**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 ACT OF1934

**Forthe Quarterly Period Ended September 30, 2006**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe Transition Period from                     to                    **

**Mirant Americas Generation, LLC**

(Exact name of registrantas specified in its charter)
| **Delaware**                                                     | **N/A**                   | **51-0390520**                             |
|------------------------------------------------------------------|---------------------------|--------------------------------------------|
| (State or other  jurisdiction of  Incorporation or Organization) | (Commission File  Number) | (I.R.S. Employer  Identification No.) |

 

| **1155 Perimeter Center West, Suite 100,  Atlanta, Georgia** | **30338**  |
|-------------------------------------------------------------------|------------|
| (Address of  Principal Executive Offices)                         | (Zip Code) |

 

**(678) 579-5000**

(Registrant’s TelephoneNumber, Including Area Code)

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

**None**

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

**None**

 

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Indicate by check markwhether the 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 checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| o   Large  Accelerated Filer | o   Accelerated  Filer | x   Non-accelerated  Filer |
|----------------------------------------|----------------------------------|--------------------------------------|

 

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

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.   x Yes   o 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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**TABLEOF CONTENTS**

|              | ** ** | ** **                                                                                  | ** ** | **Page** | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
|         |       | Cautionary  Statement Regarding Forward-Looking Information                                 |       |     | 3          |   |   |
|         | ** ** | **PART I—FINANCIAL  INFORMATION**                                                 |       |     |       |   |   |
| Item 1. |       | Interim  Financial Statements (unaudited):                                                  |       |     |       |   |   |
|         |       | Condensed  Consolidated and Combined Statements of Operations                               |       |     | 5          |   |   |
|         |       | Condensed  Consolidated Balance Sheets                                                      |       |     | 6          |   |   |
|         |       | Condensed  Consolidated Statements of Member’s Equity and Comprehensive Income         |       |     | 7          |   |   |
|         |       | Condensed  Consolidated and Combined Statements of Cash Flows                               |       |     | 8          |   |   |
|         |       | Notes to  the Condensed Consolidated and Combined Financial Statements                      |       |     | 9          |   |   |
| Item 2. |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |       |     | 45         |   |   |
| Item 3. |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       |     | 67         |   |   |
| Item 4. |       | Controls and  Procedures                                                                    |       |     | 67         |   |   |
|         | ** ** | **PART II—OTHER  INFORMATION**                                                    |       |     |       |   |   |
| Item 1. |       | Legal Proceedings                                                                           |       |     | 68         |   |   |
| Item 1A.     |       | Risk Factors                                                                                |       |     | 75         |   |   |
| Item 6. |       | Exhibits                                                                                    |       |     | 75         |   |   |

 

2

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

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,one can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expect,” “plan,” “anticipate,” “estimate,” “predict,” “target,”“potential” or “continue” or the negative of these terms or other comparableterminology.

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

·       legislativeand regulatory initiatives regarding deregulation, regulation or restructuringof the 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, including outages for unscheduledmaintenance or repair;

·       ourability to divest certain of our intermediate and peaking natural gas-firedassets at prices and on terms that we would be willing to accept, as well asany adverse impact on our debt rating that may result from such sales;

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

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

·       ourinability to access effectively the over-the-counter and exchange-basedcommodity markets or changes in commodity market liquidity or other commoditymarket conditions, which may affect our ability to engage in asset management andproprietary trading activities as expected;

·       ourability to borrow additional funds and access capital markets;

·       strikes,union activity or labor unrest;

·       weatherand other natural phenomena, including hurricanes and earthquakes;

·       thecost and availability of emissions allowances;

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

·       curtailmentof operations due to transmission constraints;

·       environmentalregulations that restrict our ability to operate our business;

·       war,terrorist activities or 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;

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

3

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·       pricemitigation strategies employed by independent system operators (“ISOs”) orregional transmission organizations (“RTOs”) that reduce our revenue and mayresult in a failure to compensate our generation units adequately for all oftheir costs;

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

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

·       theinability of our operating subsidiaries to generate sufficient cash flow andour inability to access that cash flow to enable us to make debt service andother payments;

·       thefact that our New York subsidiaries remain in bankruptcy;

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

·       restrictionson the ability of our subsidiaries to pay dividends, make distributions orotherwise transfer funds to us, including restrictions on Mirant North America,LLC (“Mirant North America”) contained in its financing agreements andrestrictions on Mirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) contained inits leveraged lease financing agreements;

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

·       ourability to negotiate favorable terms from suppliers, counterparties and othersand to retain customers because we were previously subject to bankruptcyprotection; and

·       thedisposition of the pending litigation described in this Form 10-Q aswell as in our Annual Report on Form 10-K for the year ended December 31,2005.

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

**Factors that CouldAffect Future Performance**

In addition to thediscussion of certain risks in Management’s Discussion and Analysis of Resultsof Operations and Financial Condition and the accompanying Notes to MirantAmericas Generation, LLC’s unaudited condensed consolidated and combinedfinancial statements, other factors that could affect the Company’s futureperformance (business, financial condition or results of operations and cashflows) are set forth in our 2005 Annual Report on Form 10-K.

**Certain Terms**

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

4

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**MIRANTAMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)SEPTEMBER 30, 2006, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)andSEPTEMBER 30, 2005, CONDENSED COMBINED STATEMENTS OF OPERATIONS(UNAUDITED)**

| ** **                                                                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                         | ** ** | **(in millions)**                               | ** ** |
| Operating  revenues—affiliate                                                                                                 | ** ** | **$**                                                | **18**     |                                                | $          | 64 | ** ** | **$** | **47** |   | $ | 120 |   |
| Operating  revenues—nonaffiliate                                                                                              | ** ** | **1,025**                                            |       | 482                                                 | ** ** | **2,630** |   | 1,650 |   |
| Total operating revenues                                                                                                           | ** ** | **1,043**                                            |       | 546                                                 | ** ** | **2,677** |   | 1,770 |   |
| Cost of fuel,  electricity and other products—affiliate                                                                       | ** ** | **50**                                               |       | 75                                                  | ** ** | **101** |   | 140 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                                                                    | ** ** | **372**                                              |       | 573                                                 | ** ** | **941** |   | 1,323 |   |
| Total cost of fuel, electricity and other products                                                                                 | ** ** | **422**                                              |       | 648                                                 | ** ** | **1,042** |   | 1,463 |   |
| **Gross  Margin**                                                                                                                  | ** ** | **621**                                              |       | (102                                                | )          | **1,635** |   | 307 |   |
| **Operating Expenses:**                                                                                                            | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operations and  maintenance—affiliate, including restructuring charges of $1 and  $3 in 2006 and 2005, respectively | ** ** | **72**                                               |       | 68                                                  | ** ** | **210** |   | 213 |   |
| Operations and  maintenance—nonaffiliate                                                                                      | ** ** | **65**                                               |       | 67                                                  | ** ** | **213** |   | 201 |   |
| Depreciation and  amortization                                                                                                     | ** ** | **32**                                               |       | 28                                                  | ** ** | **91** |   | 85 |   |
| Generation  facilities rent                                                                                                        | ** ** | **24**                                               |       | 24                                                  | ** ** | **72** |   | 75 |   |
| Loss (gain) on  sales of assets, net                                                                                               | ** ** | **(2**                                               | **)**      | 2                                                   | ** ** | **(8** | **)** | 1 |   |
| Impairment loss                                                                                                                    | ** ** | **120**                                              |       | —                                              | ** ** | **120** |   | — |   |
| Total operating expenses                                                                                                           | ** ** | **311**                                              |       | 189                                                 | ** ** | **698** |   | 575 |   |
| **Operating  Income (Loss)**                                                                                                       | ** ** | **310**                                              |       | (291                                                | )          | **937** |   | (268 | ) |
| **Other Expense (Income), net:**                                                                                                   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense—affiliate                                                                                                   | ** ** | **—**                                           |       | 7                                                   | ** ** | **—** |   | 13 |   |
| Interest  expense—nonaffiliate                                                                                                | ** ** | **69**                                               |       | 621                                                 | ** ** | **212** |   | 623 |   |
| Interest  income—affiliate                                                                                                    | ** ** | **—**                                           |       | —                                              | ** ** | **(1** | **)** | — |   |
| Interest  income—nonaffiliate                                                                                                 | ** ** | **(10**                                              | **)**      | (3                                                  | )          | **(26** | **)** | (4 | ) |
| Gain on sale of  investments                                                                                                       | ** ** | **(13**                                              | **)**      | —                                              | ** ** | **(15** | **)** | — |   |
| Other, net                                                                                                                         | ** ** | **—**                                           |       | (1                                                  | )          | — |   | (3 | ) |
| Total other expense, net                                                                                                           | ** ** | **46**                                               |       | 624                                                 | ** ** | **170** |   | 629 |   |
| **Income(Loss)  From Continuing Operations Before Reorganization Items and Income Taxes**                                          | ** ** | **264**                                              |       | (915                                                | )          | **767** |   | (897 | ) |
| Reorganization  items, net                                                                                                         | ** ** | **(1**                                               | **)**      | 46                                                  | ** ** | **(2** | **)** | 53 |   |
| Provision for  income taxes                                                                                                        | ** ** | **1**                                                |       | 5                                                   | ** ** | **3** |   | 10 |   |
| **Income  (Loss) From Continuing Operations**                                                                                      | ** ** | **264**                                              |       | (966                                                | )          | **766** |   | (960 | ) |
| **Income  (Loss) From Discontinued Operations, net**                                                                               | ** ** | **(59**                                              | **)**      | 9                                                   | ** ** | **(57** | **)** | 4 |   |
| **Net Income (Loss)**                                                                                                              | ** ** | **$**                                                | **205**    |                                                | $          | (957 | ) | **$** | **709** |   | $ | (956 | ) |

 

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

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

| ** **                                                                                     | ** ** | **At September 30,** | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                       | ** ** | **2005**                      | ** ** |
| ** **                                                                                     | ** ** | **(Unaudited)**                | ** ** | ** **                    | ** ** |
| ** **                                                                                     | ** ** | **(in millions)**         | ** ** |
| **ASSETS**                                                                                     | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| **Current Assets:**                                                                            | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Cash and cash equivalents                                                                      | ** ** |                           | **$**      | **699**                       |       |   |   | $ | 424 |   |   |
| Funds on deposit                                                                               | ** ** |                           | **368**    |                          |       |   | 1,540 |   |   |
| Receivables:                                                                                   |       |                           |       |                          |       |   |   |   |   |
| Affiliate                                                                                      | ** ** |                           | **12**     |                          |       |   | 21 |   |   |
| Nonaffiliate, less allowance for uncollectibles of $7  and $10 for 2006 and 2005, respectively | ** ** |                           | **298**    |                          |       |   | 578 |   |   |
| Price risk management assets—affiliate                                                    | ** ** |                           | **3**      |                          |       |   | — |   |   |
| Price risk management assets—nonaffiliate                                                 | ** ** |                           | **799**    |                          |       |   | 603 |   |   |
| Prepaid rent and other payments                                                                | ** ** |                           | **116**    |                          |       |   | 134 |   |   |
| Inventories                                                                                    | ** ** |                           | **290**    |                          |       |   | 275 |   |   |
| Investment in securities available for sale                                                    | ** ** |                           | **38**     |                          |       |   | 30 |   |   |
| Assets held for sale                                                                           | ** ** |                           | **454**    |                          |       |   | 543 |   |   |
| Total current assets                                                                           | ** ** |                           | **3,077**  |                          |       |   | 4,148 |   |   |
| **Property, Plant and Equipment, net**                                                         | ** ** |                           | **2,204**  |                          |       |   | 2,295 |   |   |
| **Noncurrent Assets:**                                                                         | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Intangible assets, net                                                                         | ** ** |                           | **214**    |                          |       |   | 221 |   |   |
| Price risk management assets—affiliate                                                    | ** ** |                           | **2**      |                          |       |   | — |   |   |
| Price risk management assets—nonaffiliate                                                 | ** ** |                           | **191**    |                          |       |   | 105 |   |   |
| Prepaid rent                                                                                   | ** ** |                           | **196**    |                          |       |   | 208 |   |   |
| Funds on deposit                                                                               | ** ** |                           | **5**      |                          |       |   | 5 |   |   |
| Debt issuance costs, net                                                                       | ** ** |                           | **61**     |                          |       |   | 37 |   |   |
| Other                                                                                          | ** ** |                           | **14**     |                          |       |   | 1 |   |   |
| Total noncurrent assets                                                                        | ** ** |                           | **683**    |                          |       |   | 577 |   |   |
| **Total assets**                                                                               | ** ** |                           | **$**      | **5,964**                     |       |   |   | $ | 7,020 |   |   |
| **LIABILITIES AND EQUITY**                                                                     | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| **Current Liabilities:**                                                                       | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Notes payable—affiliate                                                                   | ** ** |                           | **$**      | **8**                         |       |   |   | $ | 21 |   |   |
| Current portion of long-term debt                                                              | ** ** |                           | **91**     |                          |       |   | 3 |   |   |
| Claims payable and estimated claims accrual                                                    | ** ** |                           | **97**     |                          |       |   | 1,831 |   |   |
| Accounts payable and accrued liabilities                                                       | ** ** |                           | **391**    |                          |       |   | 483 |   |   |
| Payable to affiliate                                                                           | ** ** |                           | **53**     |                          |       |   | 305 |   |   |
| Price risk management liabilities—affiliate                                               | ** ** |                           | **11**     |                          |       |   | 5 |   |   |
| Price risk management liabilities—nonaffiliate                                            | ** ** |                           | **458**    |                          |       |   | 791 |   |   |
| Accrued property taxes                                                                         | ** ** |                           | **234**    |                          |       |   | 184 |   |   |
| Other                                                                                          | ** ** |                           | **31**     |                          |       |   | 16 |   |   |
| Total current liabilities                                                                      | ** ** |                           | **1,374**  |                          |       |   | 3,639 |   |   |
| **Noncurrent Liabilities:**                                                                    | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Long-term debt                                                                                 | ** ** |                           | **3,184**  |                          |       |   | 2,579 |   |   |
| Price risk management liabilities—affiliate                                               | ** ** |                           | **7**      |                          |       |   | — |   |   |
| Price risk management liabilities—nonaffiliate                                            | ** ** |                           | **41**     |                          |       |   | 27 |   |   |
| Asset retirement obligations                                                                   | ** ** |                           | **40**     |                          |       |   | 33 |   |   |
| Other                                                                                          | ** ** |                           | **9**      |                          |       |   | 5 |   |   |
| Total noncurrent liabilities                                                                   | ** ** |                           | **3,281**  |                          |       |   | 2,644 |   |   |
| **Liabilities Subject to Compromise**                                                          | ** ** |                           | **34**     |                          |       |   | 34 |   |   |
| **Commitments and Contingencies**                                                              | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| **Equity:**                                                                                    | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Member’s interest                                                                         | ** ** |                           | **1,572**  |                          |       |   | 995 |   |   |
| Preferred stock in affiliate                                                                   | ** ** |                           | **(334**   | **)**                         |       |   | (319 | ) |   |
| Accumulated other comprehensive income                                                         | ** ** |                           | **37**     |                          |       |   | 27 |   |   |
| Total equity                                                                                   | ** ** |                           | **1,275**  |                          |       |   | 703 |   |   |
| **Total  liabilities and equity**                                                              | ** ** |                           | **$**      | **5,964**                     |       |   |   | $ | 7,020 |   |   |

 

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

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

**CONDENSEDCONSOLIDATED STATEMENTS OF MEMBER’S EQUITY ANDCOMPREHENSIVE INCOME (UNAUDITED)(in millions)**

| ** **                                                   | ** ** | ** **        | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **        | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | ** **        | ** ** | **Preferred**     | ** ** | **Other**         | ** ** | ** **        | ** ** |
| ** **                                                   | ** ** | **Member’s** | ** ** | **Stock in** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                                                   | ** ** | **Interest**      | ** ** | **Affiliate**     | ** ** | **Income**        | ** ** | **Income**        | ** ** |
| Balance,  December 31, 2005                             |       |              | $          | 995               |       |              |       | $                 | (319       | ) |   |   | $ | 27 |   |   |   |   |   |   |
| Net Income                                                   | ** ** | ** **        | **709**    | ** **        | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **—** |   | ** ** | ** ** | **$** | **709** |   |   |
| Amortization of discount on preferred stock in  affiliate    | ** ** | ** **        | **15**     | ** **        | ** ** | ** **        | **(15**    | **)**             | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Distribution to member                                       | ** ** | ** **        | **(148**   | **)**             | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Capital contribution pursuant to the Plan of  Reorganization | ** ** | ** **        | **1**      | ** **        | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Other comprehensive income                                   | ** ** | ** **        | **—** | ** **        | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **10** |   | ** ** | ** ** | **10** |   |   |
| Comprehensive income                                         | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** |   | ** ** | ** ** | **$** | **719** |   |   |
| **Balance, September 30,  2006**                        | ** ** | ** **        | **$**      | **1,572**         | ** ** | ** **        | ** ** | **$**             | **(334**   | **)** | ** ** | ** ** | **$** | **37** |   | ** ** | ** ** | ** ** |   |   |

 

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

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**MIRANTAMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)SEPTEMBER 30, 2006, CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)andSEPTEMBER 30, 2005, CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)**

| ** **                                                                                                                      | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                                                      | ** ** | **(in millions)**                              | ** ** |
| **Cash Flows from Operating  Activities:**                                                                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                               | ** ** | **$**                                               | **709**    |   | $ | (956 | ) |
| Income (loss) from discontinued operations                                                                                      | ** ** | **(57**                                             | **)**      | 4 |   |
| Income (loss) from continuing operations                                                                                        | ** ** | **766**                                             |       | (960 | ) |
| Adjustments to reconcile  net income (loss) from continuing operations to net cash provided by (used  in) operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                                                                   | ** ** | **99**                                              |       | 85 |   |
| Impairment charges                                                                                                              | ** ** | **120**                                             |       | — |   |
| Non-cash post-petition interest expense                                                                                         | ** ** | **—**                                          |       | 620 |   |
| Loss (gain) on sales of assets and investments                                                                                  | ** ** | **(23**                                             | **)**      | 1 |   |
| Non-cash charges for reorganization items                                                                                       | ** ** | **—**                                          |       | 22 |   |
| Price risk management activities, net                                                                                           | ** ** | **(593**                                            | **)**      | 407 |   |
| Other, net                                                                                                                      | ** ** | **2**                                               |       | (5 | ) |
| Changes  in operating assets and liabilities:                                                                                   |       |                                                |       |   |   |
| Affiliate accounts receivable, net                                                                                              | ** ** | **8**                                               |       | (297 | ) |
| Customer accounts receivable, net                                                                                               | ** ** | **368**                                             |       | (66 | ) |
| Prepaid rent                                                                                                                    | ** ** | **12**                                              |       | 7 |   |
| Inventories                                                                                                                     | ** ** | **(15**                                             | **)**      | 43 |   |
| Other assets                                                                                                                    | ** ** | **257**                                             |       | (736 | ) |
| Accounts payable and accrued liabilities                                                                                        | ** ** | **(92**                                             | **)**      | 15 |   |
| Settlement of claims payable                                                                                                    | ** ** | **(744**                                            | **)**      | — |   |
| Payable to affiliate                                                                                                            | ** ** | **(1**                                              | **)**      | 408 |   |
| Property taxes accrued, affiliate                                                                                               | ** ** | **—**                                          |       | (1 | ) |
| Property taxes accrued, nonaffiliate                                                                                            | ** ** | **50**                                              |       | 38 |   |
| Other liabilities                                                                                                               | ** ** | **8**                                               |       | 7 |   |
| Total adjustments                                                                                                               | ** ** | **(544**                                            | **)**      | 548 |   |
| Net cash provided by (used in) operating activities  of continuing operations                                                   | ** ** | **222**                                             |       | (412 | ) |
| Net cash provided by operating activities of  discontinued operations                                                           | ** ** | **27**                                              |       | 10 |   |
| Net cash provided by (used in) operating activities                                                                             | ** ** | **249**                                             |       | (402 | ) |
| **Cash Flows from Investing  Activities:**                                                                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                                            | ** ** | **(93**                                             | **)**      | (79 | ) |
| Repayments of notes receivable from affiliate                                                                                   | ** ** | **—**                                          |       | 10 |   |
| Proceeds from the sales of assets and investments,  net                                                                         | ** ** | **33**                                              |       | 4 |   |
| Net cash used in investing activities of continuing  operations                                                                 | ** ** | **(60**                                             | **)**      | (65 | ) |
| Net cash used in investing activities of discontinued  operations                                                               | ** ** | **(4**                                              | **)**      | (3 | ) |
| Net cash used in investing activities                                                                                           | ** ** | **(64**                                             | **)**      | (68 | ) |
| **Cash Flows from Financing  Activities:**                                                                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from issuance of debt-affiliate                                                                                        | ** ** | **—**                                          |       | 90 |   |
| Proceeds from issuance of long-term debt-nonaffiliate                                                                           | ** ** | **2,015**                                           |       | — |   |
| Repayment of debt-affiliate                                                                                                     | ** ** | **(14**                                             | **)**      | — |   |
| Repayment of long-term debt-nonaffiliate                                                                                        | ** ** | **(472**                                            | **)**      | (2 | ) |
| Settlement of debt under the Plan                                                                                               | ** ** | **(990**                                            | **)**      | — |   |
| Debt issuance costs                                                                                                             | ** ** | **(51**                                             | **)**      | — |   |
| Payment to affiliate under the Plan                                                                                             | ** ** | **(250**                                            | **)**      | — |   |
| Distribution to member                                                                                                          | ** ** | **(148**                                            | **)**      | — |   |
| Net cash provided by financing activities of  continuing operations                                                             | ** ** | **90**                                              |       | 88 |   |
| Net cash provided by financing activities of  discontinued operations                                                           |       | —                                              |       | — |   |
| Net cash provided by financing activities                                                                                       | ** ** | **90**                                              |       | 88 |   |
| **Net Increase (Decrease) in Cash and Cash  Equivalents**                                                                       | ** ** | **275**                                             |       | (382 | ) |
| **Cash and Cash Equivalents, beginning of period**                                                                              | ** ** | **424**                                             |       | 636 |   |
| **Cash and Cash Equivalents, end of period**                                                                                    | ** ** | **$**                                               | **699**    |   | $ | 254 |   |
| **Supplemental Cash Flow  Disclosures:**                                                                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Cash paid for interest, net of amounts capitalized                                                                              | ** ** | **$**                                               | **124**    |   | $ | 16 |   |
| Cash paid for claims and professional fees from  bankruptcy                                                                     | ** ** | **$**                                               | **1,755**  |   | $ | 47 |   |
| **Financing Activity:**                                                                                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Capital  contribution—non-cash                                                                                             | ** ** | **$**                                               | **1**      |   | $ | — |   |

 

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

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS**

**A.**                Descriptionof 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”). Mirant was incorporated in Delaware on September 23,2005, and is the successor to a corporation of the same name that was formed inDelaware on April 3, 1993. This succession occurred by virtue of thetransfer of substantially all of old Mirant’s assets to new Mirant inconjunction with old Mirant’s emergence from bankruptcy protection on January 3,2006. Old Mirant was then renamed and transferred to a trust, which is notaffiliated with new Mirant. As used in this report “Mirant” refers to oldMirant prior to January 3, 2006, and to new Mirant on or after January 3,2006.

The Company produces and sells substantially all of theoutput from its generating facilities in the forward and spot markets and theremainder under contracts with third parties. The Company uses derivativefinancial instruments, such as commodity forwards, futures, options and swapsto manage its exposure to fluctuations in electric energy and fuel prices. TheCompany is a Delaware limited liability company and owns or leasesapproximately 12,000 megawatts (“MW”) of electric generation capacity in theUnited States. The Company operates 72 generating units at 21 plantsserving customers located near major metropolitan load centers in Maryland,California, New York, Michigan, Texas, Massachusetts and Virginia. During thethird quarter of 2006, Mirant commenced auction processes to sell certain of itsnatural gas-fired assets including the Company’s Mirant Zeeland, LLC (“Zeeland”)(837 MW) and Mirant Texas, LP (“Bosque”) (536 MW) plants. See Note Bfor additional information regarding the treatment of these assets asdiscontinued operations as a result of this decision.

Pursuant to the Plan of Reorganization (the “Plan”)that was approved in conjunction with Mirant’s emergence from bankruptcy, in December 2005Mirant contributed its interest in Mirant Potomac River, LLC (“MirantPotomac River”) and Mirant Peaker, LLC (“Mirant Peaker”) to the Company’sindirect wholly-owned subsidiary, Mirant Mid-Atlantic, LLC (“MirantMid-Atlantic”) and its interest in Zeeland and Mirant Americas EnergyMarketing, LP (“Mirant Americas Energy Marketing”), Mirant Americas Development, Inc.,Mirant Americas Production Company, Mirant Americas Energy Capital, LLC,Mirant Americas Energy Capital Assets, LLC, Mirant Americas DevelopmentCapital, LLC, Mirant Americas Retail Energy Marketing, LP, and MirantAmericas Gas Marketing, LLC (collectively, the “Trading Debtors”) toMirant North America, LLC (“Mirant North America”). All of the contributedsubsidiaries were under the common control of Mirant and are collectivelyreferred to as the “Contributed Subsidiaries.” Mirant’s contribution of theContributed Subsidiaries resulted in a change in the Mirant Americas Generationreporting entity under Accounting Principles Board Opinion No. 20*, “Accounting Changes*,” which was replaced by Statement ofFinancial Accounting Standards (“SFAS”) No. 154, “*Accounting Changes**and ErrorCorrections,”* andaccordingly the Company has restated the financial statements for all priorperiods to reflect the financial information of the new reporting entity. On January 31,2006, the trading and marketing business of the Trading Debtors was transferredto Mirant Energy Trading, LLC (“Mirant Energy Trading”), a wholly-ownedsubsidiary of Mirant North America. After these transfers took place, theTrading Debtors were transferred to a trust created under the Plan that is notaffiliated with the Company. As a result, the Company now executes with MirantEnergy Trading the affiliate transactions previously executed with the TradingDebtors.

The Company has a numberof service agreements for labor and administrative services with MirantServices, LLC (“Mirant Services”). In addition, Mirant Energy Trading, andpreviously Mirant Americas Energy Marketing, provides services to other Mirantaffiliates related to the sale of electric power and the procurement of fueland emissions allowances.

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***Basis of Presentation***

The accompanying unaudited condensed consolidated andcombined financial statements of Mirant Americas Generation and itswholly-owned subsidiaries have been prepared in accordance with United Statesgenerally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by GAAP for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. For further information, refer to the consolidated and combinedfinancial statements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005.

The accompanying unaudited condensed consolidated andcombined financial statements include the accounts of Mirant AmericasGeneration and its wholly-owned subsidiaries and the Contributed Subsidiariesas discussed above and have been prepared from records maintained by MirantAmericas Generation, its subsidiaries and the Contributed Subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inpreparing the unaudited condensed consolidated and combined financialstatements.

Certain prior periodamounts have been reclassified to conform to the current year financialstatement presentation. In accordance with SFAS No. 144, “*Accounting for the Impairment or Disposal ofLong-Lived Assets,*” (“SFAS No. 144”) the results of operationsof the Company’s assets to be disposed of have been reclassified todiscontinued operations and the associated assets and liabilities have been reclassifiedto assets and liabilities held for sale for all periods presented. See Note Bfor additional information regarding discontinued operations. In addition, theaccompanying unaudited condensed consolidated and combined statements of cashflows present the cash flows from discontinued operations in each of the threemajor categories (operating, investing and financing activities). The unauditedcondensed combined statement of cash flows for the nine months ended September 30,2005, was revised during 2006, to conform to this presentation.

