**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

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

**Forthe Quarterly Period Ended June 30, 2005**

**Or**

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

**Forthe Transition Period from               to               **

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Mirant Americas Generation, LLC

(Exact name of registrantas specified in its charter)

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

 

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

o Yes    x No

Indicate by check markwhether the registrant is an accelerated filer (as defined by Rule 12b-2of the Act).

o Yes    x No

Allof our outstanding membership interests are held by our parent, Mirant Americas, Inc.,so we have no membership interests held by nonaffiliates.

 

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**TABLE OF CONTENTS**
|              | ** **                                  | ** **                                                                                  | ** ** | **Page** |
|--------------|---------------------------------------------|---------------------------------------------------------------------------------------------|------------|----------|
|         |                                        | Cautionary  Statement Regarding Forward-Looking Information                                 |       | 3        |
|         | **PART I—FINANCIAL  INFORMATION** |                                                                                        |       |
| Item 1. |                                        | Interim Financial Statements (unaudited):                                                   |       |     |
|         |                                        | Condensed Consolidated  Statements of Operations                                            |       | 6        |
|         |                                        | Condensed Consolidated  Balance Sheets                                                      |       | 7        |
|         |                                        | Condensed  Consolidated Statements of Member’s Equity                                  |       | 8        |
|         |                                        | Condensed  Consolidated Statements of Cash Flows                                            |       | 9        |
|         |                                        | Notes to the  Condensed Consolidated Financial Statements                                   |       | 10       |
| Item 2. |                                        | Management’s Discussion and Analysis of Results of Operations  and Financial Condition |       | 32       |
| Item 3. |                                        | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 43       |
| Item 4. |                                        | Controls  and Procedures                                                                    |       | 43       |
| ** **   | **PART II—OTHER INFORMATION**     |                                                                                        |       |
| Item 1. |                                        | Legal  Proceedings                                                                          |       | 44       |
| Item 6. |                                        | Exhibits                                                                                    |       | 44       |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGINFORMATION**

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

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

**General Factors**

·       legislativeand regulatory initiatives regarding deregulation, regulation or restructuringof the electric utility industry; changes in state, federal and otherregulations (including rate and other regulations); changes in, or changes inthe application of, environmental and other laws and regulations to which weand our subsidiaries and affiliates are or could become subject;

·       failureof our assets to perform as expected;

·       ourpursuit of potential business strategies, including the disposition orutilization of assets;

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

·       market volatility or othermarket conditions that could increase our affiliates’ obligations to postcollateral beyond amounts which are expected;

·       our inability to accesseffectively the over-the-counter (“OTC”) and exchange-based commodity marketsor changes in commodity market liquidity or other commodity market conditions,which may affect our ability to engage in asset management activities asexpected;

·       strikes, union activity orlabor unrest;

·       weather and other naturalphenomena;

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

·       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;

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

·       price mitigation strategiesemployed by independent system operators (“ISOs”) or regional transmissionoperators (“RTOs”) that result in a failure to compensate our generation unitsadequately for all of their costs;

·       volatility in our grossmargin as a result of our accounting for financial instruments used in ourasset management activities and volatility in our cash flow from operationsresulting from working capital requirements, including collateral, to supportour asset management activities;

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

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

·       our substantialconsolidated indebtedness and the possibility that we or our subsidiaries mayincur additional indebtedness in the future;

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

·       the disposition of thepending litigation described in this Form 10-Q as well as our Form 10-Kfor the year ended December 31, 2004.

**Bankruptcy-Related Factors**

·       thelack of comparable financial data due to the restructuring of our business andthe potential adoption of fresh start reporting;

·       theactions and decisions of our creditors and of other third parties withinterests in the voluntary petitions for reorganization filed with the U.S.Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “BankruptcyCourt”) on July 14, 2003 and July 15, 2003 (collectively, the “PetitionDate”), August 18, 2003, October 3, 2003 and November 18, 2003,by Mirant Corporation (“Mirant”) and substantially all of its wholly-ownedand certain non wholly-owned U.S. subsidiaries (“Mirant Debtors”) underChapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”),including actions taken by our creditors and other third parties with respectto our proposed plan of reorganization, filed with the Bankruptcy Court on January 19,2005, as amended on March 25, 2005, and any subsequent amendments thereto(the “Plan”);

·       theMirant Debtors’ ability to satisfy the conditions precedent to theeffectiveness of the proposed Plan, including their ability to secure thenecessary financing;

·       theeffects of the Chapter 11 proceedings on our liquidity and results ofoperations;

·       the instructions, ordersand decisions of the Bankruptcy Court, the U.S. District Court for the NorthernDistrict of Texas, the U.S. Court of Appeals for the Fifth Circuit, the FederalEnergy Regulatory Commission (the “FERC”) and other legal and administrative proceedings, settlements,investigations and claims;

·       ourability to operate pursuant to the terms of our debtor-in-possession financingagreement;

·       ourability to successfully reject unfavorable contracts and to modify thecovenants of the Mirant Mid-Atlantic leveraged leases;

·       the disposition ofunliquidated claims against us;

·       ourability to obtain and maintain normal terms with vendors and service providersand to maintain contracts that are critical to our operations;

·       our ability to attract andretain key employees;

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

·       the possibility thatcertain of our subsidiaries may remain in bankruptcy after our emergence;

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·       the effects of changes in our organizational structure in conjunctionwith our emergence from Chapter 11 protection, including changes resulting fromour reorganization under a new parent entity formed in a jurisdiction outsidethe United States; and

·       theduration of our Chapter 11 proceedings.

The ultimate outcome of matters with respect to whichwe make forward-looking statements and the terms of any reorganizationplan ultimately confirmed can affect the value of our various pre-petitionliabilities and other securities. No assurance can be given as to what values,if any, will be ascribed in the bankruptcy proceedings to each of theseconstituencies. Accordingly, we urge that caution be exercised with respect toexisting and future investments in these liabilities and/or securities.

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

**Factorsthat Could Affect Future Performance**

In addition to the discussion of certain risks inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and the accompanying Notes to Mirant Americas Generation, LLC’sunaudited condensed consolidated financial statements, other factors that couldaffect the Company’s future performance (business, financial condition orresults of operations and cash flows) are set forth in our 2004 Annual Reporton Form 10-K.

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**
| ** **                                                                                  | ** ** | **Three Months**  | ** ** | **Six Months** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                                                  | ** ** | **Ended**              | ** ** | **Ended**           | ** ** |
| ** **                                                                                  | ** ** | **June 30,**      | ** ** | **June 30,**   | ** ** |
| ** **                                                                                  | ** ** | **2005**               | ** ** | **2004**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(in millions)** | ** ** |
| **Operating Revenues:**                                                                     |       |                   |       |                |       |   |   |   |   |
| Affiliate                                                                                   | ** ** | **$**                  | **452**    |                | $          | 376 | ** ** | **$** | **833** |   | $ | 847 |   |
| Nonaffiliate                                                                                | ** ** | **32**                 |       | 92                  | ** ** | **82** |   | 169 |   |
| Total operating revenues                                                                    | ** ** | **484**                |       | 468                 | ** ** | **915** |   | 1,016 |   |
| Cost of fuel, electricity and other  products—affiliate                                | ** ** | **215**                |       | 251                 | ** ** | **425** |   | 551 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                             | ** ** | **34**                 |       | 44                  | ** ** | **88** |   | 89 |   |
| Total cost of fuel, electricity and other products                                          | ** ** | **249**                |       | 295                 | ** ** | **513** |   | 640 |   |
| **Gross  Margin**                                                                           | ** ** | **235**                |       | 173                 | ** ** | **402** |   | 376 |   |
| **Operating  Expenses:**                                                                    |       |                   |       |                |       |   |   |   |   |
| Generation facilities  rent                                                                 | ** ** | **26**                 |       | 24                  | ** ** | **51** |   | 48 |   |
| Depreciation and  amortization                                                              | ** ** | **22**                 |       | 21                  | ** ** | **45** |   | 44 |   |
| Operations and  maintenance—affiliate                                                  | ** ** | **59**                 |       | 68                  | ** ** | **121** |   | 138 |   |
| Operations and  maintenance—nonaffiliate                                               | ** ** | **70**                 |       | 64                  | ** ** | **127** |   | 122 |   |
| Gain on sales of  assets, net                                                               | ** ** | **—**             |       | —              | ** ** | **(1** | **)** | — |   |
| Total operating expenses                                                                    | ** ** | **177**                |       | 177                 | ** ** | **343** |   | 352 |   |
| **Operating  Income (Loss)**                                                                | ** ** | **58**                 |       | (4                  | )          | **59** |   | 24 |   |
| **Other (Expense) Income, net:**                                                            |       |                   |       |                |       |   |   |   |   |
| Interest expense—affiliate                                                             | ** ** | **(2**                 | **)**      | (2                  | )          | **(4** | **)** | (2 | ) |
| Interest expense—nonaffiliate                                                          | ** ** | **(1**                 | **)**      | (1                  | )          | **(1** | **)** | (1 | ) |
| Other, net                                                                                  | ** ** | **1**                  |       | 1                   | ** ** | **2** |   | 1 |   |
| Total other expense, net                                                                    | ** ** | **(2**                 | **)**      | (2                  | )          | **(3** | **)** | (2 | ) |
| **Income  (Loss) from Continuing Operations Before Reorganization Items and Income  Taxes** | ** ** | **56**                 |       | (6                  | )          | **56** |   | 22 |   |
| Reorganization items, net                                                                   | ** ** | **(150**               | **)**      | 31                  | ** ** | **(135** | **)** | 44 |   |
| (Benefit)  provision for income taxes                                                       | ** ** | **—**             |       | 1                   | ** ** | **6** |   | 1 |   |
| **Net Income (Loss)**                                                                       | ** ** | **$**                  | **206**    |                | $          | (38 | ) | **$** | **185** | ** ** | $ | (23 | ) |

 

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

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                        | ** ** | **At June 30,  2005**         | ** ** | **  At December 31,  2004  ** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **  (Unaudited)  ** | ** ** | ** **                                                  | ** ** |
| ** **                                        | ** ** | **(in millions)**                  | ** ** |
| **Assets**                                        |       |                                    |       | ** **                                                  |       |   |   |   |   |
| **Current Assets:**                               |       |                                    |       | ** **                                                  |       |   |   |   |   |
| Cash and cash equivalents                         | ** ** | ** **                              | **$**      | **429**                                                     | ** ** |   |   | $ | 414 |   |   |
| Receivables:                                      |       |                                    |       | ** **                                                  |       |   |   |   |   |
| Affiliate                                         | ** ** | ** **                              | **208**    | ** **                                                  |       |   | 246 |   |   |
| Customer accounts                                 | ** ** | ** **                              | **1**      | ** **                                                  |       |   | 11 |   |   |
| Price risk management  assets—affiliate      | ** ** | ** **                              | **27**     | ** **                                                  |       |   | 11 |   |   |
| Prepaid rent and other  payments                  | ** ** | ** **                              | **116**    | ** **                                                  |       |   | 133 |   |   |
| Inventory                                         | ** ** | ** **                              | **167**    | ** **                                                  |       |   | 162 |   |   |
| Other current assets                              | ** ** | ** **                              | **21**     | ** **                                                  |       |   | 35 |   |   |
| Total current assets                              | ** ** | ** **                              | **969**    | ** **                                                  |       |   | 1,012 |   |   |
| **Property,  Plant and Equipment, net**           | ** ** | ** **                              | **2,115**  | ** **                                                  |       |   | 2,109 |   |   |
| **Noncurrent Assets:**                            |       |                                    |       | ** **                                                  |       |   |   |   |   |
| Other intangible assets,  net                     | ** ** | ** **                              | **203**    | ** **                                                  |       |   | 207 |   |   |
| Notes receivable from  affiliate                  | ** ** | ** **                              | **478**    | ** **                                                  |       |   | 478 |   |   |
| Price risk management  assets—affiliate      | ** ** | ** **                              | **17**     | ** **                                                  |       |   | 1 |   |   |
| Prepaid rent                                      | ** ** | ** **                              | **214**    | ** **                                                  |       |   | 197 |   |   |
| Other noncurrent assets                           | ** ** | ** **                              | **77**     | ** **                                                  |       |   | 26 |   |   |
| Total noncurrent assets                           | ** ** | ** **                              | **989**    | ** **                                                  |       |   | 909 |   |   |
| **Total  Assets**                                 | ** ** | ** **                              | **$**      | **4,073**                                                   | ** ** |   |   | $ | 4,030 |   |   |
| **Liabilities  and Member’s Equity**         |       |                                    |       | ** **                                                  |       |   |   |   |   |
| **Current Liabilities:**                          |       |                                    |       | ** **                                                  |       |   |   |   |   |
| Accounts payable and  accrued liabilities         | ** ** | ** **                              | **$**      | **49**                                                      | ** ** |   |   | $ | 51 |   |   |
| Payable to affiliate                              | ** ** | ** **                              | **33**     | ** **                                                  |       |   | 52 |   |   |
| Price risk management  liabilities—affiliate | ** ** | ** **                              | **70**     | ** **                                                  |       |   | 62 |   |   |
| Revenue subject to refund                         | ** ** | ** **                              | **—** | ** **                                                  |       |   | 5 |   |   |
| Accrued taxes—affiliate                      | ** ** | ** **                              | **54**     | ** **                                                  |       |   | 51 |   |   |
| Accrued taxes—nonaffiliate                   | ** ** | ** **                              | **149**    | ** **                                                  |       |   | 122 |   |   |
| Other current liabilities                         | ** ** | ** **                              | **73**     | ** **                                                  |       |   | 8 |   |   |
| Total current liabilities                         | ** ** | ** **                              | **428**    | ** **                                                  |       |   | 351 |   |   |
| **Noncurrent Liabilities:**                       |       |                                    |       | ** **                                                  |       |   |   |   |   |
| Price risk  management liabilities—affiliate | ** ** | ** **                              | **1**      | ** **                                                  |       |   | 1 |   |   |
| Other noncurrent  liabilities                     | ** ** | ** **                              | **32**     | ** **                                                  |       |   | 46 |   |   |
| Total noncurrent  liabilities                     | ** ** | ** **                              | **33**     | ** **                                                  |       |   | 47 |   |   |
| **Liabilities  Subject to Compromise**            | ** ** | ** **                              | **3,233**  | ** **                                                  |       |   | 3,438 |   |   |
| **Member’s Equity:**                         |       |                                    |       | ** **                                                  |       |   |   |   |   |
| Member’s interest                            | ** ** | ** **                              | **3,853**  | ** **                                                  |       |   | 3,853 |   |   |
| Accumulated deficit                               | ** ** | ** **                              | **(3,474** | **)**                                                       |       |   | (3,659 | ) |   |
| Total member’s equity                        | ** ** | ** **                              | **379**    | ** **                                                  |       |   | 194 |   |   |
| **Total Liabilities and Member’s Equity**    | ** ** | ** **                              | **$**      | **4,073**                                                   | ** ** |   |   | $ | 4,030 |   |   |

