policies were partially implemented at both the federaland state levels to encourage competition in wholesale electricity markets.

As a result, independentpower producers built new generating plants, purchased plants from regulatedutilities and marketed wholesale power. ISOs and RTOs were created toadminister the new markets and maintain system reliability. Beginning in 2001,however, in response to extreme price volatility and electricity shortages inCalifornia, regulators began to re-examine the nature and pace of deregulationof wholesale electricity markets, and that re-examination is continuing.

Independent powerproducers, as well as utilities, constructed primarily natural gas-fired plantsin the 1990s because natural gas prices were low and such plants could beconstructed more quickly and were less expensive to permit and build thannuclear and coal-fired plants. Stagnation in the growth of natural gassupplies, the increased demand from new generation facilities and the damagecaused by hurricanes Katrina and Rita resulted in a sharp increase in the priceof natural gas during 2005. In 2006, there was volatility in natural gasprices, with a substantial decline from their 2005 highs. Although natural gasprices have declined from 2005, natural gas prices remain high compared tohistorical prices. High natural gas prices have contributed to high electricityprices.

A number of factorscombined to create excess generating capacity in certain markets, including asubstantial increase in construction of generation facilities following thederegulation efforts described above, capital investments by utilities aimed atextending the lives of older units and the inability to decommission certainplants for reliability reasons. In certain markets, that excess has beenabsorbed or is close to being absorbed. Electricity demand has been growing andsupply has not appreciably increased. Given the substantial time necessary topermit and construct new power plants, we think that the markets in which weoperate need to begin the process now of adding generating capacity to meetgrowing demand. A number of key ISOs have implemented capacity markets as a wayto encourage such construction of additional generation, but it is not clearwhether independent power producers will be sufficiently incentivized to buildthis new generation.

Falling reserve margins,as well as high electricity prices as a result of high natural gas prices, haveled to renewed interest in new coal-fired or nuclear plants. Coal-firedgeneration and nuclear generation currently account for approximately 50% and20%, respectively, of the electricity produced in the United States. There issubstantial environmental opposition to building either coal-fired or nuclearplants.

In light of the foregoingmarket conditions, some regulated utilities are proposing to constructcoal-fired units or nuclear plants, in some cases with governmental subsidiesor under legislative mandate. Unlike independent power producers like us, theseutilities often are able to recover fixed costs through regulated retail rates,allowing them to build without relying on market prices to recover theirinvestments.

Many regulated utilitiesare also seeking to acquire distressed assets or make substantial environmentalimprovements to existing coal plants, in each case with regulatory assurancethat the utility 

6

----

will bepermitted to recover its costs, plus earn a return on its investment. Successby utilities in those efforts may put independent power producers at adisadvantage because they rely heavily on market prices rather than regulatoryassurances.

**Business Segments**

Previously, we managed ourbusiness as one operating segment. In 2006, Mirant commenced auction processesto dispose of certain natural gas-fired plants, including our Zeeland andBosque plants. The planned sales have resulted in the reclassification of therevenues and expenses of these assets to discontinued operations and thereclassification of the related assets and liabilities to held for sale for allperiods presented. In the fourth quarter of 2006, we re-evaluated the businesssegments of our continuing operations. As a result, we now have four operatingsegments: Mid-Atlantic, Northeast, California and Other Operations. Other Operationsincludes proprietary trading and fuel oil management activities. For periodsprior to 2006, Other Operations includes gains and losses related to acontractual arrangement entered into with Pepco with respect to certain PPAs,including Pepco’s long-term PPAs with Panda and Ohio Edison (the “Back-to-BackAgreement”). For selected financial information about our business segments seeNote 16 to our consolidated and combined financial statements containedelsewhere in this report. See “Item 2. Properties” for a complete list of ourassets.

Thetable below summarizes selected financial information for our businesssegments, after giving effect to the pending sales, for the year ended December 31,2006 (dollars in millions):

| ** **                   | ** ** | **Revenues** | ** ** | **%**  | ** ** | **Gross  Margin** | ** ** | **%**  | ** ** | **Operating  Income** | ** ** | **%**  | ** ** |
|------------------------------|------------|--------------|------------|--------|------------|-------------------|------------|--------|------------|-----------------------|------------|--------|------------|
| Business Segment:            |       |         |       |   |       |              |       |   |       |                  |       |   |       |   |   |   |   |
| Mid-Atlantic                 |       |         | $          | 1,901  |       |              | 58         | %      | $          | 1,318                 |       | 67     | %          |   | $ | 918 |   |   | 78 | % |
| Northeast                    |       |         | 827        |   |       | 25                | %          | 358    |       | 18                    | %          |   | 128        |   |   | 11 | % |
| California                   |       |         | 171        |   |       | 5                 | %          | 115    |       | 6                     | %          |   | 39         |   |   | 3 | % |
| Other Operations             |       |         | 3,262      |   |       | 100               | %          | 131    |       | 7                     | %          |   | 98         |   |   | 8 | % |
| Eliminations                 |       |         | (2,888     | )      |       | (88               | )%         | 38     |       | 2                     | %          |   | (6         | ) |   | — |   |
| Total Continuing  Operations |       |         | $          | 3,273  |       |              | 100        | %      | $          | 1,960                 |       | 100    | %          |   | $ | 1,177 |   |   | 100 | % |

 

*Overview*

Our core business is theproduction and sale of electrical energy, electrical capacity (the ability toproduce electricity on demand) and ancillary services (services that areancillary to transmission services). Our customers are ISOs, utilities,municipal systems, aggregators, electric cooperative utilities, producers,generators, marketers and large industrial customers.

*Ownership and Operation of Electricity GenerationAssets*

As of December 31,2006, our continuing operations consist of owned or leased generationfacilities with 10,650 MW of generating capacity. Our generating portfolio isdiversified across fuel types, power markets and dispatch types and servescustomers located near many major metropolitan load centers. Our totalgeneration capacity includes approximately 32% baseload units, 48% intermediateunits and 20% peaking units.

*Commercial Operations*

Our commercial operationsconsist primarily of procuring fuel, dispatching electricity, hedging theproduction and sale of electricity by our generating facilities, fuel oilmanagement and providing logistical support for the operation of our facilities(for example, by procuring transportation for coal). We often sell theelectricity we produce into the wholesale market at prices in effect at thetime we produce it (“spot price”). Those prices are volatile, however, and inorder to reduce the risk of that volatility and achieve 

7

----

morepredictable financial results, it is our strategy to enter into hedges—forwardsales of electricity into the wholesale market and purchases of fuel andemissions allowances to allow us to produce and sell the electricity—for differentperiods of time. We procure these hedges in OTC transactions or exchanges whereelectricity, fuel and emissions allowances are broadly traded, or throughspecific transactions with buyers and sellers, using futures, forwards, swapsand options. We also sell capacity and ancillary services where there aremarkets for such products and when it is economic to do so. In addition toselling the electricity we produce and buying the fuel and emissions allowanceswe need to produce electricity (“asset management”), we buy and sell someelectricity that we do not produce and some fuel and emissions allowances thatwe do not need to produce electricity (“proprietary trading”). Proprietarytrading is a small part of our commercial operations, which we do in order togain information about the markets to support our asset management and to takeadvantage of selected opportunities that we may identify from time to time. Allof our commercial activities are governed by a comprehensive Risk ManagementPolicy, which requires that our hedging activities with respect to our assetsbe risk-reducing and sets limits on the size of trading positions and VaR inour proprietary trading activities.

We use dispatch models tomake daily decisions regarding the quantity and price of the power ourfacilities will generate and sell into the markets. We bid the energy from ourgeneration facilities into the day-ahead energy market and sell ancillaryservices through the ISO markets. We work with the ISOs and RTOs in real timeto ensure that our generation facilities are dispatched economically to meetthe reliability needs of the market.

We economically hedge asubstantial portion of our Mid-Atlantic coal-fired baseload generation andcertain of our Northeast coal, gas and oil-fired generation through OTCtransactions. However, we generally do not hedge most of our intermediate andpeaking units. In 2006 and through February 26, 2007, our MirantMid-Atlantic subsidiary entered into financial swap transactions resulting inMirant Mid-Atlantic being economically hedged for approximately 92%, 93%, 97%and 38% of its expected on-peak coal-fired baseload generation in 2007, 2008,2009 and 2010, respectively. The financial swap transactions include new hedgesin addition to the previously disclosed January 2006 hedges. Thesetransactions are senior unsecured obligations of Mirant Mid-Atlantic and do notrequire the posting of cash collateral either for initial margin or forsecuring exposure due to changes in power prices. As of February 26, 2007,our total portfolio is economically hedged approximately 84%, 48%, 36% and 14%for 2007, 2008, 2009 and 2010, respectively. The corresponding fuel hedges areapproximately 82%, 27%, 15% and 0% for 2007, 2008, 2009 and 2010, respectively.

While OTC transactionsmake up a substantial portion of our economic hedge portfolio, Mirant EnergyTrading also sells non-standard, structured products to customers. In additionto energy, these products typically include capacity, ancillary services and otherenergy products. We view these transactions as a method of mitigating the riskof certain portions of our business that are not easy to economically hedge inthe OTC market. Typically, we are able to sell these products at a higherpremium than standard products. Additionally, we have facilities operatingunder long-term contracted capacity and RMR contracts. At December 31,2006, our contracted capacity pursuant to these agreements was 2,347 MW withterms expiring through October 2011.

We enter into contracts ofvarying terms to secure appropriate quantities of fuel that meet the varyingspecifications of our generating facilities. For our coal-fired generationfacilities, we purchase coal from a variety of suppliers under contracts withterms of varying lengths, some of which extend to 2009. For our oil-firedunits, fuel typically is purchased under short-term contracts linked to atransparent oil index price. For our gas-fired units, fuel typically ispurchased under short-term contracts with a variety of suppliers on a day-aheador monthly basis.

Our coal supply primarilycomes from the Central Appalachian and Northern Appalachian coal regions. Allof our coal is delivered by rail, although we are in the process of permittinga barge unloading facility at our Morgantown station that will enable us toreceive coal by an alternative transportation 

8

----

sourcebeginning in 2008. We monitor coal supply and delivery logistics carefully,and, despite occasional interruptions of scheduled deliveries, to date we have managedto avoid any significant impact to our operations. We maintain an inventory ofcoal at our coal-fired facilities for this purpose. Interruptions of scheduleddeliveries can occur because of supply disruptions due to strikes or otherreasons or as a result of rail system disruptions due to weather or otherreasons.

*Mid-Atlantic Region*

We own or lease fourgeneration facilities in the Mid-Atlantic region with a total generationcapacity of 5,256 MW: Chalk Point, Morgantown, Dickerson and Potomac River. OurMid-Atlantic region had a combined 2006 capacity factor (average percentage offull capacity used over a year) of 36%. Our Mid-Atlantic facilities are locatedin Maryland and Virginia and were acquired from Pepco in December 2000.The Chalk Point facility is our largest generation facility in the region. Itconsists of two coal-fired baseload units, two oil and gas-fired intermediateunits and two oil-fired and five gas and oil-fired peaking units, for a totalgeneration capacity of 2,429 MW. Our next largest facility in the region is theMorgantown facility. It consists of two dual-fueled (coal and oil) baseloadunits and six oil-fired peaking units, for a total generation capacity of 1,492MW. The Dickerson facility has three coal-fired baseload units, and oneoil-fired and two gas and oil-fired peaking units, for a total generationcapacity of 853 MW. The Potomac River station has three coal-fired baseloadunits and two coal-fired intermediate units, for a total generation capacity of482 MW.

Power generated by ourMid-Atlantic facilities is sold into the PJM market. For a discussion of thePJM market, see “Regulatory Environment” below. We have participated indirectlyin standard offer service auctions in Maryland and Washington, D.C. Powersales, made either directly through these auctions or indirectly throughsubsequent market transactions that are a result of the auction process, serveas economic hedges for the Mid-Atlantic assets.

On August 24, 2005,power production at all five units of the Potomac River generating facility wastemporarily halted in response to a letter from the Virginia DEQ. On August 25, 2005, the District of ColumbiaPublic Service Commission filed an emergency petition and complaint with theFERC and the DOE to prevent the shutdown of the Potomac River facility. Thematter remains pending before the FERC and the DOE. On December 20, 2005,due to a determination by the DOE that an emergency situation existed withrespect to the reliability of the supply of electricity to central Washington,D.C., the DOE ordered Mirant Potomac River to generate electricity at thePotomac River generating facility, as requested by PJM, during any period inwhich one or both of the transmission lines serving central Washington, D.C.are out of service due to a planned or unplanned outage. In addition, the DOEordered Mirant Potomac River, at all other times, for electric reliabilitypurposes, to keep as many units in operation as possible and to reduce thestart-up time of units not in operation  without contributing to any NAAQS exceedances. The DOE required MirantPotomac River to submit a plan that met these requirements, on or before December 30,2005. The order further provides that Mirant Potomac River and its customersshould agree to mutually satisfactory terms for any costs incurred by it underthis order or just and reasonable terms shall be established by a supplementalorder. Certain parties filed for rehearing of the DOE order, and on February 17,2006, the DOE issued an order granting rehearing solely for purposes ofconsidering further the rehearing requests. Mirant Potomac River submitted anoperating plan in accordance with the order. On January 4, 2006, the DOEissued an interim response to Mirant Potomac River’s operating plan authorizingoperation of the units of the Potomac River generating facility on a reducedbasis, but making it possible to bring the entire plant into service withinapproximately 28 hours when necessary for reliability purposes. The DOE’s orderexpires July 1, 2007, but Mirant Potomac River expects it will be able tocontinue to operate these units after that expiration.

9

----

In aletter received December 30, 2005, the EPA invited Mirant Potomac Riverand the Virginia DEQ to work withthe EPA to ensure that Mirant Potomac River’s operating plan submitted to theDOE adequately addressed NAAQS issues. The EPA also asserted in its letter thatMirant Potomac River did not immediately undertake action as directed by theVirginia DEQ’s August 19, 2005, letter and failed to comply with therequirements of the Virginia State Implementation Plan established by thatletter. Mirant Potomac River received a second letter from the EPA on December 30,2005, requiring Mirant to provide certain requested information as part of anEPA investigation to determine the Clean Air Act compliance status of thePotomac River generating facility.

On June 1, 2006,Mirant Potomac River and the EPA executed an ACO by Consent to resolve the EPA’sallegations that Mirant Potomac River violated the Clean Air Act by notimmediately shutting down all units at the Potomac River facility upon receiptof the Virginia DEQ’s August 19, 2005, letter and to assure an acceptablelevel of reliability to the District of Columbia. The ACO (i) specifiescertain operating scenarios and SO2 emissions limits for the Potomac Riverfacility, which scenarios and limits take into account whether one or both ofthe 230kV transmission lines serving Washington, D.C. are out of service; (ii) requiresthe operation of trona injection units to reduce SO2 emissions; and (iii) requiresMirant Potomac River to undertake a model evaluation study to predict ambientair quality impacts from the facility’s operations. In accordance with thespecified operating scenarios, the ACO permits the facility to operate using adaily predictive modeling protocol. This protocol allows Mirant Potomac Riverto schedule the facility’s level of operations based on whether computermodeling predicts an NAAQS exceedance, based on weather and certain operatingparameters. On June 2, 2006, the DOE issued a letter modifying its January 6,2006, order to direct Mirant Potomac River to comply with the ACO in order toensure adequate electric reliability to the District of Columbia. MirantPotomac River is operating the Potomac River facility in accordance with theACO and has been able to operate all five units of the facility most of thetime under the ACO. This ACO expires in June 2007.

*Northeast Region*

We own generatingfacilities in the Northeast region consisting of 3,047 MW of capacity. OurNortheast region had a combined 2006 capacity factor of 17%. The Northeast regionis comprised of our assets located in New York and New England. Thesubsidiaries that own our New York facilities remain in bankruptcy. For furtherinformation, see “Item 3. Legal Proceedings.” Generation is sold from ourNortheast facilities through a combination of bilateral contracts, spot markettransactions and structured transactions.

*New York.**  *Our New York generating facilities were acquired fromOrange and Rockland and Consolidated Edison Company of New York, Inc. in June 1999.The New York generating facilities consist of the Bowline and Lovett facilitiesand various smaller generating facilities comprising a total of 1,656 MW ofcapacity. The Bowline facility is a 1,125 MW dual-fueled (natural gas and oil)facility comprised of two intermediate/peaking units. The Lovett facilityconsists of two baseload units capable of burning coal and gas comprising atotal of 348 MW and a peaking unit capable of burning gas or oil comprising 63MW. The smaller New York generating facilities have a total capacity of 120 MWand consist of the Hillburn and Shoemaker facilities, which each contain asingle peaking unit capable of running on natural gas or jet fuel, and theMongaup 1-4, Swinging Bridge 1-2 and Rio 1-2 facilities,which each contain a hydroelectric intermediate unit. We also had anoperational interest in the Grahamsville facility, pursuant to a subleasebetween Orange and Rockland and Mirant NY-Gen. On October 31, 2006, wetransferred the Grahamsville facility to Orange and Rockland for transfer tothe City of New York. The capacity, energy and ancillary services from our NewYork generating units are sold into the bilateral markets and into the marketsadministered by the NYISO through Mirant Energy Trading. For a discussion ofNYISO, see “Regulatory Environment” below.

10

----

Our current plan is toretire units 3 and 5 at the Lovett facility by April 30, 2007, and theremaining unit by April 30, 2008, as required under the terms of a consentdecree entered into on June 11, 2003, to resolve issues related to NSRregulations promulgated under the Clean Air Act (the “2003 Consent Decree”) ifcertain environmental controls are not added to the two units of the Lovettfacility that burn coal. We are also considering scenarios that allow continuedoperations past April 2007 and April 2008 as we continue to work withthe State of New York and other parties to achieve a solution related toenvironmental controls and to allow Lovett to continue to contribute to thereliability of the electric system of the State of New York. In order for thefacility to remain viable on a long-term basis, we need to accomplish two primarytasks. First, we need to reach agreement with the State of New York onamendments to the 2003 Consent Decree that would address the installation ofenvironmental equipment. Second, because current market conditions do not allowMirant Lovett to recover the necessary returns to fund the installation ofenvironmental controls specified under the 2003 Consent Decree, we are seekingan agreement with a third party assuring us of enough revenue to justify therequired capital expenditures. Our view is that the Lovett facility isnecessary to the provision of reliable electricity to the Lower Hudson Valleyand other areas within the New York Control Area.

In the fourth quarter of2006, the Bankruptcy Court approved a settlement of disputed property taxes amongMirant Bowline, Mirant Lovett, Hudson Valley Gas and various New York taxjurisdictions. The settlement resolves pending disputes regarding refundssought by us for property taxes paid for 1995 through 2003 and unpaid taxesassessed for 2003 through 2006. Under the settlement, in February 2007 wereceived refunds totaling approximately $163 million for 1995 through 2002, andpaid unpaid taxes of approximately $115 million for 2003 through 2006,resulting in receipt of a net cash amount of $48 million. As a result of therefund and the reduction in unpaid taxes under the settlement, we recognized again of approximately $244 million in the fourth quarter of 2006. Of the $244million gain recognized, $163 million is included in reorganization items, net,and $94 million is a reduction in operations and maintenance expense in theconsolidated statement of operations. These amounts are partially offset by $13million in interest expense.

In May 2005, asinkhole was discovered in the dam of our Swinging Bridge facility. In response, Mirant NY-Gen filled this sinkhole,inspected for damage the dam’s slopes and the enclosed pipe that delivers waterfrom the reservoir to the generator, drew down the lake level and cleaned thediversion tunnel. Mirant NY-Gen’s analysis indicates that the most probablecause of the sinkhole was erosion of soil comprising the dam from water flowthrough a hole in the pipe that delivers water from the reservoir to thegenerator. The dam is stabilized, and Mirant NY-Gen is performing additionalremediation repairs. By letter dated June 14, 2006, the FERCauthorized Mirant NY-Gen to proceed with its remediation plan for the sinkhole.The FERC has also concurred with the results of Mirant NY-Gen’s flood study forits Swinging Bridge, Rio and Mongaup generation facilities, which studyconcluded that no additional remediation is required. On June 29, 2006,the Bankruptcy Court authorized Mirant NY-Gen to proceed with implementation ofthe remediation plan. The current estimated cost to remediate the dam atSwinging Bridge is approximately $29 million, of which approximately $22million had been incurred through December 31, 2006. Mirant NY-Gencurrently expects to recover insurance proceeds for a portion of these repaircosts. The Bankruptcy Court has approved adebtor-in-possession loan to Mirant NY-Gen from Mirant Americas under whichMirant Americas, subject to certain conditions, would lend up to $16.5 millionto Mirant NY-Gen to provide funding for the repairs on the Swinging Bridge dam.

On January 26, 2007,Mirant New York, Mirant Bowline, and Hudson Valley Gas (collectively the “EmergingNew York Entities”) filed a Supplemental Joint Chapter 11 Plan ofReorganization of the Emerging New York Entities (the “Supplemental Plan”) withthe Bankruptcy Court. For more detail concerning the Supplemental Plan, see “Item3. Legal Proceedings, Chapter 11 Proceedings.”

On January 31, 2007,Mirant New York entered into an agreement to sell Mirant NY-Gen, which owns theHillburn and Shoemaker gas turbine facilities and the Swinging Bridge, Rio andMongaup 

11

----

hydroelectricgenerating facilities to Alliance Energy, LLC (the “Alliance Sale”). The salesprice of approximately $5 million is subject to adjustments for working capitaland certain dam remediation efforts that are ongoing at the Swinging Bridgefacility. TheBankruptcy Court approved the Alliance Sale on March 8, 2007. Thetransaction is expected to close in the second quarter of 2007. On February 15,2007, Mirant NY-Gen filed its proposed Chapter 11 Plan of Reorganization (the “MirantNY-Gen Plan”). For more detail concerning the Mirant NY-Gen Plan, see “Item 3.Legal Proceedings, Chapter 11 Proceedings.”

*New England.**  *Our New England generating facilities, with a totalcapacity of 1,391 MW, were acquired from subsidiaries of Commonwealth EnergySystem and Eastern Utilities Associates in December 1998. The New Englandgenerating facilities consist of the Canal station, the Kendall station, theMartha’s Vineyard diesels and an interest in the Wyman unit 4 facility. TheCanal and Kendall facilities, located in close proximity to Boston, consist of1,112 MW and 256 MW of generating capacity, respectively, and are designed tooperate during periods of intermediate and peak demand. The Kendall facility isa combined cycle facility which produces both steam and electricity for sale.Both the Canal and Kendall facilities possess the ability to burn both naturalgas and 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 9 MW) in the 614 MW Wymanunit 4 located on Cousin’s Island, Yarmouth, Maine. Wyman unit 4 is primarilyowned and operated by the Florida Power and Light Group.

The capacity, energy andancillary services from our New England generating units are sold into theNEPOOL bilateral markets and into the markets administered by the ISO-NEthrough Mirant Energy Trading. For a discussion of the NEPOOL and the ISO-NE,see “Regulatory Environment” below.

We had determined thatmarket fundamentals in NEPOOL did not permit us to operate the Kendall facilityon an economical basis as a merchant facility. We therefore had planned to shutdown, at least temporarily, the Kendall facility from January 2005 throughDecember 2007, with the possibility of restarting operations as early as January 2008.However, the ISO-NE determined that part of the capacity of the Kendallfacility was needed for reliability and proposed an RMR agreement with a termlasting until the earlier of (1) the date a locational installed capacitycost recovery mechanism applicable to the Kendall facility is in place or (2) 120-days after we are providedwritten notice. We entered into and received FERC approval for an agreementwith NSTAR and ISO-NE, which included the RMR agreement. On December 28,2006, ISO-NE provided notice that the RMR agreement shall terminate effective May 1,2007. A locational installed capacity market has been implemented in NewEngland and, as a result and coupled with additional steam sales, there are noplans to shut down the Kendall facility in 2007.

*California*

Our California facilities,with a total capacity of 2,347 MW, are primarily gas-fired generatingfacilities and consist of the Pittsburg, Contra Costa and Potrero facilities,which have generation capacity of 1,311 MW, 674 MW and 362 MW, respectively.Our California facilities had a 2006 capacity factor of 6%.

The Pittsburg and ContraCosta facilities are natural gas facilities and both generate electricity byusing gas-fired steam boilers. They are located in Contra Costa County,approximately ten miles apart along the Sacramento/San Joaquin River. ThePotrero facility, located in the City of San Francisco, has one naturalgas-fired intermediate steam boiler from which it generates electricity andthree oil-fired peaking distillate fueled combustion turbines.

Through the end of 2006,the majority of our California assets were subject to RMR arrangements with theCAISO. These agreements are described further under “Regulatory Environment”below. Our California subsidiaries had the largest portfolio of units thatoperated under RMR arrangements in California, reflecting that the location ofthese units is key to electric system reliability. Pittsburg unit 7 and ContraCosta unit 6 were not subject to an RMR arrangement, and thus functioned solelyas merchant 

12

----

facilitiesin the CAISO. In 2006, we either sold the output of Pittsburg unit 7 and ContraCosta unit 6 into the market through bilateral transactions with utilities andother merchant generators, or dispatched the units in the CAISO clearingmarkets.

On July 28, 2006, wesigned two tolling agreements with PG&E to provide electricity from ournatural gas-fired units at Pittsburg and Contra Costa, including Pittsburg unit7 and Contra Costa unit 6. The agreements are for 100% of the capacity fromthese assets, approximately 2,000 MW. The contracts have varying tenors rangingfrom one to four years, and include capacity of 1,985 MW for 2007, 2008 and2009, 1,303 MW for 2010 and 674 MW for 2011. We will receive monthly capacitypayments with bonuses and/or penalties based on guaranteed heat rate andavailability tolerances. As a result of these contracts, the Pittsburg andContra Costa units are no longer subject to the RMR agreements. Potrero units 3-6continue to be subject to the RMR arrangements as described.

On January 14, 2005,we and certain of our subsidiaries entered into a Settlement and Release ofClaims Agreement (the “California Settlement”) with PG&E, SCE, San DiegoGas and Electric Company, the CPUC, the Cal DWR, the EOB and the AttorneyGeneral of the State of California and with the Office of Market Oversight andInvestigations of the FERC. Pursuant to the settlement agreement that becameeffective in April 2005, the partially constructed Contra Costa unit 8project, which is a planned 530 MW combined cycle generating facility, andrelated equipment (collectively, the “CC8 Assets”) were transferred to PG&Eon November 29, 2006. Mirant Delta received $70 million that under theterms of the settlement had been held in an escrow account to be paid toPG&E if the Contra Costa 8 project was not transferred to it by June 30,2008. We recognized a gain of $27 million in the fourth quarter of 2006 as aresult of these transfers.

***DiscontinuedOperations***

The Zeeland facility,located in Zeeland, Michigan, is comprised of simple cycle units totaling 327MW of capacity and a 576 MW combined cycle facility (903 MW of total capacity).The Zeeland facility is interconnected with the International TransmissionCompany, which is a member of the MISO and operates under the East Central AreaReliability Coordination Agreement.

The Bosque facility,located in Laguna Park, Texas, consists of a gas-fired combustion turbine witha corresponding steam turbine with a capacity of 239 MW that is available toserve baseload and intermediate demand. Additionally, Bosque units 1 and 2 aregas-fired peaking facilities with a total capacity of 307 MW. The Bosquefacility operates in the ERCOT market. For a discussion of ERCOT, see “RegulatoryEnvironment” below.

**Regulatory Environment**

The electricity industryis subject to comprehensive regulation at the federal, state and local levels.At the federal level, the FERC has exclusive jurisdiction under the FederalPower Act over sales of electricity at wholesale and the transmission ofelectricity in interstate commerce. Any of our subsidiaries that owns agenerating facility selling at wholesale or that markets electricity atwholesale outside of ERCOT is a “public utility” subject to the FERC’sjurisdiction under the Federal Power Act. These subsidiaries must comply withcertain FERC reporting requirements and FERC-approved market rules and aresubject to FERC oversight of mergers and acquisitions, the disposition of FERC-jurisdictionalfacilities and the issuance of securities. In addition, under the Natural GasAct, the FERC has limited jurisdiction over certain resales of natural gas, butdoes not regulate the prices received by our subsidiary that markets naturalgas.

The FERC has authorizedour subsidiaries that constitute public utilities under the Federal Power Actto sell energy and capacity at wholesale at market-based rates and hasauthorized some of these subsidiaries to sell certain ancillary services atwholesale at market-based rates. The majority of the output of thegeneration facilities owned by our subsidiaries that constitute publicutilities is sold pursuant to this 

13

----

authorization,although certain of our facilities sell their output under cost-based RMRagreements, as explained below. The FERC may revoke or limit our market-basedrate authority if it determines that we possess undue market power in aregional market. The FERC requires that our subsidiaries with market-based rateauthority, as well as those with blanket certificate authorization permittingmarket-based sales of natural gas, adhere to certain market behavior rules andcodes of conduct, respectively. If any of our subsidiaries violates the marketbehavior rules or codes of conduct, the FERC may require a disgorgement ofprofits or revoke its market-based rate authority or blanket certificateauthority. If the FERC were to revoke market-based rate authority, ouraffected subsidiary would have to file a cost-based rate schedule for all orsome of its sales of electricity at wholesale. If the FERC revoked the blanketcertificate authority of any of our subsidiaries, certain sales of natural gaswould be prohibited.

Our facilities operate inISO/RTO markets. In areas where ISOs or RTOs control the regional transmissionsystems, market participants have expanded access to transmission service. ISOsoperate real-time and day-ahead energy and ancillary services markets,typically governed by FERC-approved tariffs and market rules. Some RTOs andISOs also operate capacity markets. Changes to the applicable tariffs andmarket rules may be requested by market participants, state regulatoryagencies and the system operator, and such proposed changes, if approved by theFERC, could have a significant impact on our operations and business plan.While participation by transmission-owning public utilities in ISOs andRTOs has been and is expected to continue to be voluntary, the majority of suchpublic utilities in New England, New York, theMid-Atlantic and California have joined the respective ISO/RTO.

Our subsidiaries owninggeneration were exempt wholesale generators under the PUHCA, as amended. Withthe repeal of the PUHCA and the adoption of the Public Utility Holding CompanyAct of 2005, the FERC adopted new regulations effective February 8, 2006,that allow our subsidiaries owning generation to retain their exempt wholesalegenerator status.

State and local regulatoryauthorities have historically overseen the distribution and sale of electricityat retail to the ultimate end user, as well as the siting, permitting andconstruction of generating and transmission facilities. Our existing generationmay be subject to a variety of state and local regulations, includingregulations regarding the environment, health and safety, maintenance andexpansion of generation facilities. To the extent that a subsidiary sellselectricity at retail in a state with a retail access program, it may besubject to state certification requirements and to bidding rules thatprovide default service to customers who choose to remain with their regulatedutility distribution companies.

*Mid-Atlantic Region.*   OurMid-Atlantic facilities sell power into the markets operated by PJM, which theFERC approved to operate as an ISO in 1997 and as an RTO in 2002. We haveaccess to the PJM transmission system pursuant to PJM’s Open AccessTransmission Tariff. PJM operates the PJM Interchange Energy Market, which isthe region’s spot market for wholesale electricity, provides ancillary servicesfor its transmission customers, performs transmission planning for the region and economically dispatches generators. PJM administers day-ahead and real-time marginalcost clearing price markets and calculates electricity prices based on alocational marginal pricing model. A locational marginal pricing modeldetermines a price for energy at each node in a particular zone taking intoaccount the limitations on transmission of electricity and losses involved intransmitting energy into the zone, resulting in a higher zonal price whencheaper power cannot be imported from another zone. Generation owners in PJMare subject to mitigation, which limits the prices that they may receive undercertain specified conditions.

Load-serving entitieswithin PJM are required to have adequate sources of capacity. PJM operates acapacity market whereby load-serving entities can procure their capacityrequirements through a system-wide single clearing price auction. In PJM, allcapacity is assumed to be universally deliverable, regardless of its location.PJM has greatly expanded its system to include Allegheny Power, CommonwealthEdison, AEP, DP&L and Dominion-Virginia Power. As a result, capacity priceshave significantly declined. The PJM expansions have resulted in an apparentsystem-wide surplus of capacity, despite the fact that certain regions inPJM-Mid-Atlantic are currently in need of capacity additions.

14

----

On December 22, 2006, the FERC approved, withconditions, a settlement between PJM and multiple market participants regardingPJM’s RPM, which was originally filed with the FERC on August 31, 2005, toreplace the existing system-wide single clearing price capacity market. The RPMsettlement is intended to ensure reliability and reasonable rates in the PJMregion. The RPM settlement provides for a three-year forward capacity auctionusing a modified demand curve from the original RPM filing and locational deliverabilityzones that will be phased in over several years. Demand curves areadministrative mechanisms used to establish electricity generation capacityprices. The RPM settlement will provide increased opportunities for our powerplants located in the Mid-Atlantic region to receive more revenues for theircapacity. The order approving the RPM is subject to rehearing and a motion tovacate. Parties opposed to the RPM settlement have filed requests with the FERCto rehear, vacate or stay the effectiveness of the December 22, 2006,order, which are currently pending before the FERC.

In addition, PJM and the MISO have been directed bythe FERC to establish a common and seamless market, an effort that is largelydependent upon the MISO’s ability to first establish and operate its markets.The development of a joint market is contingent on the approval of the internalcosts to both entities to develop and operate the infrastructure necessary forjoint operations. It is unclear at this time if either the respective entitiesor the FERC will approve such costs to achieve a common and seamless market.

*NortheastRegion.*   Our New York plantsparticipate in a market controlled by the NYISO, which replaced the New YorkPower Pool. The NYISO provides statewide transmission service under a singletariff and interfaces with neighboring market control areas. To account fortransmission congestion and losses, the NYISO calculates energy prices using alocational marginal pricing model that is similar to that used in PJM and ISO-NE.The NYISO also administers a spot market for energy, as well as markets forinstalled capacity and services that are ancillary to transmission service,such as operating reserves and regulation service (which balances resourceswith load). The NYISO’s locational capacity market rules use a demandcurve mechanism to determine for every month the required amount of installedcapacity as well as installed capacity prices to be paid for three locationalzones: New York City, Long Island and Rest of State. Our facilities operateoutside of New York City and Long Island. On April 21, 2005, the FERCissued an order accepting the NYISO’s demand curves for capability years2005/2006, 2006/2007 and 2007/2008 with minor modifications to the NYISO’sproposal. The new demand curves may result in increased prices within the NYISOfor capacity.

Our New England plants participatein a market administered by ISO-NE. Mirant Energy Trading is a member ofNEPOOL, which is a voluntary association of electric utilities and other marketparticipants in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Islandand Vermont, and which functions as an advisory organization to ISO-NE. TheFERC approved ISO-NE as the RTO for the New England region effective on February 1,2005, making ISO-NE responsible for market rule filings at the FERC, inaddition to its responsibilities for the operation of transmission systems andadministration and settlement of the wholesale electric energy, capacity andancillary services markets. ISO-NE utilizes a locational marginal pricing model similar to that used in PJM and NYISO. Inearly 2004, ISO-NE filed with the FERC to adopt a LICAP similar to NYISO’scapacity market. After extensive litigation before the FERC on the LICAPproposal, on March 6, 2006, a comprehensive settlement proposal was filedwith the FERC between ISO-NE and multiple market participants that wouldreplace the LICAP proposal with a forward capacity market (“FCM”) under whichannual capacity auctions would be conducted for supply three years in advanceof delivery. In addition, the settlement provided for a four-year transitionperiod under which capacity suppliers would receive a set price for theircapacity commencing on December 1, 2006, and continuing with priceescalators through May 31, 2010. On June 16, 2006, the FERC issued adecision accepting the proposed FCM settlement without modification. The FCMwill result in increased opportunities for our New England generators toreceive more revenues for their capacity commencing in December 2006. TheFERC’s orders regarding the LICAP and FCM are pending review with the U.S. 

15

----

Court of Appeals. On February 15,2007, ISO-NE filed the market rules with the FERC to implement FCM. Themarket rules were supported by a majority of NEPOOL members. NEPOOL didnot join in the filing but will be filing separate comments. Existing resourceswill need to be qualified, and the amount of MW they have to participate in thefirst auction certified, by April 2007. In June 2007, another roundof information will be due from new generators, on a more detailed and bindingnature than the show of interest forms. In October 2007 all resources thatwant to participate in the first auction will be fully qualified by ISO-NE. Thefirst auction will take place starting February 4, 2008, for the deliveryperiod June 1, 2010 - May 31, 2011.

*California.*   OurCalifornia facilities are located inside the CAISO’s control area. The CAISOschedules transmission transactions, arranges for necessary ancillary servicesand administers a real-time balancing energy market. Most sales in Californiaare pursuant to bilateral contracts, but a significant percentage of generationoutput is sold in the real-time market. The CAISO does not operate a forwardmarket like those described for PJM and other Eastern ISO markets, nor does itcurrently operate a capacity market.

Our subsidiaries owning facilities subject to RMRarrangements are parties to a PPA with PG&E that allows PG&E todispatch and purchase the power output of all of our CAISO designated RMR unitsfrom 2006 through 2012. The PPA currently applies only to Potrero units 3-6,our CAISO designated RMR generating units for 2007. Under the PPA, through 2008PG&E is paying us charges equivalent to the rates we charged during 2004when the units were designated RMR Contract Condition 2 reduced by $1.4 millionfor each year. For 2009 through 2012, the charges for the units that are thensubject to the PPA will be determined annually by the FERC.

The CAISO has proposed changes to its market design tomore closely mirror the eastern ISO markets, including establishing a wholesalecapacity market. The market redesign has been delayed several times, with fullimplementation now expected in 2008. Any proposal for a capacity market inCalifornia is subject to filing with and approval by the FERC, and at thistime, the CAISO has not proposed a capacity market mechanism in its marketredesign. The CPUC has taken a role in developing recommended options withrespect to a wholesale capacity market in conjunction with the CAISO. We cannotat this time predict the outcome of the CPUC proceeding or the timing orstructure of a wholesale capacity market in California.

The FERC approved a $400 per MWh cap, effective on January 1,2006, on prices for energy in the CAISO market, which was an increase from theprevious $250 per MWh cap, but still far short of the $1,000 per MWh energy caputilized in the other FERC approved RTO markets. In addition, owners ofnon-hydroelectric generation in California, including certain of ourfacilities, must offer to keep their generation on-line and stand ready tooffer power into the CAISO’s spot markets if the output is not under contractor scheduled for delivery within the hour, unless granted a waiver by theCAISO. The practical effect of this rule is to obtain operating reserveswithout paying for them, and to release excess energy into the market, therebydepressing prices. On August 26, 2005, the Independent Energy Producers, atrade association, filed a complaint with the FERC, requesting that the FERCrequire the CAISO to implement a reliability capacity services tariff (“RCST”)that would pay generators for the capacity obtained pursuant to the must-offerrequirement. Prior to the FERC’s ruling on the merits of the complaint, theCAISO and multiple market participants filed a settlement that would implementa form of the RCST. On February 13, 2007, the FERC approved the RCSTsettlement with minor modifications with an effective date of June 1,2006. The RCST settlement may result in increased capacity revenueopportunities for generators and possibly could increase revenues for certainunits at our Pittsburg and Contra Costa plants for the June 1 - December 31,2006, period, depending upon how the CAISO implements the terms of thesettlement. However, after December 31, 2006, our Pittsburg and ContraCosta plants are under contract for varying periods from now until 2011, and wewill not realize any opportunities from RCST until those contracts expire. 

16

----

The CPUC has issued aseries of orders purporting to require exempt wholesale generators and otherpower plant owners to comply with detailed operation, maintenance andrecordkeeping standards for electricity generating facilities. In its orders,the CPUC has stated its intent to implement and enforce these detailedstandards to maintain and protect the public health and safety of Californiaresidents and businesses, to ensure that electric generating facilities areeffectively and appropriately maintained and efficiently operated, and toensure electrical service reliability and adequacy. The CPUC has adopteddetailed reporting requirements for the standards, and conducts frequenton-site spot inspections and more comprehensive facility audits to evaluate compliance.Some standards are intended to ensure that units are maintained in a state ofreadiness so as to be available to operate if requested by a control areaoperator, while others provide procedures for changing a unit’s long-termstatus. The CPUC’s efforts to implement and enforce the operation, maintenanceand recordkeeping standards could interfere with our future ability to makeeconomic business decisions regarding our units, including decisions regardingunit retirements, and could have a material adverse impact on our businessactivities in California.

***Environmental Regulation***

Our business is subject to extensive environmentalregulation by federal, state and local authorities. This requires us to complywith applicable laws and regulations, and to obtain and comply with the termsof government issued permits. Our costs of complying with environmental laws,regulations and permits are substantial. We expect that cash flows fromoperations and from preferred shares in Mirant Americas will be sufficient tofund these capital expenditures. 

*MarylandHealthy Air Act.*   On August 3,2006, we announced a plan to comply with the requirements of the MarylandHealthy Air Act by reducing SO2 emissions by as much as 95% at our Marylandpower plants. We will install flue gas desulphurization (“FGD”) emissionscontrols at our Chalk Point, Dickerson and Morgantown plants. In addition, wewill install selective catalytic reduction (“SCR”) systems at the Morgantown(as contemplated by the pending NOx Consent Decree described in “Item 3. LegalProceedings, Environmental Matters”) and Chalk Point facilities that willreduce NOx emissions byapproximately 80%. Together, the FGDs and the SCRs will reduce by approximately80% the emissions of ionic mercury from the three Maryland power plants. 

The Maryland Healthy Air Act requires deeperreductions in NOx and SO2 in 2010 and 2015 than reductions required underfederal law including the CAIR. As a result of passage of the more restrictiveMaryland state standard on NOx and SO2 emissions, our plan to install controlequipment will allow the Maryland facilities to meet or exceed the CAIR limits.We anticipate that the capital expenditures to achieve compliance for SO2 andNOx emissions will be approximately $1.6 billion through 2009. The MarylandHealthy Air Act also requires reductions of mercury emissions by the year 2010.As a result of our installation of equipment to satisfy the more restrictiveMaryland state standard on mercury emissions, our Mid-Atlantic facilities willalso meet or exceed the CAMR limits. The state law also requires Maryland tojoin the Regional Greenhouse Gas Initiative (“RGGI”), a seven state plan toreduce CO2 emissions by 2018. The State of Maryland will initiate a rule-makingproceeding in 2007 to determine the regulatory framework for RGGIparticipation.

At the federal level, there are efforts to passlegislation to mandate reductions of CO2 emissions from generation facilities.There are several pieces of legislation being advanced that vary in levels ofreductions and mechanisms for compliance. 

*AirEmissions Regulations.*   Our mostsignificant environmental requirements generally fall under the Clean Air Actand similar state laws. Under the Clean Air Act, we are required to comply witha broad range of mandates concerning air emissions, operating practices andpollution control equipment. Several of our facilities are located in or nearmetropolitan areas, such as New York City, Boston, San Francisco and WashingtonD.C., which are classified by the EPA as not achieving certain NAAQS. As aresult of the 

17

----

NAAQS classification ofthese areas, our operations are subject to more stringent air pollutionrequirements, including, in some cases, further emissions reductions. In thefuture, we anticipate increased regulation of generation facilities under theClean Air Act and applicable state laws and regulations concerning air quality.Significant air regulatory programs to which we are subject include thosedescribed below.

*CleanAir Interstate Rule (CAIR).*   InMay 2005, the EPA promulgated the CAIR regulations, which established in theeastern United States an SO2 and NOx cap-and-allowance trading programapplicable to generation facilities. These cap-and-trade programs will beimplemented in two phases, with the first phase going into effect in 2010 andmore stringent caps going into effect in 2015. In order to comply with thefirst phase of those regulations, we will have to install additional pollutioncontrol equipment and/or purchase additional emissions allowances, atsignificant cost. We are planning to install pollution control equipment atsome of our facilities to address, in part, our requirements under the firstphase of the CAIR. The costs of that equipment are included in our estimate ofanticipated environmental capital expenditures from 2007 through 2010. However,since the determination of how much pollution control equipment to install isbased upon factors such as the cost of emissions allowances and the operationaldemands on our generation facilities, our plans may change significantly. Forour Maryland facilities, compliance with the Maryland Healthy Air Act meets orexceeds the requirements under CAIR.

*CleanAir Mercury Rule (CAMR).*   In May 2005,the EPA issued the CAMR, which limits total annual mercury emissions fromcoal-fired power plants across the United States through a two-phasedcap-and-trade program. The first phase begins in 2010 and the second phasebegins in 2018. The EPA expects that, in the first stage, the necessaryreductions in mercury will be achieved as a co-benefit using the same pollutioncontrol equipment required to achieve the reductions of SO2 and NOx under theCAIR. All states are required to adopt either the EPA rule or a state rule meetingthe minimum requirements outlined in the CAMR. Under the EPA rule, we willreceive an allocation of mercury emissions allowances associated with ourcoal-fired plants nationwide, unless there are restrictions imposed at thestate level. We expect our coal-fired facilities to comply with the CAMRregulations by taking advantage of the co-benefits derived from NOx and SO2controls that are, or will soon be, installed.

*NSRenforcement initiative.**  *In1999, the DOJ, on behalf of the EPA, commenced enforcement actions against anumber of companies in the power generation industry for alleged violations ofthe NSR regulations, which require permitting and impose other requirements forcertain maintenance, repairs and replacement work on facilities. Theseenforcement actions can result in a facility owner having obligations to, amongother things, install emissions controls at significant cost. These enforcementactions were broadly challenged by the industry in the courts, among otherreasons, for being a new interpretation of longstanding regulations. In aneffort to provide additional clarity, it is expected that in 2007 the Bushadministration will adopt new air pollution rules to clarify what constitutesan emissions increase under the NSR program. 

In 2001,the EPA requested information concerning some of our facilities in Maryland andVirginia covering a time period that pre-dates our acquisition or lease ofthose facilities in December 2000. We responded fully to thisrequest. Under the APSA, Pepco is responsible for fines and penalties arisingfrom any violation associated with operations prior to our subsidiaries’acquisition or lease of the plants. If a violation is determined to haveoccurred at any of the plants, our subsidiary owning or leasing the plant maybe responsible for the cost of purchasing and installing emissions controlequipment, the cost of which may be material. Our subsidiaries owning orleasing the Chalk Point, Dickerson and Morgantown plants in Maryland will beinstalling a variety of emissions control equipment on those plants to complywith the Maryland Healthy Air Act, but that equipment will not include all ofthe emissions control equipment that would be required if a violation of theEPA’s NSR regulations is determined to have occurred at one or more of thoseplants. If such a violation is determined to have occurred after oursubsidiaries acquired or leased the plants or, if occurring prior to theacquisition or lease, is determined to constitute a continuing 

18

----

violation, our subsidiaryowning or leasing the plant at issue could also be subject to fines andpenalties by the state or federal government for the period after itsacquisition or lease of the plant, the cost of which may be material, althoughapplicable bankruptcy law may bar such liability for periods prior to January 3,2006, when the Plan became effective for us and our subsidiaries that own orlease these plants.

*Stateair regulations.*   Various states where we dobusiness also have other air quality laws and regulations with increasinglystringent limitations and requirements that will become applicable in futureyears to our facilities and operations. 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. Specific state items include:

*VirginiaCAIR and CAMR Implementation.**  *InApril 2006, Virginia enacted the Clean Smokestacks Law, which granted theVirginia State Air Pollution Control Board the discretion to limit the abilityof a facility in a non-attainment area to purchase additional mercury, SO2 andNOx allowances to achieve compliance with CAIR and CAMR. The State AirPollution Control Board has approved the implementing regulations to the CleanSmokestacks Law but they have not yet been promulgated. The State Air PollutionControl Board has interpreted the current form of these regulations asrestricting facilities in non-attainment areas from purchasing emissionallowances to achieve compliance with CAIR and CAMR. If the regulations arepromulgated in their current form and the State Air Pollution Control Board’sinterpretation is correct, such restrictions would reduce our flexibility incomplying with CAIR and CAMR and could result in operating restrictions for ourPotomac River generating facility in Virginia. 

*MassachusettsEmissions Standards for Power Plants.**  *TheCommonwealth of Massachusetts has finalized regulations to further reduce NOxemissions from certain generation facilities. The Massachusetts regulationsrelate to NOx emissions during ozone season and become effective in 2009. Ouroperations will not be materially affected by the newly established limits. 

*NewYork.**  *In 2000,the State of New York issued an NOV to the previous owner of our Lovettfacility alleging NSR violations associated with the operation of that facilityprior to its acquisition by us. On June 11, 2003, Mirant New York, MirantLovett and the State of New York entered into the 2003 Consent Decree. The 2003Consent Decree was approved by the Bankruptcy Court on October 15, 2003.Under the 2003 Consent Decree, Mirant Lovett has three options: (1) installemissions controls on Lovett’s two coal-fired units; (2) shut down oneunit and convert one unit to natural gas; or (3) shut down both coalburning units in 2007 and 2008. If Mirant Lovett elects to install emissionscontrols on its two coal-fired units by 2007 through 2008, it must install: (a) emissionscontrols consisting of SCR technology to reduce NOx emissions; (b) alkalinein-duct injection technology to reduce SO2 emissions; and (c) a baghouse.Additionally, in 2003, the State of New York finalized air regulations thatsignificantly reduced allowances for NOx and SO2 emissions from generationfacilities through a state emissions cap-and-trade program, which will becomeeffective during the 2006-2008 timeframe. 

On October 19, 2006, Mirant Lovett notified theNew York Public Service Commission, the NYISO, Orange and Rockland and certainother affected transmission and distribution companies in New York of itsintent to discontinue operation of units 3 and 5 of the Lovett facility in April 2007.The 2003 Consent Decree imposes similar requirements with respect to unit 4that have to be met by April 30, 2008. 

*Climatechange.**  *Concern over climate change has led to significantlegislative and regulatory efforts to limit greenhouse gas emissions.

In 1998, the United States became a signatory to theKyoto Protocol of the United Nations Framework Convention on Climate Change.The Kyoto Protocol, which became effective in February 2005 after Russia’sratification in November 2004, calls for developed nations to reduce theiremissions of greenhouse gases to 5% below 1990 levels by 2012. CO2, which is amajor byproduct of the combustion of fossil fuel, is a greenhouse gas thatwould be regulated under the Kyoto Protocol. The United States 

19

----

Senate indicated that itwould not enact the Kyoto Protocol, and in 2002 President Bush confirmed thatthe United States would not enter into the Kyoto Protocol. Instead, thePresident indicated that the United States would support voluntary measures forreducing greenhouse gases and technologies that would use or dispose of CO2effectively and economically. As the Kyoto Protocol becomes effective in othercountries, there is increasing pressure for sources in the United States to besubject to mandatory restrictions on CO2 emissions. In the last year, theUnited States Congress has considered bills that would regulate domesticgreenhouse gas emissions, but such bills have not received sufficientCongressional approval to date to become law. If the United States ultimatelyratifies the Kyoto Protocol and/or if the United States Congress or individualstates or groups of states in which we operate ultimately pass legislationregulating the emissions of greenhouse gases such as the RGGI discussed below,any resulting limitations on generation facility CO2 emissions could have amaterial adverse impact on all fossil fuel-fired generation facilities (particularlycoal-fired facilities), including ours.

On August 16, 2006, a model rule wasfinalized and seven states in the Northeast will move forward with theimplementation of the RGGI. This is a multi-state regional initiative that usesa regional cap-and-trade program to reduce CO2 emissions from power plants of25 MW or greater. The program aims to stabilize CO2 emissions to currentlevels from 2009 to 2015. This is to be followed by a 10% reduction inemissions by 2019. At this time, our assets in Maryland, Massachusetts and NewYork will be affected, and we are evaluating our options to comply with therequirements of the rule.

In addition, separate from the RGGI, California andMassachusetts have also enacted limitations on CO2 emissions from power plantswhich affect our gas-fired plants in California and our Canal facility inMassachusetts. We expect that we will be able to comply with these restrictionseither by reducing our emissions or purchasing emissions credits if permittedby the applicable law, but if we are unable to comply, we will be forced tocurtail our operations at these facilities.

At the federal level Congress is expected to advanceseveral mandatory CO2 bills, which may require reductions of CO2 emissionsnationwide. 

*Waterregulations.**  *We are requiredunder the Clean Water Act to comply with effluent and intake requirements,technological controls requirements and operating practices. Our wastewaterdischarges are subject to permitting under the Clean Water Act, and our permitsunder the Clean Water Act are subject to review every five years. As with airquality regulations, federal and state water regulations are expected toincrease and impose additional and more stringent requirements or limitationsin the future. This is particularly true for regulatory requirements governingcooling water intake structures, which are subject to regulation under section316(b) of the Clean Water Act. A recent decision by the United StatesCourt of Appeals for the Second Circuit in *RiverkeeperInc. et al v. EPA*, in which the court**remanded numerous provisions of the EPA’s current section316(b) regulations for existing power plants, has created substantialuncertainty about exactly what technologies or other measures will be needed tosatisfy section 316(b) requirements in the future and when any new requirementswill be imposed. Until the EPA acts on the issues remanded, it is impossible tosay exactly what requirements will be imposed or what they will cost.

In February 2006, Mirant Delta received correspondencefrom the U.S. Fish and Wildlife Service and the U.S. Army Corps of Engineersexpressing the view that the federal Endangered Species Act coverage for ourContra Costa and Pittsburg facilities located along the Sacramento River andSuisun Bay is insufficient or inoperative. Endangered Species Act consultationhas been formally reinitiated, and we are continuing to work with theseagencies to resolve these issues. It is possible, however, that we will beunable to resolve these issues with the agencies and that more formal legalaction may be instituted against us resulting in substantial fines oroperational curtailment of these facilities. 

On May 10, 2006, the San Francisco Regional WaterQuality Control Board issued Mirant Potrero a National Pollution DischargeElimination System permit pursuant to the Clean Water Act regulating thePotrero facility’s cooling water and process water discharges to the SanFrancisco Bay. Communities for a 

20

----

Better Environment, anenvironmental advocacy organization, contested various elements of the permitin a petition filed with the California State Water Resources ControlBoard on June 8, 2006, seeking relief that could include a plantcurtailment, and/or costly technological upgrades. Mirant Potrero filed atimely response to this petition as the permit holder on November 27,2006, in support of the Regional Board’s permit decision. A decision from theState Board is expected by July 2007. 

On September 26, 2006, the MassachusettsDepartment of Environmental Protection and the EPA jointly issued to MirantKendall a Surface Water Discharge Permit (“SWDP”) and a National PollutantDischarge Elimination System (“NPDES”) permit for the Kendall generatingfacility. The new permit imposes in-stream temperature limits, an extensivetemperature, water quality and biological monitoring program, and a requirementto develop and install a barrier net system to reduce fish impingement andentrainment. The provisions regulating the thermal discharge could causesubstantial curtailments of the operations of the Kendall facility. MirantKendall has appealed significant portions of the SWDP and NPDES permit, alongwith a related state Water Quality Certificate. The portions of the permitsthat Mirant Kendall has appealed are stayed pending appeal. We are unable topredict the outcome of this proceeding.

*Wastes,hazardous materials and contamination.**  *Our facilities are subject to several wastemanagement laws and regulations. The Resource Conservation and Recovery Act of1976 set forth comprehensive requirements for the handling of solid andhazardous wastes. The generation of electricity produces non-hazardous andhazardous materials, and we incur substantial costs to store and dispose ofwaste materials 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, CERCLA, orSuperfund, establishes a framework for dealing with the cleanup of contaminatedsites. Many states have enacted similar state superfund statutes as well as otherlaws imposing obligations to investigate and clean up contamination. Areas ofsoil and groundwater contamination are known to exist at our Pittsburg, ContraCosta and Potrero facilities. Prior to our acquisition of those facilities fromPG&E in 1998, PG&E conducted soil and groundwater investigations atthose facilities which revealed significant contamination. The consultantsconducting the investigation estimated the aggregate cleanup costs at thosefacilities could be as much as $60 million. Pursuant to the terms of thePurchase and Sale Agreement with PG&E, PG&E has responsibility for thecontainment or capping of all soil and groundwater contamination at the Potrerogenerating facility and the disposition of up to 60,000 cubic yards of contaminatedsoil at the Potrero generating facility and the remediation of any groundwateror solid contamination identified by PG&E at the Pittsburg and Contra Costagenerating facilities. Pursuant to our requests, PG&E has disposed of 807cubic yards of contaminated soil at the Potrero generating facility. We are notaware of soil or groundwater conditions for which we expect our remediationcosts to be material that are not covered by third-party agreements.