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

Mirant Americas Generationevaluates long-lived assets, such as property, plant and equipment andpurchased intangible assets subject to amortization, for impairment wheneverevents or changes in circumstances indicate that the carrying amount of theasset may not be recoverable. Such evaluations are performed in accordance withSFAS No. 144*.* Recoverability of assets to beheld and used is measured by a comparison of the carrying amount of an asset tothe estimated undiscounted future cash flows expected to be generated by theasset. If the carrying amount of an asset exceeds its estimated undiscountedfuture cash flows, an impairment charge is recognized as the amount by whichthe carrying amount of the asset exceeds the discounted future cash flows ofthe asset. Assets to be disposed of are presented separately in theaccompanying condensed consolidated balance sheets and are reported at thelower of the carrying amount or fair value less costs to sell. The assets andliabilities of a disposal group classified as held for sale are presentedseparately in the appropriate asset and liability sections of the accompanyingcondensed consolidated balance sheets. See Note C for information on impairmentcharges the Company recognized in the third quarter of 2006.

***Recently Adopted Accounting Standards***

In September 2005, the Financial AccountingStandards Board (“FASB”) ratified Emerging Issues Task Force (“EITF”) Issue 04-13,“*Accounting for Purchases and Sales of Inventorywith the Same Counterparty”*(“EITF 04-13”), whichrequires companies to account for certain purchases and sales of inventory withthe same counterparty as a single transaction. The Company adopted EITF 04-13on 

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April 1, 2006. Theapplication of EITF 04-13 has not had a material impact on theCompany’s statement of operations, financial position or cash flows.

In April 2006, theFASB issued FASB Staff Position (“FSP”) FASB Interpretation (“FIN”) No. 46R-6,“*Determining the Variability to be Considered inApplying FASB Interpretation No. 46R”*(“FSP FIN 46R-6”).The variability that is considered in applying FIN 46 (Revised December 2003),“*Consolidation**of VariableInterest Entities—an Interpretation of Accounting Research Bulletin No. 51”*(“FIN 46R”) affects the determination of whether an entity is a variableinterest entity (“VIE”), which interests are variable interests in the entity,and which party, if any, is the primary beneficiary of the VIE. According toFSP FIN 46R-6, the variability to be considered should be based onthe nature of the risks of the entity and the purpose for which the entity wascreated. The guidance in FSP FIN 46R-6 is applicable prospectivelyto an entity at the time a company first becomes involved with such entity andis applicable to all entities previously required to be analyzed under FIN 46Rwhen a reconsideration event has occurred beginning with the first reportingperiod after June 15, 2006. Retrospective application to the date of theinitial application of FIN 46R is permitted but not required. The Companyadopted FSP FIN 46R-6 on July 1, 2006, on a prospective basis.Upon adoption there was no material impact on the Company’s statements ofoperations, financial position or cash flows.

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

In February 2006, the FASB issued SFAS No. 155,“*Accounting for Certain Hybrid Financial Instruments”*(“SFAS No. 155”), which allows fair value measurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation. SFAS No. 155 is effective for all financialinstruments acquired, issued or subject to a re-measurement event beginning inthe first fiscal year after September 15, 2006. At the date of adoption,any difference between the total carrying amount of the existing bifurcatedhybrid financial instrument and the fair value of the combined hybrid financialinstrument will be recognized as a cumulative effect adjustment to beginningretained earnings. The Company will adopt SFAS No. 155 on January 1,2007. The adoption of SFAS No. 155 is not expected to have a materialimpact on the Company’s statements of operations, financial position or cashflows.

In March 2006, the FASB issued SFAS No. 156,“*Accounting for Servicing of Financial Assets”*(“SFAS No. 156”), which requires all separately recognized servicingassets and servicing liabilities to be measured initially at fair value andpermits, but does not require, an entity to measure subsequently thoseservicing assets or liabilities at fair value. SFAS No. 156 is effectiveat the beginning of the first fiscal year after September 15, 2006. TheCompany will adopt SFAS No. 156 on January 1, 2007. All requirementsfor recognition and initial measurement of servicing assets and servicingliabilities will be applied prospectively to transactions occurring after theadoption of this statement. The adoption of SFAS No. 156 is not expectedto have a material impact on the Company’s statements of operations, financialposition or cash flows.

On July 13, 2006, the FASB issued FIN No. 48,“*Accounting for Uncertainty in Income Taxes: anInterpretation of FASB Statement No. 109”* (“FIN 48”). FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109, “*Accounting for Income Taxes*” (“SFAS No. 109”). FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.

The evaluation of a tax position in accordance with FIN 48is a two-step process. The first step is recognition based on a determinationof whether it is more likely than not that a tax position will be sustainedupon examination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position. In evaluating whethera tax position has met the more-likely-than-not recognition threshold, theenterprise should presume that the position will be examined by the appropriate

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taxing authority havingfull knowledge of all relevant information. The second step is to measure a taxposition that meets the more-likely-than-not threshold. The tax position ismeasured at the largest amount of benefit that is greater than 50% likely ofbeing realized upon ultimate settlement.

FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company will adopt FIN 48 on January 1,2007. Upon initial adoption, the provisions of FIN 48 will be applied toall tax positions. Only tax positions that meet the more-likely-than-notrecognition threshold at the effective date may be recognized or continue to berecognized. The Company has not yet determined the impact of FIN 48 on itsstatements of operations, financial position or cash flows.

On June 28, 2006, the FASB ratified the EITF’sconsensus reached on EITF Issue No. 06-3, “How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”),which relates to the income statement presentation of taxes collected fromcustomers and remitted to government authorities. The Task Force affirmed as aconsensus on this issue that the presentation of taxes on either a gross basisor a net basis within the scope of EITF 06-3 is an accounting policydecision that should be disclosed pursuant to APB Opinion No. 22, “Disclosureof Accounting Policies.” A company should disclose the amount of those taxesthat is recognized on a gross basis in interim and annual financial statementsfor each period for which an income statement is presented if those amounts aresignificant. The Company will adopt EITF 06-3 on January 1,2007. The adoption of EITF 06-3 is not expected to have a materialimpact on the Company’s statements of operations, financial position or cashflows.

On July 13, 2006, the FASB finalized FSP FAS 13-2,“Accountingfor a Change or Projected Change in the Timing of Cash Flows Relating to IncomeTaxes Generated by a Leveraged Lease Transaction” (“FSP FAS 13-2”),which addresses how a change or projected change in the timing of cash flowsrelating to income taxes generated by a leveraged lease transaction affects theaccounting by a lessor for that lease. The Company will adopt FSP FAS 13-2on January 1, 2007. The Company has not yet determined the impact of FSP FAS 13-2on its statements of operations, financial position or cash flows.

On September 8, 2006, the FASB issued FSP AUG AIR-1,“*Accounting for Planned Major Maintenance Activities”*(“FSP AUG AIR-1”). FSP AUG AIR-1 permits the followingmethods for accounting for major maintenance activities: direct expense,built-in overhaul and deferral. It specifically prohibits accruing in advancefor major maintenance. The guidance in FSP AUG AIR-1 is to be applied tothe first fiscal year beginning after December 15, 2006. The Company willadopt FSP AUG AIR-1 on January 1, 2007. The adoption of FSP AUG AIR-1is not expected to have a material impact on the Company’s statements ofoperations, financial position or cash flows given that the Company currentlyuses the deferral method of accounting for major maintenance activities.

On September 13, 2006, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108“*Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”*(“SAB 108”)*.* SAB 108 provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.The SEC staff thinks that registrants should quantify errors using both abalance sheet and an income statement approach and evaluate whether eitherapproach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is material. SAB 108is effective for fiscal years ending on or after November 15, 2006. Theadoption of SAB 108 is not expected to have a material impact on theCompany’s statements of operations, financial position or cash flows.

On September 15,2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS No. 157”), which establishes a framework for measuring fair valuein GAAP and expands disclosure about fair value measurements. SFAS No. 157requires companies to disclose the fair value of their financial instrumentsaccording to a fair value hierarchy (i.e., levels 1, 2, and 3, asdefined). Additionally, companies 

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arerequired to provide enhanced disclosure regarding fair value measurements inthe level 3 category, including a reconciliation of the beginning andending balances separately for each major category of assets and liabilitiesaccounted for at fair value. SFAS No. 157 is effective at the beginning ofthe first fiscal year after November 15, 2007. The Company will adopt SFASNo. 157 on January 1, 2008. At the date of adoption, the Company willevaluate the fair value of its assets and liabilities according to thehierarchy established by the FASB. The Company has not yet determined theimpact of SFAS No. 157 on its statements of operations, financial positionor cash flows.

**B.**               Dispositions

***Assets and Liabilities Held for Sale***

Assets and liabilities held for sale includesdiscontinued operations and other assets that the Company expects to dispose ofin the next year. In the third quarter of 2006, Mirant commenced auctionprocesses to sell the Company’s Zeeland (837 MW facility) and Bosque (536 MWfacility) natural gas-fired intermediate and peaking plants, representing atotal of 1,373 MW. The sales are expected to be complete by mid-2007.The associated assets and liabilities have been reclassified to assets andliabilities held for sale in the condensed consolidated balance sheets.Liabilities held for sale are included in other on the Company’s condensedconsolidated balance sheets.

Thetable below presents the components of the balance sheet accounts classified asassets and liabilities held for sale at September 30, 2006 andDecember 31, 2005 (in millions):

| ** **                     | ** ** | **At September 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| Current Assets                 |       |                                 | $          | 20                                  |       |   |   | $ | 29 |   |   |
| Property, Plant  and Equipment |       |                                 | 434        |                                |       |   | 513 |   |   |
| Noncurrent Assets              |       |                                 | —     |                                |       |   | 1 |   |   |
| Total Assets                   |       |                                 | $          | 454                                 |       |   |   | $ | 543 |   |   |
| Current Liabilities            |       |                                 | $          | 7                                   |       |   |   | $ | 5 |   |   |
| Noncurrent  Liabilities        |       |                                 | 12         |                                |       |   | 11 |   |   |
| Total Liabilities              |       |                                 | $          | 19                                  |       |   |   | $ | 16 |   |   |

 

Assets held for sale at September 30, 2006,consisted of the planned dispositions discussed above. Assets held for sale atDecember 31, 2005, consisted of the planned dispositions discussed aboveplus $7 million related to the Mirant Service Center. The sale of theMirant Service Center closed in the second quarter of 2006, and the Companyrecognized a gain of approximately $6 million.

Liabilities held for saleincluded $12 million and $11 million at September 30, 2006, andDecember 31, 2005, respectively, related to the Zeeland capital lease.

***Losses on Assets Held for Sale***

In accordance with SFAS No. 144, an assetclassified as held for sale shall be measured at the lower of carrying value orfair value less costs to sell. As the assets described below will be sold aspart of an auction process, the final selling price (fair value) will not bedetermined until the auction process is complete. Therefore, managementdeveloped an approach for estimating the fair value of the assets to bedisposed of. The estimate will be refined in subsequent periods as the auctionprocesses proceed and more information is known about the ultimate salesprices.

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Mirant commenced auctionprocesses to sell the Company’s Zeeland and Bosque natural gas-firedintermediate and peaking plants. The Company reviewed each asset independentlyfor impairment through the allocation of the fair value of the portfolio of allof Mirant’s U.S. gas assets held for sale. As a result of this review, theCompany recorded a loss of $71 million to write down the Zeeland asset toestimated fair value less costs to sell. The loss is included in discontinuedoperations in the unaudited condensed consolidated statements of operations forthe three and nine months ended September 30, 2006.

***Discontinued Operations***

The Company has reclassified amounts for prior periodsin the financial statements to report separately, as discontinued operations,the revenues and expenses of components of the Company that have been disposedof or have met the required criteria for such classification at September 30,2006. In the third quarter of 2006, Mirant commenced auction processes to sellcertain of the Company’s natural gas-fired assets as discussed above in A*ssets and Liabilities Held for Sale*.

Forthe three and nine months ended September 30, 2006 and 2005, income fromdiscontinued operations relates to the Zeeland and Bosque plants. The followingsummarizes certain financial information for these discontinued operations(in millions):

| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating  revenues         |       | $                                                    | 23         |                                                |       | $ | 32 |   |   | $ | 45 |   |   | $ | 63 |   |   |
| Operating  expenses, net(1) |       | 82                                                   |       |                                                | 22         |   |   | 101 |   |   | 58 |   |   |
| Operating income  (loss)    |       | (59                                                  | )          |                                                | 10         |   |   | (56 | ) |   | 5 |   |   |
| Other expense,  net         |       | —                                               |       |                                                | 1          |   |   | 1 |   |   | 1 |   |   |
| Net income (loss)           |       | $                                                    | (59        | )                                                   |       | $ | 9 |   |   | $ | (57 | ) |   | $ | 4 |   |   |

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(1)          Includesan impairment loss of $71 million in the three and nine months ended September 30,2006.

**C.**               Impairments onAssets Held and Used

In accordance with SFAS No. 144,an asset classified as held and used shall be tested for recoverabilitywhenever events or changes in circumstances indicate that the carrying amountof the asset may not be recoverable. An asset impairment charge must berecognized if the sum of the undiscounted expected future cash flows from along-lived asset is less than the carrying value of that asset. The amount ofany impairment charge is calculated as the excess of the carrying value of theasset over its fair value. Fair value is estimated based on the discountedfuture cash flows from that asset or determined by other valuation techniques.

*Background*

The Mirant Lovett, LLC(“Mirant Lovett”) and Mirant Bowline, LLC (“Mirant Bowline”) generationfacilities in New York are subject to disputes with local tax authoritiesregarding property tax assessments. Mirant Lovett and Mirant Bowline have beennegotiating with local authorities to settle past taxes and to reach agreementson payments in lieu of taxes (“PILOT”) covering future years.

In addition, Mirant Lovettis in discussions with the New York State Department of EnvironmentalConservation (“NYSDEC”) and the New York State Office of the Attorney Generalregarding environmental controls. Until a resolution is reached on thesematters that would permit economically feasible operation, Mirant Lovett andMirant Bowline will remain in Chapter 11.

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*Current Period Events*

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

The Company estimates thatthe decisions rendered by the New York state court with respect to the taxchallenges asserted by Mirant Bowline and Mirant Lovett will result in refundsthat with interest will cover the majority of the unpaid taxes for the Bowlineand Lovett facilities, taking into account the reduction in those unpaid taxesthat would occur under the decisions. While the decisions rendered by the NewYork state court found that the values set by the taxing authorities for theBowline and Lovett facilities significantly exceeded what the court concludedwere the full values of those facilities for the years at issue, the valuesfound by the court for the Bowline facility still exceeded significantly whatMirant Bowline paid in 1999 for that facility. For the Lovett facility, thedecisions failed to take into account the significant capital expenditures thatwould have to be made to keep the facility operational after April 2008.Mirant Bowline and Mirant Lovett have appealed the decisions of the New Yorkstate court, and the relevant taxing authorities have cross-appealed. See *New York Tax Proceeding*s in Note K—Litigation and OtherContingencies for additional information.

On September 19, 2006, Mirant Lovett soughtBankruptcy Court approval to discontinue operations at units 3 and 5 ofthe Lovett generation facility if an alternative environmental compliancemechanism on environmental controls that is agreeable to the State of New Yorkis not approved by April 30, 2007. On October 18, 2006, theBankruptcy Court approved the Company’s request. On October 19, 2006,Mirant Lovett submitted notices of its intent to discontinue operations at units 3and 5 of the Lovett facility on April 30, 2007, to the New York PublicService Commission, New York Independent System Operator (“NYISO”), Orange andRockland Utilities, Inc. (“Orange and Rockland”) and several otheraffected transmission and distribution utilities in New York. Mirant Lovettreserved its rights to withdraw these notices if a viable alternativeenvironmental compliance mechanism is found. See *New YorkState Administrative Claim* in Note K—Litigation and OtherContingencies for additional information.

*Asset Grouping*

For purposes of measuring an impairment loss, along-lived asset or assets must be grouped at the lowest level of independentidentifiable cash flows. All of the units at Mirant Lovett are viewed as onegroup. For Bowline, the Company determined that the suspended Bowline unit 3construction project is independent of the operating Bowline units in thecurrent quarter. In addition, the Company’s analysis and planning aroundoperating Bowline units 1 and 2 do not consider the suspended constructionproject for Bowline unit 3.

*Assumptions and Results*

In its impairment analysisof the Bowline and Lovett generation facilities in prior periods, the Companyhad assumed that the PILOT agreements would be successfully approved andimplemented. The Company no longer expects those PILOT agreements to beimplemented. The August 2006 decisions and the appeals that followedprompted management to test for recoverability of the asset under SFAS No. 144because additional uncertainty now exists related to achieving propertytaxation levels that allow economically feasible operation of the Bowline andLovett generation facilities. As a result of these developments, managementre-reviewed the economic viability of these facilities in the third quarter of2006.

*Lovett.*   Inits impairment analysis of the Lovett generation facility in prior periods, theCompany had considered multiple scenarios, including potential shutdown of thefacility. Thus, the request for approval 

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to discontinueoperations was not viewed as a potential impairment event in the third quarterbut was considered in the probability weighting of the scenarios.

The Company’s assessmentof Lovett under SFAS No. 144 in the current period involved estimatesrelated to property tax refunds and payments and assumed that property taxesare negotiated to a reasonable level for future periods. Among the multiplescenarios considered were the shut down of units 3 and 5 by April 30,2007, and unit 4 by April 30, 2008. The Company also consideredscenarios that allow operations past April 2008 because the Companycontinues to work with the State of New York and other parties to achieve asolution related to environmental controls and to allow Lovett to continue tocontribute to the reliability of the electric system of the State of New York.The sum of the probability weighted undiscounted cash flows for the Lovettgeneration facility exceeded the Company’s carrying value at September 30,2006. If a resolution is not reached on property taxes and environmentalcontrols that would permit economically feasible operation, the Company willreassess the recoverability of Lovett’s carrying value.

*Bowline Units 1 and2.*   The Company’s assessment of Bowline units 1and 2 under SFAS No. 144 in the current period involved estimates relatedto property tax refunds and payments and assumed that property taxes arenegotiated to levels for future periods that allow Bowline units 1 and 2to operate until the end of their remaining economic useful lives. The sum ofthe undiscounted cash flows exceeded the Company’s carrying value at September 30,2006, for Bowline units 1 and 2. If a resolution is not reached on propertytaxes that would permit economically feasible operation, the Company willreassess the recoverability of Bowline’s carrying value.

*Bowline Unit 3.*   TheCompany’s assessment of the Bowline unit 3 suspended construction projectassumed that completion of this project is remote. A strategic review of theCompany’s portfolio of assets in 2006 resulted in the conclusion that theBowline 3 project as currently configured and permitted is noteconomically viable. As a result of this conclusion, the Company determined theestimated value of the equipment and project termination liabilities. At September 30,2006, the carrying value of the development and construction costs for Bowline unit 3exceeded the estimated undiscounted cash flows of the abandonment of theproject. The Company recorded an impairment of $120 million, which isreflected in impairment losses on the unaudited condensed consolidated statementsof operations for the three and nine months ended September 30, 2006.

**D.**              Price RiskManagement Assets and Liabilities

Thefair values of the Company’s price risk management assets and liabilities, netof credit reserves, at September 30, 2006, are included in the followingtable (in millions):

| ** **                                | ** ** | **Net Price Risk Management Assets/(Liabilities)** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Assets**                                                             | ** ** | **Liabilities** | ** ** | **Net ** | ** ** |
| ** **                                | ** ** | **Current**                                                            | ** ** | **Noncurrent** | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **Fair Value** | ** ** |
| Electricity                               |       |                                                                   | $          | 712 |   |   |   | $ | 184 |   |   |   | $ | (421 | ) |   |   | $ | (33 | ) |   |   | $ | 442 |   |   |
| Natural gas                               |       |                                                                   | 26         |   |   |   | 3 |   |   |   | (26 | ) |   |   | (3 | ) |   |   | — |   |   |
| Oil                                       |       |                                                                   | 54         |   |   |   | 3 |   |   |   | (16 | ) |   |   | (12 | ) |   |   | 29 |   |   |
| Coal and other,  including credit reserve |       |                                                                   | 10         |   |   |   | 3 |   |   |   | (6 | ) |   |   | — |   |   |   | 7 |   |   |
| Total                                     |       |                                                                   | $          | 802 |   |   |   | $ | 193 |   |   |   | $ | (469 | ) |   |   | $ | (48 | ) |   |   | $ | 478 |   |   |

 

Of the $478 millionnet fair value asset at September 30, 2006, a net price risk managementasset of $129 million relates to the remainder of 2006, a net price riskmanagement asset of $266 million relates to 2007, and a net price riskmanagement asset of $83 million relates to periods thereafter. The volumetricweighted average maturity, or weighted average tenor, of the price riskmanagement portfolio at September 30, 2006, was approximately 13 months.The net notional amount of the price risk management assets and liabilities at September 30,2006, was a net short position of approximately 24 million equivalentmegawatt-hours (“MWh”).

16

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In January 2006,Mirant Mid-Atlantic entered into financial swap transactions with acounterparty, the effect of which was to hedge its Mid-Atlantic expectedon-peak coal-fired generation by approximately 80%, 50% and 50% for 2007, 2008and 2009, respectively.

The following tableprovides a summary of the factors impacting the change in net fair value of theprice risk management asset and liability accounts for the nine months ended September 30,2006 (in millions):

| ** **                                              | ** ** | **Proprietary  Trading** | ** ** | **Asset  Management** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-----------|------------|
| Net fair value of  portfolio at December 31, 2005  |       |                     | $          | 40                    |       |      |       | $ | (155 | ) |   | $ | (115 | ) |
| Gains recognized  in the period, net                    |       |                     | 25         |                  |       |      | 420        |   |   | 445 |   |
| Contracts settled  during the period, net               |       |                     | (20        | )                     |       |      | 168        |   |   | 148 |   |
| Net fair value of  portfolio at September 30, 2006 |       |                     | $          | 45                    |       |      |       | $ | 433 |   |   | $ | 478 |   |

 

**E.**               Property, Plant andEquipment, net

Property, plant andequipment, net consisted of the following at September 30, 2006 and December 31,2005 (in millions):

| ** **                                | ** ** | **At September 30,** | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2006**                       | ** ** | **2005**                      | ** ** |
| Production                                |       |                           | $          | 2,489                         |       |   |   | $ | 2,441 |   |   |
| Oil pipeline                              |       |                           | 25         |                          |       |   | 25 |   |   |
| Construction work in  progress            |       |                           | 145        |                          |       |   | 74 |   |   |
| Other                                     |       |                           | 88         |                          |       |   | 87 |   |   |
| Suspended construction  projects(1)       |       |                           | 55         |                          |       |   | 174 |   |   |
| Less accumulated  depreciation            |       |                           | (598       | )                             |       |   | (506 | ) |   |
| Total property, plant  and equipment, net |       |                           | $          | 2,204                         |       |   |   | $ | 2,295 |   |   |

----

(1)          Inthe third quarter of 2006, the Company recognized an impairment loss of $120 millionrelated to Bowline unit 3. See Note C for further discussion relatedto impairments of long-lived assets. The remaining suspended construction at September 30,2006, is primarily related to Contra Costa 8 in California.

Property, plant andequipment, net of $434 million and $513 million related to assets tobe sold has been reclassified to assets held for sale in the Company’scondensed consolidated balance sheets at September 30, 2006 and December 31,2005, respectively. See Note B for additional information on assets heldfor sale.

Depreciation of the recordedcost of property, plant and equipment is recognized on a straight-line basisover the estimated useful lives of the assets. The Company received emissionsallowances in the acquisition of the Pepco assets for both sulfur dioxide (“SO2”)and nitrogen oxide (“NOx”) emissions and the right to future allowances. Theacquired allowances related to owned facilities are included in productionassets above, and are depreciated over the average life of the related assets.Mirant Americas Generation does not depreciate its suspended constructionproject costs or property, plant and equipment that has been reclassified toassets held for sale.

**F.**                Change inReporting Entity

As discussed in Note A,pursuant to the Plan, Mirant contributed its interest in the ContributedSubsidiaries to the Company, resulting in a change in the Mirant AmericasGeneration reporting entity at December 31, 2005. In the third quarter of2006, Mirant commenced auction processes to sell the Company’s naturalgas-fired Zeeland and Bosque plants. The associated assets and liabilities havebeen reclassified to assets and liabilities held for sale in the condensedconsolidated balance sheets. See Note B for additional information on theplanned dispositions.