 

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

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDSTATEMENTS of MEMBER’S EQUITY (UNAUDITED)**
| ** **                       | ** ** | **Member’s**      | ** ** | **Accumulated** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------|------------|
| ** **                       | ** ** | **Interest**           | ** ** | **Deficit**     | ** ** |
| ** **                       | ** ** | **(in millions)** | ** ** |
| Balance,  December 31, 2004 |       |                   | $          | 3,853           |       |   |   | $ | (3,659 | ) |   |
| Net income                       |       |                   | —     |            |       |   | 185 | ** ** |   |
| **Balance, June 30, 2005**  | ** ** | ** **             | **$**      | **3,853**       |       | ** ** | ** ** | **$** | **(3,474** | **)** |   |

 

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

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**
| ** **                                                                                     | ** ** | **Six Months Ended June 30,**                                            | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** **                                                                                     | ** ** | **(in millions)**                                                                       | ** ** |
| **Cash Flows from Operating  Activities:**                                                     |       |                                                                                         |       | ** ** |   |   |   |   |   |
| Net income (loss)                                                                              | ** ** | ** **                                                                                   | **$**      | **185** | ** ** |   |   | $ | (23 | ) |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:      |       |                                                                                         |       | ** ** |   |   |   |   |   |
| Depreciation and amortization                                                                  | ** ** | ** **                                                                                   | **45**     | ** ** |   |   | 44 |   |   |
| Unrealized (gains) losses on price risk management assets  and liabilities—affiliate, net |       |                                                                                         | **(24**    | **)** |   |   | 63 |   |   |
| Restructuring charges, net of amounts paid                                                     | ** ** | ** **                                                                                   | **—** | ** ** |   |   | 25 |   |   |
| Non-cash charge for reorganization items                                                       | ** ** | ** **                                                                                   | **(164**   | **)** |   |   | — |   |   |
| Deferred income taxes                                                                          | ** ** | ** **                                                                                   | **2**      | ** ** |   |   | (3 | ) |   |
| Gain on sale of assets, net                                                                    | ** ** | ** **                                                                                   | **(1**     | **)** |   |   | — |   |   |
| Changes in  certain assets and liabilities:                                                    |       |                                                                                         |       | ** ** |   |   |   |   |   |
| Affiliate receivables                                                                          | ** ** | ** **                                                                                   | **(42**    | **)** |   |   | (78 | ) |   |
| Customer accounts receivable                                                                   | ** ** | ** **                                                                                   | **15**     | ** ** |   |   | 1 |   |   |
| Inventory                                                                                      | ** ** | ** **                                                                                   | **14**     | ** ** |   |   | (1 | ) |   |
| Prepaid rent                                                                                   | ** ** | ** **                                                                                   | **(17**    | **)** |   |   | (13 | ) |   |
| Other assets                                                                                   | ** ** | ** **                                                                                   | **20**     | ** ** |   |   | 30 |   |   |
| Accounts payable and accrued liabilities                                                       | ** ** | ** **                                                                                   | **18**     | ** ** |   |   | 7 |   |   |
| Payable to affiliate                                                                           | ** ** | ** **                                                                                   | **(4**     | **)** |   |   | (6 | ) |   |
| Accrued taxes—affiliate                                                                   | ** ** | ** **                                                                                   | **(5**     | **)** |   |   | (1 | ) |   |
| Accrued taxes—nonaffiliate                                                                | ** ** | ** **                                                                                   | **19**     | ** ** |   |   | 34 |   |   |
| Total adjustments                                                                              | ** ** | ** **                                                                                   | **(124**   | **)** |   |   | 102 |   |   |
| Net cash provided by operating activities                                                      | ** ** | ** **                                                                                   | **61**     | ** ** |   |   | 79 |   |   |
| **Cash  Flows from Investing Activities:**                                                     |       |                                                                                         |       | ** ** |   |   |   |   |   |
| Capital expenditures                                                                           | ** ** | ** **                                                                                   | **(50**    | **)** |   |   | (37 | ) |   |
| Issuance of notes receivables from affiliate                                                   | ** ** | ** **                                                                                   | **—** | ** ** |   |   | (33 | ) |   |
| Proceeds from the sale of assets                                                               | ** ** | ** **                                                                                   | **4**      | ** ** |   |   | — |   |   |
| Net cash used in investing activities                                                          | ** ** | ** **                                                                                   | **(46**    | **)** |   |   | (70 | ) |   |
| **Cash  Flows from Financing Activities:**                                                     |       |                                                                                         |       | ** ** |   |   |   |   |   |
| Net cash provided by financing activities                                                      | ** ** | ** **                                                                                   | **—** | ** ** |   |   | — |   |   |
| **Net Increase in Cash and Cash Equivalents**                                                  | ** ** | ** **                                                                                   | **15**     | ** ** |   |   | 9 |   |   |
| **Cash and Cash Equivalents, beginning of period**                                             | ** ** | ** **                                                                                   | **414**    | ** ** |   |   | 324 |   |   |
| **Cash and Cash Equivalents, end of period**                                                   | ** ** | ** **                                                                                   | **$**      | **429** | ** ** |   |   | $ | 333 |   |   |
| **Supplemental  Cash Flow Disclosures:**                                                       |       |                                                                                         |       | ** ** |   |   |   |   |   |
| Cash refund received for income taxes                                                          | ** ** | ** **                                                                                   | **$**      | **—** | ** ** |   |   | $ | (1 | ) |   |
| Cash paid for interest                                                                         | ** ** | ** **                                                                                   | **$**      | **2** | ** ** |   |   | $ | 1 |   |   |

 

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

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Debtor-in-Possession)NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTSJune 30, 2005 and 2004**

**A. Description of Business**

***Overview***

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

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

***Basis of Presentation***

The accompanying condensed consolidated financialstatements (unaudited) of Mirant Americas Generation and its wholly-ownedsubsidiaries have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interim financial information and with theinstructions for Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby GAAP for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sForm 10-K for the year ended December 31, 2004.

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

***New Accounting Principle Not Yet Adopted***

In March 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47,*Accounting for Conditional Asset RetirementObligations* (“FIN 47”). The interpretation requires 

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companiesto recognize a liability for the fair value of a legal obligation to performasset retirement activities that are conditional on a future event if theamount can be reasonably estimated. FIN 47 is effective for the fiscal yearsending after December 15, 2005. The Company will adopt the provisions ofFIN 47 on the earlier of its emergence from bankruptcy or the effective date ofFIN 47. The Company has not yet determined the impact, if any, of FIN 47 on itsfinancial statements.

**B. Bankruptcy Related Disclosures**

On January 19, 2005, Mirant Corporation andsubstantially all of its wholly-owned and certain non wholly-ownedU.S. subsidiaries (“Mirant Debtors”) filed a proposed Plan of Reorganization(as amended, the “Plan”) and Disclosure Statement (as amended, the “DisclosureStatement”) with the Bankruptcy Court. A First Amended Plan and a First AmendedDisclosure Statement were filed on March 25, 2005. The proposed Plan setsforth the proposed structure of the Mirant Debtors at emergence and outlineshow the claims of creditors and stockholders are proposed to be treated. Oncethe Disclosure Statement is complete, the Bankruptcy Court will hold a hearingto determine its adequacy. If the Disclosure Statement is found by theBankruptcy Court to contain adequate information, then the Mirant Debtors willuse the Disclosure Statement to solicit votes on the proposed Plan from thosecreditors, security holders and interest holders who are entitled to vote onthe proposed Plan.

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

·       thebusiness of the Mirant Debtors will continue to be operated in substantiallyits current form, subject to (1) certain internal structural changes thatthe Mirant Debtors believe will improve operational efficiency, facilitate andoptimize their ability to meet financing requirements and accommodate theirdebt structure as contemplated at emergence and (2) organizing the newparent entity for the Mirant Debtors’ ongoing business operations (“New Mirant”)in a jurisdiction outside the United States;

·       theestates of the Mirant Debtors (excluding Mirant Americas Generation and itsdebtor subsidiaries) (collectively, the “Consolidated Mirant Debtors”) will besubstantively consolidated solely for purposes of voting on the Plan (except asset forth in Section 7.3 of the Plan), confirmation of the Plan anddetermining the treatment of claims against and equity interests in suchConsolidated Mirant Debtors under the proposed Plan;

·       theestates of Mirant Americas Generation and its debtor subsidiaries(collectively, the “Mirant Americas Generation Debtors”) will be substantivelyconsolidated solely for purposes of voting on the Plan (except as set forth in Section 7.3of the Plan), confirmation of the Plan and determining the treatment of claimsagainst and equity interests in the Mirant Americas Generation Debtors underthe proposed Plan;

·       theholders of unsecured claims against the Consolidated Mirant Debtors willreceive a pro rata share of 100% of the shares of New Mirant common stock,except for (1) certain shares to be issued to the holders of certainclaims against Mirant Americas Generation Debtors, as described below, and (2) theshares reserved for issuance pursuant to the New Mirant employee stockprograms;

·       a single intermediateholding company, Mirant North America, LLC (“Mirant North America”), will beformed under Mirant Americas Generation and will directly or indirectly own100% of the equity interests in the operating subsidiaries of Mirant AmericasGeneration, including Mirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”);

·       theunsecured claims against the Mirant Americas Generation Debtors will be paid infull through (1) the issuance to general unsecured creditors and holdersof the Mirant Americas Generation revolving credit facilities and senior notesmaturing in 2006 and 2008 of (a) new debt securities of Mirant NorthAmerica or, at the option of the Mirant Debtors, cash proceeds from third-party

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financing transactions, inan amount equal to 90% of the full amount owed to such creditors (as determinedby the Bankruptcy Court) and (b) common stock in New Mirant having a valueequal to 10% of such amount owed; and (2) the reinstatement of MirantAmericas Generation senior notes maturing in 2011, 2021 and 2031;

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

·       theintercompany claims between and among the Consolidated Mirant Debtors and theMirant Americas Generation Debtors will be resolved as part of a globalsettlement under the proposed Plan whereby intercompany claims will not receivea distribution under the proposed Plan;

·       theprospective working capital requirements of Mirant Americas Generation and itssubsidiaries are expected to be met with a new senior secured revolving creditfacility of Mirant North America in the amount of $750 million to $1 billion.In addition the Mirant Americas Generation consolidated business will haveapproximately $3.05 billion of debt (as compared to approximately $2.8 billionof debt at the commencement of the Chapter 11 cases) comprised of $1.7 billionof reinstated debt at Mirant Americas Generation and $1.35 billion of new debtincurred by Mirant North America in partial satisfaction of certain existingMirant Americas Generation debt, which amount does not include the MirantMid-Atlantic operating leases related to Morgantown Station and DickersonStation;

·       tohelp support the feasibility of the proposed Plan with respect to the MirantAmericas Generation Debtors, Mirant shall contribute value to Mirant NorthAmerica, including Mirant’s trading and marketing business (subject to anobligation to return a portion of the embedded cash collateral in the tradingand marketing business to Mirant provided that, under certain circumstances,the Mirant Debtors may elect to satisfy this obligation by transferring $250million to Mirant Americas, Inc. (“Mirant Americas”) from Mirant NorthAmerica), Mirant Peaker, LLC (“Mirant Peaker”), Mirant Potomac River, LLC (“MirantPotomac River”) and Mirant Zeeland, LLC and commitments to make prospectivecapital contributions of $150 million to Mirant Americas Generation (forrefinancing) and, under certain circumstances, up to $265 million to MirantNorth America (for sulfur dioxide (“SO2”) capital expenditures). Under theproposed Plan, Mirant Peaker and Mirant Potomac River will become subsidiariesof Mirant Mid-Atlantic;

·       thedisputes regarding the Mirant Debtors’ ad valorem real property taxes for the Bowlineand Lovett facilities will be settled and resolved on terms that permit thefeasible operation of these assets, subject to market conditions, or the MirantDebtors that own such assets will remain in Chapter 11 until such matters areresolved by settlement or through litigation;

·       substantiallyall of the assets of Mirant will be transferred to New Mirant, which will serveas the corporate parent of the Mirant Debtors’ business enterprise on and afterthe effective date of the proposed Plan; similarly, the Mirant trading andmarketing business of Mirant Americas Energy Marketing shall be substantiallytransferred to Mirant Energy Trading, LLC (a subsidiary of Mirant NorthAmerica); and

·       theoutstanding common stock in Mirant will be cancelled and the holders thereofwill receive any surplus value after creditors are paid in full, plus the rightto receive a pro rata share of warrants issued by New Mirant if they vote toaccept the proposed Plan.