21

----

**Employees**

Underour services agreement with Mirant Services, Mirant Services provides thepersonnel who operate our facilities. At December 31, 2006, approximately1,290 Mirant Services employees worked at our facilities, of whom approximately1,180 were employed by Mirant Services at our power plants. The followingdetails the employees subject to collective bargaining agreements:

| **Union**                            | ** ** | ** **                      | ** ** | ** ** | **Location** | ** ** | ** ** | **Number of  Employees  Covered** | ** ** | **Contract  Expiration  Date** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|------------|--------------|------------|------------|----------------------------------------|------------|--------------------------------|------------|
| **Continuing Operations:**           |       |                            |       |       |         |       |       |                                   |       |
| IBEW Local 1900                      |       | Maryland and Virginia |       |       | 482          |       |       | 6/1/2010                               |       |
| IBEW Local 503                       |       | New  York                       |       |       | 136          |       |       | 6/1/2008                               |       |
| IBEW Local 1245                      |       | California                      |       |       | 123          |       |       | 10/31/2008                             |       |
| UWUA Local 369                       |       | Cambridge, Massachusetts   |       |       | 34           |       |       | 2/28/2009                              |       |
| UWUA Local 480                       |       | Sandwich, Massachusetts    |       |       | 51           |       |       | 6/1/2011                               |       |
| Total                                |       |                            |       |       | 826          |       |       |                                   |       |
| **Discontinued  Operations**         |       |                            |       |       |         |       |       |                                   |       |
| United Steel  Workers Local 12502(1) |       | Indiana and Michigan  |       |       | 27           |       |       | 1/1/2007                               |       |
| Total                                |       |                            |       |       | 853          |       |       |                                   |       |

----

(1)          One year contractextension through 1/1/2008.

To mitigate and reduce the risk of disruption duringlabor negotiations, we engage in contingency planning for continuation of ourgeneration and/or distribution activities to the extent possible during anadverse collective action by the union with whom Mirant Services isnegotiating.

**Item 1A.**                *Risk Factors*

The following are factorsthat could affect our future performance:

***Our revenues are unpredictable because many of ourfacilities operate without long-term power sales agreements, and our revenuesand results of operations depend on market and competitive forces that arebeyond our control.***

We sell capacity, energy and ancillary services frommany of our generating facilities into competitive power markets on ashort-term fixed price basis or through power sales agreements. We are notguaranteed recovery of our costs or any return on our capital investmentsthrough mandated rates. The market for wholesale electric energy and energyservices reflects various market conditions beyond our control, including thebalance of supply and demand, the marginal and long run costs incurred by ourcompetitors and the impact of market regulation. Lack of diversification inrevenue may also result in concentrated exposure to markets, especially PJM.The price for which we can sell our output may fluctuate on a day-to-day basis.The markets in which we compete remain subject to one or more forms ofregulation that limit our ability to raise prices during periods of shortage tothe degree that would occur in a fully deregulated market, limiting our abilityto recover costs and an adequate return on our investment.

Our revenues andresults of operations are influenced by factors that are beyond our control,including:

·       thefailure of market regulators to develop efficient mechanisms to compensatemerchant generators for the value of providing capacity needed to meet demand;

·       actionsby regulators, ISOs, RTOs and other bodies that may prevent capacity and energyprices from rising to the level sufficient for recovery of our costs, ourinvestment and an adequate return on our investment;

22

----

·       theability of wholesale purchasers of power to make timely payment for energy orcapacity, which may be adversely affected by factors such as retail rate caps,refusal by regulators to allow utilities to fully recover their wholesale powercosts and investments through rates, catastrophic losses and losses frominvestments in unregulated businesses;

·       thefact that increases in prevailing market prices for fuel oil, coal, natural gasand emissions allowances may not be reflected in prices we receive for sales ofenergy;

·       increasesin supplies due to actions of our current competitors or new market entrants,including the development of new generating facilities that may be able toproduce electricity less expensively than our generating facilities, andimprovements in transmission that allow additional supply to reach our markets;

·       thecompetitive advantages of certain competitors including continued operation ofolder power plants in strategic locations after recovery of historic capitalcosts from ratepayers;

·       existingor future regulation of our markets by the FERC, ISOs and RTOs, including anyprice limitations and other mechanisms to address some of the price volatilityor illiquidity in these markets or the physical stability of the system;

·       regulatorypolicies of state agencies that affect the willingness of our customers toenter into long-term contracts generally, and contracts for capacity inparticular;

·       weatherconditions that depress demand or increase the supply of hydro power; and

·       changesin the rate of growth in electricity usage as a result of such factors asregional economic conditions and implementation of conservation programs.

In addition, unlike mostother commodities, electric energy can only be stored on a very limited basisand generally must be produced at the time of use. As a result, the wholesalepower markets are subject to substantial price fluctuations over relativelyshort periods of time and can be unpredictable.

***Changes in commodity prices may negatively affect 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 affect 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.

Mirant Energy Trading engages in asset managementactivities related to sales of electricity and purchases of fuel. The incomeand losses from these activities are recorded as generation revenues and fuelcosts. Mirant Energy Trading may use forward contracts and derivative financialinstruments to manage market risk and exposure to volatility in electricity,coal, natural gas, emissions and oil prices. We cannot provide assurance thatthese strategies will be successful in managing our price risks, or that they willnot result in net losses to us as a result of future volatility in electricityand fuel markets.

Many factors influence commodity prices, includingweather, market liquidity, transmission and transportation inefficiencies,availability of competitively priced alternative energy sources, demand forenergy commodities, natural gas, crude oil and coal production, naturaldisasters, wars, embargoes and other catastrophic events, and federal and stateenvironmental regulation and legislation.

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 affect our financial results andfinancial position, either favorably or unfavorably. Furthermore, the riskmanagement procedures we have in place may not always be followed or may notalways work as 

23

----

planned.As a result of these and other factors, we cannot predict the impact that riskmanagement decisions may have on our businesses, operating results or financialposition. Although management devotes a considerable amount of attention tothese issues, their outcome is uncertain.

***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 agreements for naturalgas, coal and oil fuel supply.***

Although we attempt topurchase fuel based on our expected fuel requirements, we still face the risksof supply interruptions and fuel price volatility. Our cost of fuel may notreflect changes in energy and fuel prices in part because we must pre-purchaseinventories of coal and oil for reliability and dispatch requirements, and thusthe price of fuel may have been determined at an earlier date than the price ofenergy generated from it. The price we can obtain from the sale of energy maynot rise at the same rate, or may not rise at all, to match a rise in fuelcosts. This may have a material adverse effect on our financial performance.The volatility of fuel prices could adversely affect our financial results andoperations.

***Some of our generation facilities depend on only oneor a few customers or suppliers. These parties, as well as other parties withwhom we have contracts, may fail to perform their obligations, or may terminatetheir existing agreements, which may result in a default on project debt or aloss in revenues and may require us to institute legal proceedings to enforcethe relevant agreements.***

Several of our power production facilities depend on asingle customer or a few customers to purchase most or all of the facility’soutput or on a single supplier or a few suppliers to provide fuel, water andother services required for the operation of the facility. The sale andprocurement agreements for these facilities may also provide support for anyproject debt used to finance the facilities. The failure of any supplier orcustomer to fulfill its contractual obligations to the facility could have a materialadverse effect on such facility’s financial results. The financial performanceof these facilities is dependent on the continued performance by customers andsuppliers of their obligations under their long-term agreements.

Revenue received by our subsidiariesmay be reduced upon the expiration or termination of existing power salesagreements. Some of the electricity we generate from our existing portfolio issold under long-term power sales agreements that expire at various times. Whenthe terms of each of these power sales agreements expire, it is possible thatthe price paid to us for the generation of electricity may be reducedsignificantly, which would substantially reduce our revenue.

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

The operation ofour generation facilities involves various operating risks, including, but notlimited to:

·       theoutput and efficiency levels at which those generation facilities perform;

·       interruptionsin fuel supply;

·       disruptionsin the delivery of electricity;

·       adversezoning;

·       breakdownsor equipment failures (whether due to age or otherwise);

·       restrictionson emissions;

·       violationsof our permit requirements or changes in the terms of or revocation of permits;

·       releasesof pollutants and hazardous substances to air, soil, surface water orgroundwater;

24

----

·       shortagesof equipment or spare parts;

·       labordisputes;

·       operatorerrors;

·       curtailmentof operations due to transmission constraints;

·       failuresin the electricity transmission system which may cause large energy blackouts;

·       implementationof unproven technologies in connection with environmental improvements; and

·       catastrophicevents such as fires, explosions, floods, earthquakes, hurricanes or othersimilar occurrences.

A decrease in, or theelimination of, the revenues generated by our facilities or an increase in thecosts of operating such facilities could materially affect our cash flows andresults of operations, including cash flows available to us to makepayments on our debt or our other obligations.

***Our asset management and proprietary tradingactivities may increase the volatility of our quarterly and annual financialresults.***

Weengage in asset management activities to economically hedge our exposure tomarket risk with respect to: (1) electricity sales from our generationfacilities; (2) fuel used by those facilities; and (3) emissionsallowances. We generally attempt to balance our fixed-price purchases and salescommitments in terms of contract volumes and the timing of performance anddelivery obligations through the use of financial and physical derivativecontracts. We also use derivative contracts with respect to our limitedproprietary trading and fuel oil management activities, through which weattempt to achieve incremental returns by transacting where we have specificmarket expertise. Derivatives from our asset management and proprietary tradingactivities are recorded on our balance sheet at fair value pursuant to SFAS No. 133.None of our derivatives recorded at fair market value are designated as hedgesunder SFAS No. 133 and changes in their fair value are thereforerecognized currently in earnings as unrealized gains or losses. As a result,our financial results—including gross margin, operating income and balancesheet ratios—will, at times, be volatile and subject to fluctuations in valueprimarily due to changes in forward electricity and fuel prices. For amore detailed discussion of the accounting treatment of our asset managementand proprietary trading activities, see Note 6 to our consolidated and combinedfinancial statements, included herein.

***Our results are subject to quarterly and seasonalfluctuations.***

Our operatingresults have fluctuated in the past and may continue to do so in the future asa result of a number of factors, including:

·       seasonalvariations in demand and corresponding energy and fuel prices; and

·       variations in levels ofproduction.

***We compete to sell energy and capacity in thewholesale power markets against some competitors that enjoy competitiveadvantages, including the ability to recover fixed costs through rate basemechanisms and a lower cost of capital.***

Regulated utilities in thewholesale markets generally enjoy a lower cost of capital than we do and oftenare able to recover fixed costs through regulated retail rates including, inmany cases, the costs of generation, allowing them to build, buy and upgradegeneration facilities without relying exclusively on market clearing prices torecover their investments. The competitive advantages of such participantscould 

25

----

adverselyaffect our ability to compete effectively and could have an adverse impact onthe revenues generated by our facilities.

***Our business and activities are subject to extensiveenvironmental requirements and could be adversely affected by suchrequirements, including future changes to them.***

Our business is subject to extensive environmentalregulations promulgated by federal, state and local authorities, which, amongother things, restrict the discharge of pollutants into the air, water andsoil, and also govern the use of water from adjacent waterways. Such laws andregulations frequently require us to obtain operating permits and remain in continuouscompliance with the conditions established by those operating permits. Tocomply with these legal requirements and the terms of our operating permits, wemust spend significant sums on environmental monitoring, pollution controlequipment and emissions allowances. If we were to fail to comply with theserequirements, we could be subject to civil or criminal liability and theimposition of liens or fines. In addition, we may be required to shut downfacilities if we are unable to comply with the requirements, such as with CO2regulations for which there currently is not a technical compliance solution,or if we determine the expenditures required to comply are uneconomic.

In addition, environmental laws, particularly withrespect to air emissions, wastewater discharge and cooling water intakestructures, are generally becoming more stringent, which may require us to makeexpensive facility upgrades or restrict our operations to meet more stringentstandards. With the trend toward stricter standards, greater regulation, andmore extensive permitting requirements, we expect our environmentalexpenditures to be substantial in the future. Although we have budgeted forsignificant expenditures to comply with these requirements, actual expendituresmay be greater than budgeted amounts. We may have underestimated the cost ofthe environmental work we are planning or the air emissions allowances weanticipate buying. In addition, new environmental laws may be enacted, new orrevised regulations under those laws may be issued, the interpretation of suchlaws and regulations by regulatory authorities may change, or additionalinformation concerning the way in which such requirements apply to us may beidentified. For example, in April 2006, Maryland enacted the Healthy AirAct, which requires more significant reductions in emissions of NOx, SO2 and mercury than the recentlyfinalized CAIR and CAMR. This legislation affects our Chalk Point, Dickersonand Morgantown facilities. We anticipate that the capital expenditures toachieve compliance for SO2 and NOx emissions will be approximately $1.6 billionthrough 2009.

From time to time we may not be able to obtainnecessary environmental regulatory approvals. Such approvals could be delayedor subject to onerous conditions. If there is a delay in obtaining anyenvironmental regulatory approvals or if onerous conditions are imposed, theoperation of our generation facilities or the sale of electricity to thirdparties could be prevented or become subject to additional costs. Such delaysor onerous conditions could have a material adverse effect on our financialperformance and condition.

Certain environmentallaws, including CERCLA and comparable state laws, impose strict and, in manycircumstances, joint and several liability for costs of contamination in soil,groundwater and elsewhere. Some of our facilities have areas with known soiland/or groundwater contamination. Releases of hazardous substances at ourgeneration facilities, or at locations where we dispose of (or in the pastdisposed of) hazardous substances and other waste, could require us to spendsignificant sums to remediate contamination, regardless of whether we causedsuch contamination. The discovery of significant contamination at ourgeneration facilities, at disposal sites we currently utilize or have formerlyutilized, or at other locations for which we may be liable, or the failure orinability of parties contractually responsible to us for contamination torespond when claims or obligations regarding such contamination arise, couldhave a material adverse effect on our financial performance and condition.

26

----

***Major environmental construction projects planned by2010 at our Mid-Atlantic coal facilities may not meet their anticipatedschedule, which would restrict these units from running at their maximumeconomic levels. In the event that the operating constraints were sufficientlysevere, Mirant Mid-Atlantic may not have sufficient cash flow to permit it tomake distributions or, if more severe, to meet its obligations.***

Under the Maryland Healthy Air Act, we are required toreduce annual emissions below certain levels by January 2010. The levelsestablished do not allow for the use of additional emissions allowances to meetthe mandated levels. To meet these requirements, we plan to install scrubberson all of our Maryland coal facilities. We may not meet this constructionschedule by January 2010 due to a number of factors, which may result in aloss of cash flows from operations due to reduced unit operations.

***The expected decommissioning and/or site remediationobligations of certain of our generation facilities may negatively affect ourcash flows.***

We expect that certain ofour generation facilities and related properties will become subject todecommissioning and/or site remediation obligations that may require materialexpenditures. The exact amount and timing of such expenditures, if any, is notpresently known. Furthermore, laws and regulations may change to imposematerial additional decommissioning and remediation obligations on us in thefuture. If we are required to make material expenditures to decommission orremediate one or more of our facilities, such obligations will affect our cashflows and may adversely affect our ability to make payments on our 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.***

As of December 31,2006, our total indebtedness forcontinuing operations was approximately $3.3 billion. In addition, the presentvalue of lease payments under the Mirant Mid-Atlantic leveraged leases isapproximately $1.1 billion (assuming a 10% discount rate) and the terminationvalue of the Mirant Mid-Atlantic leveraged leases is $1.4 billion. Oursubstantial degree of leverage could have important consequences, including thefollowing: (1) it may limit our ability to obtain additional debt orequity financing for working capital, capital expenditures, debt servicerequirements, acquisitions and general corporate or other purposes; (2) asubstantial portion of our cash flows from operations must be dedicated to thepayment of principal and interest on our indebtedness and will not be availablefor other purposes, including our operations, capital expenditures and futurebusiness opportunities; (3) the debt service requirements of ourindebtedness could make it more difficult for us to satisfy our financialobligations; (4) certain of our borrowings, including borrowings under oursenior secured credit facilities, are at variable rates of interest, exposingus to the risk of increased interest rates; (5) it may limit our abilityto adjust to changing market conditions and place us at a competitivedisadvantage compared with our competitors that have less debt; and (6) wemay be more vulnerable in a downturn in general economic conditions or in ourbusiness and we may be unable to carry out capital expenditures that areimportant to our long-term growth or necessary to comply with environmentalregulations.

***We and our subsidiary Mirant North America are holdingcompanies and we may not have access to sufficient cash to meet our obligationsif our subsidiaries, in particular, Mirant Mid-Atlantic, are unable to makedistributions.***

We and our subsidiary, Mirant North America areholding companies and, as a result, we are dependent upon dividends,distributions and other payments from our subsidiaries to generate the fundsnecessary to meet our obligations. The ability of our subsidiaries to paydividends and distributions is restricted under the terms of their debt orother agreements. In particular, a significant portion of cash from ouroperations is generated by the power generation facilities of MirantMid-Atlantic. Under the Mirant Mid-Atlantic leveraged leases, MirantMid-Atlantic is subject to a covenant that restricts its right to 

27

----

make distributions to us.Mirant Mid-Atlantic’s ability to satisfy the criteria set by that covenant inthe future could be impaired by factors which negatively affect the performanceof its power generation facilities, including interruptions in operation orcurtailment of operations to comply with environmental restrictions.

Our obligations and theobligations of Mirant North America, including our respective indebtedness, areeffectively subordinated to the obligations or indebtedness of their respectivesubsidiaries, except to the extent that such obligations or indebtedness areassumed or guaranteed by a subsidiary.

***We may be unable to generate sufficient liquidity toservice our debt and to post required amounts of cash collateral necessary toeffectively hedge market risks.***

Our ability to pay principal and interest on our debtdepends on our future operating performance. If our cash flows and capitalresources are insufficient to allow us to make scheduled payments on our debt,we may have to reduce or delay capital expenditures, sell assets, seekadditional capital, restructure or refinance. There can be no assurance thatthe terms of our debt will allow these alternative measures, that the financialmarkets will be available to us on acceptable terms or that such measures wouldsatisfy our scheduled debt service obligations.

We seek to manage the risks associated with thevolatility in the price at which we sell power produced by our generationfacilities and in the prices of fuel, emissions allowances and other inputsrequired to produce such power by entering into hedging transactions. Theseasset management activities may require us to post collateral either in theform of cash or letters of credit. As of December 31, 2006, we hadapproximately $38 million of posted cash collateral and $204 million of lettersof credit outstanding primarily to support our asset management activities anddebt service reserve requirements. While we seek to structure transactions in away that reduces our potential liquidity needs for collateral, we may be unableto execute our hedging strategy successfully if we are unable to post theamount of collateral required to enter into and support hedging contracts.

We are an active participant in energy exchange andclearing markets. These markets require a per contract initial margin to beposted, regardless of the credit quality of the participant. The initialmargins are determined by the exchanges through the use of proprietary modelsthat rely on a variety of inputs and factors, including market conditions. Wehave limited notice of any changes to the margin rates. Consequently, we areexposed to changes in the per unit margin rates required by the exchanges andcould be required to post additional collateral on short notice.

If our facilitiesexperience unplanned outages, we may be required to procure replacement powerin the open market to satisfy contractual commitments. Without adequateliquidity to post margin and collateral requirements, we may be exposed tosignificant losses and may miss significant opportunities, and we may haveincreased exposure to the volatility of spot markets.

***Our business is subject to complex governmentregulations. Changes in these regulations, or their administration, bylegislatures, state and federal regulatory agencies, or other bodies may affectthe costs of operating our facilities or our ability to operate our facilities.Such cost impacts, in turn, may negatively affect our financial condition andresults of operations.***

Generally, we are subject to regulation by the FERCregarding the terms and conditions of wholesale service and rates, as well asby state agencies regarding physical aspects of our generation facilities. Themajority of our generation is sold at market prices under market-based rateauthority granted by the FERC. If certain conditions are not met, the FERC hasthe authority to withhold or rescind market-based rate authority and requiresales to be made based on cost-of-service rates. A loss of our market-basedrate authority could have a materially negative impact on our generationbusiness.

28

----

Even where market-based rate authority has beengranted, the FERC may impose various forms of market mitigation measures,including price caps and operating restrictions, where it determines thatpotential market power might exist and that the public interest requires suchpotential market power to be mitigated. In addition to direct regulation by theFERC, most of our assets are subject to rules and terms of participationimposed and administered by various RTOs and ISOs. Although these entities arethemselves ultimately regulated by the FERC, they can impose rules,restrictions and terms of service that are quasi-regulatory in nature and canhave a material adverse impact on our business. For example, ISOs and RTOs mayimpose bidding and scheduling rules, both to curb the potential exercise ofmarket power and to ensure market functions. Such actions may materially affectour ability to sell and the price we receive for our energy and capacity.

Changes in the markets in which we compete may have anadverse impact on the results of our operations. For example, in the fall of2004, PJM completed its integration of AEP, Duquesne Light and DP&L intoPJM. Under PJM rules, AEP, Duquesne Light and DP&L were then deemed by PJMto be capable of providing capacity to all areas of PJM. The integration ofthese companies into PJM in conjunction with the existing market rules depressedthe prices that can be charged for capacity in PJM.

To conduct our business, we must obtain licenses,permits and approvals for our facilities. These licenses, permits and approvalscan be in addition to any required environmental permits. No assurance can beprovided that we will be able to obtain and comply with all necessary licenses,permits and approvals for these facilities. If we cannot comply with allapplicable regulations, our business, results of operations and financialcondition could be adversely affected.

On August 8, 2005, the EPAct 2005 was enacted.Among other things, the EPAct 2005 provides incentives for various forms ofelectric generation technologies, which will subsidize certain of ourcompetitors. Many regulations that could be issued pursuant to the EPAct 2005may have an adverse impact on our business.

We cannot predict whetherthe federal or state legislatures will adopt legislation relating to therestructuring of the energy industry. There are proposals in many jurisdictionsboth to advance and to roll back the movement toward competitive markets forthe supply of electricity, at both the wholesale and retail levels. Inaddition, any future legislation favoring large, vertically integratedutilities and a concentration of ownership of such utilities could affect ourability to compete successfully, and our business and results of operationscould suffer. We cannot provide assurance that the introductions of new laws,or other future regulatory developments, will not have a material adverseimpact on our business, operations or financial condition.

***Changes in technology may significantly affect ourgeneration business by making our generation facilities less competitive.***

A basic premise of ourgeneration business is that generating power at central facilities 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 most centralstation electric production, which could have a material impact on our resultsof operations.

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

As power generators, weface heightened risk of an act of terrorism, either a direct act against one ofour generation 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 

29

----

attackwere to occur, our business, financial condition and results of operationscould be materially adversely affected. In addition, such an attack couldaffect our ability to service our indebtedness, our ability to raise capitaland our future 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 injury topersonnel or loss of life, severe damage to and destruction of property, plantand equipment, contamination of, or damage to, the environment and suspensionof operations. The occurrence of any one of these events may result in ourbeing named as a defendant in lawsuits asserting claims for substantialdamages, environmental cleanup costs, personal injury and fines and/orpenalties. We maintain an amount of insurance protection that we consideradequate, but we cannot assure that our insurance will be sufficient oreffective under all circumstances and against all hazards or liabilities towhich we may be subject. A successful claim for which we are not fully insuredcould have a material adverse effect on our financial results and our financialcondition.

***The subsidiaries that own our generation facilities inNew York, including our Lovett and Bowline facilities, have not emerged fromChapter 11.***

Our subsidiaries related to our New York businessoperations, Mirant New York, Mirant Bowline, Mirant Lovett, Hudson Valley Gasand Mirant NY-Gen, remain in bankruptcy. Our Lovett and Bowline generationfacilities in New York were subject to disputes with local tax authorities regardingproperty tax assessments that were not resolved until December 2006.Mirant Lovett is in discussions with the NYSDEC and the New York State Officeof the Attorney General regarding environmental controls required under the2003 Consent Decree for the Lovett generation facility to continue operatingpast April 30, 2007, for unit 5 and past April 2008, with respect tounit 4. Until a resolution is reached on environmental controls that wouldpermit economically feasible operation, Mirant Lovett will likely remain inChapter 11. Mirant NY-Gen, which owns hydroelectric facilities at SwingingBridge, Rio and Mongaup, and small combustion turbine facilities at Hillburnand Shoemaker, is insolvent. Its expenses are being funded under adebtor-in-possession facility provided by Mirant Americas with the approval of,and under the supervision of, the Bankruptcy Court. Mirant NY-Gen is proceedingwith the implementation of a remediation plan for the sinkhole discovered in May 2005in the dam at the Swinging Bridge facility.

On January 26, 2007, the Emerging New YorkEntities filed the Supplemental Plan with the Bankruptcy Court. For moreinformation on the Supplemental Plan, see “Item 3. Legal Proceedings, Chapter11 Proceedings.” The hearing before the Bankruptcy Court to consider theconfirmation of the Supplemental Plan is scheduled for March 21, 2007.Until our subsidiaries related to our New York business operations emerge frombankruptcy, we will not have access to the cash from operations generated fromthese subsidiaries. In 2006, our New York operations generated $5 million ofcash from operating activities.

On January 31, 2007, Mirant New York entered intothe Alliance Sale pursuant to which it will sell Mirant NY-Gen, which owns theHillburn and Shoemaker gas turbine facilities and the Swinging Bridge, Rio andMongaup hydroelectric generating facilities, to Alliance Energy, LLC. The salesprice of approximately $5 million is subject to adjustments for working capitaland certain dam remediation efforts that are ongoing at the Swinging Bridgefacility. TheBankruptcy Court approved the Alliance Sale on 

30

----

March 8, 2007. The transaction is expected to close inthe second quarter of 2007. On February 15, 2007, Mirant NY-Gen filed theMirant NY-Gen Plan. For more detail concerning the Mirant NY-Gen Plan, see “Item3. Legal Proceedings, Chapter 11 Proceedings.”

***We may be subject to claims that were not dischargedin the bankruptcy cases, which could have a material adverse effect on ourresults of operations and profitability.***

The nature of our businessfrequently subjects us to litigation. Substantially all of the material claimsagainst us that arose prior to the bankruptcy filing in July 2003 wereresolved during our Chapter 11 proceedings. In addition, the Bankruptcy Codeprovides that the confirmation of a plan of reorganization discharges a debtorfrom substantially all debts arising prior to confirmation and certain debtsarising afterwards. With a few exceptions, all claims that arose prior to ourbankruptcy filing and before confirmation of the Plan in December 2005 are(1) subject to compromise and/or treatment under the Plan or (2) discharged,in accordance with the Bankruptcy Code and terms of the Plan. Circumstances inwhich claims and other obligations that arose prior to our bankruptcy filingwere not discharged primarily relate to certain actions by governmental unitsunder police power authority, where we have agreed to preserve a claimant’sclaims, as well as, potentially, instances where a claimant had inadequatenotice of the bankruptcy filing. The ultimate resolution of such claims andother obligations may have a material adverse effect on our results ofoperations and profitability.

***We are currently involved in significant litigationthat, if decided adversely to us, could materially adversely affect our resultsof operations and profitability.***

We are currently involvedin various litigation matters, which are described in more detail in this Form 10-K.We intend to vigorously defend against those claims that we are unable tosettle, but the results of this litigation cannot be determined. Adverseoutcomes for us in this litigation could require significant expenditures by usand could have a material adverse effect on our results of operations and profitability.

**Item 1B.**               *Unresolved Staff Comments*

None.

31

----

**Item 2.**                        *Properties*

The following propertieswere owned or leased as of December 31, 2006:

**Operating Plants:**

| ** **                              | ** ** | ** **    | ** ** | ** **                    | ** ** | ** **                | ** ** | **Mirant’s %** | ** ** | ** **      | ** ** | **Net Equity** | ** ** | ** **           | ** ** |
|-----------------------------------------|------------|---------------|------------|-------------------------------|------------|---------------------------|------------|--------------------------|------------|-----------------|------------|---------------------|------------|----------------------|------------|
| ** **                              | ** ** | ** **    | ** ** | ** **                    | ** ** | ** **                | ** ** | **Leasehold/**           | ** ** | ** **      | ** ** | **Interest/**       | ** ** | **2006**             | ** ** |
| ** **                              | ** ** | ** **    | ** ** | ** **                    | ** ** | ** **                | ** ** | **Ownership**            | ** ** | **Total**       | ** ** | **Lease in**   | ** ** | **Capacity**         | ** ** |
| **Power Generation Business** | ** ** | ** **    | ** ** | **Location**                  | ** ** | **Plant Type**       | ** ** | **Primary Fuel**    | ** ** | **Interest(1)** | ** ** | **MW(2)**           | ** ** | **Total MW(2)** | ** ** | **Factor(3)** | ** ** |
| **Continuing Operations**               |       |          |       |                          |       |                      |       |                     |       |            |       |                |       |                 |       |   |   |   |   |   |   |   |   |
| **Mid-Atlantic  Region:**               |       |          |       |                          |       |                      |       |                     |       |            |       |                |       |                 |       |   |   |   |   |   |   |   |   |
| Chalk Point                             |       | Maryland      |       | Intermediate/Baseload/Peaking |       | Natural  Gas/Coal/Oil     |       |                     | 100        |            |       |                | 2,429      |                 |       |   | 2,429 |   |   |   | 22 | % |   |
| Dickerson                               |       | Maryland      |       | Baseload/Peaking              |       | Natural  Gas/Coal/Oil     |       |                     | 100        |            |       |                | 853        |                 |       |   | 853 |   |   |   | 42 | % |   |
| Morgantown                              |       | Maryland      |       | Baseload/Peaking              |       | Coal/Oil                  |       |                     | 100        |            |       |                | 1,492      |                 |       |   | 1,492 |   |   |   | 58 | % |   |
| Potomac River                           |       | Virginia      |       | Intermediate/Baseload         |       | Coal                      |       |                     | 100        |            |       |                | 482        |                 |       |   | 482 |   |   |   | 26 | % |   |
| Total Mid-Atlantic                      |       |          |       |                          |       |                      |       |                     |       |            |       |                | 5,256      |                 |       |   | 5,256 |   |   |   | 36 | % |   |
| **Northeast Region:**                   |       |          |       |                          |       |                      |       |                     |       |            |       |                |       |                 |       |   |   |   |   |   |   |   |   |
| Canal                                   |       | Massachusetts |       | Intermediate                  |       | Natural  Gas/Oil          |       |                     | 100        |            |       |                | 1,112      |                 |       |   | 1,112 |   |   |   | 17 | % |   |
| Kendall                                 |       | Massachusetts |       | Baseload                      |       | Natural  Gas/Oil/Jet fuel |       |                     | 100        |            |       |                | 256        |                 |       |   | 256 |   |   |   | 52 | % |   |
| Martha’s Vineyard                  |       | Massachusetts |       | Peaking                       |       | Diesel                    |       |                     | 100        |            |       |                | 14         |                 |       |   | 14 |   |   |   | 1 | % |   |
| Wyman                                   |       | Maine         |       | Peaking                       |       | Fuel  Oil                 |       |                     | 1.4        |            |       |                | 614        |                 |       |   | 9 |   |   |   | — |   |   |
| Total New England                       |       |          |       |                          |       |                      |       |                     |       |            |       |                | 1,996      |                 |       |   | 1,391 |   |   |   | 23 | % |   |
| Bowline                                 |       | New  York     |       | Intermediate/Peaking          |       | Natural  Gas/Oil          |       |                     | 100        |            |       |                | 1,125      |                 |       |   | 1,125 |   |   |   | 2 | % |   |
| Hillburn                                |       | New  York     |       | Baseload/Peaking              |       | Natural  Gas/Jet Fuel     |       |                     | 100        |            |       |                | 51         |                 |       |   | 51 |   |   |   | — |   |   |
| Lovett                                  |       | New  York     |       | Baseload/Peaking              |       | Natural  Gas/Coal/Oil     |       |                     | 100        |            |       |                | 411        |                 |       |   | 411 |   |   |   | 44 | % |   |
| Mongaup                                 |       | New  York     |       | Intermediate/Peaking          |       | Hydro                     |       |                     | 100        |            |       |                | 4          |                 |       |   | 4 |   |   |   | 23 | % |   |
| Rio                                     |       | New  York     |       | Intermediate/Peaking          |       | Hydro                     |       |                     | 100        |            |       |                | 9          |                 |       |   | 9 |   |   |   | 34 | % |   |
| Shoemaker                               |       | New  York     |       | Peaking                       |       | Natural  Gas/Jet Fuel     |       |                     | 100        |            |       |                | 44         |                 |       |   | 44 |   |   |   | 1 | % |   |
| Swinging Bridge                         |       | New  York     |       | Intermediate/Peaking          |       | Hydro                     |       |                     | 100        |            |       |                | 12         |                 |       |   | 12 |   |   |   | 8 | % |   |
| Total New York                          |       |          |       |                          |       |                      |       |                     |       |            |       |                | 1,656      |                 |       |   | 1,656 |   |   |   | 13 | % |   |
| Total Northeast                         |       |          |       |                          |       |                      |       |                     |       |            |       |                | 3,652      |                 |       |   | 3,047 |   |   |   | 17 | % |   |
| **California:**                         |       |          |       |                          |       |                      |       |                     |       |            |       |                |       |                 |       |   |   |   |   |   |   |   |   |
| Contra Costa                            |       | California    |       | Intermediate                  |       | Natural  Gas              |       |                     | 100        |            |       |                | 674        |                 |       |   | 674 |   |   |   | 2 | % |   |
| Pittsburg                               |       | California    |       | Intermediate                  |       | Natural  Gas              |       |                     | 100        |            |       |                | 1,311      |                 |       |   | 1,311 |   |   |   | 4 | % |   |
| Potrero                                 |       | California    |       | Intermediate/Peaking          |       | Natural  Gas/Oil          |       |                     | 100        |            |       |                | 362        |                 |       |   | 362 |   |   |   | 17 | % |   |
| Total California                        |       |          |       |                          |       |                      |       |                     |       |            |       |                | 2,347      |                 |       |   | 2,347 |   |   |   | 6 | % |   |
| **Total Continuing Operations**         |       |          |       |                          |       |                      |       |                     |       |            |       |                | 11,255     |                 |       |   | 10,650 |   |   |   | 24 | % |   |
| **Discontinued Operations**             |       |          |       |                          |       |                      |       |                     |       |            |       |                |       |                 |       |   |   |   |   |   |   |   |   |
| Zeeland                                 |       | Michigan      |       | Intermediate/Peaking          |       | Natural  Gas              |       |                     | 100        |            |       |                | 903        |                 |       |   | 903 |   |   |   | 6 | % |   |
| Bosque                                  |       | Texas         |       | Baseload/Peaking              |       | Natural  Gas              |       |                     | 100        |            |       |                | 546        |                 |       |   | 546 |   |   |   | 28 | % |   |
| **Total Discontinued Operations**       |       |          |       |                          |       |                      |       |                     |       |            |       |                | 1,449      |                 |       |   | 1,449 |   |   |   | 14 | % |   |
| **Total  Mirant Americas Generation**   |       |          |       |                          |       |                      |       |                     |       |            |       |                | 12,704     |                 |       |   | 12,099 |   |   |   |   |   |   |
|                                         |            |               |            |                               |            |                           |            |                          |            |                 |            |                     |            |                      |            |  |  |  |  |  |  |  |  |  |  |

----

(1)          Amounts reflect ourpercentage economic interest in the total MW.

(2)          MW amounts reflect netdependable capacity.

(3)          Capacity factor is theaverage percentage of full capacity used over a year.

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

32

----

**Item3.**                        *Legal Proceedings*

***Chapter 11Proceedings***

On July 14, 2003, andvarious dates thereafter, Mirant Corporation and certain of its subsidiaries(collectively, the “Mirant Debtors”), including us and our subsidiaries, filedvoluntary petitions for relief under Chapter 11 of the Bankruptcy Code inthe Bankruptcy Court. Most of the material claims filed against the MirantDebtors’ estates were disallowed or were resolved and became “allowed” claimsbefore confirmation of the Plan that became effective for Mirant, us and mostof the Mirant Debtors on January 3, 2006. Mirant, as the distributionagent under the Plan, has made distributions pursuant to the terms of the Planon those allowed claims. Some claims, however, remain unresolved.

As of December 31,2006, approximately 21 million of the shares of Mirant common stock to bedistributed under the Plan have not yet been distributed and have been reservedfor distribution with respect to claims that are disputed by the Mirant Debtorsand have not been resolved. A settlement entered into on May 30, 2006,among Pepco, Mirant, MC 2005, LLC f/k/a Mirant Corporation (“Old Mirant”), andvarious subsidiaries of Mirant, including certain of our subsidiaries, ifapproved by final order in the Chapter 11 proceedings, would result in thedistribution of up to 18 million of the reserved shares to Pepco, as describedbelow in *Pepco Litigation*. Under the terms of thePlan, to the extent other such unresolved claims are resolved now that we haveemerged from bankruptcy, the claimants will be paid from the reserved shares onthe same basis as if they had been paid when the Plan became effective. Thatmeans that their allowed claims will receive the same pro rata distributions ofMirant common stock, cash, or both common stock and cash as previously allowed claimsin accordance with the terms of the Plan. To the extent the aggregate amount ofthe payouts determined to be due with respect to such disputed claimsultimately exceeds the amount of the funded claim reserve, Mirant would have toissue additional shares of common stock to address the shortfall, which woulddilute existing Mirant shareholders, and Mirant and we would have to payadditional cash amounts as necessary under the terms of the Plan to satisfysuch pre-petition claims.

Our subsidiaries relatedto our New York business operations, Mirant New York, Mirant Bowline, MirantLovett, Hudson Valley Gas and Mirant NY-Gen, remain in bankruptcy. Our Lovettand Bowline generation facilities in New York were subject to disputes withlocal tax authorities regarding property tax assessments that were not resolveduntil December 2006, as described below in *New York TaxProceedings*. Resolution of those tax disputes should allow MirantNew York, Mirant Bowline, and Hudson Valley Gas to emerge from bankruptcy in2007. On January 26, 2007, Mirant New York, Mirant Bowline, and HudsonValley Gas (collectively the “Emerging New York Entities”) filed a SupplementalJoint Chapter 11 Plan of Reorganization of the Emerging New York Entities (the “SupplementalPlan”) with the Bankruptcy Court. The Supplemental Plan has two maincomponents. First, the Supplemental Plan incorporates a settlement with thevarious New York tax jurisdictions that resolved the tax disputes related tothe Lovett and Bowline facilities. Second, the Supplemental Plan providesunsecured creditors of the Emerging New York Entities with the same treatmentafforded holders of unsecured claims against us and our subsidiaries under thePlan. Such unsecured creditors of the Emerging New York Entities will receivetheir pro rata share of the pool of assets created under the Plan for thebenefit of our unsecured creditors and those of our subsidiaries. On January 26,2007, the Emerging New York Entities also filed a motion with the BankruptcyCourt to establish procedures to facilitate the consideration and confirmationof the Supplemental Plan. That motion requests, among other things, that theBankruptcy Court find that the Supplemental Plan does not alter in any respectfrom the Plan the treatment of the holders of unsecured claims against theEmerging New York Entities, and that all votes previously cast by such holdersin respect of the Plan (which votes accepted the Plan for the Emerging New YorkEntities by the requisite number and amount required by the Bankruptcy Code)should be deemed votes cast in respect of the Supplemental Plan. The hearingbefore the Bankruptcy Court to consider the confirmation of the SupplementalPlan is scheduled for March 21, 2007.

33

----

On October 19, 2006,Mirant Lovett notified the New York Public Service Commission, the NYISO,Orange and Rockland and certain other affected transmission and distributioncompanies in New York of its intent to discontinue operation of units 3 and 5of the Lovett facility in April 2007. The discontinuance of operations atunit 5 is in accordance with the requirements of a June 11, 2003, ConsentDecree (the “2003 Consent Decree”) among Mirant Lovett, the State of New Yorkand the NYSDEC that requires Mirant Lovett to install certain environmentalcontrols on unit 5 of the Lovett facility or shut down that unit by April 30,2007. The 2003 Consent Decree imposes similar requirements with respect to unit4 that have to be met by April 30, 2008. Operations at unit 3 are beingdiscontinued because it is uneconomic to continue to run unit 3 if operationsat unit 5 are discontinued. Mirant Lovett is in discussions with the NYSDEC andthe New York State Office of the Attorney General regarding environmentalcontrols. If Mirant Lovett is able to agree with the New York Attorney General’soffice and the NYSDEC on alternative control technologies that would allow unit5 to remain in operation past April 30, 2007, then Mirant Lovett mayrescind the notice of its intent to discontinue operations at units 3 and 5.Until a resolution is reached on environmental controls that would permiteconomically feasible operation, Mirant Lovett will likely remain in Chapter11. Mirant NY-Gen, which owns hydroelectric facilities at Swinging Bridge, Rioand Mongaup, and small combustion turbine facilities at Hillburn and Shoemaker,is insolvent. Its expenses are being funded under a debtor-in-possessionfacility provided by Mirant Americas with the approval of, and under thesupervision of, the Bankruptcy Court. Mirant NY-Gen is proceeding with theimplementation of a remediation plan for the sinkhole discovered in May 2005in the dam at the Swinging Bridge facility. The status of the remediationeffort is discussed in “Other Contingencies” in Note 17 to the consolidated andcombined financial statements.

On January 31, 2007,Mirant New York entered into the Alliance Sale pursuant to which it will sellMirant NY-Gen, which owns the Hillburn and Shoemaker gas turbine facilities andthe Swinging Bridge, Rio and Mongaup hydroelectric generating facilities, toAlliance Energy, LLC. The sales price of approximately $5 million is subject toadjustments for working capital and certain dam remediation efforts that areongoing at the Swinging Bridge facility. The Bankruptcy Court approved the AllianceSale on March 8, 2007. The transaction is expected to close in the secondquarter of 2007 in conjunction with a plan of reorganization becoming effectivefor Mirant NY-Gen. On February 15, 2007, Mirant NY-Gen filed the proposedMirant NY-Gen Plan. It subsequently filed a related disclosure statement. Uponapproval of the disclosure statement by the Bankruptcy Court, Mirant NY-Genwill solicit votes of its creditors and proceed to a confirmation hearingseeking approval of the Mirant NY-Gen Plan. The Bankruptcy Court will considerapproval of the disclosure statement on March 21, 2007. No date has beenset for the confirmation of the Mirant NY-Gen Plan. The Mirant NY-Gen Plan isproposed in connection with the Alliance Sale. Under the terms of the MirantNY-Gen Plan, on the date that the Mirant NY-Gen Plan is confirmed, theBankruptcy Court will estimate the amount of cash required for Mirant NY-Gen topay in full all the claims outstanding against Mirant NY-Gen other than claimsarising from the debtor-in-possession loan provided by Mirant Americas toMirant NY-Gen and intercompany claims. Proceeds from the Alliance Sale in anamount equal to the Bankruptcy Court’s estimate of the claims will be reservedto pay such claims. The balance will be paid to Mirant Americas in partialsatisfaction of the $16.5 million debtor-in-possession loan, and allintercompany claims held by Mirant NY-Gen will be assigned to Mirant Americas.Upon closing of the Alliance Sale, Mirant Americas will release all of itsclaims and liens against Mirant NY-Gen.

Until our subsidiariesrelated to our New York business operations emerge from bankruptcy, we will nothave access to the cash from operations generated from these subsidiaries. In2006, our New York operations generated $5 million of cash from operatingactivities.

***Pepco Litigation***

In 2000, Mirant purchasedpower generating facilities and other assets from Pepco, including certain PPAsbetween Pepco and third parties. Under the terms of the APSA, Mirant and Pepco entered into a 

34

----

contractual agreement (the “Back-to-Back Agreement”) withrespect to certain PPAs, including Pepco’s long-term PPA with Panda, underwhich (1) Pepco agreed to resell to Mirant all capacity, energy, ancillaryservices and other benefits to which it is entitled under those agreements and (2) Mirantagreed to pay Pepco each month all amounts due from Pepco to the sellers underthose agreements for the immediately preceding month associated with suchcapacity, energy, ancillary services and other benefits. The Panda PPAruns until 2021, and the Back-to-Back Agreement does not expire until allobligations have been performed under the Panda PPA. Under the Back-to-BackAgreement, Mirant is obligated to purchase power from Pepco at prices thattypically are higher than the market prices for power.

Mirant assigned its rightsand obligations under the Back-to-Back Agreement to Mirant Americas EnergyMarketing. In the Chapter 11 cases of the Mirant Debtors, Pepco asserted thatan Assignment and Assumption Agreement dated December 19, 2000, thatincludes as parties Pepco and various of our subsidiaries causes oursubsidiaries that are parties to the agreement to be jointly and severallyliable to Pepco for various obligations, including the obligations under theBack-to-Back Agreement. The Mirant Debtors have sought to reject the APSA, theBack-to-Back Agreement, and the Assignment and Assumption Agreement, and therejection motions have not been resolved. Under the Plan, the obligations ofthe Mirant Debtors under the APSA (including any other agreements executedpursuant to the terms of the APSA and found by a final court order to be partof the APSA), the Back-to-Back Agreement, and the Assignment and AssumptionAgreement are to be performed by Mirant Power Purchase, whose performance isguaranteed by Mirant. If any of the agreements is successfully rejected, theobligations of Mirant Power Purchase and Mirant’s guarantee obligationsterminate with respect to that agreement, and Pepco would be entitled to aclaim in the Chapter 11 proceedings for any resulting damages. That claim wouldthen be addressed under the terms of the Plan. If the Bankruptcy Court were toconclude that the Assignment and Assumption Agreement imposed liability uponour subsidiaries for the obligations under the Back-to-Back Agreement and theBack-to-Back Agreement were to be rejected, the resulting rejection damagesclaim could result in a claim in the Chapter 11 proceedings against oursubsidiaries but any such claim would be reduced by the amount recovered byPepco on its comparable claim against Mirant.

On May 30, 2006,Mirant, Mirant Power Purchase, Old Mirant, various subsidiaries of Mirant(including certain of our subsidiaries), and a trust established pursuant tothe Plan to which ownership of Old Mirant and Mirant Americas Energy Marketingwas transferred (collectively the “Mirant Settling Parties”) entered into aSettlement Agreement and Release (the “Settlement Agreement”) with Pepco andvarious affiliates of Pepco (collectively the “Pepco Settling Parties”). Onceit becomes effective, the Settlement Agreement will fully resolve the contractrejection motions that remain pending in the bankruptcy proceedings, as well asother matters currently disputed between Pepco and Mirant and its subsidiaries.The Pepco Settling Parties and the Mirant Settling Parties will release eachother from all claims known as of May 30, 2006, including the fraudulenttransfer claims brought by Old Mirant and several of its subsidiaries againstPepco in July 2005. The Settlement Agreement will become effective once ithas been approved by the Bankruptcy Court and that approval order has become afinal order no longer subject to appeal. On August 9, 2006, the BankruptcyCourt entered an order approving the Settlement Agreement, but certain holdersof unsecured claims against Old Mirant in the bankruptcy proceedings appealedthat order. On December 26, 2006, the United States District Court for theNorthern District of Texas affirmed the bankruptcy court order approving thesettlement, but the claims holders have appealed that ruling to the UnitedStates Court of Appeals for the Fifth Circuit, and the approval order has notyet become a final order.

Under the SettlementAgreement, Mirant Power Purchase will perform any remaining obligations underthe APSA, and Mirant will guaranty its performance. The Back-to-Back Agreementwill be rejected and terminated effective as of May 31, 2006, unlessMirant exercises an option given to it under the Settlement Agreement to havethe Back-to-Back Agreement assumed under certain conditions. If the closingprice of Mirant’s stock is less than $16.00 on four business days in a 20consecutive business day period prior to any distribution of shares to Pepco onits claim, then Mirant can elect to have the Back-to-

35

----

BackAgreement assumed and assigned to Mirant Power Purchase rather than rejectingit, and the claim received by Pepco will be reduced as described below.

With respect to the otheragreements executed as part of the closing of the APSA (the “AncillaryAgreements”) and other agreements between Pepco and subsidiaries of Mirant,including our subsidiaries, the Mirant subsidiary that is a party to eachagreement will assume the agreement and Mirant will guaranty that subsidiary’sperformance. Mirant Power Purchase’s obligations under the APSA do not includeany obligations related to the Ancillary Agreements. If the Back-to-BackAgreement is rejected pursuant to the terms of the Settlement Agreement, theSettlement Agreement provides that a future breach of the APSA or any AncillaryAgreement by a party to such agreement will not entitle the non-defaultingparty to terminate, suspend performance under, or exercise any other right orremedy under or with respect to any of the remainder of such agreements. If,however, Mirant elects to have the Back-to-Back Agreement assumed and assignedto Mirant Power Purchase under the conditions set out in the SettlementAgreement, then the Settlement Agreement provides that nothing in its terms prejudicesthe argument currently being made by Pepco in the contract rejectionproceedings that the APSA, the Back-to-Back Agreement, and the AncillaryAgreements constitute a single non-severable agreement, the material breach ofwhich would entitle Pepco to suspend or terminate its performance thereunder,or any defense of Mirant and its subsidiaries to such an argument by Pepco.

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having avalue, after liquidation of the stock by Pepco, equal to $520 million, subjectto certain adjustments. Upon the Settlement Agreement becoming effective,Mirant will distribute up to 18 million shares of Mirant common stock to Pepcoto satisfy its claim and Pepco will liquidate those shares. The shares to bedistributed to Pepco will be determined by Mirant after the SettlementAgreement becomes effective so as to produce upon liquidation total netproceeds as near to $520 million as possible, subject to the overall cap on theshares to be distributed of 18 million shares. If the net proceeds received byPepco from the liquidation of the shares are less than $520 million, Mirantwill pay Pepco cash equal to the difference. If Mirant exercises the option tohave the Back-to-Back Agreement assumed, then the $520 million is reduced to$70 million, Mirant Power Purchase would continue to perform the Back-to-BackAgreement through its expiration in 2021, and Mirant would guarantee itsperformance. The Settlement Agreement allocates the $70 million to variousclaims asserted by Pepco that do not arise from the rejection of theBack-to-Back Agreement, including claims asserted under the Local Area SupportAgreement between Pepco and Mirant Potomac River that are discussed in *“Pepco Assertion of Breach of Local Area Support Agreement”*inNote 17 to the consolidated and combined financial statements.

***U.S. GovernmentInquiries***

*Department of JusticeInquiries.**  *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 its activities and those of its subsidiaries forthe period since January 1, 1998. The subpoena requested informationrelated to the California energy markets and other topics, including thereporting of inaccurate information to trade publications that publish naturalgas or electricity spot price data. The subpoena was issued as part of a grandjury investigation. The DOJ’s investigation is based upon the samecircumstances that were the subject of an investigation by the CFTC that wassettled in December 2004, as described in Mirant’s Annual Report onForm 10-K for the year ended December 31, 2004, in*Legal Proceedings—Other Governmental Proceedings—CFTC Inquiry*.On June 19, 2006, two former employees of Mirant pled guilty to charges ofconspiracy to manipulate the price of natural gas in interstate commerce duringthe period from July 1, 2000, until November 1, 2000, while they werewest region traders for Mirant Americas Energy Marketing. Mirant is discussingthe disposition of this matter with the DOJ. If Mirant is unable to reach aconsensual resolution with the DOJ, it is possible that the DOJ could seekindictments against one or more Mirant entities for alleged violations of theCommodity 

36

----

Exchange Act. Aconsensual resolution of this matter could involve a deferred prosecutionagreement and payment of a fine or penalty. Our current assessment is that anysuch fine or penalty would be paid by Mirant, not us or our subsidiaries.

***Environmental Matters***

*EPAInformation Request.**  *InJanuary 2001, the EPA issued a request for information to Mirantconcerning the implications under the EPA’s NSR regulations promulgated underthe Clean Air Act of past repair and maintenance activities at the PotomacRiver plant in Virginia and the Chalk Point, Dickerson and Morgantown plants inMaryland. The requested information concerns the period of operations thatpredates our subsidiaries’ ownership and lease of those plants. Mirantresponded fully to this request. Under the APSA, Pepco is responsible for finesand penalties arising from any violation associated with operations prior toour subsidiaries’ acquisition or lease of the plants. If a violation isdetermined to have occurred at any of the plants, our subsidiary owning orleasing the plant may be responsible for the cost of purchasing and installingemissions control equipment, the cost of which may be material. Oursubsidiaries owning or leasing the Chalk Point, Dickerson and Morgantown plantsin Maryland will be installing a variety of emissions control equipment onthose plants to comply with the Maryland Healthy Air Act, but that equipmentwill not include all of the emissions control equipment that could be requiredif a violation of the EPA’s NSR regulations is determined to have occurred atone or more of those plants. If such a violation is determined to have occurredafter our subsidiaries acquired or leased the plants or, if occurring prior tothe acquisition or lease, is determined to constitute a continuing violation,our subsidiary owning or leasing the plant at issue could also be subject tofines and penalties by the state or federal government for the period after itsacquisition or lease of the plant, the cost of which may be material, althoughapplicable bankruptcy law may bar such liability for periods prior to January 3,2006, when the Plan became effective for us and our subsidiaries that own orlease these plants.

*MirantPotomac River Notice of Violation.**  *OnSeptember 10, 2003, the Virginia DEQ issued an NOV to Mirant Potomac Riveralleging that it violated its Virginia Stationary Source Permit to Operate byemitting NOx in excess of the “cap” established by the permit for the 2003summer ozone season. Mirant Potomac River responded to the NOV, asserting thatthe cap was unenforceable, noting that when the cap was made part of the permitit could comply through the purchase of emissions allowances and raising otherequitable defenses. Virginia’s civil enforcement statute provides forinjunctive relief and penalties. On January 22, 2004, the EPA issued anNOV to Mirant Potomac River alleging the same violation of its VirginiaStationary Source Permit to Operate as set out in the NOV issued by theVirginia DEQ.

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MDE, the DOJand the EPA entered into, and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia, a proposed consent decree(the “Original Consent Decree”) that, if approved, would have resolved MirantPotomac River’s potential liability for matters addressed in the NOVspreviously issued by the Virginia DEQ and the EPA. The Original Consent Decreewould have required Mirant Potomac River and Mirant Mid-Atlantic to (1) installpollution control equipment at the Potomac River plant in Virginia and at theMorgantown plant in Maryland leased by Mirant Mid-Atlantic, (2) complywith declining system-wide ozone season NOx emissions caps from 2004 through2010, (3) comply with system-wide annual NOx emissions caps starting in2004, (4) meet seasonal system average emissions rate targets in 2008 and (5) paycivil penalties and perform supplemental environmental projects in and aroundthe Potomac River plant expected to achieve additional environmental benefits.Except for the installation of the controls planned for the Potomac River unitsand the installation of selective catalytic reduction (“SCR”) or equivalenttechnology at Mirant Mid-Atlantic’s Morgantown units 1 and 2 in 2007 and 2008,the Original Consent Decree would not have obligated our subsidiaries toinstall specifically designated technology, but rather to reduce emissionssufficiently to meet the various NOx caps. Moreover, as to the requiredinstallations of SCRs at Morgantown, Mirant Mid-Atlantic may choose 

37

----

notto install the technology by the applicable deadlines and leave the units offeither permanently or until such time as the SCRs are installed. The OriginalConsent Decree was subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree was not approved and theparties have filed an amended proposed consent decree that supersedes theOriginal Consent Decree.