17

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Thefollowing tables and discussion summarize the effects of the ContributedSubsidiaries and discontinued operations on the previously reported MirantAmericas Generation’s unaudited condensed combined statements of operations forthe three and nine months ended September 30, 2005:

| ** **                                                          | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **As Previously  Reported**                                   | ** ** | **Adjustments** | ** ** | **Combined** | ** ** | **Discontinued  Operations** | ** ** | **Combined and  Discontinued** | ** ** |
| ** **                                                          | ** ** | **(in millions)**                                             | ** ** |
| Operating  revenues—affiliate                                  |       |                                                               | $          | 292 |   |   |   | $ | (228 | ) |   |   | $ | 64 |   |   |   | $ | — |   |   |   | $ | 64 |   |   |
| Operating  revenues—nonaffiliate                               |       |                                                               | 44         |   |   |   | 470 |   |   |   | 514 |   |   |   | (32 | ) |   |   | 482 |   |   |
| Total operating revenues                                            |       |                                                               | 336        |   |   |   | 242 |   |   |   | 578 |   |   |   | (32 | ) |   |   | 546 |   |   |
| Cost of fuel,  electricity and other products—affiliate        |       |                                                               | 460        |   |   |   | (385 | ) |   |   | 75 |   |   |   | — |   |   |   | 75 |   |   |
| Cost of fuel,  electricity and other products—nonaffiliate     |       |                                                               | 50         |   |   |   | 536 |   |   |   | 586 |   |   |   | (13 | ) |   |   | 573 |   |   |
| Total cost of fuel, electricity and other products                  |       |                                                               | 510        |   |   |   | 151 |   |   |   | 661 |   |   |   | (13 | ) |   |   | 648 |   |   |
| Gross Margin                                                        |       |                                                               | (174       | ) |   |   | 91 |   |   |   | (83 | ) |   |   | (19 | ) |   |   | (102 | ) |   |
| Operating Expenses:                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance—affiliate, including restructuring |       |                                                               | 56         |   |   |   | 14 |   |   |   | 70 |   |   |   | (2 | ) |   |   | 68 |   |   |
| Operations and  maintenance—nonaffiliate                       |       |                                                               | 65         |   |   |   | 5 |   |   |   | 70 |   |   |   | (3 | ) |   |   | 67 |   |   |
| Depreciation and  amortization                                      |       |                                                               | 23         |   |   |   | 9 |   |   |   | 32 |   |   |   | (4 | ) |   |   | 28 |   |   |
| Generation  facilities rent                                         |       |                                                               | 24         |   |   |   | — |   |   |   | 24 |   |   |   | — |   |   |   | 24 |   |   |
| Loss on sales of  assets, net                                       |       |                                                               | —     |   |   |   | 2 |   |   |   | 2 |   |   |   | — |   |   |   | 2 |   |   |
| Total operating expenses                                            |       |                                                               | 168        |   |   |   | 30 |   |   |   | 198 |   |   |   | (9 | ) |   |   | 189 |   |   |
| Operating Loss                                                      |       |                                                               | (342       | ) |   |   | 61 |   |   |   | (281 | ) |   |   | (10 | ) |   |   | (291 | ) |   |
| Other Expense,  net                                                 |       |                                                               | 563        |   |   |   | 62 |   |   |   | 625 |   |   |   | (1 | ) |   |   | 624 |   |   |
| Loss before  Reorganization Items and Income Taxes                  |       |                                                               | (905       | ) |   |   | (1 | ) |   |   | (906 | ) |   |   | (9 | ) |   |   | (915 | ) |   |
| Reorganization  items, net                                          |       |                                                               | 37         |   |   |   | 9 |   |   |   | 46 |   |   |   | — |   |   |   | 46 |   |   |
| Provision for  income taxes                                         |       |                                                               | 4          |   |   |   | 1 |   |   |   | 5 |   |   |   | — |   |   |   | 5 |   |   |
| Loss from  Continuing Operations                                    |       |                                                               | (946       | ) |   |   | (11 | ) |   |   | (957 | ) |   |   | (9 | ) |   |   | (966 | ) |   |
| Income from  Discontinued Operations                                |       |                                                               | —     |   |   |   | — |   |   |   | — |   |   |   | 9 |   |   |   | 9 |   |   |
| Net Loss                                                            |       |                                                               | $          | (946 | ) |   |   | $ | (11 | ) |   |   | $ | (957 | ) |   |   | $ | — |   |   |   | $ | (957 | ) |   |

 

18

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| ** **                                                          | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **As Previously  Reported**                                  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** | **Discontinued  Operations** | ** ** | **Combined and  Discontinued** | ** ** |
| ** **                                                          | ** ** | **(in millions)**                                            | ** ** |
| Operating  revenues—affiliate                                  |       |                                                              | $          | 1,122 |   |   |   | $ | (1,002 | ) |   |   | $ | 120 |   |   |   | $ | — |   |   |   | $ | 120 |   |   |
| Operating  revenues—nonaffiliate                               |       |                                                              | 129        |   |   |   | 1,584 |   |   |   | 1,713 |   |   |   | (63 | ) |   |   | 1,650 |   |   |
| Total operating revenues                                            |       |                                                              | 1,251      |   |   |   | 582 |   |   |   | 1,833 |   |   |   | (63 | ) |   |   | 1,770 |   |   |
| Cost of fuel,  electricity and other products—affiliate        |       |                                                              | 885        |   |   |   | (745 | ) |   |   | 140 |   |   |   | — |   |   |   | 140 |   |   |
| Cost of fuel,  electricity and other products—nonaffiliate     |       |                                                              | 138        |   |   |   | 1,216 |   |   |   | 1,354 |   |   |   | (31 | ) |   |   | 1,323 |   |   |
| Total cost of fuel,  electricity and other products                 |       |                                                              | 1,023      |   |   |   | 471 |   |   |   | 1,494 |   |   |   | (31 | ) |   |   | 1,463 |   |   |
| Gross Margin                                                        |       |                                                              | 228        |   |   |   | 111 |   |   |   | 339 |   |   |   | (32 | ) |   |   | 307 |   |   |
| Operating Expenses:                                                 |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance—affiliate, including restructuring |       |                                                              | 177        |   |   |   | 40 |   |   |   | 217 |   |   |   | (4 | ) |   |   | 213 |   |   |
| Operations and  maintenance—nonaffiliate                       |       |                                                              | 192        |   |   |   | 19 |   |   |   | 211 |   |   |   | (10 | ) |   |   | 201 |   |   |
| Depreciation and  amortization                                      |       |                                                              | 68         |   |   |   | 30 |   |   |   | 98 |   |   |   | (13 | ) |   |   | 85 |   |   |
| Generation facilities  rent                                         |       |                                                              | 75         |   |   |   | — |   |   |   | 75 |   |   |   | — |   |   |   | 75 |   |   |
| Loss (gain) on sales of  assets, net                                |       |                                                              | (1         | ) |   |   | 2 |   |   |   | 1 |   |   |   | — |   |   |   | 1 |   |   |
| Total operating expenses                                            |       |                                                              | 511        |   |   |   | 91 |   |   |   | 602 |   |   |   | (27 | ) |   |   | 575 |   |   |
| Operating Loss                                                      |       |                                                              | (283       | ) |   |   | 20 |   |   |   | (263 | ) |   |   | (5 | ) |   |   | (268 | ) |   |
| Other Expense, net                                                  |       |                                                              | 566        |   |   |   | 64 |   |   |   | 630 |   |   |   | (1 | ) |   |   | 629 |   |   |
| Loss before  Reorganization Items and Income Taxes                  |       |                                                              | (849       | ) |   |   | (44 | ) |   |   | (893 | ) |   |   | (4 | ) |   |   | (897 | ) |   |
| Reorganization items,  net                                          |       |                                                              | (98        | ) |   |   | 151 |   |   |   | 53 |   |   |   | — |   |   |   | 53 |   |   |
| Provision for income  taxes                                         |       |                                                              | 10         |   |   |   | — |   |   |   | 10 |   |   |   | — |   |   |   | 10 |   |   |
| Loss from Continuing  Operations                                    |       |                                                              | (761       | ) |   |   | (195 | ) |   |   | (956 | ) |   |   | (4 | ) |   |   | (960 | ) |   |
| Income from Discontinued  Operations                                |       |                                                              | —     |   |   |   | — |   |   |   | — |   |   |   | 4 |   |   |   | 4 |   |   |
| Net Loss                                                            |       |                                                              | $          | (761 | ) |   |   | $ | (195 | ) |   |   | $ | (956 | ) |   |   | $ | — |   |   |   | $ | (956 | ) |   |

 

Historically, the Company’s operating subsidiarieswere party to services agreements with Mirant Americas Energy Marketing. MirantAmericas Energy Marketing was responsible for marketing the output of theCompany’s facilities and procurement of fuel for the Company’s facilities, aswell as for executing contracts, including economic hedges, to reduce pricerisk. Transactions between the operating subsidiaries and Mirant AmericasEnergy Marketing were included in operating revenues—affiliate and cost offuel, electricity and other products—affiliate, in the previously reportedMirant Americas Generation statements of operations. Because Mirant AmericasEnergy Marketing is part of the combined Mirant Americas Generation financialstatements, these affiliate transactions are now eliminated. In addition,Mirant Americas Energy Marketing’s sales and purchase transactions withnonaffiliates are now reflected in Mirant Americas Generation unauditedcondensed combined statements of operations.

19

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Thefollowing table summarizes the effects of the Contributed Subsidiaries anddiscontinued operations on the previously reported Mirant Americas Generation’sunaudited condensed combined statements of cash flows for the nine months endedSeptember 30, 2005:

| ** **                                                                                 | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **As Previously  Reported**                                  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** | **Discontinued  Operations** | ** ** | **Combined and  Discontinued** | ** ** |
| ** **                                                                                 | ** ** | **(in millions)**                                            | ** ** |
| **Cash Flows from Operating  Activities:**                                                 | ** ** |                                                              | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net loss                                                                                   |       |                                                              | $          | (761 | ) |   |   | $ | (195 | ) |   |   | $ | (956 | ) |   |   | $ | — |   |   |   | $ | (956 | ) |   |
| Income from discontinued operations                                                        |       |                                                              | —     |   |   |   | — |   |   |   | — |   |   |   | 4 |   |   |   | 4 |   |   |
| Loss from continuing operations                                                            |       |                                                              | (761       | ) |   |   | (195 | ) |   |   | (956 | ) |   |   | (4 | ) |   |   | (960 | ) |   |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                              |       |                                                              | 68         |   |   |   | 30 |   |   |   | 98 |   |   |   | (13 | ) |   |   | 85 |   |   |
| Non-cash post-petition interest expense                                                    |       |                                                              | 561        |   |   |   | 59 |   |   |   | 620 |   |   |   | — |   |   |   | 620 |   |   |
| Loss (gain) on sales of assets and investments                                             |       |                                                              | (1         | ) |   |   | 2 |   |   |   | 1 |   |   |   | — |   |   |   | 1 |   |   |
| Non-cash charges for reorganization items                                                  |       |                                                              | (134       | ) |   |   | 155 |   |   |   | 21 |   |   |   | 1 |   |   |   | 22 |   |   |
| Price risk management activities, net                                                      |       |                                                              | 445        |   |   |   | (43 | ) |   |   | 402 |   |   |   | 5 |   |   |   | 407 |   |   |
| Other, net                                                                                 |       |                                                              | 3          |   |   |   | (9 | ) |   |   | (6 | ) |   |   | 1 |   |   |   | (5 | ) |   |
| Changes in  operating assets and liabilities:                                              |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate accounts receivable, net                                                         |       |                                                              | (14        | ) |   |   | (283 | ) |   |   | (297 | ) |   |   | — |   |   |   | (297 | ) |   |
| Customer accounts receivable, net                                                          |       |                                                              | 7          |   |   |   | (72 | ) |   |   | (65 | ) |   |   | (1 | ) |   |   | (66 | ) |   |
| Prepaid rent                                                                               |       |                                                              | 8          |   |   |   | (1 | ) |   |   | 7 |   |   |   | — |   |   |   | 7 |   |   |
| Inventories                                                                                |       |                                                              | 26         |   |   |   | 17 |   |   |   | 43 |   |   |   | — |   |   |   | 43 |   |   |
| Other assets                                                                               |       |                                                              | (36        | ) |   |   | (703 | ) |   |   | (739 | ) |   |   | 3 |   |   |   | (736 | ) |   |
| Accounts payable and accrued liabilities                                                   |       |                                                              | 10         |   |   |   | 7 |   |   |   | 17 |   |   |   | (2 | ) |   |   | 15 |   |   |
| Payable to affiliate.                                                                      |       |                                                              | 70         |   |   |   | 338 |   |   |   | 408 |   |   |   | — |   |   |   | 408 |   |   |
| Property taxes accrued, affiliate                                                          |       |                                                              | (1         | ) |   |   | — |   |   |   | (1 | ) |   |   | — |   |   |   | (1 | ) |   |
| Property taxes accrued, nonaffiliate                                                       |       |                                                              | 38         |   |   |   | — |   |   |   | 38 |   |   |   | — |   |   |   | 38 |   |   |
| Other liabilities                                                                          |       |                                                              | 4          |   |   |   | 3 |   |   |   | 7 |   |   |   | — |   |   |   | 7 |   |   |
| Total adjustments                                                                          |       |                                                              | 1,054      |   |   |   | (500 | ) |   |   | 554 |   |   |   | (6 | ) |   |   | 548 |   |   |
| Net cash provided by (used in) operating activities  of continuing operations              |       |                                                              | 293        |   |   |   | (695 | ) |   |   | (402 | ) |   |   | (10 | ) |   |   | (412 | ) |   |
| Net cash provided by operating activities of  discontinued operations                      |       |                                                              | —     |   |   |   | — |   |   |   | — |   |   |   | 10 |   |   |   | 10 |   |   |
| Net cash provided by (used in) operating activities                                        |       |                                                              | 293        |   |   |   | (695 | ) |   |   | (402 | ) |   |   | — |   |   |   | (402 | ) |   |
| **Cash Flows from Investing Activities:**                                                  | ** ** |                                                              | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Capital expenditures                                                                       |       |                                                              | (70        | ) |   |   | (12 | ) |   |   | (82 | ) |   |   | 3 |   |   |   | (79 | ) |   |
| Repayments on notes receivable from affiliate                                              |       |                                                              | (482       | ) |   |   | 492 |   |   |   | 10 |   |   |   | — |   |   |   | 10 |   |   |
| Proceeds from the sales of assets, net                                                     |       |                                                              | 4          |   |   |   | — |   |   |   | 4 |   |   |   | — |   |   |   | 4 |   |   |
| Net cash used in investing activities of continuing  operations                            |       |                                                              | (548       | ) |   |   | 480 |   |   |   | (68 | ) |   |   | 3 |   |   |   | (65 | ) |   |
| Net cash used in investing activities of discontinued  operations                          |       |                                                              | —     |   |   |   | — |   |   |   | — |   |   |   | (3 | ) |   |   | (3 | ) |   |
| Net cash provided by (used in) investing activities                                        |       |                                                              | (548       | ) |   |   | 480 |   |   |   | (68 | ) |   |   | — |   |   |   | (68 | ) |   |
| **Cash Flows from Financing  Activities:**                                                 | ** ** |                                                              | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Proceeds from issuance of long-term debt—affiliate                                    |       |                                                              | —     |   |   |   | 90 |   |   |   | 90 |   |   |   | — |   |   |   | 90 |   |   |
| Repayment of long-term debt—nonaffiliate                                              |       |                                                              | —     |   |   |   | (2 | ) |   |   | (2 | ) |   |   | — |   |   |   | (2 | ) |   |
| Net cash provided by financing activities of  continuing operations                        |       |                                                              | —     |   |   |   | 88 |   |   |   | 88 |   |   |   | — |   |   |   | 88 |   |   |
| Net cash provided by financing activities of  discontinued operations                      |       |                                                              | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net cash provided by financing activities                                                  |       |                                                              | —     |   |   |   | 88 |   |   |   | 88 |   |   |   | — |   |   |   | 88 |   |   |
| **Net Decrease in Cash and Cash Equivalents**                                              |       |                                                              | (255       | ) |   |   | (127 | ) |   |   | (382 | ) |   |   | — |   |   |   | (382 | ) |   |
| **Cash and Cash Equivalents, beginning of period**                                         |       |                                                              | 414        |   |   |   | 222 |   |   |   | 636 |   |   |   | — |   |   |   | 636 |   |   |
| **Cash and  Cash Equivalents, end of period**                                              |       |                                                              | $          | 159 |   |   |   | $ | 95 |   |   |   | $ | 254 |   |   |   | $ | — |   |   |   | $ | 254 |   |   |

 

20

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**G.**              RelatedParty Arrangements and Transactions

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

MirantServices provides the Company with various management, personnel and otherservices. The Company reimburses Mirant Services for amounts equal to MirantServices’ direct costs of providing such services. The total costs incurredunder the Management, Personnel and Services Agreement with Mirant Serviceshave been included in the accompanying unaudited condensed consolidated andcombined statements of operations for the three and nine months ended September 30,2006 and 2005 as follows (in millions):

| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of fuel, electricity and other products—affiliate |       |                                                 | $          | 3                                                   |       |   |   | $ | 2 |   |   | $ | 7 |   | $ | 7 |   |
| Operations and maintenance expense—affiliate           |       |                                                 | 38         |                                                |       |   | 39 |   |   | 114 |   | 124 |   |
| Total                                                       |       |                                                 | $          | 41                                                  |       |   |   | $ | 41 |   |   | $ | 121 |   | $ | 131 |   |

 

***Servicesand Risk Management Agreements with Affiliates***

For the three and nine months ended September 30,2006, the Company provided energy marketing and fuel procurement servicesthrough Mirant Energy Trading to the following affiliates: Mirant Las Vegas,LLC, Mirant Sugar Creek, LLC, Mirant Shady Hills, LLC, Mirant West Georgia, LLCand Mirant Wichita Falls, LP.  For thethree and nine months ended September 30, 2005, these services wereprovided by Mirant Americas Energy Marketing. Amounts due from each affiliateunder their respective services agreements are recorded as a net accountspayable-affiliate or accounts receivable-affiliate because of each subsidiary’slegal right to offset. For the three and nine months ended September 30,2006 and 2005, the Company recorded a reduction to operations and maintenanceof approximately $1 million and $4 million, respectively, compared to $2million and $6 million, respectively, related to these agreements.

Mirant Wichita Falls was sold by Mirant in the secondquarter of 2006. Mirant has commenced auction processes to sell Mirant LasVegas, LLC, Mirant Sugar Creek, LLC, Mirant Shady Hills, LLC and Mirant WestGeorgia, LLC. The sales are expected to be completed by mid-2007. Subsequent tothe sale of these affiliates by Mirant, the Company will no longer recognize areduction to operations and maintenance associated with providing services tothese affiliates.

The Company’s gross margin for future periods is notexpected to be materially impacted by the sale of these affiliates. However,because the Company would likely discontinue providing energy marketing andfuel procurement services to these entities, the Company would expect itsoperating revenues-affiliate and cost of fuel, electricity, and other products– affiliate to decrease or be eliminated subsequent to the sale of theseaffiliates. In addition, these decreases would result in correspondingdecreases in cost of fuel, electricity, and other products –nonaffiliate andoperating revenues-nonaffiliate, respectively, in the consolidated statementsof operations in future periods.

***Administration Arrangements with Mirant Services***

Substantially all ofMirant’s corporate overhead costs are allocated to Mirant’s operatingsubsidiaries. For the three and nine months ended September 30, 2006, theCompany incurred approximately $35 million and $100 million,respectively, compared to $31 million and $95 million, respectively,for the same periods in 2005, in costs under these arrangements, which areincluded in operations and maintenance—affiliate in the accompanying unauditedcondensed consolidated and combined statements of operations.

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***Notes Payable to Affiliate***

During the pendency of theChapter 11 proceedings, Mirant and certain of its subsidiariesparticipated in an intercompany cash management program approved by theBankruptcy Court, pursuant to which cash balances at Mirant and theparticipating subsidiaries were transferred to central concentration accountsand, if necessary, lent to Mirant or any participating subsidiary to fundworking capital and other needs, subject to the intercompany borrowing limitsapproved by the Bankruptcy Court. At September 30, 2006, and December 31,2005, the Company had current notes payable to affiliate of $8 million and$21 million, respectively. For the three and nine months ended September 30,2006, the Company incurred less than $1 million of interest expense underthis arrangement, compared to $7 million and $13 million, for thesame periods in 2005, which are recorded in interest expense—affiliate in theaccompanying unaudited condensed consolidated and combined financialstatements.

***Payable to Mirant Americas Pursuant to the Plan***

Pursuant to the Plan,Mirant North America, the Company’s wholly-owned subsidiary, was required topay $250 million to Mirant Americas, Inc. (“Mirant Americas”) withinfive days of the effective date of the Plan in return for Mirant’s contributionof the Trading Debtors. This amount is included in payable to affiliate at December 31,2005, in the consolidated balance sheet and was paid in January 2006.

***Mirant Guarantees***

Mirant posted pre-petition letters of credit and aguarantee on behalf of Mirant Mid-Atlantic to provide for the rent paymentreserve required in connection with Mirant Mid-Atlantic’s lease obligations inthe event that it was unable to pay its lease payment obligations. On January 3,2006, as part of the Company’s emergence from bankruptcy, Mirant North Americaposted a $75 million letter of credit for the benefit of MirantMid-Atlantic to cover rent payment reserve obligations on Mirant Mid-Atlantic’sleases. Upon the posting of the letter of credit, the trustee returned $56 millionof cash collateral to Mirant Mid-Atlantic.

Mirant posted a post-petition letter of credit in theamount of $5 million on behalf of Mirant Texas, LP as of December 31,2004, related to a tolling agreement. This post-petition letter of credit wasset to expire in January 2006. Upon emergence from bankruptcy, MirantNorth America replaced this post-petition letter of credit with a letter ofcredit issued under its senior secured credit facilities. The current letter ofcredit expires on February 28, 2007.

In July 2006, Mirant North America posted aletter of credit in the amount of $14 million on behalf of Mirant Delta, LLCrelated to a tolling agreement. This letter of credit expires in July 2007.

Prior to 2005, Mirantentered into pre-petition letters of credit to support the Company’s assetmanagement activities. In September 2005, several of these letters ofcredit were drawn in the amount of $39 million. In January 2006, theremaining pre-petition letter of credit of $7 million was drawn in full.In addition, Mirant entered into post-petition letters of credit to support itsasset hedging activities. In January 2006, letters of credit from theMirant North America senior secured credit facilities replaced the elevenpost-petition letters of credit outstanding at December 31, 2005. SeeFinancial Condition—*Cash Collateral andLetters of Credit*for details on letters of credit outstanding at September 30,2006*.*

***Preferred Stock in Mirant Americas***

Pursuant to the Plan,preferred stock in Mirant Americas, Inc (“Mirant Americas”) was issued to theCompany and Mirant Mid-Atlantic to provide credit support for refinancing and environmentalcapital expenditures, respectively. For the nine months ended September 30,2006, the Company recorded 

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$15 millionin Preferred Stock in affiliate and Member’s Interest in the unauditedcondensed consolidated balance sheet related to the amortization of thediscount on the preferred stock in Mirant Americas.

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

Mirant North America and Mirant Americas EnergyMarketing, (the “Primary DIP Lenders”) entered into an agreement (the ‘‘PrimaryNew York DIP Agreement’’) to make secured debtor-in-possession financing in anamount of (i) $20 million, plus (ii) an amount equal to theamount of credit support provided on behalf of Mirant New York, Inc. (“MirantNew York”), Mirant Bowline, Mirant Lovett, and Hudson Valley Gas Corporation(collectively, the ‘‘New York DIP Borrowers’’), to the extent such amounts arecollateralized with cash or cash equivalents by the New York DIP Borrowers. Thefacility is available on a joint and several basis to the New York DIPBorrowers. On January 31, 2006, all the assets of Mirant Americas EnergyMarketing were transferred to Mirant Energy Trading, with Mirant Energy Tradingto succeed to all rights and assume all obligations of Mirant Americas EnergyMarketing under the Primary New York DIP Agreement. The New York DIP Borrowershave posted $24 million cash collateral with Mirant Energy Trading inaccordance with the September 30, 2006, collateral allocation performed ingood faith by Mirant Energy Trading. To the extent that the required level ofcredit support provided to the New York DIP Borrowers is reduced, the amount ofsuch reduction is required to be returned to the New York DIP Borrowers.

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

The Bankruptcy Court hasapproved a debtor-in-possession loan to Mirant NY-Gen, LLC (“Mirant NY-Gen”)from Mirant Americas under which Mirant Americas, subject to certainconditions, would lend up to $9.5 million to Mirant NY-Gen to providefunding for the repairs on the Swinging Bridge dam. The loan wasextended for an additional 180 days in July 2006.

For further discussion see*Item 2. Management’s Discussion and Analysisof Results of Operations and Financial Condition—Financial Condition.*

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**H.**              Debt

Long-termdebt at September 30, 2006 and December 31, 2005, was as follows (inmillions):

| ** **                                       | ** ** | **At  September 30,  2006** | ** ** | **At  December 31,  2005** | ** ** | **Interest Rate** | ** ** | **Secured/  Unsecured** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------|------------|-------------------------|------------|
| **Long-term Debt:**                              | ** ** |                             | ** ** | ** **                      |       |                   | ** ** | ** **              |       | ** ** | ** ** | ** ** | ** ** |
| Mirant Americas  Generation:                     |       |                             |       |                            |       |                   |       |                    |       |   |   |   |   |
| Senior notes:                                    |       |                             |       |                            |       |                   |       |                    |       |   |   |   |   |
| Due 2011                                         |       |                             | $          | 850                             |       |                   |       | $                       | 850        |   |   | 8.30 | % | Unsecured |   |
| Due 2021                                         |       |                             | 450        |                            |       |                   | 450        |                    |       | 8.50 | % | Unsecured |   |
| Due 2031                                         |       |                             | 400        |                            |       |                   | 400        |                    |       | 9.125 | % | Unsecured |   |
| Unamortized debt discount                        |       |                             | (4         | )                               |       |                   | (4         | )                       |       |   |   |   |   |
| Mirant North America:                            |       |                             |       |                            |       |                   |       |                    |       |   |   |   |   |
| Term loan, due 2006 to 2013(1)                   |       |                             | 695        |                            |       |                   | —     |                    |       | LIBOR + 1.75 | % | Secured |   |
| Note, due 2013.                                  |       |                             | 850        |                            |       |                   | 850        |                    |       | 7.375 | % | Unsecured |   |
| Other:                                           |       |                             |       |                            |       |                   |       |                    |       |   |   |   |   |
| Mirant Peaker capital lease, due 2006 to 2015    |       |                             | 34         |                            |       |                   | 36         |                    |       | 8.19 | % |   |   |
| Total                                            |       |                             | 3,275      |                            |       |                   | 2,582      |                    |       |   |   |   |   |
| Less: current  portion of long-term debt         |       |                             | (91        | )                               |       |                   | (3         | )                       |       |   |   |   |   |
| Total long-term  debt, excluding current portion |       |                             | $          | 3,184                           |       |                   |       | $                       | 2,579      |   |   |   |   |   |   |

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(1)          Under the senior securedterm loan, $200 million was deposited into a cash collateral account tosupport issuance of up to $200 million of letters of credit. As of September 30,2006, there were approximately $185 million of letters of creditoutstanding.

Pursuant to the Plan,Mirant Americas Generation reinstated $1.7 billion of senior notesmaturing in 2011, 2021 and 2031. The reinstated senior notes are unsecuredobligations of Mirant Americas Generation and are not recourse to anysubsidiary or affiliate of Mirant Americas Generation. During the third quarterof 2006, approximately $12 million and $11 million for the Zeelandcapital lease have been reclassified to liabilities held for sale on theCompany’s condensed consolidated balance sheets at September 30, 2006 and December 31,2005, respectively. See Note B for additional information on liabilitiesheld for sale.

***Senior Secured Credit Facilities***

Mirant North America, a wholly-owned subsidiary of theCompany, entered into senior secured credit facilities in January 2006,which are comprised of an $800 million six-year senior secured revolvingcredit facility and a $700 million seven-year senior secured term loan.The full amount of the senior secured revolving credit facility is availablefor cash draws or for the issuance of letters of credit. On January 3,2006, Mirant North America drew $465 million under its senior securedrevolving credit facility. All amounts were repaid during the first quarter of2006.******The senior secured term loan wasfully drawn at closing and amortizes in quarterly installments aggregating0.25% of the original principal of the term loan per quarter for the first27 quarters, with the remainder payable on the final maturity date in January 2013.At the closing, $200 million drawn under the senior secured term loan wasdeposited into a cash collateral account to support the issuance of up to $200 millionof letters of credit. The senior secured credit facilities are obligations ofMirant North America and the respective guarantors and are not recourse to anyother Mirant Americas Generation entity or affiliate.

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Loans under the senior secured credit facilities are availableat either of the following rates: (i) a fluctuating rate of interest perannum equal to, on any given day, the greater of (a) the interest rate perannum publicly announced by JPMorgan Chase Bank, N.A. as its prime rate ineffect at its principal office in New York City on that day, and (b) thefederal funds rate in effect on that day plus 0.50%, plus the applicable margindescribed below (the “base rate”), or (ii) a fixed rate determined forselected interest periods of one, two, three or six months equal to U.S. dollarLondon InterBank Offered Rate (“LIBOR”), plus the applicable margin describedbelow (the “Eurodollar rate”).

The applicable margin with respect to loans under thesenior secured revolving credit facility is 1.25% in the case of base rateloans or 2.25% in the case of Eurodollar rate loans. The applicable margin issubject to a reduction of up to 0.50% based on the achievement and maintenanceof certain leverage ratios by Mirant North America. This reduction becameeffective June 7, 2006. The applicable margin with respect to the seniorsecured term loan is 0.75% in the case of base rate loans or 1.75% in the caseof Eurodollar rate loans.