The Mirant Americas Generation Creditor Committee,together with Wells Fargo Bank, National Association and the Ad Hoc Committeeof Bondholders of Mirant Americas Generation, have objected to thereinstatement of the Mirant Americas Generation senior notes maturing in 2011,2021 and 2031 and filed a motion requesting an order determining that theselong-term noteholders are impaired under the Plan and thus entitled to vote onthe Plan. The Bankruptcy Court issued an opinion on May 24, 2005 

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denying their motion andfinding that the treatment under the Plan of the long-term notes did not impairthe holders thereof and, therefore, the holders of the Mirant AmericasGeneration long-term notes may not vote on the Plan. The Committees have soughtleave from the United States District Court for the Northern District of Texasto appeal the Bankruptcy Court’s order, which is not a final order that isappealable as a matter of right.

At present, the proposed Plan has not been approved byany of the Committees established by the office of the United States Trustee inMirant’s bankruptcy proceedings that represent the unsecured creditors ofMirant, the unsecured creditors of Mirant Americas Generation and the equitysecurity holders of Mirant (the “Statutory Committees”). As such, the MirantDebtors anticipate that negotiations will continue between the Mirant Debtorsand each of the Statutory Committees. Negotiations with the StatutoryCommittees, whether or not successful, could lead to material changes tocertain components of the proposed Plan.

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

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

***Accounting for Reorganization***

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

*Interest Expense*

The Mirant Debtors havediscontinued recording interest on liabilities subject to compromise.Contractual interest on liabilities subject to compromise in excess of reportedinterest was approximately $56 million and $115 million for the three and sixmonths ended June 30, 2005, respectively, exclusive of any potentialamounts attributable to compound interest, default interest and additionalinterest relating to the Company’s failure to meet certain reportingrequirements. Contractual interest on liabilities subject to compromise inexcess of reported interest for the period from the Petition Date through June 30,2005 is approximately $454 million, exclusive of any potential amounts attributableto compound interest, default interest in the amount of approximately $11million and additional interest relating to the Company’s failure to meetcertain reporting requirements in the amount of approximately $23 million. Thisamount 

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includesapproximately $285 million of interest related to Mirant Americas Generationsenior notes maturing in 2011, 2021 and 2031, which would be reinstated underthe proposed Plan, excluding additional interest relating to the Company’sfailure to meet certain reporting requirements in the amount of approximately$16 million.

*ReorganizationItems*

Reorganizationitems, net represents expense or income amounts that were recorded in theconsolidated financial statements as a result of the bankruptcy proceedingsprimarily related to estimated claims and professional fees for accounting andlegal services. For the three and six months ended June 30, 2005, theCompany recorded a net gain of $150 million and $135 million,respectively, and a net expense of $31 million and $44 million for the sameperiods in 2004, in the accompanying unaudited condensed consolidatedstatements of operations.For the three and six monthsended June 30, 2005, the following represent the significant items withinthis category (in millions): 
| ** **                                    | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                        | ** ** | ** 2004 **                          | ** ** | **2005** | ** ** | ** 2004 ** | ** ** |
| Professional fees  and administrative expense |       | $                                               | 20         |                                          |       | $ | 11 |   |   | $ | 35 |   |   | $ | 21 |   |   |
| Estimated claims                              |       | (167                                            | )          |                                          | 21         |   |   | (164 | ) |   | 25 |   |   |
| Interest income,  net                         |       | (3                                              | )          |                                          | (1         | ) |   | (6 | ) |   | (2 | ) |   |
| Total                                         |       | $                                               | (150       | )                                             |       | $ | 31 |   |   | $ | (135 | ) |   | $ | 44 |   |   |

 

***Liabilities Subject to Compromise***

Theamounts subject to compromise consisted of the following items(in millions):
| ** **                                                                            | ** ** | ** June 30,   2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| Items, absent the  bankruptcy filings, that would have been considered current at:    |       |                                |       |                        |       |   |   |   |   |
| Accounts payable and accrued liabilities—affiliate                               |       |                                | $          | 184                         |       |   |   | $ | 169 |   |   |
| Accounts payable and accrued liabilities—nonaffiliate                            |       |                                | 278        |                        |       |   | 498 |   |   |
| Current portion of long-term debt                                                     |       |                                | 800        |                        |       |   | 300 |   |   |
| Items, absent the  bankruptcy filings, that would have been considered noncurrent at: |       |                                |       |                        |       |   |   |   |   |
| Long-term debt                                                                        |       |                                | 1,970      |                        |       |   | 2,470 |   |   |
| Other noncurrent liabilities                                                          |       |                                | 1          |                        |       |   | 1 |   |   |
| Total                                                                                 |       |                                | $          | 3,233                       |       |   |   | $ | 3,438 |   |   |

 

***PEPCO Litigation***

In 2000, Mirant purchased certain power generatingassets and certain other assets from Potomac Electric Power Company (“PEPCO”),including certain power purchase agreements (“PPAs”). Under the terms of theAsset Purchase and Sale Agreement (the “APSA”), Mirant and PEPCO entered into acontractual arrangement (the “Back-to-Back Agreement”) with respect to certainPPAs, including PEPCO’s long-term PPAs with Ohio Edison Company (“Ohio Edison”)and Panda-Brandywine L.P. (“Panda”), under which (1) PEPCO agreed toresell to Mirant all capacity, energy, ancillary services and other benefits towhich it is entitled under those agreements; and (2) Mirant agreed to payPEPCO 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 and Ohio Edison PPAsrun until 2021 and 2005, respectively. Under the Back-to-Back Agreement, Mirantis obligated to purchase power from PEPCO at prices that are significantlyhigher than existing market prices 

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for power. In the Chapter11 cases of the Mirant Debtors, PEPCO has asserted that an Assignment andAssumption Agreement dated December 19, 2000 that includes as partiesPEPCO, various subsidiaries of the Company, Mirant Potomac River, and MirantAmericas Energy Marketing, causes the Company’s subsidiaries that are partiesto the agreement to be jointly and severally liable to PEPCO for variousobligations, including the obligations under the Back-to-Back Agreement. PEPCOalso asserts that the Assignment and Assumption Agreement causes the Company’ssubsidiaries to be jointly and severally liable for a claim of $105 millionfiled by PEPCO in the Chapter 11 cases related to modifications agreed tobetween Mirant Americas Energy Marketing and PEPCO related to the TransitionPower Agreements in place between PEPCO and Mirant Americas Energy Marketingthrough January 2005. The Company is disputing this interpretation of theAssignment and Assumption Agreement in proceedings before the Bankruptcy Court,but the outcome of those proceedings is uncertain. If the Company’ssubsidiaries are determined to be jointly and severally liable for theobligations of Mirant and Mirant Americas Energy Marketing to PEPCO under theAssignment and Assumption Agreement, then the claim related to the TransitionPower Agreements and the proceedings described below involving the Back-to-BackAgreement could have an adverse effect upon the Company’s financial condition,although such an effect would be mitigated by Mirant and Mirant Americas EnergyMarketing also having responsibility for those obligations.

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

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

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

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

*Suspension of PEPCO Back-to-Back Payments.  *OnDecember 9, 2004, in an effort to halt further out-of-market paymentsunder the Back-to-Back Agreement while awaiting resolution of issues related tothe potential rejection of the Back-to-Back Agreement (but prior to notice ofentry of the district court’s order of December 9, 2004), Mirant filed anotice in the Bankruptcy Court stating that Mirant was suspending furtherpayments to PEPCO under the Back-to-Back Agreement absent further order of thecourt (the “Suspension Notice”). On December 10, 2004, in response to theSuspension Notice, PEPCO filed a motion in the district court seeking atemporary restraining order and injunctive relief to require Mirant to performunder the Back-to-Back Agreement (the “Injunctive Relief Motion”). On December 13,2004, the district court issued an order referring the Injunctive Relief Motionto the Bankruptcy Court. On December 21, 2004, the Bankruptcy Court issuedan order denying the temporary restraining order sought by PEPCO.

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

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

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

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

*Potential Adjustment Related to Panda PowerPurchase Agreement.  *At the time of the acquisition ofthe Mirant Mid-Atlantic assets from PEPCO, Mirant also entered into anagreement with PEPCO that, as subsequently modified, provided that the pricepaid by Mirant for its December 2000 acquisition of PEPCO assets would beadjusted if by April 8, 2005 a binding court order had been enteredfinding that the Back-to-Back Agreement violated PEPCO’s power purchaseagreement with Panda (the “Panda PPA”) as a prohibited assignment, transfer ordelegation of the Panda PPA or because it effected a prohibited delegation ortransfer of rights, duties or obligations under the Panda PPA that was notseverable from the rest of the Back-to-Back Agreement. Panda initiated legalproceedings in 2000 asserting that the Back-to-Back Agreement violatedprovisions in the Panda PPA prohibiting PEPCO from assigning the Panda PPA ordelegating its duties under the Panda PPA to a third party without Panda’sprior written consent. On June 10, 2003, the Maryland Court of Appeals,Maryland’s highest court, ruled that the assignment of certain rights anddelegation of certain duties by PEPCO to Mirant did violate the non-assignmentprovision of the Panda PPA and was unenforceable. The court, however, left openthe issues whether the provisions found to violate the Panda PPA could besevered and the rest of the Back-to-Back Agreement enforced and whether Panda’srefusal to consent to the assignment of the Panda PPA by PEPCO to Mirant wasunreasonable and violated the Panda PPA. The Company believes that the June 10,2003 decision by the Maryland Court of Appeals does not suffice to trigger apurchase price adjustment under the agreement between Mirant and PEPCO. If thatcourt order were found to have triggered the purchase price adjustment, theagreement between Mirant and PEPCO provides that the amount of the adjustmentwould be negotiated in good faith by the parties or determined by bindingarbitration so as to compensate PEPCO for the termination of the benefit of theBack-to-Back Agreement while also holding Mirant economically indifferent fromsuch court order.

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

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**C.Related Party Arrangements and Transactions**

***Services and Administration Arrangements***

TheCompany and its subsidiaries utilize the services of Mirant, Mirant AmericasEnergy Marketing and Mirant Services. Amounts due to Mirant Americas EnergyMarketing and due from Mirant Americas Energy Marketing under the ServiceAgreements are recorded by each subsidiary of the Company as a net accountspayable—affiliate or accounts receivable—affiliatebecause of the Company’s legal right of offset. The following table summarizesthe amounts incurred under the arrangements that are recorded in theaccompanying unaudited condensed consolidated statements of operations asoperations and maintenance—affiliate (in millions):
| ** **                          | ** ** | **Three Months Ended  June 30,**          | ** ** | **Six Months Ended  June 30,**            | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Management,  personnel and services |       |                                                     | $          | 34                                                       |       |   |   | $ | 35 |   |   |   | $ | 67 |   |   |   | $ | 70 |   |   |
| Services  agreements                |       |                                                     | 12         |                                                     |       |   | 15 |   |   |   | 23 |   |   |   | 30 |   |   |
| Administration  arrangement         |       |                                                     | 13         |                                                     |       |   | 18 |   |   |   | 31 |   |   |   | 38 |   |   |
| Total                               |       |                                                     | $          | 59                                                       |       |   |   | $ | 68 |   |   |   | $ | 121 |   |   |   | $ | 138 |   |   |

 

*Management,Personnel and Services Agreement with Mirant 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 Serviceshave been included in the accompanying unaudited condensed consolidatedstatements of operations as follows (in millions):
| ** **                                                         | ** ** | **Three Months Ended  June 30,**          | ** ** | **Six Months Ended  June 30,**            | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                         | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **   2005   ** | ** ** | **  2004  ** | ** ** |
| Cost of fuel,  electricity and other products—affiliate  |       |                                                     | $          | 2                                                        |       |   |   | $ | 2 |   |   |   | $ | 4 |   |   |   | $ | 4 |   |   |
| Operations and  maintenance expense—affiliate                 |       |                                                     | 34         |                                                     |       |   | 35 |   |   |   | 67 |   |   |   | 70 |   |   |
| Total                                                              |       |                                                     | $          | 36                                                       |       |   |   | $ | 37 |   |   |   | $ | 71 |   |   |   | $ | 74 |   |   |

 

***Mirant Texas Tolling Arrangements with Mirant AmericasEnergy Marketing***

Mirant Texas Investments, Inc.and Mirant Texas Management, Inc. (collectively “Mirant Texas”),wholly-owned subsidiaries, and Mirant Americas Energy Marketing entered intotwo tolling agreements, under which Mirant Americas Energy Marketing paidMirant Texas annual capacity based payments on the guaranteed capacity ofMirant Texas’ generating units in Texas. Mirant Americas Energy Marketing paidMirant Texas a fee for each megawatt-hour (“MWh”) of energy generated.For the three and six months ended June 30, 2004, revenue from MirantAmericas Energy Marketing under the tolling agreement was approximately $4million and $7 million, respectively. In August 2004, Mirant Texas enteredinto a tolling agreement with a third party through December 2006.

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

The Company purchasesemissions allowances from Mirant Americas Energy Marketing at Mirant AmericasEnergy Marketing’s original cost to purchase the emissions allowances. Whereallowances have been purchased by Mirant Americas Energy Marketing from aMirant affiliate, the price paid by Mirant Americas Energy Marketing isdetermined by market indices. For the six months ended June 30, 2005 and2004, the Company purchased $4 million and $11 million, respectively, ofemissions allowances from 

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MirantAmericas Energy Marketing. For the six months ended June 30, 2005 and2004, the Company sold allowances to Mirant Americas Energy Marketing for $5million and $2 million, respectively. The allowances sold in the six monthsended June 30, 2005 had a book value of $4 million resulting in a gain of$1 million, which is reflected in gross margin. Emissions allowances purchasedfrom Mirant Americas Energy Marketing that were utilized in the three and sixmonths ended June 30, 2005 were $12 million and $20 million, respectively,compared to $16 million and $23 million for the same periods in 2004, and arerecorded in cost of fuel, electricity and other products—affiliate in theaccompanying unaudited condensed consolidated statements of operations. Amountsexpensed as a result of writing down emissions allowances to the lower of costor market were $4 million for both the three and six months ended June 30,2005, respectively. There was no expense recorded for the same periods in 2004for lower of cost or market write downs. As of June 30, 2005, the Companyhad emissions allowances purchased from Mirant Americas Energy Marketing of $34million, which are recorded in inventory in the accompanying unauditedcondensed consolidated balance sheets. In addition, emissions allowances of $20million related to the Company’s California assets were recorded in inventoryas a result of the California Settlement.