On July 22, 2005, thedistrict court granted a motion filed by the City of Alexandria seeking tointervene in the district court action, although the district court imposedcertain limitations on the City of Alexandria’s participation in theproceedings. On September 23, 2005, the City of Alexandria filed a motionseeking authority to file an amended complaint in the action seeking injunctiverelief and civil penalties under the Clean Air Act for alleged violations byMirant Potomac River of its Virginia Stationary Source Permit to Operate andthe State of Virginia’s State Implementation Plan. Based upon a computermodeling described below in *Mirant Potomac RiverDownwash Study*, the City of Alexandria asserted that emissions fromthe Potomac River plant cause or contribute to exceedances of NAAQS for SO2,NO2 and particulate matter. The City of Alexandria also contended based on itsmodeling analysis that the plant’s emissions of hydrogen chloride and hydrogenfluoride exceed Virginia state standards. Mirant Potomac River disputes theCity of Alexandria’s allegations that it has violated the Clean Air Act andVirginia law. On December 2, 2005, the district court denied the City ofAlexandria’s motion seeking to file an amended complaint.

In early May 2006, theparties to the Original Consent Decree and Mirant Chalk Point entered into andfiled for approval with the United States District Court for the EasternDistrict of Virginia an amended consent decree (the “Amended Consent Decree”)that, if approved, will resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The Amended Consent Decree includes the requirements that were to beimposed under the terms of the Original Consent Decree as described above. Italso defines the rights and remedies of the parties in the event of a rejectionin bankruptcy or other termination of any of the long-term leases under whichMirant Mid-Atlantic leases the coal units at the Dickerson and Morgantownplants. The Amended Consent Decree provides that if Mirant Mid-Atlanticrejects or otherwise loses one or more of its leasehold interests in theMorgantown and Dickerson plants and ceases to operate one or both of theplants, Mirant Mid-Atlantic, Mirant Chalk Point and/or Mirant Potomac will (i) providethe EPA, Virginia DEQ and the MDE with the written agreement of the new owneror operator of the affected plant or plants to be bound by the obligations ofthe Amended Consent Decree and (ii) where the affected plant is theMorgantown plant, offer to any and all prospective owners and/or operators ofthe Morgantown plant to pay for completion of engineering, construction andinstallation of the SCRs required by the Amended Consent Decree. If the newowner or operator of the affected plant or plants does not agree to be bound bythe obligations of the Amended Consent Decree, it requires Mirant Mid-Atlantic,Mirant Chalk Point and/or Mirant Potomac to install an alternative suite ofenvironmental controls at the plants they continue to own. The district courtand the Bankruptcy Court must approve the Amended Consent Decree for it tobecome effective. The City of Alexandria and certain individuals andorganizations have opposed entry of the Amended Consent Order. The BankruptcyCourt approved the Amended Consent Decree on June 1, 2006. The districtcourt has not yet approved the Amended Consent Decree.

On April 26, 2006, Mirant Mid-Atlantic and theMDE entered into an agreement to allow Mirant Mid-Atlantic to implement theconsent decree with respect to the Morgantown plant, if the consent decreereceives the necessary approvals. Under the agreement, Mirant Mid-Atlanticagreed to certain ammonia and particulate matter emissions limits and to submittesting results to the MDE.

*MirantPotomac 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” from the plant (1) on ambient concentrations of SO2,NO2, CO and PM10 for comparison to the 

38

----

applicable NAAQS and (2) onambient concentrations of mercury for comparison to Virginia Standards ofPerformance for Toxic Pollutants. Downwash is the effect that occurs whenaerodynamic turbulence induced by nearby structures causes emissions from anelevated source, such as a smokestack, to move rapidly toward the groundresulting in higher ground-level concentrations of emissions.

The computer modeling analysis predicted thatemissions from the Potomac River plant have the potential to contribute tolocalized, modeled instances of exceedances of the NAAQS for SO2, NO2 and PM10under certain conditions. Based on those results, the Virginia DEQ issued adirective to Mirant Potomac River on August 19, 2005, to undertakeimmediately such action as was necessary to ensure protection of human healthand the environment and eliminate NAAQS violations. On August 24, 2005,power production at all five units of the Potomac River generating facility wastemporarily halted in response to the directive from the Virginia DEQ. On August 25, 2005, the District of ColumbiaPublic Service Commission filed an emergency petition and complaint with theFERC and the DOE to prevent the shutdown of the Potomac River facility. Thematter remains pending before the FERC and the DOE. On December 20, 2005,due to a determination by the DOE that an emergency situation existed withrespect to the reliability of the supply of electricity to central Washington,D.C., the DOE ordered Mirant Potomac River to generate electricity at thePotomac River generating facility, as requested by PJM, during any period inwhich one or both of the transmission lines serving the central Washington,D.C. area are out of service due to a planned or unplanned outage. In addition,the DOE ordered Mirant Potomac River, at all other times, for electricreliability purposes, to keep as many units in operation as possible and toreduce the start-up time of units not in operation without contributing to anyNAAQS exceedances. The DOE required Mirant Potomac River to submit a plan, onor before December 30, 2005, that met these requirements. The orderfurther provides that Mirant Potomac River and its customers should agree tomutually satisfactory terms for any costs incurred by it under this order orjust and reasonable terms shall be established by a supplemental order. Certainparties filed for rehearing of the DOE order, and on February 17, 2006,the DOE issued an order granting rehearing solely for purposes of consideringfurther the rehearing requests. Mirant Potomac River submitted an operatingplan in accordance with the order. On January 4, 2006, the DOE issued aninterim response to Mirant Potomac River’s operating plan authorizing operationof the units of the Potomac River generating facility on a reduced basis, butmaking it possible to bring the entire plant into service within approximately28 hours when necessary for reliability purposes. The DOE’s order expires July 1,2007, but Mirant Potomac River expects it will be able to continue to operatethese units after that expiration.

In a letter received December 30,2005, the EPA invited Mirant Potomac River and the Virginia DEQ to work withthe EPA to ensure that Mirant Potomac River’s operating plan submitted to theDOE adequately addressed NAAQS issues. The EPA also asserted in its letter thatMirant Potomac River did not immediately undertake action as directed by theVirginia DEQ’s August 19, 2005, letter and failed to comply with therequirements of the Virginia State Implementation Plan established by thatletter. Mirant Potomac River received a second letter from the EPA on December 30,2005, requiring Mirant to provide certain requested information as part of anEPA investigation to determine the Clean Air Act compliance status of thePotomac River generating facility.

On June 1, 2006, Mirant Potomac River and the EPAexecuted an ACO by Consent to resolve the EPA’s allegations that Mirant PotomacRiver violated the Clean Air Act by not immediately shutting down all units atthe Potomac River facility upon receipt of the Virginia DEQ’s August 19,2005, letter and to assure an acceptable level of reliability to the Districtof Columbia. The ACO (i) specifies certain operating scenarios and SO2emissions limits for the Potomac River facility, which scenarios and limitstake into account whether one or both of the 230kV transmission lines servingWashington, D.C. are out of service; (ii) requires the operation of tronainjection units to reduce SO2 emissions; and (iii) requires Mirant PotomacRiver to undertake a model evaluation study to predict ambient air qualityimpacts from the facility’s operations. In accordance with the specifiedoperating scenarios, the ACO permits the facility 

39

----

to operate using a dailypredictive modeling protocol. This protocol allows Mirant Potomac River toschedule the facility’s level of operations based on whether computer modelingpredicts a NAAQS exceedance, based on weather and certain operating parameters.On June 2, 2006, the DOE issued a letter modifying its January 6,2006, order to direct Mirant Potomac River to comply with the ACO in order toensure adequate electric reliability to the District of Columbia. MirantPotomac River is operating the Potomac River facility in accordance with theACO and has been able to operate all five units of the facility most of thetime under the ACO. This ACO expires in June 2007.

*Cityof Alexandria Nuisance Suit.**  *OnOctober 7, 2005, the City of Alexandria filed a suit against MirantPotomac River and Mirant Mid-Atlantic in the Circuit Court for the City ofAlexandria. The suit asserted nuisance claims, alleging that the Potomac Riverplant’s emissions of coal dust, flyash, NOx, SO2, particulate matter, hydrogenchloride, hydrogen fluoride, mercury and oil pose a health risk to thesurrounding community and harm property owned by the City. The City soughtinjunctive relief, damages and attorneys’ fees. On February 17, 2006, theCity amended its complaint to add additional allegations in support of itsnuisance claims relating to noise and lighting, interruption of traffic flow bytrains delivering coal to the Potomac River plant, particulate matter from thetransport and storage of coal and flyash, and potential coal leachate into thesoil and groundwater from the coal pile. On December 13, 2006, the Citywithdrew the suit.

*SuitRegarding Chalk Point Emissions.**  *Byletter dated June 15, 2006, four environmental advocacy organizations—EnvironmentalIntegrity Project, Chesapeake Climate Action Network, Patuxent Riverkeeper andEnvironment Maryland Research and Policy Center—notified Mirant and MirantMid-Atlantic that they intended to file suit alleging that Mirant Chalk Pointhad violated the opacity limits set by the permits for Chalk Point unit 3 andunit 4 during thousands of six minute time intervals between January 2002and March 2006. The letter indicated that the organizations intend to filesuit to enjoin the violations alleged, to obtain civil penalties for pastnoncompliance to the extent that liability for these violations was notdischarged by the bankruptcy of Mirant Chalk Point, and to recover attorneys’fees. On August 3, 2006, Mirant, Mirant Mid-Atlantic, and Mirant ChalkPoint filed a complaint in the Bankruptcy Court seeking an injunction barringthe four organizations from filing suit as threatened in the June 15,2006, notice on the grounds that the notice and any claim for civil penaltiesor other monetary relief for alleged violations occurring before January 3,2006, violated the discharge of claims and causes of action granted MirantChalk Point under the Plan. On August 14, 2006, the Bankruptcy Courtentered an order agreed to by the parties enjoining the four organizations fromseeking monetary damages for any alleged violations occurring on or before January 3,2006. As part of that order, the organizations agreed not to file a complaintinitiating litigation concerning the alleged violations until August 30,2006.

On August 29, 2006, MDE filed a complaint againstMirant Chalk Point in the Circuit Court for Prince George’s County, Maryland,based upon the alleged violations of the opacity limits applicable to ChalkPoint units 3 and 4 that were the focus of the June 15, 2006, noticeletter from the environmental organizations and seeking civil penalties,injunctive relief and costs. Simultaneously with the filing of the complaint,Mirant Chalk Point and the MDE filed a proposed Consent Decree to resolve theissues raised by the Complaint. That Consent Decree was approved by theMaryland court on September 11, 2006. The Consent Decree subjects ChalkPoint unit 3 to more stringent opacity and particulate standards and requiresit when burning fuel oil to use fuel oil with a lower sulfur content thanpreviously allowed under its permits. Mirant Chalk Point agreed in the ConsentDecree to burn natural gas in Chalk Point units 3 and 4 for 95% of their heatinput during certain months, subject to certain exceptions.

On August 30, 2006, the four environmentalorganizations filed suit in the United States District Court for the Districtof Maryland against Mirant, Mirant Mid-Atlantic, and Mirant Chalk Pointasserting that emissions from Chalk Point units 3 and 4 had violated opacitylimits set under the Clean Air Act and state law on numerous occasions since January 4,2006. The plaintiffs sought an injunction prohibiting further violations byChalk Point units 3 and 4 of the Clean Air Act, civil penalties of up to$32,500 for 

40

----

each violation of theClean Air Act, additional civil penalties for mitigation projects, andattorneys’ fees. On September 22, 2006, the Mirant defendants filed amotion to dismiss, arguing that under the Clean Air Act the MDE’s prosecution ofthe same alleged violations in the Maryland state court proceeding and theirresolution through the Consent Decree barred the plaintiffs’ suit. On January 3,2007, the district court granted the motion and dismissed the complaint, andthat order has become final.

*MorgantownParticulate Emissions NOV.**  *OnMarch 3, 2006, Mirant Mid-Atlantic received a notice sent on behalf of theMDE alleging that violations of particulate matter emissions limits applicableto unit 1 at the Morgantown plant occurred on nineteen days in June and July 2005.The notice advises that the potential civil penalty is up to $25,000 per dayfor each day that unit 1 exceeded the applicable particulate matter limit. Theletter further advises that the MDE has asked the Maryland Attorney General tofile a civil suit under Maryland law based upon the alleged violations.

*MorgantownSO2 Exceedances.**  *MirantMid-Atlantic received an NOV dated March 8, 2006, asserting that on threedays in June 2005 and January 2006, the Morgantown facility exceededSO2 emissions limitations specified in its air permit. The NOV indicates thaton two of those days the SO2 emissions limitation was exceeded by two differentunits of the Morgantown facility each day. The NOV did not seek a specificpenalty amount but noted that the violations identified could subject MirantMid-Atlantic to a civil penalty of up to $25,000 per day.

*MorgantownEmissions Observation NOV.**  *OnJune 30, 2006, the MDE issued an NOV to Mirant Mid-Atlantic indicatingthat it had failed to comply with the air permit for the Morgantown facility byoperating the combustion turbines at the facility for more than 168 hourswithout performing an EPA Reference Method 9 observation of stack emissions foran 18-minute period. The NOV did not seek a specific penalty amount butnoted that the violation identified could subject Mirant Mid-Atlantic to acivil penalty of up to $25,000 per day.

*RiverkeeperSuit 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 Clean Water Act. The suit alleges that Mirant Lovett failed to implement amarine life exclusion system at its Lovett generating plant and to performmonitoring for the exclusion of certain aquatic organisms from the plant’scooling water intake structures in violation of Mirant Lovett’s water dischargepermit issued by the State of New York. The plaintiff requests the court toenjoin Mirant Lovett from continuing to operate the Lovett generating plant ina manner that allegedly violates the Clean Water Act, to impose civil penaltiesof $32,500 per day of violation, and to award the plaintiff attorneys’ fees. OnApril 20, 2005, the district court approved a stipulation agreed to by theplaintiff and Mirant Lovett that stays the suit until 60 days after entry of anorder by the Bankruptcy Court confirming a plan of reorganization for MirantLovett becomes final and non-appealable.

*Mirant Canal NOV.**  *On December 5, 2006, Mirant Canal received anotice of noncompliance from the Massachusetts DEP indicating that during August 2006,personnel from the Massachusetts DEP determined that the low NOx calibrationgas cylinder for the continuous emission monitoring system (“CEMS”) for unit 1of the Canal generating facility had an expiration date of December 23,2005, which resulted in the CEMS being considered to be “out-of-control” afterthat date. The notice required Mirant Canal to review and update the facilityCEMS operating and maintenance plan and CEMS quality control plan and to reviewand revise as necessary certain previously submitted reports. Further actionmay be taken by the Massachusetts DEP following its review of the informationsubmitted by Mirant Canal in response to the notice.

***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 

41

----

resulted in the zoningstatus of Mirant Potomac River’s generating plant being changed from “noncomplyinguse” to “nonconforming use subject to abatement.” Under the nonconforming usestatus, unless Mirant Potomac River applies for and is granted a special usepermit for the plant during the seven-year abatement period, the operation ofthe plant must be terminated within a seven-year period, and no alterationsthat directly prolong the life of the plant will be permitted during theseven-year period. If Mirant Potomac River were to apply for and receive aspecial use permit for the plant, the City Council would likely impose variousconditions and stipulations as to the permitted use of the plant and seek tolimit the period for which it could continue to operate.

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’s action, provided, however,that if Mirant Potomac River within such 120-day period filed an applicationfor the necessary special use permits to bring the plant into compliance withthe zoning 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.

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 sought 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 the groundsthat those actions violated federal, state and city laws. The complaintasserted, 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 requested the court to enjoin the City of Alexandria andthe City Council from taking any enforcement action against Mirant PotomacRiver or from requiring it to obtain a special use permit for the continuedoperation of its generating plant. On January 18, 2006, the court issuedan oral ruling following a trial that the City of Alexandria acted unreasonablyand arbitrarily in changing the zoning status of Mirant Potomac River’sgenerating plant and in revoking the 1989 SUPs. On February 24, 2006, thecourt entered judgment in favor of Mirant Potomac River and Mirant Mid-Atlanticdeclaring the change in the zoning status of Mirant Potomac River’s generatingplant adopted December 18, 2004, to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. The City of Alexandria filed a petitionwith the Virginia Supreme Court seeking to appeal this judgment, and on September 11,2006, the Virginia Supreme Court agreed to hear the appeal.

***New York TaxProceedings***

Mirant New York, MirantBowline, Mirant Lovett, and Hudson Valley Gas (collectively with Mirant NewYork, Mirant Bowline, and Mirant Lovett, the “New York Companies”) were thepetitioners in various proceedings (“Tax Certiorari Proceedings”) initiallybrought in the New York state courts challenging the assessed values determinedby local taxing authorities for the Bowline and Lovett generating facilitiesand a natural gas pipeline (the “HVG Property”) owned by Hudson Valley Gas.Mirant Bowline had challenged the assessed value of the Bowline generatingfacility and the resulting local tax assessments for tax years 1995 through2006. Mirant Bowline succeeded to rights held by Orange & Rockland forthe tax years prior to its acquisition of the Bowline Plant in 1999 under itsagreement with Orange & Rockland for the purchase of that plant.Mirant Lovett had challenged the assessed value of the 

42

----

Lovettfacility for each of the years 2000 through 2006. Hudson Valley Gas hadchallenged the assessed value of the HVG Property for each of the years 2004through 2006.

As of December 31,2006, Mirant Bowline and Mirant Lovett had not paid property taxes on theBowline and Lovett generating facilities that fell due in the period from September 30,2003, through September 30, 2006, in order to preserve their respectiverights to offset the overpayments of taxes made in earlier years against thesums payable on account of current taxes. Hudson Valley Gas had not paidproperty taxes that fell due in the period from September 30, 2004,through September 30, 2006. The failure to pay these taxes when duepotentially subjected Mirant Bowline, Mirant Lovett, and Hudson Valley Gas toadditional penalties and interest.

On August 11, 2006,and August 28, 2006, the New York state court issued decisions addressingMirant Bowline’s challenges to the assessed values of the Bowline facility forthe years 1995 to 2003 and Mirant Lovett’s challenges to the assessed values ofthe Lovett facility for the years 2000 to 2003. Except for 1996, where it foundthat Mirant Bowline had failed to perfect its challenge to the assessed valueof the Bowline facility, the New York state court concluded that the value ofthe Bowline facility and the Lovett facility in each year was substantiallyless than the assessed value set by the taxing authorities. Mirant Bowline andMirant Lovett appealed the decisions of the New York state court, and therelevant taxing authorities cross-appealed.

On December 13, 2006,Mirant and the New York Companies entered into a settlement agreement (the “SettlementAgreement”) with the Town of Haverstraw (“Haverstraw”), the Town of Stony Point(“Stony Point”), the Haverstraw-Stony Point Central School District (the “SchoolDistrict”), the County of Rockland (the “County”), the Village of Haverstraw (“HaverstrawVillage”), and the Village of West Haverstraw (“West Haverstraw Village” andcollectively with Haverstraw, Stony Point, the School District, the County, andHaverstraw Village, the “Tax Jurisdictions”). The Settlement Agreement wasapproved by the Bankruptcy Court on December 14, 2006, and resolved allpending disputes regarding real property taxes between the New York Companiesand the Tax Jurisdictions. Under the agreement, the New York Companies acceptedthe determinations of assessed value for the Bowline Facility for 1995 through2003 and the Lovett Facility for 2000 through 2003 made by the New York statecourt in its rulings in the Tax Certiorari Proceedings issued in August 2006.The New York Companies and the Tax Jurisdictions agreed to adopt the New Yorkstate court’s assessed values for the Bowline Facility and the Lovett Facilityfor 2003 as the assessed values for each facility for 2004 through 2006. Theparties agreed that the assessed values for the HVG Property for 2004 through2006 should be the values determined previously by Haverstraw. The TaxJurisdictions agreed to cancel penalties on the unpaid taxes owed by the NewYork Companies and to collect interest on those taxes at a rate of 8% per yearfor Mirant Bowline and Mirant Lovett and 12% per year for Hudson Valley Gas.Overall, the New York Companies under the settlement received total refunds of$163 million from the Tax Jurisdictions and paid unpaid taxes to the TaxJurisdictions of $115 million, resulting in the New York Companiesreceiving a net cash payment in the amount of $48 million. The refunds andunpaid taxes were paid in early February 2007, and the New York Companiesand the Tax Jurisdictions are in the process of dismissing all pendinglitigation related to the refunds and the unpaid taxes.

The $163 million oftotal refunds received by the New York Companies was recognized as a gain inthe financial statements in the fourth quarter of 2006. In addition, the NewYork Companies had previously accrued a liability based upon the unpaid taxesas billed by the Tax Jurisdictions. Due to the reductions of the unpaid taxesthat occurred pursuant to the terms of the Settlement Agreement, the New YorkCompanies also recognized in the fourth quarter of 2006 a reduction ofoperating expenses of approximately $23 million related to 2006 and a gainof approximately $71 million related to prior periods.

**Item4.**                        *Submission of Matters to a Vote of Security Holders*

None.

43

----

**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. We did not make any cash distributions from the Petition Date throughDecember 31, 2005. We made $236 million of cash distributions in 2006.We have no equity compensation plans under which we issue our membershipinterests.

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

The following discussion should be read in conjunctionwith our consolidated and combined financial statements and the notes thereto,which are included elsewhere in this Form 10-K. The following tablepresents our selected financial information, which is derived from ourconsolidated and combined financial statements. Prior years have been revisedto reflect the impact of our planned dispositions of the Zeeland and Bosquenatural gas-fired intermediate and peaking plants. See Note 3 to ourconsolidated and combined financial statements for further discussion of ourdiscontinued operations.

From July 14,2003 (the “Petition Date”), through emergence, our consolidated and combined financialstatements were prepared in accordance with SOP 90-7. Our Statements ofOperations Data for the years ended December 31, 2004 and 2003, do notinclude interest expense on debt that was subject to compromise subsequent tothe Petition Date. Our Statement of Operations Data for the year ended December 31,2005, reflects the effects of accounting for the Plan confirmed on December 9,2005.

| ** **                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                            | ** ** | **(in millions)**                      | ** ** |
| **Statements of Operations Data:**                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Operating  revenues                                                   |       | $                                           | 3,273      |   | $ | 2,967 |   | $ | 3,465 |   | $ | 3,965 |   | $ | 3,407 |   |
| Income (loss)  from continuing operations                             |       | 1,190                                       |       | (760 | ) | 123 |   | (3,203 | ) | 160 |   |
| Income (loss)  from discontinued operations                           |       | 10                                          |       | (3 | ) | (17 | ) | 4 |   | 67 |   |
| Net income (loss)                                                     |       | 1,200                                       |       | (779 | ) | 106 |   | (3,209 | ) | 227 |   |
| **Balance  Sheet Data:**                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| Total assets                                                          |       | 5,837                                       |       | 7,020 |   | 6,157 |   | 6,296 |   | 11,752 |   |
| Total long-term  debt, excluding discontinued operations              |       | 3,272                                       |       | 2,582 |   | 38 |   | 43 |   | 3,570 |   |
| Liabilities  subject to compromise, excluding discontinued operations |       | 34                                          |       | 34 |   | 5,364 |   | 5,345 |   | — |   |
| Equity (deficit)                                                      |       | $                                           | 1,644      |   | $ | 703 |   | $ | (326 | ) | $ | (439 | ) | $ | 2,338 |   |

 

At December 31, 2004and 2003, certain long-term debt amounts were included in liabilities subjectto compromise.

44

----

**Item 7.**                        *Management’s Discussion and Analysis of Results of Operations andFinancial Condition*

This section is intendedto provide the reader with information that will assist in understanding ourfinancial statements, the changes in those financial statements from year toyear and the primary factors contributing to those changes. The followingdiscussion should be read in conjunction with our consolidated and combinedfinancial statements and the notes accompanying those financial statements.

**Overview**

Weare a competitive energy company that produces and sells electricity. We are anindirect wholly-owned subsidiary of Mirant. Our continuing operationsconsist of power generation facilities and our energy trading and marketingoperations. Our continuing business consists of 10,650 MW located inmarkets that are characterized by low and declining reserve margins.

During the third quarter of 2006, Mirant commencedauction processes to sell certain of its natural gas-fired plants, includingour Zeeland (903 MW) and Bosque (546 MW) plants. On January 15, 2007, weentered into a definitive purchase and sale agreement with a subsidiary of LSPower Equity Partners I, L.P., LS Power Equity Partners II, L.P. and certainother affiliated funds, (collectively, “LS Power”), for the sale of our Zeelandand Bosque natural gas-fired plants. The net proceeds from the sales areexpected to be approximately $500 million, after transaction costs. Thetransaction is expected to close in the second quarter of 2007 after thesatisfaction of certain customary conditions.

The primary factors affecting the earnings and cashflows of our continuing operations are the prices for power, emissionsallowances, natural gas, oil and coal, which are largely driven by supply anddemand. The increase in new generation capacitythat followed the restructuring of the power markets in the late 1990s hascreated an oversupply situation in most markets which is expected to continueuntil 2008 to 2010. In certain markets, that excess has been absorbed or isclose to being absorbed. Electricity demand has been growing and supply has notappreciably increased. Given the substantial time necessary to permit andconstruct new power plants, we think that the markets in which we operate needto begin the process now of adding generating capacity to meet growing demand.A number of key ISOs have implemented capacity markets as a way to encouragesuch construction of additional generation, but it is not clear whether theincentives offered will result in the construction of new generation.

Demand for power can also vary regionally andseasonally due to, among other things, weather and general economic conditions.Power supplies similarly vary by region and are affected significantly byavailable generating capacity, transmission capacity and federal and stateregulation. We also are affected by the relationship between the prices forpower and the prices for fuel, such as natural gas, coal and oil that affectour cost of generating electricity.

*HedgingActivities.*   Prior to 2006, we hedged asubstantial portion of our Mid-Atlantic baseload coal-fired generation and ourNew England intermediate oil-fired generation through OTC transactions. As aresult, we achieved a significant increase in our realized gross margin for theyear ended December 31, 2006, as compared to the same period in 2005because our generation was hedged at higher gross margins for this period thanfor the same period in 2005. Our intermediate and peaking generation volumesgenerally were lower in the year ended December 31, 2006, than in 2005,due primarily to lower generation from our oil-fired units as a result of lowerpower prices combined with sharply higher oil prices in 2006.

In 2006 and through February 26, 2007, our MirantMid-Atlantic subsidiary entered into financial swap transactions resulting inMirant Mid-Atlantic being economically hedged for approximately 92%, 93%, 97%and 38% of its expected on-peak coal-fired baseload generation in 2007, 2008,2009 and 2010, respectively. The financial swap transactions include new hedgesin addition to the previously disclosed January 2006 hedges. Thesetransactions are senior unsecured obligations of Mirant Mid-Atlantic and do notrequire the posting of cash collateral either for initial margin or forsecuring exposure due to changes 

45

----

in power prices. As of February 26,2007, our total portfolio is economically hedged approximately 84%, 48%, 36%and 14% for 2007, 2008, 2009 and 2010, respectively. The corresponding fuel hedgesare approximately 82%, 27%, 15% and 0% for 2007, 2008, 2009 and 2010,respectively.

*NewYork Property Tax Settlement.*   On December 13,2006, we entered into a settlement agreement with certain tax jurisdictionsrelated to property tax assessments at the Bowline and Lovett generatingfacilities that resolves all pending disputes regarding refunds sought by usfor property taxes paid for 1995 through 2003 and unpaid taxes assessed for2003 through 2006. Under the settlement, we were awarded refunds totalingapproximately $163 million for 1995 through 2003, against which wereoffset unpaid taxes of approximately $115 million for 2003 through 2006,resulting in a net cash payment in the amount of $48 million. The refundswere received and the unpaid taxes were paid in early February 2007. As aresult of the refunds and the reduction in unpaid taxes under the settlement,we recognized a gain of approximately $244 million in the fourth quarterof 2006. Of the $244 million gain recognized, $163 million isincluded in reorganization items, net, and $94 million is a reduction inoperations and maintenance expense in our consolidated statements ofoperations. These amounts are partially offset by $13 million in interestexpense.

*CapitalResources.*   Our business is subject to extensiveenvironmental regulation by federal, state and local authorities. Our costs ofcomplying with environmental laws, regulations and permits are substantial anddifficult to estimate because we cannot always assess what regulations may beadopted or modified in the future or what costs might be associated withcomplying with the regulation. To comply with the requirements for SO2 and NOxemissions under the Maryland Healthy Air Act, we anticipate total capitalexpenditures of approximately $1.6 billion through 2009, including $80 millionincurred through 2006. We expect that cash flows from operations and preferredshares in Mirant Americas will be sufficient to fund these capitalexpenditures.

A portion of our capital resources, in the form ofcash and letters of credit, is needed to satisfy counterparty collateralrequirements. These counterparty collateral requirements reflect ournon-investment grade credit ratings, volatile energy prices, generally highermargin levels in the industry and other factors. Whenever feasible, we seek tostructure transactions in a way that reduces our potential liquidity needs forcollateral.

*Use of Proceeds fromPlanned Dispositions.**  *Thesale of the Zeeland and Bosque plants is subject to the terms of our and MirantNorth America’s indebtedness, including provisions with respect to themandatory prepayment and/or reinvestment of the sale proceeds and therequirement to secure a credit rating affirmation. We have received therequired credit rating affirmations.

46

----

*ConsolidatedFinancial Performance*

Wereported net income of $1.2 billion for the year ended December 31,2006, a net loss of $779 million for the year ended December 31,2005, and net income of $106 million for the year ended December 31,2004. The change in net income is detailed as follows (dollars in millions):

| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | ** **                                  | ** ** | ** ** | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** |
| ** **                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Gross margin                                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                              |       | $                                           | (63        | ) | $ | (28 | ) |   | $ | (35 | ) |   | $ | (28 | ) | $ | 311 |   |   | $ | (339 | ) |   |
| Nonaffiliate                                           |       | 2,023                                       |       | 863 |   |   | 1,160 |   |   | 863 |   | 770 |   |   | 93 |   |   |
| Total gross  margin                                    |       | 1,960                                       |       | 835 |   |   | 1,125 |   |   | 835 |   | 1,081 |   |   | (246 | ) |   |
| Operating  expenses:                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                            |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                              |       | 274                                         |       | 287 |   |   | (13 | ) |   | 287 |   | 318 |   |   | (31 | ) |   |
| Nonaffiliate                                           |       | 277                                         |       | 375 |   |   | (98 | ) |   | 375 |   | 341 |   |   | 34 |   |   |
| Depreciation and  amortization                         |       | 122                                         |       | 115 |   |   | 7 |   |   | 115 |   | 112 |   |   | 3 |   |   |
| Impairment loss                                        |       | 119                                         |       | — |   |   | 119 |   |   | — |   | 2 |   |   | (2 | ) |   |
| Loss (gain) on  sales of assets, net                   |       | (9                                          | )          | (1 | ) |   | (8 | ) |   | (1 | ) | 62 |   |   | (63 | ) |   |
| Total operating  expenses                              |       | 783                                         |       | 776 |   |   | 7 |   |   | 776 |   | 835 |   |   | (59 | ) |   |
| Operating income                                       |       | 1,177                                       |       | 59 |   |   | 1,118 |   |   | 59 |   | 246 |   |   | (187 | ) |   |
| Other expense  (income), net                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                              |       | (1                                          | )          | 23 |   |   | (24 | ) |   | 23 |   | 8 |   |   | 15 |   |   |
| Nonaffiliate                                           |       | 220                                         |       | 750 |   |   | (530 | ) |   | 750 |   | (8 | ) |   | 758 |   |   |
| Gain on sales of  investments                          |       | (74                                         | )          | (44 | ) |   | (30 | ) |   | (44 | ) | — |   |   | (44 | ) |   |
| Reorganization  items, net                             |       | (163                                        | )          | 85 |   |   | (248 | ) |   | 85 |   | 138 |   |   | (53 | ) |   |
| Provision  (benefit) for income taxes                  |       | 5                                           |       | 5 |   |   | — |   |   | 5 |   | (15 | ) |   | 20 |   |   |
| Income (loss)  from continuing operations              |       | 1,190                                       |       | (760 | ) |   | 1,950 |   |   | (760 | ) | 123 |   |   | (883 | ) |   |
| Income (loss)  from discontinued operations            |       | 10                                          |       | (3 | ) |   | 13 |   |   | (3 | ) | (17 | ) |   | 14 |   |   |
| Cumulative effect  of changes in accounting principles |       | —                                      |       | (16 | ) |   | 16 |   |   | (16 | ) | — |   |   | (16 | ) |   |
| Net income (loss)                                      |       | $                                           | 1,200      |   | $ | (779 | ) |   | $ | 1,979 |   |   | $ | (779 | ) | $ | 106 |   |   | $ | (885 | ) |   |

 

**BankruptcyConsiderations**

While in bankruptcy, our financial results werevolatile as asset impairments, asset dispositions, restructuring activities,contract terminations and rejections, and claims assessments significantlyaffected our consolidated and combined financial results. As a result, ourhistorical financial performance is not indicative of our financial performancepost-bankruptcy.

At December 31, 2006and 2005, amounts related to allowed claims, estimated unresolved claims andprofessional fees associated with the bankruptcy to be settled in cash were $5 millionand $1.831 billion, respectively, and these amounts were recorded inclaims payable and estimated claims accrual on the accompanying consolidatedbalance sheets. These amounts do not include unresolved claims that areexpected to be settled in common stock or the stock portion of claims that areexpected to be settled with cash and stock. During the year ended December 31,2006, we paid approximately $1.755 billion in cash related to bankruptcyclaims. Of this amount, $990 million represents the principal amount ofdebt claims and is reflected in cash flows from financing activities fromcontinuing operations. The remaining $765 million is reflected in cashflows from operating activities and represents other bankruptcy claims andrelated interest.

47

----

**Results ofOperations**

The following discussion of our performance isorganized by reportable operating segment, which is consistent with the way wemanage our business. Previously, we managed our business as one operatingsegment. In 2006, Mirant commenced auction processes to dispose of certainnatural gas-fired plants, including our Zeeland and Bosque plants. The plannedsales have resulted in the reclassification of the revenues and expenses ofthese assets to discontinued operations and the reclassification of the relatedassets and liabilities to assets and liabilities held for sale, for all periodspresented. In the fourth quarter of 2006, we re-evaluated the business segmentsof our continuing operations. As a result, we now have four operating segments:Mid-Atlantic, Northeast, California and Other Operations. For selectedfinancial information about our business segments, see Note 16 to ourconsolidated and combined financial statements contained elsewhere in thisreport.

In the tables below, theMid-Atlantic region includes our Chalk Point, Morgantown, Dickerson and PotomacRiver facilities. The Northeast region includes our Bowline, Canal, Lovett,Kendall, Hillburn, Shoemaker, Martha’s Vineyard, Swinging Bridge, Rio, Mongaupand Wyman facilities. The California region includes our Pittsburg, ContraCosta and Potrero facilities. Other Operations includes proprietary trading andfuel oil management activities. For periods prior to 2006, Other Operationsincludes gains and losses related to the contractual arrangement with Pepcowith respect to certain PPAs, including Pepco’s long-term PPAs with Panda andOhio Edison (the “Back-to-Back Agreement”) and TPAs with Pepco.

*OperatingStatistics*

Thefollowing table summarizes capacity factor (average percentage of full capacityused over a year) by region for the years ended December 31, 2006, 2005and 2004:

| ** **   | ** ** | **Years Ended December 31,** | ** ** |
|--------------|------------|---------------------------------------------|------------|
| ** **   | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** |
| ** **   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **Decrease** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       |                                        | 36         | % |   |   | 39 | % |   |   | (3 | )% |   |   | 39 | % |   |   | 40 | % |   |   | (1 | )% |   |
| Northeast    |       |                                        | 17         | % |   |   | 34 | % |   |   | (17 | )% |   |   | 34 | % |   |   | 33 | % |   |   | 1 | % |   |
| California   |       |                                        | 6          | % |   |   | 7 | % |   |   | (1 | )% |   |   | 7 | % |   |   | 17 | % |   |   | (10 | )% |   |
| Total        |       |                                        | 24         | % |   |   | 31 | % |   |   | (7 | )% |   |   | 31 | % |   |   | 33 | % |   |   | (2 | )% |   |

 

Thefollowing table summarizes power generation volumes by region for the yearsended December 31, 2006, 2005 and 2004 (in gigawatt hours):

| ** **   | ** ** | **Years Ended December 31,** | ** ** |
|--------------|------------|---------------------------------------------|------------|
| ** **   | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** |
| ** **   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **Decrease** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       | 16,607                                      |       | 18,200 |   |   | (1,593 | ) |   | 18,200 |   | 18,712 |   |   | (512 | ) |   |
| Northeast    |       | 4,693                                       |       | 9,184 |   |   | (4,491 | ) |   | 9,184 |   | 8,832 |   |   | 352 |   |   |
| California   |       | 1,136                                       |       | 1,414 |   |   | (278 | ) |   | 1,414 |   | 3,460 |   |   | (2,046 | ) |   |
| Total        |       | 22,436                                      |       | 28,798 |   |   | (6,362 | ) |   | 28,798 |   | 31,004 |   |   | (2,206 | ) |   |

 

48

----

***2006versus 2005***

*Gross Margin*

Thefollowing table details gross margin by realized and unrealized margin for theyears ended December 31, 2006 and 2005 (in millions):

| ** **       | ** ** | **Years Ended December 31,** | ** ** |
|------------------|------------|---------------------------------------------|------------|
| ** **       | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **       | ** ** | **Realized**                                | ** ** | **Unrealized** | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic     |       |                                        | $          | 834 |   |   |   | $ | 484 |   |   | $ | 1,318 |   |   | $ | 552 |   |   |   | $ | (97 | ) |   | $ | 455 |   |
| Northeast        |       |                                        | 297        |   |   |   | 61 |   |   | 358 |   |   | 216 |   |   |   | (11 | ) |   | 205 |   |
| California       |       |                                        | 112        |   |   |   | 3 |   |   | 115 |   |   | 113 |   |   |   | — |   |   | 113 |   |
| Other Operations |       |                                        | 70         |   |   |   | 61 |   |   | 131 |   |   | (39 | ) |   |   | 85 |   |   | 46 |   |
| Eliminations     |       |                                        | 38         |   |   |   | — |   |   | 38 |   |   | 16 |   |   |   | — |   |   | 16 |   |
| Total            |       |                                        | $          | 1,351 |   |   |   | $ | 609 |   |   | $ | 1,960 |   |   | $ | 858 |   |   |   | $ | (23 | ) |   | $ | 835 |   |

 

***Mid-Atlantic***

OurMid-Atlantic segment, which accounts for approximately half our generatingcapacity, includes four generation facilities with a total generation capacityof 5,256 MW. The following table summarizes the operations of our Mid-Atlanticsegment for the years ended December 31, 2006 and 2005 (in millions):

| ** **                                                                      | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                      | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                          | ** ** | $                                       | 834        |          | $          | 552 |   |   | $ | 282 | ** ** |   |
| Unrealized Gross  Margin                                                        |       | 484                                     |       | (97           | )          |   | 581 |   |   |
| Total Gross  Margin                                                             |       | 1,318                                   |       | 455           |       |   | 863 |   |   |
| Operating expenses:                                                             |       |                                    |       |          |       |   |   |   |   |
| Operations and maintenance                                                      |       | 333                                     |       | 341           |       |   | (8 | ) |   |
| Depreciation and amortization                                                   |       | 74                                      |       | 64            |       |   | 10 |   |   |
| Gain on sales of assets, net                                                    |       | (7                                      | )          | —        |       |   | (7 | ) |   |
| Total operating  expenses                                                       |       | 400                                     |       | 405           |       |   | (5 | ) |   |
| Operating income                                                                |       | 918                                     |       | 50            |       |   | 868 |   |   |
| Total other  expense (income), net                                              |       | (4                                      | )          | 18            |       |   | (22 | ) |   |
| Income from continuing  operations before reorganization items and income taxes |       | $                                       | 922        |          | $          | 32 |   |   | $ | 890 |   |   |

 

*Gross Margin*

Grossmargin increased by $863 million for the year ended December 31,2006, compared to the same period for 2005 and is detailed as follows (inmillions):

| ** **                            | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                       | 558        |          | $          | 867 |   |   | $ | (309 | ) |   |
| Contracted and  capacity              |       | 39                                      |       | 64            |       |   | (25 | ) |   |
| Incremental  realized value of hedges |       | 237                                     |       | (379          | )          |   | 616 |   |   |
| Unrealized gains  (losses)            |       | 484                                     |       | (97           | )          |   | 581 |   |   |
| Total                                 |       | $                                       | 1,318      |          | $          | 455 |   |   | $ | 863 |   |   |

 

49

----

Energy represents gross margin from the generation ofelectricity, emissions allowances sales and purchases, fuel sales, fuelpurchases and handling, steam sales and our proprietary trading activities.

Contracted and capacity represents revenue receivedthrough RMR contracts and other installed capacity arrangements, revenues fromancillary services and revenue from the Back-to-Back Agreement, as applicable.

Incremental realized value of hedges represents theactual margin upon the settlement of our power and fuel hedging contracts.

Unrealized gains/losses represent the unrealizedportion of our derivative contracts.

The significantincrease in the gross margin for our Mid-Atlantic operations is primarily dueto the following:

·       anincrease of $581 million related to unrealized gains and losses on hedgingactivities. In 2006, unrealized gains of $484 million are primarily due to$312 million from increased value associated with forward power contracts forfuture periods as a result of decreases in forward power prices in 2006 and$172 million due to the settlement of power and fuel contracts during the yearfor which net unrealized losses had been recorded in prior periods,particularly during the high energy prices of late 2005. In 2005, unrealizedlosses of $97 million were primarily due to increases in power prices as aresult of increases in gas prices;

·       anincrease of $616 million in incremental realized value of hedges of ourgeneration output. In 2006, the incremental realized value of our hedgescontributed $237 million to our gross margin as our power contracts settled atprices higher than market prices for the year. In 2005, our opportunity cost ofhedging was $379 million primarily due to the impact of rising energy prices inthe latter part of 2005 that resulted in the settlement of power contracts at priceslower than market prices for that year; and

·       a decrease of$309 million in energy primarily related to lower power prices and lowergeneration volume on our oil-fired units. Power prices were lower due tosignificantly lower gas prices in 2006 compared to 2005. Our baseload coalunits’ generation decreased slightly and our 9% total decrease in generationvolumes was driven by significantly lower volumes generated by our oil-firedunits. A sharp decrease in power prices combined with average oil prices thatwere somewhat higher than in 2005 resulted in our oil-fired units not beingable to dispatch economically for much of the year.

50

----

***Northeast***

OurNortheast segment is comprised of our assets located in New York and NewEngland with a total generation capacity of 3,047 MW. The following tablesummarizes the operations of our Northeast segment for the years ended December 31,2006 and 2005 (in millions):

| ** **                                                                             | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                             | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                                 |       | $                                       | 297        |          | $          | 216 |   |   | $ | 81 |   |   |
| Unrealized Gross  Margin                                                               |       | 61                                      |       | (11           | )          |   | 72 |   |   |
| Total Gross  Margin                                                                    |       | 358                                     |       | 205           |       |   | 153 |   |   |
| Operating  expenses:                                                                   |       |                                    |       |          |       |   |   |   |   |
| Operations and maintenance                                                             |       | 133                                     |       | 225           |       |   | (92 | ) |   |
| Depreciation and amortization                                                          |       | 25                                      |       | 33            |       |   | (8 | ) |   |
| Impairment losses                                                                      |       | 118                                     |       | —        |       |   | 118 |   |   |
| Gain on sales of  assets, net                                                          |       | (46                                     | )          | (10           | )          |   | (36 | ) |   |
| Total operating  expenses                                                              |       | 230                                     |       | 248           |       |   | (18 | ) |   |
| Operating income  (loss)                                                               |       | 128                                     |       | (43           | )          |   | 171 |   |   |
| Total other  expense, net                                                              |       | 9                                       |       | 6             |       |   | 3 |   |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       | $                                       | 119        |          | $          | (49 | ) |   | $ | 168 |   |   |

 

*Gross Margin*

Grossmargin increased by $153 million for the year ended December 31,2006, compared to the same period for 2005 and is detailed as follows (inmillions):

| ** **                            | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                       | 125        |          | $          | 235 |   |   | $ | (110 | ) |   |
| Contracted and  capacity              |       | 47                                      |       | 36            |       |   | 11 |   |   |
| Incremental  realized value of hedges |       | 125                                     |       | (55           | )          |   | 180 |   |   |
| Unrealized gains  (losses)            |       | 61                                      |       | (11           | )          |   | 72 |   |   |
| Total                                 |       | $                                       | 358        |          | $          | 205 |   |   | $ | 153 |   |   |

 

The increase ingross margin is primarily due to the following:

·       anincrease of $72 million related to unrealized gains and losses on hedgingactivities. In 2006, unrealized gains of $61 million are primarily due to$50 million from increased value associated with forward power and fuelcontracts for future periods mainly as a result of decreases in forward powerprices in 2006 and $11 million due to the settlement of power and fuelcontracts during the year for which unrealized losses had been recorded inprior periods, particularly during the high energy prices of late 2005. In2005, unrealized losses of $11 million were primarily due to increases in powerprices as a result of increased gas prices and the settlement of contractsduring the year for which unrealized losses had been recorded in prior periods,partially offset by an increase in the value of fuel hedges due to higher fuelprices;

·       anincrease of $180 million in incremental realized value of hedges of ourgeneration output. In 2006, the incremental realized value of our hedgescontributed $125 million to our gross margin as our power contracts settled atprices higher than market prices for the year, partially offset by hedged fuelcosts that were higher than the market. In 2005, our opportunity cost ofhedging was 

51

----

$55 million primarily dueto the impact of rising energy prices in the latter part of 2005 that resultedin the settlement of power contracts at prices lower than market prices forthat year, partially offset by the favorable impact of hedged fuel costs thatwere generally lower than the market as fuel prices increased in 2005; and

·       a decrease of$110 million in energy primarily related to lower generation volumes. Ourdecrease in generation volumes was driven by significantly lower volumesgenerated by our oil-fired units. A decrease in power prices combined withaverage oil prices that were higher than in 2005 resulted in our oil-firedunits not being able to dispatch economically for most of the period.

*Operating Expenses*

The decrease of $18million in operating expenses is primarily due to a decrease of $92 million inoperations and maintenance, of which $94 million relates to the New Yorkproperty tax settlement. Of this amount, $71 million relates to periods priorto 2006. The remaining decrease in property tax expense represents thedifference in the 2006 expense under the settlement compared to the 2005expense that was accrued based on the property tax assessments. Gains on salesof assets increased $36 million due to an increase of $37 million in gains onsales of emissions allowances to affiliates that are eliminated in theconsolidated and combined statement of operations. Impairment losses in 2006represent the impairment of the Bowline unit 3 suspended construction project.

***California***

OurCalifornia segment consists of the Pittsburg, Contra Costa and Potrerofacilities with a total generation capacity of 2,347 MW. The following tablesummarizes the operations of our California segment for the years ended December 31,2006 and 2005 (in millions):

| ** **                                                                      | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                      | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                          |       | $                                       | 112        |          | $          | 113 |   |   | $ | (1 | ) |   |
| Unrealized Gross  Margin                                                        |       | 3                                       |       | —        |       |   | 3 |   |   |
| Total Gross  Margin                                                             |       | 115                                     |       | 113           |       |   | 2 |   |   |
| Operating  expenses:                                                            |       |                                    |       |          |       |   |   |   |   |
| Operations and maintenance                                                      |       | 63                                      |       | 69            |       |   | (6 | ) |   |
| Depreciation and amortization                                                   |       | 13                                      |       | 5             |       |   | 8 |   |   |
| Total operating  expenses                                                       |       | 76                                      |       | 74            |       |   | 2 |   |   |
| Operating income                                                                |       | 39                                      |       | 39            |       |   | — |   |   |
| Total other  expense (income), net                                              |       | (34                                     | )          | 1             |       |   | (35 | ) |   |
| Income from continuing  operations before reorganization items and income taxes |       | $                                       | 73         |          | $          | 38 |   |   | $ | 35 |   |   |

 

52

----

*Gross Margin*

Grossmargin increased by $2 million for the year ended December 31, 2006,compared to the same period for 2005 and is detailed as follows (in millions):

| ** **                            | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                       | 14         |          | $          | — |   |   | $ | 14 |   |   |
| Contracted and  capacity              |       | 101                                     |       | 114           |       |   | (13 | ) |   |
| Incremental  realized value of hedges |       | (3                                      | )          | (1            | )          |   | (2 | ) |   |
| Unrealized gains                      |       | 3                                       |       | —        |       |   | 3 |   |   |
| Total                                 |       | $                                       | 115        |          | $          | 113 |   |   | $ | 2 |   |   |

 

The increase in our energygross margin is primarily due to several days of extreme heat in July 2006,which allowed us to earn incremental gross margin on units that were under atolling agreement for the same period in 2005. The expiration of this tollingagreement is the primary driver of the decrease in our contracted and capacitymargin.

*Other Expense(Income), net*

The decrease of $35million in other expense (income), net is primarily due to a gain of $26million in 2006 related to the transfer of Contra Costa unit 8 to PG&E andan increase of $6 million in interest income. See “California Settlement” inNote 17 to our consolidated and combined financial statements for furtherdiscussion.

***Other Operations***

Other Operations includes proprietary trading and fueloil management activities. For periods prior to 2006, Other Operations includesgains and losses related to our Back-to-Back Agreement and TPAs with Pepco. See“Pepco Litigation” in Note 17 to our consolidated and combined financialstatements for further discussion of the Back-to-Back Agreement.

Thefollowing table summarizes the operations of our Other Operations segment forthe years ended December 31, 2006 and 2005 (in millions):

| ** **                                                                    | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                    | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                        |       | $                                       | 70         |          | $          | (39 | ) |   | $ | 109 |   |   |
| Unrealized Gross  Margin                                                      |       | 61                                      |       | 85            |       |   | (24 | ) |   |
| Total Gross  Margin                                                           |       | 131                                     |       | 46            |       |   | 85 |   |   |
| Operating  expenses:                                                          |       |                                    |       |          |       |   |   |   |   |
| Operations and  maintenance                                                   |       | 22                                      |       | 27            |       |   | (5 | ) |   |
| Depreciation and  amortization                                                |       | 10                                      |       | 13            |       |   | (3 | ) |   |
| Impairment losses                                                             |       | 1                                       |       | —        |       |   | 1 |   |   |
| Loss on sales of  assets, net                                                 |       | —                                  |       | 1             |       |   | (1 | ) |   |
| Total operating  expenses                                                     |       | 33                                      |       | 41            |       |   | (8 | ) |   |
| Operating income                                                              |       | 98                                      |       | 5             |       |   | 93 |   |   |
| Total other  expense, net                                                     |       | 174                                     |       | 730           |       |   | (556 | ) |   |
| Loss from continuing  operations before reorganization items and income taxes |       | $                                       | (76        | )             | $          | (725 | ) |   | $ | 649 |   |   |

 

53

----

*Gross Margin*

Grossmargin increased by $85 million for the year ended December 31, 2006,compared to the same period for 2005 and is detailed as follows (in millions):

| ** **               | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **               | ** ** | **2006**                                | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Energy                   |       | $                                       | 70         |          | $          | 39 |   |   | $ | 31 |   |   |
| Contracted and  capacity |       | —                                  |       | (78           | )          |   | 78 |   |   |
| Unrealized gains         |       | 61                                      |       | 85            |       |   | (24 | ) |   |
| Total                    |       | $                                       | 131        |          | $          | 46 |   |   | $ | 85 |   |   |

 

The increase ingross margin is primarily due to the following:

·       anincrease of $31 million in energy primarily related to our proprietarytrading and fuel oil management activities net of lower of cost or marketadjustments on our oil inventory during the third and fourth quarters of 2006;

·       anincrease of $78 million in contracted and capacity due to a decrease inrealized losses on the Back-to-Back Agreement and the related hedges of thiscontract primarily due to the expiration of one of the PPAs under thatagreement. In 2006, the Back-to-Back agreement was transferred to Mirant PowerPurchase; and

·       a decrease of$24 million in unrealized gains, which included an increase of $73 millionin unrealized gains on our proprietary trading and fuel oil managementactivities, offset by a decrease of $97 million in unrealized gains on theBack-to-Back Agreement and the related hedges. In 2006, the Back-to-Backagreement was transferred to Mirant Power Purchase.

*Operating Expenses*

Operating expensesdecreased by $8 million primarily due to a decrease in operations andmaintenance of $5 million and a decrease in depreciation of $3 million.

*Other Expense, net*

The decrease inother expense, net of $556 million is primarily due to the following:

·       interestexpense, net decreased by $527 million. In 2005, we recognized $746 million ofinterest on liabilities subject to compromise for the period from the 2003petition date through December 2005; and

·       our gain on sales ofinvestments increased $30 million. In 2006, we recognized a gain of $54 millionrelated to sales of our investment in ICE and a gain of $19 million on the saleof our two New York Mercantile Exchange seats and shares. In 2005, werecognized a gain of $44 million related to the sale of a portion of ourinvestment in ICE.

54

----

**Other SignificantConsolidated Statements of Operations Comparison**

*ReorganizationItems, net*

Reorganizationitems, net for the years ended December 31, 2006 and 2005, are comprisedof the following (in millions):

| ** **                                                     | ** ** | **Years Ended  December, 31,** | ** ** | **Increase/** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------|------------|---------------|------------|
| ** **                                                     | ** ** | **2006**                                 | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| Gain on the  implementation of the Plan                        |       | $                                        | —     |          | $          | (30 | ) |   | $ | 30 |   |   |
| Gain on the New  York property tax settlement                  |       | (163                                     | )          | —        |       |   | (163 | ) |   |
| Estimated claims  and losses on rejected and amended contracts |       | —                                   |       | 54            |       |   | (54 | ) |   |
| Professional fees  and administrative expense                  |       | 2                                        |       | 82            |       |   | (80 | ) |   |
| Interest income,  net                                          |       | (2                                       | )          | (21           | )          |   | 19 |   |   |
| Total                                                          |       | $                                        | (163       | )             | $          | 85 |   |   | $ | (248 | ) |   |

 

Reorganization items, net decreased by $248 millionfor the year ended December 31, 2006, compared to 2005, primarily relatedto the settlement of the New York State property tax disputes. Under the termsof the settlement, in February 2007 we received refunds totalingapproximately $163 million for 1995 through 2003 and paid unpaid taxes ofapproximately $115 million for 2003 through 2006. For the year ended December 31,2005, reorganization items, net represents amounts that were recorded in thefinancial statements as a result of the bankruptcy proceedings.

Estimated claims andlosses on rejected and amended contracts relate primarily to rejected energycontracts, such as tolling agreements, gas transportation contracts andelectric transmission contracts.

*DiscontinuedOperations*

During the third quarter of 2006, Mirant commencedauction processes to sell certain natural gas-fired plants, including ourZeeland and Bosque plants. Accordingly, the results of operations related tothe planned sales were reclassified to income (loss) from discontinuedoperations in our consolidated and combined statements of operations for allperiods presented.

For the year ended December 31, 2006, we reportednet income from discontinued operations of $10 million, which includes animpairment loss of $8 million to write-down the Zeeland and Bosque plants tofair value. For the year ended December 31, 2005, we reported a net lossfrom discontinued operations of $3 million. See Note 3 to our consolidatedand combined financial statements for additional information related to planneddispositions and discontinued operations.