Mirant North America is required to prepay a portionof the outstanding principal balance of the senior secured term loan once ayear, in addition to the regularly scheduled principal payments, based onadjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”)calculation to determine excess free cash flows, as defined in the loanagreement. At September 30, 2006, the current estimate of the mandatoryprincipal prepayment of the term loan in April 2007 is approximately $81 million.This amount has been reclassified from long-term debt to current portion oflong-term debt at September 30, 2006.

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

***Senior Notes***

In December 2005, Mirant North America issuedsenior notes (the “Old Notes”) in an aggregate principal amount of $850 millionthat bear interest at 7.375% and mature on December 31, 2013. The seniornotes were issued in a private placement and were not registered with the SEC.Interest on the notes is payable on each June 30 and December 31,commencing June 30, 2006. The proceeds of the notes offering initiallywere placed in escrow pending the emergence of Mirant North America frombankruptcy. The proceeds were released from escrow in connection with MirantNorth America’s emergence from bankruptcy and the closing of the senior securedcredit facilities. The senior notes are obligations of Mirant North America andthe respective guarantors and are not recourse to any other Mirant AmericasGeneration entity or affiliate.

In connection with the issuance of the Old Notes,Mirant North America entered into a registration rights agreement under whichit agreed to complete an exchange offer for the Old Notes. On June 29,2006, Mirant North America completed its registration under the Securities Actof 1933 (the “Securities Act”) of $850 million of 7.375% senior notes due2013 (the “New Notes”) and initiated an offer to exchange all of theoutstanding Old Notes for the New Notes (the “Exchange Offer”). The ExchangeOffer was completed on August 4, 2006, with $849.965 million of theoutstanding Old Notes being tendered for the New Notes. The terms of the NewNotes are identical in all material respects to the terms of the Old Notes,except that the New Notes are registered under the Securities Act and generallyare not subject to transfer restrictions or registration rights.

The sale of the Zeelandand Bosque natural gas-fired plants is subject to the terms of the Mirant NorthAmerica senior notes, including the provisions with respect to a mandatoryoffer to purchase and/or reinvest with the sale proceeds.

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**I.**                   IncomeTaxes

The Company is a limited liability company treated asa branch of Mirant Americas for income tax purposes. As a result, MirantAmericas and Mirant have direct liability for the majority of the federal andstate income taxes relating to the Company’s operations. Through December 31,2005, the Company has allocated current and deferred income taxes to eachregarded corporate member entity of our consolidated group as if each regardedcorporate entity member were a single taxpayer utilizing the asset andliability method to account for income taxes except with respect to recognizingcertain current period tax benefits. Specifically, the Company did not recordcurrent period tax benefits on each regarded corporate entity’s ability tocarry back its separate company current year net operating loss as realizationof such losses were dependent on reimbursements from Mirant, which were atMirant’s discretion under the tax sharing agreement.

Several significant changes to the Company’s taxposture occurred as a result of the Plan, including the conversion of certainof the Company’s regarded corporate entities to limited liability companiescoupled with the liquidation and/or merger of these regarded corporate entitiesinto other disregarded corporate entities for income tax purposes, and certainpartnerships owned by the regarded corporate entities were also liquidated andnow form part of these disregarded entities for income tax purposes. The resulteliminates the Company’s recording of tax expense and benefit beginning January 1,2006, with respect to the liquidated regarded corporate entities. Furthermore,with respect to those liquidated regarded corporate entities, all previouslyexisting deferred tax assets and liabilities were eliminated as of December 31,2005.

Certain of the Company’s other subsidiaries continueto exist as regarded corporate entities for income tax purposes. For thosecorporate regarded entities, the Company allocates current and deferred incometaxes to each regarded corporate entity as if such entity were a singletaxpayer utilizing the asset and liability method to account for income taxes.To the extent the Company provides tax expense or benefit, any related taxpayable or receivable to Mirant is reclassified to equity in the same period.

If the Company was to beallocated income taxes attributable to its operations, pro forma income taxexpense attributable to income before tax would be $1 million and $3 millionfor the three and nine months ending September 30, 2006, respectively,compared to $1 million and $3 million for the same periods in 2005.The pro forma balance of the Company’s deferred income taxes would be zero asof September 30, 2006.

**J.**                  BankruptcyRelated Disclosures

Mirant’s Plan was confirmed by the United StatesBankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”) onDecember 9, 2005, and Mirant and the Company emerged from bankruptcy on January 3,2006. For financial statement presentation purposes, Mirant and the Companyrecorded the effects of the Plan at December 31, 2005.

At September 30, 2006and December 31, 2005, amounts related to allowed claims, estimatedunresolved claims and professional fees associated with the bankruptcy that areto be settled in cash were $97 million and $1.831 billion,respectively, and these amounts were recorded in claims payable and estimatedclaims accrual on the accompanying condensed consolidated balance sheets. Theseamounts do not include unresolved claims that will be settled in Mirant commonstock. During the nine months ended September 30, 2006, the Company paidapproximately $1.734 billion in cash related to bankruptcy claims. Of thisamount approximately $990 million is reflected in cash flows fromfinancing activities and represents the principal amount of debt claims. Theremaining $744 million is reflected in cash flows from operatingactivities and represents other bankruptcy claims and interest.

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***Financial Statements of Subsidiaries in Bankruptcy***

Mirant Americas Generation’sNew York subsidiaries remain in bankruptcy and include the following entities:Mirant Lovett, Mirant Bowline, Mirant NY-Gen, Mirant New York andHudson Valley Gas Corporation. Unaudited condensed consolidated financialstatements of Mirant Americas Generation’s New York subsidiaries are set forthbelow:

**NewYork SubsidiariesUnaudited Condensed Consolidated Statements of Operations Data**

| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(in millions)**                               | ** ** |
| Operating  revenues                           |       | $                                                    | 98         |                                                | $          | 107 |   | $ | 287 |   | $ | 257 |   |
| Cost of fuel,  electricity and other products |       | 48                                                   |       | 133                                                 |       | 132 |   | 252 |   |
| Operating  expenses                           |       | 167                                                  |       | 44                                                  |       | 262 |   | 130 |   |
| Operating loss                                |       | (117                                                 | )          | (70                                                 | )          | (107 | ) | (125 | ) |
| Other expense,  net                           |       | —                                               |       | —                                              |       | 2 |   | 1 |   |
| Reorganization  items, net                    |       | —                                               |       | —                                              |       | (2 | ) | (1 | ) |
| Provision for  income taxes                   |       | —                                               |       | —                                              |       | — |   | 1 |   |
| Net loss                                      |       | $                                                    | (117       | )                                                   | $          | (70 | ) | $ | (107 | ) | $ | (126 | ) |

 

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**NewYork SubsidiariesUnaudited Condensed Consolidated Balance Sheets Data**

| ** **                                           | ** ** | **At September 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **(in millions)**               | ** ** |
| Assets—nonaffiliate                             |       |                                 | $          | 147                                 |       |   |   | $ | 32 |   |   |
| Assets—affiliate                                |       |                                 | 81         |                                |       |   | 148 |   |   |
| Property, plant  and equipment, net                  |       |                                 | 370        |                                |       |   | 502 |   |   |
| Other                                                |       |                                 | 13         |                                |       |   | 4 |   |   |
| Total assets                                         |       |                                 | $          | 611                                 |       |   |   | $ | 686 |   |   |
| Liabilities not  subject to compromise               |       |                                 |       |                                |       |   |   |   |   |
| Current liabilities—nonaffiliate                |       |                                 | $          | 214                                 |       |   |   | $ | 168 |   |   |
| Liabilities—affiliate                           |       |                                 | 23         |                                |       |   | 36 |   |   |
| Noncurrent liabilities                               |       |                                 | 10         |                                |       |   | 9 |   |   |
| Liabilities subject  to compromise—affiliate    |       |                                 | 61         |                                |       |   | 62 |   |   |
| Liabilities  subject to compromise—nonaffiliate |       |                                 | 18         |                                |       |   | 18 |   |   |
| Member’s equity                                 |       |                                 | 285        |                                |       |   | 393 |   |   |
| Total liabilities and  member’s equity          |       |                                 | $          | 611                                 |       |   |   | $ | 686 |   |   |

 

**NewYork SubsidiariesUnaudited Condensed Consolidated Statements of Cash Flows Data**

| ** **                                      | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in millions)**                              | ** ** |
| Net cash provided by  (used in):                |       |                                                |       |   |   |
| Operating activities                            |       | $                                                   | 28         |   | $ | 22 |   |
| Investing activities                            |       | 73                                                  |       | (26 | ) |
| Financing activities                            |       | 5                                                   |       | 4 |   |
| Net increase in  cash and cash equivalents      |       | 106                                                 |       | — |   |
| Cash and cash  equivalents, beginning of period |       | 1                                                   |       | — |   |
| Cash and cash  equivalents, end of period       |       | $                                                   | 107        |   | $ | — |   |

 

***Liabilities Subject to Compromise***

The Company’s liabilities subject to compromise are$34 million at both September 30, 2006 and December 31, 2005,and relate to its New York subsidiaries that remain in bankruptcy.

Theamounts subject to compromise at September 30, 2006, and December 31,2005, consisted of the following items (in millions):

| ** **                                                                      | ** ** | **At September 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| Items, absent the  bankruptcy filings, that would have been considered current: |       |                                 |       |                                |       |   |   |   |   |
| Accounts payable  and accrued liabilities—affiliate                        |       |                                 | $          | 16                                  |       |   |   | $ | 16 |   |   |
| Accounts payable  and accrued liabilities—nonaffiliate                     |       |                                 | 18         |                                |       |   | 18 |   |   |
|                                                                            |       |                                 | $          | 34                                  |       |   |   | $ | 34 |   |   |

 

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***Reorganization Items, net***

Forthe three and nine months ended September 30, 2006, reorganization items,net relate to the New York subsidiaries. For the three and nine months ended September 30,2006 and 2005, reorganization items, net represent amounts that were recordedin the financial statements as a result of the bankruptcy proceedings. Thefollowing were the significant items within this category (in millions):

| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Estimated claims  and losses on rejected and amended contracts |       |                                                 | $          | —                                              |       |   |   | $ | 39 |   |   |   | $ | — |   |   | $ | 22 |   |
| Professional fees  and administrative expense                  |       |                                                 | —     |                                                |       |   | 11 |   |   |   | — |   |   | 46 |   |
| Interest income,  net                                          |       |                                                 | (1         | )                                                   |       |   | (4 | ) |   |   | (2 | ) |   | (15 | ) |
| Total                                                          |       |                                                 | $          | (1                                                  | )          |   |   | $ | 46 |   |   |   | $ | (2 | ) |   | $ | 53 |   |

 

**K.**              Litigationand Other Contingencies

The Company is involved ina number of significant legal proceedings. In certain cases plaintiffs seek torecover large and sometimes unspecified damages, and some matters may beunresolved for several years. The Company cannot currently determine theoutcome of the proceedings described below or the ultimate amount of potentiallosses and therefore has not made any 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 and combined financialposition, results of operations or cash flows.

***Chapter 11 Proceedings***

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

As of September 30, 2006, approximately 21.2 millionof the shares of Mirant common stock to be distributed under the Plan have notyet been distributed and have been reserved for distribution with respect toclaims that are disputed by the Mirant Debtors and have not been resolved. Asettlement entered into on May 30, 2006, among Pepco, Mirant, MC 2005, LLCf/k/a Mirant Corporation (“Old Mirant”), and various subsidiaries of Mirant,including subsidiaries of the Company, if approved by final order in the Chapter 11proceedings, would result in the distribution of up to 18 million of thereserved shares to Pepco, as described below in *PepcoLitigation*. Under the terms of the Plan, to the extent other such unresolvedclaims are resolved now that the Company has emerged from bankruptcy, theclaimants will be paid from the reserved shares on the same basis as if theyhad been paid when the Plan became effective. That means that their allowedclaims will receive the same pro rata distributions of Mirant common stock,cash, or both common stock and cash as previously allowed claims in accordancewith the terms of the Plan. To the extent the aggregate amount of the payoutsdetermined to be due with respect to such disputed claims ultimately exceedsthe amount of the funded claim reserve, Mirant would have to issue additionalshares of common stock to address the shortfall, which would dilute existingMirant shareholders, and Mirant and the Company would have to pay additionalcash amounts as necessary under the terms of the Plan to satisfy suchpre-petition claims.

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The Company’s Lovett and Bowline generation facilitiesin New York are subject to disputes with local tax authorities regardingproperty tax assessments, as described below in *New York TaxProceedings*. The current property taxation levels of the facilitiescall into question whether their continued operation is economically feasible.In addition, Mirant Lovett is in discussions with the NYSDEC and the New YorkState Office of the Attorney General regarding environmental controls. On October 19,2006, Mirant Lovett notified the New York Public Service Commission, the NYISO,Orange and Rockland and certain other affected transmission and distributioncompanies in New York of its intent to discontinue operation of units 3and 5 of the Lovett facility in April 2007. The discontinuance ofoperations at unit 5 is in accordance with the requirements of a June 11,2003, Consent Decree (the “2003 Consent Decree”) among Mirant Lovett, the Stateof New York and the NYSDEC that requires Mirant Lovett to install certainenvironmental controls on unit 5 of the Lovett facility or shut down thatunit by April 30, 2007. The 2003 Consent Decree imposes similarrequirements with respect to unit 4 that have to be met by April 30,2008. Operations at unit 3 are being discontinued because it is uneconomicto continue to run unit 3 if operations at unit 5 are discontinued.If Mirant Lovett is able to agree with the New York Attorney General’s officeand the NYSDEC on alternative control technologies that would allow unit 5to remain in operation past April 30, 2007, then Mirant Lovett may rescindthe notice of its intent to discontinue operations at units 3 and 5. Untila resolution is reached on property taxes and environmental controls that wouldpermit economically feasible operation, the Company’s subsidiaries that own thefacilities, Mirant Lovett and Mirant Bowline, will remain in Chapter 11.Until such issues are resolved and the companies emerge from bankruptcy, theCompany will not have access to the cash from operations generated from thesesubsidiaries. The cash from operations generated by these subsidiaries is notmaterial.

The Company’s othersubsidiaries related to its New York business operations, Mirant New York,Hudson Valley Gas Corporation and Mirant NY-Gen also remain in bankruptcy.Mirant NY-Gen, which owns hydroelectric facilities at Swinging Bridge, Rio andMongaup, and small combustion turbine facilities at Hillburn and Shoemaker, isinsolvent. Its expenses are being funded under a debtor-in-possession facilitymade by Mirant Americas, Inc. (“Mirant Americas”) with the approval of,and under the supervision of, the Bankruptcy Court. Mirant NY-Gen is proceedingwith the implementation of a remediation plan for the sinkhole discovered in May 2005in the dam at the Swinging Bridge facility. The status of the remediationeffort is discussed below in *Other Contingencies*.

***Pepco Litigation***

In 2000, Mirant purchased power generating facilitiesand other assets from Pepco, including certain power purchase agreements (“PPAs”)between Pepco and third parties. Under the terms of the Asset Purchase and SaleAgreement (“APSA”), Mirant and Pepco enteredinto a contractual agreement (the “Back-to-Back Agreement”) with respect tocertain PPAs, including Pepco’s long-term PPA with Panda-Brandywine L.P.(“Panda”), under which (1) Pepco agreed to resell to Mirant all capacity,energy, ancillary services and other benefits to which it is entitled underthose agreements and (2) Mirant agreed to pay Pepco each month all amountsdue from Pepco to the sellers under those agreements for the immediatelypreceding month associated with such capacity, energy, ancillary services andother benefits. The Panda PPA runs until 2021, and the Back-to-BackAgreement does not expire until all obligations have been performed under thePanda PPA. Under the Back-to-Back Agreement, Mirant is obligated to purchasepower from Pepco at prices that typically are higher than the market prices forpower.

Mirant assigned its rights and obligations under theBack-to-Back Agreement to Mirant Americas Energy Marketing. In the Chapter 11cases of the Mirant Debtors, Pepco asserted that an Assignment and AssumptionAgreement dated December 19, 2000, that includes as parties Pepco andvarious of the Company’s subsidiaries causes the Company’s subsidiaries thatare parties to the agreement to be jointly and severally liable to Pepco forvarious obligations, including the obligations under the Back-to-BackAgreement. The Mirant Debtors have sought to reject the APSA, the Back-to-BackAgreement, and the Assignment and Assumption Agreement, and the rejectionmotions have not been resolved. Under the 

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Plan, the obligations ofthe Mirant Debtors under the APSA (including any other agreements executedpursuant to the terms of the APSA and found by a final court order to be partof the APSA), the Back-to-Back Agreement, and the Assignment and AssumptionAgreement are to be performed by Mirant Power Purchase, LLC (“Mirant PowerPurchase”), whose performance is guaranteed by Mirant. If any of the agreementsis successfully rejected, the obligations of Mirant Power Purchase and Mirant’sguarantee obligations terminate with respect to that agreement, and Pepco wouldbe entitled to a claim in the Chapter 11 proceedings for any resultingdamages. That claim would then be addressed under the terms of the Plan. If theBankruptcy Court were to conclude that the Assignment and Assumption Agreementimposed liability upon the Company’s subsidiaries for the obligations under theBack-to-Back Agreement and the Back-to-Back Agreement were to be rejected, theresulting rejection damages claim could result in a claim in the Chapter 11proceedings against the Company’s subsidiaries but any such claim would bereduced by the amount recovered by Pepco on its comparable claim againstMirant.

On May 30, 2006, Mirant, Mirant Power Purchase,Old Mirant, various subsidiaries of Mirant (including subsidiaries of theCompany), and a trust established pursuant to the Plan to which ownership ofOld Mirant and Mirant Americas Energy Marketing was transferred (collectivelythe “Mirant Settling Parties”) entered into a Settlement Agreement and Release(the “Settlement Agreement”) with Pepco and various affiliates of Pepco(collectively the “Pepco Settling Parties”). Once it becomes effective, theSettlement Agreement will fully resolve the contract rejection motions thatremain pending in the bankruptcy proceedings, as well as other matterscurrently disputed between Pepco and Mirant and its subsidiaries. The PepcoSettling Parties and the Mirant Settling Parties will release each other fromall claims known as of May 30, 2006, including the fraudulent transferclaims brought by Old Mirant and several of its subsidiaries against Pepco in July 2005.The Settlement Agreement will become effective once it has been approved by theBankruptcy Court and that approval order has become a final order no longersubject to appeal. On August 9, 2006, the Bankruptcy Court entered anorder approving the Settlement Agreement, but certain holders of unsecuredclaims against Old Mirant in the bankruptcy proceedings have appealed thatorder, and it has not yet become a final order.

Under the Settlement Agreement, Mirant Power Purchasewill perform any remaining obligations under the APSA, and Mirant will guarantyits performance. The Back-to-Back Agreement will be rejected and terminatedeffective as of May 31, 2006, unless Mirant exercises an option given toit under the Settlement Agreement to have the Back-to-Back Agreement assumedunder certain conditions as described below. While the appeal filed from theBankruptcy Court’s August 9, 2006, order approving the SettlementAgreement is pending, the parties will continue to perform their obligationsunder the Back-to-Back Agreement until the appeal is resolved and the approvalorder has become a final order. Unless the Back-to-Back Agreement is assumed,Pepco will refund to Mirant Power Purchase all payments received under theBack-to-Back Agreement for energy, capacity or other services delivered after May 31,2006, through the date the Settlement Agreement becomes effective.

With respect to the other agreements executed as partof the closing of the APSA (the “Ancillary Agreements”) and other agreementsbetween Pepco and subsidiaries of Mirant, including subsidiaries of theCompany, the Mirant subsidiary that is a party to each agreement will assumethe agreement and Mirant will guaranty that subsidiary’s performance. MirantPower Purchase’s obligations under the APSA do not include any obligationsrelated to the Ancillary Agreements. If the Back-to-Back Agreement is rejectedpursuant to the terms of the Settlement Agreement, the Settlement Agreementprovides that a future breach of the APSA or any Ancillary Agreement by a partyto such agreement will not entitle the non-defaulting party to terminate,suspend performance under, or exercise any other right or remedy under or withrespect to any of the remainder of such agreements. If, however, Mirant electsto have the Back-to-Back Agreement assumed and assigned to Mirant PowerPurchase under the conditions set out in the Settlement Agreement, then theSettlement Agreement provides that nothing in its terms prejudices the argumentcurrently being made by Pepco in the contract rejection proceedings that theAPSA, the Back-to-Back Agreement, and the Ancillary Agreements constitute asingle non-severable agreement, the 

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material breach of whichwould entitle Pepco to suspend or terminate its performance thereunder, or anydefense of Mirant and its subsidiaries to such an argument by Pepco.

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having avalue, after liquidation of the stock by Pepco, equal to $520 million,subject to certain adjustments. Upon the Settlement Agreement becomingeffective, Mirant will distribute up to 18 million shares of Mirant commonstock to Pepco to satisfy its claim and Pepco will liquidate those shares. Theshares are to be distributed to Pepco in two distributions, the first totaling13.5 million shares and the second to be determined by Mirant after the SettlementAgreement becomes effective so as to produce upon liquidation total netproceeds from both share distributions as near to $520 million aspossible, subject to the overall cap on the shares to be distributed of 18 millionshares. If the net proceeds received by Pepco from the liquidation of theshares are less than $520 million, Mirant will pay Pepco cash equal to thedifference. If the closing price of Mirant’s stock is less than $16.00 on fourbusiness days in a 20 consecutive business day period prior to any distributionof shares to Pepco on its claim, then Mirant can elect to have the Back-to-BackAgreement assumed and assigned to Mirant Power Purchase rather than rejectingit. If Mirant exercises this right to have the Back-to-Back Agreement assumed,then the $520 million is reduced to $70 million and Mirant PowerPurchase would continue to perform the Back-to-Back Agreement through itsexpiration in 2021 with Mirant guaranteeing its performance. The SettlementAgreement allocates the $70 million to various claims asserted by Pepcothat do not arise from the rejection of the Back-to-Back Agreement, includingclaims asserted under the Local Area Support Agreement between Pepco and MirantPotomac River, LLC (“Mirant Potomac River”) that are discussed below in *Pepco Assertion of Breach of Local Area Support Agreement*.

***California and Western Power Markets***

*FERCRefund Proceedings.*   On July 25, 2001, theFederal Energy Regulatory Commission (the “FERC”) issued an order requiringproceedings (the “FERC Refund Proceedings”) to determine the amount of anyrefunds and amounts owed for sales made by market participants, includingMirant Americas Energy Marketing, to the California Independent System Operator(“CAISO”) or the California Power Exchange (“Cal PX”) from October 2,2000, through June 20, 2001 (the “Refund Period”). Various parties haveappealed these FERC orders to the United States Court of Appeals for the NinthCircuit (the “Ninth Circuit”) seeking review of a number of issues, includingchanging the Refund Period to include periods prior to October 2, 2000,and expanding the sales of electricity subject to potential refund to includebilateral sales made to the California Department of Water Resources (the “DWR”)and other parties. On August 2, 2006, the Ninth Circuit issued an opinionaddressing some of the issues raised by these appeals. The Ninth Circuitremanded to the FERC for further proceedings the FERC’s denial of relief forsales of electricity made in the CAISO and Cal PX markets prior to October 2,2000, at rates found to be unjust and directed the FERC to address the parties’request for a market-wide remedy for tariff violations that may have occurredprior to October 2, 2000. In addition, the Ninth Circuit found that theFERC had not adequately supported its decision to exclude from the FERC RefundProceedings (i) sales made in the CAISO and Cal PX that had a term ofgreater than 24 hours, and (ii) energy exchange transactions, and remandedthese issues to the FERC for further proceedings. The Ninth Circuit affirmedthe FERC’s decision to exclude bilateral sales to the DWR from the FERC RefundProceeding. If the FERC grants the parties’ requested relief with respect tothe issues remanded by the Ninth Circuit, any expansion of the Refund Period toinclude periods prior to October 2, 2000, or of the types of sales ofelectricity potentially subject to refund could increase the refund exposure ofMirant Americas Energy Marketing in this proceeding.

In the July 25, 2001, order, the FERC alsoordered that a preliminary evidentiary proceeding be held to develop a factualrecord on whether there had been unjust and unreasonable charges for spotmarket bilateral sales in the Pacific Northwest from December 25, 2000,through June 20, 2001. In that 

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proceeding, the CaliforniaAttorney General, the California Public Utility Commission (the “CPUC”) and theCalifornia Electricity Oversight Board (the “EOB”) filed to recover certainrefunds from parties, including Mirant Americas Energy Marketing, for bilateralsales of electricity to the DWR at the California/Oregon border, claiming thatsuch sales took place in the Pacific Northwest. In an order issued June 25,2003, the FERC ruled that no refunds were owed and terminated the proceeding.On November 10, 2003, the FERC denied requests for rehearing filed byvarious parties. Various parties have appealed the FERC’s decision to the NinthCircuit.

On September 9, 2004, the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed in 2002 by the California AttorneyGeneral that sought refunds for transactions conducted in markets administeredby the CAISO and the Cal PX outside the Refund Period set by the FERC and fortransactions between the DWR and various owners of generation and powermarketers, including Mirant Americas Energy Marketing and subsidiaries of theCompany. The Ninth Circuit remanded the proceeding to the FERC for it todetermine what remedies, including potential refunds, are appropriate whereentities, including Mirant Americas Energy Marketing, purportedly did notcomply with certain filing requirements for transactions conducted undermarket-based rate tariffs. On July 31, 2006, the Ninth Circuit denied apetition for rehearing filed by Mirant Americas Energy Marketing and otherparties.

On January 14, 2005,**Mirantand certain of its subsidiaries, including the Company, entered into aSettlement and Release of Claims Agreement (the “California Settlement”) withPG&E, Southern California Edison Company (“SCE”), San Diego Gas andElectric Company, the CPUC, the DWR, the EOB and the Attorney General of theState of California (collectively, the “California Parties”) and with theOffice of Market Oversight and Investigations of the FERC. The CaliforniaSettlement settled a number of disputed lawsuits and regulatory proceedingsthat were pursued originally in state and federal courts and before the FERC.The Mirant entities that are parties to the California Settlement(collectively, the “Mirant Settling Parties”) include Mirant Corporation,Mirant Americas Energy Marketing, the Company, and Mirant North America (as thesuccessor to Mirant California Investments, Inc.). The CaliforniaSettlement was approved by the FERC on April 13, 2005, and becameeffective April 15, 2005, upon its approval by the Bankruptcy Court. TheCalifornia Settlement resulted in the release of most of Mirant Americas EnergyMarketing’s potential liability (1) in the FERC Refund Proceedings forsales made in the CAISO or the Cal PX markets, (2) in the proceeding alsoinitiated by the FERC in July 2001 to determine whether there had beenunjust and unreasonable charges for spot market bilateral sales in the PacificNorthwest from December 25, 2000, through June 20, 2001, and (3) inany proceedings at the FERC resulting from the Ninth Circuit’s reversal of theFERC’s dismissal of the complaint filed in 2002 by the California AttorneyGeneral. Under the California Settlement, the California Parties and thoseother market participants who have opted into the settlement have released theMirant Settling Parties from any liability for refunds related to sales ofelectricity and natural gas in the western markets from January 1, 1998,through July 14, 2003. Also, the California Parties have assumed theobligation of Mirant Americas Energy Marketing to pay any refunds determined bythe FERC to be owed by Mirant Americas Energy Marketing to other parties that donot opt into the settlement for transactions in the CAISO and Cal PX marketsduring the Refund Period, with the liability of the California Parties for suchrefund obligation limited to the amount of certain receivables assigned byMirant Americas Energy Marketing to the California Parties under the CaliforniaSettlement. Subject to applicable bankruptcy law, however, Mirant AmericasEnergy Marketing will continue to be liable for any refunds that the FERCdetermines it to owe (1) to participants in the Cal PX and CAISO marketsthat are not California Parties (or that did not elect to opt into thesettlement) for periods outside of the Refund Period and (2) toparticipants in bilateral transactions with Mirant Americas Energy Marketingthat are not California Parties (or that did not elect to opt into thesettlement).