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

Forthe three and six months ended June 30, 2005, the Company sold $0and $9 million, respectively, of fuel oil inventory from its Chalk Pointfacility to Mirant Peaker, which approximated book value, compared to $3million and $7 million for the same periods in 2004.

**D. PriceRisk Management Assets and Liabilities**

Thefair values of Mirant Americas Generation’s price risk management assets—affiliateand price risk management liabilities—affiliate, net of reserves, as of June 30,2005 are included in the following table (in millions):
| ** **   | ** ** | **Assets**  | ** ** | **Liabilities** | ** ** | **Net Value at** | ** ** |
|--------------|------------|-------------|------------|-----------------|------------|----------------------------|------------|
| ** **   | ** ** | **Current** | ** ** | **Noncurrent**  | ** ** | **Current**                | ** ** | **Noncurrent** | ** ** | **June 30, 2005** | ** ** |
| Electricity  |       |        | $          | (33             | )          |                       |       | $ | (8 | ) |   |   | $ | (94 | ) |   |   | $ | (1 | ) |   |   | $ | (136 | ) |   |
| Natural gas  |       |        | 2          |            |       |                       | 3          |   |   |   | 3 |   |   |   | — |   |   |   | 8 |   |   |
| Crude oil    |       |        | 21         |            |       |                       | —     |   |   |   | 2 |   |   |   | — |   |   |   | 23 |   |   |
| Residual oil |       |        | 37         |            |       |                       | —     |   |   |   | 1 |   |   |   | — |   |   |   | 38 |   |   |
| Coal/other   |       |        | —     |            |       |                       | 22         |   |   |   | 18 |   |   |   | — |   |   |   | 40 |   |   |
| Total        |       |        | $          | 27              |       |                       |       | $ | 17 |   |   |   | $ | (70 | ) |   |   | $ | (1 | ) |   |   | $ | (27 | ) |   |

 

Of the total $27 million net value liability at June 30,2005, a net price risk management liability of $49 million relates to contractsto be settled in 2005 and a $22 million net price risk management asset relatesto contracts to be settled in periods thereafter. The volumetric weightedaverage maturity, or weighted average tenor, of the price risk managementportfolio at June 30, 2005, was approximately eight months. The netnotional amount of the price risk management assets and liabilities at June 30,2005, was a net short position of approximately 1.4** **millionequivalent MWh.

During the second quarter of 2005, the Company wasrequired to fair value certain of its coal contracts that were historicallyaccounted for on an accrual basis pursuant to the normal purchases or normalsales exclusion of Statement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments*, (“SFAS 133”). Due toamendments to the terms of the coal contracts or the Company’s inability tocontinue to assert expected physical receipt and consumption of coal volumes inthe normal course of business, these coal contracts no longer qualified for thenormal purchases or normal sales exclusion. The fair value of these coalcontracts, net of reserves, at June 30, 2005 approximated $39 million witha corresponding unrealized gain recorded in cost of fuel, electricity and otherproducts—affiliate in 

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the unaudited condensedconsolidated statements of operations for the three and six months ended June 30,2005.

Acoal mine that serves as a source for coal under one of these contracts ishaving various production issues, including a possible force majeure event.These issues have been considered in the calculation of fair value of thecontract at June 30, 2005. If these production issues continue, the fairvalue of the contract may need to be adjusted downward.

**E.Mirant Mid-Atlantic Operating Leases**

In conjunction with the acquisition of certain assetsfrom PEPCO, Mirant Mid-Atlantic has leased the Morgantown and the Dickersonbaseload units and associated property for terms of 33.75 and 28.5 yearsrespectively. Mirant Mid-Atlantic has an option to renew the leases for aperiod that would cover up to 75% of the economic useful life of thefacilities, as measured from the beginning of the original lease term throughthe end of the proposed renewal lease term. Mirant Mid-Atlantic is accountingfor these leases as operating leases. Rent expenses associated with theMorgantown and Dickerson operating leases totaled approximately$26 million and $51 million for the three and six months ended June 30,2005, respectively, as compared to $24 million and $48 million for the sameperiods in 2004 and are recorded as generation facilities rent expense in theaccompanying unaudited condensed consolidated statements of operations. Whilethere is variability in the scheduled payment amounts over the lease term,Mirant Mid-Atlantic recognizes rental expense for these leases on astraight-line basis. As of June 30, 2005 and December 31, 2004,Mirant Mid-Atlantic has paid approximately $295 million and$285 million, respectively, of actual operating lease payments inaccordance with the lease agreements in excess of rent expense recognized, andhas reported these amounts as prepaid rent in the accompanying unauditedcondensed consolidated balance sheets. A further $12 million of scheduled rentdue on June 30, 2005 was funded through a draw made by the lease trusteeon letters of credit arranged by Mirant. In addition to the regularly scheduledrent payments, Mirant Mid-Atlantic paid an additional $6 million and$11 million as of June 30, 2005 and December 31, 2004,respectively, as required by the lease agreements.

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

At this time, the Mirant Debtors maintain that theleases are not true leases for bankruptcy purposes. However, based on theBankruptcy Court’s comments in its April 2005 ruling, the Mirant Debtorsmay determine to modify their proposed Plan (and related Disclosure Statement)to propose that the leases be assumed conditioned upon certain provisions inthe leases—including the limitations on restricted payments and therestrictions on the incurrence of indebtedness and liens—being modified, strickenor determined to be unenforceable and certain alleged defaults determined asnot requiring “cure” as a condition to assumption. In order to assume leases, adebtor-lessee must obtain bankruptcy court approval and, subject to certainexceptions set forth in the Bankruptcy Code, must cure any existing defaultsunder the applicable leases (unless such defaults are duly waived). It would bethe Mirant Debtors’ objective that assumption would be approved at or beforeconfirmation of the Plan, and that as part of the assumption or confirmationorder, Mirant Mid-Atlantic would be relieved of the obligation to cure certaindefaults and of the obligation to perform certain covenants. If it is notfeasible for Mirant Mid-Atlantic to assume the leases because relief fromcertain defaults and/or covenants is not available, the two remainingalternatives 

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are rejection andrevisiting the issue of recharacterization. In the latter circumstance, if theBankruptcy Court recharacterizes the leases as indebtedness, MirantMid-Atlantic may be required to re-evaluate the accounting for the leases. If,on the other hand, recharacterization is not sought or is not available, and/orMirant Mid-Atlantic cannot or does not assume the leases, then the leases willbe rejected. In that event, the owner lessors would be entitled to a return ofthe leased assets and would have a claim for damages, if any, arising from suchrejection, subject to the limitation on allowed claims under section 502(b)(6) ofthe Bankruptcy Code applicable to leases of real property. Any claims arisingon account of rejection would be subject to compromise in Mirant Mid-Atlantic’sChapter 11 case. The impact of any of these events would be reflected in theCompany’s consolidated financial statements if and when the events occur.

As a result of MirantMid-Atlantic’s bankruptcy filing, a lease event of default has occurred underthe leases. The leases provide that, upon a lease event of default, the ownerlessors’ remedies include (1) terminating the leases and repossessing theleased assets, (2) selling their interests in the leased assets, (3) demandingpayment by Mirant Mid-Atlantic of the excess, if any, of the termination valueover the fair market sales value of the leased assets or the discounted fair marketrental value of the leased assets and (4) demanding payment of thetermination value mitigated by a sale of the leased assets for the account ofMirant Mid-Atlantic. The termination value for the leases approximated$1.4 billion at June 30, 2005 and generally decreases over time. Theability of the owner lessors to exercise their remedies under the leases iscurrently stayed as a result of Mirant Mid-Atlantic’s Chapter 11 filing.

**F. Litigationand Other Contingencies**

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

***Effect of Chapter 11 Proceedings***

On July 14, 2003 and July 15,2003 (the “Petition Date”), August 18, 2003, October 3, 2003 and November 18,2003, the Mirant Debtors filed voluntary petitions for relief underChapter 11 of the Bankruptcy Code. As of the Petition Date, most pendinglitigation (including some of the actions described below) is stayed, andabsent further order of the Bankruptcy Court, no party, subject to certainexceptions, may take any action, again subject to certain exceptions, torecover on pre-petition claims against the Mirant Debtors. One exception tothis stay of litigation is for an action or proceeding by a governmental agencyto enforce its police or regulatory power. The claims asserted in litigationand proceedings to which the stay applies may be fully and finally resolved inconnection with the administration of the bankruptcy proceedings and, to theextent not resolved, will need to be addressed in the Plan. On November 19,2003, the Bankruptcy Court entered an order staying most litigation pendingagainst current or former officers, directors and managers of the MirantDebtors arising out of the performance of their duties and against certainpotential indemnitees of the Mirant Debtors. The Bankruptcy Court took thataction to avoid the risk that the continuation of such litigation would impedethe Mirant Debtors’ ability to reorganize or would have a negative impact uponthe assets of the Mirant Debtors. At this time, it is not possible to predictthe outcome of the Chapter 11 proceedings or their effect on the business ofthe Mirant Debtors or outstanding legal proceedings. The Mirant Debtors intendto resolve as many of these claims as possible through the claims resolutionprocess in the bankruptcy proceeding or the Plan.

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***California and Western Power Markets***

*FERC Refund Proceedings:*   On July 25, 2001, the FERC issuedan order requiring proceedings (the “FERC Refund Proceedings”) to determine theamount of any refunds and amounts owed for sales made by market participants,including Mirant Americas Energy Marketing, to the California IndependentSystem Operator (the “CAISO”) or the California Power Exchange (the “Cal PX”)from October 2, 2000 through June 20, 2001 (the “Refund Period”).Various parties have appealed these FERC orders to the United States Court ofAppeals for the Ninth Circuit (the “Ninth Circuit”) seeking review of a numberof issues, including changing the Refund Period to include periods prior to October 2,2000 and expanding the sales of electricity subject to potential refund toinclude bilateral sales made to the California Department of Water Resources(the “DWR”) and other parties. Any such expansion of the Refund Period or thetypes of sales of electricity potentially subject to refund could significantlyincrease the refund exposure of Mirant Americas Energy Marketing in thisproceeding. Although Mirant Americas Energy Marketing is the Mirant entity thatengaged in transactions with the CAISO and the Cal PX, the orders issued by theFERC in the refund proceedings, and the filings made by other parties in thoseproceedings, generally refer to the Mirant entity involved as Mirant withoutbeing more specific. Mirant believes that the Mirant entity that would actuallybe liable to third parties for any refunds determined by the FERC to be owed,or that would be due any receivables found to be owed to Mirant, is MirantAmericas Energy Marketing. Agreements that were in effect at the time of thetransactions at issue between Mirant Americas Energy Marketing and the Company’ssubsidiaries that own generating facilities in California would shift some ofthe economic burden of such refunds or the benefit of such receivables fromMirant Americas Energy Marketing to those subsidiaries.

In the July 25, 2001 order, the FERC also orderedthat a preliminary evidentiary proceeding be held to develop a factual recordon whether there had been unjust and unreasonable charges for spot marketbilateral sales in the Pacific Northwest from December 25, 2000 through June 20,2001. In that proceeding, the California Attorney General, the CaliforniaPublic Utility Commission (the “CPUC”) and the California Electricity OversightBoard (the “EOB”) filed to recover certain refunds from parties, includingMirant Americas Energy Marketing, for bilateral sales of electricity to the DWRat the California/Oregon border, claiming that such sales took place in thePacific Northwest. In an order issued June 25, 2003, the FERC ruled thatno refunds were owed and terminated the proceeding. On November 10, 2003,the FERC denied requests for rehearing filed by various parties. Variousparties have 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 and subsidiaries of theCompany, purportedly did not comply with certain filing requirements fortransactions conducted under market-based rate tariffs. Mirant Americas EnergyMarketing and other parties have filed a petition for rehearing with the NinthCircuit.

On January 14, 2005, Mirant and certain of itssubsidiaries entered into a Settlement and Release of Claims Agreement (the “CaliforniaSettlement”) with Pacific Gas and Electric Company (“PG&E”), SouthernCalifornia Edison Company (“SCE”), San Diego Gas and Electric Company, theCPUC, the DWR, the EOB and the Attorney General of the State of California(collectively, the “California Parties”) and with the Office of MarketOversight and Investigations of the FERC settling a variety of disputedmatters. The Mirant entities that are parties to the California Settlement areMirant, Mirant Americas, Mirant Americas Energy Marketing, Mirant AmericasEnergy Marketing Investments, Inc., the Company, 

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Mirant CaliforniaInvestments, Inc., Mirant California, LLC, Mirant Delta, LLC, MirantPotrero, LLC, Mirant Special Procurement, Inc., Mirant Services and MirantAmericas Development, Inc. (collectively, the “Mirant Settling Parties”).The California Settlement was approved by the FERC on April 13, 2005 andbecame effective April 15, 2005 upon its approval by the Bankruptcy Court.The California Settlement results in the release of most of Mirant AmericasEnergy Marketing’s and therefore the Company’s potential liability (1) in theFERC Refund Proceedings for sales made in the CAISO or the Cal PX markets, (2) inthe proceeding also initiated by the FERC in July 2001 to determinewhether there had been unjust and unreasonable charges for spot marketbilateral sales in 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 Mirant and its subsidiaries from any liability forrefunds related to sales of electricity and natural gas in the western marketsfrom January 1, 1998 through July 14, 2003. Also, the CaliforniaParties will assume 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. Subject to applicable bankruptcylaw, however, Mirant Americas Energy Marketing will continue to be liable forany refunds that FERC determines it to owe (1) to participants in the CalPX and CAISO markets that are not California Parties (or that did not elect toopt into the settlement) 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). This liability of Mirant Americas Energy Marketing could result inadditional liability of the Company’s subsidiaries to Mirant Americas EnergyMarketing under the intercompany agreements referred to above.