***2005versus 2004***

Thefollowing table details gross margin by realized and unrealized margin for theyears ended December 31, 2005 and 2004 (in millions):

| ** **       | ** ** | **Years Ended December 31,** | ** ** |
|------------------|------------|---------------------------------------------|------------|
| ** **       | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **       | ** ** | **Realized**                                | ** ** | **Unrealized** | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic     |       |                                        | $          | 552 |   |   |   | $ | (97 | ) |   | $ | 455 |   |   | $ | 576 |   |   |   | $ | (75 | ) |   | $ | 501 |   |
| Northeast        |       |                                        | 216        |   |   |   | (11 | ) |   | 205 |   |   | 197 |   |   |   | 31 |   |   | 228 |   |
| California       |       |                                        | 113        |   |   |   | — |   |   | 113 |   |   | 143 |   |   |   | 3 |   |   | 146 |   |
| Other Operations |       |                                        | (39        | ) |   |   | 85 |   |   | 46 |   |   | (14 | ) |   |   | 213 |   |   | 199 |   |
| Eliminations     |       |                                        | 16         |   |   |   | — |   |   | 16 |   |   | 7 |   |   |   | — |   |   | 7 |   |
| Total            |       |                                        | $          | 858 |   |   |   | $ | (23 | ) |   | $ | 835 |   |   | $ | 909 |   |   |   | $ | 172 |   |   | $ | 1,081 |   |

 

55

----

***Mid-Atlantic***

Thefollowing table summarizes the operations of our Mid-Atlantic segment for theyears ended December 31, 2005 and 2004 (in millions):

| ** **                                                                      | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                      | ** ** | **2005**                                | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                          |       | $                                       | 552        |          | $          | 576 |   |   | $ | (24 | ) |   |
| Unrealized Gross  Margin                                                        |       | (97                                     | )          | (75           | )          |   | (22 | ) |   |
| Total Gross  Margin                                                             |       | 455                                     |       | 501           |       |   | (46 | ) |   |
| Operating expenses:                                                             |       |                                    |       |          |       |   |   |   |   |
| Operations and maintenance                                                      |       | 341                                     |       | 336           |       |   | 5 |   |   |
| Depreciation and amortization                                                   |       | 64                                      |       | 62            |       |   | 2 |   |   |
| Total operating  expenses                                                       |       | 405                                     |       | 398           |       |   | 7 |   |   |
| Operating income                                                                |       | 50                                      |       | 103           |       |   | (53 | ) |   |
| Total other  expense, net                                                       |       | 18                                      |       | 3             |       |   | 15 |   |   |
| Income from continuing  operations before reorganization items and income taxes |       | $                                       | 32         |          | $          | 100 |   |   | $ | (68 | ) |   |

 

*Gross Margin*

Grossmargin decreased by $46 million for the year ended December 31, 2005,compared to the same period for 2004 and is detailed as follows (in millions):

| ** **                            | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2005**                                | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                       | 867        |          | $          | 481 |   |   | $ | 386 |   |   |
| Contracted and  capacity              |       | 64                                      |       | 62            |       |   | 2 |   |   |
| Incremental realized  value of hedges |       | (379                                    | )          | 33            |       |   | (412 | ) |   |
| Unrealized losses                     |       | (97                                     | )          | (75           | )          |   | (22 | ) |   |
| Total                                 |       | $                                       | 455        |          | $          | 501 |   |   | $ | (46 | ) |   |

 

The decrease ingross margin is primarily due to the following:

·       adecrease of $412 million in incremental realized value of hedges primarilyrelated to the impact of rising energy prices on the realized economic hedgesof our generation output during the 2005 period;

·       adecrease of $22 million related to unrealized gains and losses on hedgingactivities. In 2005, unrealized losses of $97 million included $207 millionrelated to decreased value associated with forward power contracts for futureperiods resulting from increases in forward power prices late in the year,partially offset by $49 million related to increased value associated withforward fuel contracts for future periods resulting from increases in forwardfuel prices late in the year. This was partially offset by unrealized gains of$61 million primarily due to the settlement of power contracts during the yearfor which unrealized losses had been recorded in prior periods; and

·       an increase of $386 millionin energy primarily related to higher market prices for power, partially offsetby higher fuel costs during the year ended December 31, 2005, compared tothe same period in 2004.

56

----

***Northeast***

Thefollowing table summarizes the operations of our Northeast segment for theyears ended December 31, 2005 and 2004 (in millions):

| ** **                                                                    | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                    | ** ** | **2005**                                | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                        |       | $                                       | 216        |          | $          | 197 |   |   | $ | 19 |   |   |
| Unrealized Gross  Margin                                                      |       | (11                                     | )          | 31            |       |   | (42 | ) |   |
| Total Gross  Margin                                                           |       | 205                                     |       | 228           |       |   | (23 | ) |   |
| Operating  expenses:                                                          |       |                                    |       |          |       |   |   |   |   |
| Operations and maintenance                                                    |       | 225                                     |       | 200           |       |   | 25 |   |   |
| Depreciation and amortization                                                 |       | 33                                      |       | 31            |       |   | 2 |   |   |
| Loss (gain) on sales of assets, net                                           |       | (10                                     | )          | 43            |       |   | (53 | ) |   |
| Total operating  expenses                                                     |       | 248                                     |       | 274           |       |   | (26 | ) |   |
| Operating loss                                                                |       | (43                                     | )          | (46           | )          |   | 3 |   |   |
| Total other  expense (income), net                                            |       | 6                                       |       | (3            | )          |   | 9 |   |   |
| Loss from continuing  operations before reorganization items and income taxes |       | $                                       | (49        | )             | $          | (43 | ) |   | $ | (6 | ) |   |

 

*Gross Margin*

Grossmargin decreased by $23 million for the year ended December 31, 2005,compared to the same period for 2004 and is detailed as follows (in millions):

| ** **                            | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2005**                                | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                       | 235        |          | $          | 142 |   |   | $ | 93 |   |   |
| Contracted and  capacity              |       | 36                                      |       | 36            |       |   | — |   |   |
| Incremental  realized value of hedges |       | (55                                     | )          | 19            |       |   | (74 | ) |   |
| Unrealized gains  (losses)            |       | (11                                     | )          | 31            |       |   | (42 | ) |   |
| Total                                 |       | $                                       | 205        |          | $          | 228 |   |   | $ | (23 | ) |   |

 

The decrease ingross margin is primarily due to the following:

·       adecrease of $74 million in incremental realized value of hedges primarilyrelated to the impact of rising energy prices on the realized economic hedgesof our generation output during the 2005 period;

·       adecrease of $42 million related to unrealized gains and losses on hedgingactivities. In 2005, unrealized losses of $11 million are primarily due to thesettlement of power and fuel contracts during the year for which net unrealizedgains had been recorded in prior periods. In 2004, the settlement of hedges forwhich unrealized losses had been recognized in prior periods resulted in a gainof $17 million. In addition, the impact of rising fuel prices on forward fuelcontracts, less the impact of rising power prices on forward power contracts,resulted in a gain of $14 million; and

·       an increase of $93 millionin energy primarily related to higher market prices for power, partially offsetby higher fuel costs during the year ended 2005 compared to the same period in2004.

57

----

*Operating Expenses*

The decrease of $26 millionin operating expenses is primarily due to an increase of $53 million in gain onsales of assets. In 2004, we recognized a loss of $65 million on the sale ofthree natural gas combustion turbines partially offset by an increase of $25million in operations and maintenance expense, which included increasedmaintenance costs of $8 million on the dam at Swinging Bridge and $5 millionrelated to environmental remediation costs at the Lovett and Hillburnfacilities.

***California***

Thefollowing table summarizes the operations of our California segment for theyears ended December 31, 2005 and 2004 (in millions): 

| ** **                                                                      | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                      | ** ** | **2005**                                | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                          |       | $                                       | 113        |          | $          | 143 |   |   | $ | (30 | ) |   |
| Unrealized Gross  Margin                                                        |       | —                                  |       | 3             |       |   | (3 | ) |   |
| Total Gross  Margin                                                             |       | 113                                     |       | 146           |       |   | (33 | ) |   |
| Operating  expenses:                                                            |       |                                    |       |          |       |   |   |   |   |
| Operations and maintenance                                                      |       | 69                                      |       | 80            |       |   | (11 | ) |   |
| Depreciation and amortization                                                   |       | 5                                       |       | 4             |       |   | 1 |   |   |
| Total operating  expenses                                                       |       | 74                                      |       | 84            |       |   | (10 | ) |   |
| Operating income                                                                |       | 39                                      |       | 62            |       |   | (23 | ) |   |
| Total other  expense, net                                                       |       | 1                                       |       | 1             |       |   | — |   |   |
| Income from continuing  operations before reorganization items and income taxes |       | $                                       | 38         |          | $          | 61 |   |   | $ | (23 | ) |   |

 

*Gross Margin*

Grossmargin decreased by $33 million for the year ended December 31, 2005,compared to the same period for 2004 and is detailed as follows (in millions):

| ** **                            | ** ** | **Years Ended  December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2005**                                | ** ** | **2004**   | ** ** | **Decrease** | ** ** |
| Energy                                |       | $                                       | —     |       | $          | 5 |   |   | $ | (5 | ) |   |
| Contracted and  capacity              |       | 114                                     |       | 127        |       |   | (13 | ) |   |
| Incremental  realized value of hedges |       | (1                                      | )          | 11         |       |   | (12 | ) |   |
| Unrealized gains                      |       | —                                  |       | 3          |       |   | (3 | ) |   |
| Total                                 |       | $                                       | 113        |       | $          | 146 |   |   | $ | (33 | ) |   |

 

The decrease ingross margin is primarily due to the following:

·       adecrease in contracted and capacity of $13 million related to the expiration ofan RMR contract for one of our California generating facilities in 2004,partially offset by income from tolling agreements on those California assetsnot covered by RMR agreements; and

·       a decrease of $12 millionin the incremental realized value of hedges is due to favorable price spreadson both power and fuel contracts.

58

----

***Other Operations***

Thefollowing table summarizes the operations of our Other Operations segment forthe years ended December 31, 2005 and 2004 (in millions): 

| ** **                                                                             | ** ** | **Years Ended  December 31,** | ** ** | **Increase/** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|
| ** **                                                                             | ** ** | **2005**                                | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Realized Gross  Margin                                                                 |       | $                                       | (39        | )             | $          | (14 | ) |   | $ | (25 | ) |   |
| Unrealized Gross  Margin                                                               |       | 85                                      |       | 213           |       |   | (128 | ) |   |
| Total Gross  Margin                                                                    |       | 46                                      |       | 199           |       |   | (153 | ) |   |
| Operating  expenses:                                                                   |       |                                    |       |          |       |   |   |   |   |
| Operations and maintenance                                                             |       | 27                                      |       | 44            |       |   | (17 | ) |   |
| Depreciation and amortization                                                          |       | 13                                      |       | 15            |       |   | (2 | ) |   |
| Impairment losses                                                                      |       | —                                  |       | 2             |       |   | (2 | ) |   |
| Loss on sales of assets-nonaffiliate                                                   |       | 1                                       |       | 1             |       |   | — |   |   |
| Total operating  expenses                                                              |       | 41                                      |       | 62            |       |   | (21 | ) |   |
| Operating income                                                                       |       | 5                                       |       | 137           |       |   | (132 | ) |   |
| Total other  expense, net                                                              |       | 730                                     |       | 6             |       |   | 724 |   |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       | $                                       | (725       | )             | $          | 131 |   |   | $ | (856 | ) |   |

 

*Gross Margin*

Grossmargin decreased by $153 million for the year ended December 31,2005, compared to the same period for 2004 and is detailed as follows (inmillions):

| ** **               | ** ** | **Year Ended  December 31,** | ** ** | **Increase/** | ** ** |
|--------------------------|------------|----------------------------------------|------------|---------------|------------|
| ** **               | ** ** | **2005**                               | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Energy                   |       | $                                      | 39         |          | $          | (28 | ) |   | $ | 67 |   |   |
| Contracted and  capacity |       | (78                                    | )          | 14            |       |   | (92 | ) |   |
| Unrealized gains         |       | 85                                     |       | 213           |       |   | (128 | ) |   |
| Total                    |       | $                                      | 46         |          | $          | 199 |   |   | $ | (153 | ) |   |

 

The decrease ingross margin is primarily due to:

·       an increase of $67 million in energy primarilyrelated to an increase in realized margin from our proprietary tradingactivities;

·       adecrease of $92 million in contracted and capacity, which includes a decreaseof $335 million in amortization on two TPAs into which we entered in connectionwith the acquisition of the Mid-Atlantic facilities from Pepco. Under the TPAs,we agreed to supply Pepco its full load requirement in the District of Columbiaand in Maryland. The Maryland TPA expired in 2004 and the District of ColumbiaTPA expired in early 2005. The decrease related to the TPAs was partiallyoffset by an increase of $243 million in realized losses on the Back-to-BackAgreement. In 2006, the Back-to-Back Agreement was transferred to Mirant PowerPurchase; and

·       a decrease of $128 millionrelated to unrealized gains in our proprietary trading. For the year ended December 31,2005, we had unrealized losses of $12 million related to our proprietarytrading activities and $97 million in unrealized gains from the Back-to-Back Agreement.For the same period in 2004, we had unrealized gains of $45 million related toour proprietary trading activities and $168 million in unrealized gains on theBack-to-Back Agreement.

59

----

*Operating Expenses*

The decrease in operatingexpenses of $21 million is primarily due to a decrease in operations andmaintenance of $17 million resulting from a reduction in allocated corporatecosts of $10 million in 2005. 

*Other Expense, net*

The increase in otherexpense, net of $724 million is primarily due to the recognition in 2005 of$746 million of interest on liabilities that were subject to compromise for theperiod from the Petition Date through December 31, 2005, and an increasein the gain on sales of investment of $44 million related to the sale of aportion of our investment in ICE in 2005.

**Other SignificantConsolidated Statements of Operations Comparison**

*ReorganizationItems, net*

Reorganizationitems, net decreased by $53 million for the year ended December 31, 2005,compared to the same period in 2004. Reorganization items represent expense,income or gain and loss amounts that were recorded in the financial statementsas a result of the bankruptcy proceedings. For the years ended December 31,2005 and 2004, this amount included:

| ** **                                                     | ** ** | **Years Ended  December, 31,** | ** ** | **Increase/** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------|------------|---------------|------------|
| ** **                                                     | ** ** | **2005**                                 | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** |
| Gain on the  implementation of the Plan                        |       | $                                        | (30        | )             | $          | — |   |   | $ | (30 | ) |   |
| Estimated claims  and losses on rejected and amended contracts |       | 54                                       |       | 101           |       |   | (47 | ) |   |
| Professional fees  and administrative expense                  |       | 82                                       |       | 47            |       |   | 35 |   |   |
| Interest income,  net                                          |       | (21                                      | )          | (10           | )          |   | (11 | ) |   |
| Total                                                          |       | $                                        | 85         |          | $          | 138 |   |   | $ | (53 | ) |   |

 

Estimated claims and losseson rejected and amended contracts relate primarily to rejected energycontracts, such as tolling agreements, gas transportation and electrictransmission contracts and includes a $32 million gain related to theCalifornia Settlement.

*Discontinued Operations*

For the years ended December 31,2005 and 2004, we reported a net loss from discontinued operations of$3 million and $17 million, respectively, which includes thereclassification of the results of operations related to the planneddisposition of our Zeeland and Bosque plants.

**Liquidity andCapital Resources**

***Overview***

Our liquidity and capitalrequirements are primarily a function of our debt maturities and debt servicerequirements, capital expenditures, collateral requirements, fuel procurementand power sale contract obligations, legal settlements and working capitalneeds. Net cash flow provided by operating activities totaled $362 million forthe year ended December 31, 2006. Net cash flow used in operatingactivities totaled $192 million and $151 million for the years ended December 31,2005 and 2004, respectively.

***Senior Notes andSenior Secured Credit Facilities***

On December 23, 2005,in connection with our emergence from bankruptcy, our subsidiary Mirant NorthAmerica issued $850 million of 7.375% senior unsecured notes due 2013 (the“Old Notes”). The 

60

----

OldNotes were issued in a private placement and were not registered with the SEC.The funds from this issuance initially were placed in escrow and were releasedfrom escrow on January 3, 2006. On August 4, 2006, Mirant NorthAmerica completed an exchange offer for the Old Notes, whereby$849.965 million of senior notes registered under the Securities Act (the “NewNotes”) were exchanged for an equal amount of the Old Notes. The terms of theNew Notes are identical in all material respects to the Old Notes, except thatthe New Notes are registered under the Securities Act and generally are notsubject to transfer restrictions or registration rights. On January 3,2006, Mirant North America also entered into an $800 million seniorsecured revolving credit facility and a $700 million senior secured termloan. At the closing, $200 million drawn under the senior secured termloan was deposited into a cash collateral account to support the issuance of upto $200 million of letters of credit.

***Sources of Fundsand Capital Structure***

The principal sources ofliquidity for our future operations and capital expenditures are expected tobe: (i) existing cash on hand and cash flows from the operations of oursubsidiaries; (ii) borrowings under Mirant North America’s $800 millionsix year senior secured revolving credit facility; and (iii) $200 millionof letters of credit capacity under Mirant North America’s $700 million termloan; and (iv) preferred shares in Mirant Americas.

Proceeds from the sales ofthe Zeeland and Bosque plants, expected to be approximately $500 million, willbe reinvested in our subsidiary Mirant North America and/or used to retire debtat Mirant North America.

Our operating cash flowsmay be affected by, among other things: (i) demand for electricity; (ii) thedifference between the cost of fuel used to generate electricity and the marketvalue of the electricity generated; (iii) commodity prices (includingprices for electricity, emissions allowances, natural gas, coal and oil); (iv) thecost of ordinary course operations and maintenance expenses; (v) plannedand unplanned outages; (vi) terms with trade creditors; and (vii) cashrequirements for capital expenditures relating to certain facilities (includingthose necessary to comply with environmental regulations).

We and our subsidiaryMirant North America are holding companies and, as a result, we are dependentupon dividends, distributions and other payments from our subsidiaries togenerate the funds necessary to meet our obligations. The ability of certain ofour subsidiaries to pay dividends and distributions is restricted under theterms of their debt or other agreements. We have no operations and no subsidiarieswith operations other than Mirant North America and its subsidiaries, includingMirant Mid-Atlantic. The Mirant North America notes and senior secured creditfacilities restrict its ability to make distributions. In particular, asignificant portion of cash from operations is generated by the powergeneration facilities of Mirant Mid-Atlantic. Under the Mirant Mid-Atlanticleveraged leases, Mirant Mid-Atlantic is subject to a covenant that restrictsits right to make distributions to us and Mirant North America. MirantMid-Atlantic’s ability to satisfy the criteria set by that covenant in thefuture could be impaired by factors which negatively affect the performance ofits power generation facilities, including interruptions in operation or curtailmentof operations to comply with environmental restrictions.

***Uses of Funds***

Our requirements forliquidity and capital resources, other than for the day-to-day operation of ourgeneration facilities, are significantly influenced by three activities: (i) ourasset management and proprietary trading activities; (ii) capitalexpenditures required to keep our power generation facilities in operation; and(iii) debt service.

61

----

*CollateralRequirements.**  *Ourasset management and, to a lesser extent, proprietary trading activities,represent a significant need for liquidity and capital resources. Theseliquidity requirements are primarily driven by margin and collateral postingrequirements with counterparties and levels of inventory. As of December 31,2006, we had approximately $38 million of posted cash collateral and$204 million of letters of credit outstanding primarily to support ourasset management activities and debt service reserve requirements. Ourliquidity requirements are highly dependent on the level of our hedgingactivity, forward prices for energy, emissions credits and fuel, commoditymarket volatility and credit terms with third parties.

*CapitalExpenditures.**  *Capitalexpenditures for our continuing operations were $127 million,$96 million and $86 million for the years ended December 31,2006, 2005 and 2004, respectively. Our capital expenditures for 2007 areexpected to be approximately $826 million for our continuing business,with approximately $573 million of that amount for environmental capitalexpenditures needed to achieve compliance with the SO2 and NOx emissionsrequirements of the Maryland Healthy Air Act. For a more detailed discussion ofenvironmental expenditures we expect to incur in the future, see ‘‘Item 1.Business.’’

*DebtService.**  *At December 31, 2006, our continuingoperations had approximately $3.3 billion of long-term debt withexpected annual interest expense of approximately $255 million. Under the termsof its senior secured term facility, Mirant North America is required to use50% of its free cash flow for each fiscal year (less amounts paid to us for thepurpose of paying interest on our senior notes) to pay down its senior securedterm loan, in addition to its scheduled amortization of $7 million peryear. The percentage of free cash flow that Mirant North America is required touse to pay down its senior secured term loan may be reduced to 25% upon theachievement by it of a net debt to EBITDA ratio of less than 2:1. At December 31,2006, the current estimate of the mandatory principal prepayment of the termloan in March 2007 is approximately $131 million.

*Mirant Mid-AtlanticOperating Leases.**  *MirantMid-Atlantic leases the Morgantown and Dickerson baseload units and associatedproperty through 2034 and 2029, respectively. Mirant Mid-Atlantic has an optionto extend the leases. Any extensions of the respective leases would be limitedto 75% of the economic useful life of the facility, as measured from thebeginning of the original lease term through the end of the proposed remaininglease term. We are accounting for these leases as operating leases. While thereis variability in the scheduled payment amounts over the lease term, werecognize rental expense for these leases on a straight-line basis inaccordance with the applicable accounting literature. As of December 31,2006, the total notional minimum lease payments for the remaining term of theleases aggregated approximately $2.2 billion and the aggregate terminationvalue for the leases was approximately $1.4 billion and generallydecreases over time. Rent expenses under the Mirant Mid-Atlantic leases were$96 million, $99 million and $103 million for the years ended December 31,2006, 2005 and 2004, respectively. In addition, Mirant Mid-Atlantic is requiredto post rent reserves in an aggregate amount equal to the greater of the nextsix months’ rent, fifty percent of the next twelve months’ rent or $75 million.

***Use of Proceeds from Planned Dispositions***

Proceeds from the sales ofthe Zeeland and Bosque plants, expected to be approximately $500 million, willbe reinvested in Mirant North America, a subsidiary of Mirant AmericasGeneration, and/or used to retire debt at Mirant North America.

***Debtor-in-Possession Financing for New YorkSubsidiaries***

Mirant North America and Mirant Americas EnergyMarketing, (the “Primary DIP Lenders”) entered into the Primary New YorkDIP Agreement to make secured debtor-in-possession financing in an amount of (i) $20 million,plus (ii) an amount equal to the amount of credit support provided onbehalf of 

62

----

the Mirant New York,Mirant Bowline, Mirant Lovett, and Hudson Valley Gas Corporation (collectively,the ‘‘New York DIP Borrowers’’), to the extent such amounts are collateralizedwith cash or cash equivalents by the New York DIP Borrowers. The facilityis available on a joint and several basis to the New York DIP Borrowers.On January 31, 2006, all the assets of Mirant Americas Energy Marketingwere transferred to Mirant Energy Trading, with Mirant Energy Trading tosucceed to all rights and assume all obligations of Mirant Americas EnergyMarketing under the Primary New York DIP Agreement. The financing underthe Primary New York DIP Agreement can be utilized through borrowings bythe New York DIP Borrowers, the issuance of letters of credit for theaccount of any of the New York DIP Borrowers or in support of commercialtransactions entered into by Mirant Energy Trading for the benefit of theNew York DIP Borrowers, the posting of cash in respect of obligationsincurred for the benefit of any of the New York DIP Borrowers, includingthe making of prepayments for fuel and other commodities for the benefit of anyof the New York DIP Borrowers. Under the Primary New York DIPAgreement, the amount which represents the excess on the effective date of thePlan of (x) credit support posted for the benefit of the New York DIPBorrowers by the lenders in respect of transactions entered into on theirbehalf over (y) the amount of cash collateral posted by the New YorkDIP Borrowers to the lenders is deemed to be a loan made to the New YorkDIP Borrowers on such date. The New York DIP Borrowers have posted$5 million cash collateral with Mirant Energy Trading in accordance withthe December 31, 2006, collateral allocation performed in good faith byMirant Energy Trading. To the extent that the required level of credit supportprovided to the New York DIP Borrowers is reduced, the amount of suchreduction is required to be returned to the New York DIP Borrowers. Thefinancing under the Primary New York DIP Agreement has a stated maturityof 180 days, subject to renewal or extension, and is available until theearlier of (x) the expiration of such period or (y) with respect toeach of the New York DIP Borrowers, the effective date of a confirmed Planfor such New York DIP Borrower in its Chapter 11 case. The loan hastwice been extended such that the stated maturity date is now June 26,2007. Subject to the authorization of the Bankruptcy Court, the obligations ofthe New York DIP Borrowers under the Primary New York DIP Agreement,pursuant to Section 364(c) of theBankruptcy Code, (i) constitute a claim having priority over any orall administrative expenses of the kind specified in sections 503(b) or507(b) of Bankruptcy Code, (ii) are secured by a lien on property ofthe estates of the New York DIP Borrowers that is not otherwise subject toa lien and (iii) are secured by a junior lien on property of the estatesof the New York DIP Borrowers that is subject to a lien. The financingbears interest at a rate of LIBOR plus 2.25%. The Primary New York DIPAgreement contains certain events of default, and the ability of theNew York DIP Borrowers to borrow thereunder is subject to certainconditions precedent. In addition, the Primary New York DIP Agreementcontains covenants that, among other things, restrict the ability of theNew York DIP Borrowers to engage in mergers, acquisitions and asset sales,to make investments and to incur indebtedness.

Contemporaneous with their entry into the PrimaryNew York DIP Agreement, the New York DIP Borrowers also entered intothe Secondary New York DIP Agreement. The Secondary New York DIPAgreement permits Mirant to make secured debtor-in-possession financing in themaximum amount of $50 million to the New York DIP Borrowers, and theborrowings are available solely for cash collateral postings by any one or moreof the New York DIP Borrowers. The terms of the Secondary New YorkDIP Agreement are substantially similar to the terms of the PrimaryNew York DIP Agreement. However, (i) the rights of the Primary DIPLenders to payment out of cash collateral posted by the New York DIPBorrowers pursuant to the Primary New York DIP Agreement as may be repaidshall at all times rank senior to the rights of Mirant under the SecondaryNew York DIP Agreement and (ii) certain claims and liens grantedunder the Primary New York DIP Agreement in respect of cash collateralposted by the New York DIP Borrowers shall at all times be senior tosimilar claims and liens granted under the Secondary New York DIPAgreement. The loan has twice been extended such that the stated maturity dateis now June 26, 2007.

63

----

TheBankruptcy Court has approved a debtor-in-possession loan to Mirant NY-Genfrom Mirant Americas under which Mirant Americas, subject to certainconditions, would lend up to $16.5 million to Mirant NY-Gen toprovide funding for the repairs on the Swinging Bridge dam. The loan hasbeen extended such that the stated maturity date is now June 26, 2007.

***Cash Flows***

***2006versus 2005***

*Continuing Operations*

*Operating Activities.*   Ourcash provided by operating activities is affected by seasonality, changes inenergy prices and fluctuations in our working capital requirements. Cashprovided by operating activities from continuing operations increased $538 millionfor the year ended December 31, 2006, compared to the same period in 2005,primarily due to the following:

·       anincrease in realized gross margin of $493 million for the year ended December 31,2006, compared to the same period in 2005. See “Results of Operations” for additionaldiscussion of our improved performance in 2006 compared to the same period in2005;

·       adecrease in energy trading collateral levels of $819 million in the year ended December 31,2006, compared to the same period in 2005. The change in collateral requirementsis due to the settlement of energy contracts combined with energy pricedeclines in the year ended December 31, 2006, compared to the same periodin 2005. For the year ended December 31, 2006, $592 million of cashcollateral from brokers and counterparties has been returned to us. For theyear ended December 31, 2005, additional net collateral used to supportcommercial operations was $227 million; and

·       anincrease in bankruptcy related claims and expenses of $662 million. In 2006 wepaid bankruptcy claims and professional fees of $1.773 billion, of which$765 million is reflected in cash from operations. Our remaining claims payableand estimated claims accrual is $5 million at December 31, 2006. Wepaid $103 million in the year ended December 31, 2005 related toprofessional fees and other expenses associated with the bankruptcyproceedings.

*Investing Activities.*   Net cash usedin investing activities from continuing operations was $30 million for theyear ended December 31, 2006, compared to $34 million in 2005. Thisdifference was primarily due to the following:

·       anincrease of $31 million in capital expenditures for 2006 compared to 2005,primarily due to our environmental capital expenditures in 2006 atMid-Atlantic;

·       anincrease in the proceeds from the sales of assets and investments of $45 million.In 2006, we received $97 million in proceeds from the sales of assets andinvestments, which included $12 million from the sale of the MirantService Center, $20 million from the sale of our investment in the New YorkMercantile Exchange and $58 million from the sale of a portion of ourinvestment in ICE. In 2005, proceeds from the sales of assets and investmentswere $52 million and included $48 million from the sale of a portion of ourinvestment in ICE and $4 million in additional proceeds from the 2004 sale ofthe Bowline gas turbines; and

·       adecrease in the repayment of notes receivable from affiliate of$10 million compared to the same period in 2005.

64

----

*Financing Activities.**  *Net cash provided by financing activities fromcontinuing operations was $5 million for the year ended December 31,2006, compared to $18 million for the same period in 2005. This difference wasprimarily due to the following:

·       anincrease in proceeds from the issuance of long-term debt of approximately$2 billion. Proceeds from the issuance of long-term debt in 2006 included$850 million from the Mirant North America debt offering that was releasedfrom escrow on January 3, 2006, $700 million from the Mirant NorthAmerica senior secured loan and $465 million drawn on the Mirant NorthAmerica senior secured revolving credit facility. In 2006 we also incurred $51million in debt issuance costs.

·       anincrease in repayments of long-term debt comprised of the repayment of$465 million on the Mirant North America senior secured revolving creditfacility and $990 million of principal payments for debt settled under thePlan;

·       thepayment by Mirant North America of $250 million to Mirant Americas underthe Plan and the distribution of $236 million to Mirant Americas asmember; and

·       in 2005, proceeds from theissuance of debt-affiliate of $21 million represented advances under theintercompany cash management program.

*DiscontinuedOperations*

Cash provided by operatingactivities from discontinued operations increased $16 million for the yearended December 31, 2006, compared to the same period in 2005, primarilydue to an increase of $14 million in realized gross margin.

***2005versus 2004***

*ContinuingOperations*

*Operating Activities.*   Cashused in operating activities from continuing operations increased $39 millionfor the year ended December 31, 2005, compared to the same period in 2004,primarily due to the following:

·       adecrease in cash used due to a $284 million increase in gross margin, excludingunrealized gains and losses and TPA amortization. See “Results of Operations”for additional discussion;

·       anincrease in cash used of $231 million due to a $182 million increase in the collateral required to support commercialoperations and $49 million of collateral posted related to the MirantMid-Atlantic leases; and

·       anincrease in cash used of $32 million for 2005 payments under the settlementagreement related to the Mirant Mid-Atlantic leases.

*Investing Activities.*   Net cash usedin investing activities from continuing operations was $34 million for theyear ended December 31, 2005, compared to $282 million cash provided in2004. This difference is primarily due to the following:

·       capitalexpenditures were $96 million in 2005 compared to $86 million for the sameperiod in 2004;

·       in2005, proceeds from the sales of assets and investments was $52 million andincluded $48 million from the sale of a portion of our investment in ICE and $4million related to the sale of the Bowline turbines. In 2004, proceeds from thesales of assets and investments was $42 million related to the sale of theBowline turbines; and

·       in2005, we received repayments on notes receivable from affiliates of $10 millioncompared to $325 million in 2004.

65

----

*Financing Activities.*   Netcash provided by financing activities from continuing operations increased $13million for the year ended December 31, 2005, compared to the same periodin 2004. Proceeds from the issuance of long-term debt—affiliate was $21 millionin 2005. We received $7 million from Mirant Americas under the make-wholecontract in 2004.

*DiscontinuedOperations*

Cash provided by operatingactivities from discontinued operations decreased $2 million for the yearended December 31, 2005, compared to the same period in 2004 primarily dueto an increase in operating expenses of $7 million, partially offset by anincrease in gross margin of $4 million.

***Total Cash, Cash Equivalents and Credit FacilityAvailability***

At December 31,2006, we have total cash, cash equivalents, and credit facility availability ofapproximately $1.4 billion. The table below sets forth total cash, cashequivalents and availability of credit facilities of Mirant Americas Generationand our subsidiaries at December 31, 2006 and 2005 (in millions):

| ** **                                                                                                         | ** ** | **At December 31,   2006** | ** ** | **At December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| Cash and Cash  Equivalents:                                                                                        |       |                                      |       |                                |       |   |   |   |   |
| Mirant Americas Generation                                                                                         |       |                                      | $          | —                              |       |   |   | $ | 129 |   |   |
| Mirant North America                                                                                               |       |                                      | 678        |                                |       |   | 19 |   |   |
| Mirant Mid-Atlantic                                                                                                |       |                                      | 75         |                                |       |   | 276 |   |   |
| Total cash and  cash equivalents                                                                                   |       |                                      | 753        |                                |       |   | 424 |   |   |
| Less: Cash  restricted due to bankruptcy of New York entities and reserved for working  capital and other purposes |       |                                      | 102        |                                |       |   | 1 |   |   |
| Total available  cash and cash equivalents                                                                         |       |                                      | 651        |                                |       |   | 423 |   |   |
| Available under  credit facilities                                                                                 |       |                                      | 796        |                                |       |   | — |   |   |
| Available under  the DIP Facility                                                                                  |       |                                      | —     |                                |       |   | 249 |   |   |
| Total cash, cash  equivalents and credit facilities availability                                                   |       |                                      | $          | 1,447                               |       |   |   | $ | 672 |   |   |

 

Mirant North America’s ability to pay dividends isrestricted under the terms of its debt agreements. At December 31, 2006,Mirant North America had distributed to us all available cash that waspermitted to be distributed under the terms of its debt agreements. Aftertaking into account the financial results of Mirant North America for thetwelve months ended December 31, 2006, we expect Mirant North America willbe able to distribute approximately $131 million in March 2007.

Maintainingsufficient liquidity in our business is crucial in order to mitigate the riskof future financial distress to us. Accordingly, we plan on a prospective basisfor the expected liquidity requirements of our business considering the factorslisted below:

·       expectedcollateral posted in support of our business;

·       effectsof market price volatility on collateral posted for economic hedge transactionsand risk management transactions;

·       effectsof market price volatility on fuel pre-payment requirements;

·       seasonaland intra-month working capital requirements; and

·       otherunforeseen events.

Our capital expendituresfor 2007 and 2008 are expected to be approximately $826 million and $802million, respectively. This forecast does not assume any construction of newgenerating units during the 

66

----

forecastperiod. Instead, the current capital expenditure program, which is expected tobe funded by operating cash flow, focuses on efficiency, safety, reliability,compliance with existing environmental laws and contract obligations. To complywith the requirements for SO2 and NOx emissions under the Maryland Healthy AirAct, we anticipate total capital expenditures of approximately $1.6 billionthrough 2009, including $80 million incurred through 2006.

***Cash Collateral and Letters of Credit***

In order to sell power and purchase fuel in theforward markets and perform other energy trading and marketing activities, weare often required to provide trade credit support to our counterparties ormake deposits with brokers. In addition, we are often required to provide cashcollateral or letters of credit for access to the transmission grid, toparticipate in power pools, to fund debt service reserves and for otheroperating activities. Trade credit support includes cash collateral, letters ofcredit and financial guarantees. In the event that we default, the counterpartycan draw on a letter of credit or apply cash collateral held to satisfy theexisting amounts outstanding under an open contract. At December 31, 2006,our outstanding issued letters of credit totaled $204 million.

Thefollowing table summarizes cash collateral posted with counterparties andbrokers and letters of credit issued as of December 31, 2006 and 2005(in millions):

| ** **                                                  | ** ** | **At December 31,  2006** | ** ** | **At December 31,  2005** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Continuing  operations:                                     |       |                                |       |                                |       |   |   |   |   |
| Cash collateral  posted—energy trading and marketing   |       |                                | $          | 27                                  |       |   |   | $ | 619 |   |   |
| Cash collateral  posted—debt service and rent reserves |       |                                | —     |                                |       |   | 56 |   |   |
| Cash collateral  posted—other operating activities     |       |                                | 11         |                                |       |   | 10 |   |   |
| Letters of  credit—energy trading and marketing        |       |                                | 100        |                                |       |   | 51 |   |   |
| Letters of  credit—debt service and rent reserves      |       |                                | 84         |                                |       |   | — |   |   |
| Letters of  credit—other operating activities          |       |                                | 15         |                                |       |   | — |   |   |
|                                                        |       |                                | 237        |                                |       |   | 736 |   |   |
| Discontinued  operations:                                   |       |                                |       |                                |       |   |   |   |   |
| Assets held for  sale—letters of credit                |       |                                | 5          |                                |       |   | 5 |   |   |
| Total                                                       |       |                                | $          | 242                                 |       |   |   | $ | 741 |   |   |

 

On July 13, 2006, Moody’s Investors Servicereduced Mirant’s corporate credit rating to “B2” and our debt rating was alsolowered. Standard and Poor’s also announced that they had placed Mirant’scorporate credit rating and our debt rating on credit watch.

67

----

***Debt Obligations, Off-Balance Sheet Arrangements andContractual Obligations***

Ourdebt obligations, off-balance sheet arrangements and contractual obligations asof December 31, 2006, are as follows (in millions):

| ** **                                                                          | ** ** | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **>5 years** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------------|------------|
| Mirant  Mid-Atlantic operating leases                                               |       | $         | 2,246      |     | $          | 112      |       | $        | 121        |     | $          | 142      |       | $                    | 140        |   | $ | 134 |   |   | $ | 1,597 |   |   |
| Other operating  leases                                                             |       | 34        |       | 4        |       | 4        |       | 4        |       | 4        |       | 3        |       |                 | 15         |   |   |
| Long-term debt                                                                      |       | 5,725     |       | 396      |       | 260      |       | 260      |       | 260      |       | 1,063    |       |                 | 3,486      |   |   |
| Claims payable  and estimated claims accrual                                        |       | 5         |       | 5        |       | —   |       | —   |       | —   |       | —   |       |                 | —     |   |   |
| Purchase commitments:                                                               |       |      |       |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Long-term service agreements                                                        |       | 33        |       | 3        |       | 1        |       | 2        |       | 2        |       | 2        |       |                 | 23         |   |   |
| Fuel commitments                                                                    |       | 418       |       | 263      |       | 89       |       | 66       |       | —   |       | —   |       |                 | —     |   |   |
| Other purchase commitments                                                          |       | 172       |       | 172      |       | —   |       | —   |       | —   |       | —   |       |                 | —     |   |   |
| Total excluding  liabilities subject to compromise                                  |       | 8,633     |       | 955      |       | 475      |       | 474      |       | 406      |       | 1,202    |       |                 | 5,121      |   |   |
| Liabilities  subject to compromise                                                  |       | 34        |       |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Discontinued  operations                                                            |       | 187       |       |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Total debt  obligations, off-balance sheet arrangements and contractual obligations |       | $         | 8,854      |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |   |
|                                                                                     |            |           |            |          |            |          |            |          |            |          |            |          |            |                      |            |  |  |  |  |  |  |  |  |  |

 

Operating leases are off-balance sheet arrangementsand are discussed in Note 15 to our consolidated and combined financialstatements contained elsewhere in this report. These amounts primarily relateto our minimum lease payments associated with our lease of the Morgantown andDickerson baseload units.

Long-term debt includes the current portion oflong-term debt and long-term debt on the consolidated balance sheets which arediscussed in Note 10 to our consolidated and combined financial statementscontained elsewhere in this report. Long-term debt also includes estimatedinterest on debt based on a U.S. Dollar LIBOR curve as of January 2,2007.

Claims payable and estimated claims accrual primarilyconsists of allowed bankruptcy claims, estimated unresolved bankruptcy claimsthat are to be settled in cash and professional fees associated with thebankruptcy proceedings.

Long-term service agreements represent our totalestimated commitments under our long-term service agreements associated withturbines installed or in storage and are discussed in Note 15 to ourconsolidated and combined financial statements contained elsewhere in thisreport.

Fuel commitments primarily relate to long-term coalagreements and other fuel purchase agreements. The fair value of certaincontracts is included in price risk management assets or price risk managementliabilities on our consolidated balance sheets.

Other purchase commitments represent the open purchaseorders less invoices received related to open purchase orders for generalprocurement of products and services purchased in the ordinary course ofbusiness. These include construction, maintenance and labor activities at ourgeneration facilities.

Liabilities subject to compromise on the consolidatedbalance sheets at December 31, 2006, relate only to our New Yorksubsidiaries that remain in bankruptcy and are discussed in Note 12 to ourconsolidated and combined financial statements contained elsewhere in thisreport.

Discontinued operationsinclude the debt and obligations of our Zeeland and Bosque natural gas-firedplants.

68

----

**Critical AccountingPolicies and Estimates**

The accountingpolicies described below are considered critical to obtaining an understandingof our consolidated and combined financial statements because their applicationrequires significant estimates and judgments by management in preparing ourconsolidated and combined financial statements. Management’s estimates andjudgments are inherently uncertain and may differ significantly from actualresults achieved. Management considers an accounting estimate to be critical ifthe following conditions apply:

·       theestimate requires significant assumptions; and

·       changesin the estimate could have a material effect on our consolidated and combinedresults of operations or financial condition; or,

·       ifdifferent estimates that could have been selected had been used, there could bea material impact on our consolidated and combined results of operations orfinancial condition.

We have discussed theselection and application of these accounting estimates with the Board ofManagers and our independent auditors. It is management’s view that the currentassumptions and other considerations used to estimate amounts reflected in ourconsolidated and combined financial statements are appropriate. However, actualresults can differ significantly from those estimates under differentassumptions and conditions. The sections below contain information about ourmost critical accounting estimates, as well as the effects of hypotheticalchanges in the material assumptions used to develop the estimates.

***RevenueRecognition and Accounting for Energy Trading and Marketing Activities***

*Natureof Estimates Required.**  *Weutilize two comprehensive accounting models in reporting our consolidated andcombined financial position and results of operations as required by GAAP—anaccrual model and a fair value model. We determine the appropriate model forour operations based on applicable accounting standards.

The accrual model hashistorically been used to account for our generation revenue from the sale ofenergy, capacity and ancillary services and to account for distribution revenuefrom the sale and distribution of energy. We recognize revenue when earned andcollection is probable as a result of electric power delivered to customerspursuant to contractual commitments that specify volume, price and deliveryrequirements. Sales of energy are based on economic dispatch, or they may be ‘as-ordered’by an ISO, based on member participation agreements, but without an underlyingcontractual commitment. ISO revenues and revenues for sales of energy based oneconomic-dispatch are recorded on the basis of MWh delivered, at the relevantday-ahead or real-time prices.

The fair value model hashistorically been used for derivative energy contracts that economically hedgeour electricity generation assets or that are used in our proprietary tradingactivities. We use a variety of derivative contracts, such as futures, swapsand option contracts, in the management of our business. Such derivativecontracts have varying terms and durations, or tenors, which range from a fewdays to a number of years, depending on the instrument.

Pursuant to SFAS No. 133,derivative contracts are reflected in our financial statements at fairvalue, with changes in fair value recognized currently in earnings unless theyqualify for a scope exception. We currently defer inception gains and losses inaccordance with EITF 02-3. Management considers fair value techniques,valuation adjustments related to credit and liquidity and judgments related tothe probability of completing forecasted transactions to be critical accountingestimates. These estimates are considered significant because they are highlysusceptible to change from period to period and are dependent on manysubjective factors. The fair value of derivative contracts is included in pricerisk management assets and 

69

----

liabilities affiliate andnonaffiliate in our consolidated balance sheets. Transactions that do notqualify for accounting under SFAS No. 133, either because they are notderivatives or because they qualify for a scope exception, are accounted forunder accrual accounting as described above.

*KeyAssumptions and Approach Used.**  *Determining the fair valueof derivatives involves significant estimates based largely on the mid-point ofquoted prices in active markets. The mid-point may vary significantly from thebid or ask price for some delivery points. If no active market exists, weestimate the fair value of certain derivative contracts using quantitativepricing models. Fair value estimates involve uncertainties and matters ofsignificant judgment. Our modeling techniques for fair value estimation includeassumptions for market prices, supply and demand market data, correlation andvolatility. The degree of complexity of our pricing models increases for longerduration contracts, contracts with multiple pricing features, option contractsand off-hub delivery points.

The fair value of price risk management assets andliabilities affiliate and nonaffiliate in our consolidated balance sheets isalso affected by our assumptions as to interest rate, counterparty credit riskand liquidity risk. The nominal value of the contracts is discounted using aforward interest rate curve based on LIBOR. In addition, the fair value of ourderivative contracts is reduced to reflect the estimated risk of default ofcounterparties on their contractual obligations to us.

*Effectif Different Assumptions Used.**  *The amounts recorded asrevenue or cost of fuel, electricity and other products change as estimates arerevised to reflect actual results and changes in market conditions or otherfactors, many of which are beyond our control. Because we use derivativefinancial instruments and have not elected cash flow or fair value hedgeaccounting under SFAS No. 133, certain components of our financialstatements, including gross margin, operating income and balance sheet ratios,are at times volatile and subject to fluctuations in value primarily due tochanges in energy and fuel prices. Due to the complexity of the models used tovalue some of the derivative instruments each period, a significant change inestimate could have a material impact on our results of operations and cashflows at the time contracts are ultimately settled. See Note 6 to ourconsolidated and combined financial statements for further information onfinancial instruments related to energy trading and marketing activities.

For additional informationregarding accounting for derivative instruments, see “Item 7A.Quantitative and Qualitative Disclosures about Market Risk.”

***Long-Lived Assets***

**Estimated UsefulLives**

*Natureof Estimates Required.**  *Theestimated useful lives of our long-lived assets are used to computedepreciation expense, determine the carrying value of asset retirementobligations, and estimate expected future cash flows attributable to an assetfor the purposes of impairment testing. Estimated useful lives are based, inpart, on the assumption that we provide an appropriate level of capitalexpenditures while the assets are still in operation. Without these continuedcapital expenditures, the useful lives of these assets could decreasesignificantly.

*KeyAssumptions and Approach Used.**  *Estimateduseful lives are the mechanism by which we allocate the cost of long-livedassets over the asset’s service period. We perform depreciation studiesperiodically to update changes in estimated useful lives. The actual usefullife of an asset could be affected by changes in estimated or actual commodityprices, environmental regulations, various legal factors, competitive forcesand our liquidity and ability to sustain required maintenance expenditures andsatisfy asset retirement obligations. We use composite depreciation for groupsof similar assets and establish an average useful life for each group ofrelated assets. In accordance with SFAS No. 144, we cease depreciation onlong-lived assets classified as available for sale. See Note 7 to our consolidatedand combined financial statements for additional information related to ourproperty, plant and equipment.

70

----

*Effect if DifferentAssumptions Used.**  *Thedetermination of estimated useful lives is dependent on subjective factors suchas expected market conditions, commodity prices and anticipated capitalexpenditures. Since composite depreciation rates are used, the actual usefullife of a particular asset may differ materially from the useful life estimatedfor the related group of assets. In the event the useful lives of significantassets were found to be shorter than originally estimated, depreciation expensemay increase, liabilities recognized for future asset retirement obligationsmay be insufficient and impairments in the carrying value of tangible andintangible assets may result.

**Asset RetirementObligations**

*Nature of Estimates Required*.*  *We account for asset retirement obligationsunder SFAS No. 143 and under FIN 47. SFAS No. 143 and FIN 47require an entity to recognize the fair value of a liability for conditionaland unconditional asset retirement obligations in the period in which they areincurred. Retirement obligations associated with long-lived assets includedwithin the scope of SFAS No. 143 and FIN 47 are those obligations forwhich a requirement exists under enacted laws, statutes and written or oralcontracts, including obligations arising under the doctrine of promissoryestoppel. Asset retirement obligations are estimated using the estimatedcurrent cost to satisfy the retirement obligation, increased for inflationthrough the expected period of retirement and discounted back to present valueat our credit-adjusted risk-free rate. We have identified certain retirementobligations within our power generation operations have a noncurrent liabilityof $41 million recorded as of December 31, 2006. These asset retirementobligations are primarily related to asbestos abatement at some of ourgenerating facilities, the removal of oil storage tanks, equipment on leasedproperty and environmental obligations related to the closing of ash disposalsites.

*KeyAssumptions and Approach Used.**  *Thefair value of liabilities associated with asset retirement obligations isestimated by applying a present value calculation to current engineering costestimates of satisfying the obligations. Significant inputs to the presentvalue calculation include current cost estimates, estimated asset retirementdates and appropriate discount rates. Where appropriate, multiple cost and/orretirement scenarios have been probability weighted.

*Effect if DifferentAssumptions Used.**  *Weupdate liabilities associated with asset retirement obligations as significantassumptions change or as relevant new information becomes available. However,due to changes in inflation assumptions, interest rates and asset useful lives,actual future cash flows required to satisfy asset retirement obligations coulddiffer materially from the current recorded liabilities.

**Asset Impairments**

*Nature of EstimatesRequired.**  *We evaluateour long-lived assets, including definite-lived intangible assets for impairmentin accordance with applicable accounting guidance. The amount of an impairmentcharge is calculated as the excess of the asset’s carrying value over its fairvalue, which generally represents the discounted expected future cash flowsattributable to the asset or in the case of assets we expect to sell, at fairvalue less costs to sell.

71

----

***Property, Plant and Equipment and Definite-LivedIntangibles***

SFAS No. 144 requires management to recognize animpairment charge if the sum of the undiscounted expected future cash flowsfrom a long-lived asset or definite-lived intangible is less than the carryingvalue of that asset. We evaluate our long-lived assets (property, plant andequipment) and definite-lived intangibles for impairment whenever indicators ofimpairment exist or when we commit to sell the asset. These evaluations oflong-lived assets and definite-lived intangibles may result from significantdecreases in the market price of an asset, a significant adverse change in theextent or manner in which an asset is being used or in its physical condition,a significant adverse change in legal factors or in the business climate thatcould affect the value of an asset, as well as other economic or operationsanalyses. If the carrying amount is not recoverable, an impairment charge isrecorded.

*KeyAssumptions and Approach Used.**  *Thefair value of an asset is the amount at which the asset could be bought or soldin a current transaction between willing parties, that is, other than in aforced or liquidation sale. Quoted market prices in active markets are the bestevidence of fair value and are used as the basis for the measurement, whenavailable. In the absence of quoted prices for identical or similar assets,fair value is estimated using various internal and external valuation methods.The determination of fair value requires management to apply judgment inestimating future energy prices, environmental and maintenance expenditures andother cash flows. Our estimates of the fair value of the assets includesignificant assumptions about the timing of future cash flows, remaining usefullives and selecting a discount rate that reflects the risk inherent in futurecash flows.

On August 9, 2006, Mirant announced the plannedsale of certain of its intermediate and peaking natural gas-fired plants whichincluded our Zeeland and Bosque plants. The planned sales resulted in thereclassification of the long-lived assets related to these plants as held forsale at December 31, 2006. During the third quarter of 2006, we reviewedeach asset independently for impairment through the allocation of the fairvalue of the portfolio. As a result of this review, we recorded a loss of $71million to write down the assets to their estimated fair value.

On January 15, 2007, we entered into a definitivepurchase and sale agreement with a subsidiary of LS Power Equity Partners I,L.P., LS Power Equity Partners II, L.P. and certain other affiliated funds,(collectively, “LS Power”) for the sale of our Zeeland and Bosque naturalgas-fired plants. The net proceeds from the sales are expected to beapproximately $500 million, after transaction costs. The updated fair valuesalong with changes to the working capital calculation in the draft purchase andsale agreement provided to the bidders, resulted in a reduction to theimpairment loss of $63 million, which was recorded in the fourth quarter of2006. The net 2006 impairment loss of $8 million was recorded in discontinuedoperations in our consolidated financial statement of operations during theyear to decrease the carrying value of the assets to their fair value lesscosts to sell.

During the third quarter of 2006, our estimates ofcash flows related to our impairment analysis of our Lovett and Bowlinegeneration facilities required significant judgment related to the outcome ofproperty tax disputes and future tax assessments for Lovett and Bowline. Ourestimates also required prediction of the likelihood of various outcomes ofunresolved matters related to environmental controls and a reasonable economicreturn for our Lovett generation facility. See Note 4 to our consolidatedand combined financial statements where further discussed.

*Effect if DifferentAssumptions Used.*   The estimates andassumptions used to determine whether an impairment exists are subject to ahigh degree of uncertainty. The estimated fair value of an asset would changeif different estimates and assumptions were used in our applied valuationtechniques, including estimated undiscounted cash flows, discount rates andremaining useful lives. If actual results are not consistent with the assumptionsused in estimating future cash flows and asset fair values, we may be exposedto additional losses that could be material to our results of operations. SeeNotes 3 and 4 to our consolidated and combined financial statements foradditional information on impairments.

72

----

**Income Taxes**

We are a limited liability company treated as a branchfor income tax purposes. As a result, Mirant Americas and Mirant have directliability for the majority of the federal and state income taxes relating toour operations. Through December 31, 2005, we allocated current anddeferred income taxes to each regarded corporate member entity of ourconsolidated group as if each regarded corporate entity member were a singletaxpayer utilizing the asset and liability method to account for income taxesexcept with respect to recognizing certain current period tax benefits.Specifically, we did not record current period tax benefits on each regardedcorporate entity’s ability to carry back its separate company current year NOLas realization of such losses were dependent on reimbursements from Mirant,which were 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 NOL and tax creditcarryforwards. When necessary, deferred tax assets are reduced by a valuationallowance to reflect the amount that is estimated to be recoverable. Inassessing the recoverability of our deferred tax assets, we consider whether itis likely that some portion or all of the deferred tax assets will be realized.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enacted change.

Several significant changes to our tax postureoccurred as a result of the Plan. Implementation of the Plan included theconversion of certain of our regarded corporate entities to limited liabilitycompanies coupled with the liquidation and/or merger of these regardedcorporate entities into other disregarded corporate entities for income taxpurposes. As a result, certain subsidiaries previously treated as regardedcorporate entities for income tax purposes have either been liquidated orconverted into disregarded entities for income tax purposes pursuant to thePlan. Additionally, certain partnerships owned by the regarded corporateentities were also liquidated, and now form part of these disregarded entitiesfor income tax purposes. The result of the above Plan effects was to eliminateour recording of tax expense and benefit prospectively with respect to theliquidated regarded corporate entities. Furthermore, with respect to thoseliquidated regarded corporate entities, all previously existing deferred taxassets and liabilities were eliminated as of December 31, 2005. Certain ofour other subsidiaries continue to exist as regarded corporate entities forincome tax purposes, including Mirant New York, Hudson Valley GasCorporation, Mirant Kendall and Mirant Special Procurement, Inc.

In December 2005, pursuant to the Plan, Mirantrejected and thereby eliminated the tax sharing agreement with its direct andindirect wholly owned regarded corporate entities. As a result, Mirant’s directand indirect wholly owned regarded corporate entities are no longer responsiblefor reimbursing Mirant for their intercompany tax obligations attributable totheir operations. Accordingly, our income tax receivables and payables withMirant or Mirant Americas were resolved pursuant to a global settlement underthe Plan whereby intercompany receivables and payables received no distribution,with the exception of income tax payables and receivables related to MirantNew York which continues to remain in bankruptcy at December 31,2006.

For those subsidiaries that continue to exist ascorporate regarded entities, we allocate current and deferred income taxes toeach corporate regarded entity as if such entity were a single taxpayerutilizing the asset and liability method to account for income taxes. To theextent we provide tax expense or benefit, any related tax payable or receivableto Mirant is reclassified to equity in the same period.

The determination of a valuation allowance requiressignificant judgment as to the generation of future taxable income duringfuture periods for which temporary differences are expected to be deductible.In making this determination, management considers all available positive andnegative evidence affecting 

73

----

specific deferred taxassets, including our past and anticipated future performance, the reversal ofdeferred tax liabilities and the implementation of tax planning strategies.