The Company’s view is that the bulk of any obligationsof Mirant Americas Energy Marketing to make refunds as a result of salescompleted prior to July 14, 2003, in the CAISO or Cal PX markets or inbilateral transactions either have been addressed by the California Settlementor have been resolved as 

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part of Mirant AmericasEnergy Marketing’s bankruptcy proceedings. To the extent that Mirant AmericasEnergy Marketing’s potential refund liability arises from contracts that weretransferred to Mirant Energy Trading as part of the transfer of the trading andmarketing business under the Plan, Mirant Energy Trading may have exposure toany refund liability related to transactions under those contracts.

*FERCShow Cause Proceeding Relating to Trading Practices.**  *On June 25, 2003, the FERC issued a show causeorder (the “Trading Practices Order”) to more than 50 parties, includingMirant Americas Energy Marketing and subsidiaries of Mirant AmericasGeneration, that a FERC staff report issued on March 26, 2003, identifiedas having potentially engaged in one or more trading strategies of the typeemployed by Enron Corporation and its affiliates (“Enron”), as described inEnron memos released by the FERC in May 2002. The Trading Practices Orderidentified certain specific trading practices that the FERC indicated couldconstitute gaming or anomalous market behavior in violation of the CAISO andCal PX tariffs. The Trading Practices Order requires the CAISO to identifytransactions between January 1, 2000, and June 20, 2001, that mayinvolve 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 sales of ancillary services, which is discussed below. In a November 14,2003, order in a different proceeding, the FERC ruled that certain allegationsof improper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in the show cause proceeding. On December 19,2003, the Mirant entities filed with the FERC for approval of an amendment tothe Trading Settlement Agreement reached with the FERC Trial Staff with respectto the sale of ancillary services. Under that amendment, the FERC would have anallowed unsecured claim in Mirant Americas Energy Marketing’s bankruptcyproceeding for $3.67 million in settlement of the allegations with respectto the sale of ancillary services. The FERC approved the Trading SettlementAgreement, as amended, on June 27, 2005, and the Bankruptcy Court approvedit on August 24, 2005. Certain parties filed motions for rehearing, whichthe FERC denied on October 11, 2006.

*MirantAmericas Energy Marketing Contract Dispute with Nevada Power.*   OnDecember 5, 2001, Nevada Power Co. filed a complaint at the FERC seekingreformation of the purchase price of energy under a contract it had enteredwith Mirant Americas Energy Marketing, claiming that the prices under thatcontract were unjust and unreasonable because, when it entered into thecontract, Western power markets were dysfunctional and non-competitive markets.On June 25, 2003, the FERC dismissed this complaint. Nevada Power hasappealed that dismissal to the United States Court of Appeals for the NinthCircuit. The sales made under the contract with Nevada Power have beencompleted, and the Company expects that any refund claim related to thatcontract, if not now barred, will be addressed in the Chapter 11proceedings.

*Mirant Americas EnergyMarketing Contract Dispute with Southern California Water.*   OnDecember 21, 2001, Southern California Water Co. filed a complaint at theFERC seeking reformation of the purchase price of energy under a long-termcontract it had entered with Mirant Americas Energy Marketing, claiming thatthe prices under that contract were unjust and unreasonable because, when itentered the contract, Western power markets were dysfunctional andnon-competitive markets. On June 25, 2003, the FERC dismissed thisproceeding. Southern California Water has appealed that dismissal to the UnitedStates Court of Appeals for the Ninth Circuit. The contract with SouthernCalifornia Water Company continues through 2006. Upon the transfer of theassets of the trading and marketing business to Mirant Energy Trading under thePlan, Mirant Energy Trading assumed Mirant Americas Energy Marketing’s contractobligations to Southern California Water Company, including any potentialrefund obligations.

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***U.S. Government Inquiries***

*Department of JusticeInquiries.*   In November 2002, Mirantreceived a subpoena from the Department of Justice (the “DOJ”), acting throughthe United States Attorney’s office for the Northern District of California,requesting information about its activities and those of its subsidiaries forthe period since January 1, 1998. The subpoena requested informationrelated to the California energy markets and other topics, including thereporting of inaccurate information to the trade press that publish natural gasor electricity spot price data. The subpoena was issued as part of a grand juryinvestigation. The DOJ’s investigation of the reporting of inaccurate naturalgas price information is continuing, and Mirant has held discussions with theDOJ regarding the disposition of this matter. The DOJ’s investigation is basedupon the same circumstances that were the subject of an investigation by theCommodity Futures Trading Commission (“CFTC”) that was settled in December 2004.As described in Mirant’s Annual Report on Form 10-K for the yearended December 31, 2004, in*Legal Proceedings—OtherGovernmental Proceedings-CFTC Inquiry*, Mirant and Mirant AmericasEnergy Marketing pursuant to the settlement consented to the entry of an orderby the CFTC in which it made findings, which are neither admitted nor denied byMirant and Mirant Americas Energy Marketing, that (1) from January 2000through December 2001, certain Mirant Americas Energy Marketing naturalgas traders (a) knowingly reported inaccurate price, volume, and/orcounterparty information regarding natural gas cash transactions to publishersof natural gas indices and (b) inaccurately reported to index publisherstransactions observed in the market as Mirant Americas Energy Marketingtransactions and (2) from January to October 2000, certain MirantAmericas Energy Marketing west region traders knowingly delivered the falsereports in an attempt to manipulate the price of natural gas. On June 19,2006, two former employees of Mirant pled guilty to charges of conspiracy tomanipulate the price of natural gas in interstate commerce during the periodfrom July 1, 2000, until November 1, 2000, while they were westregion traders for Mirant Americas Energy Marketing. The DOJ could decide thatfurther action against Mirant and Mirant Americas Energy Marketing is notappropriate or could seek indictments against one or more Mirant entities, orthe DOJ and Mirant could agree to a disposition that might involve undertakingsor a fine. Mirant has cooperated fully with the DOJ and intends to continue todo so. At this time, the Company’s view is that any action taken by the DOJagainst Mirant or its subsidiaries related to the reporting of natural gasprice information would not involve the Company or its subsidiaries except tothe extent that any disposition of this matter results in ongoing undertakingsby Mirant Energy Trading as the recipient of the assets of Mirant AmericasEnergy Marketing under the Plan.

***Environmental Matters***

*EPAInformation Request.**  *InJanuary 2001, the Environmental Protection Agency (the “EPA”) issued arequest for information to Mirant concerning the implications under the EPA’snew source review (“NSR”) regulations promulgated under the Federal Clean AirAct (the “Clean Air Act”) of past repair and maintenance activities at the PotomacRiver plant in Virginia and the Chalk Point, Dickerson and Morgantown plants inMaryland. The requested information concerns the period of operations thatpredates the Company subsidiaries’ ownership and lease of those plants. Miranthas responded fully to this request. Under the APSA, Pepco is responsible forfines and penalties arising from any violation associated with operations priorto the Company subsidiaries’ acquisition or lease of the plants. If a violationis determined to have occurred at any of the plants, the Company subsidiaryowning or leasing the plant may be responsible for the cost of purchasing andinstalling emissions control equipment, the cost of which may be material. TheCompany’s subsidiaries owning or leasing the Chalk Point, Dickerson andMorgantown plants in Maryland will be installing a variety of emissions controlequipment on those plants to comply with the Maryland Healthy Air Act, but thatequipment will not include all of the emissions control equipment that could berequired if a violation of the EPA’s NSR regulations is determined to haveoccurred at one or more of those plants. If such a violation is determined tohave occurred after the Company’s subsidiaries acquired or leased the plantsor, if occurring prior to the acquisition or lease, is 

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determined to constitute acontinuing violation, the Company’s subsidiary owning or leasing the plant atissue could also be subject to fines and penalties by the state or federalgovernment for the period after its acquisition or lease of the plant, the costof which may be material, although applicable bankruptcy law may bar suchliability for periods prior to January 3, 2006, when the Plan becameeffective for the Company and its subsidiaries that own or lease these plants.

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

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MarylandDepartment of the Environment (the “MDE”), the DOJ and the EPA entered into,and filed for approval with the United States District Court for the EasternDistrict of Virginia, a proposed consent decree (the “Original Consent Decree”)that, if approved, would resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The Original Consent Decree requires Mirant Potomac River and MirantMid-Atlantic to (1) install pollution control equipment at the PotomacRiver plant in Virginia and at the Morgantown plant in Maryland leased byMirant Mid-Atlantic, (2) comply with declining system-wide ozone seasonNOx emissions caps from 2004 through 2010, (3) comply with system-wideannual NOx emissions caps starting in 2004, (4) meet seasonal systemaverage emissions rate targets in 2008 and (5) pay civil penalties andperform supplemental environmental projects in and around the Potomac Riverplant expected to achieve additional environmental benefits. Except for theinstallation of the controls planned for the Potomac River units and theinstallation of selective catalytic reduction (“SCR”) or equivalent technologyat Mirant Mid-Atlantic’s Morgantown units 1 and 2 in 2007 and 2008, theOriginal Consent Decree does not obligate the Company’s subsidiaries 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 Original ConsentDecree is subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree has not yet beenapproved and the parties have filed an amended proposed consent decree.

The owners/lessors under thelease-financing transactions covering the Morgantown and Dickerson plants (the “Owners/Lessors”)objected to the Original Consent Decree in the Bankruptcy Court and filed amotion to intervene in the district court action. As part of a resolution ofdisputed matters in the Chapter 11 proceedings, the Owners/Lessors agreednot to object to the Original Consent Decree, subject to certain terms setforth in the Plan and the order entered by the Bankruptcy Court on December 9,2005, approving the Plan.

On July 22, 2005, thedistrict court granted a motion filed by the City of Alexandria seeking tointervene in the district court action, although the district court imposed certainlimitations on the City of Alexandria’s participation in the proceedings. On September 23,2005, the City of Alexandria filed a motion seeking authority to file anamended complaint in the action seeking injunctive relief and civil penaltiesunder the Clean Air Act for alleged violations by Mirant Potomac River of itsVirginia Stationary Source Permit to Operate and the State of Virginia’s StateImplementation Plan. Based upon a computer modeling, described below in *Environmental Matters—Mirant Potomac River Downwash Study,*the City of 

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Alexandriaasserted that emissions from the Potomac River plant cause or contribute toexceedances of national ambient air quality standards (“NAAQS”) for SO2,nitrogen dioxide (“NO2”) and particulate matter. The City of Alexandria alsocontended based on its modeling analysis that the plant’s emissions of hydrogenchloride and hydrogen fluoride exceed Virginia state standards. Mirant PotomacRiver disputes the City of Alexandria’s allegations that it has violated theClean Air Act and Virginia law. On December 2, 2005, the district courtdenied the City of Alexandria’s motion seeking to file an amended complaint.

In early May 2006, theparties to the Original Consent Decree and Mirant Chalk Point, LLC (“MirantChalk Point”) entered into and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia an amended consent decree(the “Amended Consent Decree”) that, if approved, will resolve Mirant PotomacRiver’s potential liability for matters addressed in the NOVs previously issuedby the Virginia DEQ and the EPA. The district court and the Bankruptcy Courtmust approve the Amended Consent Decree for it to become effective. TheBankruptcy Court approved the Amended Consent Decree on June 1, 2006. Thedistrict court has not yet approved the Amended Consent Decree. The AmendedConsent Decree includes the requirements that were to be imposed under theterms of the Original Consent Decree as described above. It also defines therights and remedies of the parties in the event of a rejection in bankruptcy orother termination of any of the long-term leases under which MirantMid-Atlantic leases the coal units at the Dickerson and Morgantown plants. TheAmended Consent Decree provides that if Mirant Mid-Atlantic rejects orotherwise loses one or more of its leasehold interests in the Morgantown andDickerson plants and ceases to operate one or both of the plants, MirantMid-Atlantic, Mirant Chalk Point and/or Mirant Potomac will (i) providethe EPA, Virginia DEQ and the MDE with the written agreement of the new owneror operator of the affected plant or plants to be bound by the obligations ofthe Amended Consent Decree and (ii) where the affected plant is theMorgantown plant, offer to any and all prospective owners and/or operators ofthe Morgantown plant to pay for completion of engineering, construction andinstallation of the SCRs required by the Amended Consent Decree. If the newowner or operator of the affected plant or plants does not agree to be bound bythe obligations of the Amended Consent Decree, it requires Mirant Mid-Atlantic,Mirant Chalk Point and/or Mirant Potomac to install an alternative suite ofenvironmental controls at the plants they continue to own.

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

*MirantPotomac River Downwash Study.**  *OnSeptember 23, 2004, the Virginia DEQ and Mirant Potomac River entered intoan order by consent with respect to the Potomac River plant under which MirantPotomac River agreed to perform a modeling analysis to assess the potentialeffect of “downwash” from the plant (1) on ambient concentrations of SO2,NO2, carbon monoxide (“CO”) and particulate matter less than or equal to 10micrometers (“PM10”) for comparison to the applicable NAAQS and (2) onambient concentrations of mercury for comparison to Virginia Standards ofPerformance for Toxic Pollutants. Downwash is the effect that occurs whenaerodynamic turbulence induced by nearby structures causes emissions from anelevated source, such as a smokestack, to move rapidly toward the groundresulting in higher ground-level concentrations of emissions. If the modelinganalysis indicated that emissions from the facility may cause exceedances ofthe NAAQS for SO2, NO2, CO or PM10, or exceedances of mercury compared toVirginia Standards of Performance for Toxic Pollutants, the consent orderrequired Mirant Potomac River to submit to the Virginia DEQ a plan and scheduleto eliminate and prevent such exceedances on a timely basis. Upon approval bythe Virginia DEQ of the plan and schedule, the approved plan and schedule is tobe incorporated by reference into the consent order.

The computer modeling analysis predicted thatemissions from the Potomac River plant have the potential to contribute tolocalized, modeled instances of exceedances of the NAAQS for SO2, NO2 and 

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PM10 under certainconditions. Based on those results, the Virginia DEQ issued a directive toMirant Potomac River on August 19, 2005, to undertake immediately suchaction as was necessary to ensure protection of human health and theenvironment and eliminate NAAQS violations. On August 24, 2005, powerproduction at all five units of the Potomac River generating facility wastemporarily halted in response to the directive from the Virginia DEQ. On August 25, 2005, the District of ColumbiaPublic Service Commission filed an emergency petition and complaint with theFERC and the Department of Energy (the “DOE”) to prevent the shutdown of thePotomac River facility. The matter remains pending before the FERC and the DOE.On September 21, 2005, Mirant Potomac River commenced partial operation ofone unit of the plant. On December 20, 2005, due to a determination by theDOE that an emergency situation existed with respect to the reliability of thesupply of electricity to central Washington, D.C., the DOE ordered MirantPotomac River to generate electricity at the Potomac River generating facility,as requested by Pennsylvania-New Jersey-Maryland Interconnection, LLC (“PJM”),during any period in which one or both of the transmission lines serving thecentral Washington, D.C. area are out of service due to a planned or unplannedoutage. In addition, the DOE ordered Mirant Potomac River, at all other times,for electric reliability purposes, to keep as many units in operation aspossible and to reduce the start-up time of units not in operation withoutcontributing to any NAAQS exceedances. The DOE required Mirant Potomac River tosubmit a plan, on or before December 30, 2005, that met theserequirements. The DOE advised that it would consider Mirant Potomac River’splan in consultation with the EPA. The order further provides that MirantPotomac River and its customers should agree to mutually satisfactory terms forany costs incurred by it under this order or just and reasonable terms shall beestablished by a supplemental order. Certain parties filed for rehearing of theDOE order, and on February 17, 2006, the DOE issued an order grantingrehearing solely for purposes of considering further the rehearing requests.Mirant Potomac River submitted an operating plan in accordance with the order.On January 4, 2006, the DOE issued an interim response to Mirant PotomacRiver’s operating plan authorizing operation of the units of the Potomac Rivergenerating facility on a reduced basis, but making it possible to bring theentire plant into service within approximately 28 hours when necessary forreliability purposes. The DOE’s order expires after November 30, 2006, butMirant Potomac River expects it will be able to continue to operate these unitsafter that expiration.

In a letter received December 30,2005, the EPA invited Mirant Potomac River and the Virginia DEQ to work withthe EPA to ensure that Mirant Potomac River’s operating plan submitted to theDOE adequately addresses NAAQS issues. The EPA also asserts in its letter thatMirant Potomac River did not immediately undertake action as directed by theVirginia DEQ’s August 19, 2005, letter and failed to comply with therequirements of the Virginia State Implementation Plan established by thatletter. Mirant Potomac River received a second letter from the EPA on December 30,2005, requiring Mirant to provide certain requested information as part of anEPA investigation to determine the Clean Air Act compliance status of thePotomac River generating facility. On January 9, 2006, the FERC issued anorder directing PJM and Pepco to file a long-term plan to maintain adequatereliability in the Washington D.C. area and surrounding region and a plan toprovide adequate reliability pending implementation of this long-term plan. On February 8,2006, PJM and Pepco filed their proposed reliability plans.

On June 1, 2006, Mirant Potomac River and the EPAexecuted an Administrative Compliance Order by Consent (the “ACO”) to resolvethe EPA’s allegations that Mirant Potomac River violated the Clean Air Act bynot immediately shutting down all units at the Potomac River facility uponreceipt of the Virginia DEQ’s August 19, 2005, letter and to assure anacceptable level of reliability to the District of Columbia. The ACO (i) specifiescertain operating scenarios and SO2 emissions limits for the Potomac Riverfacility, which scenarios and limits take into account whether one or both ofthe 230kV transmission lines serving Washington, D.C. are out of service; (ii) requiresthe operation of trona injection units to reduce SO2 emissions; and (iii) requiresMirant Potomac River to undertake a model evaluation study to predict ambientair quality impacts from the facility’s operations. In accordance with thespecified operating scenarios, the ACO permits the facility to operate using adaily predictive modeling protocol. 

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This protocol allows thefacility to schedule operations based on whether computer modeling predicts aNAAQS exceedance, based on weather and certain operating parameters. Also, analarm system and six ambient SO2 monitors in various sites near the facilitysignal potential exceedances of the NAAQS. Mirant Potomac River reports data,including modeled predictions and actual readings, to the EPA and the VirginiaDEQ. On June 2, 2006, the DOE issued a letter modifying its January 6,2006, order to direct Mirant Potomac River to comply with the ACO in order toensure adequate electric reliability to the District of Columbia. MirantPotomac River is operating the Potomac River facility in accordance with theACO and has been able to operate all five units of the facility most of thetime under the ACO.

*Cityof Alexandria Nuisance Suit.*   On October 7,2005, the City of Alexandria filed a suit against Mirant Potomac River andMirant Mid-Atlantic in the Circuit Court for the City of Alexandria. The suitasserts nuisance claims, alleging that the Potomac River plant’s emissions ofcoal dust, flyash, NOx, SO2, particulate matter, hydrogen chloride, hydrogenfluoride, mercury and oil pose a health risk to the surrounding community andharm property owned by the City. The City seeks injunctive relief, damages andattorneys’ fees. On February 17, 2006, the City amended its complaint toadd additional allegations in support of its nuisance claims relating to noiseand lighting, interruption of traffic flow by trains delivering coal to thePotomac River plant, particulate matter from the transport and storage of coaland flyash, and potential coal leachate into the soil and groundwater from thecoal pile.

*SuitRegarding Chalk Point Emissions.**  *Byletter dated June 15, 2006, four environmental advocacy organizations—EnvironmentalIntegrity Project- Chesapeake Climate Action Network- Patuxent Riverkeeper andEnvironment Maryland Research and Policy Center—notified Mirant and MirantMid-Atlantic that they intended to file suit alleging that Mirant Chalk Pointhad violated the opacity limits set by the permits for Chalk Point unit 3and unit 4 during thousands of six minute time intervals betweenJanuary 2002 and March 2006. The letter indicated that theorganizations intend to file suit to enjoin the violations alleged, to obtaincivil penalties for past noncompliance to the extent that liability for theseviolations was not discharged by the bankruptcy of Mirant Chalk Point, and torecover attorneys’ fees. On August 3, 2006, Mirant, Mirant Mid-Atlantic,and Mirant Chalk Point filed a complaint in the Bankruptcy Court seeking aninjunction barring the four organizations from filing suit as threatened in theJune 15, 2006, notice on the grounds that the notice and any claim forcivil penalties or other monetary relief for alleged violations occurringbefore January 3, 2006, violated the discharge of claims and causes ofaction granted Mirant Chalk Point under the Plan. On August 14, 2006, theBankruptcy Court entered an order agreed to by the parties enjoining the fourorganizations from seeking monetary damages for any alleged violationsoccurring on or before January 3, 2006. As part of that order, theorganizations agreed not to file a complaint initiating litigation concerningthe alleged violations until August 30, 2006.

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

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On August 30, 2006, the four environmentalorganizations filed suit in the United States District Court for the Districtof Maryland against Mirant, Mirant Mid-Atlantic, and Mirant Chalk Pointasserting that emissions from Chalk Point units 3 and 4 had violatedopacity limits set under the Clean Air Act and state law on numerous occasionssince January 4, 2006. The plaintiffs seek an injunction prohibitingfurther violations by Chalk Point units 3 and 4 of the Clean Air Act,civil penalties of up to $32,500 for each violation of the Clean Air Act,additional civil penalties for mitigation projects, and attorneys’ fees. On September 22,2006, the Mirant defendants filed a motion to dismiss, arguing that under theClean Air Act the MDE’s prosecution of the same alleged violations in theMaryland state court proceeding and their resolution through the Consent Decreebarred the plaintiffs’ suit.

*NewYork State Administrative Claim.*   On January 24,2006, the State of New York and the NYSDEC filed a notice of administrativeclaims in the Mirant Debtors’ Chapter 11 proceedings asserting a claim seekingto require the Mirant Debtors to provide funding to the Company’s subsidiariesowning generating facilities in New York to satisfy certain specifiedenvironmental compliance obligations. The State of New York alleges that duringthe pendency of the Chapter 11 proceedings the Mirant Debtors that have emergedfrom bankruptcy made decisions on behalf of the Company’s subsidiaries owninggenerating facilities in New York and did not appropriately maintain thecorporate separateness between themselves and those subsidiaries. The Companydisputes those allegations. The State of New York cites various existingoutstanding matters between the State and the Company’s subsidiaries owninggenerating facilities in New York related to compliance with environmental lawsand regulations, most of which are not material. The most significantcompliance obligation identified by the State of New York in its notice ofadministrative claim relates to a consent decree entered into on June 11,2003 (the “2003 Consent Decree”), by Mirant New York and Mirant Lovett with theState of New York to resolve issues related to NSR requirements under the CleanAir Act related to the Lovett plant. Under the 2003 Consent Decree, MirantLovett is required to make an election to install certain environmentalcontrols on units 5 and 4 of the Lovett facility or shut down those unitsby 2007 to 2008, respectively. The State of New York notes in its notice ofadministrative claim that the cost of implementing such environmental controlscould exceed $200 million. On October 19, 2006, Mirant Lovettnotified the New York Public Service Commission and the NYISO of its intent todiscontinue operation of unit 5 of the Lovett facility in April 2007in accordance with the requirements of the 2003 Consent Decree. If MirantLovett is able to agree with the State of New York and the NYSDEC on alternativecontrol technologies that would allow unit 5 to remain in operation past April 30,2007, then Mirant Lovett may rescind the notice of its intent to discontinueoperations at unit 5. The State of New York and the NYSDEC have executed astipulated order with the Company, its New York subsidiaries and the otherMirant Debtors to stay resolution of this administrative claim. That stipulatedorder was approved by the Bankruptcy Court on February 23, 2006.

*Riverkeeper Suit AgainstMirant Lovett.**  *On March 11,2005, Riverkeeper, Inc. filed suit against Mirant Lovett in the UnitedStates District Court for the Southern District of New York under the 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 violatesMirant 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 violation, and to awardthe plaintiff attorney’s 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.

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***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 resultedin the zoning status of Mirant Potomac River’s generating plant being changedfrom “noncomplying use” to “nonconforming use subject to abatement.” Under thenonconforming use status, unless Mirant Potomac River applies for and isgranted a special use permit for the plant during the seven-year abatementperiod, the operation of the plant must be terminated within a seven-yearperiod, and no alterations that directly prolong the life of the plant will bepermitted during the seven-year period. If Mirant Potomac River were to applyfor and receive a special use permit for the plant, the City Council wouldlikely impose various conditions and stipulations as to the permitted use ofthe plant and seek to limit the period for which it could continue to operate.

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

On January 18, 2005,Mirant Potomac River and Mirant Mid-Atlantic filed a complaint against the Cityof Alexandria and the City Council in the Circuit Court for the City ofAlexandria. The complaint sought to overturn the actions taken by the CityCouncil on December 18, 2004, changing the zoning status of Mirant PotomacRiver’s generating plant and approving revocation of the 1989 SUPs, on thegrounds that those actions violated federal, state and city laws. The complaintasserted, among other things, that the actions taken by the City Councilconstituted unlawful spot zoning, were arbitrary and capricious, constituted anunlawful attempt by the City Council to regulate emissions from the plant, andviolated Mirant Potomac River’s due process rights. Mirant Potomac River andMirant Mid-Atlantic requested the court to enjoin the City of Alexandria andthe City Council from taking any enforcement action against Mirant PotomacRiver or from requiring it to obtain a special use permit for the continuedoperation of its generating plant. On January 18, 2006, the court issuedan oral ruling following a trial that the City of Alexandria acted unreasonablyand arbitrarily in changing the zoning status of Mirant Potomac River’sgenerating plant and in revoking the 1989 SUPs. On February 24, 2006, thecourt entered judgment in favor of Mirant Potomac River and Mirant Mid-Atlanticdeclaring the change in the zoning status of Mirant Potomac River’s generatingplant adopted December 18, 2004, to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. The City of Alexandria filed a petitionwith the Virginia Supreme Court seeking to appeal this judgment, and on September 11,2006, the Virginia Supreme Court agreed to hear the appeal.