*FERCShow Cause Proceeding Relating to Trading Practices:  *OnJune 25, 2003, the FERC issued a show cause order (the “Trading PracticesOrder”) to more than 50 parties, including Mirant Americas Energy Marketing andsubsidiaries of the Company, that a FERC staff report issued on March 26,2003 identified as having potentially engaged in one or more trading strategiesof the type employed by Enron Corporation and its affiliates (“Enron”), asdescribed in the Enron memos released by the FERC in May 2002. The TradingPractices Order identified certain specific trading practices that the FERCindicated could constitute gaming or anomalous market behavior in violation ofthe CAISO and Cal PX tariffs. The Trading Practices Order requires the CAISO toidentify transactions between January 1, 2000 and June 20, 2001 thatmay involve the identified trading strategies, and then requires the applicablesellers involved in those transactions to demonstrate why such transactionswere not violations of the CAISO and Cal PX tariffs. On September 30,2003, the Mirant entities filed with the FERC for approval of a settlementagreement (the “Trading Settlement Agreement”) entered into between certainMirant entities and the FERC Trial Staff, under which Mirant Americas EnergyMarketing would pay $332,411 to settle the show cause proceeding, except for anissue related to selling of ancillary services, which is discussed below. In a November 14,2003 order in a different proceeding, the FERC ruled that certain allegationsof improper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in 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 “Ancillary Amount”). The TradingSettlement Agreement, as amended, must be approved by the FERC and theBankruptcy Court to become effective. On April 15, 2005 the CaliforniaSettlement became effective, and, as a result, the California Parties withdrewtheir opposition to the Trading Settlement Agreement as amended and supportedapproval of 

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the Trading SettlementAgreement as proposed by the Mirant entities that are parties to that agreementand the FERC Trial Staff without change or modification. The FERC approved theTrading Settlement Agreement, as amended, on June 27, 2005, and the Mirantentities will now seek approval from the Bankruptcy Court.

*Accounting Impact of CaliforniaSettlement.***  **Historically,the Company had recorded receivables and related reserves associated withamounts due to Mirant Americas Energy Marketing from the CAISO and Cal PXrelated to the period from October 2000 to June 2001 and reservesrelated to disputed refunds under certain Reliability-Must-Run Agreements thatwere resolved by the California Settlement. Upon the California Settlement’seffectiveness on April 15, 2005, the Company recognized a non-cash gain ofapproximately $161 million in reorganization items, net in the unauditedcondensed consolidated statements of operations for the three and six monthsended June 30, 2005.

***Mirant Americas Generation Bondholder Suit***

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

In December 2003, Lehman Commercial Paper Inc. (“Lehman”),as agent for various lenders under certain pre-petition credit agreements,filed a claim against the Company in the bankruptcy proceedings. In December 2003,Wells Fargo Bank, N.A. (“Wells Fargo”) also filed claims in the bankruptcyproceedings as successor indenture trustee for bond indebtedness under acertain indenture against the Company. In addition to their original claims,Lehman and Wells Fargo filed contingent, unliquidated supplemental claimsagainst the Company, Mirant and a number of other subsidiaries of Mirant (the “SupplementalClaims”) seeking recovery of principal, interest, fees, and costs under theMirant Americas Generation loan documents and bond documents,respectively. In their Supplemental 

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Claims, Lehman and WellsFargo essentially seek to preserve whatever rights and remedies they may have,if any, based upon the claims previously sought to be asserted by the MirantAmericas Generation Creditor Committee or other claims identified throughdiscovery.

On November 3, 2004,the Mirant Debtors objected to the Supplemental Claims against Mirant AmericasGeneration and the other Mirant entities on the grounds that: (1) Lehmanand Wells Fargo lack standing to pursue the Supplemental Claims, which arederivative claims belonging to each respective Mirant Debtor’s estate; (2) thereis no factual basis for any of the “potential” causes of action against MirantAmericas Generation and no basis whatsoever for the claims against any other Mirantentities; and (3) the Supplemental Claims are duplicative andcontingent. In addition to the objection, the Mirant Debtors also filed amotion to dismiss the Supplemental Claims on the basis that the SupplementalClaims do not allege any independent harm to Lehman and Wells Fargo and assertnothing more than derivative claims belonging to the Mirant Debtors’ estatesthat cannot be asserted by Lehman and Wells Fargo. The Bankruptcy Court issuedan order on April 12, 2005, ruling that (A) the Supplemental Claimswill be withdrawn without prejudice, (B) the Bar Date is extended for theSupplemental Claims, to the extent that they are not property of the estates ofor derivative of a Mirant Debtor (the “Withdrawn Claims”), through the date ofconfirmation of a plan in the Mirant Debtors’ Chapter 11 proceedings, (C) tothe extent the Supplemental Claims are derivative, the rights of Lehman, WellsFargo or any other party in interest to assert the Supplemental Claims or anyissue relating thereto in connection with the confirmation of a plan ofreorganization would be preserved and (D) the rights of Lehman, Wells Fargo andthe Mirant Americas Generation Committee to seek leave to assert theSupplemental Claims would be preserved.

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

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

The Company and theplaintiff have entered into a stipulation of settlement of the Wisniak suit andthe claim filed against the Company that was approved by the Bankruptcy Courton January 19, 2005. Under the terms of the stipulation of settlement, theplaintiff will seek certification of a class by the district court that willreceive $2.25 million to be paid by insurers for the Company and an allowed,unsecured claim for $2 million against Mirant, subordinated to the claims ofits other unsecured creditors. Members of the plaintiff class will have theopportunity to opt out of the settlement, and if class members who choose toopt out own in the aggregate more than 1% of the Company’s bonds that are thesubject of the suit, then the Mirant defendants have the option to withdrawfrom the settlement. The stipulation of 

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settlementmust also be approved by the district court to become effective. On June 27,2005, the district court entered an order granting preliminary approval to thesettlement, certifying a settlement class, and scheduling a hearing for finalapproval of the settlement for September 6, 2005.

***Environmental Matters***

*EPA Information Request.  *InJanuary 2001, the Environmental Protection Agency (the “EPA”) issued arequest for information to Mirant concerning the air permitting and airemissions control implications under the EPA’s new source review regulationspromulgated under the Clean Air Act (“NSR”) of past repair and maintenanceactivities at Mirant Potomac River’s plant in Virginia and Mirant Mid-Atlantic’sChalk Point, Dickerson and Morgantown plants in Maryland. The requestedinformation concerns the period of operations that predates Mirant Mid-Atlantic’sownership and lease of the plants. Mirant has responded fully to this request.Under the sales agreement with PEPCO for those plants, PEPCO is responsible forfines and penalties arising from any violation associated with historical operationsprior to the Company’s acquisition or lease of the plants. If a violation isdetermined to have occurred at any of the plants, the Mirant entity owning orleasing the plant may be responsible for the cost of purchasing and installingemissions control equipment, the cost of which may be material. If suchviolation is determined to have occurred after the Company acquired or leasedthe plants or, if occurring prior to the acquisition or lease, is determined toconstitute a continuing violation, the Mirant entity owning or leasing theplant at issue would also be subject to fines and penalties by the state orfederal government for the period subsequent to its acquisition or lease of theplant, the cost of which may be material.

*Mirant Potomac River Notice of Violation.  *OnSeptember 10, 2003, the Virginia Department of Environmental Quality (“VirginiaDEQ”) issued a Notice of Violation (“NOV”) to Mirant Potomac River allegingthat it violated its Virginia Stationary Source Permit to Operate by emittingnitrogen oxide (“NOx”) in excess of the “cap” established by the permit for the2003 summer ozone season. Mirant Potomac River responded to the NOV, assertingthat the cap is unenforceable, noting that it can comply through the purchaseof emissions allowances and raising other equitable defenses. Virginia’s civilenforcement statute provides for injunctive relief and penalties. On January 22,2004, the EPA issued an NOV to Mirant Potomac River alleging the same violationof its Virginia Stationary Source Permit to Operate as set out in the NOVissued by the Virginia DEQ.

On September 27, 2004, Mirant Potomac River,Mirant Mid-Atlantic, the Virginia DEQ, the Maryland Department of theEnvironment, the United States Department of Justice (the “DOJ”) and the EPAentered into, and filed for approval with the United States District Court forthe Eastern District of Virginia, a consent decree that, if approved, willresolve Mirant Potomac River’s potential liability for matters addressed in theNOVs previously issued by the Virginia DEQ and the EPA. The consent decreerequires Mirant Potomac River and Mirant Mid-Atlantic to (1) installpollution control equipment at Mirant Potomac River’s plant and at theMorgantown plant leased by Mirant Mid-Atlantic in Maryland, (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 consent decree does not obligate the Mirant entities to installspecifically designated technology, but rather to reduce emissions sufficientlyto meet the various NOx caps. Moreover, as to the required installations ofSCRs at Morgantown, Mirant Mid-Atlantic may choose not to install thetechnology by the applicable deadlines and leave the units off eitherpermanently or until such time as the SCRs are installed. The aggregate amountof the civil penalties to be paid and costs to be incurred by 

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Mirant Potomac River forthe supplemental environmental projects is $1.5 million. The consent decree issubject to the approval of the district court and the Bankruptcy Court.

*Mirant Potomac River Downwash Study.  *OnSeptember 23, 2004, the Virginia DEQ and Mirant Potomac River entered intoan order by consent with respect to the Potomac River plant under which MirantPotomac River agreed to perform a modeling analysis to assess the potentialeffect of “downwash” from the plant (1) on ambient concentrations of SO2,nitrogen dioxide (“NO2”), carbon monoxide (“CO”) and particulate matter lessthan or equal to 10 micrometers (“PM10”) for comparison to the applicable nationalambient air quality standards (“NAAQS”) and (2) on ambient concentrationsof mercury for comparison to Virginia Standards of Performance for ToxicPollutants. Downwash is the effect that occurs when aerodynamic turbulenceinduced by nearby structures causes pollutants from an elevated source, such asa smokestack, to be mixed rapidly toward the ground resulting in higher groundlevel concentrations of pollutants. If the modeling analysis indicates thatemissions from the facility may cause exceedances of the NAAQS for SO2, NO2, COor PM10, or exceedances of mercury compared to Virginia Standards ofPerformance for Toxic Pollutants, the consent order requires Mirant PotomacRiver to submit to the Virginia DEQ a plan and schedule to eliminate and preventsuch exceedances on a timely basis. Upon approval by the Virginia DEQ of theplan and schedule, the approved plan and schedule is to be incorporated byreference into the consent order. To the extent that the downwash studyindicates that emissions from the Potomac River plant exceed either the NAAQSor the Virginia Standards of Performance for Toxic Pollutants, the remedialactions required could include material modifications to the plant or to itsoperation. The financial and operational implications of any such remedialactions are not known at this time. Mirant Potomac River received the VirginiaDEQ’s approval of the modeling protocol on June 20, 2005 and has 60 daysfrom that date to complete the modeling analysis.

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

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

*Riverkeeper Suit Against MirantLovett.  *On March 11, 2005, Riverkeeper, Inc.filed suit against Mirant Lovett, LLC (“Mirant Lovett”) in the United StatesDistrict Court for the Southern District of New York under the FederalWater Pollution Control Act (the “Clean Water Act”). The suit alleges thatMirant Lovett’s failure to implement a marine life exclusion system at itsLovett generating plant and to perform monitoring for the exclusion of certainaquatic organisms from the plant’s cooling water intake structures violatedMirant Lovett’s water discharge permit issued by the State of New York. Theplaintiff requests the court to enjoin Mirant Lovett from continuing to operatethe Lovett generating plant in a manner that allegedly violates the Clean WaterAct, to impose civil penalties of $32,500 per day of 

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violation, and toaward the plaintiff attorneys’ fees. On April 20, 2005, the district courtapproved a stipulation agreed to by the plaintiff and Mirant Lovett that staysthe suit until 60 days after entry of an order by the Bankruptcy Courtconfirming a plan of reorganization for Mirant Lovett becomes final andnon-appealable.

***New York Tax Proceedings***

The Company’s subsidiaries that own generating plantsin New York are or were (in the settled proceedings discussed below) thepetitioners in 41 proceedings (“Tax Certiorari Proceedings”) initially broughtin various New York state courts challenging the assessed value of thosegenerating plants determined by their respective local taxing authorities.Mirant Bowline, LLC (“Mirant Bowline”) has challenged the assessed value of theBowline generating facility and the resulting local tax assessments paid fortax years 1995 through 2003. Mirant Bowline succeeded to rights held by Orange &Rockland Utilities, Inc. (“Orange & Rockland”) for the tax yearsprior to its acquisition of the Bowline Plant in 1999 under its agreement withOrange & Rockland for the purchase of that plant. Mirant Lovett hasinitiated proceedings challenging the assessed value of the Lovett facility foreach of the years 2000 through 2003. Mirant NY-Gen (collectively with MirantBowline and Mirant Lovett, the “New York Debtors”) has settled its taxcertiorari proceedings with respect to the combustion turbine and hydroelectricfacilities it owns for each of the years 2000 through 2003. If the remainingTax Certiorari Proceedings result in a reduction of the assessed value of thegenerating facility at issue in each proceeding, the New York Debtor owning thefacility would be entitled to a refund with interest of any excess taxes paidfor those tax years.

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

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

All of the Tax Certiorari Proceedings related to thegenerating facilities owned by Mirant NY-Gen have been resolved on termsfavorable to the New York Debtors, but the Tax Certiorari Proceedings relatedto the Bowline and Lovett generating facilities remain unresolved.