Additionally, we have contingent liabilities relatedto tax uncertainties arising in the ordinary course of business. Weperiodically assess our contingent liabilities in connection with theseuncertainties based on the latest information available. For thoseuncertainties where it is probable that a loss has occurred and the loss orrange of loss can be reasonably estimated, a liability is recognized in thefinancial statements. The recognition of contingent losses for tax uncertaintiesrequires management to make significant assumptions about the expected outcomesof certain tax contingencies.

***Loss Contingencies***

*Natureof Estimates Required.**  *Werecord loss contingencies when it is probable that a liability has beenincurred and the amount can be reasonably estimated. We consider losscontingency estimates to be critical accounting estimates because they entailsignificant judgment regarding probabilities and ranges of exposure, and theultimate outcome of the proceedings is unknown and could have a materialadverse effect on our results of operations, financial condition and cashflows. We currently have loss contingencies related to litigation,environmental matters, tax matters and others.

*KeyAssumptions and Approach Used.**  *Thedetermination of a loss contingency requires significant judgment as to theexpected outcome of each contingency in future periods. In making thedetermination as to potential losses and probability of loss, we consider allavailable positive and negative evidence including the expected outcome ofpotential litigation. We record our best estimate of a loss, or the low end ofour range if no estimate is better than another estimate within a range ofestimates, when the loss is considered probable. As additional informationbecomes available, we reassess the potential liability related to thecontingency and revise our estimates. In our evaluation of legal matters,management holds discussions with applicable legal counsel and relies onanalysis of case law and legal precedents.

*Effect if DifferentAssumptions Used.**  *Revisionsin our estimates of potential liabilities could materially affect our resultsof operations, and the ultimate resolution may be materially different from theestimates that we make.

***Litigation***

See “Item 3. Legal Proceedings” and Note 17 to ourconsolidated and combined financial statements for further information relatedto our legal proceedings.

We are currently involved in certain legalproceedings. We estimate the range of liability through discussions withapplicable legal counsel and analysis of case law and legal precedents. Werecord our best estimate of a loss, or the low end of our range if no estimateis better than another estimate within a range of estimates, when the loss isconsidered probable. As additional information becomes available, we reassessthe potential liability related to our pending litigation and revise ourestimates. Revisions in our estimates of the potential liability couldmaterially affect our results of operations, and the ultimate resolution may bematerially different from the estimates that we make.

74

----

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

We are exposed to marketrisks associated with commodity prices, interest rates and credit risk.

**Commodity PriceRisk**

In connection with our power generation business, weare exposed to energy commodity price risk associated with the acquisition offuel needed to generate electricity, as well as the electricity produced andsold. A portion of our fuel requirements is purchased in the spot market and aportion of the electricity we produce is sold in the spot market. In addition,the open positions in our proprietary trading activities expose us to risksassociated with changes in energy commodity prices. As a result, our financialperformance varies depending on changes in the prices of energy andenergy-related commodities. See “Critical Accounting Policies and Estimates”for a discussion of the accounting treatment for proprietary trading and assetmanagement activities.

The financial performance of our power generationbusiness is influenced by the difference between the variable cost ofconverting a source fuel, such as natural gas, oil or coal, into electricity,and the revenue we receive from the sale of that electricity. The differencebetween the cost of a specific fuel used to generate one MWh of electricity andthe market value of the electricity generated is commonly referred to as the “conversionspread.” Absent the effects of our price risk management activities, theoperating margins that we realize are equal to the difference between theaggregate conversion spread and the cost of operating the facilities thatproduce the electricity sold.

Conversion spreads are dependent on a variety offactors that influence the cost of fuel and the sales price of the electricitygenerated over the longer term, including conversion spreads of othergeneration facilities in the regions in which we operate, facility outages,weather and general economic conditions. As a result of these influences, thecost of fuel and electricity prices do not always change in the same magnitudeor direction, which results in conversion spreads for a particular generationfacility widening or narrowing (or becoming negative) over time.

Through our asset management activities, we enter intoa variety of exchange-traded and OTC energy and energy-relatedderivative contracts, such as forward contracts, futures contracts, optioncontracts and financial swap agreements to manage our exposure to commodityprice risk and changes in conversion spreads. These derivatives have varyingterms and durations, or tenors, which range from a few days to a number ofyears, depending on the instrument. Our proprietary trading activities alsoutilize similar contracts in markets where we have a physical presence toattempt to generate incremental gross margin.

Derivative energy contracts required to be reflectedat fair value are presented as price risk management assets andliabilities-affiliate and price risk management assets andliabilities-nonaffiliate in the accompanying consolidated balance sheets. Thenet changes in their market values are recognized in income in the period ofchange. The fair value of the PPAs which we account for as derivatives areincluded in price risk management assets-affiliate and liabilities-affiliate onthe accompanying consolidated balance sheets at December 31, 2006 and2005. The determination of fair value considers various factors, includingclosing exchange or OTC market price quotations, time value, credit quality,liquidity and volatility factors underlying options and contracts.

The volumetric weighted average maturity, or weightedaverage tenor, of the price risk management portfolio at December 31,2006, was eleven months. The net notional amount, or net short position, of theprice risk management assets and liabilities-affiliate and price riskmanagement assets and liabilities-nonaffiliate at December 31, 2006, wasapproximately 24 million equivalent MWh.

75

----

Thefollowing table provides a summary of the factors affecting the change in netfair value of the price risk management asset and (liability) accounts in 2006(in millions):

| ** **                                             | ** ** | **Proprietary  Trading** | ** ** | **Asset  Management** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-----------|------------|
| Net fair value of  portfolio at December 31, 2005 |       |                     | $          | 40                    |       |      |       | $ | (155 | ) |   | $ | (115 | ) |
| Gains recognized  in the period, net                   |       |                     | 29         |                  |       |      | 411        |   |   | 440 |   |
| Contracts settled  during the period, net              |       |                     | (23        | )                     |       |      | 192        |   |   | 169 |   |
| Net fair value of  portfolio at December 31, 2006 |       |                     | $          | 46                    |       |      |       | $ | 448 |   |   | $ | 494 |   |

 

Thefair values of our price risk management assets and liabilities-affiliate andprice risk management assets and liabilities-nonaffiliate, net of creditreserves, as of December 31, 2006, are as follows (in millions):

| ** **                       | ** ** | **Net Price Risk Management** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **Assets**                                   | ** ** | **Liabilities** | ** ** | **Net Fair Value at** | ** ** |
| ** **                       | ** ** | **Current**                                  | ** ** | **Noncurrent** | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **December 31, 2006** | ** ** |
| Electricity                      |       |                                         | $          | 619 |   |   |   | $ | 104 |   |   |   | $ | (260 | ) |   |   | $ | (12 | ) |   |   | $ | 451 |   |   |
| Natural Gas                      |       |                                         | 21         |   |   |   | 1 |   |   |   | (26 | ) |   |   | (2 | ) |   |   | (6 | ) |   |
| Oil                              |       |                                         | 83         |   |   |   | — |   |   |   | (10 | ) |   |   | (29 | ) |   |   | 44 |   |   |
| Coal                             |       |                                         | 13         |   |   |   | — |   |   |   | (3 | ) |   |   | — |   |   |   | 10 |   |   |
| Other, including  credit reserve |       |                                         | (5         | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (5 | ) |   |
| Total                            |       |                                         | $          | 731 |   |   |   | $ | 105 |   |   |   | $ | (299 | ) |   |   | $ | (43 | ) |   |   | $ | 494 |   |   |

 

**Value at Risk**

Our Risk Management Policy prohibits the trading ofcertain products, e.g., natural gas liquids and pulp and paper and containslimits and restrictions related to our asset management and proprietary tradingactivities.

We manage the price risk associated with assetmanagement activities through a variety of methods. Our Risk Management Policyrequires that asset management activities are restricted to only thoseactivities that are risk-reducing in nature. To ensure compliance with thisrestriction, each transaction is classified as either a conversion spreadtransaction or fuel oil management transaction. Each conversion spreadtransaction is tested at the transaction level to ensure that each individualtransaction executed is risk reducing relative to the overall asset position.Fuel oil management activities include management of physical fuel oil burns,physical fuel oil infrastructure and time and product spread positions. Whilethese fuel oil activities are designed primarily to manage the risk associatedwith physical specifications and availability of fuel oil for the power plants,at any given time the fuel oil portfolio contains open market price risk. Eachindividual fuel oil transaction is not tested for risk reduction, but theseactivities are tested in aggregate to ensure that the overall activity is riskreducing. While the net result of these transactions is risk reducing, thetiming of the roll-off could result in volatility in the gross margin results.To ensure that fuel oil management activities are risk-reducing in aggregate, aVaR limit of $5 million was established in the Risk Management Policy effectiveDecember 14, 2006.

The average VaR of our fuel oil management activities,using a five day holding period and a 95% confidence interval, was $2 millionfor the year ended December 31, 2006, and the VaR at December 31,2006 was $2 million. If we assumed VaR levels using a one-day holding periodfor all positions in our fuel oil management portfolio, based on a 95%confidence interval, our average portfolio VaR for the year ended December 31,2006 was $1 million and the VaR at December 31, 2006, was $1 million. ThisVaR control was initiated on December 14, 2006, and actual daily lossversus one-day VaR calculations are not available for the calendar year.

76

----

Our Risk Management Policy sets a VaR limit withrespect to our proprietary trading activities of $7.5 million. See “CriticalAccounting Policies and Estimates” for accounting treatment for assetmanagement and proprietary trading activities.

The average VaR for ourproprietary trading activities, using a five-day holding period and a 95%confidence level, was $3 million for the year ended December 31,2006, and the VaR at December 31, 2006, was $4 million. If we assumedVaR levels using a one-day holding period for all positions in our proprietarytrading portfolio, based on a 95% confidence level, our average portfolio VaRfor the year ended December 31, 2006, was $1 million and the VaR at December 31,2006, was $2 million. During the year ended December 31, 2006, theactual daily loss on a fair value basis exceeded the corresponding one-day VaRcalculation 14 times, which is reasonable given our 95% confidence level.

***Interest Rate Risk***

We have two loans that providefor a variable rate of interest. Interest expense on such borrowings issensitive to changes in the market rate of interest.

Ourtotal debt from continuing operations is subject to variable interest ratesthrough either the Mirant North America Term Loan or Revolving credit facility.Assuming they are fully drawn, this debt totals approximately $1.5 billion. A1% per annum increase in the average market rate would result in an increase inour annual interest expense of approximately $15 million for continuingoperations.

***Credit Risk***

Credit risk represents theloss that we would incur if a counterparty failed to perform under itscontractual obligations. We have established controls and procedures in ourRisk Management Policy to determine and monitor the creditworthiness ofcustomers and counterparties. Our credit policies are established and monitoredby the Risk Oversight Committee. The Risk Oversight Committee includes theChief Financial Officer and management’s representatives from severalfunctional areas. We measure credit risk as the loss we would record if ourcustomers failed to perform pursuant to the terms of their contractualobligations less the value of collateral held by us, if any, to cover such losses.We use published ratings of customers, as well as our internal analysis, toguide us in the process of setting credit levels, risk limits and contractualarrangements including master netting agreements. Where external ratings arenot available, we rely on our internal assessments of customers.

***Collection Risk***

Once we bill a customer for the commodity delivered orhave financially settled the credit risk, we are subject to collection risk.Collection risk is similar to credit risk and collection risk is accounted forwhen we establish our allowance for bad debts. We manage this risk using thesame techniques and processes used in credit risk discussed above.

77

----

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

**MIRANTAMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)**

**DECEMBER31, 2006 CONSOLIDATED STATEMENT OF OPERATIONSandDECEMBER 31, 2005 and 2004, COMBINED STATEMENTS OF OPERATIONS**

| ** **                                                                                                                         | ** ** | **For the Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                         | ** ** | **(in millions)**                                        | ** ** |
| Operating  revenues—affiliate                                                                                                 | ** ** | **$**                                                         | **70**     |   | $ | 159 |   | $ | 442 |   |
| Operating  revenues—nonaffiliate                                                                                              | ** ** | **3,203**                                                     |       | 2,808 |   | 3,023 |   |
| Total operating revenues                                                                                                           | ** ** | **3,273**                                                     |       | 2,967 |   | 3,465 |   |
| Cost of fuel,  electricity, and other products—affiliate                                                                      | ** ** | **133**                                                       |       | 187 |   | 131 |   |
| Cost of fuel,  electricity, and other products—nonaffiliate                                                                   | ** ** | **1,180**                                                     |       | 1,945 |   | 2,253 |   |
| Total cost of fuel, electricity, and other products                                                                                | ** ** | **1,313**                                                     |       | 2,132 |   | 2,384 |   |
| **Gross  Margin**                                                                                                                  | ** ** | **1,960**                                                     |       | 835 |   | 1,081 |   |
| Operations and  maintenance—affiliate, including restructuring charges of $1, $3 and $5 in  2006, 2005 and 2004, respectively | ** ** | **274**                                                       |       | 287 |   | 318 |   |
| Operations and  maintenance—nonaffiliate                                                                                      | ** ** | **277**                                                       |       | 375 |   | 341 |   |
| Depreciation and  amortization                                                                                                     | ** ** | **122**                                                       |       | 115 |   | 112 |   |
| Impairment losses                                                                                                                  | ** ** | **119**                                                       |       | — |   | 2 |   |
| Loss (gain) on  sales of assets, net                                                                                               | ** ** | **(9**                                                        | **)**      | (1 | ) | 62 |   |
| Total operating expenses                                                                                                           | ** ** | **783**                                                       |       | 776 |   | 835 |   |
| **Operating  Income**                                                                                                              | ** ** | **1,177**                                                     |       | 59 |   | 246 |   |
| **Other  Expense (Income), net:**                                                                                                  |       |                                                          |       |   |   |   |   |
| Interest  expense—affiliate                                                                                                   | ** ** | **—**                                                    |       | 23 |   | 8 |   |
| Interest expense—nonaffiliate                                                                                                 | ** ** | **289**                                                       |       | 759 |   | 4 |   |
| Interest  income—affiliate                                                                                                    | ** ** | **(1**                                                        | **)**      | — |   | — |   |
| Interest  income—nonaffiliate                                                                                                 | ** ** | **(39**                                                       | **)**      | (6 | ) | (2 | ) |
| Gain on sales of  investment, net                                                                                                  | ** ** | **(74**                                                       | **)**      | (44 | ) | — |   |
| Other, net                                                                                                                         | ** ** | **(30**                                                       | **)**      | (3 | ) | (10 | ) |
| Total other expense (income), net                                                                                                  | ** ** | **145**                                                       |       | 729 |   | — |   |
| **Income  (Loss) from Continuing Operations before Reorganization Items and Income  Taxes**                                        | ** ** | **1,032**                                                     |       | (670 | ) | 246 |   |
| Reorganization  items, net                                                                                                         | ** ** | **(163**                                                      | **)**      | 85 |   | 138 |   |
| Provision  (benefit) for income taxes                                                                                              | ** ** | **5**                                                         |       | 5 |   | (15 | ) |
| **Income (Loss)  from Continuing Operations**                                                                                      | ** ** | **1,190**                                                     |       | (760 | ) | 123 |   |
| **Income  (Loss) from Discontinued Operations, net**                                                                               | ** ** | **10**                                                        |       | (3 | ) | (17 | ) |
| **Income  (Loss) before Cumulative Effect of Change in Accounting Principles**                                                     | ** ** | **1,200**                                                     |       | (763 | ) | 106 |   |
| Cumulative effect  of change in accounting principles, net of taxes                                                                |       | —                                                        |       | (16 | ) | — |   |
| **Net Income (Loss)**                                                                                                              | ** ** | **$**                                                         | **1,200**  |   | $ | (779 | ) | $ | 106 |   |

 

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

78

----

**MIRANTAMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)**

**CONSOLIDATEDBALANCE SHEETS**

| ** **                                                                                     | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| ** **                                                                                     | ** ** | **(in millions)**        | ** ** |
| **ASSETS**                                                                                     |       |                          |       |   |   |
| **Current Assets:**                                                                            |       |                          |       |   |   |
| Cash and cash equivalents                                                                      | ** ** | **$**                         | **753**    |   | $ | 424 |   |
| Funds on deposit                                                                               | ** ** | **233**                       |       | 1,540 |   |
| Receivables:                                                                                   |       |                          |       |   |   |
| Affiliate                                                                                      | ** ** | **12**                        |       | 21 |   |
| Nonaffiliate, less allowance for uncollectibles of $2  and $10 for 2006 and 2005, respectively | ** ** | **371**                       |       | 578 |   |
| Price risk management assets—affiliate                                                    | ** ** | **3**                         |       | — |   |
| Price risk management assets—nonaffiliate                                                 | ** ** | **728**                       |       | 603 |   |
| Prepaid rent and other payments                                                                | ** ** | **131**                       |       | 134 |   |
| Inventories                                                                                    | ** ** | **288**                       |       | 275 |   |
| Investment in securities available for sale                                                    |       | —                        |       | 30 |   |
| Assets held for sale                                                                           | ** ** | **519**                       |       | 543 |   |
| Total current assets                                                                           | ** ** | **3,038**                     |       | 4,148 |   |
| **Property, Plant and Equipment, net**                                                         | ** ** | **2,187**                     |       | 2,295 |   |
| **Noncurrent Assets:**                                                                         |       |                          |       |   |   |
| Intangible assets, net                                                                         | ** ** | **212**                       |       | 221 |   |
| Price risk management assets—affiliate                                                    | ** ** | **1**                         |       | — |   |
| Price risk management assets—nonaffiliate                                                 | ** ** | **104**                       |       | 105 |   |
| Prepaid rent                                                                                   | ** ** | **218**                       |       | 208 |   |
| Funds on deposit                                                                               | ** ** | **6**                         |       | 5 |   |
| Debt issuance costs, net                                                                       | ** ** | **59**                        |       | 37 |   |
| Other                                                                                          | ** ** | **12**                        |       | 1 |   |
| Total noncurrent assets                                                                        | ** ** | **612**                       |       | 577 |   |
| **Total assets**                                                                               | ** ** | **$**                         | **5,837**  |   | $ | 7,020 |   |
| **LIABILITIES AND EQUITY**                                                                     |       |                          |       |   |   |
| **Current Liabilities:**                                                                       |       |                          |       |   |   |
| Notes payable—affiliate                                                                   | ** ** | **$**                         | **13**     |   | $ | 21 |   |
| Current portion of long-term debt                                                              | ** ** | **141**                       |       | 3 |   |
| Claims payable and estimated claims accrual                                                    | ** ** | **5**                         |       | 1,831 |   |
| Accounts payable and accrued liabilities                                                       | ** ** | **329**                       |       | 483 |   |
| Payable to affiliate                                                                           | ** ** | **48**                        |       | 305 |   |
| Price risk management liabilities—affiliate                                               | ** ** | **13**                        |       | 5 |   |
| Price risk management liabilities—nonaffiliate                                            | ** ** | **286**                       |       | 791 |   |
| Accrued property taxes                                                                         | ** ** | **75**                        |       | 184 |   |
| Other                                                                                          | ** ** | **27**                        |       | 16 |   |
| Total current liabilities                                                                      | ** ** | **937**                       |       | 3,639 |   |
| **Noncurrent Liabilities:**                                                                    |       |                          |       |   |   |
| Long-term debt                                                                                 | ** ** | **3,131**                     |       | 2,579 |   |
| Price risk management liabilities—affiliate                                               | ** ** | **4**                         |       | — |   |
| Price risk management liabilities—nonaffiliate                                            | ** ** | **39**                        |       | 27 |   |
| Asset retirement obligations                                                                   | ** ** | **41**                        |       | 33 |   |
| Other                                                                                          | ** ** | **7**                         |       | 5 |   |
| Total noncurrent liabilities                                                                   | ** ** | **3,222**                     |       | 2,644 |   |
| **Liabilities Subject to Compromise**                                                          | ** ** | **34**                        |       | 34 |   |
| **Commitments and Contingencies**                                                              |       |                          |       |   |   |
| **Equity:**                                                                                    |       |                          |       |   |   |
| Member’s interest                                                                         | ** ** | **1,983**                     |       | 995 |   |
| Preferred stock in affiliate                                                                   | ** ** | **(339**                      | **)**      | (319 | ) |
| Accumulated other comprehensive income                                                         |       | —                        |       | 27 |   |
| Total equity                                                                                   | ** ** | **1,644**                     |       | 703 |   |
| **Total  liabilities and equity**                                                              | ** ** | **$**                         | **5,837**  |   | $ | 7,020 |   |

 

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

79

----

**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES (Wholly-Owned Indirect Subsidiary of Mirant Corporation)**

**DECEMBER 31, 2006CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME (LOSS)ANDDECEMBER 31, 2005 and 2004 COMBINED STATEMENTS OF EQUITY (DEFICIT) ANDCOMPREHENSIVE INCOME (LOSS)**

**(in millions)**

| ** **                                                                                     | ** ** | ** **        | ** ** | ** **        | ** ** | ** **         | ** ** | **Accumulated**   | ** ** | ** **                    | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|-------------------------------|------------|
| ** **                                                                                     | ** ** | ** **        | ** ** | **Preferred**     | ** ** | ** **         | ** ** | **Other**         | ** ** | ** **                    | ** ** |
| ** **                                                                                     | ** ** | **Member’s** | ** ** | **Stock in** | ** ** | **Investment**     | ** ** | **Comprehensive** | ** ** | **Comprehensive**             | ** ** |
| ** **                                                                                     | ** ** | **Interest**      | ** ** | **Affiliate**     | ** ** | **by Mirant** | ** ** | **Income**        | ** ** | **Income / (Loss)** | ** ** |
| **Balance,  December 31, 2003**                                                           |       |              | $          | —            |       |               |       | $                 | —     |                          |       |   | $ | (439 | ) |   |   | $ | — |   |   |   |   |   |   |
| Net income                                                                                     |       |              | —     |              |       |               | —     |              |       |                          | 106        |   |   |   | — |   |   |   |   |   |   |
| Capital  contributions—payments received from Mirant Americas under make-whole  agreement |       |              | —     |              |       |               | —     |              |       |                          | 7          |   |   |   | — |   |   |   |   |   |   |
| **Balance,  at December 31, 2004**                                                        |       |              | —     |              |       |               | —     |              |       |                          | (326       | ) |   |   | — |   |   |   |   |   |   |
| Net loss                                                                                       |       |              | —     |              |       |               | —     |              |       |                          | (779       | ) |   |   | — |   |   |   | $ | (779 | ) |   |
| Contribution of  net assets and liabilities from Mirant under the Plan                         |       |              | —     |              |       |               | —     |              |       |                          | 1,781      |   |   |   | — |   |   |   | — |   |   |
| Other  comprehensive income                                                                    |       |              | —     |              |       |               | —     |              |       |                          | —     |   |   |   | 27 |   |   |   | 27 |   |   |
| Comprehensive  loss                                                                            |       |              |       |              |       |               |       |              |       |                          |       |   |   |   |   |   |   |   | (752 | ) |   |
| Change in member  pursuant to the Plan                                                         |       |              | 995        |              |       |               | (319       | )                 |       |                          | (676       | ) | ** ** | ** ** | **—** |   |   |   |   |   |   |
| **Balance,  at December 31, 2005**                                                        |       |              | 995        |              |       |               | (319       | )                 | ** ** | ** **                    | **—** |   |   |   | 27 |   |   |   |   |   |   |
| Net income                                                                                     | ** ** | ** **        | **1,200**  | ** **        | ** ** | ** **         | **—** | ** **        | ** ** | ** **                    | **—** |   | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **1,200** | ** ** | ** ** |
| Amortization of  discount on preferred stock in affiliate                                      | ** ** | ** **        | **20**     | ** **        | ** ** | ** **         | **(20**    | **)**             | ** ** | ** **                    | **—** |   | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** |
| Distribution to  member                                                                        | ** ** | ** **        | **(236**   | **)**             | ** ** | ** **         | **—** | ** **        | ** ** | ** **                    | **—** |   | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** |
| Capital  contributions                                                                         | ** ** | ** **        | **4**      | ** **        | ** ** | ** **         | **—** | ** **        | ** ** | ** **                    | **—** |   | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** |
| Other  comprehensive loss                                                                      | ** ** | ** **        | **—** | ** **        | ** ** | ** **         | **—** | ** **        | ** ** | ** **                    | **—** |   | ** ** | ** ** | **(27** | **)** | ** ** | ** ** | **(27** | **)** | ** ** |
| Comprehensive  income                                                                          | ** ** | ** **        | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **                    | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **1,173** | ** ** | ** ** |
| **Balance, at December 31,  2006**                                                        | ** ** | ** **        | **$**      | **1,983**         | ** ** | ** **         | ** ** | **$**             | **(339**   | **)**                         | ** ** | ** ** | **$** | **—** |   | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

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

80

----

**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES (Wholly-Owned Indirect Subsidiary of Mirant Corporation)**

**DECEMBER31, 2006 CONSOLIDATED STATEMENT OF CASH FLOWSandDECEMBER 31, 2005 AND 2004 COMBINED STATEMENTS OF CASH FLOWS**

**(in millions)**

| ** **                                                                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows from Operating Activities:**                                                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                               | ** ** | **$**                                       | **1,200**  |   | $ | (779 | ) | $ | 106 |   |
| Income (loss) from  discontinued operations                                                                                     | ** ** | **10**                                      |       | (3 | ) | (17 | ) |
| Income (loss) from  continuing operations                                                                                       | ** ** | **1,190**                                   |       | (776 | ) | 123 |   |
| Adjustments to reconcile  net income (loss) from continuing operations to net cash provided by (used  in) operating activities: |       |                                        |       |   |   |   |   |
| Equity income in  affiliates, net of dividends                                                                                  | ** ** | **—**                                  | ** ** | **—** |   | 1 |   |
| Depreciation and  amortization                                                                                                  | ** ** | **132**                                     |       | 120 |   | 112 |   |
| Amortization of  transition power agreements and other obligations                                                              | ** ** | **—**                                  |       | (9 | ) | (344 | ) |
| Impairment charges                                                                                                              | ** ** | **119**                                     |       | — |   | 2 |   |
| Non-cash  post-petition interest expense                                                                                        | ** ** | **—**                                  |       | 746 |   | — |   |
| Loss (gain) on  sales of assets and investments                                                                                 | ** ** | **(83**                                     | **)**      | (43 | ) | 65 |   |
| Cumulative effect  of changes in accounting principles                                                                          | ** ** | **—**                                  |       | 16 | ** ** | **—** | ** ** |
| Non-cash charges  for reorganization items                                                                                      | ** ** | **1**                                       |       | 8 |   | 99 |   |
| Effects of the  Plan                                                                                                            | ** ** | **—**                                  |       | (30 | ) | **—** | ** ** |
| Price risk  management activities, net                                                                                          | ** ** | **(609**                                    | **)**      | 23 |   | (172 | ) |
| Non-cash gain on  property tax settlement                                                                                       | ** ** | **(71**                                     | **)**      | — |   | — |   |
| Deferred income  tax                                                                                                            | ** ** | **—**                                  |       | (11 | ) | 1 |   |
| Other, net                                                                                                                      | ** ** | **(23**                                     | **)**      | 2 |   | (2 | ) |
| Changes in operating  assets and liabilities:                                                                                   |       |                                        |       |   |   |   |   |
| Affiliate accounts  receivable, net                                                                                             | ** ** | **9**                                       |       | (296 | ) | (17 | ) |
| Customer accounts  receivable, net                                                                                              | ** ** | **115**                                     |       | (112 | ) | 51 |   |
| Prepaid rent                                                                                                                    | ** ** | **(9**                                      | **)**      | (9 | ) | (23 | ) |
| Inventories                                                                                                                     | ** ** | **(11**                                     | **)**      | (17 | ) | (63 | ) |
| Other assets                                                                                                                    | ** ** | **460**                                     |       | (376 | ) | (33 | ) |
| Accounts payable  and accrued liabilities                                                                                       | ** ** | **(210**                                    | **)**      | 117 |   | (105 | ) |
| Settlement of  claims payable                                                                                                   | ** ** | **(765**                                    | **)**      | 404 | ** ** | **—** | ** ** |
| Payable to  affiliate                                                                                                           | ** ** | **(7**                                      | **)**      | — |   | 117 |   |
| Property taxes  accrued, affiliate                                                                                              | ** ** | **—**                                  |       | — |   | (14 | ) |
| Property taxes accrued,  nonaffiliate                                                                                           | ** ** | **55**                                      |       | 25 |   | 48 |   |
| Other liabilities                                                                                                               | ** ** | **37**                                      |       | 10 |   | (15 | ) |
| Total adjustments                                                                                                               | ** ** | **(860**                                    | **)**      | 568 |   | (292 | ) |
| Net cash provided  by (used in) operating activities of continuing operations                                                   | ** ** | **330**                                     |       | (208 | ) | (169 | ) |
| Net cash provided  by operating activities of discontinued operations                                                           | ** ** | **32**                                      |       | 16 |   | 18 |   |
| Net cash provided  by (used in) operating activities                                                                            | ** ** | **362**                                     |       | (192 | ) | (151 | ) |
| **Cash Flows from Investing Activities:**                                                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                                                           | ** ** | **(127**                                    | **)**      | (96 | ) | (86 | ) |
| Repayments of  notes receivable from affiliate                                                                                  | ** ** | **—**                                  |       | 10 |   | 325 |   |
| Repayments of  notes receivable from nonaffiliate                                                                               | ** ** | **—**                                  | ** ** | **—** |   | 1 |   |
| Proceeds from the  sales of assets and investments, net                                                                         | ** ** | **97**                                      |       | 52 |   | 42 |   |
| Net cash provided  by (used in) investing activities of continuing operations                                                   | ** ** | **(30**                                     | **)**      | (34 | ) | 282 |   |
| Net cash used in  investing activities of discontinued operations                                                               | ** ** | **(6**                                      | **)**      | (4 | ) | (2 | ) |
| Net cash provided  by (used in) investing activities                                                                            | ** ** | **(36**                                     | **)**      | (38 | ) | 280 |   |
| **Cash Flows from Financing Activities:**                                                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  issuance of debt-affiliate                                                                                       | ** ** | **—**                                  |       | 21 | ** ** | **—** | ** ** |
| Proceeds from  issuance of long-term debt-nonaffiliate                                                                          | ** ** | **2,015**                                   | ** ** | **—** | ** ** | **—** | ** ** |
| Repayment of  debt-affiliate                                                                                                    | ** ** | **(9**                                      | **)**      | **—** | ** ** | **—** | ** ** |
| Repayment of  long-term debt-nonaffiliate                                                                                       | ** ** | **(474**                                    | **)**      | (3 | ) | (2 | ) |
| Payments received  under make-whole agreement                                                                                   | ** ** | **—**                                  | ** ** | **—** |   | 7 |   |
| Settlement of member’s  obligation under the Plan                                                                          | ** ** | **(990**                                    | **)**      | **—** | ** ** | **—** | ** ** |
| Debt issuance  costs                                                                                                            | ** ** | **(51**                                     | **)**      | **—** | ** ** | **—** | ** ** |
| Payment to  affiliate under the Plan                                                                                            | ** ** | **(250**                                    | **)**      | **—** | ** ** | **—** | ** ** |
| Distribution to  member                                                                                                         | ** ** | **(236**                                    | **)**      | **—** | ** ** | **—** | ** ** |
| Net cash provided  by financing activities of continuing operations                                                             | ** ** | **5**                                       |       | 18 |   | 5 |   |
| Net cash used in  financing activities of discontinued operations                                                               | ** ** | **(2**                                      | **)**      | **—** |   | (1 | ) |
| Net cash provided  by financing activities                                                                                      | ** ** | **3**                                       |       | 18 |   | 4 |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                                                       | ** ** | **329**                                     |       | (212 | ) | 133 |   |
| **Cash and  Cash Equivalents, beginning of period**                                                                             | ** ** | **424**                                     |       | 636 |   | 503 |   |
| **Cash and  Cash Equivalents, end of period**                                                                                   | ** ** | **$**                                       | **753**    |   | $ | 424 |   | $ | 636 |   |
| **Supplemental Cash Flow Disclosures:**                                                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for  interest, net of amounts capitalized                                                                             | ** ** | **$**                                       | **220**    |   | $ | 29 |   | $ | 13 |   |
| Cash paid for  claims and professional fees from bankruptcy                                                                     | ** ** | **$**                                       | **1,773**  |   | $ | 103 |   | $ | 60 |   |
| Refunds received  from income tax                                                                                               | ** ** | **$**                                       | **—** |   | $ | — |   | $ | (2 | ) |
| **Financing Activity:**                                                                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  contribution—non-cash                                                                                             | ** ** | **$**                                       | **4**      |   | $ | — |   | $ | — |   |

 

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

81

----

**MIRANT AMERICAS GENERATION AND SUBSIDIARIESNOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSDecember 31, 2006, 2005 and 2004**

**1.**                 Description ofBusiness and Organization

Mirant Americas Generation is a national independentpower producer and an indirect wholly-owned subsidiary of Mirant. MirantAmericas Generation generates revenues primarily through the production ofelectricity. Mirant was incorporated in Delaware on September 23, 2005,and is the successor to a corporation of the same name that was formed inDelaware on April 3, 1993. This succession occurred by virtue of thetransfer of substantially all of Old Mirant’s assets to New Mirant inconjunction with Old Mirant’s emergence from bankruptcy protection on January 3,2006. Old Mirant was then renamed and transferred to a trust that is notaffiliated with New Mirant.

Pursuant to the Plan of Reorganization (the “Plan”)that was approved in conjunction with Mirant’s emergence from bankruptcy, in December 2005Mirant contributed its interest in Mirant Potomac River and Mirant Peaker tothe Company’s indirect wholly-owned subsidiary, Mirant Mid-Atlantic, itsinterest in Zeeland, and its interest in the following: Mirant Americas EnergyMarketing, Mirant Americas Development, Inc., Mirant Americas ProductionCompany, Mirant Americas Energy Capital, LLC, Mirant Americas Energy CapitalAssets, LLC, Mirant Americas Development Capital, LLC, Mirant Americas RetailEnergy Marketing, LP, and Mirant Americas Gas Marketing, LLC (collectively, the“Trading Debtors”) to Mirant North America. All of the contributed subsidiarieswere under the common control of Mirant and are collectively referred to as the“Contributed Subsidiaries.” On January 31, 2006, the trading and marketingbusiness of the Trading Debtors was transferred to Mirant Energy Trading, awholly-owned subsidiary of Mirant North America. After these transfers tookplace, the Trading Debtors were transferred to a trust created under the Planthat is not affiliated with the Company.

The accompanying consolidated financial statementsinclude the accounts of Mirant Americas Generation. The accompanying 2005 and2004 combined financial statements present the results of operations and cashflows of the Company based on the assets, liabilities and operations of thepredecessor Mirant Contributed Subsidiaries. The effects of the Plan arereflected as of December 31, 2005.

The Company produces and sells substantially all ofthe output from its generating facilities in the forward and spot markets andthe remainder under contracts with third parties. The Company uses derivativefinancial instruments, such as commodity forwards, futures, options and swapsto manage its exposure to fluctuations in electric energy and fuel prices. TheCompany is a Delaware limited liability company. As of December 31, 2006,the Company owned or leased 12,099 MW of electric generating capacity.

In the third quarter of 2006, Mirant commenced auctionprocesses to sell certain natural gas-fired plants, including the Company’sZeeland (903 MW) and Bosque (546 MW) plants. On January 15, 2007, theCompany entered into a definitive purchase and sale agreement with a subsidiaryof LS Power Equity Partners I, L.P., LS Power Equity Partners II, L.P. andcertain other affiliated funds, (collectively, “LS Power”), for the sale of theCompany’s Zeeland and Bosque natural gas-fired plants. The net proceeds fromthe sales are expected to be approximately $500 million, after transactioncosts. The transaction is expected to close in the second quarter of 2007 afterthe satisfaction of certain customary conditions. See Note 3 for additionalinformation related to discontinued operations.

After giving effect to the aforementioned sales,Mirant Americas Generation’s continuing operations of 10,650 MW consist of theownership, long-term lease and operation of power generation facilities 

82

----

located in markets in theMid-Atlantic and Northeast regions of the United States and in California, andenergy trading and marketing operations in Atlanta, Georgia.

The Company has a number of service agreements forlabor and administrative services with Mirant Services. In addition, MirantEnergy Trading, and previously Mirant Americas Energy Marketing, providesservices to other Mirant affiliates related to the sale of electric power andthe procurement of fuel and emissions allowances. These agreements arediscussed further in Note 9.

**2.**                 Accounting andReporting Policies

***Basis ofPresentation***

The accompanying consolidated and combined financialstatements of Mirant Americas Generation have been prepared in accordance withGAAP.

The accompanying consolidated and combined financialstatements include the accounts of Mirant Americas Generation and itswholly-owned subsidiaries and the Contributed Subsidiaries as discussed in Note1 and have been prepared from the historical records maintained by MirantAmericas Generation, its subsidiaries and the Contributed Subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated.

In accordance with SFAS No. 144, the results ofoperations of the Company’s assets to be disposed of have been reclassified todiscontinued operations and the associated assets and liabilities have beenreclassified to assets and liabilities held for sale for all periods presented.In addition, the accompanying consolidated and combined statements of cashflows present the cash flows from discontinued operations in each of the threemajor categories (operating, investing and financing activities). The combined statementsof cash flows for the years ended December 31, 2005 and 2004, were revisedto conform to this presentation. See Note 3 for additional informationregarding discontinued operations.

Certain prior periodamounts have been reclassified to conform to the current year financialstatement presentation.

***Use of Estimates***

The preparation ofconsolidated and combined financial statements in conformity with GAAP requiresmanagement to make a number of estimates and assumptions that affect thereported amounts of assets and liabilities and disclosures of contingent assetsand liabilities at the date of the consolidated and combined financialstatements and the reported amounts of revenues and expenses during the period.Actual results could differ from those estimates. The Company’s significantestimates include:

·       determining the fair valueof certain derivative contracts;

·       determiningthe value of the Company’s asset retirement obligations;

·       estimatingfuture cash flows in determining impairments of long-lived assets, goodwill andindefinite-lived intangible assets; and

·       estimating losses to berecorded for contingent liabilities.

***Revenue Recognition***

Mirant Americas Generationrecognizes affiliate and nonaffiliate revenue when electric power is delivered,capacity is made available or ancillary services are provided to an affiliateor to a customer pursuant to contractual commitments that specify volume, priceand delivery requirements, and collection of such revenue is probable. Somesales of energy are based on economic dispatch, or “as-ordered” by an ISO basedon member participation agreements, but without an underlying contractualcommitment. ISO revenues and revenues for sales of energy based oneconomic-dispatch are recorded on the basis of MWh 

83

----

delivered,at the relevant day-ahead or real-time prices. When a long-term electric poweragreement conveys to the buyer of the electric power the right to use thegenerating capacity of Mirant Americas Generation’s plant, that agreement isevaluated to determine if it is a lease of the generating facility rather thana sale of electric power. Operating lease revenue for the Company’s generatingunits is normally recorded as capacity revenue and included in generationrevenues in the consolidated and combined statements of operations.

***Derivative Financial Instruments***

Derivative financial instruments are recorded in theaccompanying consolidated balance sheets at fair value as either price riskmanagement assets or liabilities-affiliate or price risk management assets orliabilities-nonaffiliate, and changes in fair value are recognized currently inearnings, unless specific hedge accounting criteria are met. If the derivativeis designated as a fair value hedge, the changes in the fair value of thederivative and of the hedged item attributable to the hedged risk arerecognized currently in earnings. If the derivative is designated as a cashflow hedge, the changes in the fair value of the derivative are recorded in OCIand the realized gains and losses related to these derivatives are recognizedin earnings in the same period as the settlement of the underlying hedgedtransaction. Any ineffectiveness relating to cash flow hedges is recognizedcurrently in earnings. The assets and liabilities related to derivative instrumentsthat have not been designated as hedges for accounting purposes are included inprice risk management assets and liabilities-affiliate and price riskmanagement assets and liabilities-nonaffiliate. For the years ended December 31,2006, 2005 and 2004, the Company did not have any derivative instruments thatit had designated as fair value or cash flow hedges for accounting purposes.Mirant North America’s derivative financial instruments are categorized by theCompany, based on the business objective the instrument is expected to achieve:asset management or proprietary trading. All derivative contracts are recordedat fair value, except for a limited number of transactions that qualify for thenormal purchases or normal sales exclusion from SFAS No. 133 and thereforequalify for the use of accrual accounting.

As the Company’s commodityderivative financial instruments have not been designated as hedges foraccounting purposes, changes in such instruments’ fair values are recognizedcurrently in earnings. For asset management activities, changes in fair valueof electricity derivative financial instruments are reflected in generationrevenue-affiliate and nonaffiliate and changes in fair value of fuel derivativecontracts are reflected in cost of fuel, electricity and otherproducts-affiliate and nonaffiliate in the accompanying consolidated andcombined statements of operations. Changes in the fair value and settlements ofcontracts for proprietary trading activities are recorded as net operating revenueaffiliate and nonaffiliate in the accompanying consolidated and combinedstatements of operations.

***Concentration of Revenues***

In2006, 2005 and 2004, the Company earned a significant portion of its operatingrevenue and gross margin from the PJM energy market, where its MirantMid-Atlantic generation facilities are located. Mirant Mid-Atlantic’s revenuesand gross margins as a percentage of the Company’s total revenues and grossmargin from continuing operations are as follows:

| ** **    | ** ** | **Years Ended December 31,** | ** ** |
|---------------|------------|----------------------------------------|------------|
| ** **    | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues      |       |                                   | 58         | % |   |   | 40 | % |   |   | 29 | % |   |
| Gross margins |       |                                   | 67         | % |   |   | 54 | % |   |   | 46 | % |   |

 

84

----

***Concentration of Labor Subject to CollectiveBargaining Agreements***

Personnel at the Company’sfacilities are employed through Mirant Services. As of December 31, 2006,approximately 64% of the employees of the Company’s continuing operations aresubject to collective bargaining agreements.

***Cash and Cash Equivalents***

The Company considers allshort-term investments with an original maturity of three months or less tobe cash equivalents.

***Restricted Cash***

Restricted cash isincluded in current and noncurrent assets as funds on deposit in theaccompanying consolidated balance sheets. As of December 31, 2006, currentand noncurrent funds on deposit are $233 million and $6 million, respectively.As of December 31, 2005, current and noncurrent funds on deposit are $1.5billion and $5 million, respectively. Restricted cash includes deposits withbrokers and cash collateral posted with third parties to support the Company’s commoditypositions as well as a $200 million deposit Mirant North America posted underits senior secured term loan to support the issuance of letters of credit. Inaddition, as of December 31, 2005, restricted cash included $853 millionof escrowed proceeds from a bond offering in December 2005. These amountswere released from escrow on January 3, 2006.

***Inventory***

Inventory consistsprimarily of oil, coal, purchased emissions allowances and materials andsupplies. Inventory, including commodity trading inventory, is generally statedat the lower of cost or market value. Fuel stock is removed from the inventoryaccount as it is used in the production of electricity. Materials and suppliesare removed from the inventory account when they are used for repairs,maintenance or capital projects.

***Emissions Allowances***

Purchased emissions allowances are recorded ininventory at the lower of cost or market value. Cost is computed on an averagecost basis. Purchased emissions allowances for SO2 and NOx are removed frominventory and charged to cost of fuel, electricity and other products in theaccompanying consolidated and combined statements of operations as they areutilized against emissions volumes that exceed the allowances granted to theCompany by the EPA.

Emissions allowances granted by the EPA related togeneration facilities owned by the Company are recorded at fair value at thedate of the acquisition of the facility and are included in property, plant andequipment. These emissions allowances are depreciated on a straight-line basisover the estimated useful life of the respective generation facility, whichranges from 14 to 34 years, and are charged to depreciation and amortizationexpense in the accompanying consolidated and combined statements of operations.

Emissions allowances granted by the EPA related togeneration facilities leased by the Company are recorded at fair value at thecommencement of the lease in other intangible assets. These emissionsallowances are amortized on a straight-line basis over the term of the lease,and are charged to depreciation and amortization expense in the accompanyingconsolidated and combined statements of operations. In addition the Companyacquired emissions allowances for future periods as part of the CaliforniaSettlement. These allowances are included in other intangible assets and willbe amortized over the periods in which they may be utilized.

The Company has determinedthat certain exchanges of emissions allowances that the Company mayperiodically transact qualify as nonmonetary exchanges under SFAS No. 153.

85

----

***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 equipment isdetermined using primarily composite rates. Leasehold improvements aredepreciated over the shorter of the expected life of the related equipment orthe lease term. Upon the retirement or sale of property, plant and equipment,the cost of such assets and the related accumulated depreciation are removedfrom the consolidated balance sheets. No gain or loss is recognized forordinary retirements in the normal course of business since the compositedepreciation rates used by the Company take into account the effect of interimretirements.

***Capitalization of Interest Cost***

TheCompany capitalizes interest on projects during the advanced stages ofdevelopment and during the construction period. The Company determines whichdebt instruments 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 amortized over the estimated useful life of the plant. For theyears ended December 31, 2006, 2005 and 2004, the Company incurred thefollowing interest costs on debt to nonaffiliates (in millions):

| ** **                                                           | ** ** | **For the Years  Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total interest  costs:                                               |       | $                                                         | 298        |   | $ | 759 |   |   | $ | 4 |   |   |
| Interest  capitalized and included in construction work in progress: |       | (9                                                        | )          | — |   |   | — |   |   |
| Total interest  expense—nonaffiliate:                           |       | $                                                         | 289        |   | $ | 759 |   |   | $ | 4 |   |   |

 

In the third quarter of2005, the Company determined that it was probable that contractual interest onliabilities subject to compromise from the Petition Date would be incurred forcertain claims expected to be allowed under the Plan and, accordingly, recordedapproximately $746 million of interest expense in 2005 on liabilities subjectto compromise.

***Environmental Remediation Costs***

The Company accrues forcosts associated with environmental remediation when such costs are probableand can be reasonably estimated. Accruals for estimated losses fromenvironmental remediation obligations generally are recognized no later thancompletion of the remedial feasibility study. Such accruals are adjusted asfurther information develops or circumstances change. The cost of futureexpenditures for environmental remediation obligations are discounted to theirpresent value.

***Debt Issuance Costs***

Debt issuance costs arecapitalized and amortized as interest expense on a basis that approximates theeffective interest method over the term of the related debt.

86

----

***Income Taxes***

The Company is a limited liability company treated asa branch for income tax purposes. As a result, Mirant Americas and Mirant havedirect liability for the majority of the federal and state income taxesrelating to the Company’s operations. Through December 31, 2005, the Companyhas allocated current and deferred income taxes to each regarded corporateentity of its consolidated group as if each regarded corporate entity were asingle taxpayer utilizing the asset and liability method to account for incometaxes except with respect to recognizing certain current period tax benefits.Specifically, the Company did not record current period tax benefits on eachregarded corporate entity’s ability to carry back its separate company currentyear NOL as realization of such losses is 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 NOL and tax credit carryforwards.When necessary, deferred tax assets are reduced by a valuation allowance toreflect the amount that is estimated to be recoverable. In assessing therecoverability of its deferred tax assets, the Company considers whether it islikely that some portion or all of the deferred tax assets will be realized. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date.

Several changes to the Company’s tax posture occurredas a result of the Plan. Implementation of the Plan included the conversion ofcertain of the Company’s regarded corporate entities to limited liabilitycompanies coupled with the liquidation and/or merger of certain regardedcorporate entities into other disregarded corporate entities for income taxpurposes. As a result, certain subsidiaries previously treated as regardedcorporate entities for income tax purposes have either been liquidated orconverted into disregarded entities for income tax purposes pursuant to the Plan.Additionally, certain partnerships owned by regarded corporate entities werealso liquidated, and now form part of disregarded entities for income taxpurposes. The result of the above Plan effects was to eliminate the Company’srecording of tax expense and benefit prospectively with respect to theliquidated regarded corporate entities. Furthermore, with respect to thoseliquidated regarded corporate entities, all previously existing deferred taxassets and liabilities were eliminated as of December 31, 2005. Certain ofthe Company’s other subsidiaries continue to exist as regarded corporateentities for income tax purposes, including Mirant New York, Hudson Valley GasCorporation, Mirant Kendall, and Mirant Special Procurement, Inc.

In December 2005, pursuant to the Plan, Mirantrejected and thereby eliminated the tax sharing agreement with its direct andindirect wholly owned regarded corporate entities. As a result, Mirant’s directand indirect wholly owned regarded corporate entities are no longer responsiblefor reimbursing Mirant for their intercompany tax obligations attributable totheir operations. Accordingly, the Company’s income tax receivables andpayables with Mirant or Mirant Americas were resolved pursuant to a globalsettlement under the Plan whereby intercompany receivables and payablesreceived no distribution, with the exception of income tax payables andreceivables related to Mirant New York which continues to remain in bankruptcyat December 31, 2006.

For those subsidiaries that continue to exist ascorporate regarded entities, the Company continues to allocate current anddeferred income taxes to each corporate regarded entity as if such entity werea single taxpayer utilizing the asset and liability method  to account for income taxes. To the extentthe Company provides tax expense or benefit, any related tax payable orreceivable to Mirant is reclassified to equity in the same period.

87

----

The determination of a valuation allowance requiressignificant judgment as to the generation of future taxable income duringfuture periods for which temporary differences are expected to be deductible.In making this determination, management considers all available positive andnegative evidence affecting specific deferred tax assets, including theCompany’s past and anticipated future performance, the reversal of deferred taxliabilities and the implementation of tax planning strategies.

Additionally, the Companyhas contingent liabilities related to tax uncertainties arising in the ordinarycourse of business. The Company periodically assesses its contingentliabilities in connection with these uncertainties based on the latestinformation available. For those uncertainties where it is probable that a losshas occurred and the loss or range of loss can be reasonably estimated, aliability is recognized in the financial statements. The recognition ofcontingent losses for tax uncertainties requires management to make significantassumptions about the expected outcomes of certain tax contingencies. 

***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. Such evaluations are performed in accordance with SFAS No. 144.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to the estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of an assetexceeds its estimated undiscounted future cash flows, an impairment charge is recognizedas the amount by which the carrying amount of the asset exceeds its fair value.Assets to be disposed of are separately presented in the accompanyingconsolidated balance sheets and are reported at the lower of the carryingamount or fair value less costs to sell, and are not depreciated. The assetsand liabilities of a disposal group classified as held for sale are presentedseparately in the appropriate asset and liability sections of the accompanyingconsolidated balance sheets.

***Cumulative Effect of Changes in Accounting Principles***

The Company adopted FIN47, effective December 31, 2005, related to the costs associated withconditional legal obligations to retire tangible long-lived assets. Conditionalasset retirement obligations are recorded at the fair value in the period inwhich they are incurred by increasing the carrying amount of the relatedlong-lived asset. In each subsequent period, the liability is accreted to itsfair value and the capitalized costs are depreciated over the useful life ofthe related asset. For the year ended December 31, 2005, the Companyrecorded a charge as a cumulative effect of a change in accounting principle ofapproximately $16 million, net of tax, related to the adoption of thisaccounting standard.

***Investments***

*EquityInvestment in ICE.**  *TheCompany accounted for its $6 million investment in ICE using the cost method.In the fourth quarter of 2005, ICE completed an initial public offering and theCompany’s investment was exchanged for approximately 2.8 million shares ofcommon stock of ICE. The Company sold a portion of its investment in ICE for$48 million in 2005. The Company recorded a gain on sales of investments of $44million related to this sale.

In 2006,the Company sold its remaining investment in ICE for $58 million and realizedgain of $54 million during the year. The gain was recorded as a gain on salesof investments in the consolidated statement of operations.

*New York MercantileExchange Seats.**  *In late 1998 andearly 1999, the Company acquired two seats on the New York Mercantile Exchangefor approximately $1.2 million, which were recorded as an investment in theconsolidated balance sheet at December 31, 2005. In the fourth quarter of2006, the 

88

----

Company sold itsinvestment for $20 million and recognized a gain of $19 million, which isrecorded in gain on sales of investments, net on the Company’s consolidatedstatement of operations.

***Fair Value of Financial Instruments***

SFAS No. 107 requires the disclosure of the fairvalue of all financial instruments that are not otherwise recorded at fairvalue in the financial statements. At December 31, 2006 and 2005,financial instruments recorded at contractual amounts that approximate marketor fair value include cash and cash equivalents, funds on deposit, receivablesfrom affiliate and customer accounts receivable, notes receivable-affiliate,accounts payable and accrued liabilities, payable to affiliate and notespayable-affiliate. The market values of such items are not materially sensitiveto shifts in market interest rates because of the short term to maturity ofthese instruments. At December 31, 2006 and 2005, the fair value of theCompany’s long-term accounts receivable of $1 million and $1 million, respectively,are not readily determinable due to uncertainty regarding the amount and timingof collection from the Company’s customers.

The fair value of theCompany’s long-term debt is estimated using quoted market prices whenavailable. At December 31, 2006, the carrying value of the Company’slong-term debt approximated fair value.

***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 isincluded in operations and maintenance-nonaffiliate in the accompanyingconsolidated and combined statements of operations. Payments made under theterms of the lease agreement in excess of the amount of lease expenserecognized are recorded as prepaid rent in the accompanying consolidatedbalance sheets. Prepaid rent attributable to periods beyond one year isincluded in noncurrent assets.

***Recently Adopted Accounting Standards***

In September 2005, the FASB ratified EITF 04-13,which requires companies to account for certain purchases and sales ofinventory with the same counterparty as a single transaction. The Companyadopted EITF 04-13 on April 1, 2006. The application ofEITF 04-13 has not had a material impact on the Company’s statementof operations, financial position or cash flows.

In April 2006, the FASB issued FSP FIN 46R-6.The variability that is considered in applying FIN 46R affects thedetermination of whether an entity is a VIE, which interests are variableinterests in the entity and which party, if any, is the primary beneficiary ofthe VIE. According to FSP FIN 46R-6, the variability to beconsidered should be based on the nature of the risks of the entity and thepurpose for which the entity was created. The guidance in FSP FIN 46R-6is applicable prospectively to an entity at the time a company first becomesinvolved with such entity and is applicable to all entities previously requiredto be analyzed under FIN 46R when a reconsideration event has occurredbeginning with the first reporting period after June 15, 2006.Retrospective application to the date of the initial application ofFIN 46R is permitted but not required. The Company adopted FSP FIN 46R-6on July 1, 2006, on a prospective basis. Upon adoption there was nomaterial impact on the Company’s statements of operations, financial positionor cash flows.

On September 13,2006, the SEC issued SAB No. 108, which provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.SAB No. 108 provides that a registrant should quantify errors using both abalance sheet and an income statement approach and evaluate whether eitherapproach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is 

89

----

material.SAB No. 108 is effective for fiscal years ending on or after November 15,2006. The adoption of SAB No. 108 had no material impact on the Company’sstatements of operations, financial position or cash flows.

***New Accounting Standards Not Yet Adopted***

In February 2006, the FASB issued SFAS No. 155,which allows fair value measurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation. SFAS No. 155is effective for all financial instruments acquired, issued or subject to are-measurement event beginning in the first fiscal year after September 15,2006. At the date of adoption, any difference between the total carrying amountof the existing bifurcated hybrid financial instrument and the fair value ofthe combined hybrid financial instrument will be recognized as a cumulativeeffect adjustment to beginning retained earnings. The Company will adopt SFAS No. 155on January 1, 2007. The adoption of SFAS No. 155 is not expected tohave a material impact on the Company’s statements of operations, financialposition or cash flows.

In March 2006, the FASB issued SFAS No. 156,which requires all separately recognized servicing assets and servicingliabilities to be measured initially at fair value and permits, but does notrequire, an entity to measure subsequently those servicing assets or liabilitiesat fair value. SFAS No. 156 is effective at the beginning of the firstfiscal year after September 15, 2006. The Company will adopt SFAS No. 156on January 1, 2007. All requirements for recognition and initialmeasurement of servicing assets and servicing liabilities will be appliedprospectively to transactions occurring after the adoption of this statement.The adoption of SFAS No. 156 is not expected to have a material impact onthe Company’s statements of operations, financial position or cash flows.