***Pepco Assertion of Breach of Local Area SupportAgreement***

Following the shutdown of the Potomac River plant on August 24,2005, Mirant Potomac River notified Pepco on August 30, 2005, that itconsidered the circumstances resulting in the shutdown of the plant toconstitute a force majeure event under the Local Area Support Agreement dated December 19,2000, between Pepco and Mirant Potomac River. That agreement imposesobligations upon Mirant Potomac River to dispatch the Potomac River plant undercertain conditions, to give Pepco several years advance notice of anyindefinite or permanent shutdown of the plant and to pay all or a portion ofcertain 

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costs incurred by Pepcofor transmission additions or upgrades when an indefinite or permanent shutdownof the plant occurs prior to December 19, 2010. On September 13,2005, Pepco notified Mirant Potomac River that it considers Mirant PotomacRiver’s shutdown of the plant to be a material breach of the Local Area SupportAgreement that is not excused under the force majeure provisions of theagreement. Pepco contends that Mirant Potomac River’s actions entitle Pepco torecover as damages the cost of constructing additional transmission facilities.Pepco, on January 24, 2006, filed a notice of administrative claims in thebankruptcy proceedings asserting that Mirant Potomac River’s shutdown of thePotomac River plant causes Mirant Potomac River to be liable for the cost ofsuch transmission facilities, which cost it estimates to be in excess of $70 million.Mirant Potomac River disputes Pepco’s interpretation of the agreement. Theoutcome of this matter cannot be determined at this time.

If it is approved by a finalorder of the Bankruptcy Court, the Settlement Agreement entered into on May 30,2006, by the Mirant Settling Parties and the Pepco Settling Parties wouldresolve all claims asserted by Pepco against Mirant Potomac River arising outof the suspension of operations of the Potomac River plant in August 2005.On August 9, 2006, the Bankruptcy Court entered an order approving theSettlement Agreement, but certain holders of unsecured claims in the bankruptcyproceedings have appealed that order, and the order has not yet become a finalorder. Under the Settlement Agreement, Pepco would release all claims it hasasserted against Mirant Potomac River related to the shutdown of the plant inreturn for the claim Pepco receives in the Mirant bankruptcy proceeding.

***New York Tax Proceedings***

The Company’s subsidiaries that own the Bowline andLovett generating plants in New York are the petitioners in various proceedings(“Tax Certiorari Proceedings”) initially brought in the New York state courtschallenging the assessed value of those generating plants determined by theirrespective local taxing authorities. Mirant Bowline has challenged the assessedvalue of the Bowline generating facility and the resulting local taxassessments for tax years 1995 through 2006. Mirant Bowline succeeded to rightsheld by Orange & Rockland for the tax years prior to its acquisitionof the Bowline Plant in 1999 under its agreement with Orange &Rockland for the purchase of that plant. Mirant Lovett has initiatedproceedings challenging the assessed value of the Lovett facility for each ofthe years 2000 through 2006. If the Tax Certiorari Proceedings result in areduction of the assessed value of the generating facility at issue in eachproceeding, the New York Debtor owning the facility would be entitled to arefund with interest of any excess taxes paid for those tax years.

On September 30, 2003, the Mirant Debtors filed amotion (the “Tax Determination Motion”) with the Bankruptcy Court requestingthat it determine what the property tax liability should have been for theBowline generating facility in each of the years 1995 through 2003 and for theLovett generating facility in each of the years 2000 through 2003. The basesfor the relief requested in the Tax Determination Motion on behalf of MirantBowline and Mirant Lovett were that the assessed values of the generatingfacilities made by the relevant taxing authorities had no justifiable basis andwere far in excess of their actual value. The local taxing authorities haveopposed the Tax Determination Motion, arguing that the Bankruptcy Court eitherlacks jurisdiction over the matters addressed by the Tax Determination Motionor should abstain from addressing those issues so that they can be addressed bythe state courts in which the Tax Certiorari Proceedings described in thepreceding paragraph were originally filed. On December 10, 2003, theBankruptcy Court ruled that it would retain joint jurisdiction with the NewYork state courts over the issues raised by the Tax Certiorari Proceedings andthe Tax Determination Motion.

Collectively, Mirant Bowline and Mirant Lovett havenot paid approximately $58 million assessed by local taxing authorities onthe Bowline and Lovett generating facilities for 2003, which fell due on September 30,2003, and January 30, 2004, approximately $53 million assessed bylocal taxing authorities on the generating facilities for 2004 that fell due onSeptember 30, 2004, and January 30, 2005, 

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approximately $59 millionassessed by local taxing authorities on the generating facilities for 2005 thatfell due on September 30, 2005, and January 30, 2006, and $40 millionassessed by local taxing authorities on the generating facilities for 2006 thatfell due on September 30, 2006, in order to preserve their respectiverights to offset the overpayments of taxes made in earlier years against thesums payable on account of current taxes. The failure to pay the taxes due on September 30,2003, January 30, 2004, September 30, 2004, January 30, 2005, September 30,2005, January 30, 2006, and September 30, 2006, could subject MirantBowline and Mirant Lovett to additional penalties and interest.

On June 23, 2006, the Bankruptcy Court entered anorder indicating that it would determine the disputed property tax liabilitiesin response to the Tax Determination Motion if the New York state court inwhich the Tax Certiorari Proceedings are pending had not issued a ruling by October 21,2006. On August 11, 2006, and August 28, 2006, the New York statecourt issued decisions addressing Mirant Bowline’s challenges to the assessedvalues of the Bowline facility for the years 1995 to 2003 and Mirant Lovett’schallenges to the assessed values of the Lovett facility for the years 2000 to2003. Except for 1996, where it found that Mirant Bowline had failed to perfectits challenge to the assessed value of the Bowline facility, the New York statecourt concluded that the value of the Bowline facility and the Lovett facilityin each year was substantially less than the assessed value set by the taxingauthorities. The Company estimates that the decisions rendered by the New Yorkstate court with respect to the tax challenges asserted by Mirant Bowline andMirant Lovett will result in refunds that with interest will cover the majorityof the unpaid taxes for the Bowline and Lovett facilities, taking into accountthe reduction in those unpaid taxes that would occur under the decisions.Mirant Bowline and Mirant Lovett have appealed the decisions of the New Yorkstate court, and the relevant taxing authorities have cross-appealed.

On October 3, 2006,the County of Rockland, New York, filed a motion with the Bankruptcy Courtasking it to compel Mirant Bowline and Mirant Lovett to pay the real propertytaxes owed for 2003 through 2006 based upon the values of the Bowline andLovett facilities for 2003 determined by the New York state court. The Countyof Rockland asserts that the New York state court’s determination of the valueof those facilities for 2003 should also fix their assessed values for thesubsequent three years under section 727 of New York Real Property TaxLaw. The County asserts that the unpaid taxes total $111 million, withpenalties and interest. On October 5, 2006, Mirant, Mirant New York,Mirant Bowline and Mirant Lovett filed a complaint with the Bankruptcy Courtrequesting that it determine the real property taxes owed by Mirant Bowline andMirant Lovett for 2004 through 2006, that any refunds owed to Mirant Bowlineand Mirant Lovett should be treated as payments of or set off against theunpaid taxes, and that the penalties and interest potentially owed on theunpaid taxes should be reduced or eliminated. The Mirant plaintiffs argue thatthe pending appeals of the rulings entered by the New York state court andexceptions set out in section 727 of New York Real Property Tax Law causethe rulings by the New York state court not to be determinative of the valuesof the plants for any year after 2003.

***Other Legal Matters***

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

***Other Contingencies***

*SwingingBridge.*   On May 5,2005, Mirant NY-Gen discovered a sinkhole at its Swinging Bridge dam,located in Sullivan County, New York. In response, Mirant NY-Gen filledthis sinkhole, inspected the dam’s penstock and slopes for damage, drew downthe lake level, and cleaned the diversion tunnel. Mirant NY-Gen’s analysisindicates that the most probable cause of the sinkhole was erosion of soilcomprising the dam from water flow through a hole in the penstock. The dam iscurrently stabilized, and Mirant NY-Gen is performing additionalremediation repairs. Mirant NY-Gen currently expects to incur 

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additionalcosts to repair the dam that could be material and to recover insuranceproceeds for a portion of these repair costs. By letter dated June 14,2006, the FERC authorized Mirant NY-Gen to proceed with its remediationplan for the sinkhole. The FERC has also concurred with the results of Mirant NY-Gen’sflood study for its New York Swinging Bridge, Rio and Mongaup generationfacilities, which study concluded that no additional remediation is required.The Bankruptcy Court authorized Mirant NY-Gen to proceed withimplementation of the remediation plan on June 29, 2006. The currentestimated cost to remediate the dam at Swinging Bridge is approximately $23 millionof which approximately $17 million had been incurred through September 30,2006. The Bankruptcy Court has approved adebtor-in-possession loan to Mirant NY-Gen from Mirant Americas underwhich Mirant Americas, subject to certain conditions, would lend up to $9.5 millionto Mirant NY-Gen to provide funding for the repairs on the Swinging Bridgedam.

*CaliforniaSettlement.**  *TheCalifornia Settlement described above in *California and WesternPower Markets—FERC Refund Proceedings*included a provision thateither (1) the partially constructed Contra Costa 8 project, which isa planned 530 MW combined cycle generating facility, and related equipment(collectively, the “CC8 Assets”) will be transferred to PG&E or (2) PG&Ewill receive additional alternative consideration of $70 million (the “CC8Alternative Consideration”). To fund the CC8 Alternative Consideration,PG&E received an allowed, unsecured claim in the bankruptcy proceedingsagainst Mirant Delta, LLC (“Mirant Delta”) that resulted in a distributionto PG&E of cash and Mirant common stock with a value of approximately $70 million.PG&E was required to liquidate the common stock received as part of thatdistribution and place the net resulting amount plus any cash received into anescrow account.

The California Settlement provides that if thetransfer of the CC8 Assets to PG&E does not occur on or before June 30,2008, then the CC8 Alternative Consideration is to be paid to PG&E and theMirant Settling Parties will retain the CC8 Assets. If PG&E closes onits acquisition of the CC8 Assets, the funds in the escrow account will bepaid to Mirant Delta. The transfer is expected to be completed before the endof 2006. In the period that the CC8 Assets are transferred to PG&E andthe $70 million escrow account is paid to Mirant Delta, the Companyexpects to recognize a gain for the amount by which the escrow account exceedsthe carrying amount of the CC8 Assets. The estimated amount of that gainis approximately $24 million and will be included in other income in theCompany’s consolidated statements of operations.

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**Item 2.**                        *Management’s Discussion and Analysis of Results of Operations andFinancial Condition*

The following discussionshould be read in conjunction with our accompanying unaudited condensedconsolidated and combined financial statements and the notes thereto, which areincluded elsewhere in this report*.*

***Overview***

We are a competitive energycompany that produces and sells electricity in the United States. We are anindirect wholly-owned subsidiary of Mirant Corporation (“Mirant”), whichemerged from Chapter 11 on January 3, 2006. Our operationsconsist of power generation facilities and our energy trading and marketingoperations. During the third quarter of 2006, Mirant commenced auctionprocesses to sell our Mirant Zeeland, LLC (“Zeeland”) (837 megawatts(“MW”) and Mirant Texas, LP (“Bosque”) (536 MW) natural gas-firedintermediate and peaking plants. These sales are expected to close by mid-2007.Our continuing business is approximately 10,700 MW located in highlyconcentrated markets that are characterized by low and declining reservemargins.

The sale of our Zeeland and Bosque plants is subjectto the terms of the Mirant North America, LLC (“Mirant North America”)indebtedness, including provision with respect to the mandatory prepaymentand/or reinvestment of the sale proceeds and the requirement to secure a creditrating affirmation.

During the third quarter of 2006, Mirant repurchased43 million shares of its common stock foran aggregate purchase price of approximately $1.23 billion. To payfor the shares tendered in the offer and related expenses, Mirant utilizedapproximately $315 million of cash on hand at Mirant Corporation andapproximately $915 million of distributions or repayments from itssubsidiaries, including approximately $175 million and $740 milliondistributed or repaid from us and Mirant Asia-Pacific Limited and itssubsidiaries, respectively.

Our gross margin for the three and nine months ended September 30,2006, was $621 million and $1.635 billion, respectively. Theseamounts included significant unrealized gains from hedging activities primarilydue to the decline in forward power prices from December 31, 2005 levels.Our realized gross margin for the three and nine months ended September 30,2006, was $405 million and $1.042 billion respectively, compared to$369 million and $714 million, respectively, for the same periods in2005.

Prior to 2006, we hedged a substantial portion of ourMirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) baseload coal-firedgeneration and our New England intermediate oil-fired generation throughover-the-counter transactions. As a result, we achieved a significant increasein our realized gross margin for the nine months ended September 30, 2006,as compared to the same period in 2005 because our generation was hedged athigher gross margins for this period than for the same period in 2005. Ourintermediate and peaking generation volumes generally were lower in the ninemonths ended September 30, 2006, than in the same period of 2005, dueprimarily to lower generation from our oil-fired units as a result of lowerpower prices combined with sharply higher oil prices in 2006.

In January 2006, Mirant Mid-Atlantic entered intofinancial swap transactions with a counterparty pursuant to which MirantMid-Atlantic economically hedged approximately 80%, 50% and 50% of its expectedon-peak coal-fired baseload generation for 2007, 2008 and 2009, respectively.The financial swap transactions are senior unsecured obligations of MirantMid-Atlantic and do not require the posting of cash collateral either forinitial margin or for securing exposure due to changes in power prices.

Cash flows from operationsprovided $249 million of cash for the nine months ended September 30,2006, which was comprised of cash provided by continuing operations of $222 millionand cash provided by discontinued operations of $27 million. Included incash provided from continuing operations was $744 million paid forbankruptcy claims and interest on bankruptcy claims. Our cash flows fromfinancing 

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activitiesreflect our exit financing as part of our bankruptcy emergence and the firstquarter payment of approximately $990 million of bankruptcy claims relatedto outstanding indebtedness.

**Results ofOperations**

Our continuing operations consist primarily of powergeneration (approximately 10,700 MW of generating capacity) and energytrading and marketing activities managed as a combined business. In the thirdquarter of 2006, Mirant announced the planned sales of our Zeeland and Bosquenatural gas-fired plants. The results of operations related to the planneddispositions have been reclassified to discontinued operations in the unauditedcondensed consolidated and combined statements of operations for each period.

Ouroperating revenues and expenses from affiliates and nonaffiliates aggregated byclassification are as follows (in millions):

| ** **                                  | ** ** | **Three Months  Ended  September 30,** | ** ** | **Increase/** | ** ** | **Nine Months  Ended  September 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                                  | ** ** | **2006**                                         | ** ** | **2005**      | ** ** | **(Decrease)**                                  | ** ** | **2006**      | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Gross margin                                |       |                                             |       |          |       |                                            |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                                   |       | $                                                | (32        | )             | $          | (11                                             | )          |          | $          | (21 | ) |   | $ | (54 | ) | $ | (20 | ) |   | $ | (34 | ) |   |
| Nonaffiliate                                |       | 653                                              |       | (91           | )          |                                            | 744        |          |       | 1,689 |   | 327 |   |   | 1,362 |   |   |
| Total gross  margin                         |       | 621                                              |       | (102          | )          |                                            | 723        |          |       | 1,635 |   | 307 |   |   | 1,328 |   |   |
| Operating expenses:                         |       |                                             |       |          |       |                                            |       |          |       |   |   |   |   |   |   |   |   |
| Operations and  maintenance                 |       |                                             |       |          |       |                                            |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                                   |       | 72                                               |       | 68            |       |                                            | 4          |          |       | 210 |   | 213 |   |   | (3 | ) |   |
| Nonaffiliate                                |       | 65                                               |       | 67            |       |                                            | (2         | )             |       | 213 |   | 201 |   |   | 12 |   |   |
| Depreciation and  amortization              |       | 32                                               |       | 28            |       |                                            | 4          |          |       | 91 |   | 85 |   |   | 6 |   |   |
| Generation  facilities rent                 |       | 24                                               |       | 24            |       |                                            | —     |          |       | 72 |   | 75 |   |   | (3 | ) |   |
| Loss (gain) on  sales of assets, net        |       | (2                                               | )          | 2             |       |                                            | (4         | )             |       | (8 | ) | 1 |   |   | (9 | ) |   |
| Impairment loss                             |       | 120                                              |       | —        |       |                                            | 120        |          |       | 120 |   | — |   |   | 120 |   |   |
| Total operating  expenses                   |       | 311                                              |       | 189           |       |                                            | 122        |          |       | 698 |   | 575 |   |   | 123 |   |   |
| Operating income                            |       | 310                                              |       | (291          | )          |                                            | 601        |          |       | 937 |   | (268 | ) |   | 1,205 |   |   |
| Other expense (income),  net                |       |                                             |       |          |       |                                            |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                                   |       | —                                           |       | 7             |       |                                            | (7         | )             |       | (1 | ) | 13 |   |   | (14 | ) |   |
| Nonaffiliate                                |       | 46                                               |       | 617           |       |                                            | (571       | )             |       | 171 |   | 616 |   |   | (445 | ) |   |
| Reorganization  items, net                  |       | (1                                               | )          | 46            |       |                                            | (47        | )             |       | (2 | ) | 53 |   |   | (55 | ) |   |
| Provision  (benefit) for income taxes       |       | 1                                                |       | 5             |       |                                            | (4         | )             |       | 3 |   | 10 |   |   | (7 | ) |   |
| Income (Loss)  from Continuing Operations   |       | 264                                              |       | (966          | )          |                                            | 1,230      |          |       | 766 |   | (960 | ) |   | 1,726 |   |   |
| Income (Loss)  from Discontinued Operations |       | (59                                              | )          | 9             |       |                                            | (68        | )             |       | (57 | ) | 4 |   |   | (61 | ) |   |
| Net Income (Loss)                           |       | $                                                | 205        |          | $          | (957                                            | )          |          | $          | 1,162 |   |   | $ | 709 |   | $ | (956 | ) |   | $ | 1,665 |   |   |

 

In the tables below, theMid-Atlantic region includes our Chalk Point, Morgantown, Dickerson and PotomacRiver facilities. The Northeast region includes our Bowline, Canal, Lovett,Kendall, Hillburn, Shoemaker, Grahamsville, Martha’s Vineyard, Swinging Bridge,Rio, Mongaup, and Wyman facilities. The California region includes ourPittsburg, Contra Costa and Potrero facilities. Other includes proprietarytrading and the elimination of intercompany transactions between MirantAmericas Generation subsidiaries.

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*OperatingStatistics*

Thefollowing table summarizes capacity factor (average percentage of full capacityused over a specific period) by region for the three and nine months ended September 30,2006 and 2005:

| ** **   | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------|------------|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **   | ** ** | **2006**                                             | ** ** | **2005**   | ** ** | **Decrease**                                        | ** ** | **2006**   | ** ** | **2005** | ** ** | **Decrease** | ** ** |
| Mid-Atlantic |       |                                                 | 44         | %          |       |                                                | 51         | %          |       |   | (7 | )% |   |   | 36 | % |   |   | 40 | % |   |   | (4 | )% |   |
| Northeast    |       |                                                 | 22         | %          |       |                                                | 40         | %          |       |   | (18 | )% |   |   | 18 | % |   |   | 34 | % |   |   | (16 | )% |   |
| California   |       |                                                 | 8          | %          |       |                                                | 13         | %          |       |   | (5 | )% |   |   | 6 | % |   |   | 7 | % |   |   | (1 | )% |   |

 

Thefollowing table summarizes power generation volumes by region for the three andnine months ended September 30, 2006 and 2005 (in gigawatt hours):

| ** **   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **   | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **Decrease** | ** ** | **2006** | ** ** | **2005** | ** ** | **Decrease** | ** ** |
| Mid-Atlantic |       | 5,066                                                |       | 5,922                                               |       |   | (856 | ) |   | 12,385 |   | 13,964 |   |   | (1,579 | ) |   |
| Northeast    |       | 1,476                                                |       | 2,713                                               |       |   | (1,237 | ) |   | 3,640 |   | 6,843 |   |   | (3,203 | ) |   |
| California   |       | 414                                                  |       | 671                                                 |       |   | (257 | ) |   | 943 |   | 1,147 |   |   | (204 | ) |   |
| Total        |       | 6,956                                                |       | 9,306                                               |       |   | (2,350 | ) |   | 16,968 |   | 21,954 |   |   | (4,986 | ) |   |

 

*Gross Margin*

Thefollowing tables detail gross margin by realized and unrealized margin for thethree and nine months ended September 30, 2006 and 2005 (in millions):

| ** **   | ** ** | **Three Months Ended  September 30, 2006** | ** ** | **Three Months Ended  September 30, 2005** | ** ** |
|--------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **   | ** ** | **Realized**                                                   | ** ** | **Unrealized**                                                 | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic |       |                                                           | $          | 267                                                            |       |   |   | $ | 186 |   |   | $ | 453 |   |   | $ | 215 |   |   |   | $ | (273 | ) |   | $ | (58 | ) |
| Northeast    |       |                                                           | 77         |                                                           |       |   | 8 |   |   | 85 |   |   | 82 |   |   |   | (194 | ) |   | (112 | ) |
| California   |       |                                                           | 40         |                                                           |       |   | 1 |   |   | 41 |   |   | 30 |   |   |   | (3 | ) |   | 27 |   |
| Other        |       |                                                           | 21         |                                                           |       |   | 21 |   |   | 42 |   |   | 42 |   |   |   | (1 | ) |   | 41 |   |
| Total        |       |                                                           | $          | 405                                                            |       |   |   | $ | 216 |   |   | $ | 621 |   |   | $ | 369 |   |   |   | $ | (471 | ) |   | $ | (102 | ) |

 

| ** **   | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|--------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **   | ** ** | **Realized**                                                  | ** ** | **Unrealized**                                                | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic |       |                                                          | $          | 597                                                           |       |   |   | $ | 511 |   |   | $ | 1,108 |   |   | $ | 457 |   |   |   | $ | (263 | ) |   | $ | 194 |   |
| Northeast    |       |                                                          | 292        |                                                          |       |   | 41 |   |   | 333 |   |   | 189 |   |   |   | (181 | ) |   | 8 |   |
| California   |       |                                                          | 93         |                                                          |       |   | 2 |   |   | 95 |   |   | 79 |   |   |   | (2 | ) |   | 77 |   |
| Other        |       |                                                          | 60         |                                                          |       |   | 39 |   |   | 99 |   |   | (11 | ) |   |   | 39 |   |   | 28 |   |
| Total        |       |                                                          | $          | 1,042                                                         |       |   |   | $ | 593 |   |   | $ | 1,635 |   |   | $ | 714 |   |   |   | $ | (407 | ) |   | $ | 307 |   |

 

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*Three Months Ended September 30,2006 versus September 30, 2005*

Ourgross margin increased by $723 million for the three months ended September 30,2006, compared to the same period for 2005 and is detailed as follows (inmillions):

| ** **                               | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                 | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                               | $          | 239 |   |   |   | $ | 45 |   |   |   | $ | 12 |   |   |   | $ | 21 |   |   | $ | 317 |   |
| Contracted and  capacity(2)              |       |                                                               | 12         |   |   |   | 14 |   |   |   | 30 |   |   |   | — |   |   | 56 |   |
| Incremental  realized value of hedges(3) |       |                                                               | 16         |   |   |   | 18 |   |   |   | (2 | ) |   |   | — |   |   | 32 |   |
| Unrealized gains  (losses)(4)            |       |                                                               | 186        |   |   |   | 8 |   |   |   | 1 |   |   |   | 21 |   |   | 216 |   |
| Total                                    |       |                                                               | $          | 453 |   |   |   | $ | 85 |   |   |   | $ | 41 |   |   |   | $ | 42 |   |   | $ | 621 |   |

 

| ** **                               | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                 | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                               | $          | 368 |   |   |   | $ | 96 |   |   |   | $ | (1 | ) |   |   | $ | 50 |   |   | $ | 513 |   |
| Contracted and  capacity(2)              |       |                                                               | 21         |   |   |   | 11 |   |   |   | 30 |   |   |   | (8 | ) |   | 54 |   |
| Incremental  realized value of hedges(3) |       |                                                               | (174       | ) |   |   | (25 | ) |   |   | 1 |   |   |   | — |   |   | (198 | ) |
| Unrealized gains  (losses)(4)            |       |                                                               | (273       | ) |   |   | (194 | ) |   |   | (3 | ) |   |   | (1 | ) |   | (471 | ) |
| Total                                    |       |                                                               | $          | (58 | ) |   |   | $ | (112 | ) |   |   | $ | 27 |   |   |   | $ | 41 |   |   | $ | (102 | ) |

 

| ** **                               | ** ** | **Three Months Ended September 30, 2006 vs. 2005** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                                    | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                                                  | $          | (129 | ) |   |   | $ | (51 | ) |   |   | $ | 13 |   |   |   | $ | (29 | ) |   | $ | (196 | ) |
| Contracted and  capacity(2)              |       |                                                                                  | (9         | ) |   |   | 3 |   |   |   | — |   |   |   | 8 |   |   | 2 |   |
| Incremental  realized value of hedges(3) |       |                                                                                  | 190        |   |   |   | 43 |   |   |   | (3 | ) |   |   | — |   |   | 230 |   |
| Unrealized gains  (losses)(4)            |       |                                                                                  | 459        |   |   |   | 202 |   |   |   | 4 |   |   |   | 22 |   |   | 687 |   |
| Total                                    |       |                                                                                  | $          | 511 |   |   |   | $ | 197 |   |   |   | $ | 14 |   |   |   | $ | 1 |   |   | $ | 723 |   |

----

(1)          Energy includes grossmargin from the generation of electricity, emissions allowances sales andpurchases, fuel sales, steam sales and our proprietary trading activities.

(2)          Contracted and capacityrelates to revenue received through reliability must run contracts (“RMR”) andother installed capacity mechanisms, revenues from ancillary services andrevenue from the Back-to-Back Agreement in 2005.

(3)          Incremental realized valueof hedges reflects the actual margin upon the settlement of our power and fuelhedging contracts.

(4)          Unrealized gains(losses) reflect the unrealized portion of our derivative hedging contracts.

Mid-Atlanticoperations gross margin increased by $511 million primarily due to thefollowing:

·       anincrease of $459 million related to hedging activities as a result of $186 millionof unrealized gains for the three months ended September 30, 2006,compared to unrealized losses of $273 million for the same period in 2005.Unrealized gains in 2006 are primarily due to the increased value associatedwith forward power contracts for future periods as a result of decreases inforward power prices in the period, partially offset by the settlement of powercontracts for which unrealized gains had previously been recorded. Unrealizedlosses for the third quarter of 2005 were primarily due to increases in powerprices as a result of increased gas prices;

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·       anincrease of $190 million in incremental realized value of hedges primarilyrelated to the settlement of power contracts at prices higher than marketprices for the period; and

·       adecrease of $129 million in energy primarily related to lower power pricesand lower generation volumes. Power prices were lower due to significantlylower gas prices in 2006 compared to the same period in 2005. Our baseload coalunits’ volumes decreased slightly and our 14% total decrease in generationvolumes was driven by significantly lower volumes generated by our oil-firedunits. A sharp decrease in power prices combined with average oil prices thatwere somewhat higher than in 2005, resulted in our oil-fired units not beingable to dispatch economically for most of the period.

Northeastoperations gross margin increased by $197 million primarily due to thefollowing:

·       anincrease of $202 million related to hedging activities as a result of $8 millionof unrealized gains for the three months ended September 30, 2006, ascompared to unrealized losses of $194 million for the same period in 2005.Unrealized losses for the third quarter of 2005 were primarily due to increasesin power prices as a result of increased gas prices;

·       anincrease of $43 million in incremental realized value of hedges primarilyrelated to the settlement of power contracts at higher prices than marketprices for the period, partially offset by less favorable results from thesettlement of fuel contracts compared to the prior period; and

·       adecrease of $51 million in energy, primarily related to lower generation volumes.Our 46% decrease in generation volumes was driven by significantly lowervolumes generated by our oil-fired units. A sharp decrease in power pricescombined with average oil prices that were slightly higher than in 2005,resulted in our oil-fired units not being able to dispatch economically formost of the period.