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

On February 18, 2005, two providers ofelectricity at retail in Texas, Utility Choice, L.P. and Cirro Group, Inc.,filed a suit in the United States District Court for the Southern District ofTexas, entitled*Utility Choice, L.P., et al. v. TXU Corp.,et al*., against numerous owners of generating facilities and powermarketers in Texas, including Mirant Americas Energy Marketing, Mirant AmericasDevelopment, Inc., and two subsidiaries of the Company owning generatingfacilities in Texas. The plaintiffs allege that the defendants, including theMirant defendants, acting individually and in collusion with each other,engaged in various types of unlawful manipulation of the short-term andbilateral wholesale power markets in the Electric Reliability Council of Texasregion beginning in 2001 and continuing to the period immediately prior to thefiling of the suit that caused the plaintiffs to pay significantly higherprices for power they purchased and to incur other significant costs. The typesof conduct that the plaintiffs allege were engaged in by the defendants,including the Mirant defendants, include submitting false schedules and bids, “hockeystick” bidding, withholding generation resources from the market and biddinggeneration resources at artificially high prices, in each case with the intentto create artificially high market prices. The complaint asserts various causesof action, including without limitation claims under the federal and Texasantitrust acts and the federal Racketeer Influenced and Corrupt Organizations (“RICO”)Act, as well as state law claims for fraud, negligent misrepresentation, andpromissory estoppel. The plaintiffs seek lost profits and other compensatorydamages of an unspecified amount, treble damages, exemplary damages andattorneys’ fees.

On March 21, 2005,the plaintiffs filed a motion with the district court seeking to dismisswithout prejudice the Mirant defendants, noting that those Mirant defendantsare the subject of pending bankruptcy proceedings. The district court grantedthat motion on March 21, 2005. On April 1, 2005, the plaintiffs fileda motion with the Bankruptcy Court seeking leave to file claims in the Chapter 11cases against Mirant Americas Energy Marketing, Mirant Americas Development, Inc.,and the two subsidiaries of the Company based upon the same allegations made inthe suit filed February 18, 2005 and seeking to assert claims in excess of$100 million. On June 29, 2005, Mirant Americas Energy Marketingentered into a settlement agreement with the plaintiffs under which theplaintiffs agreed to release all claims against the Mirant Debtors in returnfor allowed claims against Mirant Americas Energy Marketing totaling $20,000.The Bankruptcy Court approved the settlement agreement on August 3, 2005.

***City of Alexandria Zoning Action***

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

At its December 18, 2004 meeting, the CityCouncil also approved revocation of two special use permits issued in 1989 (the“1989 SUPs”), one applicable to the administrative office space at MirantPotomac River’s plant and the other for the plant’s transportation managementplan. Under the terms of the approved action, the revocation of the 1989 SUPswas to take effect 120 days after the City Council revocation, provided,however, that if Mirant Potomac River within such 120-day period filed anapplication for the necessary special use permits to bring the plant intocompliance with the zoning ordinance provisions then in effect, the effective dateof the revocation of the 1989 SUPs would be stayed until final decision by theCity Council on such application. The approved action further provides that if 

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such special use permitapplication is approved by the City Council, revocation of the 1989 SUPs willbe dismissed as moot, and if the City Council does not approve the application,the revocation of the 1989 SUPs will become effective and the plant will beconsidered a nonconforming use subject to abatement. On July 7, 2005, theCircuit Court for the City of Alexandria entered a consent order agreed to bythe City of Alexandria and Mirant Potomac River in the suit described in thenext paragraph that extends through October 17, 2005 the period withinwhich Mirant Potomac River may file an application for the necessary specialuse permits.

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

***Asbestos Cases***

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

***Other Governmental Proceedings***

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

***Other Legal Matters***

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

***Other Contingencies***

On May 5, 2005,Mirant NY-Gen discovered a sinkhole at its Swinging Bridge dam, located inSullivan County, New York. In response to finding the sinkhole, Mirant NY-Genfilled this sinkhole, inspected the 

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dam’spenstock and slopes for damage, drew down the lake level by 40 feet, andcleaned the diversion tunnel. The dam is currently stabilized, but is in needof additional repairs before lake levels can be restored to normal. MirantNY-Gen currently expects to spend approximately $5.6 million in order toproperly repair the dam, but the cost of the repairs could be substantially inexcess of this amount. It expects these repairs to be complete by the secondquarter of 2006. Mirant NY-Gen currently expects to recover insurance proceedsof approximately $3.2 million with regard to these repair costs, but ifthe costs of the repair are higher than anticipated then the Company intends topursue additional insurance recoveries. As a result of the sinkhole, MirantNY-Gen is required to perform a flood study relating to the Swinging Bridge,Rio and Mongaup reservoirs to determine the maximum capacity of the reservoirsand the down stream consequences of a rain event resulting in a greater thanthe maximum capacity event. The Company does not expect to know the results ofthe flood study until the fourth quarter of 2005. The costs of remedial work,if any, are unknown at this time, but could be significant.

**G. Income Taxes**

The Company is a limitedliability company and is treated as a branch of Mirant Americas for income taxpurposes. As a result, Mirant Americas, the Company’s ultimate parent, has soledirect liability for the federal and state income taxes related to the Company’soperations, except for the Company’s subsidiaries that are separate taxpayers.The Company allocates current and deferred taxes to each tax regarded member ofits consolidated group as if each member were a single taxpayer utilizing theasset and liability method to account for income taxes except with respect torecognizing certain current period tax benefits. Specifically, the Company hasnot recorded current period tax benefits based on a member’s ability to carryback its separate company current period net operating loss as the realizationof such current period tax benefits are dependent on reimbursements fromMirant, at Mirant’s discretion under the tax sharing agreement. If the Companywere to be allocated income taxes attributable to all its operations, the proforma income tax expense attributable to income before tax is $(1) millionand $2 million for the three and six months ended June 30, 2005,respectively, and $5 million and $11 million for the same periods in2004. The pro forma balance of the Company’s deferred income taxes is a netasset of $4 million as of June 30, 2005.

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**Item 2.**   Management’s Discussion and Analysis ofResults of Operations and Financial Condition

The following discussionshould be read in conjunction with our unaudited condensed consolidatedfinancial statements and the notes thereto, which are included elsewhere inthis report.

**Executive Summary**

We operate as a debtor-in-possession under thejurisdiction of the Bankruptcy Court in accordance with Chapter 11 of theBankruptcy Code. As a result, our financial statements include the results ofBankruptcy Court actions, probable claims against our estate and professionaland administrative costs related to the bankruptcy process.

On January 19, 2005, we filed our initialproposed plan of reorganization with the Bankruptcy Court, which we amended on March 25,2005. We spent significant time and effort in our second quarter of 2005participating in proceedings before the Bankruptcy Court with respect to thevaluation of the Mirant Debtors. Pursuant to a letter dated June 30, 2005from the Bankruptcy Court, as subsequently amended, we are now working with theExaminer appointed by the Office of The United States Trustee and TheBlackstone Group to reflect modifications to our business plan and thevaluation report prepared by The Blackstone Group based on the Bankruptcy Court’sinstructions. The Bankruptcy Court indicated that it intends to use themodified business plan and valuation report to generate an enterprise value forthe Mirant Debtors that can be used for purposes of confirmation of a plan ofreorganization for the Mirant Debtors. Absent a settlement among the MirantDebtors, the Statutory Committees and the other parties, we do not expect tocomplete these modifications ordered by the Bankruptcy Court before the end of September 2005.At this time, we are unable to predict the timing of our emergence frombankruptcy protection.

The key financial performance factors that haveinfluenced our results are continued narrow conversion spreads and changes inthe Company’s accounting for certain coal contracts that have given rise to therecognition of the fair value of certain coal contracts historically accountedfor on an accrual basis of accounting.

For our business, changing commodity prices can resultin volatile financial results as our derivative instruments do not currentlyreceive cash flow hedge accounting treatment in our financial statements.Instead, these derivative instruments are reflected in our financial statementsat fair value, resulting in volatility in our gross margin. Our unrealizedgains and losses for each period reflect changes in fair value of commoditycontracts not yet settled and the reversal of unrealized gains and lossesrecognized in previous periods that settled in the current reporting period.

Our cash flows from operations decreased $18 millionfor the six months ended June 30, 2005 compared to the same period in2004. The decrease in cash related to lower realized gross margin is primarilydue to lower generation volumes, higher unit prices for fuel and emissions andlosses on realized economic power hedges, partially offset by a cash settlementon a coal contract, gains on realized economic fuel hedges and higher pricesfor energy and ancillary services at our Mid-Atlantic facilities. Net cashprovided by changes in operating assets and liabilities increased $45 millionprimarily due to a smaller increase in receivables—affiliate as a result oflower gross margin.

Ourgross margin increased $62 million and $26 million for the three andsix months ended June 30, 2005, respectively, compared to the same periodsin 2004. In 2005, we had an increase in unrealized gains of $89 millionand $85 million for the three and six months ended June 30,respectively, compared to the same periods in 2004, primarily due to therecognition of the fair value of certain coal contracts in the second quarterof 2005. Unrealized gains in 2005 also resulted from the settlement of unfavorablepower hedges in both the three and six month ended June 30, 2005. Thesegains were partially offset by unrealized losses on power contracts. Ourrealized gross margin decreases of $27 million and $59 million 

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for the three and six months ended June 30, 2005,respectively, compared to the same periods in 2004 stem from lower generationvolumes, the expiration of a reliability-must-run (“RMR”) contract for one ourgeneration facilities and narrower conversion spreads after taking into accountthe results of realized hedging activity.

**Results of Operations**

Ourgross margin and expenses from affiliates and nonaffiliates aggregated byclassification are as follows (in millions):
| ** **                            | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|---------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                            | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Increase/  (Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** |
| Gross Margin                          | ** ** | ** **                   |       |                         |       |   |   | ** ** |   | ** ** |   |   |   |   |   |   |   |
| Affiliate                             | ** ** | **$**                        | **237**    |                         | $          | 125 |   |   | $ | 112 |   |   | **$** | **408** |   | $ | 296 |   |   | $ | 112 |   |   |
| Nonaffiliate                          | ** ** | **(2**                       | **)**      | 48                           |       |   | (50 | ) |   | **(6** | **)** | 80 |   |   | (86 | ) |   |
| Total gross  margin                   | ** ** | **235**                      |       | 173                          |       |   | 62 |   |   | **402** |   | 376 |   |   | 26 |   |   |
| Operating Expenses:                   |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Generation facilities rent            | ** ** | **26**                       |       | 24                           |       |   | 2 |   |   | **51** |   | 48 |   |   | 3 |   |   |
| Depreciation and amortization         | ** ** | **22**                       |       | 21                           |       |   | 1 |   |   | **45** |   | 44 |   |   | 1 |   |   |
| Operations and  maintenance           |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                             | ** ** | **59**                       |       | 68                           |       |   | (9 | ) |   | **121** |   | 138 |   |   | (17 | ) |   |
| Nonaffiliate                          | ** ** | **70**                       |       | 64                           |       |   | 6 |   |   | **127** |   | 122 |   |   | 5 |   |   |
| Loss (gain) on sales of assets, net   | ** ** | **—**                   |       | —                       |       |   | — |   |   | **(1** | **)** | — |   |   | (1 | ) |   |
| Total operating  expenses             | ** ** | **177**                      |       | 177                          |       |   | — |   |   | **343** |   | 352 |   |   | (9 | ) |   |
| Operating Income  (Loss)              | ** ** | **58**                       |       | (4                           | )          |   | 62 |   |   | **59** |   | 24 |   |   | 35 |   |   |
| Other (Expense)  Income, net          | ** ** | **(2**                       | **)**      | (2                           | )          |   | — |   |   | **(3** | **)** | (2 | ) |   | (1 | ) |   |
| Reorganization  items, net            | ** ** | **(150**                     | **)**      | 31                           |       |   | (181 | ) |   | **(135** | **)** | 44 |   |   | (179 | ) |   |
| (Benefit)  provision for income taxes | ** ** | **—**                   |       | 1                            |       |   | (1 | ) |   | **6** |   | 1 |   |   | 5 |   |   |
| Net Income (Loss)                     | ** ** | **$**                        | **206**    |                         | $          | (38 | ) |   | $ | 244 |   |   | **$** | **185** |   | $ | (23 | ) |   | $ | 208 |   |   |

 

Thefollowing table summarizes gross margin by region (in millions):
| ** **     | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|----------------|------------|------------------------------|------------|------------------------------|------------|
| ** **     | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **     | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Increase/  (Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** |
| Mid-Atlantic   |       | $                            | 154        |                         | $          | 73 |   |   | $ | 81 |   |   | $ | 219 |   | $ | 191 |   |   | $ | 28 |   |   |
| Northeast      |       | 50                           |       | 50                           |       |   | — |   |   | 121 |   | 101 |   |   | 20 |   |   |
| West and other |       | 31                           |       | 50                           |       |   | (19 | ) |   | 62 |   | 84 |   |   | (22 | ) |   |
| Total          |       | $                            | 235        |                         | $          | 173 |   |   | $ | 62 |   |   | $ | 402 |   | $ | 376 |   |   | $ | 26 |   |   |

 

Thefollowing table summarizes capacity factor (average percentage of full capacityused over a specific period) by region:
| ** **   | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|--------------|------------|------------------------------|------------|------------------------------|------------|
| ** **   | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **   | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Increase/  (Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** |
| Mid-Atlantic |       |                         | 34         | %                            |       |   | 41 | % |   |   | (7 | )% |   |   | 38 | % |   |   | 45 | % |   |   | (7 | )% |   |
| Northeast    |       |                         | 23         | %                            |       |   | 26 | % |   |   | (3 | )% |   |   | 31 | % |   |   | 37 | % |   |   | (6 | )% |   |
| West         |       |                         | 10         | %                            |       |   | 21 | % |   |   | (11 | )% |   |   | 10 | % |   |   | 19 | % |   |   | (9 | )% |   |

 

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Thefollowing table summarizes power generation volumes by region (in gigawatthours):
| ** **   | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|--------------|------------|------------------------------|------------|------------------------------|------------|
| ** **   | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **   | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Increase/  (Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** |
| Mid-Atlantic |       | 3,173                        |       | 3,761                        |       |   | (588 | ) |   | 7,089 |   | 8,446 |   |   | (1,357 | ) |   |
| Northeast    |       | 1,523                        |       | 1,770                        |       |   | (247 | ) |   | 4,131 |   | 5,027 |   |   | (896 | ) |   |
| West         |       | 610                          |       | 1,339                        |       |   | (729 | ) |   | 1,261 |   | 2,388 |   |   | (1,127 | ) |   |

 

*Three Months ended June 30,2005 versus 2004*

*Gross Margin.  *Ourgross margin increased by $62 million for the three months ended June 30,2005 compared to the same period for 2004.