On July 13, 2006, the FASB issued FIN 48.FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with SFAS No. 109.FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return.

The evaluation of a tax position in accordance withFIN 48 is a two-step process. The first step is recognition based on a determinationof whether it is more-likely-than-not that a tax position will be sustainedupon examination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position. In evaluating whethera tax position has met the more-likely-than-not recognition threshold, theenterprise should presume that the position will be examined by the appropriatetaxing authority having full knowledge of all relevant information. The secondstep is to measure a tax position that meets the more-likely-than-notthreshold. The tax position is measured at the largest amount of benefit thatis greater than 50% likely of being realized upon ultimate settlement.

FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company will adopt FIN 48 on January 1,2007. Upon initial adoption, the provisions of FIN 48 will be applied toall tax positions. Only tax positions that meet the more-likely-than-notrecognition threshold at the effective date may be recognized or continue to berecognized. The Company anticipates that the balance sheetreclassification to increase member’s interest and decrease liabilities as aresult of adopting this standard is approximately $50 million. 

On June 28, 2006, the FASB ratified the EITF’sconsensus reached on EITF 06-3, which relates to the income statementpresentation of taxes collected from customers and remitted to governmentauthorities. The Task Force affirmed as a consensus on this issue that thepresentation of taxes on either a gross basis or a net basis within the scopeof EITF 06-3 is an accounting policy decision that should bedisclosed pursuant to APB No. 22. A company should disclose the amount ofthose taxes that is recognized on a gross basis in interim and annual financialstatements for each period for which an income statement is presented if thoseamounts are significant. The Company will adopt EITF 06-3 on January 1,2007. The 

90

----

adoption of EITF 06-3is not expected to have a material impact on the Company’s statements ofoperations, financial position or cash flows.

On July 13, 2006, the FASB finalized FSPFAS 13-2, which addresses how a change or projected change in thetiming of cash flows relating to income taxes generated by a leveraged leasetransaction affects the accounting by a lessor for that lease. The Company willadopt FSP FAS 13-2 on January 1, 2007. The adoption of FSP FAS13-2 is not expected to have a material impact on the Company’sstatements of operations, financial position or cash flows.

On September 8, 2006, the FASB issued FSP AUG AIR-1.FSP AUG AIR-1 permits the following methods for accounting for majormaintenance activities: direct expense, built-in overhaul and deferral. Itspecifically prohibits accruing in advance for major maintenance. The guidancein FSP AUG AIR-1 is to be applied to the first fiscal year beginningafter December 15, 2006. The Company will adopt FSP AUG AIR-1 on January 1,2007. The adoption of FSP AUG AIR-1 is not expected to have a materialimpact on the Company’s statements of operations, financial position or cashflows given that the Company currently uses the deferral or direct expensemethods of accounting for major maintenance activities.

On September 15, 2006, the FASB issued SFAS No. 157,which establishes a framework for measuring fair value in GAAP and expandsdisclosure about fair value measurements. SFAS No. 157 requires companiesto disclose the fair value of their financial instruments according to a fairvalue hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companiesare required to provide enhanced disclosure regarding fair value measurementsin the level 3 category, including a reconciliation of the beginning and endingbalances separately for each major category of assets and liabilities accountedfor at fair value. SFAS No. 157 is effective at the beginning of the firstfiscal year after November 15, 2007. The Company will adopt SFAS No. 157on January 1, 2008. At the date of adoption, the Company will evaluate thefair value of its assets and liabilities according to the hierarchy establishedby the FASB and present the required disclosures. It is also expected that theadoption of SFAS No. 157 will impact the measurement of certainliabilities to incorporate the Company’s own credit standing and the accountingfor inception gains and losses currently being deferred under EITF 02-3.The net deferred inception gains and losses at December 31, 2006, were$1.1 million. The Company has not yet determined the impact of SFAS No. 157on its statements of operations, financial position or cash flows.

On February 15, 2007,the FASB issued SFAS No. 159, which permits an entity to measure manyfinancial instruments and certain other items at fair value by electing a fairvalue option. Once elected, the fair value option may be applied on aninstrument by instrument basis, is irrevocable and is applied only to entireinstruments. SFAS No. 159 also requires companies with trading andavailable-for-sale securities to report the unrealized gains and losses forwhich the fair value option has been elected within earnings for the periodpresented. SFAS No. 159 is effective at the beginning of the first fiscalyear after November 15, 2007. The Company will adopt SFAS No. 159 on January 1,2008. The Company has not yet determined the impact of SFAS No. 159 on itsstatements of operations, financial position or cash flows.

**3.**                 Dispositions

***Overview***

Assets and liabilities held for sale includesdiscontinued operations and other assets that the Company expects to dispose ofin the next year. In the third quarter of 2006, Mirant commenced auctionprocesses to sell certain natural gas-fired plants, including the Company’sZeeland (903 MW facility) and Bosque (546 MW facility) natural gas-firedintermediate and peaking plants, representing a total of 1,449 MW. Theassociated assets and liabilities have been reclassified to assets andliabilities held for sale in the consolidated balance sheets. Liabilities heldfor sale are included in other current liabilities in the Company’sconsolidated balance sheets.

91

----

On January 15, 2007, the Company entered into adefinitive purchase and sale agreement with a subsidiary of LS Power EquityPartners I, L.P., LS Power Equity Partners II, L.P. and certain otheraffiliated funds, (collectively “LS Power”), for the sale of the Zeeland andBosque natural gas-fired plants discussed above. The net proceeds to theCompany are expected to be approximately $500 million, after transaction costs.The sale of the Zeeland and Bosque natural gas-fired plants is subject to theterms of the Mirant North America credit facilities and senior notes, includingthe provisions with respect to the use of the proceeds of such sales to repayamounts under the senior term loans and/or reinvest with the sale proceeds. Thetransaction is expected to close in the second quarter of 2007 after thesatisfaction of certain customary conditions to closing. See Note 10 foradditional information regarding restrictions on the proceeds from the sale ofthe gas assets.

Thetable below presents the components of the balance sheet accounts classified asassets and liabilities held for sale for the years ended December 31, 2006and 2005 (in millions):

| ** **                     | ** ** | ** ** | **At December 31,** | ** ** |       |
|--------------------------------|------------|------------|--------------------------|------------|------------|
| ** **                     | ** ** | ** ** | **2006**                 | ** ** | ** ** | ** ** | **2005** | ** ** |   |
| Current Assets                 |       |       | $                        | 22         |       |   |   | $ | 29 |   |   |
| Property, Plant  and Equipment |       |       | 497                      |       |       |   | 513 |   |   |
| Noncurrent Assets              |       |       | —                   |       |       |   | 1 |   |   |
| Total Assets                   |       |       | $                        | 519        |       |   |   | $ | 543 |   |   |
| Current  Liabilities           |       |       | $                        | 5          |       |   |   | $ | 5 |   |   |
| Noncurrent  Liabilities        |       |       | 11                       |       |       |   | 11 |   |   |
| Total Liabilities              |       |       | $                        | 16         |       |   |   | $ | 16 |   |   |

 

Assets held for sale at December 31, 2006,consisted of the planned dispositions discussed above. Assets held for sale at December 31,2005, consisted of the planned dispositions discussed above plus$7 million related to the Mirant Service Center in Maryland. The sale ofthe Mirant Service Center closed in the second quarter of 2006, and the Companyrecognized a gain of approximately $6 million.

Liabilities held for sale included $11 million atDecember 31, 2006 and 2005, related to the Zeeland capital lease and areincluded in other current liabilities on the consolidated balance sheets.

During the fourth quarterof 2004, the Company entered into an agreement to dispose of three natural gasturbines related to a suspended construction project. The sale resulted in theCompany receiving $42 million in the fourth quarter of 2004 and $4 million inthe first quarter of 2005. As a result, the Company in the year ended December 31,2004, recognized a loss related to these turbines of $65 million which isincluded in loss (gain) on sales of assets, net in the combined statements of operations.

***Measurement of Assets Held for Sale***

In accordance with SFAS No. 144, an assetclassified as held for sale shall be measured at the lower of carrying value orfair value less costs to sell.

Pursuant to the definitivepurchase and sale agreement entered into by Mirant with LS Power, the Zeelandand Bosque plants will be sold in a single transaction. The Company recorded animpairment loss of $71 million in the third quarter of 2006 to write down theZeeland asset to its estimated fair value less cost to sell. As a result ofupdated fair values along with changes to the working capital calculation inthe purchase and sale agreement, the Company recorded a reduction to theimpairment loss of $63 million in the fourth quarter of 2006. The net 2006impairment loss of $8 million was recorded in discontinued operations in theCompany’s consolidated statement of operations for the year ended December 31,2006 to decrease the carrying value of the assets to their fair value lesscosts to sell.

92

----

***Discontinued Operations***

The Company has reclassified amounts for prior periodsin the financial statements to report separately, as discontinued operations,the revenues and expenses of components of the Company that have been disposedof or have met the required criteria for such classification at December 31,2006.

Asummary of the operating results for these discontinued operations for theyears ended December 31, 2006, 2005 and 2004 are as follows(in millions):

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  revenues      |       |                  | $          | 54 |   |   |   | $ | 74 |   |   | $ | 89 |   |
| Operating  expenses(1)   |       |                  | 43         |   |   |   | 74 |   |   | 94 |   |
| Operating income  (loss) |       |                  | 11         |   |   |   | — |   |   | (5 | ) |
| Other expense,  net      |       |                  | 1          |   |   |   | 3 |   |   | 12 |   |
| Net income (loss)        |       |                  | $          | 10 |   |   |   | $ | (3 | ) |   | $ | (17 | ) |

----

(1)          Includesa net impairment loss of $8 million in 2006.

***Other Commitments***

Mirant AmericasGenerations has commitments under fuel and transportation, long term serviceagreements and other purchase commitments with various terms and expirationdates that are related to its discontinued operations. The total of thesecommitments as of December 31, 2006, is approximately $187 million.

**4.**                 Impairmentson Assets Held and Used

In accordance with SFAS No. 144,an asset classified as held and used shall be tested for recoverability wheneverevents or changes in circumstances indicate that the carrying amount of theasset may not be recoverable. An asset impairment charge must be recognized ifthe sum of the undiscounted expected future cash flows from a long-lived assetis less than the carrying value of that asset. The amount of any impairmentcharge is calculated as the excess of the carrying value of the asset over itsfair value. Fair value is estimated based on the discounted future cash flowsfrom that asset or determined by other valuation techniques.

*Current Year Events*

The Mirant Lovett and Mirant Bowline generationfacilities in New York have been subject to disputes with local tax authoritiesregarding property tax assessments. In addition, Mirant New York and MirantLovett entered into the 2003 Consent Decree to resolve issues related to NSRrequirements under the Clean Air Act related to the Lovett plant. Mirant Lovettis in discussions with the NYSDEC and the New York State Office of the AttorneyGeneral regarding environmental controls under the 2003 Consent Decree.

On August 11, 2006, and August 28, 2006, theNew York state court issued decisions addressing Mirant Bowline’s challenges tothe assessed values of the Bowline facility for the years 1995 to 2003 andMirant Lovett’s challenges to the assessed values of the Lovett facility forthe years 2000 to 2003. Except for 1996, where it found that Mirant Bowline hadfailed to perfect its challenge to the assessed value of the Bowline facility,the New York state court concluded that the value of the Bowline facility andthe Lovett facility in each year was substantially less than the assessed valueset by the taxing authorities.

Under the 2003 Consent Decree, Mirant Lovett isrequired to make an election to install certain environmental controls on units5 and 4 of the Lovett facility or shut down those units by April 30, 2007 

93

----

and April 30, 2008,respectively. On September 19, 2006, Mirant Lovett sought Bankruptcy Courtapproval to discontinue operations at units 3 and 5 of the Lovett generationfacility if an alternative environmental compliance mechanism that is agreeableto the State of New York is not approved by April 30, 2007. On October 18,2006, the Bankruptcy Court approved the Company’s request. On October 19,2006, Mirant Lovett submitted notices of its intent to discontinue operationsat units 3 and 5 of the Lovett facility on April 30, 2007, to the New YorkPublic Service Commission, NYISO, Orange and Rockland and several otheraffected transmission and distribution utilities in New York. Mirant Lovettreserved its rights to withdraw these notices if a viable alternativeenvironmental compliance mechanism is found. See *New YorkState Administrative Claim* in Note 17—Litigation and OtherContingencies for additional information.

On December 14, 2006,the Bankruptcy Court approved a settlement of disputed property taxes amongMirant Bowline, Mirant Lovett, Hudson Valley Gas and various New York taxjurisdictions. The settlement resolves pending disputes regarding refunds soughtby the Company’s New York subsidiaries for property taxes paid for 1995 through2003 and unpaid taxes assessed for 2003 through 2006. Under the settlement, in February 2007,the Company received refunds totaling approximately $163 million for 1995through 2002, and paid unpaid taxes of approximately $115 million for 2003through 2006, resulting in receipt of a net cash amount of $48 million. As aresult of the refunds and the reductions in unpaid taxes under the settlement,the Company recognized a gain of $244 million in the fourth quarter of 2006. Ofthis amount, $163 million was included in reorganization items, net in theconsolidated statement of operations as it related to periods prior to thePetition Date.

***AssetGrouping***

For purposes of measuringan impairment loss, a long-lived asset or assets must be grouped at the lowestlevel of independent identifiable cash flows. All of the units at Mirant Lovettwere viewed as one group. For Bowline, the Company determined that thesuspended Bowline unit 3 construction project was independent of theoperating Bowline units. In addition, the Company’s analysis and planningaround the operating Bowline units 1 and 2 did not consider the suspendedconstruction project for Bowline unit 3.

***Assumptionsand Results***

In its impairment analysis of the Bowline and Lovettgeneration facilities in prior periods, the Company assumed that PILOTagreements covering 2006 and seven subsequent years would be successfullyapproved and implemented. The Company no longer expects such PILOT agreementsto be implemented. The August 2006 decisions and the appeals that followedprompted management to test for recoverability of the asset under SFAS No. 144because additional uncertainty existed related to achieving property taxationlevels that would allow economically feasible operation of the Bowline andLovett generation facilities. As a result of these developments, managementre-reviewed the economic viability of these facilities in the third quarter of2006.

*Lovett*.*  *TheCompany’s assessment of Lovett under SFAS No. 144 in the third quarter of2006 involved estimating property tax refunds and payments and assuming thatproperty taxes would be negotiated to a reasonable level for future periods.Among the multiple scenarios considered were the shut down of units 3 and 5 by April 30,2007, and unit 4 by April 30, 2008. The Company also consideredscenarios that would allow operations past April 2008 because the Companycontinues to work with the State of New York and other parties to achieve asolution related to environmental controls and to allow Lovett to continue tocontribute to the reliability of the electric system of the State of New York.The sum of the probability weighted undiscounted cash flows for the Lovettgeneration facility exceeded the Company’s carrying value at September 30,2006. As the refunds and taxes owed agreed upon in the settlement agreementwere not materially different from the estimates used in the impairmentanalysis, the Company determined that no further analysis was needed at December 31,2006.

94

----

*Bowline Units 1 and 2*.*  *TheCompany’s assessment of Bowline units 1 and 2 under SFAS No. 144 in thethird quarter of 2006 involved estimating property tax refunds and payments andassuming that property taxes would be negotiated to levels for future periodsthat would allow Bowline units 1 and 2 to operate until the end of theirremaining economic useful lives. The sum of the undiscounted cash flowsexceeded the Company’s carrying value at September 30, 2006, for Bowlineunits 1 and 2. As the refunds and taxes owed agreed upon in the settlementagreement were not materially different from the estimates used in theimpairment analysis, the company determined that no further analysis was neededat December 31, 2006.

*BowlineUnit 3*.   The Company’s assessment of the Bowlineunit 3 suspended construction project assumed that completion of thisproject was remote. A strategic review of the Company’s portfolio of assets in2006 resulted in the conclusion that the Bowline 3 project as currentlyconfigured and permitted is not economically viable. As a result of thisconclusion, the Company determined the estimated value of the equipment andproject termination liabilities. At December 31, 2006, the carrying valueof the development and construction costs for Bowline unit 3 exceeded theestimated undiscounted cash flows from the abandonment of the project by$120 million, which is reflected in impairment losses on the consolidatedstatement of operations for the year ended December 31, 2006. On January 15,2007, the Company entered into a definitive purchase and sale agreement with LSPower, for the sale of certain natural gas-fired plants, which includes some ofthe equipment at Bowline unit 3. The transaction is expected to close in thesecond quarter of 2007. The sale of the equipment at Bowline unit 3 has beenapproved by the Bankruptcy Court. 

**5.**                 Inventory

Inventoryat December 31, 2006 and 2005, consisted of the following (in millions):

| ** **              | ** ** | **At December 31,** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Fuel                    |       |                          | $          | 196 |   |   |   | $ | 202 |   |   |
| Materials and  supplies |       |                          | 63         |   |   |   | 58 |   |   |
| Emissions  allowances   |       |                          | 29         |   |   |   | 15 |   |   |
| Total inventory         |       |                          | $          | 288 |   |   |   | $ | 275 |   |   |

 

**6.**                 FinancialInstruments

***Commodity Financial Instruments***

The Company manages the risks around fuel supply andpower to be generated from its physical asset positions. Mirant manages theprice risk associated with asset management activities through a variety ofmethods. Mirant’s Risk Management Policy requires that asset managementactivities are restricted to only those activities that are risk-reducing innature. In addition, the Company, through its proprietary trading and fuel oilmanagement activities, attempts to achieve incremental returns by entering intoenergy contracts where it has specific market expertise or physical assetpositions. Proprietary trading and fuel oil management activities increase riskand expose the Company to risk of loss if prices move differently thanexpected. As of December 31, 2006, Mirant’s Risk Management Policy setsVaR limits with respect to the Company’s proprietary trading and fuel oilmanagement activities of $7.5 million and $5 million, respectively.

The Company enters into a variety of derivativefinancial and physical instruments to manage its exposure to the prices of thefuel it acquires for generating electricity, as well as the electricity that itsells. These include contractual agreements, such as forward purchase and saleagreements, futures, swaps and option contracts. Futures are traded on nationalexchanges and swaps are typically traded in OTC financial markets. Optioncontracts are traded on both a national exchange and in OTC financial markets.These 

95

----

contractual agreementshave varying terms, notional amounts and durations, or tenors, which range froma few days to a number of years, depending on the instrument. As part of itsproprietary trading activities, the Company is exposed to certain market risksin an effort to generate gains from changes in market prices by entering intoderivative instruments, including exchange-traded and OTC contracts, aswell as other contractual arrangements.

Derivative instruments are recorded at their estimatedfair value in the Company’s accompanying consolidated balance sheets as pricerisk management assets and liabilities except for a limited number oftransactions that qualify for the normal purchase or normal sale exceptionelection that allows accrual accounting treatment. Changes in the fair valueand settlements of electricity derivative financial instruments are reflectedin generation revenue and changes in the fair value and settlements of fuelderivative contracts are reflected in cost of fuel and other products in theaccompanying consolidated and combined statements of operations. As of December 31,2006, the Company does not have any derivative instruments for which hedgeaccounting has been elected.

Thefair values of the Company’s price risk management assets and liabilities, netof credit reserves, at December 31, 2006, are included in the followingtable (in millions): 

| ** **                       | ** ** | **Net Price Risk Management** | ** ** | **Net Fair Value** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Assets**                                   | ** ** | **Liabilities**              | ** ** | **at December 31,** | ** ** |
| ** **                       | ** ** | **Current**                                  | ** ** | **Noncurrent**               | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **2006** | ** ** |
| Electricity                      |       |                                         | $          | 619                          |       |   |   | $ | 104 |   |   |   | $ | (260 | ) |   |   | $ | (12 | ) |   |   | $ | 451 |   |   |
| Natural gas                      |       |                                         | 21         |                         |       |   | 1 |   |   |   | (26 | ) |   |   | (2 | ) |   |   | (6 | ) |   |
| Oil                              |       |                                         | 83         |                         |       |   | — |   |   |   | (10 | ) |   |   | (29 | ) |   |   | 44 |   |   |
| Coal                             |       |                                         | 13         |                         |       |   | — |   |   |   | (3 | ) |   |   | — |   |   |   | 10 |   |   |
| Other, including  credit reserve |       |                                         | (5         | )                            |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (5 | ) |   |
| Total                            |       |                                         | $          | 731                          |       |   |   | $ | 105 |   |   |   | $ | (299 | ) |   |   | $ | (43 | ) |   |   | $ | 494 |   |   |

 

Thefollowing table represents the net price risk management assets and liabilitiesby tenor at December 31, 2006 (in millions):

| ** **                | ** ** | **All    Agreements** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| 2007                      |       |                            | $          | 433 |   |   |
| 2008                      |       |                            | 13         |   |   |
| 2009                      |       |                            | 40         |   |   |
| 2010                      |       |                            | 9          |   |   |
| Thereafter                |       |                            | (1         | ) |   |
| Net (liabilities)  assets |       |                            | $          | 494 |   |   |

 

The volumetric weighted average maturity, or weightedaverage tenor, of the price risk management portfolio at December 31,2006, was approximately 11 months. The net notional amount of the price riskmanagement assets and liabilities at December 31, 2006, was a net shortposition of approximately 24 million equivalent MWh.

96

----

Thefair values of the Company’s price risk management assets and liabilities, netof credit reserves, at December 31, 2005, are included in the followingtable (in millions):

| ** **                        | ** ** | **Net Price Risk Management** | ** ** | **Net Fair Value** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Assets**                                   | ** ** | **Liabilities**              | ** ** | **at December 31,** | ** ** |
| ** **                        | ** ** | **Current**                                  | ** ** | **Noncurrent**               | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **2005** | ** ** |
| Electricity                       |       |                                         | $          | 449                          |       |   |   | $ | 51 |   |   |   | $ | (677 | ) |   |   | $ | (6 | ) |   |   | $ | (183 | ) |   |
| Natural Gas                       |       |                                         | 113        |                         |       |   | 19 |   |   |   | (112 | ) |   |   | (20 | ) |   |   | — |   |   |
| Oil                               |       |                                         | 21         |                         |       |   | 11 |   |   |   | (5 | ) |   |   | — |   |   |   | 27 |   |   |
| Coal                              |       |                                         | 31         |                         |       |   | 24 |   |   |   | (2 | ) |   |   | (1 | ) |   |   | 52 |   |   |
| Other, including  credit reserves |       |                                         | (11        | )                            |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (11 | ) |   |
| Total                             |       |                                         | $          | 603                          |       |   |   | $ | 105 |   |   |   | $ | (796 | ) |   |   | $ | (27 | ) |   |   | $ | (115 | ) |   |

 

**7.**                 Property,Plant and Equipment, net

Property,plant and equipment, net consisted of the following at December 31, 2006and 2005 (in millions):

| ** **                                | ** ** | **At December 31,** | ** ** | **Depreciable** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                | ** ** | **2006**                      | ** ** | **2005**        | ** ** | **Lives** | ** ** |
| Production                                |       | $                             | 2,504      |            | $          | 2,441 |   |   | 14 to 34 |   |   |
| Oil pipeline                              |       | 26                            |       | 25              |       |   | 24 |   |   |
| Construction work  in progress            |       | 187                           |       | 74              |       |   | — |   |   |
| Other                                     |       | 88                            |       | 87              |       |   | 2 to 12 |   |   |
| Suspended  construction projects          |       | 8                             |       | 174             |       |   | — |   |   |
| Less accumulated  depreciation            |       | (626                          | )          | (506            | )          |   |   |   |   |
| Total property,  plant and equipment, net |       | $                             | 2,187      |            | $          | 2,295 |   |   |   |   |   |

 

Property, plant and equipment, net of $497 million and$513 million have been reclassified to assets held for sale in the Company’s consolidatedbalance sheets at December 31, 2006 and 2005, respectively. See Note 3 foradditional information on assets held for sale.

Suspended construction projects decreased in 2006 dueto the transfer of Contra Costa unit 8 to PG&E pursuant to a Settlement andRelease of Claims Agreement and the impairment loss of $120 millionrelated to Bowline unit 3. See California Settlement in Note 17 foradditional information regarding the transfer of the CC8 Assets. SeeNote 4 for further discussion related to impairments of long-lived assets.

Depreciation of the recorded cost of property, plantand equipment is recognized on a straight-line basis over the estimated usefullives of the assets. Mirant Americas Generation does not depreciate itssuspended construction project costs or property, plant and equipment that hasbeen reclassified to assets held for sale. The Company received emissionsallowances in the acquisition of the Pepco assets for both SO2 and NOxemissions and the right to future allowances. The acquired allowances relatedto owned facilities are included in production assets above, and aredepreciated over the average life of the related assets.

The Company evaluates itslong-lived assets (property, plant and equipment) and definite-livedintangibles for impairment whenever events or changes in circumstances indicatethat the Company may not be able to recover the carrying amount of the asset.An asset impairment charge must be recognized 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. The amount of anyimpairment charge is calculated as the excess of the carrying value of theasset over its fair value. Fair value is estimated based on the discountedfuture cash flows from that asset or determined by other valuation techniques.In the case of assets the 

97

----

Companyexpects to sell, the impairment charge is based on the estimated sales valueless costs to sell. For additional information on impairments see Note 4 and Note3.

**8.**                 IntangibleAssets, net

Followingis a summary of intangible assets at December 31, 2006 and 2005(in millions):

| ** **                     | ** ** | ** **                                         | ** ** | **At December 31, 2006** | ** ** | **At December 31, 2005** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                     | ** ** | **Weighted Average  Amortization Lives** | ** ** | **Gross Carrying  Amount**         | ** ** | **Accumulated  Amortization**           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Trading rights                 |       |                                               | 26 years   |                                    |       |                                    | $          | 27 |   |   |   | $ | (3 | ) |   |   | $ | 27 |   |   |   | $ | (2 | ) |   |
| Development  rights            |       |                                               | 38 years   |                                    |       |                                    | 62         |   |   |   | (9 | ) |   |   | 62 |   |   |   | (7 | ) |   |
| Emissions  allowances          |       |                                               | 32 years   |                                    |       |                                    | 151        |   |   |   | (25 | ) |   |   | 151 |   |   |   | (21 | ) |   |
| Other intangibles              |       |                                               | 30 years   |                                    |       |                                    | 12         |   |   |   | (3 | ) |   |   | 13 |   |   |   | (2 | ) |   |
| Total other  intangible assets |       |                                               |       |                                    |       |                                    | $          | 252 |   |   |   | $ | (40 | ) |   |   | $ | 253 |   |   |   | $ | (32 | ) |   |

 

Trading rights represent intangible assets recognizedin connection with asset purchases that represent the Company’s ability togenerate additional cash flows by incorporating the Company’s tradingactivities with the acquired generating facilities.

Development rights represent the right to expandcapacity at certain acquired generating facilities. The existinginfrastructure, including storage facilities, transmission interconnections,and fuel delivery systems, and contractual rights acquired by the Companyprovide the opportunity to expand or repower certain generation facilities.

Emissions allowances recorded in intangible assetsrelate to allowances granted for the leasehold baseload units at the Morgantownand Dickerson facilities, as well as the Company’s units in California.Allowances granted by the EPA for other owned assets are recorded withinproperty, plant and equipment, net on the consolidated balance sheets.

Substantially all of Mirant Americas Generation’sother remaining intangible assets are subject to amortization and are beingamortized on a straight-line basis over their estimated useful lives.

Amortization expense wasapproximately $8 million for the years ended December 31, 2006, 2005 and2004. Assuming no future acquisitions, dispositions or impairments ofintangible assets, amortization expense is estimated to continue at this levelfor each of the next five years.

**9.**                 RelatedParty Arrangements and Transactions

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

MirantServices provides the Company with various management, personnel and otherservices. The Company reimburses Mirant Services for amounts equal to MirantServices’ direct costs of providing such services. The total costs incurredunder the Management, Personnel and Services Agreement with Mirant Services have been included in the accompanyingconsolidated and combined statements of operations as follows(in millions):

| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cost of fuel,  electricity and other products—affiliate |       | $                                           | 9          |   | $ | 10 |   | $ | 10 |   |
| Operations and  maintenance expense—affiliate           |       | 148                                         |       | 162 |   | 164 |   |
| Total                                                        |       | $                                           | 157        |   | $ | 172 |   | $ | 174 |   |

 

98

----

***Services and Risk Management Agreements withAffiliates***

The Company, through Mirant Energy Trading andpreviously Mirant Americas Energy Marketing, provides energy marketing and fuelprocurement services to the following affiliates: Mirant Las Vegas, MirantSugar Creek, Shady Hills, Mirant West Georgia and Mirant Wichita Falls. Amountsdue from each affiliate under their respective service agreements are recordedas a net accounts payable-affiliate or accounts receivable—affiliate because ofeach subsidiary’s legal right to offset.

Substantially all energy marketing costs are allocatedto Mirant’s operating subsidiaries. During the years ended December 31,2006, 2005 and 2004, the total energy marketing costs were $45 million,$54 million and $83 million, respectively. For the years ended December 31,2006, 2005 and 2004, the Company recorded a reduction to operations andmaintenance of approximately $6 million, $8 million and $14 million,respectively, related to the allocation of costs to affiliates of the Company.

For the period from January 1, 2006 to January 31,2006, Mirant Americas Energy Marketing continued to provide these services tothe affiliates. Beginning February 1, 2006, Mirant Energy Trading beganproviding these services to the affiliates.

Mirant Wichita Falls was sold by Mirant in the secondquarter of 2006. Mirant has signed an agreement to sell Mirant Las Vegas,Mirant Sugar Creek, Shady Hills and Mirant West Georgia. The sales are expectedto be completed in the second quarter of 2007. Subsequent to the sale of theseaffiliates by Mirant, the Company will no longer recognize a reduction tooperations and maintenance associated with providing services to theseaffiliates.

The Company’s gross marginfor future periods is not expected to be materially impacted by the sale ofthese affiliates. However, because the Company will likely discontinueproviding energy marketing and fuel procurement services to these entities, theCompany would expect its operating revenues-affiliate and cost of fuel,electricity, and other products—affiliate to decrease or be eliminatedsubsequent to the sale of these affiliates. In addition, these decreases wouldresult in corresponding decreases in cost of fuel, electricity, and otherproducts—nonaffiliate and operating revenues-nonaffiliate, respectively, in theconsolidated and combined statements of operations in future periods.

***Administration Arrangements with Mirant Services***

Substantially all ofMirant’s corporate overhead costs are allocated to Mirant’s operatingsubsidiaries. For the years ended December 31, 2006, 2005 and 2004, theCompany incurred approximately $132 million, $133 million and $168 million,respectively, in costs under these arrangements, which are included inoperations and maintenance—affiliate in the accompanying consolidated andcombined statements of operations.

***Make-Whole Reimbursement Agreement***

Under the asset purchase and sale agreement for thePepco generating assets, Mirant assumed and recorded net obligations ofapproximately $2.4 billion, representing the estimated fair value (at thedate of acquisition) of out-of-market energy delivery and PPAs, which consistedof five PPAs and two TPAs. The estimated fair value of the contracts wasderived using forward prices obtained from brokers and other external sourcesin the marketplace, including brokers and trading platforms/exchanges such asNew York Mercantile Exchange and estimated load information. Mirant AmericasEnergy Marketing assumed these obligations from Mirant pursuant to a liabilityassignment agreement.

Mirant Americas and MirantAmericas Energy Marketing entered into a Make-Whole Agreement, whereby MirantAmericas was obligated to reimburse Mirant Americas Energy Marketing for lossesarising from the TPAs, PPAs, and related hedges of these agreements. In anymonth that Mirant Americas Energy Marketing realized net gains related to theTPAs, PPAs, and related hedges, it was required to pay 

99

----

theseamounts to Mirant Americas. Amounts received were recorded as capitalcontributions and amounts paid were recorded as capital distributions in theaccompanying combined financial statements. In 2004, the Company receivedpayments from Mirant Americas under the Make-Whole Agreement of$7 million. Under the Plan, claims arising out of the Make-Whole Agreementwere resolved pursuant to a global settlement, whereby intercompany claims didnot receive distributions.

***Sales to MirantEnergy Marketing Canada***

Historically, MirantAmericas Energy Marketing purchased natural gas from Mirant Energy MarketingCanada, a subsidiary of Mirant. These purchases were reflected in operatingrevenue—affiliate on the combined statements of operations. The natural gas wassold to third parties; therefore, the revenue was reflected in operatingrevenue—nonaffiliate in the combined statements of operations. In 2003, Mirantsold a substantial portion of the Canadian operation and decided to exit theremaining elements of its trading business in Canada. Gas purchases from MirantEnergy Marketing Canada for the years endedDecember 31, 2005 and 2004, were $3 million and $17 million,respectively.

***RestructuringCharges***

During the years ended December 31,2006, 2005 and 2004, the Company recorded restructuring charges of $1 million,$3 million and $5 million, respectively, for severance costs andother charges, which are included in operations and maintenance—affiliate inthe accompanying consolidated and combined statements of operations. Theseverance costs and other employee termination-related charges associatedwith the restructuring at the Company’s locations were paid by Mirant Servicesand billed to the Company and are included in the amounts disclosed above formanagement, personnel and services.

***Notes Payable toAffiliate***

During the pendency of theChapter 11 proceedings, Mirant and certain of its subsidiariesparticipated in an intercompany cash management program approved by theBankruptcy Court, pursuant to which cash balances at Mirant and theparticipating subsidiaries were transferred to central concentration accountsand, if necessary, lent to Mirant or any participating subsidiary to fundworking capital and other needs, subject to the intercompany borrowing limitsapproved by the Bankruptcy Court. At December 31, 2006 and 2005, theCompany had current notes payable to affiliate of $13 million and$21 million, respectively. Interest expense-affliate was $23 million and$8 million for the years ended December 31, 2005 and 2004, respectively.

***Payable to MirantAmericas Pursuant to the Plan***

Pursuant to the Plan,Mirant North America, the Company’s wholly-owned subsidiary, was required topay $250 million to Mirant Americas within five days of the effective date ofthe Plan in return for Mirant’s contribution of the Trading Debtors. Thisamount is included in payable to affiliate at December 31, 2005, in theconsolidated balance sheet and was paid in January 2006.

***Mirant Guarantees***

Mirant posted pre-petitionletters of credit and a guarantee on behalf of Mirant Mid-Atlantic to providefor the rent payment reserve required in connection with Mirant Mid-Atlantic’slease obligations in the event that it is unable to pay its lease paymentobligations. On January 3, 2006, as part of the settlement and the Company’semergence from bankruptcy, Mirant North America posted a $75 million letter ofcredit for the benefit of Mirant Mid-Atlantic to cover debt service reserveobligations on Mirant Mid-Atlantic’s leases. Upon the posting of the letter ofcredit, the trustee returned $56 million of cash collateral to MirantMid-Atlantic.

100

----

Mirant posted apost-petition letter of credit in the amount of $5 million on behalf of MirantTexas as of December 31, 2004, related to a tolling agreement. Thispost-petition letter of credit was set to expire in January 2006. Uponemergence from bankruptcy, Mirant North America replaced this post-petitionletter of credit with a letter of credit issued under its senior secured creditfacilities. The letter of credit expired in February 2007.

In July 2006, MirantNorth America posted a letter of credit in the amount of $14 million on behalfof Mirant Delta related to a tolling agreement. This letter of credit expiresin July 2007.

Prior to 2005, Mirantentered into pre-petition letters of credit to support the Company’s assetmanagement activities. In September 2005, several of these letters ofcredit were drawn in the amount of $39 million. In January 2006, theremaining pre-petition letter of credit of $7 million was drawn in full. Inaddition, Mirant entered into post-petition letters of credit to support itsasset management activities. In January 2006, letters of credit from theMirant North America senior secured credit facilities replaced the elevenpost-petition letters of credit outstanding at December 31, 2005. See “FinancialCondition-Cash Collateral and Letters of Credit” for details on letters ofcredit outstanding at December 31, 2006.

***Series APreferred Shares in Mirant Americas***

***Pursuant to the Plan, Mirant Americas wasrequired to make capital contributions to Mirant Mid-Atlantic for the purposeof funding future environmental capital expenditures. These capitalcontributions were made in the form of mandatorily redeemable Series APreferred Shares, and are reflected as preferred stock in affiliate in theaccompanying consolidated balance sheets at December 31, 2006 and 2005.***

TheSeries A Preferred Shares have a Scheduled Redemption Date at a SpecifiedRedemption Amount as follows (in millions): 

| 2007   |   | $  | 5      |   |
|--------|--------|----|--------|--------|
| 2008   |   | 31 |   |
| 2009   |   | 84 |   |
| 2010   |   | 95 |   |
| 2011   |   | 50 |   |
|   |   | $  | 265    |   |

 

The redemption of any ofthe Series A Preferred Shares on any Scheduled Redemption Date shall bedeferred to the extent that Mirant Mid-Atlantic has not incurred prior to theScheduled Redemption Date, or does not reasonably expect to incur within 180days of such Scheduled Redemption Date, expenditures with respect to theinstallation of control technology related to environmental capitalexpenditures at facilities owned or leased by Mirant Mid-Atlantic. Any amountsso deferred shall be added to the amount of Series A Preferred Shares tobe redeemed on the next Scheduled Redemption Date.

Mirant Mid-Atlantic hasthe right to put the Series A Preferred Shares to Mirant at an amountequal to the Specified Redemption Amount in the event that Mirant Americasfails to redeem the Series A Preferred Shares on a Scheduled RedemptionDate.

The Series APreferred Shares are recorded at a fair value of $221 million and $208 millionas a component of equity in the Company’s consolidated balance sheets atDecember 31, 2006 and 2005, respectively. The fair value was determinedusing a discounted cash flow method based on the Specified Redemption Amountsusing a 6.21% discount rate. For year ended December 31, 2006, the Companyrecorded $13 million in Preferred Stock in affiliate and Member’s Interestin the consolidated balance sheet related to the amortization of the discounton the preferred stock in Mirant Americas.

101

----

***Series B Preferred Shares in Mirant Americas***

In December 2005, Mirant Americas issued the Series BPreferred Shares for the purpose of supporting the refinancing of $850 millionof Mirant Americas Generation senior notes due in 2011. The Series BPreferred Shares have a mandatory redemption date of April 1, 2011, for the liquidationpreference amount of $150 million. At any time after June 30, 2010, MirantAmericas Generation has the right to put the Series B Preferred Shares toMirant at the liquidation preference amount.

The Series BPreferred Shares are recorded at a fair value of $118 million and $111 millionas a component of equity in the Company’s consolidated balance sheets at December 31,2006 and 2005, respectively. The fair value was determined using a discountedcash flow method based on the expected redemption date and the liquidationpreference amount using a 6.21% discount rate.

***Debtor in Possession Financing for New YorkSubsidiaries***

Mirant North America and Mirant Americas EnergyMarketing, (the “Primary DIP Lenders”) entered into an agreement (the “PrimaryNew York DIP Agreement”) to make secured debtor-in-possessionfinancing in an amount of (i) $20 million, plus (ii) an amountequal to the amount of credit support provided on behalf of Mirant New York,Mirant Bowline, Mirant Lovett, and Hudson Valley Gas Corporation (collectively,the “New York DIP Borrowers”), to the extent such amounts are collateralizedwith cash or cash equivalents by the New York DIP Borrowers. The facility isavailable on a joint and several basis to the New York DIP Borrowers. OnJanuary 31, 2006, all the assets of Mirant Americas Energy Marketing weretransferred to Mirant Energy Trading, with Mirant Energy Trading to succeed toall rights and assume all obligations of Mirant Americas Energy Marketing underthe Primary New York DIP Agreement. The financing under the PrimaryNew York DIP Agreement can be utilized through borrowings by theNew York DIP Borrowers, the issuance of letters of credit for the accountof any of the New York DIP Borrowers or in support of commercialtransactions entered into by Mirant Energy Trading for the benefit of theNew York DIP Borrowers, the posting of cash in respect of obligationsincurred for the benefit of any of the New York DIP Borrowers, includingthe making of prepayments for fuel and other commodities for the benefit of anyof the New York DIP Borrowers. Under the Primary New York DIPAgreement, the amount which represents the excess on the effective date of thePlan of (x) credit support posted for the benefit of the New York DIPBorrowers by the lenders in respect of transactions entered into on theirbehalf over (y) the amount of cash collateral posted by the New YorkDIP Borrowers to the lenders is deemed to be a loan made to the New YorkDIP Borrowers on such date. The New York DIP Borrowers have posted $5 millioncash collateral with Mirant Energy Trading in accordance with the December 31,2006, collateral allocation performed in good faith by Mirant Energy Trading.To the extent that the required level of credit support provided to the NewYork DIP Borrowers is reduced, the amount of such reduction is required to bereturned to the New York DIP Borrowers. The financing under the PrimaryNew York DIP Agreement has a stated maturity of 180 days, subject torenewal or extension, and is available until the earlier of (x) theexpiration of such period or (y) with respect to each of the New YorkDIP Borrowers, the effective date of a confirmed Plan for such New YorkDIP Borrower in its Chapter 11 case. The loan has twice been extended suchthat the stated maturity date is now June 26, 2007. Subject to theauthorization of the Bankruptcy Court, the obligations of the New York DIPBorrowers under the Primary New York DIP Agreement, pursuant toSection 364(c) of the Bankruptcy Code,(i) constitute a claim having priority over any or all administrativeexpenses of the kind specified in sections 503(b) or 507(b) of BankruptcyCode, (ii) are secured by a lien on property of the estates of theNew York DIP Borrowers that is not otherwise subject to a lien and(iii) are secured by a junior lien on property of the estates of theNew York DIP Borrowers that is subject to a lien. The financing bearsinterest at a rate of LIBOR plus 2.25%. The Primary New York DIP Agreementcontains certain events of default, and the ability of the New York DIPBorrowers to borrow thereunder is subject to certain conditions precedent. Inaddition, the Primary New York DIP Agreement contains covenants 

102

----

that, among other things,restrict the ability of the New York DIP Borrowers to engage in mergers,acquisitions and asset sales, to make investments and to incur indebtedness.

Contemporaneous with their entry into the Primary NewYork DIP Agreement, the New York DIP Borrowers also entered into an agreementfor secured financing with Mirant (the “Secondary New York DIP Agreement”). TheSecondary New York DIP Agreement permits Mirant to make secured debtor-in-possessionfinancing in the maximum amount of $50 million to the New York DIP Borrowers,and the borrowings are available solely for cash collateral postings by any oneor more of the New York DIP Borrowers.

The Bankruptcy Court hasapproved a debtor-in-possession loan to Mirant NY-Gen from Mirant Americasunder which Mirant Americas, subject to certain conditions, would lend up to$16.5 million to Mirant NY-Gen to provide funding for the repairs on theSwinging Bridge dam. The loan has been extended such that the stated maturityis now June 26, 2007.

**10. Long-Term Debt**

Long-term debt at December 31,2006 and 2005, was as follows (in millions): 

| ** **                                              | ** ** | **At December 31,** | ** ** | ** ** | ** ** | **Secured/**            | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **2006**                      | ** ** | **2005**   | ** ** | **Interest Rate**  | ** ** | **Unsecured** | ** ** |
| **Long-term  Debt:**                                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** **              | ** ** | ** ** | ** ** |
| Mirant Americas  Generation:                            |       |                          |       |       |       |                    |       |   |   |
| Senior notes:                                           |       |                          |       |       |       |                    |       |   |   |
| Due 2011                                                |       | $                             | 850        |       | $          | 850                     |       | 8.30% |   | Unsecured |   |
| Due 2021                                                |       | 450                           |       | 450        |       | 8.50%                   |       | Unsecured |   |
| Due 2031                                                |       | 400                           |       | 400        |       | 9.125%                  |       | Unsecured |   |
| Unamortized debt discount                               |       | (4                            | )          | (4         | )          |                    |       |   |   |
| Mirant North  America:                                  |       |                          |       |       |       |                    |       |   |   |
| Term loan, due 2007 to 2013                             |       | 692                           |       | —     |       | LIBOR + 1.75% |       | Secured |   |
| Notes, due 2013.                                        |       | 850                           |       | 850        |       | 7.375%                  |       | Unsecured |   |
| Other:                                                  |       |                          |       |       |       |                    |       |   |   |
| Mirant Chalk Point capital lease, due 2007 to 2015 |       | 34                            |       | 36         |       | 8.19%                   |       | — |   |
| Total Mirant Americas Generation                        |       | 3,272                         |       | 2,582      |       |                    |       |   |   |
| Less: current  portion of long-term debt                |       | (141                          | )          | (3         | )          |                    |       |   |   |
| Total long-term  debt, excluding current portion        |       | $                             | 3,131      |       | $          | 2,579                   |       |   |   |   |   |

 

Pursuant to the Plan,Mirant Americas Generation reinstated $1.7 billion of senior notesmaturing in 2011, 2021 and 2031. The reinstated senior notes are senior unsecuredobligations of Mirant Americas Generation and are not recourse to anysubsidiary or affiliate of Mirant Americas Generation. During 2006,approximately $11 million for the Zeeland capital lease was reclassifiedto liabilities held for sale and included in other current liabilities on theCompany’s consolidated balance sheets at December 31, 2006 and 2005. SeeNote 3 for additional information on liabilities held for sale.

***Senior Secured Credit Facilities***

Mirant North America, a wholly-owned subsidiary of theCompany, entered into senior secured credit facilities in January 2006,which are comprised of an $800 million six-year senior secured revolvingcredit facility and a $700 million seven-year senior secured term loan.The full amount of the senior secured revolving credit facility is availablefor cash draws or for the issuance of letters of credit. On January 3, 

103

----

2006, Mirant North Americadrew $465 million under its senior secured revolving credit facility. Allamounts were repaid during the first quarter of 2006.******Thesenior secured term loan was fully drawn at closing and amortizes in quarterlyinstallments aggregating 0.25% of the original principal of the term loan perquarter for the first 27 quarters, with the remainder payable on the finalmaturity date in January 2013. At the closing, $200 million drawnunder the senior secured term loan was deposited into a cash collateral accountto support the issuance of up to $200 million of letters of credit. As of December 31,2006, there were approximately $199 million of letters of credit outstandingunder the term loan and $6 million outstanding under the revolver. The seniorsecured credit facilities are obligations of Mirant North America and therespective guarantors and are not recourse to any other Mirant AmericasGeneration entities.

Mirant North America is required to prepay a portionof the outstanding principal balance of the senior secured term loan once ayear, in addition to the regularly scheduled principal payments, based on anEBITDA calculation to determine excess free cash flows, as defined in the loanagreement. At December 31, 2006, the current estimate of the mandatoryprincipal prepayment of the term loan in March 2007 is approximately$131 million. This amount has been reclassified from long-term debt tocurrent portion of long-term debt at December 31, 2006.

The sale of the Zeelandand Bosque natural gas-fired plants is subject to the terms of the Mirant NorthAmerica senior secured credit facilities, including the mandatory prepaymentand/or reinvestment provisions and the requirement to secure credit ratingaffirmations. Mirant North America has received the required credit ratingaffirmations.

***Senior Notes***

In December 2005, Mirant North America issued theOld Notes in an aggregate principal amount of $850 million that bearinterest at 7.375% and mature on December 31, 2013. The senior notes wereissued in a private placement and were not registered with the SEC. Interest onthe notes is payable on each June 30 and December 31, commencing June 30,2006. The proceeds of the notes offering initially were placed in escrowpending the emergence of Mirant North America from bankruptcy. The proceedswere released from escrow in connection with Mirant North America’s emergencefrom bankruptcy and the closing of the senior secured credit facilities. Thesenior notes are obligations of Mirant North America and the respectiveguarantors and are not recourse to any other Mirant Americas Generationentities.

In connection with the issuance of the Old Notes,Mirant North America entered into a registration rights agreement under whichit agreed to complete an exchange offer for the Old Notes. On June 29,2006, Mirant North America completed its registration under the Securities Actof $850 million of the New Notes and initiated the Exchange Offer. The ExchangeOffer was completed on August 4, 2006, with $849.965 million of theoutstanding Old Notes being tendered for the New Notes. The terms of the NewNotes are identical in all material respects to the terms of the Old Notes,except that the New Notes are registered under the Securities Act and generallyare not subject to transfer restrictions or registration rights.

The notes are redeemable at the option of Mirant NorthAmerica, in whole or in part, at any time prior to December 31, 2009, at aprice equal to 100% of the principal amount, plus accrued and unpaid interest,plus a make-whole premium. At any time on or after December 31, 2009,Mirant North America may redeem the notes at specified redemption prices,together with accrued and unpaid interest, if any, to the date of redemption.At any time prior to December 31, 2008, Mirant North America may redeem upto 35% of the original principal amount of the notes with the proceeds ofcertain equity offerings at a redemption price of 107.375% of the principalamount of the notes, together with accrued and unpaid interest, if any, to thedate of redemption. Under the terms of the notes, the occurrence of a change ofcontrol will be a triggering event requiring Mirant North America to offer topurchase all or a portion of 

104

----

the notes at a price equalto 101% of their principal amount, together with accrued and unpaid interest,if any, to the date of purchase. In addition, certain asset dispositions orcasualty events will be triggering events which may require Mirant NorthAmerica to use the proceeds from those asset dispositions or casualty events tomake an offer to purchase the notes at 100% of their principal amount, togetherwith accrued and unpaid interest, if any, to the date of purchase if suchproceeds are not otherwise used, or committed to be used, within certain timeperiods, to repay senior secured indebtedness, to repay indebtedness under thesenior secured credit facilities (with a corresponding reduction incommitments) or to invest in capital assets related to its business.

The sale of the Zeeland and Bosque natural gas-firedplants is subject to the terms of the Mirant North America senior notes,including the provisions with respect to a mandatory offer to purchase and/orreinvest with the sale proceeds.

At December 31, 2006,the annual scheduled maturities of debt during the next five years andthereafter were as follows (in millions):

| 2007       |   | $     | 141    |   |
|------------|--------|-------|--------|--------|
| 2008       |   | 10    |   |
| 2009       |   | 10    |   |
| 2010       |   | 10    |   |
| 2011       |   | 861   |   |
| Thereafter |   | 2,240 |   |
| Total      |   | $     | 3,272  |   |

 

Other than for 2007, theannual scheduled maturities above do not include estimates of Mirant NorthAmerica’s required payments of its senior secured term loan based on itsEBITDA.

***Capital Leases***

Long-term debt includes acapital lease by Mirant Chalk Point. At December 31, 2006 and 2005, thecurrent portion of the long-term debt under this capital lease was $3 million.The amount outstanding under the capital lease which matures in 2015 is $34million with an 8.19% annual interest rate. This lease is of an 84 MW peakingelectric power generation facility. Depreciation expense related to this leasewas approximately $2 million for each of the years ended December 31,2006, 2005 and 2004. The principal payments under this lease are approximately$3 million annually in 2007 through 2010, $4 million in 2011 and $18 millionthereafter. The gross amount of assets under the capital lease, recorded inproperty, plant and equipment, net as of December 31, 2006 and 2005, was$24 million. The related accumulated depreciation was $10 million and $8million as of December 31, 2006 and 2005, respectively.

***Sources of Funds and Capital Structure***

The principal sources of liquidity for the Company’sfuture operations and capital expenditures are expected to be: (i) existingcash on hand and cash flows from the operations of the Company’s subsidiaries; (ii) borrowingsunder Mirant North America’s $800 million six-year senior securedrevolving credit facility; (iii) $200 million of letters of creditcapacity under Mirant North America’s $700 million term loan; and (iv) proceedsfrom the preferred shares issued by Mirant Americas to Mirant Mid-Atlantic andthe Company to fund capital expenditures and support the refinancing of theCompany’s senior notes due in 2011.

The Company and its subsidiary, including Mirant NorthAmerica are holding companies and, as a result, they are dependent upondividends, distributions and other payments from their respective subsidiariesto generate the funds necessary to meet their obligations. The ability ofcertain of the 

105

----

Company’s subsidiaries topay dividends and distributions is restricted under the terms of their debt orother agreements. The Company has no operations and no subsidiaries withoperations other than Mirant North America and its subsidiaries, includingMirant Mid-Atlantic.

In particular, a substantial portion of the cash fromthe Company’s operations is generated by Mirant Mid-Atlantic. The MirantMid-Atlantic leveraged leases contain a number of covenants, includinglimitations on dividends, distributions and other restricted payments. Underits leveraged leases, Mirant Mid-Atlantic is not permitted to make anydividends, 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.In the event of a default under the leveraged leases or if the restrictedpayments test is not satisfied, the cash of Mirant Mid-Atlantic would not beable to be distributed. Based on the Company’s calculation of the fixed chargecoverage ratios under the leveraged leases as of December 31, 2006, MirantMid-Atlantic meets the required 1.7 to 1.0 ratio for restricted payments, bothon a historical and projected basis.

The Plan provided for theorganization of Mirant North America as an intermediate holding company that isa subsidiary of Mirant Americas Generation and the parent of its indirectsubsidiaries, including Mirant Mid-Atlantic. Pursuant to the confirmed Plan,Mirant North America incurred certain indebtedness and entered into a revolvingcredit facility for working capital and other purposes secured by the assets ofMirant North America and its subsidiaries (other than Mirant Mid-Atlantic andits subsidiaries). The revolving credit facility includes certain covenantstypical in such credit facilities, including restrictions on dividends,distributions and other restricted payments. Further, the revolving creditfacility includes financial covenants that will exclude from the calculation ofcompliance with such covenants the financial results of any subsidiary that isunable to make distributions or dividends at the time of such calculation.Thus, the ability of Mirant Mid-Atlantic to make distributions to Mirant NorthAmerica under the leveraged lease transaction could have a material impact onthe calculation of the financial covenants under the revolving credit facilityand other debt of Mirant North America and on its ability to make distributionsto the Company.

**11.**          OtherComprehensive (Loss) Income

Other comprehensive (loss)income includes unrealized gains and losses on certain derivatives thatqualified as cash flow hedges and unrealized gains on available-for-salesecurities. Changes in accumulated other comprehensive (loss) income, net oftax are as follows (in millions):

| Balance,  December 31, 2004                                               |   | $      | — |   |
|--------------------------------------------------------------------------------|--------|--------|--------|--------|
| Other comprehensive  income for the period:                                    |   |   |   |
| Unrealized gain on available-for-sale securities                               |   | 27     |   |
| Balance,  December 31, 2005                                               |   | 27     |   |
| Other comprehensive  income for the period:                                    |   |   |   |
| Unrealized gain on available-for-sale securities reclassification  to earnings |   | (27    | )      |
| Balance,  December 31, 2006                                               |   | $      | — |   |

 

The $27million in accumulated other comprehensive income at December 31, 2005, isassociated with unrealized gains on available for sale securities. In 2006, theunrealized gains were reclassified to earnings when the securities were sold.

106

----

**12.**          BankruptcyRelated Disclosures

Mirant’s Plan was confirmed by the Bankruptcy Court onDecember 9, 2005, and Mirant and the Company emerged from bankruptcy onJanuary 3, 2006. For financial statement presentation purposes, Mirant andthe Company recorded the effects of the Plan at December 31, 2005.

At December 31, 2006and 2005, amounts related to allowed claims, estimated unresolved claims andprofessional fees associated with the bankruptcy that are to be settled in cashwere $5 million and $1,831 million, respectively, and these amounts wererecorded in claims payable and estimated claims accrual on the accompanyingconsolidated balance sheets. These amounts do not include unresolved claimsthat will be settled in Mirant common stock. During the year endedDecember 31, 2006, the Company paid approximately $1.755 billion in cashrelated to bankruptcy claims. Of this amount approximately $990 million isreflected in cash flows from financing activities from continuing operationsand represents the principal amount of debt claims. The remaining $765 millionis reflected in cash flows from operating activities and represents otherbankruptcy claims and interest.