California operations gross margin increased by $14 millionin energy primarily due to several days of extreme heat in July 2006,which allowed us to earn incremental gross margin on units that were under atolling agreement for the same period in 2005.

Other gross marginincreased by $1 million primarily due to the following:

·       adecrease of $29 million in energy primarily due to a decrease of $12 millionin realized margin from our proprietary trading activities and a $19 millionlower of cost or market adjustment on our oil inventory during the quarter dueto a decline in oil prices;

·       anincrease of $8 million in contracted and capacity due to realized marginon the Back-to-Back Agreement in 2005. In 2006, the Back-to-Back Agreement wastransferred to Mirant Power Purchase, LLC (“Mirant Power Purchase”); and

·       anincrease of $22 million related to unrealized gains on our proprietarytrading activities. For the three months ended September 30, 2006, we hadunrealized gains of $21 million. For the same period in 2005, we hadunrealized gains related to the Back-to-Back Agreement of $63 million andunrealized losses of $64 million from our proprietary trading activities.

*Operating Expense, net*

Our operating expensesincreased by $122 million for the three months ended September 30,2006, compared to the same period in 2005 primarily due to the $120 millionwrite-down of the Bowline unit 3 suspended construction project. See Note Cfor further discussion of this impairment loss.

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*Other Expense, net*

Our other expense,net decreased by $578 million for the three months ended September 30,2006, compared to the same period in 2005 primarily due to the following:

·       interestexpense decreased by $559 million primarily due to the inclusion of $620 millionof interest on liabilities subject to compromise in 2005; and

·       other,net includes a gain on sale of investments of $13 million in 2006 relatedto the sale of a portion of our investment in InterContinental Exchange, Inc.We sold our remaining investment in InterContinental Exchange, Inc. in October 2006for approximately $41 million and will recognize a gain of approximately$40 million in the fourth quarter of 2006.

*ReorganizationItems, net*

Reorganization items, netof $46 million for the three months ended September 30, 2005,represented amounts that were recorded in the financial statements as a resultof the bankruptcy proceedings.

*DiscontinuedOperations*

During the third quarter of 2006, Mirant commencedauction processes to sell our Zeeland and Bosque intermediate and peakingnatural gas-fired plants. Accordingly, the results of operations related to theplanned sales were reclassified to income (loss) from discontinued operationsin our unaudited condensed consolidated statements of operations for allperiods presented.

For the three months ended September 30, 2006, wereported a loss from discontinued operations of $59 million, whichincludes the reclassification of the results of operations related to theplanned dispositions. Included in the loss from discontinued operations was animpairment loss of $71 million to write-down the Zeeland natural gas-firedasset to estimated fair value.

For the three months ended September 30, 2005, wereported income from discontinued operations of $9 million, which includesthe reclassification of the results of operations related to the planneddispositions.

See Note B foradditional information related to planned dispositions and discontinuedoperations.

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*Nine Months Ended September 30,2006 versus September 30, 2005*

Ourgross margin increased $1.328 billion for the nine months ended September 30,2006, compared to the same period for 2005 and is detailed as follows (inmillions):

| ** **                               | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                              | $          | 457 |   |   |   | $ | 151 |   |   |   | $ | 13 |   |   |   | $ | 60 |   |   | $ | 681 |   |
| Contracted and  capacity(2)              |       |                                                              | 31         |   |   |   | 32 |   |   |   | 82 |   |   |   | — |   |   | 145 |   |
| Incremental  realized value of hedges(3) |       |                                                              | 109        |   |   |   | 109 |   |   |   | (2 | ) |   |   | — |   |   | 216 |   |
| Unrealized gains  (losses)(4)            |       |                                                              | 511        |   |   |   | 41 |   |   |   | 2 |   |   |   | 39 |   |   | 593 |   |
| Total                                    |       |                                                              | $          | 1,108 |   |   |   | $ | 333 |   |   |   | $ | 95 |   |   |   | $ | 99 |   |   | $ | 1,635 |   |

 

| ** **                               | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                              | $          | 636 |   |   |   | $ | 177 |   |   |   | $ | (1 | ) |   |   | $ | 45 |   |   | $ | 857 |   |
| Contracted and  capacity(2)              |       |                                                              | 49         |   |   |   | 28 |   |   |   | 79 |   |   |   | (56 | ) |   | 100 |   |
| Incremental  realized value of hedges(3) |       |                                                              | (228       | ) |   |   | (16 | ) |   |   | 1 |   |   |   | — |   |   | (243 | ) |
| Unrealized gains  (losses)(4)            |       |                                                              | (263       | ) |   |   | (181 | ) |   |   | (2 | ) |   |   | 39 |   |   | (407 | ) |
| Total                                    |       |                                                              | $          | 194 |   |   |   | $ | 8 |   |   |   | $ | 77 |   |   |   | $ | 28 |   |   | $ | 307 |   |

 

| ** **                               | ** ** | **Nine Months Ended September 30, 2006 vs. 2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                                   | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                                                 | $          | (179 | ) |   |   | $ | (26 | ) |   |   | $ | 14 |   |   |   | $ | 15 |   |   | $ | (176 | ) |
| Contracted and  capacity(2)              |       |                                                                                 | (18        | ) |   |   | 4 |   |   |   | 3 |   |   |   | 56 |   |   | 45 |   |
| Incremental  realized value of hedges(3) |       |                                                                                 | 337        |   |   |   | 125 |   |   |   | (3 | ) |   |   | — |   |   | 459 |   |
| Unrealized gains  (losses)(4)            |       |                                                                                 | 774        |   |   |   | 222 |   |   |   | 4 |   |   |   | — |   |   | 1,000 |   |
| Total                                    |       |                                                                                 | $          | 914 |   |   |   | $ | 325 |   |   |   | $ | 18 |   |   |   | $ | 71 |   |   | $ | 1,328 |   |

----

(1)          Energy includes grossmargin from the generation of electricity, emissions allowances sales andpurchases, fuel sales, steam sales and our proprietary trading activities.

(2)          Contracted and capacityrelates to revenue received through reliability must run contracts (“RMR”) andother installed capacity mechanisms, revenues from ancillary services andrevenue from the Back-to-Back Agreement in 2005.

(3)          Incremental realizedvalue of hedges reflects the actual margin upon the settlement of our power andfuel hedging contracts.

(4)          Unrealized gains(losses) reflect the unrealized portion of our derivative hedging contracts.

Mid-Atlanticoperations gross margin increased by $914 million primarily due to thefollowing:

·       anincrease of $774 million related to hedging activities as a result of $511 millionof unrealized gains for the nine months ended September 30, 2006, comparedto unrealized losses of $263 million for the same period in 2005.Unrealized gains in 2006 are primarily due to the increased value associatedwith forward power contracts for future periods as a result of decreases inforward power prices in the period and the settlement of power contracts in2006 for which unrealized losses had been recognized in prior periods. In thenine months ended September 30, 2005, increases in power prices as aresult of increased gas prices were the primary driver for the unrealizedlosses for that period, partially offset by the settlement of power contractsfor which unrealized losses had previously been recognized and an increase inthe value of fuel hedges due to higher fuel prices;

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·       anincrease of $337 million in incremental realized value of hedges primarilyrelated to the settlement of power contracts at prices higher than marketprices for the period; and

·       adecrease of $179 million in energy primarily related to lower power pricesand lower generation volumes as well as increased expenses for sulfur dioxide (“SO2”) emissionsallowances. Power prices were lower due to significantly lower gas prices in2006 compared to the same period in 2005. Our baseload coal units’ volumes wererelatively unchanged and our 11% total decrease in generation volumes wasdriven by significantly lower volumes generated by our oil-fired units. Aslight decrease in power prices combined with average oil prices that weresharply higher than in 2005, resulted in our oil-fired units not being able todispatch economically for most of the period.

Northeastoperations gross margin increased by $325 million primarily due to thefollowing:

·       anincrease of $222 million related to hedging activities as a result of $41 millionof unrealized gains for the nine months ended September 30, 2006, ascompared to unrealized losses of $181 million for the same period in 2005.Unrealized losses for 2005 were primarily due to increases in power prices as aresult of increased gas prices, partially offset by an increase in the value offuel hedges due to higher fuel prices;

·       anincrease of $125 million in incremental realized value of hedges primarilyrelated to the settlement of power contracts at higher than market prices forthe period, compared to the settlement of power contracts at lower than marketprices in 2005, partially offset by less favorable results on fuel hedges; and

·       adecrease of $26 million in energy primarily related to lower generationvolumes. Our 47% decrease in generation volumes was driven by significantlylower volumes generated by our oil-fired units. A 12% decrease in power pricescombined with average oil prices that were 21% higher than in 2005, resulted inour oil-fired units not being able to dispatch economically for most of theperiod. This decrease was partially offset by a $38 million increase inintercompany sales of emissions allowances.

California operations gross margin increased by $18 millionprimarily due to several days of extreme heat in July 2006, which allowedus to earn incremental gross margin on units that were under a tollingagreement for the same period in 2005.

Other gross marginincreased $71 million and includes the following:

·       anincrease of $15 million in energy primarily consisting of 1) anincrease of $27 million in realized margin from our proprietary tradingactivities, which includes a $19 million lower of cost or marketadjustment on our oil inventory during the third quarter due to a decline inoil prices and 2) a decrease of $13 million due to the elimination ofintercompany emissions allowances transactions;

·       anincrease of $56 million in contracted and capacity due to realized marginon the Back-to-Back Agreement in 2005. In 2006, the Back-to-Back Agreement wastransferred to Mirant Power Purchase; and

·       unrealized gains for ourproprietary trading activities for the nine months ended Septmber 30, 2006,were $39 million. For the same period in 2005, we had unrealized gains of$101 million related to the Back-to-Back Agreement and unrealized lossesfrom our proprietary trading of $64 million.

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*Operating Expense,net*

Our operating expensesincreased by $123 million for the nine months ended September 30,2006, compared to the same period in 2005 primarily due to the $120 millionimpairment loss on the Bowline unit 3 suspended construction project. See Note Cfor further discussion regarding impairment losses.

*Other Expense, net*

Our other expense,net decreased by $459 million for the nine months ended September 30,2006, compared to the same period in 2005 primarily due to the following:

·       interestexpense decreased by $424 million primarily due to the inclusion of $667 millionof interest on liabilities subject to compromise in 2005; and

·       othernet includes a gain on sale of investments of $15 million related to thesale of a portion of our investment in InterContinental Exchange, Inc. Wesold our remaining investment in InterContinental Exchange, Inc. in October 2006and will recognize a gain of approximately $40 million during the fourthquarter of 2006.

*ReorganizationItems, net*

Reorganization items, netof $53 million for the nine months ended September 30, 2005,represented amounts that were recorded in the financial statements as a resultof the bankruptcy proceedings.

*DiscontinuedOperations*

During the third quarter of 2006, Mirant commencedauction processes to sell our Zeeland and Bosque intermediate and peakingnatural gas-fired plants. Accordingly, the results of operations related to theplanned sales were reclassified to income (loss) from discontinued operationsin our unaudited condensed consolidated statements of operations for allperiods presented.

For the nine months ended September 30, 2006, wereported a loss from discontinued operations of $57 million, whichincludes the reclassification of the results of operations related to theplanned dispositions. Included in the loss from discontinued operations is animpairment loss of $71 million to write-down the Zeeland natural gas-firedasset to estimated fair value.

For the nine months ended September 30, 2005, wereported income from discontinued operations of $4 million, which includesthe reclassification of the results of operations related to the planneddispositions.

See Note B foradditional information related to planned dispositions and discontinuedoperations.

**Financial Condition**

***Senior Notes and Senior Secured Credit Facilities***

On December 23, 2005,our subsidiary Mirant North America issued $850 million of 7.375% seniorunsecured notes due 2013 (the “Old Notes”). These notes were issued in aprivate placement and were not registered with the Securities and ExchangeCommission. The funds from this issuance initially were placed in escrow andwere released from escrow on January 3, 2006. On August 4, 2006,Mirant North America completed an exchange offer for the Old Notes, whereby$849.965 million of senior notes registered under the Securities Act (the “NewNotes”) were exchanged for an equal amount of the Old Notes. The terms of theNew Notes are identical in all material respects to the Old Notes, except thatthe New Notes are registered under the Securities Act and generally are notsubject to transfer restrictions or registration rights. On January 3,2006, Mirant North America also entered into an $800 million senior 

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securedrevolving credit facility and a $700 million senior secured term loan. Atthe closing, $200 million drawn under the senior secured term loan wasdeposited into a cash collateral account to support the issuance of up to $200 millionof letters of credit. As of September 30, 2006, there were approximately $185 millionof letters of credit outstanding and $800 million available under thesenior secured revolving credit facility.

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

Mirant North America and Mirant Americas EnergyMarketing, LP (“Mirant Americas Energy Marketing”) (the “Primary DIPLenders”) entered into an agreement (the ‘‘Primary New York DIP Agreement’’)to make secured debtor-in-possession financing in an amount of (i) $20 million,plus (ii) an amount equal to the amount of credit support provided onbehalf of Mirant New York, Inc. (“Mirant New York”), MirantBowline, LLC (“Mirant Bowline”), Mirant Lovett, LLC (“Mirant Lovett”)and Hudson Valley Gas Corporation (collectively, the ‘‘New York DIPBorrowers’’), to the extent such amounts are collateralized with cash or cashequivalents by the New York DIP Borrowers. The facility is available on ajoint and several basis to the New York DIP Borrowers. On January 31,2006, all the assets of Mirant Americas Energy Marketing were transferred to MirantEnergy Trading, with Mirant Energy Trading to succeed to all rights and assumeall obligations of Mirant Americas Energy Marketing under the Primary New YorkDIP Agreement. The financing under the Primary New York DIP Agreement canbe utilized through borrowings by the New York DIP Borrowers, the issuanceof letters of credit for the account of any of the New York DIP Borrowersor in support of commercial transactions entered into by Mirant Energy Tradingfor the benefit of the New York DIP Borrowers, the posting of cash inrespect of obligations incurred for the benefit of any of the New York DIPBorrowers, including the making of prepayments for fuel and other commoditiesfor the benefit of any of the New York DIP Borrowers. Under the Primary New YorkDIP Agreement, the amount which represents the excess on the effective date ofthe Plan of (x) credit support posted for the benefit of the New YorkDIP Borrowers by the lenders in respect of transactions entered into on theirbehalf over (y) the amount of cash collateral posted by the New YorkDIP Borrowers to the lenders is deemed to be a loan made to the New YorkDIP Borrowers on such date. The New York DIP Borrowers have posted $24 millioncash collateral with Mirant Energy Trading in accordance with the September 30,2006, collateral allocation performed in good faith by Mirant Energy Trading.To the extent that the required level of credit support provided to the New YorkDIP Borrowers is reduced, the amount of such reduction is required to be returnedto the New York DIP Borrowers. The financing under the Primary New YorkDIP Agreement has a stated maturity of 180 days, subject to renewal orextension, and is available until the earlier of (x) the expiration ofsuch period or (y) with respect to each of the New York DIPBorrowers, the effective date of a confirmed Plan of Reorganization (the “Plan”)for such New York DIP Borrower in its Chapter 11 case. The loan wasextended for an additional 180 days in July 2006. Subject to theauthorization of the United States Bankruptcy Court for the Northern Districtof Texas (the “Bankruptcy Court”), the obligations of the New York DIPBorrowers under the Primary New York DIP Agreement, pursuant to Section 364(c)of the Chapter 11 of Title 11 ofthe United States Bankruptcy Code (as amended, the “Bankruptcy Code”), (i) constitutea claim having priority over any or all administrative expenses of the kindspecified in sections 503(b) or 507(b) of Bankruptcy Code, (ii) aresecured by a lien on property of the estates of the New York DIP Borrowersthat is not otherwise subject to a lien and (iii) are secured by a juniorlien on property of the estates of the New York DIP Borrowers that issubject to a lien. The financing bears interest at a rate of London Interbank OfferedRate (“LIBOR”) plus 2.25%. The Primary New York DIP Agreement containscertain events of default, and the ability of the New York DIP Borrowersto borrow thereunder is subject to certain conditions precedent. In addition,the Primary New York DIP Agreement contains covenants that, among otherthings, restrict the ability of the New York DIP Borrowers to engage inmergers, acquisitions and asset sales, to make investments and to incurindebtedness.

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Contemporaneous with their entry into the Primary New YorkDIP Agreement, the New York DIP Borrowers also entered into an agreementfor secured financing with Mirant (the “Secondary New York DIP Agreement”).The Secondary New York DIP Agreement permits Mirant to make secureddebtor-in-possession financing in the maximum amount of $50 million to theNew York DIP Borrowers, and the borrowings are available solely for cashcollateral postings by any one or more of the New York DIP Borrowers. Theterms of the Secondary New York DIP Agreement are substantially similar tothe terms of the Primary New York DIP Agreement. However, (i) therights of the Primary DIP Lenders to payment out of cash collateral posted bythe New York DIP Borrowers pursuant to the Primary New York DIPAgreement as may be repaid shall at all times rank senior to the rights ofMirant under the Secondary New York DIP Agreement and (ii) certainclaims and liens granted under the Primary New York DIP Agreement inrespect of cash collateral posted by the New York DIP Borrowers shall atall times be senior to similar claims and liens granted under the Secondary New YorkDIP Agreement. The loan was extended for an additional 180 days in July 2006.

TheBankruptcy Court has approved a debtor-in-possession loan to Mirant NY-Gen, LLC(“Mirant NY-Gen”) from Mirant Americas under which Mirant Americas,subject to certain conditions, would lend up to $9.5 million to Mirant NY-Gento provide funding for the repairs on the Swinging Bridge dam. The loanwas extended for an additional 180 days in July 2006.

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

During the third quarter of 2006, Mirant commencedauction processes to sell our Zeeland (837 MW) and Bosque (536 MW)intermediate and peaking natural gas-fired plants.

The sale of the Zeelandand Bosque units is subject to the terms of the Mirant North Americaindebtedness, including a provision with respect to the mandatory prepaymentand/or reinvestment of the sale proceeds and the requirement to secure a creditrating affirmation.

***Cash Flows***

*ContinuingOperations*

*Operating Activities.*   Ourcash provided by operating activities is impacted by seasonality, changes inenergy prices and fluctuations in our working capital requirements. Cashprovided by operating activities from continuing operations increased $634 millionfor the nine months ended September 30, 2006, compared to the same periodin 2005, primarily due to the following:

·       anincrease in realized gross margin of $328 million for the nine monthsended September 30, 2006, compared to the same period in 2005. See *Results of Operations* for additional discussion of ourimproved performance in 2006 compared to the same period in 2005;

·       achange in collateral levels of $1.226 billion in the nine months ended September 30,2006, compared to the same period in 2005. The decrease in collateralrequirements is due to the settlement of energy contracts combined with energyprice declines in the nine months ended September 30, 2006, as compared tothe same period in 2005. For the nine months ended September 30, 2006,$529 million of cash collateral from brokers and counterparties has beenreturned to us. Significant increases in energy prices in the third quarter of2005 and the resulting large unrealized losses on our forward power salescontracts required us to post additional collateral of $697 million duringthe nine months ended September 30, 2005; and

·       anincrease in bankruptcy related claims and expenses of $718 million. In2006 we paid bankruptcy claims and professional fees of $765 million. Ourremaining claims payable and estimated claims accrual is $97 million at September 30,2006. We paid $47 million in the nine months ended 

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September 30,2005 related to professional fees and other expenses associated with thebankruptcy proceedings.

*Investing Activities.*   Net cash usedin investing activities from continuing operations was $60 million for thenine months ended September 30, 2006, compared to $65 million in2005. The difference was primarily due to the following:

·       anincrease of $14 million in capital expenditures for 2006 compared to 2005;

·       adecrease in the repayment of notes receivable from affiliate of $10 millioncompared to the same period in 2005; and

·       anincrease in the proceeds from the sales of assets and investments of $29 million.In 2006, we received $6 million from the sale of the Mirant ServiceCenter, and $16 million from the sale of a portion of our investment inInterContinental Exchange, Inc. In 2005, we received $4 million fromthe sale of the Bowline gas turbines.

*Financing Activities.**  *Net cash provided by financing activities fromcontinuing operations was $90 million for the nine months ended September 30,2006, compared to $88 million for the same period in 2005. This differencewas primarily due to the following:

·       anincrease in proceeds from the issuance of long-term debt of $2.015 billion.Proceeds from the issuance of long-term debt in 2006 included $850 millionfrom the Mirant North America debt offering that was released from escrow on January 3,2006, $700 million from the Mirant North America senior secured loan, and$465 million drawn on the Mirant North America senior secured revolvingcredit facility.

·       in2005, proceeds from the issuance of debt-affiliate of $90 millionrepresented advances under the intercompany cash management program;

·       anincrease in repayments of long-term debt comprised of the repayment of $465 millionon the Mirant North America senior secured revolving credit facility andapproximately $990 million of principal payments for debt settled underthe Plan; and

·       the payment by Mirant NorthAmerica of $250 million to Mirant Americas, Inc. (“Mirant Americas”)under the Plan, and the distribution of $148 million to Mirant Americas asmember.

*DiscontinuedOperations*

Cash provided by operatingactivities from discontinued operations increased $17 million for the ninemonths ended September 30, 2006, compared to the same period in 2005. Netcash used in investing activities from discontinued operations increased $1 millioncompared to the same period in 2005. There was no financing activity related todiscontinued operations.

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

At September 30,2006, we have total cash, cash equivalents, and credit facility availability ofapproximately $1.4 billion. The table below sets forth total cash, cashequivalents and availability of our credit facilities and our subsidiaries at September 30,2006 and December 31, 2005 (in millions):

| ** **                                                                                                                     | ** ** | **At September 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Continuing operations**                                                                                                      | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| Cash and Cash  Equivalents:                                                                                                    |       |                                 |       | ** **                          |       |   |   | ** ** |   |
| Mirant Americas Generation                                                                                                     |       |                                 | $          | 19                                  | ** ** |   |   | $ | 129 | ** ** |   |
| Mirant Mid-Atlantic                                                                                                            |       |                                 | 130        | ** **                          |       |   | 276 | ** ** |   |
| Mirant North America                                                                                                           |       |                                 | 550        | ** **                          |       |   | 19 | ** ** |   |
| Total cash and cash equivalents                                                                                                |       |                                 | 699        | ** **                          |       |   | 424 | ** ** |   |
| Less: Cash  required for operating, working capital or other purposes or restricted by  the subsidiaries’ debt agreements |       |                                 | 115        | ** **                          |       |   | 1 | ** ** |   |
| Total available cash and cash equivalents                                                                                      |       |                                 | 584        | ** **                          |       |   | 423 | ** ** |   |
| Available under  credit facilities                                                                                             |       |                                 | 815        | ** **                          |       |   | — | ** ** |   |
| Available under  the DIP Facility                                                                                              |       |                                 | —     | ** **                          |       |   | 249 | ** ** |   |
| Total cash, cash  equivalents and credit facilities availability                                                               |       |                                 | $          | 1,399                               | ** ** |   |   | $ | 672 | ** ** |   |

 

*Tender Offer.**  *During the third quarter of 2006, Mirant repurchased43 million shares of its common stock forapproximately $1.23 billion. Mirant paid for the shares tendered inthe offer and related expenses with approximately $315 million of cash onhand at Mirant Corporation and approximately $915 million of distributionsfrom subsidiaries, including approximately $175 million and $740 milliondistributed or repaid from us and Mirant Asia-Pacific Limited and itssubsidiaries, respectively.

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

In order to sell power and purchase fuel in theforward markets and perform other energy trading and marketing activities, weare often required to provide trade credit support to our counterparties ormake deposits with brokers. In addition, we are often required to provide tradecredit support for access to the transmission grid, to participate in powerpools, to fund debt service reserves and for other operating activities. Tradecredit support includes cash collateral, letters of credit and financialguarantees. In the event that we default, the counterparty can draw on a letterof credit or apply cash collateral held to satisfy the existing amountsoutstanding under an open contract. At September 30, 2006, our outstandingissued letters of credit totaled $185 million.

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Thefollowing table summarizes cash collateral posted with counterparties andbrokers and letters of credit issued as of September 30, 2006 and December 31,2005 (in millions):

| ** **                                                   | ** ** | **At September 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| Cash collateral  posted—energy trading and marketing(1) |       |                                 | $          | 90                                  |       |   |   | $ | 619 |   |   |
| Cash collateral  posted—debt service and rent reserves  |       |                                 | —     |                                |       |   | 56 |   |   |
| Cash collateral  posted—other operating activities      |       |                                 | 10         |                                |       |   | 10 |   |   |
| Letters of  credit—energy trading and marketing         |       |                                 | 89         |                                |       |   | 51 |   |   |
| Letters of credit—debt  service and rent reserves       |       |                                 | 75         |                                |       |   | — |   |   |
| Letters of  credit—other operating activities           |       |                                 | 16         |                                |       |   | — |   |   |
| Total                                                        |       |                                 | 280        |                                |       |   | 736 |   |   |
| Discontinued operations:                                     |       |                                 |       |                                |       |   |   |   |   |
| Assets held for  sale—letters of credit                 |       |                                 | 5          |                                |       |   | 5 |   |   |
| Total                                                        |       |                                 | $          | 285                                 |       |   |   | $ | 741 |   |   |

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(1)          The amount includesapproximately $47 million deposited with J.P. Morgan Futures, Inc.as clearing broker as of September 30, 2006.

On July 13, 2006,Moody’s Investors Service reduced Mirant’s corporate credit rating to “B2” andthe debt ratings of our subsidiaries debt ratings were also lowered. Standardand Poor’s also announced that they had placed Mirant’s corporate credit ratingand the debt ratings of our subsidiaries on credit watch.

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

In the third quarter of 2006 Mirant commenced auctionprocesses to sell our Zeeland and Bosque natural gas-fired plants. As a result,the debt, off-balance sheet arrangements and contractual obligations of theseentities are disclosed as discontinued operations in the notes to the unauditedcondensed consolidated and combined financial statements.

Debtobligations, off-balance sheet arrangements and contractual obligations as of September 30,2006, are as follows (in millions):

| ** **                                                                          | ** ** | **Total** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **>5 years** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------------|------------|
| Operating leases                                                                    |       | $         | 2,322      |     | $          | 46       |       | $        | 116        |     | $          | 124      |       | $                    | 146        |   | $ | 144 |   |   | $ | 1,746 |   |   |
| Long-term debt                                                                      |       | 5,813     |       | 68       |       | 347      |       | 263      |       | 263      |       | 264      |       |                 | 4,608      |   |   |
| Claims payable  and estimated claims accrual                                        |       | 97        |       | 97       |       | —   |       | —   |       | —   |       | —   |       |                 | —     |   |   |
| Purchase commitments:                                                               |       |      |       |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Long-term service agreements                                                        |       | 117       |       | 1        |       | 3        |       | 2        |       | 4        |       | 5        |       |                 | 102        |   |   |
| Fuel and transportation commitments                                                 |       | 500       |       | 94       |       | 227      |       | 89       |       | 90       |       | —   |       |                 | —     |   |   |
| Other purchase commitments                                                          |       | 168       |       | 168      |       | —   |       | —   |       | —   |       | —   |       |                 | —     |   |   |
| Total excluding  liabilities subject to compromise                                  |       | 9,017     |       | 474      |       | 693      |       | 478      |       | 503      |       | 413      |       |                 | 6,456      |   |   |
| Liabilities  subject to compromise                                                  |       | 34        |       |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Discontinued  operations                                                            |       | 149       |       |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Total debt  obligations, off-balance sheet arrangements and contractual obligations |       | $         | 9,200      |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |   |
|                                                                                     |            |           |            |          |            |          |            |          |            |          |            |          |            |                      |            |  |  |  |  |  |  |  |  |  |

 

Operating leases are off-balance sheet arrangements.These amounts primarily relate to our minimum lease payments associated withour lease of the Morgantown and Dickerson baseload units.