·       Mid-Atlanticoperations gross margin increased $81 million primarily due to thefollowing:

·        Adecrease of $17 million in realized gross margin primarily due to narrowerconversion spreads and 16% lower generation volumes. Increased generationcapacity in the Pennsylvania-New Jersey-Maryland Interconnection Market (“PJM”)market and higher coal, oil and emissions allowance costs resulted in narrowerconversion spreads. In addition, milder weather also contributed to lowergeneration volumes. Significant components of the $17 million decrease areas follows:

·       Anincrease of $43 million related to higher spot market prices forelectricity.

·       Anincrease of $6 million due to income from the 2005 sale of a power optionfor 2006.

·       Anincrease of $5 million due to higher prices for ancillary services.

·       Adecrease of $33 million related to the settlement of electricity contractsused to economically hedge our generation output.

·       Adecrease of $15 million related to higher unit prices for fuel.

·       Adecrease of $7 million due to lower generation volumes.

·       Adecrease of $7 million due to lower prices for capacity.

·       Adecrease of $5 million resulting from increased emissions prices primarilydue to higher prices for NOx emissions allowances.

·       Adecrease of $4 million due to realized losses related to gas and oilcontracts used to economically hedge some of our fuel purchases.

·        Anincrease of $98 million related to unrealized gains from derivativeinstruments of $65 million in 2005 compared to unrealized losses of $33 millionin 2004. The $65 million gain in 2005 is net of a $6 million loss dueto the sale of a power option for 2006. The 2005 gain is primarily due to therecognition of the fair value of certain coal contracts in the second quarterof 2005, as well as the settlement of unfavorable power hedges in the sameperiod. The 2004 loss primarily relates to power contracts for future periods,which economically hedged a portion of our energy price risk.

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·       Northeast operations grossmargin did not change between periods, despite a decrease in generation volumesprimarily due to the following:

·        Anincrease of $3 million in realized gross margin primarily due to 14% lowergeneration volumes being more than offset by higher power prices and otherfactors. Significant components of the $3 million increase are as follows:

·       Anincrease of $30 million related to higher spot market prices forelectricity.

·       Anincrease of $5 million due to settlements on contracts to economicallyhedge our fuel costs.

·       Anincrease of $3 million related to capacity income earned under a new RMRcontract for our Kendall facility.

·       Anincrease of $2 million related to the sales of surplus emissionsallowances.

·       Adecrease of $24 million related to higher unit prices for fuel.

·       Adecrease of $7 million related to the settlement of electricity contractsused to economically hedge our generation output.

·       Adecrease of $4 million due to lower capacity prices.

·       Adecrease of $3 million due to lower generation volumes.

·        Adecrease of $3 million related to net unrealized gains on derivativeinstruments used to economically hedge our generation.

·       Westoperations gross margin decreased $19 million primarily due to the factthat one of our generation facilities is no longer running under an RMRcontract beginning in 2005, combined with reduced capacity income from anotherfacility resulting from an extended planned outage. Most of our generatingunits were under RMR contracts in both periods. Under these contracts, revenuesare based on a fixed rate of return and the units’ operating costs. Significant components of the $19 milliondecrease are as follows:

·        Adecrease of $8 million in capacity income due to the planned extendedoutage of one of our facilities.

·        Adecrease of $7 million as a result of lower gains on power hedging andmerchant generation activity.

·        Adecrease of $6 million due to the expiration of an RMR contract for one ofour California generation facilities partially offset by capacity incomereceived under a new tolling agreement.

*Operating Expenses.  *Ouroperating expenses remained the same for the three months ended June 30,2005 compared to the same period in 2004 primarily due to reductions inallocated corporate costs from Mirant Services of $5 million and MirantAmericas Energy Marketing of $3 million reflected in operations andmaintenance—affiliate, offset by an increase in operations and maintenance—nonaffiliateof $6 million and an increase in generation facilities rent of $2 million.

*Six Months ended June 30,2005 versus 2004*

*Gross Margin.  *Our grossmargin increased by $26 million for the six months ended June 30,2005 compared to the same period for 2004.

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·       Mid-Atlanticoperations gross margin increased by $28 million for the six months ended June 30,2005 compared to the same period for 2004 primarily due to the following:

·        Adecrease of $48 million in realized gross margin primarily due to narrowerconversion spreads and 16% lower generation volumes. Increased generationcapacity in the PJM market and higher coal, oil and emissions allowance costsresulted in narrower conversion spreads. In addition, milder weather alsocontributed to lower generation volumes. Significant components of the $48 milliondecrease are as follows:

·       Anincrease of $62 million related to higher spot market prices forelectricity.

·       An increase of $12 milliondue to a cash settlement in lieu of receiving certain volumes of coal from acoal supplier as a result of rail car transportation scheduling issues whichresulted in lower cost of fuel—affiliate.

·       Anincrease of $9 million due to higher prices for ancillary services.

·       Anincrease of $6 million due to the 2005 sale of a power option for 2006.

·       Adecrease of $66 million related to settlement of electricity contractsused to economically hedge our generation output.

·       Adecrease of $28 million due to lower generation volumes.

·       Adecrease of $25 million related to higher unit prices for fuel.

·       Adecrease of $13 million resulting from increased emissions prices for SO2and NOx emissions allowances.

·       Adecrease of $6 million related to the settlement of fuel contracts used toeconomically hedge some of our fuel purchase requirements.

·        Anincrease of $76 million related to higher unrealized gains from derivativeinstruments of $9 million in 2005 compared to unrealized losses of $67 millionin 2004. The $9 million gain in 2005 is net of a $6 million loss dueto the sale of a power option for 2006. The 2005 gain is primarily due to therecognition of the fair value of certain coal contracts in the second quarterof 2005 and the roll-off of unfavorable power hedges in the same period, offsetby increases in forward electricity prices. The 2004 loss primarily relates topower contracts for future periods, which economically hedged a portion of ourenergy price risk.

·       Northeastoperations gross margin increased $20 million despite a decrease ingeneration volumes primarily due to the following:

·        Anincrease of $8 million in realized gross margin primarily due to narrowerconversion spreads and 18% lower generation volumes being more than offset bygains on contracts that we used to economically hedge our generation output andfuel costs. Significant components of the $8 million increase are asfollows:

·       Anincrease of $40 million related to higher spot market prices forelectricity.

·       Anincrease of $22 million related to settlement of electricity contractsused to economically hedge our generation output.

·       Anincrease of $15 million due to settlements on contracts to economicallyhedge our fuel costs.

·       Anincrease of $5 million related to capacity income earned under a new RMRcontract for our Kendall facility.

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·       Anincrease of $3 million due to the sale of surplus emissions allowances.

·       Adecrease of $43 million related to higher unit prices for fuel.

·       Adecrease of $20 million due to lower generation volumes.

·       Adecrease of $9 million due to lower net gains on gas sales in 2005 comparedto 2004.

·       Adecrease of $3 million due to lower capacity prices.

·        Anincrease of $12 million related to net unrealized gains on derivativeinstruments used to economically hedge our generation.

·       West operations grossmargin decreased $22 million primarily due to one of our generationfacilities no longer running under an RMR contract beginning in 2005, as wellas reduced capacity income at another facility that experienced an extendedplanned outage. Most of our generating units were under RMR contracts in bothperiods. Under these contracts, revenues are based on a fixed rate of returnand the units’ operating costs. Significant components of the $22 million decrease are as follows:

·        Adecrease of $14 million due to the expiration of an RMR contract for oneof our California generation facilities partially offset by a new tollingagreement.

·        Adecrease of $13 million due to reduced capacity income at one of ourfacilities as a result of an extended planned outage.

*Operating Expenses.  *Ouroperating expenses decreased by $9 million for the six months ended June 30,2005 compared to the same period in 2004 primarily due to reductions inallocated corporate costs from Mirant Services and Mirant Americas EnergyMarketing of $7 million each, and labor and benefit costs of $3 million,reflected in operations and maintenance—affiliate, offset by an increase inoperations and maintenance—nonaffiliate of $5 million and an increase ingeneration facilities rent of $3 million.

**Financial Condition**

***Liquidity and Capital Resources***

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

The Company and its subsidiaries continue toparticipate in the intercompany cash management program for the Mirant Debtorsapproved by the Bankruptcy Court and to be parties to the two-year debtor-in-possessioncredit facility, dated November 5, 2003 (the “DIP Facility”). The partiesto the DIP Facility, including the Company, were in compliance with the DIPFacility covenants, or had received affirmative waivers of compliance wherecompliance was not attained, as of June 30, 2005. As of December 31,2004, the borrowing base under the DIP Facility was $724 million. Theborrowing base decreased $48 million in January and will decreaseanother $37 million following the consummation of the pending sale of certainMirant assets. In addition, the DIP Facility matures on November 5, 2005. Inthe event that the Mirant Debtors have not emerged from bankruptcy andsatisfied the obligations under the DIP Facility prior to such date, the MirantDebtors will either seek an extension of the maturity date under the DIPFacility or terminate and satisfy the obligations thereunder. As of July 31,2005, there were $40 million of letters of credit and no borrowingsoutstanding under the DIP Facility.

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We and, upon formation, our Mirant North Americasubsidiary, are holding companies and as a result, we are dependent upondividends, distributions and other payments from our subsidiaries to generatethe funds necessary to meet our obligations. The ability of certain of our subsidiariesto pay dividends and distributions is restricted under the terms of their debtor other agreements. In particular, a substantial portion of our cash providedby operating activities is generated by Mirant Mid-Atlantic. The MirantMid-Atlantic leveraged leases as currently constituted contain a number ofcovenants, including limitations on dividends, distributions and otherrestricted payments. Under the leveraged leases, Mirant Mid-Atlantic is notpermitted to make any dividends, distributions and other restricted paymentsunless (1) it satisfies the fixed charge coverage ratio on a historicalbasis for the last period of four fiscal quarters, (2) it is projected tosatisfy the fixed charge coverage for the next two periods of four fiscalquarters, and (3) no significant lease default or event of default hasoccurred and is continuing. The projected fixed charge coverage ratios arebased on projections that are not prepared to conform to the guidelinesestablished by the American Institute of Certified Public Accountants regardingforecasts, and are not audited, reviewed or compiled by our independentregistered public accounting firm. It should be noted that the forecasts,market assumptions and many other factors are inherently inaccurate and shouldnot be relied on.Based on Mirant Mid-Atlantic’scalculation of the fixed charge coverage ratios under the leveraged leases asof June 30, 2005, it meets the required 1.7 to 1.0 ratio for restrictedpayments, both on a historical and projected basis. However, the historicalratio for June 30, 2005 and the projected historical ratio for September 30,2005 are close to the required ratio. Further, the calculation of the fixedcharge coverage ratio requires the determination of the “Consolidated EBITDA,”as defined in the lease agreements of Mirant Mid-Atlantic exclusive ofdepreciation, amortization and similar non-cash charges. Management hascalculated the fixed charge coverage ratio excluding certain non-cash chargesthat management believes to be reasonable and appropriate. During thebankruptcy, cash movements among the Mirant Debtors have been made pursuant tointercompany loans as described above and the Mirant Debtors have not madedividends, distributions or capital contributions. Further, the relevance ofthe restricted payments test under the leveraged leases post-bankruptcy isunclear given the potential determination of the Mirant Debtors to modify theirproposed Plan to provide for the assumption of the leveraged leases conditionedupon certain provisions thereof being modified, stricken or determined to beunenforceable—including the limitations on restricted payments. In the eventthe resolution of the outstanding litigation with respect to the treatment ofthe leveraged leases results in our assuming the leases with the same orsimilar limitations on restricted payments, we intend to seek confirmation ofour application of the calculation of the fixed charge coverage ratio.

The proposed Plan providesfor the organization of Mirant North America as an intermediate holding companythat would be our subsidiary and the parent of our indirect subsidiaries,including Mirant Mid-Atlantic. The proposed Plan provides for MirantNorth America to incur certain indebtedness to be issued in connection with thePlan and to enter into a revolving credit facility for working capital andother purposes and secured by the assets of Mirant North America and itssubsidiaries other than Mirant Mid-Atlantic and its subsidiaries. Weexpect that any such revolving credit facility will include certain covenantstypical in such credit facilities, including restrictions on dividends,distributions and other restricted payments. Further, we expect that any suchrevolving credit facility will include financial covenants that will excludefrom the calculation of compliance with such covenants the financial results ofany subsidiary that is unable to make distributions or dividends at the time ofsuch calculation. Thus, the ability of Mirant Mid-Atlantic to makedistributions to Mirant North America under the leveraged lease transaction isexpected to have a material impact on the calculation of the financialcovenants under the revolving credit facility and other debt of Mirant NorthAmerica and on its ability to make distributions to us.Theavailability of the Mirant North America revolving credit facility, animportant source of liquidity for our subsidiaries post-bankruptcy, our abilityto pay our obligations and the ability of Mirant North America to pay itsobligations, may be adversely affected in the event that Mirant Mid-Atlantic isunable to make distributions to Mirant North America.