***Financial Statements of Subsidiaries in Bankruptcy***

Mirant Americas Generation’sNew York subsidiaries remain in bankruptcy and include the following entities:Mirant Lovett, Mirant Bowline, Mirant NY-Gen, Mirant New York and Hudson ValleyGas Corporation. Consolidated financial statements of Mirant America Generation’sNew York subsidiaries are set forth below:

**New YorkSubsidiaries**

**CondensedConsolidated Statements of Operations Data(in millions)**

| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  revenues                                   |       | $                                           | 336        |   | $ | 433 |   | $ | 244 |   |
| Cost of fuel,  electricity and other products         |       | 162                                         |       | 361 |   | 139 |   |
| Operating  expenses                                   |       | 193                                         |       | 178 |   | 214 |   |
| Operating loss                                        |       | (19                                         | )          | (106 | ) | (109 | ) |
| Other expense,  net                                   |       | 16                                          |       | 2 |   | 1 |   |
| Reorganization  items, net(1)                         |       | (163                                        | )          | (2 | ) | 15 |   |
| Provision  (benefit) for income taxes                 |       | 2                                           |       | 1 |   | (1 | ) |
| Cumulative effect  of change in accounting principles |       | —                                      |       | 2 |   | — |   |
| Net income (loss)                                     |       | $                                           | 126        |   | $ | (109 | ) | $ | (124 | ) |

----

(1)          In2006, reorganization items, net is primarily related to the pre-petition gainon the New York Property Tax Settlement.

107

----

**New YorkSubsidiaries**

**CondensedConsolidated Balance Sheets Data(in millions)**

| ** **                                           | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Assets—affiliate                                |       | $                             | 106        |   | $ | 149 |   |
| Assets—nonaffiliate                             |       | 224                           |       | 35 |   |
| Property, plant  and equipment, net                  |       | 366                           |       | 502 |   |
| Total assets                                         |       | $                             | 696        |   | $ | 686 |   |
| Liabilities not  subject to compromise               |       |                          |       |   |   |
| Liabilities—affiliate                           |       | $                             | 28         |   | $ | 36 |   |
| Liabilities—nonaffiliate                        |       | 66                            |       | 177 |   |
| Liabilities  subject to compromise—affiliate    |       | 62                            |       | 62 |   |
| Liabilities  subject to compromise—nonaffiliate |       | 18                            |       | 18 |   |
| Member’s equity                                 |       | 522                           |       | 393 |   |
| Total liabilities and  member’s equity          |       | $                             | 696        |   | $ | 686 |   |

 

**New YorkSubsidiaries**

**CondensedConsolidated Statements of Cash Flows Data(in millions)**

| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash provided  by (used in):                |       |                                        |       |   |   |   |   |   |   |
| Operating activities                            |       |                                        | $          | 5 |   |   | $ | 10 |   | $ | 24 |   |
| Investing activities                            |       |                                        | 84         |   |   | (16 | ) | (25 | ) |
| Financing activities                            |       |                                        | 9          |   |   | 7 |   | 1 |   |
| Net increase in  cash and cash equivalents      |       |                                        | 98         |   |   | 1 |   | — |   |
| Cash and cash  equivalents, beginning of period |       |                                        | 1          |   |   | — |   | — |   |
| Cash and cash  equivalents, end of period       |       |                                        | $          | 99 |   |   | $ | 1 |   | $ | — |   |

 

***Liabilities Subjectto Compromise***

The Company’s liabilities subject to compromise, whichrelate to its New York subsidiaries that remain in bankruptcy, are $34 millionat December 31, 2006 and 2005.

Theamounts subject to compromise at December 31, 2006 and 2005, consisted ofthe following items (in millions):

| ** **                                                                      | ** ** | **At December 31,   2006** | ** ** | **At December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| Items, absent the  bankruptcy filings, that would have been considered current: |       |                                      |       |                                |       |   |   |   |   |
| Accounts payable  and accrued liabilities—affiliate                        |       |                                      | $          | 16                                  |       |   |   | $ | 16 |   |   |
| Accounts payable  and accrued liabilities—nonaffiliate                     |       |                                      | 18         |                                |       |   | 18 |   |   |
| Total                                                                           |       |                                      | $          | 34                                  |       |   |   | $ | 34 |   |   |

 

***ReorganizationItems, net***

Reorganization items, net represents expense, incomeand gain or loss amounts that were recorded in the financial statements as aresult of the bankruptcy proceedings. In 2006, reorganization items, net relate

108

----

to refunds received fromvarious New York tax jurisdictions for the settlement of the property taxdispute related to the New York subsidiaries.

Reorganizationitems, net for the years ended December 31, 2006, 2005 and 2004, arecomprised of the following (in millions): 

| ** **                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Gain on the  implementation of the Plan                           |       | $                                           | —     |   | $ | (30 | ) | $ | — |   |
| Gain on New York  property tax settlement                         |       | (163                                        | )          | — |   | — |   |
| Estimated claims  and losses on rejected and amended contracts(1) |       | —                                      |       | 54 |   | 101 |   |
| Professional fees  and administrative expense                     |       | 2                                           |       | 82 |   | 47 |   |
| Interest income,  net                                             |       | (2                                          | )          | (21 | ) | (10 | ) |
| Total                                                             |       | $                                           | (163       | ) | $ | 85 |   | $ | 138 |   |

----

(1)          Estimatedclaims and losses on rejected and amended contracts relate primarily torejected energy contracts, such as tolling agreements, gas transportation andelectric transmission contracts.

**13.**          Income Taxes

Detailsof the income tax provision (benefit) are as follows (in millions):

| ** **                            | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                              |       |                                                      |       |   |   |   |   |   |   |
| Federal                               |       |                                                      | $          | 2 |   |   | $ | 7 |   | $ | (10 | ) |
| State                                 |       |                                                      | 3          |   |   | 9 |   | (6 | ) |
| Deferred:                             |       |                                                      |       |   |   |   |   |   |   |
| Federal                               |       |                                                      | —     |   |   | (12 | ) | 2 |   |
| State                                 |       |                                                      | —     |   |   | 1 |   | (1 | ) |
| Provision  (benefit) for income taxes |       |                                                      | $          | 5 |   |   | $ | 5 |   | $ | (15 | ) |

 

Areconciliation of the Company’s expected federal statutory income tax provision(benefit) to the effective income tax provision (benefit) for continuingoperations adjusted for reorganization items is as follows (in millions):

| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. federal  statutory income tax (benefit) provision     |       | $        | 418        |     | $          | (264     | )          | $ | 38 |   |
| State and local  income taxes, net of federal income taxes |       | 5        |       | 1        |       | (1       | )          |
| LLC income not  subject to federal taxation                |       | (370     | )          | 314      |       | (50      | )          |
| Change in  deferred tax asset valuation allowance          |       | (50      | )          | (534     | )          | (4       | )          |
| Impact of the  Plan                                        |       | —   |       | 466      |       | —   |       |
| Other, net                                                 |       | 2        |       | 22       |       | 2        |       |
| Tax (benefit)  provision                                   |       | $        | 5          |     | $          | 5        |       | $ | (15 | ) |

 

109

----

Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and liabilities are as follows at December 31, 2006and 2005 (in millions):

| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:             |       |     |       |     |       |
| Property and intangible assets    |       | $        | 108        |     | $          | 99 |   |
| Net operating loss carryforwards  |       | 66       |       | 79       |       |
| Other, net                        |       | 11       |       | 45       |       |
| Deferred tax assets               |       | 185      |       | 223      |       |
| Valuation allowance               |       | (173     | )          | (223     | )          |
| Net deferred tax assets           |       | 12       |       | —   |       |
| Deferred tax  liabilities:        |       |     |       |     |       |
| Price risk management liabilities |       | (11      | )          | —   |       |
| Other, net                        |       | (1       | )          | —   |       |
| Total                             |       | (12      | )          | —   |       |
| Net deferred tax  liabilities     |       | $        | —     |     | $          | — |   |

 

Several changes to the Company’s tax posture occurredas a result of the Plan, including the conversion of certain of the Company’sregarded corporate entities to limited liability companies coupled with theliquidation and/or merger of these regarded corporate entities into otherdisregarded corporate entities for income tax purposes, and certainpartnerships owned by the regarded corporate entities were also liquidated andnow form part of these disregarded entities for income tax purposes. The resultof the plan effects eliminates the Company’s recording of tax expense andbenefit beginning January 1, 2006, with respect to the liquidated regardedcorporate entities. Furthermore, with respect to those liquidated regardedcorporate entities, all previously existing deferred tax assets and liabilitieswere eliminated as of December 31, 2005.

Certain of the Company’s other subsidiaries continueto exist as regarded corporate entities for income tax purposes includingMirant New York, Hudson Valley Gas, Mirant Kendall, and Mirant SpecialProcurement Inc. For those regarded corporate entities, the Company allocatescurrent and deferred income taxes to each regarded corporate entity as if suchentity were a single taxpayer utilizing the asset and liability method toaccount for income taxes. To the extent the Company provides tax expense orbenefit, any related tax payable or receivable to Mirant is reclassified toequity in the same period. As such, $2 million was reclassified as a capitalcontribution to member’s interest for the year ended December 31, 2006.

SFAS No. 109 requires that a valuation allowancebe established when it is more likely than not that all or a portion of adeferred tax asset will not be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences are deductible. In making thisdetermination, management considers all available positive and negativeevidence affecting specific deferred tax assets, including the Company’s pastand anticipated future performance, the reversal of deferred tax liabilities,the implementation of tax planning strategies and management’s expectations offuture reimbursements of NOL 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 evidence consideredby management in this determination. Additionally, management considered thefact that Mirant has not reimbursed the Company for current period NOLs fromthe Petition Date to December 31, 2005, and the uncertainty regarding futurereimbursements from Mirant. In 2006, 2005 and 2004, the Company recognizedchanges in its valuation allowance of $(50) million, $(534) million and $(4) million,respectively, related to its net deferred tax assets.

110

----

At December 31, 2006, the Company had $149 millionof NOL carryforwards for federal income tax purposes expiring from 2023 to 2026and $289 million of NOL carryforwards for state income tax purposesexpiring on various dates. These NOL carryforwards are available to offsetfuture federal and state income taxes.

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 the Southern Company.This agreement resulted in an assessment of $14 million includinginterest. The Company has provided adequate tax provisions in prior years forthe recognition of this liability. As this liability represented anintercompany obligation to Mirant, the liability was resolved pursuant to thePlan with no distribution for such liability. Mirant has indemnified theCompany with respect to this obligation.

Additionally, the Companyhas contingent liabilities related to tax uncertainties arising in the ordinarycourse of business. The Company periodically assesses its contingentliabilities in connection with these uncertainties based on the latest informationavailable. For those uncertainties where it is probable that a loss hasoccurred and the loss or range of loss can be reasonably estimated, a liabilityis recognized in the financial statements. The recognition of contingent lossesfor tax uncertainties requires management to make significant assumptions aboutthe expected outcomes of certain tax contingencies. On January 1, 2007,the Company will change its method of determining tax contingencies uponadoption of FIN 48. Upon initial adoption, the provisions of FIN 48 will beapplied to all tax positions. Only tax positions that meet themore-likely-than-not recognition threshold at the effective date may berecognized or continue to be recognized. The Company anticipates thatthe adoption of FIN 48 will result in a decrease in accrued liabilities ofapproximately $50 million. The decreases in accrued liabilities willresult in an increase in member’s interest of the same amount.

***Pro Forma Income Tax Disclosures***

The Company is not subject to income taxes except for thosesubsidiaries of the Company that are separate taxpayers. Mirant Americas andMirant are otherwise directly responsible for income taxes related to theCompany’s operations.

Thefollowing reflects a pro forma disclosure of the income tax provision (benefit)that would be reported if the Company were to be allocated income taxes relatedto its operations. Pro forma income tax provision (benefit) attributable toincome before tax would consist of the following (in millions):

| ** **                            | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current provision  (benefit):         |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| State                                 |       |                                                      | $          | 3 |   |   |   | $ | 9 |   |   |   | $ | (8 | ) |   |
| Total income tax  provision (benefit) |       |                                                      | $          | 3 |   |   |   | $ | 9 |   |   |   | $ | (8 | ) |   |

 

111

----

Thefollowing table presents the pro forma reconciliation of the Company’s federalstatutory income tax provision (benefit) for continuing operations adjusted forreorganization items to the pro forma effective tax provision (benefit) (inmillions):

| ** **                                                 | ** ** | **For the Years Ended  December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| U.S. federal  statutory income tax (benefit) provision     |       | $                                                         | 418        |   | $ | (264 | ) | $ | 38 |   |
| State and local  income taxes, net of federal income taxes |       | 51                                                        |       | — |   | (1 | ) |
| Impact of  discontinued operations                         |       | 3                                                         |       | (1 | ) | (6 | ) |
| Change in  deferred tax asset valuation allowance          |       | (562                                                      | )          | (10 | ) | (54 | ) |
| Professional fees  during bankruptcy                       |       | 28                                                        |       | — |   | — |   |
| Anticipated  effect of 382(l)(5)                           |       | 61                                                        |       | — |   | — |   |
| Impact of the  Plan                                        |       | —                                                    |       | 223 |   | — |   |
| Other, net                                                 |       | 4                                                         |       | 61 |   | 15 |   |
| Tax provision  (benefit)                                   |       | $                                                         | 3          |   | $ | 9 |   | $ | (8 | ) |

 

Thetax effects of temporary differences between the carrying amounts of assets andliabilities in the consolidated balance sheet and their respective tax baseswhich give rise to the pro forma deferred tax assets and liabilities would beas follows at December 31, 2006 and 2005 (in millions):

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                             |       |     |       |     |       |
| Revenue subject to refund                        |       | $        | 1          |     | $          | 182 |   |
| Net operating loss carryforwards                 |       | 784      |       | 809      |       |
| Property and intangible assets                   |       | 101      |       | 189      |       |
| Price risk management liabilities—affiliate |       | —   |       | 89       |       |
| Other, net                                       |       | 65       |       | 108      |       |
| Deferred tax assets                              |       | 951      |       | 1,377    |       |
| Valuation allowance                              |       | (788     | )          | (1,350   | )          |
| Net deferred tax assets                          |       | 163      |       | 27       |       |
| Deferred tax  liabilities:                       |       |     |       |     |       |
| Price risk management liabilities—affiliate |       | (144     | )          | (10      | )          |
| Other, net                                       |       | (19      | )          | (17      | )          |
| Total                                            |       | (163     | )          | (27      | )          |
| Net deferred tax liabilities                     |       | $        | —     |     | $          | — |   |

 

The ultimate utilization of the Company’s remaining proforma NOLs will depend on several factors, including its future financialperformance and certain tax elections. Specifically, the Company’s utilizationof pro forma NOLs will be impacted by whether Mirant elects NOL treatment underInternal Revenue Code Section (“§”) 382(l) (5) or § 382(l) (6).Under § 382(l)(5), the Company would have use of its pro forma NOLs aslong as there is not a change of Mirant ownership (broadly defined as 50 percentchange of five percent shareholders) within two years of emergence. The § 382(l)(5)election results in a reduction to the Company’s pro forma federal NOLs ofapproximately $175 million due to interest accrued on debt settled with Mirantstock for the three years prior to emergence. Under § 382(l) (6), theCompany would be subject to an overall annual limitation on use of pro forma NOLs.Mirant will make the § 382(l) (5) or § 382(l) (6) electionin its 2006 annual tax return filed in 2007. Given the likelihood that Mirantwill elect § 382(l) (5), the Company has adjusted various pro forma deferredtax items including the pro forma NOL.

The Company anticipates that the adoption of FIN 48would result in a pro forma increase in member’s interest of $50 million to $85million.

112

----

The Company has notprovided a pro forma deferred tax liability with respect to the Company’sinvestment in the Mirant Americas Preferred Stock discussed in Note 9, sincethe underlying transaction is disregarded for income tax purposes.

**14.**          Asset Retirement Obligations

SFAS No. 143 requires an entity to recognize thefair value of a liability for an asset retirement obligation in the period inwhich it is incurred. Additionally, effective December 31, 2005, theCompany adopted FIN 47, which expands the scope of asset retirement obligationsto be recognized to include asset retirement obligations that may be uncertainas to the nature or timing of settlement. Upon initial recognition of aliability for an asset retirement obligation or a conditional asset retirementobligation, an entity shall capitalize an asset retirement cost by increasingthe carrying amount of the related long-lived asset by the same amount as theliability. Over time, the liability is accreted to its present value eachperiod, and the capitalized cost is depreciated over the useful life of therelated asset. Retirement obligations associated with long-lived assetsincluded within the scope of SFAS No. 143 and FIN 47 are those for which alegal obligation exists under enacted laws, statutes and written or oralcontractions, including obligations arising under the doctrine of promissoryestoppel.

The Company identified certain asset retirementobligations within its power generation operations. These asset retirementobligations are primarily related to asbestos abatement in facilities on ownedor leased property and other environmental obligations related to fuel storagefacilities, wastewater treatment facilities, closing of ash disposal sites andclosing of owned pipelines.

Asbestos abatement is the most significant type ofasset retirement obligation identified for recognition in the Company’sadoption of FIN 47. The EPA has regulations in place governing the removal ofasbestos. Due to the nature of asbestos, it can be difficult to ascertain theextent of contamination in older acquired facilities unless substantialrenovation or demolition takes place. Therefore, the Company incorporatedcertain assumptions based on the relative age and size of its facilities toestimate the current cost for asbestos abatement. However, the actual abatementcost could differ from the estimates used to measure the asset retirementobligation. As a result, these amounts will be subject to revision when actualabatement activities are undertaken.

Thefollowing table sets forth the balances of the asset retirement obligations asof January 1, 2005, and the additions and accretion of the assetretirement obligations for the years ended December 31, 2006 and 2005. Theasset retirement obligations are included in noncurrent liabilities in theconsolidated balance sheets (in millions):

| ** **                                                                             | ** ** | **For the Years Ended December 31,**                                                        | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| Beginning  balance, January 1                                                     |       |                                                                                                                 | $          | 33 |   |   |   | $ | 10 |   |   |
| Revisions to cash flows for liabilities recognized upon adoption of  SFAS No. 143 |       |                                                                                                                 | —     |   |   |   | (5 | ) |   |
| Liabilities recognized upon adoption of FIN 47                                         |       |                                                                                                                 | —     |   |   |   | 27 |   |   |
| Liabilities recorded in the period                                                     |       |                                                                                                                 | 5          |   |   |   | — |   |   |
| Accretion expense                                                                      |       |                                                                                                                 | 3          |   |   |   | 1 |   |   |
| Ending  balance, December 31                                                      |       |                                                                                                                 | $          | 41 |   |   |   | $ | 33 |   |   |

 

113

----

Thefollowing represents, on a pro forma basis, the amount of the liability forasset retirement obligations as if FIN 47 had been applied during all periodsaffected (in millions):

| ** **                                                                             | ** ** | **For the Years Ended December 31,**                                                        | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **         2005         ** | ** ** | **         2004         ** | ** ** |
| Beginning  balance, January 1                                                     |       |                                                                                                                 | $          | 35 |   |   |   | $ | 33 |   |   |
| Revisions to cash flows for liabilities recognized upon adoption of  SFAS No. 143 |       |                                                                                                                 | (5         | ) |   |   | — |   |   |
| Accretion expense                                                                      |       |                                                                                                                 | 3          |   |   |   | 2 |   |   |
| Ending  balance, December 31                                                      |       |                                                                                                                 | $          | 33 |   |   |   | $ | 35 |   |   |

 

**15.**          Commitmentsand Contingencies

Mirant Americas Generationhas made firm commitments to buy materials and services in connection with itsongoing operations and has made financialguarantees relative to some of its investments.

***Cash Collateral and Letters of Credit***

In order to sell power and purchase fuel in theforward markets and perform other energy trading and marketing activities, theCompany often is required to provide trade credit support to its counterpartiesor make deposits with brokers. In addition, the Company often is required toprovide cash collateral or letters of credit for access to the transmissiongrid, to participate in power pools, to fund debt service reserves and forother operating activities. Trade credit support includes cash collateral,letters of credit and financial guarantees. In the event of default by theCompany, the counterparty can draw on a letter of credit or apply cashcollateral held to satisfy the existing amounts outstanding under an opencontract. The Company’s outstanding issued letters of credit totaled $204 millionas of December 31, 2006.

Followingis a summary of cash collateral posted with counterparties and brokers andletters of credit issued as of December 31, 2006 and 2005 (in millions):

| ** **                                                  | ** ** | **At December 31,** | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **Continuing Operations:**                             | ** ** | ** **                    | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Cash collateral  posted—energy trading and marketing   |       |                          | $          | 27                            |       |   |   | $ | 619 |   |   |
| Cash collateral  posted—debt service and rent reserves |       |                          | —     |                          |       |   | 56 |   |   |
| Cash collateral  posted—other operating activities     |       |                          | 11         |                          |       |   | 10 |   |   |
| Letters of  credit—energy trading and marketing        |       |                          | 100        |                          |       |   | 51 |   |   |
| Letters of  credit—debt service and rent reserves      |       |                          | 84         |                          |       |   | — |   |   |
| Letters of  credit—other operating activities          |       |                          | 15         |                          |       |   | — |   |   |
|                                                        |       |                          | 237        |                          |       |   | 736 |   |   |
| Discontinued operations:                                    |       |                          |       |                          |       |   |   |   |   |
| Assets held for  sale—letters of credit                |       |                          | 5          |                          |       |   | 5 |   |   |
| Total                                                       |       |                          | $          | 242                           |       |   |   | $ | 741 |   |   |
|                                                             |            |                               |            |                               |            |  |  |  |  |  |  |  |  |

 

On July 13, 2006,Moody’s Investors Service reduced Mirant’s corporate credit rating to “B2” andthe debt ratings of the Company’s subsidiaries debt ratings were also lowered.Standard and Poor’s also announced that they had placed Mirant’s corporatecredit rating and the debt ratings of the Company and its subsidiaries oncredit watch.

114

----

***Commitments***

Inaddition to debt and other obligations in the consolidated balance sheets, MirantAmericas Generation has the following annual commitments under variousagreements at December 31, 2006, related to its continuing operations (in millions):

| **Fiscal Year Ending**      | ** ** | ** ** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Mirant  Mid-Atlantic operating leases |       | $          | 112        |     | $          | 121      |       | $        | 142        |     | $          | 140      |       | $              | 134        |      |       | $ | 1,597 |   |   | $ | 2,246 |   |
| Other operating  leases               |       | 4          |       | 4        |       | 4        |       | 4        |       | 3        |       |     | 15         |           |       | 34        |       |
| Fuel commitments                      |       | 263        |       | 89       |       | 66       |       | —   |       | —   |       |     | —     |           |       | 418       |       |
| Long-term service  agreements         |       | 3          |       | 1        |       | 2        |       | 2        |       | 2        |       |     | 23         |           |       | 33        |       |
| Other purchase  commitments           |       | 172        |       | —   |       | —   |       | —   |       | —   |       |     | —     |           |       | 172       |       |
| Total payments                        |       | $          | 554        |     | $          | 215      |       | $        | 214        |     | $          | 146      |       | $              | 139        |      |       | $ | 1,635 |   |   | $ | 2,903 |   |

 

***Operating Leases***

Mirant Mid-Atlantic leases the Morgantown andDickerson baseload units and associated property through 2034 and 2029,respectively. Mirant Mid-Atlantic has an option to extend the leases. Anyextensions of the respective leases would be limited to 75% of the economicuseful life of the facility, as measured from the beginning of the originallease term through the end of the proposed remaining lease term. The Company isaccounting for these leases as operating leases and recognizes rent expense ona straight-line basis. Rent expenses totaled $96 million, $99 millionand $103 million for the years ended December 31, 2006, 2005 and2004, respectively, which are included in operations and maintenance expensenonaffiliate in the accompanying consolidated and combined statements ofoperations. As of December, 31, 2006 and 2005, the Company has paidapproximately $314 million and $304 million, respectively, of leasepayments in excess of rent expense recognized.

As of December 31, 2006, the total notionalminimum lease payments for the remaining terms of the leases aggregatedapproximately $2.2 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. These owner lessors each own the undivided interests inthese baseload generating facilities. The subsidiaries of the institutionalinvestors who hold the membership interests in the owner lessors are calledowner participants. Equity funding by the owner participants plus transactionexpenses paid by the owner participants totaled $299 million. The issuanceand sale of pass through certificates raised the remaining $1.2 billion neededfor the owner lessors to acquire the undivided interests.

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.

Significant disputes arose between the Mirant Debtorsand the owner lessors and the indenture trustee for the Mirant Mid-Atlanticleveraged leases regarding among other things, whether or not the leveragedlease transactions constituted a “lease” (or “leases”) within the meaning ofsection 365 of the Bankruptcy Code, or instead evidenced a financingarrangement. On November 30, 2005, the Company entered into a settlementagreement with the Morgantown and Dickerson facilities’ owner lessors and theindenture trustee as part of a resolution of disputed matters in the Chapter 11proceedings. Pursuant to this settlement agreement and the Plan, the Companymade several payments including a settlement 

115

----

payment of $6.5 millioneach to the owner lessors and the indenture trustee, $2.9 million asrestoration payments under the leases, and a reimbursement of legal andconsulting fees of approximately $22 million. With the exception of $6.5 millionpaid to the indenture trustee in January 2006, the remaining amounts werepaid in December 2005. The total costs of $38 million have beenrecorded in reorganization items, net in the 2005 combined statements ofoperations.

The Company has commitmentsunder other operating leases with various terms and expiration dates. Minimumlease payments under non-cancelable operating leases approximate $4 millionin 2007 through 2010, $3 million in 2011 and $15 million thereafter.Expenses associated with these commitments totaled approximately $4 million,$4 million and $5 million during 2006, 2005 and 2004, respectively.

***Fuel Commitments***

As of December 31,2006, the total estimated commitments associated with long-term coal and other fuelcommitments is $418 million. The fair value of certain contracts isincluded in price risk management assets or price risk management liabilitieson the Company’s consolidated balance sheets.

***Long-Term Service Agreements***

As of December 31,2006, the total estimated commitments under LTSAs associated with turbinesinstalled or in storage were approximately $165 million. Of this total,$33 million relates to the Company’s continuing operations and $132 millionrelates to the Company’s Zeeland and Bosque natural gas-fired plants that areincluded in liabilities held for sale. These commitments are payable over theterms of the respective agreements, which range from ten to twenty years. Theseagreements have terms that allow for cancellation of the contracts by theCompany upon the occurrence of several major events during the term of thecontracts. Estimates for future commitments for the LTSAs are based on thestated payment terms in the contracts at the time of execution. These paymentsare subject to an annual inflationary adjustment.

***Other Purchase Commitments***

Other purchase commitmentsrepresent the open purchase orders less invoices received related to openpurchase orders for general procurement products and services purchased in theordinary course of business. These include construction, maintenance and laboractivities at the Company’s generation facilities. Mirant Mid-Atlantic enteredinto an agreement on June 24, 2005, for an SCR System at the Morgantowngenerating station. The system shall be furnished and installed to comply witha State of Maryland environmental consent decree to reduce the emissions ofNOx. The contract value of this capital expenditure is approximately $94 million.

**16.**          SegmentReporting

Previously, the Company managed its business as oneoperating segment. In 2006, Mirant commenced auction processes to sell certainintermediate and peaking natural gas-fired plants including the Company’sZeeland and Bosque plants. The planned sales have resulted in thereclassification of the revenues and expenses of these assets to discontinuedoperations and the reclassification of the related assets and liabilities toassets and liabilities held for sale for all periods presented. In the fourthquarter of 2006, the Company re-evaluated the business segments of itscontinuing operations. As a result, the Company now has four operatingsegments: Mid-Atlantic, Northeast, California and Other Operations. OtherOperations includes proprietary trading and fuel oil management. For periodsprior to 2006, Other Operations also includes gains and losses related to theCompany’s Back-to-Back Agreement and TPAs with Pepco.

116

----

**BusinessSegments**

| ** **                                                                             | ** ** | ** **             | ** ** | ** **    | ** ** | ** **     | ** ** | **Other**      | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                                                             | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Operations** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                                                             | ** ** | **(in millions)** | ** ** |
| **2006:**                                                                              |       |                   |       |          |       |           |       |           |       |             |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues—affiliate                                                     |       |                   | $          | 1,711         |       |           |       | $              | 811        |             |       |       | $          | 47 |   |   |   | $ | 389 |   |   |   | $ | (2,888 | ) |   | $ | 70 |   |
| Operating  revenues—nonaffiliate                                                  |       |                   | 190        |          |       |           | 16         |           |       |             | 124        |       |       |   | 2,873 |   |   |   | — |   |   | 3,203 |   |
| Total operating revenues                                                               |       |                   | 1,901      |          |       |           | 827        |           |       |             | 171        |       |       |   | 3,262 |   |   |   | (2,888 | ) |   | 3,273 |   |
| Cost of fuel,  electricity and other products—affiliate                           |       |                   | 465        |          |       |           | 317        |           |       |             | 56         |       |       |   | 2,221 |   |   |   | (2,926 | ) |   | 133 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                        |       |                   | 118        |          |       |           | 152        |           |       |             | —     |       |       |   | 910 |   |   |   | — |   |   | 1,180 |   |
| Total cost of fuel, electricity and other products                                     |       |                   | 583        |          |       |           | 469        |           |       |             | 56         |       |       |   | 3,131 |   |   |   | (2,926 | ) |   | 1,313 |   |
| Gross margin                                                                           |       |                   | 1,318      |          |       |           | 358        |           |       |             | 115        |       |       |   | 131 |   |   |   | 38 |   |   | 1,960 |   |
| Operating Expenses:                                                                    |       |                   |       |          |       |           |       |           |       |             |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Operations and maintenance—affiliate                                              |       |                   | 135        |          |       |           | 78         |           |       |             | 39         |       |       |   | 22 |   |   |   | — |   |   | 274 |   |
| Operations and maintenance—nonaffiliate                                           |       |                   | 198        |          |       |           | 55         |           |       |             | 24         |       |       |   | — |   |   |   | — |   |   | 277 |   |
| Depreciation and amortization                                                          |       |                   | 74         |          |       |           | 25         |           |       |             | 13         |       |       |   | 10 |   |   |   | — |   |   | 122 |   |
| Impairment losses                                                                      |       |                   | —     |          |       |           | 118        |           |       |             | —     |       |       |   | 1 |   |   |   | — |   |   | 119 |   |
| Loss (gain) on sales of assets—affiliate                                          |       |                   | (2         | )             |       |           | (44        | )              |       |             | —     |       |       |   | 2 |   |   |   | 44 |   |   | — |   |
| Loss (gain) on sales of assets—nonaffiliate                                       |       |                   | (5         | )             |       |           | (2         | )              |       |             | —     |       |       |   | (2 | ) |   |   | — |   |   | (9 | ) |
| Total operating expenses                                                               |       |                   | 400        |          |       |           | 230        |           |       |             | 76         |       |       |   | 33 |   |   |   | 44 |   |   | 783 |   |
| Operating Income                                                                       |       |                   | 918        |          |       |           | 128        |           |       |             | 39         |       |       |   | 98 |   |   |   | (6 | ) |   | 1,177 |   |
| Total other  expense (income), net                                                     |       |                   | (4         | )             |       |           | 9          |           |       |             | (34        | )          |       |   | 174 |   |   |   | — |   |   | 145 |   |
| Income (loss)  from continuing operations before reorganization items and income taxes |       |                   | 922        |          |       |           | 119        |           |       |             | 73         |       |       |   | (76 | ) |   |   | (6 | ) |   | 1,032 |   |
| Reorganization  items, net                                                             |       |                   | —     |          |       |           | (163       | )              |       |             | —     |       |       |   | — |   |   |   | — |   |   | (163 | ) |
| Provision for  income taxes                                                            |       |                   | —     |          |       |           | 2          |           |       |             | —     |       |       |   | 3 |   |   |   | — |   |   | 5 |   |
| Income from  continuing operations                                                     |       |                   | $          | 922           |       |           |       | $              | 280        |             |       |       | $          | 73 |   |   |   | $ | (79 | ) |   |   | $ | (6 | ) |   | $ | 1,190 |   |
| Total assets of continuing operations                                                  |       |                   | $          | 3,404         |       |           |       | $              | 1,198      |             |       |       | $          | 443 |   |   |   | $ | 2,021 |   |   |   | $ | (1,748 | ) |   | $ | 5,318 |   |
| Gross property additions                                                               |       |                   | $          | 112           |       |           |       | $              | 12         |             |       |       | $          | 1 |   |   |   | $ | 2 |   |   |   | $ | — |   |   | $ | 127 |   |

 

117

----

 

| ** **                                                                             | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                                             | ** ** | **(in millions)** | ** ** |
| **2005:**                                                                              |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues—affiliate                                                     |       |                   | $          | 1,197         |       |           |       | $                     | 986        |             |       |      | $          | 60 |   |   |   | $ | 1,891 |   |   |   | $ | (3,975 | ) |   | $ | 159 |   |
| Operating  revenues—nonaffiliate                                                  |       |                   | —     |          |       |           | 53         |                  |       |             | 106        |      |       |   | 2,649 |   |   |   | — |   |   | 2,808 |   |
| Total operating revenues                                                               |       |                   | 1,197      |          |       |           | 1,039      |                  |       |             | 166        |      |       |   | 4,540 |   |   |   | (3,975 | ) |   | 2,967 |   |
| Cost of fuel,  electricity and other products—affiliate                           |       |                   | 610        |          |       |           | 778        |                  |       |             | 55         |      |       |   | 2,735 |   |   |   | (3,991 | ) |   | 187 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                        |       |                   | 132        |          |       |           | 56         |                  |       |             | (2         | )         |       |   | 1,759 |   |   |   | — |   |   | 1,945 |   |
| Total cost of fuel, electricity and other products                                     |       |                   | 742        |          |       |           | 834        |                  |       |             | 53         |      |       |   | 4,494 |   |   |   | (3,991 | ) |   | 2,132 |   |
| Gross margin                                                                           |       |                   | 455        |          |       |           | 205        |                  |       |             | 113        |      |       |   | 46 |   |   |   | 16 |   |   | 835 |   |
| Operating  Expenses:                                                                   |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and maintenance—affiliate                                              |       |                   | 148        |          |       |           | 77         |                  |       |             | 37         |      |       |   | 25 |   |   |   | — |   |   | 287 |   |
| Operations and maintenance—nonaffiliate                                           |       |                   | 193        |          |       |           | 148        |                  |       |             | 32         |      |       |   | 2 |   |   |   | — |   |   | 375 |   |
| Depreciation and amortization                                                          |       |                   | 64         |          |       |           | 33         |                  |       |             | 5          |      |       |   | 13 |   |   |   | — |   |   | 115 |   |
| Loss (gain) on sales of assets—nonaffiliate                                       |       |                   | —     |          |       |           | (10        | )                     |       |             | —     |      |       |   | 1 |   |   |   | 8 |   |   | (1 | ) |
| Total operating expenses                                                               |       |                   | 405        |          |       |           | 248        |                  |       |             | 74         |      |       |   | 41 |   |   |   | 8 |   |   | 776 |   |
| Operating Income (loss)                                                                |       |                   | 50         |          |       |           | (43        | )                     |       |             | 39         |      |       |   | 5 |   |   |   | 8 |   |   | 59 |   |
| Total other  expense (income), net                                                     |       |                   | 18         |          |       |           | 6          |                  |       |             | 1          |      |       |   | 730 |   |   |   | (26 | ) |   | 729 |   |
| Income (loss)  from continuing operations before reorganization items and income taxes |       |                   | 32         |          |       |           | (49        | )                     |       |             | 38         |      |       |   | (725 | ) |   |   | 34 |   |   | (670 | ) |
| Reorganization  items, net                                                             |       |                   | 22         |          |       |           | 7          |                  |       |             | (169       | )         |       |   | 199 |   |   |   | 26 |   |   | 85 |   |
| Provision  (benefit) for income taxes                                                  |       |                   | —     |          |       |           | 6          |                  |       |             | 9          |      |       |   | (10 | ) |   |   | — |   |   | 5 |   |
| Income (loss) from  continuing operations                                              |       |                   | $          | 10            |       |           |       | $                     | (62        | )                |       |      | $          | 198 |   |   |   | $ | (914 | ) |   |   | $ | 8 |   |   | $ | (760 | ) |
| Total assets of continuing operations                                                  |       |                   | $          | 3,334         |       |           |       | $                     | 1,020      |             |       |      | $          | 379 |   |   |   | $ | 3,724 |   |   |   | $ | (1,980 | ) |   | $ | 6,477 |   |
| Gross property additions                                                               |       |                   | $          | 67            |       |           |       | $                     | 15         |             |       |      | $          | 14 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 96 |   |

 

118

----

 

| ** **                                                                             | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                                             | ** ** | **(in millions)** | ** ** |
| **2004:**                                                                              |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating revenues—affiliate                                                      |       |                   | $          | 1,021         |       |           |       | $                     | 708        |             |       |      | $          | 232 |   |   |   | $ | 1,822 |   |   |   | $ | (3,341 | ) |   | $ | 442 |   |
| Operating revenues—nonaffiliate                                                   |       |                   | 1          |          |       |           | 96         |                  |       |             | 144        |      |       |   | 2,782 |   |   |   | — |   |   | 3,023 |   |
| Total operating revenues                                                               |       |                   | 1,022      |          |       |           | 804        |                  |       |             | 376        |      |       |   | 4,604 |   |   |   | (3,341 | ) |   | 3,465 |   |
| Cost of fuel,  electricity and other products—affiliate                           |       |                   | 372        |          |       |           | 507        |                  |       |             | 229        |      |       |   | 2,371 |   |   |   | (3,348 | ) |   | 131 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                        |       |                   | 149        |          |       |           | 69         |                  |       |             | 1          |      |       |   | 2,034 |   |   |   | — |   |   | 2,253 |   |
| Total cost of fuel,  electricity and other products                                    |       |                   | 521        |          |       |           | 576        |                  |       |             | 230        |      |       |   | 4,405 |   |   |   | (3,348 | ) |   | 2,384 |   |
| Gross margin                                                                           |       |                   | 501        |          |       |           | 228        |                  |       |             | 146        |      |       |   | 199 |   |   |   | 7 |   |   | 1,081 |   |
| Operating Expenses:                                                                    |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance—affiliate                                             |       |                   | 152        |          |       |           | 82         |                  |       |             | 50         |      |       |   | 35 |   |   |   | (1 | ) |   | 318 |   |
| Operations and  maintenance—nonaffiliate                                          |       |                   | 184        |          |       |           | 118        |                  |       |             | 30         |      |       |   | 9 |   |   |   | — |   |   | 341 |   |
| Depreciation and  amortization                                                         |       |                   | 62         |          |       |           | 31         |                  |       |             | 4          |      |       |   | 15 |   |   |   | — |   |   | 112 |   |
| Impairment losses                                                                      |       |                   | —     |          |       |           | —     |                  |       |             | —     |      |       |   | 2 |   |   |   | — |   |   | 2 |   |
| Loss on sales of assets—nonaffiliate                                              |       |                   | —     |          |       |           | 43         |                  |       |             | —     |      |       |   | 1 |   |   |   | 18 |   |   | 62 |   |
| Total operating expenses                                                               |       |                   | 398        |          |       |           | 274        |                  |       |             | 84         |      |       |   | 62 |   |   |   | 17 |   |   | 835 |   |
| Operating Income (loss)                                                                |       |                   | 103        |          |       |           | (46        | )                     |       |             | 62         |      |       |   | 137 |   |   |   | (10 | ) |   | 246 |   |
| Total other expense  (income), net                                                     |       |                   | 3          |          |       |           | (3         | )                     |       |             | 1          |      |       |   | 6 |   |   |   | (7 | ) |   | — |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       |                   | 100        |          |       |           | (43        | )                     |       |             | 61         |      |       |   | 131 |   |   |   | (3 | ) |   | 246 |   |
| Reorganization items,  net                                                             |       |                   | (6         | )             |       |           | 20         |                  |       |             | 18         |      |       |   | 98 |   |   |   | 8 |   |   | 138 |   |
| Provision (benefit) for  income taxes                                                  |       |                   | —     |          |       |           | (5         | )                     |       |             | (15        | )         |       |   | 5 |   |   |   | — |   |   | (15 | ) |
| Income (loss) from  continuing  operations                                             |       |                   | $          | 106           |       |           |       | $                     | (58        | )                |       |      | $          | 58 |   |   |   | $ | 28 |   |   |   | $ | (11 | ) |   | $ | 123 |   |
| Total assets of  continuing operations                                                 |       |                   | $          | 3,148         |       |           |       | $                     | 1,469      |             |       |      | $          | 548 |   |   |   | $ | 2,481 |   |   |   | $ | (2,044 | ) |   | $ | 5,602 |   |
| Gross property additions                                                               |       |                   | $          | 41            |       |           |       | $                     | 26         |             |       |      | $          | 19 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 86 |   |

 

**GeographicAreas**

| ** **                 | ** ** | **Property, Plant and Equipment and Other Intangible Assets** | ** ** |
|----------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Mid-Atlantic**                                                                                 | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **(in millions)**                                                                           | ** ** |
| At December 31,  2006 |       |                                                                                             | $          | 2,450 |   |   |   | $ | 571 |   |   |   | $ | 163 |   |   |   | $ | 14 |   |   |   | $ | (799 | ) |   | $ | 2,399 |   |
| At December 31, 2005  |       |                                                                                             | $          | 2,368 |   |   |   | $ | 707 |   |   |   | $ | 222 |   |   |   | $ | 18 |   |   |   | $ | (799 | ) |   | $ | 2,516 |   |

 

**17.**          Litigationand Other Contingencies

The Company is involved in a number of significantlegal proceedings. In certain cases plaintiffs seek to recover large andsometimes unspecified damages, and some matters may be unresolved for severalyears. The Company cannot currently determine the outcome of the proceedingsdescribed below or the ultimate amount of potential losses and therefore hasnot made any provision for such matters unless specifically noted below.Pursuant to SFAS No. 5, 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 and combined financialposition, results of operations or cash flows.

119

----

***Chapter 11 Proceedings***

On July 14, 2003, and various dates thereafter,Mirant Corporation and certain of its subsidiaries (collectively, the “MirantDebtors”), including the Company and its subsidiaries, filed voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code in theBankruptcy Court. Most of the material claims filed against the Mirant Debtors’estates were disallowed or were resolved and became “allowed” claims beforeconfirmation of the Plan that became effective for Mirant, the Company and mostof the Mirant Debtors on January 3, 2006. Mirant, as the distributionagent under the Plan, has made distributions pursuant to the terms of the Planon those allowed claims. Some claims, however, remain unresolved.

As of December 31, 2006, approximately 21 millionof the shares of Mirant common stock to be distributed under the Plan have notyet been distributed and have been reserved for distribution with respect toclaims that are disputed by the Mirant Debtors and have not been resolved. A settlemententered into on May 30, 2006, among Pepco, Mirant, MC 2005, LLC f/k/aMirant Corporation (“Old Mirant”), and various subsidiaries of Mirant,including subsidiaries of the Company, if approved by final order in theChapter 11 proceedings, would result in the distribution of up to 18 millionof the reserved shares to Pepco, as described below in *PepcoLitigation*. Under the terms of the Plan, to the extent other suchunresolved claims are resolved now that the Company has emerged frombankruptcy, the claimants will be paid from the reserved shares on the samebasis as if they had been paid when the Plan became effective. That means thattheir allowed claims will receive the same pro rata distributions of Mirantcommon stock, cash, or both common stock and cash as previously allowed claimsin accordance with the terms of the Plan. To the extent the aggregate amount ofthe payouts determined to be due with respect to such disputed claimsultimately exceeds the amount of the funded claim reserve, Mirant would have toissue additional shares of common stock to address the shortfall, which woulddilute existing Mirant shareholders, and Mirant and the Company would have topay additional cash amounts as necessary under the terms of the Plan to satisfysuch pre-petition claims.

The Company’s subsidiaries related to its New Yorkbusiness operations, Mirant New York, Mirant Bowline, Mirant Lovett, HudsonValley Gas Corporation and Mirant NY-Gen remain in bankruptcy. The Company’sLovett and Bowline generation facilities in New York were subject to disputeswith local tax authorities regarding property tax assessments that were notresolved until December 2006, as described below in *New York TaxProceedings*. Resolution of those tax disputes should allow MirantNew York, Mirant Bowline, and Hudson Valley Gas to emerge from bankruptcy in2007. On January 26, 2007, Mirant New York, Mirant Bowline, and HudsonValley Gas (collectively, the “Emerging New York Entities”) filed aSupplemental Joint Chapter 11 Plan of Reorganization of the Emerging New YorkEntities (the “Supplemental Plan”) with the Bankruptcy Court. The SupplementalPlan has two main components. First, the Supplemental Plan incorporates asettlement with the various New York tax jurisdictions that resolved the taxdisputes related to the Lovett and Bowline facilities. Second, the SupplementalPlan provides unsecured creditors of the Emerging New York Entities with thesame treatment afforded holders of unsecured claims against the Company and itssubsidiaries under the Plan. Such unsecured creditors of the Emerging New YorkEntities will receive their pro rata share of the pool of assets created underthe Plan for the benefit of the unsecured creditors of the Company and itssubsidiaries. On January 26, 2007, the Emerging New York Entities alsofiled a motion with the Bankruptcy Court to establish procedures to facilitatethe consideration and confirmation of the Supplemental Plan. That motionrequests, among other things, that the Bankruptcy Court find that theSupplemental Plan does not alter in any respect from the Plan the treatment ofthe holders of unsecured claims against the Emerging New York Entities, andthat all votes previously cast by such holders in respect of the Plan (whichvotes accepted the Plan for the Emerging New York Entities by the requisitenumber and amount required by the Bankruptcy Code) should be deemed votes castin respect of the Supplemental Plan. The hearing before the Bankruptcy Court toconsider the confirmation of the Supplemental Plan is scheduled for March 21,2007.

120

----

On October 19, 2006, Mirant Lovett notified theNew York Public Service Commission, the NYISO, Orange and Rockland and certainother affected transmission and distribution companies in New York of itsintent to discontinue operation of units 3 and 5 of the Lovett facility in April 2007.The discontinuance of operations at unit 5 is in accordance with therequirements of a June 11, 2003, Consent Decree (the “2003 Consent Decree”)among Mirant Lovett, the State of New York and the NYSDEC that requires MirantLovett to install certain environmental controls on unit 5 of the Lovettfacility or shut down that unit by April 30, 2007. The 2003 Consent Decreeimposes similar requirements with respect to unit 4 that have to be met by April 30,2008. Operations at unit 3 are being discontinued because it is uneconomic tocontinue to run unit 3 if operations at unit 5 are discontinued. Mirant Lovettis in discussions with the NYSDEC and the New York State Office of the AttorneyGeneral regarding environmental controls. If Mirant Lovett is able to agreewith the New York Attorney General’s office and the NYSDEC on alternativecontrol technologies that would allow unit 5 to remain in operation past April 30,2007, then Mirant Lovett may rescind the notice of its intent to discontinueoperations at units 3 and 5. Until a resolution is reached on environmentalcontrols that would permit economically feasible operation, Mirant Lovett willlikely remain in Chapter 11. Mirant NY-Gen, which owns hydroelectric facilitiesat Swinging Bridge, Rio and Mongaup, and small combustion turbine facilities atHillburn and Shoemaker, is insolvent. Its expenses are being funded under adebtor-in-possession facility provided by Mirant Americas with the approval of,and under the supervision of, the Bankruptcy Court. Mirant NY-Gen is proceedingwith the implementation of a remediation plan for the sinkhole discovered in May 2005in the dam at the Swinging Bridge facility. The status of the remediation effortis discussed below in *Other Contingencies*.

On January 31, 2007, Mirant New York entered intothe Alliance Sale pursuant to which it will sell Mirant NY-Gen, which owns theHillburn and Shoemaker gas turbine facilities and the Swinging Bridge, Rio andMongaup hydroelectric generating facilities, to Alliance Energy, LLC. The salesprice of approximately $5 million is subject to adjustments for workingcapital and certain dam remediation efforts that are ongoing at the SwingingBridge facility. The Bankruptcy Court approved the Alliance Sale on March 8,2007. The transaction is expected to close in the second quarter of 2007 inconjunction with a plan of reorganization becoming effective for Mirant NY-Gen.On February 15, 2007, Mirant NY-Gen filed the proposed Mirant NY-Gen Plan.It subsequently filed a related disclosure statement. Upon approval of thedisclosure statement by the Bankruptcy Court, Mirant NY-Gen will solicit votesof its creditors and proceed to a confirmation hearing seeking approval of the MirantNY-Gen Plan. The Bankruptcy Court will consider approval of the disclosurestatement on March 21, 2007. No date has been set for the confirmation ofthe Mirant NY-Gen Plan. The Mirant NY-Gen Plan is proposed in connection withthe Alliance Sale. Under the terms of the Mirant NY-Gen Plan, on the date thatthe Mirant NY-Gen Plan is confirmed, the Bankruptcy Court will estimate theamount of cash required for Mirant NY-Gen to pay in full all the claimsoutstanding against Mirant NY-Gen other than claims arising from thedebtor-in-possession loan provided by Mirant Americas to Mirant NY-Gen andintercompany claims. Proceeds from the Alliance Sale in an amount equal to theBankruptcy Court’s estimate of the claims will be reserved to pay such claims.The balance will be paid to Mirant Americas in partial satisfaction of the$16.5 million debtor-in-possession loan and all intercompany claims heldby Mirant NY-Gen will be assigned to Mirant Americas. Upon closing of theAlliance Sale, Mirant Americas will release all of its claims and liens againstMirant NY-Gen.

Until the Company’ssubsidiaries related to its New York business operations emerge frombankruptcy, the Company will not have access to the cash from operationsgenerated from these subsidiaries. In 2006, Mirant’s New York operationsgenerated $5 million of cash from operating activities.

***Pepco Litigation***

In 2000, Mirant purchased power generating facilitiesand other assets from Pepco, including certain PPAs between Pepco and thirdparties. Under the terms of the APSA, Mirantand Pepco entered into a 

121

----

contractualagreement (the “Back-to-Back Agreement”) with respect to certain PPAs,including Pepco’s long-term PPA with Panda, under which (1) Pepco agreedto resell to Mirant all capacity, energy, ancillary services and other benefitsto which it is entitled under those agreements and (2) Mirant agreed topay Pepco each month all amounts due from Pepco to the sellers under thoseagreements for the immediately preceding month associated with such capacity,energy, ancillary services and other benefits. The Panda PPA runs until2021, and the Back-to-Back Agreement does not expire until all obligations havebeen performed under the Panda PPA. Under the Back-to-Back Agreement, Mirant isobligated to purchase power from Pepco at prices that typically are higher thanthe market prices for power.

Mirant assigned its rights and obligations under theBack-to-Back Agreement to Mirant Americas Energy Marketing. In the Chapter 11cases of the Mirant Debtors, Pepco asserted that an Assignment and AssumptionAgreement dated December 19, 2000, that includes as parties Pepco andvarious of the Company’s subsidiaries causes the Company’s subsidiaries thatare parties to the agreement to be jointly and severally liable to Pepco forvarious obligations, including the obligations under the Back-to-BackAgreement. The Mirant Debtors have sought to reject the APSA, the Back-to-BackAgreement, and the Assignment and Assumption Agreement, and the rejectionmotions have not been resolved. Under the Plan, the obligations of the MirantDebtors under the APSA (including any other agreements executed pursuant to theterms of the APSA and found by a final court order to be part of the APSA), theBack-to-Back Agreement, and the Assignment and Assumption Agreement are to beperformed by Mirant Power Purchase, whose performance is guaranteed by Mirant.If any of the agreements is successfully rejected, the obligations of MirantPower Purchase and Mirant’s guarantee obligations terminate with respect tothat agreement, and Pepco would be entitled to a claim in the Chapter 11proceedings for any resulting damages. That claim would then be addressed underthe terms of the Plan. If the Bankruptcy Court were to conclude that theAssignment and Assumption Agreement imposed liability upon the Company’ssubsidiaries for the obligations under the Back-to-Back Agreement and theBack-to-Back Agreement were to be rejected, the resulting rejection damagesclaim could result in a claim in the Chapter 11 proceedings against the Company’ssubsidiaries but any such claim would be reduced by the amount recovered byPepco on its comparable claim against Mirant.

On May 30, 2006, Mirant, Mirant Power Purchase,Old Mirant, various subsidiaries of Mirant (including subsidiaries of theCompany), and a trust established pursuant to the Plan to which ownership ofOld Mirant and Mirant Americas Energy Marketing was transferred (collectivelythe “Mirant Settling Parties”) entered into a Settlement Agreement and Release(the “Settlement Agreement”) with Pepco and various affiliates of Pepco(collectively the “Pepco Settling Parties”). Once it becomes effective, theSettlement Agreement will fully resolve the contract rejection motions thatremain pending in the bankruptcy proceedings, as well as other matterscurrently disputed between Pepco and Mirant and its subsidiaries. The PepcoSettling Parties and the Mirant Settling Parties will release each other fromall claims known as of May 30, 2006, including the fraudulent transferclaims brought by Old Mirant and several of its subsidiaries against Pepco in July 2005.The Settlement Agreement will become effective once it has been approved by theBankruptcy Court and that approval order has become a final order no longersubject to appeal. On August 9, 2006, the Bankruptcy Court entered anorder approving the Settlement Agreement, but certain holders of unsecuredclaims against Old Mirant in the bankruptcy proceedings appealed that order. OnDecember 26, 2006, the United States District Court for the NorthernDistrict of Texas affirmed the bankruptcy court order approving the settlement,but the claims holders have appealed that ruling to the United States Court ofAppeals for the Fifth Circuit, and the approval order has not yet become afinal order.

Under the Settlement Agreement, Mirant Power Purchasewill perform any remaining obligations under the APSA, and Mirant will guarantyits performance. The Back-to-Back Agreement will be rejected and terminatedeffective as of May 31, 2006, unless Mirant exercises an option given toit under the Settlement Agreement to have the Back-to-Back Agreement assumedunder certain conditions. If the 

122

----

closing price of Mirant’sstock is less than $16.00 on four business days in a 20 consecutive businessday period prior to any distribution of shares to Pepco on its claim, thenMirant can elect to have the Back-to-Back Agreement assumed and assigned toMirant Power Purchase rather than rejecting it, and the claim received by Pepcowill be reduced as described below.

With respect to the other agreements executed as partof the closing of the APSA (the “Ancillary Agreements”) and other agreementsbetween Pepco and subsidiaries of Mirant, including subsidiaries of theCompany, the Mirant subsidiary that is a party to each agreement will assumethe agreement and Mirant will guaranty that subsidiary’s performance. MirantPower Purchase’s obligations under the APSA do not include any obligationsrelated to the Ancillary Agreements. If the Back-to-Back Agreement is rejectedpursuant to the terms of the Settlement Agreement, the Settlement Agreementprovides that a future breach of the APSA or any Ancillary Agreement by a partyto such agreement will not entitle the non-defaulting party to terminate,suspend performance under, or exercise any other right or remedy under or withrespect to any of the remainder of such agreements. If, however, Mirant electsto have the Back-to-Back Agreement assumed and assigned to Mirant PowerPurchase under the conditions set out in the Settlement Agreement, then theSettlement Agreement provides that nothing in its terms prejudices the argumentcurrently being made by Pepco in the contract rejection proceedings that theAPSA, the Back-to-Back Agreement, and the Ancillary Agreements constitute asingle non-severable agreement, the material breach of which would entitlePepco to suspend or terminate its performance thereunder, or any defense ofMirant and its subsidiaries to such an argument by Pepco.