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**Cash Flows**

*Operating Activities.  *Cashprovided by operating activities decreased $18 million for the six monthsended June 30, 2005 compared to the same period in 2004. Net cash providedby operating activities excluding the changes in operating assets andliabilities decreased by $63 million. Our realized gross margin decreased $59 millionprimarily due to lower generation volumes, higher unit prices for fuel andemissions, losses on realized economic power hedges and lower income under ourRMR contracts at our California facilities, partially offset by higher energyprices, a cash settlement on a coal contract, gains on realized economic fuelhedges and higher prices for ancillary services at our Mid-Atlantic facilities.

During the six months ended June 30, 2005, netcash provided by changes in operating assets and liabilities provided $18 millionin cash compared to using $27 million of cash for the same period in 2004.This increase of $45 million is primarily due to a smaller increase inreceivables—affiliate as a result of lower gross margin.

*Investing Activities.  *In2005, capital expenditures for maintenance activities increased $13 million.In 2004, investing activities also included the issuance of a note receivableof $33 million to Mirant Americas Energy Marketing.

*Financing Activities.  *Therewere no financing activities for the six months ended June 30, 2005 and2004.

**Other Developments**

***Plan of Reorganization***

On January 19, 2005, the Mirant Debtors filed aproposed Plan of Reorganization (as amended, the “Plan”) and DisclosureStatement (as amended, the “Disclosure Statement”) with the Bankruptcy Court. AFirst Amended Plan and a First Amended Disclosure Statement were filed on March 25,2005. The proposed Plan sets forth a proposed structure of the Mirant Debtorsat emergence from bankruptcy and outlines how the claims of creditors andstockholders are proposed to be treated. Once the Disclosure Statement iscomplete, the Bankruptcy Court will hold a hearing to determine its adequacy.If the Disclosure Statement is found by the Bankruptcy Court to contain adequateinformation then the Mirant Debtors will use the DisclosureStatement to solicit votes on the proposed Plan from those creditors, securityholders and interest holders who are entitled to vote on the proposed Plan.

The ultimate outcome ofmatters with respect to which we make forward-looking statements and theterms of any reorganization plan ultimately confirmed can affect the value ofour various pre-petition liabilities and other securities. No assurance can begiven as to what values, if any, will be ascribed in the bankruptcy proceedingsto these constituencies. Accordingly, we urge that caution be exercised withrespect to existing and future investments in any of these liabilities and/orsecurities. See Note B to our unaudited condensed consolidated financialstatements contained elsewhere in this report for further discussion.

***U.S. Energy Legislation***

TheEnergy Policy Act of 2005 (“Energy Policy Act”) was passed by the U.S. Congressin July 2005 and was signed into law in August 2005. This comprehensivelegislation, in pertinent part, repeals the Public Utilities Holding CompanyAct (“PUHCA”) effective six months after enactment of the Energy Policy Act,establishes transmission reliability standards, offers incentives fortransmission grid improvements and renewables, and prohibits marketmanipulation. The law does not contain provisions that would prevent orotherwise significantly impair the continuation of competitive markets.Overall, the legislation is not expected to have a demonstrable impact onMirant’s business, but would eliminate limitations imposed by PUHCA, such aslimitations currently imposed on Mirant’s exempt wholesale 

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generator subsidiaries and foreign utility companies. Inaddition, the repeal of PUHCA would remove limitations on the ability of apublic utility or any other entity to acquire public utility assets.

***Environmental***

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

*Mirant Bowline, LLC*.   TheNew York State Department of Environmental Conservation (“NYSDEC”) is expectedto issue a draft State Pollutant Discharge Elimination System permit on orabout August 8, 2005. At this time, the cost for implementing therequirements of the permit is unknown.

*Clean Air Interstate Rule*.   During the course of this decade, the EPA will beimplementing new, more stringent ozone and particulate matter ambient airquality standards. It will also address regional haze visibility issues, whichwill result in new regulations that will likely require further emissionsreductions from power plants, along with other emissions sources such asvehicles. To implement these air quality standards, the EPA promulgated theClean Air Interstate Rule (“CAIR”) on March 10, 2005. The CAIRestablishes, in the eastern United States, a more stringent SO2 cap andallowance trading program and a year round NOx cap and allowance tradingprogram applicable to power plants. 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. On August 1, 2005, toensure emissions reductions required under CAIR are achieved, the EPA proposeda federal implementation plan (“FIP”) to require power plants in CAIR states toparticipate in one or more of three separate cap and trade programs.Publichearings on the proposal will be held in September. We will continue to monitorthis rulemaking and attempt to develop compliance plans as necessary.

**CriticalAccounting Policies and Estimates**

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

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

We may be required, aspart of our emergence from bankruptcy protection, to adopt fresh startaccounting in a future period. If fresh start accounting is applicable, ourassets and liabilities will be recorded at fair value as of the fresh startreporting date. The fair value of our assets and liabilities may differmaterially from the recorded values of assets and liabilities on our unauditedcondensed consolidated balance sheets. In addition, if fresh start accountingis required, our financial results after the application of fresh startaccounting will be different from historical trends and these differences maybe material.

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

Our business uses derivative financial instruments andother energy contracts to economically hedge our electricity generation assets.We use a variety of derivative contracts, such as futures, swaps and option 

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contracts in themanagement of our business. Such derivative contracts have varying terms anddurations, or tenors, which range from a few days to a number of years,depending on the instrument.

Most of these activities are reflected in ourfinancial statements at fair value, with changes in fair value recognizedcurrently in earnings. The fair value of these contracts is included in pricerisk management assets and liabilities—affiliate in our unaudited condensedconsolidated balance sheets. Certain transactions do not meet the definition ofa derivative or are considered normal purchases or normal sales and, therefore,qualify for the use of accrual accounting.

The fair value amounts contained within our unauditedcondensed consolidated financial statements are estimates based largely on themid-point of quoted market prices. The mid-point may vary significantly fromthe bid or ask price for some delivery points. If no active market exists, weestimate the fair value of certain derivative contracts using quantitativepricing models. Our modeling techniques include assumptions for market prices,correlation and volatility, such as using the prices of one delivery point tocalculate the price of the contract’s delivery point. The degree of complexityof our pricing models increases for longer duration contracts, contracts withmultiple pricing features and off-hub delivery points.

The fair value of price risk management assets—affiliateand price risk management liabilities—affiliate in our unaudited condensedconsolidated balance sheets are also impacted by our assumptions regardinginterest rate and counterparty credit risk. The nominal value of the contractsis discounted using a forward interest rate curve based on the London InterBankOffered Rate (“LIBOR”). In addition, the fair value of our derivative contractsis reduced to reflect the estimated risk of default of counterparties on theircontractual obligations to us.

The amounts recorded asrevenues—affiliate and as cost of fuel, electricity and other products—affiliatechange as estimates are revised to reflect actual results and changes in marketconditions or other factors, many of which are beyond our control. Because weuse derivatives that do not currently qualify for cash flow or fair value hedgeaccounting under SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, our financial statements—includinggross margin, operating income and balance sheet ratios—are, at times, volatileand subject to fluctuations in value primarily due to changes in energy andfuel prices.

***Bankruptcy Claims Assessment***

Our accompanying unaudited condensed consolidatedfinancial statements include, as liabilities subject to compromise, ourestimated pre-petition liabilities and settlements approved by the BankruptcyCourt prior to June 30, 2005. In addition, we also reflect as liabilitiessubject to compromise the probable claim amounts relating to liabilities forrejected contracts, litigation, accounts payable and accrued liabilities, anddebt and other liabilities (the “Probable Claims Estimates”). These ProbableClaims Estimates require management to estimate the likely claim amount thatwill be allowed by the Bankruptcy Court prior to the Bankruptcy Court’s rulingon the individual claims. These estimates are based on reviews of claimants’supporting material and assessments by management and outside experts. Weexpect that our estimates, although based on the best available information,will change as the claims are resolved in the Bankruptcy Court.

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Thefollowing table summarizes the claims filed in our Chapter 11 case as of June 30,2005:
| ** **                        | ** ** | **Total Number  of Claims** | ** ** | **Total Claims  Exposure** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | ** **                            | ** ** | **(in millions)**          | ** ** |
| Total Claims Filed                |       |                                  | 1,085      |                            |       |   | $ | 91,191 |   |   |
| Less:                             |       |                                  |       |                            |       |   |   |   |   |
| Redundant claims                  |       |                                  | 28         |                            |       |   | 1 |   |   |
| Claims with basis for  objection  |       |                                  | 576        |                            |       |   | 88,181 |   |   |
| Total Claims                      |       |                                  | 481        |                            |       |   | 3,009 |   |   |
| Additional scheduled  liabilities |       |                                  |       |                            |       |   | 6 |   |   |
| Remaining  Claims                 |       |                                  |       |                            |       |   | $ | 3,015 |   |   |

 

The amount of the claims,net of redundancies and amounts for which we have identified a basis forobjection, totals approximately $3 billion, as summarized above. This amountplus approximately $1.2 billion of estimated liabilities for which claimseither have not been filed or have been filed with an undetermined amountrepresents the total estimate of current claims exposure as of June 30,2005. The $1.2 billion of estimated liabilities is mainly related to ouroperating leases.

***Long-Lived Assets***

We evaluate our long-lived assets (property, plant andequipment) and definite-lived intangibles for impairment wheneverindicators of impairment exist or when we commit to sell the asset. Theaccounting standards require that if the sum of the undiscounted expectedfuture cash flows from a long-lived asset or definite-lived intangible isless than the carrying value of that asset, an asset impairment charge must berecognized. The amount of an impairment charge is calculated as the excess ofthe asset’s carrying value over its fair value, which generally represents thediscounted expected future cash flows from that asset, or in the case of assetswe expect to sell, at fair value less costs to sell.

Our evaluations for impairment require us to applyjudgment in estimating future energy prices, environmental and othermaintenance expenditures and other cash flows. Our estimates of the fair valueof the assets require estimating useful lives and selecting a discount ratethat reflects the risk inherent in future cash flows.

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

**Litigation**

We are currently involvedin certain legal proceedings. These legal proceedings are discussed in Note Fto the unaudited condensed consolidated financial statements containedelsewhere in this report. We estimate the range of liability throughdiscussions with legal counsel and analysis of applicable case law and legalprecedents. We record our best estimate of a loss, if estimable, when the lossis considered probable, or the low end of our range if no estimate is betterthan another estimate within a range of estimates. As additional informationbecomes available, we reassess the potential liability related to our pendinglitigation and revise our estimates. Revisions in our estimates of thepotential liability could materially impact our results of operations, and theultimate resolution may be materially different from the estimates that wemake.

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**Item 3.**   *Quantitative andQualitative Disclosures about Market Risk*

We are exposed tomarket risks associated with changes in commodity prices. We are also exposedto counterparty credit risk. We are exposed to energy commodity price riskassociated with the acquisition of fuel needed to generate electricity, as wellas the electricity produced and sold. A portion of our fuel requirements is purchasedin the spot market and a portion of the electricity we produce also is sold inthe spot market. As a result, our financial performance varies depending onchanges in the prices of energy and energy-related commodities. See “CriticalAccounting Policies and Estimates” for a discussion of the accounting treatmentfor our price risk management activities and see Note D to the unauditedcondensed consolidated financial statements for detail of our price riskmanagement assets and liabilities as of June 30, 2005.

For a further discussionof market risks, refer to “Item 7A. Quantitative and Qualitative Disclosuresabout Market Risk” in our Annual Report on Form 10-K for the yearended December 31, 2004.

**Item 4.**   *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 disclosurecontrols and procedures, or our internal control over financial reporting, willprevent all error and all fraud.Ourmanagement does, however, have reasonable assurance as to the effectiveness ofour disclosure controls and procedures (discussed in the next paragraph).

**Effectivenessof Disclosure Controls and Procedures**

As required by Rule 13a-15(b) underthe Securities Exchange Act of 1934 (the “Exchange Act”),ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, conducted an evaluation 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 June 30, 2005. Basedupon this evaluation, our management concluded that, as of June 30, 2005,the design and operation of these disclosure controls and procedures wereeffective.

Appearing as exhibits to this report are thecertifications of the Chief Executive Officer and the Chief Financial Officerrequired in accordance with Section 302 of the Sarbanes-Oxley Act of2002.

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**PART II**

**Item 1.   *Legal Proceedings***

The descriptions belowupdate and should be read in conjunction with the complete descriptions in thesection titled “Legal Proceedings” in the Company’s Form 10-K for theperiod ended December 31, 2004 and the Company’s Form 10-Q for theperiod ended March 31, 2005.

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

On June 29, 2005, Mirant Americas EnergyMarketing entered into a settlement agreement with the plaintiffs under whichthe plaintiffs agreed to release all claims against the Mirant Debtors inreturn for allowed claims against Mirant Americas Energy Marketing totaling$20,000. The Bankruptcy Court approved the settlement agreement on August 3,2005.

Therehave been no other material developments in legal proceedings involving theCompany or its subsidiaries since those reported in Mirant Americas Generation’sAnnual Report on Form 10-K for the year ended December 31, 2004 andits Form 10-Q for the quarter ended March 31, 2005.

**Item 6.   *Exhibits***

***(a)          Exhibits.***
| 31.1 |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Subsection  (a) of Section 7241, Chapter 98 of Title 15, United States Code)                |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Subsection  (a) of Section 7241, Chapter 98 of Title 15, United States Code)                |
| 32.1 |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections  (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code) |
| 32.2 |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections  (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code) |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on this 11th day of August, 2005.
|          | MIRANT  AMERICAS GENERATION, LLC |
|----------|----------------------------------|
|     | By:                              | /s/ DAN STREEK |   |
| * * | * *                         | *Vice President and Controller  (Principal Accounting Officer)* |

 

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