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having avalue, after liquidation of the stock by Pepco, equal to $520 million,subject to certain adjustments. Upon the Settlement Agreement becomingeffective, Mirant will distribute up to 18 million shares of Mirant commonstock to Pepco to satisfy its claim and Pepco will liquidate those shares. Theshares to be distributed to Pepco will be determined by Mirant after theSettlement Agreement becomes effective so as to produce upon liquidation totalnet proceeds as near to $520 million as possible, subject to the overallcap on the shares to be distributed of 18 million shares. If the netproceeds received by Pepco from the liquidation of the shares are less than$520 million, Mirant will pay Pepco cash equal to the difference. IfMirant exercises the option to have the Back-to-Back Agreement assumed, thenthe $520 million is reduced to $70 million, Mirant Power Purchasewould continue to perform the Back-to-Back Agreement through its expiration in2021, and Mirant would guarantee its performance. The Settlement Agreementallocates the $70 million to various claims asserted by Pepco that do notarise from the rejection of the Back-to-Back Agreement, including claimsasserted under the Local Area Support Agreement between Pepco and MirantPotomac River that are discussed below in *Pepco Assertion of Breachof Local Area Support Agreement*.

***California and Western Power Markets***

*FERCRefund Proceedings.*   On July 25, 2001, theFERC issued an order requiring proceedings (the “FERC Refund Proceedings”) todetermine the amount of any refunds and amounts owed for sales made by marketparticipants, including Mirant Americas Energy Marketing, to the CAISO or theCal PX from October 2, 2000, through June 20, 2001 (the “RefundPeriod”). Various parties have appealed these FERC orders to the United StatesCourt of Appeals for the Ninth Circuit (the “Ninth Circuit”) seeking review ofa number of issues, including changing the Refund Period to include periodsprior to October 2, 2000, and expanding the sales of electricity subjectto potential refund to include bilateral sales made to the DWR and otherparties. On August 2, 2006, the Ninth Circuit issued an opinion addressingsome of the issues raised by these appeals. The Ninth Circuit remanded to theFERC for further proceedings the FERC’s denial of relief for sales ofelectricity made in the CAISO and Cal PX markets prior to October 2, 2000,at rates found to be unjust and directed the FERC to address the parties’request for a market-wide remedy 

123

----

for tariff violations thatmay have occurred prior to October 2, 2000. In addition, the Ninth Circuitfound that the FERC had not adequately supported its decision to exclude fromthe FERC Refund Proceedings (i) sales made in the CAISO and Cal PX thathad a term of greater than 24 hours, and (ii) energy exchangetransactions, and remanded these issues to the FERC for further proceedings.The Ninth Circuit affirmed the FERC’s decision to exclude bilateral sales tothe DWR from the FERC Refund Proceeding. If the FERC grants the parties’requested relief with respect to the issues remanded by the Ninth Circuit, anyexpansion of the Refund Period to include periods prior to October 2,2000, or of the types of sales of electricity potentially subject to refundcould increase the refund exposure of Mirant Americas Energy Marketing in thisproceeding.

In the July 25, 2001, order, the FERC alsoordered that a preliminary evidentiary proceeding be held to develop a factualrecord on whether there had been unjust and unreasonable charges for spotmarket bilateral sales in the Pacific Northwest from December 25, 2000,through June 20, 2001. In that proceeding, the California AttorneyGeneral, the CPUC and the EOB filed to recover certain refunds from parties,including Mirant Americas Energy Marketing, for bilateral sales of electricityto the DWR at the California/Oregon border, claiming that such sales took placein the Pacific Northwest. In an order issued June 25, 2003, the FERC ruledthat no refunds were owed and terminated the proceeding. On November 10,2003, the FERC denied requests for rehearing filed by various parties. Variousparties appealed the FERC’s decision to the Ninth Circuit.

On September 9, 2004, the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed in 2002 by the California AttorneyGeneral that sought refunds for transactions conducted in markets administeredby the CAISO and the Cal PX outside the Refund Period set by the FERC and fortransactions between the DWR and various owners of generation and powermarketers, including Mirant Americas Energy Marketing and subsidiaries of theCompany. 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, purportedly did notcomply with certain filing requirements for transactions conducted under market-basedrate tariffs. On July 31, 2006, the Ninth Circuit denied a petition forrehearing filed by Mirant Americas Energy Marketing and other parties. Variousparties to the proceeding have filed a petition for writ of certiorari with theUnited States Supreme Court requesting it to review the Ninth Circuit’s September 9,2004, decision.

On January 14, 2005,**Mirantand certain of its subsidiaries, including the Company, entered into aSettlement and Release of Claims Agreement (the “California Settlement”) withPG&E, SCE, San Diego Gas and Electric Company, the CPUC, the DWR, the EOBand the Attorney General of the State of California (collectively, the “CaliforniaParties”) and with the Office of Market Oversight and Investigations of theFERC. The California Settlement settled a number of disputed lawsuits andregulatory proceedings that were pursued originally in state and federal courtsand before the FERC. The Mirant entities that are parties to the CaliforniaSettlement (collectively, the “Mirant Settling Parties”) include MirantCorporation, Mirant Americas Energy Marketing, the Company, and Mirant NorthAmerica (as the successor to Mirant California Investments, Inc.). TheCalifornia Settlement was approved by the FERC on April 13, 2005, andbecame effective April 15, 2005, upon its approval by the BankruptcyCourt. The California Settlement resulted in the release of most of MirantAmericas Energy Marketing’s potential liability (1) in the FERC RefundProceedings for sales made in the CAISO or the Cal PX markets, (2) in 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) in 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 the Mirant Settling Parties from any liability forrefunds related to sales of electricity and natural gas in the western marketsfrom January 1, 1998, through July 14, 

124

----

2003. Also, the CaliforniaParties have assumed the obligation of Mirant Americas Energy Marketing to payany refunds determined by the FERC to be owed by Mirant Americas EnergyMarketing to other parties that do not opt into the settlement for transactionsin the CAISO and Cal PX markets during the Refund Period, with the liability ofthe California Parties for such refund obligation limited to the amount ofcertain receivables assigned by Mirant Americas Energy Marketing to theCalifornia Parties under the California Settlement. The settlement did notrelieve Mirant Americas Energy Marketing of liability for any refunds that theFERC determines it to owe (1) to participants in the Cal PX and CAISOmarkets that are not California Parties (or that did 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 did not elect to opt into thesettlement).

**The Company’s view is that the bulkof any obligations of Mirant Americas Energy Marketing to make refunds as aresult of sales completed prior to July 14, 2003, in the CAISO or Cal PXmarkets or in bilateral transactions either have been addressed by theCalifornia Settlement or have been resolved as part of Mirant Americas EnergyMarketing’s bankruptcy proceedings. To the extent that Mirant Americas EnergyMarketing’s potential refund liability arises from contracts that weretransferred to Mirant Energy Trading as part of the transfer of the trading andmarketing business under the Plan, Mirant Energy Trading may have exposure toany refund liability related to transactions under those contracts.**

*FERCShow Cause Proceeding Relating to Trading Practices.**  *On June 25, 2003, the FERC issued a show causeorder (the “Trading Practices Order”) to more than 50 parties, including MirantAmericas Energy Marketing and subsidiaries of the Company, that a FERC staffreport issued on March 26, 2003, identified as having potentially engagedin one or more trading strategies of the type employed by Enron Corporation andits affiliates (“Enron”), as described in 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, and June 20,2001, that may involve the identified trading strategies, and then requires theapplicable sellers involved in those transactions to demonstrate why suchtransactions were 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 sales 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 the show cause proceeding. On December 19,2003, the Mirant entities filed with the FERC for approval of an amendment tothe Trading Settlement Agreement reached with the FERC Trial Staff with respectto the sale of ancillary services. Under that 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 respectto the sale of ancillary services. The FERC approved the Trading SettlementAgreement, as amended, on June 27, 2005, and the Bankruptcy Court approvedit on August 24, 2005. Certain parties filed motions for rehearing, whichthe FERC denied on October 11, 2006. A party to the proceeding hasappealed the FERC’s June 27, 2005, order to the Ninth Circuit.

125

----

*MirantAmericas Energy Marketing Contract Dispute with Nevada Power.**  *On December 5, 2001, Nevada Power Co. filed acomplaint at the FERC seeking reformation of the purchase price of energy undera contract it had entered with Mirant Americas Energy Marketing, claiming thatthe prices under that contract were unjust and unreasonable because, when itentered into the contract, western power markets were dysfunctional andnon-competitive markets. On June 25, 2003, the FERC dismissed thiscomplaint. Nevada Power appealed that dismissal to the United States Court ofAppeals for the Ninth Circuit, which on December 19, 2006, reversed thedismissal of the complaint and remanded the proceeding to the FERC. The salesmade under the contract with Nevada Power have been completed, and the Companyexpects that any refund claim related to that contract, if not now barred, willbe addressed in the Chapter 11 proceedings.

*Mirant Americas EnergyMarketing Contract Dispute with Southern California Water.**  *On December 21, 2001, Southern California WaterCo. filed a complaint at the FERC seeking reformation of the purchase price ofenergy under a long-term contract it had entered with Mirant Americas EnergyMarketing, claiming that the prices under that contract were unjust and unreasonablebecause, when it entered the contract, western power markets were dysfunctionaland non-competitive markets. The contract was for the purchase of 15 MWs duringthe period April 1, 2001, through December 31, 2006. On June 25,2003, the FERC dismissed this proceeding. Southern California Water appealedthat dismissal to the United States Court of Appeals for the Ninth Circuit,which on December 19, 2006, reversed the dismissal of the complaint andremanded the proceeding to the FERC. Upon the transfer of the assets of thetrading and marketing business to Mirant Energy Trading under the Plan, MirantEnergy Trading assumed Mirant Americas Energy Marketing’s contract obligationsto Southern California Water Company, including any potential refund obligations.

***U.S. Government Inquiries***

*Department of JusticeInquiries.**  *In November 2002,Mirant received a subpoena from the DOJ, acting through the United StatesAttorney’s office for the Northern District of California, requestinginformation about its activities and those of its subsidiaries for the periodsince January 1, 1998. The subpoena requested information related to theCalifornia energy markets and other topics, including the reporting ofinaccurate information to trade publications that publish natural gas orelectricity spot price data. The subpoena was issued as part of a grand juryinvestigation. The DOJ’s investigation is based upon the same circumstancesthat were the subject of an investigation by the CFTC that was settled in December 2004,****as described****in Mirant’sAnnual Report on Form 10-K for the year ended December 31,2004, in*Legal Proceedings—Other Governmental Proceedings—CFTCInquiry*. On June 19, 2006, two former employees of Mirant pledguilty to charges of conspiracy to manipulate the price of natural gas ininterstate commerce during the period from July 1, 2000, until November 1,2000, while they were west region traders for Mirant Americas Energy Marketing.Mirant is discussing the disposition of this matter with the DOJ. If Mirant isunable to reach a consensual resolution with the DOJ, it is possible that theDOJ could seek indictments against one or more Mirant entities for allegedviolations of the Commodity Exchange Act. A consensual resolution of thismatter could involve a deferred prosecution agreement and payment of a fine orpenalty**.** The Company’s current assessment isthat any such fine or penalty would be paid by Mirant, not the Company or itssubsidiaries.

***Environmental Matters***

*EPAInformation Request.**  *InJanuary 2001, the EPA issued a request for information to Mirantconcerning the implications under the EPA’s NSR regulations promulgated underthe Clean Air Act of past repair and maintenance activities at the PotomacRiver plant in Virginia and the Chalk Point, Dickerson and Morgantown plants inMaryland. The requested information concerns the period of operations thatpredates the Company subsidiaries’ ownership and lease of those plants. Mirantresponded 

126

----

fully to this request.Under the APSA, Pepco is responsible for fines and penalties arising from anyviolation associated with operations prior to the Company subsidiaries’acquisition or lease of the plants. If a violation is determined to haveoccurred at any of the plants, the Company subsidiary owning or leasing theplant may be responsible for the cost of purchasing and installing emissionscontrol equipment, the cost of which may be material. The Company’ssubsidiaries owning or leasing the Chalk Point, Dickerson and Morgantown plantsin Maryland will be installing a variety of emissions control equipment onthose plants to comply with the Maryland Healthy Air Act, but that equipment willnot include all of the emissions control equipment that could be required if aviolation of the EPA’s NSR regulations is determined to have occurred at one ormore of those plants. If such a violation is determined to have occurred afterthe Company’s subsidiaries acquired or leased the plants or, if occurring priorto the acquisition or lease, is determined to constitute a continuingviolation, the Company’s subsidiary owning or leasing the plant at issue couldalso be subject to fines and penalties by the state or federal government forthe period after its acquisition or lease of the plant, the cost of which maybe material, although applicable bankruptcy law may bar such liability forperiods prior to January 3, 2006, when the Plan became effective for theCompany and its subsidiaries that own or lease these plants.

*MirantPotomac River Notice of Violation.**  *OnSeptember 10, 2003, the Virginia DEQ issued an NOV to Mirant Potomac Riveralleging that it violated its Virginia Stationary Source Permit to Operate byemitting NOx in excess of the “cap” established by the permit for the 2003summer ozone season. Mirant Potomac River responded to the NOV, asserting thatthe cap was unenforceable, noting that when the cap was made part of the permitit could comply through the purchase of emissions allowances and raising otherequitable defenses. Virginia’s civil enforcement statute provides forinjunctive relief and penalties. On January 22, 2004, the EPA issued anNOV to Mirant Potomac River alleging the same violation of its VirginiaStationary Source Permit to Operate as set out in the NOV issued by theVirginia DEQ.

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MDE, the DOJand the EPA entered into, and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia, a proposed consent decree(the “Original Consent Decree”) that, if approved, would have resolved MirantPotomac River’s potential liability for matters addressed in the NOVspreviously issued by the Virginia DEQ and the EPA. The Original Consent Decreewould have required Mirant Potomac River and Mirant Mid-Atlantic to (1) installpollution control equipment at the Potomac River plant in Virginia and at theMorgantown plant in Maryland leased by Mirant Mid-Atlantic, (2) complywith declining system-wide ozone season NOx emissions caps from 2004 through2010, (3) comply with system-wide annual NOx emissions caps starting in2004, (4) meet seasonal system average emissions rate targets in 2008 and (5) paycivil penalties and perform supplemental environmental projects in and aroundthe Potomac River plant expected to achieve additional environmental benefits.Except for the installation of the controls planned for the Potomac River unitsand the installation of selective catalytic reduction (“SCR”) or equivalenttechnology at Mirant Mid-Atlantic’s Morgantown units 1 and 2 in 2007 and 2008,the Original Consent Decree would not have obligated the Company’s subsidiariesto install specifically designated technology, but rather to reduce emissionssufficiently to meet the various NOx caps. Moreover, as to the requiredinstallations of SCRs at Morgantown, Mirant Mid-Atlantic may choose not toinstall the technology by the applicable deadlines and leave the units offeither permanently or until such time as the SCRs are installed. The Original ConsentDecree was subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree was not approved and theparties have filed an amended proposed consent decree that supersedes theOriginal Consent Decree.

On July 22, 2005, thedistrict court granted a motion filed by the City of Alexandria seeking tointervene in the district court action, although the district court imposedcertain limitations on the City of Alexandria’s participation in the proceedings.On September 23, 2005, the City of Alexandria filed a motion seekingauthority to file an amended complaint in the action seeking injunctive reliefand civil 

127

----

penaltiesunder the Clean Air Act for alleged violations by Mirant Potomac River of itsVirginia Stationary Source Permit to Operate and the State of Virginia’s StateImplementation Plan. Based upon a computer modeling described below in *Mirant Potomac River Downwash Study*, the City of Alexandriaasserted that emissions from the Potomac River plant cause or contribute toexceedances of NAAQS for SO2, NO2 and particulate matter. The City ofAlexandria also contended based on its modeling analysis that the plant’semissions of hydrogen chloride and hydrogen fluoride exceed Virginia statestandards. Mirant Potomac River disputes the City of Alexandria’s allegationsthat it has violated the Clean Air Act and Virginia law. On December 2,2005, the district court denied the City of Alexandria’s motion seeking to filean amended complaint.

In early May 2006, theparties to the Original Consent Decree and Mirant Chalk Point entered into andfiled for approval with the United States District Court for the EasternDistrict of Virginia an amended consent decree (the “Amended Consent Decree”)that, if approved, will resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The Amended Consent Decree includes the requirements that were to beimposed under the terms of the Original Consent Decree as described above. Italso defines the rights and remedies of the parties in the event of a rejectionin bankruptcy or other termination of any of the long-term leases under whichMirant Mid-Atlantic leases the coal units at the Dickerson and Morgantownplants. The Amended Consent Decree provides that if Mirant Mid-Atlanticrejects or otherwise loses one or more of its leasehold interests in theMorgantown and Dickerson plants and ceases to operate one or both of theplants, Mirant Mid-Atlantic, Mirant Chalk Point and/or Mirant Potomac will (i) providethe EPA, Virginia DEQ and the MDE with the written agreement of the new owneror operator of the affected plant or plants to be bound by the obligations ofthe Amended Consent Decree and (ii) where the affected plant is theMorgantown plant, offer to any and all prospective owners and/or operators ofthe Morgantown plant to pay for completion of engineering, construction andinstallation of the SCRs required by the Amended Consent Decree. If the new owneror operator of the affected plant or plants does not agree to be bound by theobligations of the Amended Consent Decree, it requires Mirant Mid-Atlantic,Mirant Chalk Point and/or Mirant Potomac to install an alternative suite ofenvironmental controls at the plants they continue to own. The district courtand the Bankruptcy Court must approve the Amended Consent Decree for it tobecome effective. The City of Alexandria and certain individuals andorganizations have opposed entry of the Amended Consent Order. The BankruptcyCourt approved the Amended Consent Decree on June 1, 2006. The districtcourt has not yet approved the Amended Consent Decree.

On April 26, 2006, Mirant Mid-Atlantic and theMDE entered into an agreement to allow Mirant Mid-Atlantic to implement theconsent decree with respect to the Morgantown plant, if the consent decreereceives the necessary approvals. Under the agreement, Mirant Mid-Atlanticagreed to certain ammonia and particulate matter emissions limits and to submittesting results to the MDE.

*MirantPotomac 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” from the plant (1) on ambient concentrations of SO2,NO2, CO and PM10 for comparison to the applicable NAAQS and (2) on ambientconcentrations of mercury for comparison to Virginia Standards of Performancefor Toxic Pollutants. Downwash is the effect that occurs when aerodynamicturbulence induced by nearby structures causes emissions from an elevatedsource, such as a smokestack, to move rapidly toward the ground resulting inhigher ground-level concentrations of emissions.

The computer modeling analysis predicted thatemissions from the Potomac River plant have the potential to contribute tolocalized, modeled instances of exceedances of the NAAQS for SO2, NO2 and PM10under certain conditions. Based on those results, the Virginia DEQ issued adirective to Mirant Potomac River on August 19, 2005, to undertakeimmediately such action as was necessary to ensure protection of human healthand the environment and eliminate NAAQS violations. On August 24, 2005, 

128

----

power production at allfive units of the Potomac River generating facility was temporarily halted inresponse to the directive from the Virginia DEQ. On August 25, 2005, the District of Columbia Public ServiceCommission filed an emergency petition and complaint with the FERC and the DOEto prevent the shutdown of the Potomac River facility. The matter remainspending before the FERC and the DOE. On December 20, 2005, due to adetermination by the DOE that an emergency situation existed with respect to thereliability of the supply of electricity to central Washington, D.C., the DOEordered Mirant Potomac River to generate electricity at the Potomac Rivergenerating facility, as requested by PJM during any period in which one or bothof the transmission lines serving the central Washington, D.C. area are out ofservice due to a planned or unplanned outage. In addition, the DOE orderedMirant Potomac River, at all other times, for electric reliability purposes, tokeep as many units in operation as possible and to reduce the start-up time ofunits not in operation without contributing to any NAAQS exceedances. The DOErequired Mirant Potomac River to submit a plan, on or before December 30,2005, that met these requirements. The order further provides that MirantPotomac River and its customers should agree to mutually satisfactory terms forany costs incurred by it under this order or just and reasonable terms shall beestablished by a supplemental order. Certain parties filed for rehearing of theDOE order, and on February 17, 2006, the DOE issued an order grantingrehearing solely for purposes of considering further the rehearing requests.Mirant Potomac River submitted an operating plan in accordance with the order.On January 4, 2006, the DOE issued an interim response to Mirant PotomacRiver’s operating plan authorizing operation of the units of the Potomac Rivergenerating facility on a reduced basis, but making it possible to bring theentire plant into service within approximately 28 hours when necessary forreliability purposes. The DOE’s order expires July 1, 2007, but MirantPotomac River expects it will be able to continue to operate these units afterthat expiration.

In a letter received December 30,2005, the EPA invited Mirant Potomac River and the Virginia DEQ to work withthe EPA to ensure that Mirant Potomac River’s operating plan submitted to theDOE adequately addressed NAAQS issues. The EPA also asserted in its letter thatMirant Potomac River did not immediately undertake action as directed by theVirginia DEQ’s August 19, 2005, letter and failed to comply with therequirements of the Virginia State Implementation Plan established by thatletter. Mirant Potomac River received a second letter from the EPA on December 30,2005, requiring Mirant to provide certain requested information as part of anEPA investigation to determine the Clean Air Act compliance status of thePotomac River generating facility.

On June 1, 2006, Mirant Potomac River and the EPAexecuted an ACO by Consent to resolve the EPA’s allegations that Mirant PotomacRiver violated the Clean Air Act by not immediately shutting down all units atthe Potomac River facility upon receipt of the Virginia DEQ’s August 19,2005, letter and to assure an acceptable level of reliability to the Districtof Columbia. The ACO (i) specifies certain operating scenarios and SO2emissions limits for the Potomac River facility, which scenarios and limitstake into account whether one or both of the 230kV transmission lines servingWashington, D.C. are out of service; (ii) requires the operation of tronainjection units to reduce SO2 emissions; and (iii) requires Mirant PotomacRiver to undertake a model evaluation study to predict ambient air qualityimpacts from the facility’s operations. In accordance with the specifiedoperating scenarios, the ACO permits the facility to operate using a dailypredictive modeling protocol. This protocol allows Mirant Potomac River toschedule the facility’s level of operations based on whether computer modelingpredicts a NAAQS exceedance, based on weather and certain operating parameters.On June 2, 2006, the DOE issued a letter modifying its January 6,2006, order to direct Mirant Potomac River to comply with the ACO in order toensure adequate electric reliability to the District of Columbia. MirantPotomac River is operating the Potomac River facility in accordance with theACO and has been able to operate all five units of the facility most of thetime under the ACO. This ACO expires in June 2007.

*Cityof Alexandria Nuisance Suit.**  *OnOctober 7, 2005, the City of Alexandria filed a suit against MirantPotomac River and Mirant Mid-Atlantic in the Circuit Court for the City ofAlexandria. The suit 

129

----

asserted nuisance claims,alleging that the Potomac River plant’s emissions of coal dust, flyash, NOx,SO2, particulate matter, hydrogen chloride, hydrogen fluoride, mercury and oilpose a health risk to the surrounding community and harm property owned by theCity. The City sought injunctive relief, damages and attorneys’ fees. On February 17,2006, the City amended its complaint to add additional allegations in supportof its nuisance claims relating to noise and lighting, interruption of trafficflow by trains delivering coal to the Potomac River plant, particulate matter fromthe transport and storage of coal and flyash, and potential coal leachate intothe soil and groundwater from the coal pile. On December 13, 2006, theCity withdrew the suit.

*SuitRegarding Chalk Point Emissions.**  *Byletter dated June 15, 2006, four environmental advocacy organizations—EnvironmentalIntegrity Project, Chesapeake Climate Action Network, Patuxent Riverkeeper andEnvironment Maryland Research and Policy Center—notified Mirant and MirantMid-Atlantic that they intended to file suit alleging that Mirant Chalk Pointhad violated the opacity limits set by the permits for Chalk Point unit 3 andunit 4 during thousands of six minute time intervals between January 2002and March 2006. The letter indicated that the organizations intend to filesuit to enjoin the violations alleged, to obtain civil penalties for pastnoncompliance to the extent that liability for these violations was notdischarged by the bankruptcy of Mirant Chalk Point, and to recover attorneys’fees. On August 3, 2006, Mirant, Mirant Mid-Atlantic, and Mirant ChalkPoint filed a complaint in the Bankruptcy Court seeking an injunction barringthe four organizations from filing suit as threatened in the June 15,2006, notice on the grounds that the notice and any claim for civil penaltiesor other monetary relief for alleged violations occurring before January 3,2006, violated the discharge of claims and causes of action granted MirantChalk Point under the Plan. On August 14, 2006, the Bankruptcy Courtentered an order agreed to by the parties enjoining the four organizations fromseeking monetary damages for any alleged violations occurring on or before January 3,2006. As part of that order, the organizations agreed not to file a complaintinitiating litigation concerning the alleged violations until August 30,2006.

On August 29, 2006, MDE filed a complaint againstMirant Chalk Point in the Circuit Court for Prince George’s County, Maryland,based upon the alleged violations of the opacity limits applicable to ChalkPoint units 3 and 4 that were the focus of the June 15, 2006, noticeletter from the environmental organizations and seeking civil penalties,injunctive relief and costs. Simultaneously with the filing of the complaint,Mirant Chalk Point and the MDE filed a proposed Consent Decree to resolve theissues raised by the Complaint. That Consent Decree was approved by theMaryland court on September 11, 2006. The Consent Decree subjects ChalkPoint unit 3 to more stringent opacity and particulate standards and requiresit when burning fuel oil to use fuel oil with a lower sulfur content thanpreviously allowed under its permits. Mirant Chalk Point agreed in the ConsentDecree to burn natural gas in Chalk Point units 3 and 4 for 95% of their heatinput during certain months, subject to certain exceptions.

On August 30, 2006, the four environmentalorganizations filed suit in the United States District Court for the Districtof Maryland against Mirant, Mirant Mid-Atlantic, and Mirant Chalk Pointasserting that emissions from Chalk Point units 3 and 4 had violated opacitylimits set under the Clean Air Act and state law on numerous occasions since January 4,2006. The plaintiffs sought an injunction prohibiting further violations byChalk Point units 3 and 4 of the Clean Air Act, civil penalties of up to$32,500 for each violation of the Clean Air Act, additional civil penalties formitigation projects, and attorneys’ fees. On September 22, 2006, theMirant defendants filed a motion to dismiss, arguing that under the Clean AirAct the MDE’s prosecution of the same alleged violations in the Maryland statecourt proceeding and their resolution through the Consent Decree barred theplaintiffs’ suit. On January 3, 2007, the district court granted themotion and dismissed the complaint, and that order has become final.

130

----

*NewYork State Administrative Claim.**  *OnJanuary 24, 2006, the State of New York and the NYSDEC filed a notice ofadministrative claims in the Mirant Debtors’ Chapter 11 proceedings asserting aclaim seeking to require the Mirant Debtors to provide funding to the Company’ssubsidiaries owning generating facilities in New York to satisfy certainspecified environmental compliance obligations. The State of New York allegesthat during the pendency of the Chapter 11 proceedings the Mirant Debtors thathave emerged from bankruptcy made decisions on behalf of the Company’ssubsidiaries owning generating facilities in New York and did not appropriatelymaintain the corporate separateness between themselves and those subsidiaries.The Company disputes those allegations. The State of New York cites variousexisting outstanding matters between the State and the Company’s subsidiariesowning generating facilities in New York related to compliance withenvironmental laws and regulations, most of which are not material. The mostsignificant compliance obligation identified by the State of New York in itsnotice of administrative claim relates to the “2003 Consent Decree” enteredinto by Mirant New York and Mirant Lovett with the State of New York to resolveissues related to NSR requirements under the Clean Air Act related to theLovett plant. Under the 2003 Consent Decree, Mirant Lovett is required to makean election to install certain environmental controls on units 5 and 4 of theLovett facility or shut down those units by April 30, 2007, and April 30,2008, respectively. The State of New York notes in its notice of administrativeclaim that the cost of implementing such environmental controls could exceed$200 million. On October 19, 2006, Mirant Lovett notified the New YorkPublic Service Commission and the NYISO of its intent to discontinue operationof unit 5 of the Lovett facility in April 2007 in accordance with therequirements of the 2003 Consent Decree. If Mirant Lovett is able to agree withthe State of New York and the NYSDEC on alternative control technologies thatwould allow unit 5 to remain in operation past April 30, 2007, then MirantLovett may rescind the notice of its intent to discontinue operations at unit5. The State of New York and the NYSDEC have executed a stipulated order withthe Company, its New York subsidiaries and the other Mirant Debtors to stayresolution of this administrative claim. That stipulated order was approved bythe Bankruptcy Court on February 23, 2006.

*Riverkeeper Suit Against MirantLovett.**  *On March 11,2005, Riverkeeper, Inc. filed suit against Mirant Lovett in the UnitedStates District Court for the Southern District of New York under the CleanWater Act. The suit alleges that Mirant Lovett failed to implement a marinelife exclusion system at its Lovett generating plant and to perform monitoringfor the exclusion of certain aquatic organisms from the plant’s cooling waterintake structures in violation of Mirant Lovett’s water discharge permit issuedby the State of New York. The plaintiff requests the court to enjoin MirantLovett from continuing to operate the Lovett generating plant in a manner thatallegedly violates the Clean Water Act, to impose civil penalties of $32,500per day of violation, and to award the plaintiff attorneys’ fees. On April 20,2005, the district court approved a stipulation agreed to by the plaintiff andMirant Lovett 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.

***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 resulted 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. If Mirant Potomac River were to applyfor and receive a special use permit for the plant, the City Council wouldlikely impose various conditions and stipulations as to the permitted use ofthe plant and seek to limit the period for which it could continue to operate.

131

----

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’s action, 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 will becomeeffective and the plant will be considered a nonconforming use subject toabatement.

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 sought 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 complaintasserted, 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 requested the court to enjoin the City of Alexandria andthe City Council from taking any enforcement action against Mirant PotomacRiver or from requiring it to obtain a special use permit for the continuedoperation of its generating plant. On January 18, 2006, the court issuedan oral ruling following a trial that the City of Alexandria acted unreasonablyand arbitrarily in changing the zoning status of Mirant Potomac River’sgenerating plant and in revoking the 1989 SUPs. On February 24, 2006, thecourt entered judgment in favor of Mirant Potomac River and Mirant Mid-Atlanticdeclaring the change in the zoning status of Mirant Potomac River’s generatingplant adopted December 18, 2004, to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. The City of Alexandria filed a petitionwith the Virginia Supreme Court seeking to appeal this judgment, and on September 11,2006, the Virginia Supreme Court agreed to hear the appeal.

***Pepco Assertion of Breach of Local Area SupportAgreement***

Following the shutdown of the Potomac River plant on August 24,2005, Mirant Potomac River notified Pepco on August 30, 2005, that itconsidered the circumstances resulting in the shutdown of the plant toconstitute a force majeure event under the Local Area Support Agreement dated December 19,2000, between Pepco and Mirant Potomac River. That agreement imposesobligations upon Mirant Potomac River to dispatch the Potomac River plant undercertain conditions, to give Pepco several years advance notice of anyindefinite or permanent shutdown of the plant and to pay all or a portion ofcertain costs incurred by Pepco for transmission additions or upgrades when anindefinite or permanent shutdown of the plant occurs prior to December 19,2010. On September 13, 2005, Pepco notified Mirant Potomac River that itconsiders Mirant Potomac River’s shutdown of the plant to be a material breachof the Local Area Support Agreement that is not excused under the force majeureprovisions of the agreement. Pepco contends that Mirant Potomac River’s actionsentitle Pepco to recover as damages the cost of constructing additionaltransmission facilities. Pepco, on January 24, 2006, filed a notice ofadministrative claims in the bankruptcy proceedings asserting that MirantPotomac River’s shutdown of the Potomac River plant causes Mirant Potomac Riverto be liable for the cost of such transmission facilities, which cost itestimates to be in excess of $70 million. Mirant Potomac River disputes Pepco’sinterpretation of the agreement. The outcome of this matter cannot bedetermined at this time.

132

----

If it is approved by afinal order of the Bankruptcy Court, the Settlement Agreement entered into on May 30,2006, by the Mirant Settling Parties and the Pepco Settling Parties wouldresolve all claims asserted by Pepco against Mirant Potomac River arising outof the suspension of operations of the Potomac River plant in August 2005.On August 9, 2006, the Bankruptcy Court entered an order approving theSettlement Agreement, but certain holders of unsecured claims in the bankruptcyproceedings have appealed that order, and the order has not yet become a finalorder. Under the Settlement Agreement, Pepco would release all claims it hasasserted against Mirant Potomac River related to the shutdown of the plant inreturn for the claim Pepco receives in the Mirant bankruptcy proceeding.

***New York Tax Proceedings***

Mirant New York, Mirant Bowline, Mirant Lovett, andHudson Valley Gas (collectively with Mirant New York, Mirant Bowline, andMirant Lovett, the “New York Companies”) were the petitioners in variousproceedings (“Tax Certiorari Proceedings”) initially brought in the New Yorkstate courts challenging the assessed values determined by local taxingauthorities for the Bowline and Lovett generating facilities and a natural gaspipeline (the “HVG Property”) owned by Hudson Valley Gas. Mirant Bowline hadchallenged the assessed value of the Bowline generating facility and theresulting local tax assessments for tax years 1995 through 2006. Mirant Bowlinesucceeded to rights held by Orange & Rockland for the tax years priorto its acquisition of the Bowline Plant in 1999 under its agreement with Orange &Rockland for the purchase of that plant. Mirant Lovett had challenged theassessed value of the Lovett facility for each of the years 2000 through 2006.Hudson Valley Gas had challenged the assessed value of the HVG Property foreach of the years 2004 through 2006.

As of December 31, 2006, Mirant Bowline andMirant Lovett had not paid property taxes on the Bowline and Lovett generatingfacilities that fell due in the period from September 30, 2003, through September 30,2006, in order to preserve their respective rights to offset the overpaymentsof taxes made in earlier years against the sums payable on account of currenttaxes. Hudson Valley Gas had not paid property taxes that fell due in theperiod from September 30, 2004, through September 30, 2006. Thefailure to pay these taxes when due potentially subjected Mirant Bowline,Mirant Lovett, and Hudson Valley Gas to additional penalties and interest.

On August 11, 2006, and August 28, 2006, theNew York state court issued decisions addressing Mirant Bowline’s challenges tothe assessed values of the Bowline facility for the years 1995 to 2003 andMirant Lovett’s challenges to the assessed values of the Lovett facility forthe years 2000 to 2003. Except for 1996, where it found that Mirant Bowline hadfailed to perfect its challenge to the assessed value of the Bowline facility,the New York state court concluded that the value of the Bowline facility andthe Lovett facility in each year was substantially less than the assessed valueset by the taxing authorities. Mirant Bowline and Mirant Lovett appealed thedecisions of the New York state court, and the relevant taxing authoritiescross-appealed.

On December 13, 2006, Mirant and the New YorkCompanies entered into a settlement agreement (the “Settlement Agreement”) withthe Town of Haverstraw (“Haverstraw”), the Town of Stony Point (“Stony Point”),the Haverstraw-Stony Point Central School District (the “School District”), theCounty of Rockland (the “County”), the Village of Haverstraw (“HaverstrawVillage”), and the Village of West Haverstraw (“West Haverstraw Village” andcollectively with Haverstraw, Stony Point, the School District, the County, andHaverstraw Village, the “Tax Jurisdictions”). The Settlement Agreement wasapproved by the Bankruptcy Court on December 14, 2006, and resolved allpending disputes regarding real property taxes between the New York Companiesand the Tax Jurisdictions. Under the agreement, the New York Companies acceptedthe determinations of assessed value for the Bowline Facility for 1995 through2003 and the Lovett Facility for 2000 through 2003 made by the New York statecourt in its rulings in the Tax Certiorari Proceedings issued in August 2006.The New York Companies and the Tax Jurisdictions agreed 

133

----

to adopt the New Yorkstate court’s assessed values for the Bowline Facility and the Lovett Facilityfor 2003 as the assessed values for each facility for 2004 through 2006. Theparties agreed that the assessed values for the HVG Property for 2004 through2006 should be the values determined previously by Haverstraw. The TaxJurisdictions agreed to cancel penalties on the unpaid taxes owed by the NewYork Companies and to collect interest on those taxes at a rate of 8% per yearfor Mirant Bowline and Mirant Lovett and 12% per year for Hudson Valley Gas.Overall, the New York Companies under the settlement received total refunds of$163 million from the Tax Jurisdictions and paid unpaid taxes to the TaxJurisdictions of $115 million, resulting in the New York Companies receiving anet cash payment in the amount of $48 million. The refunds and unpaid taxeswere paid in early February 2007, and the New York Companies and the TaxJurisdictions are in the process of dismissing all pending litigation relatedto the refunds and the unpaid taxes.

The $163 million of totalrefunds received by the New York Companies was recognized as a gain in thefinancial statements in the fourth quarter of 2006. In addition, the New YorkCompanies had previously accrued a liability based upon the unpaid taxes asbilled by the Tax Jurisdictions. Due to the reductions of the unpaid taxes thatoccurred pursuant to the terms of the Settlement Agreement, the New YorkCompanies also recognized in the fourth quarter of 2006 a reduction ofoperating expenses of approximately $23 million related to 2006 and a gain ofapproximately $71 million related to prior periods.

***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.

***Other Contingencies***

*SwingingBridge.*   On May 5,2005, Mirant NY-Gen discovered a sinkhole at its Swinging Bridge dam, locatedin Sullivan County, New York. In response, Mirant NY-Gen filled this sinkhole,inspected for damage the dam’s slopes and the enclosed pipe that delivers waterfrom the reservoir to the generator, drew down the lake level, and cleaned thediversion tunnel. Mirant NY-Gen’s analysis indicated that the most probablecause of the sinkhole was erosion of soil comprising the dam from water flowthrough a hole in the pipe that delivers water from the reservoir to thegenerator. The dam is currently stabilized, and Mirant NY-Gen is performingadditional remediation repairs. Mirant NY-Gen currently expects to incuradditional costs to repair the dam and to recover insurance proceeds for aportion of these repair costs. By letter dated June 14, 2006, theFERC authorized Mirant NY-Gen to proceed with its remediation plan for thesinkhole. The FERC has also concurred with the results of Mirant NY-Gen’s floodstudy for its New York Swinging Bridge, Rio and Mongaup generation facilities,which study concluded that no additional remediation is required. TheBankruptcy Court authorized Mirant NY-Gen to proceed with implementation of theremediation plan on June 29, 2006. The current estimated cost to remediatethe dam at Swinging Bridge is approximately $29 million, of which approximately$22 million had been incurred through December 31, 2006. The Bankruptcy Court has approved adebtor-in-possession loan to Mirant NY-Gen from Mirant Americas under whichMirant Americas, subject to certain conditions, would lend up to $16.5 millionto Mirant NY-Gen to provide funding for the repairs on the Swinging Bridge dam.

*CaliforniaSettlement.**  *TheCalifornia Settlement described above in *California and WesternPower Markets—FERC Refund Proceedings*included a provision thateither (1) the partially constructed Contra Costa 8 project, which is aplanned 530 MW combined cycle generating facility, and related equipment(collectively, the “CC8 Assets”) were to be transferred to PG&E or (2) PG&Ewould receive additional alternative consideration of $70 million (the “CC8Alternative Consideration”). To fund the CC8 Alternative Consideration,PG&E received an allowed, unsecured claim in the bankruptcy proceedingsagainst Mirant Delta that resulted in a distribution to PG&E of cash andMirant common stock with a 

134

----

value of approximately $70million. PG&E was required to liquidate the common stock received as partof that distribution and place the net resulting amount plus any cash receivedinto an escrow account.

The California Settlement provided that if thetransfer of the CC8 Assets to PG&E did not occur on or before June 30,2008, then the CC8 Alternative Consideration was to be paid to PG&E and theMirant Settling Parties would retain the CC8 Assets. If PG&E closed on itsacquisition of the CC8 Assets, the funds in the escrow account were to be paidto Mirant Delta. The transfer of the CC8 Assets to PG&E was completed on November 28,2006, and the $70 million escrow account was paid to Mirant Delta. The Companyrecognized in the fourth quarter of 2006 a gain of $27 million for the amountby which the escrow account exceeded the carrying amount of the CC8 Assets. Thegain is included in other income in the Company’s consolidated statements ofoperations.

135

----

**Report ofIndependent 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 31,2006 and 2005, and the related consolidated statements of operations, equityand comprehensive income (loss) and cash flows for the year ended December 31,2006, and the related combined statements of operations, equity andcomprehensive income (loss) and cash flows for each of the years in thetwo-year period ended December 31, 2005. These consolidated and combinedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated and combinedfinancial 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 and combinedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Mirant Americas Generation, LLC andsubsidiaries as of December 31, 2006 and 2005, and the results of their operationsand their cash flows for each of the years in the three-year period ended December 31,2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 tothe consolidated and combined financial statements, the Company adoptedFinancial Accounting Standards Board Interpretation No. 47, *Accounting for**Conditional Asset Retirement Obligations: an interpretation of FASBStatement No. 143,* in2005.

/s/ KPMG LLP

Atlanta, GeorgiaMarch 16, 2007

136

----

**Item 9.**                        *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure*

None.

**Item 9A.**                *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 theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control. 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 allpotential future conditions. Over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected. As a result, our management, including the Chief ExecutiveOfficer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controlover financial reporting, will prevent all error and all 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 by Rules 13a-15(e) and15d-15(e) under the Exchange Act), as of December 31, 2006.Based upon this assessment, our management concluded that, as of December 31,2006, the design and operation of these disclosure controls and procedures wereeffective.

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.

**Changes in InternalControls**

During the quarter ended December 31,2006, there were no significant changes in Mirant Americas Generation’sinternal control over financial reporting or in other factors that could materiallyaffect or is reasonably likely to affect such internal controls over financialreporting.

**Item 9B.**               *Other Information*

None.

137

----

**PART III**

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

Thetable below sets forth information on each member of the Board of Managers ofthe Company as of December 31, 2006. Each member of the Board of Managersis also an executive officer of Mirant Corporation.
| Name                  | ** ** | ** ** | ** ** | **Age**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Position** |
|-----------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Edward R. Muller |       | 55         |       | Board Manager as  of January 3, 2006. Director, Chairman, President and Chief Executive  Officer since September 2005 of Mirant Corporation. Board Manager of  Mirant Mid-Atlantic. President and Chief Executive Officer of Edison Mission  Energy, a California-based independent power producer from 1993-2000.  He is also a director of Global Santa Fe Corporation.                                                                                                                               |
| James V. Iaco    |       | 62         |       | Board Manager as  of January 3, 2006. Executive Vice President and Chief Financial Officer  of Mirant Corporation since November 2005. Board Manager of Mirant  Mid-Atlantic. Prior to joining Mirant, was a private investor with numerous  businesses and real estate ventures from 2000-2005. He served as Senior  Vice President and President, Americas’ Division of Edison Mission Energy  (1998-2000) and Senior Vice President and Chief Financial Officer,  Edison Mission Energy (1994-1998). |
| Robert M. Edgell |       | 60         |       | Chairman of the Board,  Mirant Americas Generation and Mirant North America as of January 9,  2006. Chairman of the Board of Mirant Mid-Atlantic. Mr. Edgell is  Executive Vice President and U.S. Region Head of Mirant Corporation since  2006. He was employed as Executive Vice President and General Manager of the  Asia Pacific Region for Edison Mission Energy from 1996-2000.                                                                                                                 |

 

138

----

Thetable below sets forth information on the principal executive officer,principal financial officer and principal accounting officer of Mirant AmericasGeneration as of December 31, 2006. These officers are also officers ofMirant. Policy-making functions for Mirant Americas Generation are performed bythe Board of Managers of Mirant Americas Generation and the other executiveofficers of Mirant. Information on the executive officers of Mirant will beprovided in the Mirant definitive Proxy Statement for its 2007 Annual Meetingof Stockholders.
| Name                             | ** ** | ** ** | ** ** | **Age**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **Position** |
|----------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Robert E. Driscoll          |       | 57         |       | President and  Chief Executive Officer of Mirant Americas Generation, Mirant North America  and Mirant Mid-Atlantic as of January 9, 2006. Mr. Driscoll is  Senior Vice President and Head of Asset Management, U.S. Region of Mirant  Corporation. From 2001 through 2005, he was employed as Chief Executive  Officer, Australia and Senior Vice President, Asia of Edison Mission Energy  and from 1995 through 2001, he was employed as Senior Vice President, Asia of  Edison Mission Energy.                                                                                                                                                                                                                                                                                                                                            |
| J. William  Holden III |       | 46         |       | Senior Vice  President, Chief Financial Officer and Treasurer. Mr. Holden has been  Senior Vice President and Treasurer of Mirant Corporation since  April 2002 and has served as Senior Vice President, Chief Financial  Officer and Treasurer of Mirant Americas Generation, Mirant North America and  Mirant Mid-Atlantic 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. |
| Thomas E. Legro             |       | 55         |       | Senior Vice President,  Controller and Principal Accounting Officer of Mirant Corporation, Mirant  Americas Generation, Mirant North America and Mirant Mid-Atlantic as of  December 2005. Prior to joining Mirant, he served as Vice President,  Chief Accounting Officer and Corporate Controller, National Energy &  Gas Transmission, Inc. (2001-2004). Vice President, Corporate  Controller, Director of Financial Planning and Analysis, and Assistant  Controller, Edison Mission Energy (1990-2001).                                                                                                                                                                                                                                                                                                                             |

 

The principal executiveofficer, principal financial officer and principal accounting officer of MirantAmericas Generation, LLC were elected to serve until their successors areelected and have qualified or until their removal, resignation, death ordisqualification.

*Audit Committee and Audit 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.

139

----

*Section 16(a) Beneficial Ownership ReportingCompliance*

We do not have equitysecurities registered pursuant to Section 12 of the Exchange Act andtherefore do not have officers with Section 16 reporting obligations.

*Code of Ethics for Senior Financial Officers*

Mirant has a Code ofEthics and Business Conduct that applies to all Mirant officers, employees,subsidiaries and the Board of Directors. In addition, Mirant has adopted a Codeof Conduct for Senior Financial Officers applicable to Mirant’s seniorfinancial officers that also applies to the senior financial officers of MirantAmericas Generation. A copy of each code is posted on Mirant’s website at *www.mirant.com* and also will be provided, without charge,upon request made in writing to Mirant’s Corporate Secretary at 1155 PerimeterCenter West, Atlanta, GA 30338. We intend to post any amendments and waivers tothe Code of Ethics for senior financial officers on this website.

*Shareholder Nominees 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*

The officers of MirantAmericas Generation are also officers of Mirant. Our officers are notcompensated separately in their positions with Mirant Americas Generation andnone of our officers has a contract or agreement in his capacity as an officerof Mirant Americas Generation. Policy-making functions for Mirant AmericasGeneration are performed by the Board of Managers of Mirant Americas Generationand the other executive officers of Mirant. Information on compensation for theexecutive officers of Mirant will be provided in the Mirant definitive ProxyStatement for its 2007 Annual Meeting of Stockholders.

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, Inc.; therefore, none of our managers orofficers hold any equity interests in Mirant Americas Generation.

**Item 13.**                 *Certain Relationships and Related Transactions*

*Review and Approval of Related Person Transactions*

We are an indirectwholly-owned subsidiary of Mirant. Mirant’s Nominating and Governance Committeeis responsible for reviewing and approving any related party transactions byMirant, including transactions taken at the subsidiary level. Mirant’s legaldepartment has adopted policies and procedures to assess transactions andrelationships between Mirant and/or its subsidiaries and any related parties todetermine if they have a direct or indirect material interest in thetransaction. All related party transactions must be approved by the Nominating andGovernance Committee

*Related Person Transactions*

There were no reportabletransactions between Mirant Americas Generation and related parties in 2006.

**Item 14.**                 *Principal Accountant Fees and Services*

Not Applicable.

140

----

**PART IV**

**Item 15.****                 *Exhibits and FinancialStatements***

a)               1.      *Financial Statements*

Our consolidated and combined financial statements,including the notes thereto and independent auditors’ report thereon, are setforth on pages 78 through 136 of the Annual Report on Form 10-K,and are incorporated herein by reference.

2.                 *Financial Statement Schedules*

None.

3.                 *Exhibit Index*

| Exhibit  Number | ** ** | **Exhibit Name**                                                                                                                                                                                                                                                                                 | ** ** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 2.1*            |       | Purchase  and Sale Agreement, dated as of January 15, 2007, by and between Mirant  Americas, Inc. and LS Power (Designated on Form 8-K dated  January 18, 2007 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*            |       | Amended  and Restated Limited Liability Company Agreement for Mirant Americas  Generation LLC, dated January 3, 2006, (designated on Form 10-Q  for the quarter ended September 30, 2006, 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)                                                                                             |       |
| 4.9*            |       | Form of  Senior Note Indenture between Mirant North America, LLC, Mirant North  America Escrow, LLC, MNA Finance Corp. and Law Debenture Trust Company  of New York, as Trustee (Designated in Mirant Corporation 10-K for the  year ended December 31, 2005 as Exhibit 4.2) |       |
| 10.1*           |       | Settlement  Agreement and Release dated as of May 30, 2006, by and among the Mirant  Settling Parties and the PEPCO Settling Parties (Designated on Form 8-K  filed May 30, 2006 as Exhibit 10.1)                                                                                 |       |

141

----

 

| 10.2*  |   | Tax  Settlement Agreement, dated as of December 13, 2006, by and among Mirant  Corporation, Mirant New York, Inc., Mirant Bowline, LLC, Mirant Lovett,  LLC, Hudson Valley Gas Corporation and the Town of Haverstraw, the Town of  Stony Point, the Haverstraw-Stony Point Central School District, the County  of Rockland, the Village of Haverstraw, and the Village of West Haverstraw  (Designated on Form 8-K filed December 15, 2006 as  Exhibit 10.1) |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.3*  |   | Mirant  Americas Generation, LLC—Facility B Credit Agreement (Designated on  Form 8-K filed February 12, 2003 as Exhibit 10.70)                                                                                                                                                                                                                                                                                                                           |   |
| 10.4*  |   | Mirant  Americas Generation, LLC—Facility C Credit Agreement (Designated on  Form 8-K filed February 12, 2003 as Exhibit 10.71)                                                                                                                                                                                                                                                                                                                           |   |
| 10.5*  |   | Mirant  North America, LLC—Credit Agreement with Deutsche Bank Securities Inc.,  Goldman Sachs Credit Partners L.P., and JPMorgan Chase Bank, N.A.  (designated in Mirant Corporation Form 10-K for the year ended  December 31, 2005 as Exhibit 10.33)                                                                                                                                                                                                   |   |
| 10.6*  |   | Administrative  Services Agreement dated as of January 3, 2006 between Mirant Americas  Generation, Inc. and Mirant Services, LLC (Designated on  Form 10-K filed March 31, 2006 as Exhibit 10.5)                                                                                                                                                                                                                                                         |   |
| 10.7*  |   | Power  Sale, Fuel Supply and Services Agreement dated as of January 3, 2006  among Mirant Americas Energy Marketing, LP, Mirant Bowline, LLC, Mirant  Lovett, LLC, and Mirant NY-Gen, LLC (Designated on Form 10-K  filed March 31, 2006 as Exhibit 10.6)                                                                                                                                                                                            |   |
| 10.8*  |   | Power  Sale, Fuel Supply and Services Agreement dated as of January 3, 2006  among Mirant Americas Energy Marketing, LP, Mirant Canal, LLC, and  Mirant Kendall, LLC (Designated on Form 10-K filed  March 31, 2006 as Exhibit 10.7)                                                                                                                                                                                                                      |   |
| 10.9*  |   | Power  Sale, Fuel Supply and Services Agreement dated as of January 3, 2006  between Mirant Americas Energy Marketing, LP and Mirant Chalk Point, LLC  (Designated on Form 10-K filed March 31, 2006 as  Exhibit 10.8)                                                                                                                                                                                                                                         |   |
| 10.10* |   | Power  Sale, Fuel Supply and Services Agreement dated as of January 3, 2006  between Mirant Americas Energy Marketing, LP and Mirant Mid-Atlantic, LLC  (Designated on Form 10-K filed March 31, 2006 as  Exhibit 10.9)                                                                                                                                                                                                                                        |   |
| 10.11* |   | Power  Sale, Fuel Supply and Services Agreement dated January 3, 2006 between  Mirant Americas Energy Marketing, LP and Mirant Potomac River, LLC  (Designated on Form 10-K filed March 31, 2006 as  Exhibit 10.10)                                                                                                                                                                                                                                            |   |
| 10.12* |   | Power  Sale, Fuel Supply and Services Agreement dated January 3, 2006 between  Mirant Americas Energy Marketing, LP and Mirant Texas, LP (Designated on  Form 10-K filed March 31, 2006 as Exhibit 10.10)                                                                                                                                                                                                                                                           |   |
| 10.13* |   | Power  Sale, Fuel Supply and Services Agreement dated January 3, 2006 among  Mirant Americas Energy Marketing, LP, Mirant Delta, LLC, and Mirant  Potrero, LLC (Designated on Form 10-K filed March 31,  2006 as Exhibit 10.11)                                                                                                                                                                                                                           |   |
| 10.14* |   | Power  Sale, Fuel Supply and Services Agreement dated January 3, 2006 among  Mirant Americas Energy Marketing, LP and Mirant Zeeland, LLC (Designated on  Form 10-K filed March 31, 2006 as Exhibit 10.13)                                                                                                                                                                                                                                                          |   |
| 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 (Rule 13a-14(a)).                                                                                                                                                                                                                                                                                                                                                        |   |
| 31.2   |   | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Rule 13a-14(a)).                                                                                                                                                                                                                                                                                                                                                        |   |
| 32.1   |   | Certification  of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)).                                                                                                                                                                                                                                                                                          |   |
| 32.2   |   | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)).                                                                                                                                                                                                                                                                                          |   |

----

*                    Asteriskindicates exhibits incorporated by reference.

142

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on this 16th day of March, 2007.
|        | MIRANT  AMERICAS GENERATION, LLC |
|--------|----------------------------------|
|   | By:                              | /s/ ROBERT E. DRISCOLL |
|   |                             | Robert E.  Driscoll |
|   | * *                         | *President  and Chief Executive Officer* |
|   | * *                         | *(Principal  Executive Officer)* |

 

**MIRANT AMERICASGENERATION, LLC**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below on March 16, 2007, bythe following persons on behalf of the registrant and in the capacitiesindicated.
|                             | **Signatures** | ** **                                                     | ** ** | ** ** | **Title** | ** ** |
|-----------------------------|----------------|----------------------------------------------------------------|------------|------------|-----------|------------|
| /s/ ROBERT E.  DRISCOLL     |           | President and  Chief Executive Officer of                      |
| Robert E.  Driscoll    |           | Mirant Americas  Generation, LLC (Principal Executive Officer) |
| /s/ J. WILLIAM  HOLDEN III  |           | Senior Vice  President, Chief Financial Officer and            |
|  J. William Holden III |           | Treasurer of Mirant  Americas Generation, LLC                  |
|                        |           | (Principal Financial  Officer)                                 |
| /s/ THOMAS E.  LEGRO        |           | Senior Vice  President, Controller and Principal Accounting    |
| Thomas  E. Legro            |           | Officer of Mirant  Americas Generation, LLC                    |
|                        |           | (Principal Accounting  Officer)                                |
| /s/ EDWARD R.  MULLER       |           | Manager of Mirant  Americas Generation, LLC                    |
| Edward R.  Muller      |           |                                                           |
| /s/ JAMES V.  IACO          |           | Manager of Mirant  Americas Generation, LLC                    |
| James V.  Iaco         |           |                                                           |
| /s/ ROBERT M.  EDGELL       |           | Manager of Mirant  Americas Generation, LLC                    |
| Robert  M. Edgell           |           |                                                           |

 

143

----

**SupplementalInformation to be Furnished with Reports Filed Pursuant toSection 15(d) of the Act by Registrants Which Have Not RegisteredSecurities Pursuant to Section 12 of the Act**

No annual report or proxy materials has been sent tosecurities holders and no such report or proxy material is to be furnished tosecurities holders subsequent to the filing of the annual report on this Form 10-K.

144

----