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Long-term debt includes the current portion oflong-term debt and long-term debt on the condensed consolidated balance sheets.Long-term debt also includes estimated interest on debt based on a U.S. DollarLondon InterBank Offered Rate (“LIBOR”) curve as of September 28, 2006.

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

Long-term service agreements represent our totalestimated commitments under our long-term service agreements associated withturbines installed or in storage.

Fuel and transportation commitments primarily relateto long-term coal agreements and other fuel purchase and transportationagreements. The fair value of certain contracts is included in price riskmanagement assets or price risk management liabilities on our condensedconsolidated balance sheets.

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

Liabilities subject to compromise on the consolidatedbalance sheets at September 30, 2006, relate only to our New Yorksubsidiaries that remain in bankruptcy.

Discontinued operationsinclude the debt and obligations related to our Zeeland and Bosque naturalgas-fired assets.

**Other Developments**

***Reliability Pricing Model***

On August 31, 2005, Pennsylvania-New Jersey-Maryland Interconnection, LLC(“PJM”) filed its Reliability Pricing Model (“RPM”) with the FederalEnergy Regulatory Commission (the “FERC”) to replace its current capacitymarket rules. The RPM proposal would provide for a four-year forward capacityauction using a demand curve and locational deliverability zones for capacityphased in over a several year period beginning on June 1, 2006. On November 5,2005, PJM proposed to delay the effective date of the RPM until June 1,2007. On April 20, 2006, the FERC issued an order generally findingaspects of PJM’s RPM filing to be just and reasonable, but the FERC alsoestablished further procedures including a paper hearing and staff technicalconference to resolve the remaining issues and encouraged the parties to seek anegotiated resolution. Settlement talks under the supervision of aFERC-appointed settlement judge began on June 5, 2006. On August 3,2006, the settlement judge issued a report stating that most of the activeparties to the case have reached a confidential agreement in principle, andwould work to develop a more detailed settlement agreement to be filed by September 27,2006. On September 29, 2006, a comprehensive settlement package was filedwith the FERC that would replace both PJM’s RPM filing and existing capacitymarket. The settlement provides for a three-year forward capacity auction usinga modified demand curve from the RPM filing and locational deliverability zonesthat will be phased in over several years. Parties to the settlement requestedthat the FERC approve the settlement without modification by December 22,2006, so that it may go into effect by June 1, 2007. It is impossible topredict whether the FERC will approve the settlement without conditions ormodifications. However, if the FERC approves the settlement in a form notmaterially different from what was filed, increased opportunities for our powerplants located in the Mid-Atlantic region to receive more revenues for theircapacity will result.

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***Environmental Regulation***

*Maryland Healthy Air Act*. On August 3,2006, we announced a plan to comply with the requirements of the MarylandHealthy Air Act by reducing SO2 emissions by as much as 95% at our Marylandpower plants. We will install flue gas desulfurization (“FGD”) emissionscontrols at our three Maryland power plants: Chalk Point generating stationlocated in Prince George’s County, Dickerson generating station located inMontgomery County, and Morgantown generating station located in Charles County.In addition, we will install a selective catalytic reduction (“SCR”) system atthe Chalk Point facility that will further reduce nitrogen oxide (“NOx”) emissions by approximately 92%. Together,the FGDs and the SCR will reduce by approximately 90% the emissions of ionicmercury from the three power plants. We anticipate that the capitalexpenditures required to achieve compliance will be approximately $1.3 billionto $1.5 billion from 2006 through 2009. We expect that cash flows fromoperations will be sufficient to fund these capital expenditures.

*RegionalGreenhouse Gas Initiative and State CO2 Regulation.****  ***Concern over climate change,deemed by many to be induced by rising levels of greenhouse gases in theatmosphere, continues to result in significant legislative and regulatoryefforts to limit greenhouse gas emissions.

On August 16, 2006, a model rule wasfinalized and seven states in the Northeast will move forward with theimplementation of a cooperative known as the Regional Greenhouse GasInitiative. This is a multi-state regional initiative that uses a regional capand trade program to reduce carbon dioxide (“CO2”) emissions from power plantsof 25 MW or greater. The program aims to stabilize CO2 emissions tocurrent levels from 2009 to 2015. This will be followed by a 10% reduction inemissions by 2019. At this time, our assets in New York and potentiallyMaryland will be impacted, and we are evaluating our options to comply with therequirements of the rule.

In addition, California and Massachusetts have enactedlimitations on CO2 emissions from power plants which impact our gas-firedplants in California and our Canal facility in Massachusetts, respectively. Weexpect that we will be able to comply with these restrictions either byreducing our emissions or purchasing emissions credits, but if we are unable tocomply, we will be forced to curtail our operations at these facilities.

See Note B for otherdevelopments related to the planned dispositions.

**Critical AccountingPolicies and Estimates**

The accountingestimates described below are considered critical to obtaining an understandingof our unaudited condensed consolidated and combined financial statementsbecause their application requires significant estimates and judgments bymanagement in preparing our unaudited condensed consolidated and combinedfinancial statements. Management’s estimates and judgments are inherentlyuncertain and may differ significantly from actual results achieved. Managementconsiders an accounting estimate to be critical if the following conditionsapply:

·       theestimate requires significant assumptions; and

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

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

We have discussed theselection and application of these accounting estimates with the Board ofManagers and our independent auditors. It is management’s view that the currentassumptions and other considerations used to estimate amounts reflected in ourunaudited condensed consolidated and combined financial statements areappropriate. However, actual results can differ significantly from thoseestimates 

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underdifferent assumptions and conditions. The sections below contain informationabout our most critical accounting estimates, as well as the effects ofhypothetical changes in the material assumptions used to develop the estimates.

***Revenue Recognition and Accounting for Energy Tradingand Marketing Activities***

*Natureof Estimates Required.**  *Weutilize two comprehensive accounting models in reporting our consolidatedfinancial position and results of operations as required by United Statesgenerally accepted accounting principles (“GAAP”)—an accrual model and a fairvalue model. We determine the appropriate model for our operations based onapplicable accounting standards.

The accrual model has historically been used toaccount for our generation revenue from the sale of energy and to account fordistribution revenue from the sale and distribution of energy. We recognizerevenue when earned and collection is probable as a result of electric powerdelivered to customers pursuant to contractual commitments that specify volume,price and delivery requirements. Sales of energy are based on economicdispatch, or they may be ‘as-ordered’ by an ISO, based on member participationagreements, but without an underlying contractual commitment. ISO revenues andrevenues for sales of energy based on economic-dispatch are recorded on thebasis of megawatt hours (“MWh”) delivered, at the relevant day-ahead orreal-time prices. We also recognize affiliate and nonaffiliate revenue whenancillary services have been performed and collection of such revenue isprobable.

The fair value model has historically been used forderivative energy contracts that economically hedge our electricity generationassets or that are used in our proprietary trading activities. We use a varietyof derivative contracts, such as futures, swaps and option 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.

Pursuant to Statementof Financial Accounting Standards (“SFAS”) No. 133, “*Accountingfor Derivative Instruments and Hedging Activities”* (“SFAS No. 133”),derivative contracts are reflected in our financial statements at fair value,with changes in fair value recognized currently in earnings unless they qualifyfor a scope exception. Management considers fair value techniques, valuationadjustments related to credit and liquidity and judgments related to theprobability of completing forecasted transactions to be critical accountingestimates. These estimates are considered significant because they are highlysusceptible to change from period to period and are dependent on manysubjective factors. The fair value of derivative contracts is included in pricerisk management assets and liabilities affiliate and nonaffiliate in ourunaudited condensed consolidated balance sheets. Transactions that do notqualify for accounting under SFAS No. 133, either because they are notderivatives or because they qualify for a scope exception, are accounted forunder accrual accounting as described above.

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

The fair value of price risk management assets andliabilities affiliate and nonaffiliate in our unaudited condensed consolidatedbalance sheets is also impacted by our assumptions as to interest rate,counterparty credit risk and liquidity risk. The nominal value of the contractsis discounted using a forward interest rate curve based on the LIBOR. Inaddition, the fair value of our derivative contracts is reduced to reflect theestimated risk of default of counterparties on their contractual obligations tous.

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*Effectif Different Assumptions Used.**  *The amounts recorded asrevenues and cost of fuel, electricity and other revenue change as estimatesare revised to reflect actual results and changes in market conditions or otherfactors, many of which are beyond our control. Because we use derivativefinancial instruments and have not elected cash flow or fair value hedgeaccounting under SFAS No. 133, certain components of our financialstatements, including gross margin, operating income and balance sheet ratios,are at times volatile and subject to fluctuations in value primarily due tochanges in energy and fuel prices. Due to the complexity of the models used tovalue the derivative instruments each period, a significant change in estimatecould have a material impact on our results of operations and cash flows at thetime contracts are ultimately settled. See Note D to our unauditedcondensed consolidated and combined financial statements for furtherinformation on financial instruments related to energy trading and marketingactivities.

For additional informationregarding accounting for derivative instruments, see Item 3, “Quantitativeand Qualitative Disclosures about Market Risk.”

***Long-Lived Assets***

**Estimated UsefulLives**

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

*KeyAssumptions and Approach Used.**  *Estimateduseful lives are the mechanism by which we allocate the cost of long-livedassets over the asset’s service period. We perform depreciation studiesperiodically to update changes in estimated useful lives. The actual usefullife of an asset could be impacted by changes in estimated or actual commodityprices, environmental regulations, various legal factors, competitive forcesand our liquidity and ability to sustain required maintenance expenditures andsatisfy asset retirement obligations. We use composite depreciation for groupsof similar assets and establish an average useful life for each group ofrelated assets.

*Effect if DifferentAssumptions Used.**  *Thedetermination of estimated useful lives is dependent on subjective factors suchas expected market conditions, commodity prices and anticipated capitalexpenditures. Since composite depreciation is used, the actual useful life of aparticular asset may differ materially from the useful life estimated for therelated group of assets. In the event the useful lives of significant assetswere found to be shorter than originally estimated, depreciation expense mayincrease, liabilities recognized for future asset retirement obligations may beinsufficient and impairments in the carrying value of tangible and intangibleassets may result.

**Asset RetirementObligations**

*Natureof Estimates Required.**  *Weaccount for asset retirement obligations under SFAS No. 143, “*Accounting for Asset Retirement Obligations*” (“SFAS No. 143”),and under Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 47,“*Accounting for Conditional Asset**Retirements, an Interpretation of FASB Statement No. 143”*(“FIN 47”).SFAS No. 143 and FIN 47 require an entity to recognize the fair valueof a liability for conditional and unconditional asset retirement obligationsin the period in which they are incurred. Retirement obligations associatedwith long-lived assets included within the scope of SFAS No. 143 and FIN 47are those obligations for which a requirement exists under enacted laws,statutes and written or oral contractions, including obligations arising underthe doctrine of promissory estoppel. Asset retirement obligations are estimatedusing the estimated current cost to satisfy 

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the retirement obligation,increased for inflation through the expected period of retirement anddiscounted back to present value at our credit-adjusted risk-free rate. We haveidentified certain retirement obligations within our power generationoperations. These asset retirement obligations are primarily related toasbestos abatement at some of our generating facilities, the removal of oilstorage tanks, equipment on leased property and other environmental obligationsrelated to the closing of ash disposal sites.

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

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

**Asset Impairments**

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

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

SFAS No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets,”* requiresmanagement to recognize an impairment charge if the sum of the undiscountedexpected future cash flows from a long-lived asset or definite-lived intangibleis less than the carrying value of that asset. We evaluate our long-livedassets (property, plant and equipment) and definite-lived intangibles forimpairment whenever indicators of impairment exist or when we commit to sellthe asset. These evaluations of long-lived assets and definite-livedintangibles may result from significant decreases in the market price of an asset,a significant adverse change in the extent or manner in which an asset is beingused or in its physical condition, a significant adverse change in legalfactors or in the business climate that could affect the value of an asset, aswell as other economic or operations analyses. If the carrying amount is notrecoverable, an impairment charge is recorded.

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

On August 9, 2006, Mirant announced the plannedsale of certain of its intermediate and peaking natural gas-fired plantsincluding our Zeeland and Bosque which total 1,373 MW. The planned salesresulted in the reclassification of the long-lived assets related to theseplants as held for sale at September 30, 2006. In determining our estimateof fair value, we utilized non-binding indicative bids as 

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our basis for determiningthe impairment amount. Given the nature of the assets and the currentmarketplace, a best estimate of fair value was assigned to each individualasset within the portfolio of all the Mirant assets to be sold. Based on thefair value assigned to each asset, an impairment loss of $71 million wasrecorded in discontinued operations in our condensed consolidated financialstatements of operations during the quarter to reduce the carrying value of ourassets to their estimated fair value less costs to sell.

During the current period, our estimates of cash flowsrelated to our impairment analysis of our Lovett and Bowline generationfacilities required significant judgment related to the outcome of property taxdisputes and future tax assessments for Lovett and Bowline. Our estimates alsorequired prediction of the likelihood of various outcomes of unresolved mattersrelated to environmental controls and a reasonable economic return for ourLovett generation facility. See Note C in the notes to our unauditedcondensed consolidated and combined financial statements for further discussionof impairment losses.

*Effect if DifferentAssumptions Used.*   The estimates andassumptions used to determine whether an impairment exists are subject to ahigh degree of uncertainty. The estimated fair value of an asset would changeif different estimates and assumptions are used in our applied valuationtechniques, including estimated undiscounted cash flows, discount rates andremaining useful lives. Due to the nature of the auction process for the assetsheld for sale, the ultimate sales price at the end of the auction could differfrom our current estimates of fair value determined through discounted cashflows or non-binding indicative bids for those assets. If actual results arenot consistent with the assumptions used in estimating future cash flows andasset fair values, we may be exposed to additional losses that could bematerial to our results of operations. See Notes B and C for additionalinformation on impairments recorded during the third quarter of 2006.

**Income Taxes**

We are a limited liability company treated as a branchfor income tax purposes. As a result, Mirant Americas and Mirant have directliability for the majority of the federal and state income taxes relating toour operations. Through December 31, 2005, we have allocated current anddeferred income taxes to each regarded corporate member entity of ourconsolidated group as if each regarded corporate entity member were a singletaxpayer utilizing the asset and liability method to account for income taxesexcept with respect to recognizing certain current period tax benefits.Specifically, we did not record current period tax benefits on each regardedcorporate entity’s ability to carry back its separate company current year netoperating loss as realization of such losses were dependent on reimbursementsfrom Mirant, which were at Mirant’s discretion under the tax sharing agreement.Deferred tax assets and liabilities are recognized for future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and net taxoperating losses and tax credit carryforwards. When necessary, deferred taxassets are reduced by a valuation allowance to reflect the amount that isestimated to be recoverable. In assessing the recoverability of our deferredtax assets, we consider whether it is likely that some portion or all of thedeferred tax assets will be realized. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enacted change.

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

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

Additionally, we have contingent liabilities relatedto tax uncertainties arising in the ordinary course of business. We periodicallyassess our contingent liabilities in connection with these uncertainties basedon the latest information available. For those uncertainties where it isprobable that a loss has occurred and the loss or range of loss can bereasonably estimated, a liability is recognized in the financial statements.The recognition of contingent losses for tax uncertainties requires managementto make significant assumptions about the expected outcomes of certain taxcontingencies. See Note A to our consolidated financial statements forfurther information on FIN No. 48, “*Accounting for Uncertaintyin Income Taxes: an Interpretation of FASB Statement No. 109.”*

In December 2005, pursuant to the Plan, Mirantrejected and thereby eliminated the tax sharing agreement with its direct andindirect wholly owned regarded corporate entities. As a result, Mirant’s directand indirect wholly owned regarded corporate entities are no longer responsiblefor reimbursing Mirant for their intercompany tax obligations attributable totheir operations. Accordingly, our income tax receivables and payables withMirant or Mirant Americas were resolved pursuant to a global settlement underthe Plan whereby intercompany receivables and payables received nodistribution, with the exception of income tax payables and receivables relatedto Mirant New York, Inc. which continues to remain in bankruptcy at September 30,2006.

For those subsidiariesthat continue to exist as corporate regarded entities, we allocate current anddeferred income taxes to each corporate regarded entity as if such entity werea single taxpayer utilizing the asset and liability method to account forincome taxes. To the extent we provide tax expense or benefit, any related taxpayable or receivable to Mirant is reclassified to equity in the same period.

***Loss Contingencies***

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

*KeyAssumptions and Approach Used.**  *Thedetermination of a loss contingency requires significant judgment as to theexpected outcome of each contingency in future periods. In making thedetermination as to potential losses and probability of loss, we consider allavailable positive and negative evidence including the expected outcome ofpotential litigation. We record our best estimate of a loss, or the low end ofour range if no estimate is better than another estimate within a range ofestimates, when the loss is 

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considered probable. As additionalinformation becomes available, we reassess the potential liability related tothe contingency and revise our estimates. In our evaluation of legal matters,management holds discussions with applicable legal counsel and relies onanalysis of case law and legal precedents.

*Effectif Different Assumptions Used.**  *Revisionsin our estimates of potential liabilities could materially impact our resultsof operations, and the ultimate resolution may be materially different from theestimates that we make.

***Litigation***

We are currently involved in certain legalproceedings. These legal proceedings are discussed in Part II Item 1.“Legal Proceedings,” and Note K to the unaudited condensed consolidatedand combined financial statements contained elsewhere in this report. Weestimate the range of liability through discussions with legal counsel andanalysis of applicable case law and legal precedents. We record our bestestimate of a loss, if estimable, when the loss is considered probable, or thelow end of our range if no estimate is better than another estimate within arange of estimates. As additional information becomes available, we reassessthe potential liability related to our pending litigation and revise ourestimates. Revisions in our estimates of the potential liability couldmaterially impact our results of operations, and the ultimate resolution may bematerially different from the estimates that we make.

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**Item 3.**                        *Quantitative and Qualitative Disclosures about Market Risk*

In connection with our powergenerating business, 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 ispurchased in the spot market and a portion of the electricity we produce alsois sold in the spot market. In addition, the open positions in our proprietarytrading portfolio expose us to risks associated with the changes in energycommodity prices. 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 energy trading and marketing activities and see Note D to the unauditedcondensed consolidated and combined financial statements for detail of ourprice risk management assets and liabilities.

For a further discussionof market risks, our risk management policy, and our use of Value at Risk tomeasure some of these risks, see Item 7A. “Quantitative and QualitativeDisclosures about Market Risk” in our Annual Report on Form 10-K forthe year ended December 31, 2005.

**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.

**Effectiveness ofDisclosure Controls and Procedures**

As required by Exchange Act Rule 13a-15(b),our management, including our Chief Executive Officer and our Chief FinancialOfficer, conducted an assessment of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined by Rules 13a-15(e)and 15d-15(e) under the Exchange Act), as of September 30, 2006.Based upon this assessment, our management concluded that, as of September 30,2006, 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 of 2002.

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**PART II**

**Item 1.**                        LegalProceedings

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 forthe period ended December 31, 2005, and Form 10-Qs for thequarters ended March 31, 2006 and June 30, 2006.

***Chapter 11 Proceedings***

On July 14, 2003, and various dates thereafter,Mirant Corporation and certain of its subsidiaries (collectively, the “MirantDebtors”), including the Company and its subsidiaries, filed voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code in the UnitedStates Bankruptcy Court for the Northern District of Texas (the “BankruptcyCourt”). Most of the material claims filed against the Mirant Debtors’ estateswere disallowed or were resolved and became “allowed” claims beforeconfirmation of the Plan of Reorganization (the “Plan”) that became effectivefor Mirant, the Company, and most of the Mirant Debtors on January 3,2006. Mirant, as the distribution agent under the Plan, has made distributionspursuant to the terms of the Plan on those allowed claims. Some claims,however, remain unresolved.

As of September 30,2006, approximately 21.2 million of the shares of Mirant common stock tobe distributed under the Plan have not yet been distributed and have beenreserved for distribution with respect to claims that are disputed by theMirant Debtors and have not been resolved. A settlement entered into on May 30,2006, among Pepco, Mirant, MC 2005, LLC f/k/a Mirant Corporation (“OldMirant”), and various subsidiaries of Mirant, including subsidiaries of theCompany, if approved by final order in the Chapter 11 proceedings, wouldresult in the distribution of up to 18 million of the reserved shares toPepco, as described below in *Pepco Litigation*.Under the terms of the Plan, to the extent other such unresolved claims areresolved now that the Company has emerged from bankruptcy, the claimants willbe paid from the reserved shares on the same basis as if they had been paid whenthe Plan became effective. That means that their allowed claims will receivethe same pro rata distributions of Mirant common stock, cash, or both commonstock and cash as previously allowed claims in accordance with the terms of thePlan. To the extent the aggregate amount of the payouts determined to be duewith respect to such disputed claims ultimately exceeds the amount of thefunded claim reserve, Mirant would have to issue additional shares of commonstock to address the shortfall, which would dilute existing Mirantshareholders, and Mirant and the Company would have to pay additional cashamounts as necessary under the terms of the Plan to satisfy such pre-petitionclaims.

***Pepco Litigation***

In 2000, Mirant purchased power generating facilitiesand other assets from Pepco, including certain power purchase agreements (“PPAs”)between Pepco and third parties. Under the terms of the Asset Purchase and SaleAgreement (“APSA”), Mirant and Pepco enteredinto a contractual agreement (the “Back-to-Back Agreement”) with respect tocertain PPAs, including Pepco’s long-term PPA with Panda-Brandywine L.P.(“Panda”), under which (1) Pepco agreed to resell to Mirant all capacity,energy, ancillary services and other benefits to which it is entitled underthose agreements and (2) Mirant agreed to pay Pepco each month all amountsdue from Pepco to the sellers under those agreements for the immediatelypreceding month associated with such capacity, energy, ancillary services andother benefits. The Panda PPA runs until 2021, and the Back-to-BackAgreement does not expire until all obligations have been performed under thePanda PPA. Under the Back-to-Back Agreement, Mirant is obligated to purchasepower from Pepco at prices that typically are higher than the market prices forpower.

Mirant assigned its rights and obligations under theBack-to-Back Agreement to Mirant Americas Energy Marketing. In the Chapter 11cases of the Mirant Debtors, Pepco asserted that an Assignment and 

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Assumption Agreement datedDecember 19, 2000, that includes as parties Pepco and various subsidiariesof ours causes our subsidiaries that are parties to the agreement to be jointlyand severally liable to Pepco for various obligations, including theobligations under the Back-to-Back Agreement. The Mirant Debtors have sought toreject the APSA, the Back-to-Back Agreement, and the Assignment and AssumptionAgreement, and the rejection motions have not been resolved. Under the Plan,the obligations of the Mirant Debtors under the APSA (including any otheragreements executed pursuant to the terms of the APSA and found by a finalcourt order to be part of the APSA), the Back-to-Back Agreement, and theAssignment and Assumption Agreement are to be performed by Mirant PowerPurchase, LLC (“Mirant Power Purchase”), whose performance is guaranteedby Mirant. If any of the agreements is successfully rejected, the obligationsof Mirant Power Purchase and Mirant’s guarantee obligations terminate withrespect to that agreement, and Pepco would be entitled to a claim in the Chapter 11proceedings for any resulting damages. That claim would then be addressed underthe terms of the Plan. If the Bankruptcy Court were to conclude that theAssignment and Assumption Agreement imposed liability upon the Company’ssubsidiaries for the obligations under the Back-to-Back Agreement and theBack-to-Back Agreement were to be rejected, the resulting rejection damagesclaim could result in a claim in the Chapter 11 proceedings against theCompany’s subsidiaries but any such claim would be reduced by the amountrecovered by Pepco on its comparable claim against Mirant.

On May 30, 2006, Mirant, Mirant Power Purchase,Old Mirant, various subsidiaries of Mirant (including subsidiaries of theCompany), and a trust established pursuant to the Plan to which ownership ofOld Mirant and Mirant Americas Energy Marketing was transferred (collectivelythe “Mirant Settling Parties”) entered into a Settlement Agreement and Release(the “Settlement Agreement”) with Pepco and various affiliates of Pepco(collectively the “Pepco Settling Parties”). Once it becomes effective, theSettlement Agreement will fully resolve the contract rejection motions thatremain pending in the bankruptcy proceedings, as well as other matterscurrently disputed between Pepco and Mirant and its subsidiaries. The PepcoSettling Parties and the Mirant Settling Parties will release each other fromall claims known as of May 30, 2006, including the fraudulent transferclaims brought by Old Mirant and several of its subsidiaries against Pepco in July 2005.The Settlement Agreement will become effective once it has been approved by theBankruptcy Court and that approval order has become a final order no longersubject to appeal. On August 9, 2006, the Bankruptcy Court entered anorder approving the Settlement Agreement, but certain holders of unsecuredclaims against Old Mirant in the bankruptcy proceedings have appealed thatorder, and it has not yet become a final order.

Under the Settlement Agreement, Mirant Power Purchasewill perform any remaining obligations under the APSA, and Mirant will guarantyits performance. The Back-to-Back Agreement will be rejected and terminatedeffective as of May 31, 2006, unless Mirant exercises an option given toit under the Settlement Agreement to have the Back-to-Back Agreement assumedunder certain conditions as described below. While the appeal filed from theBankruptcy Court’s August 9, 2006, order approving the SettlementAgreement is pending, the parties will continue to perform their obligationsunder the Back-to-Back Agreement until the appeal is resolved and the approvalorder has become a final order. Unless the Back-to-Back Agreement is assumed,Pepco will refund to Mirant Power Purchase all payments received under theBack-to-Back Agreement for energy, capacity or other services delivered after May 31,2006, through the date the Settlement Agreement becomes effective.

With respect to the other agreements executed as partof the closing of the APSA (the “Ancillary Agreements”) and other agreementsbetween Pepco and subsidiaries of Mirant, including subsidiaries of theCompany, the Mirant subsidiary that is a party to each agreement will assumethe agreement and Mirant will guaranty that subsidiary’s performance. MirantPower Purchase’s obligations under the APSA do not include any obligationsrelated to the Ancillary Agreements. If the Back-to-Back Agreement is rejectedpursuant to the terms of the Settlement Agreement, the Settlement Agreementprovides that a future breach of the APSA or any Ancillary Agreement by a partyto such agreement will not entitle the 

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non-defaulting party toterminate, suspend performance under, or exercise any other right or remedyunder or with respect to any of the remainder of such agreements. If, however,Mirant elects to have the Back-to-Back Agreement assumed and assigned to MirantPower Purchase under the conditions set out in the Settlement Agreement, thenthe Settlement Agreement provides that nothing in its terms prejudices theargument currently being made by Pepco in the contract rejection proceedingsthat the APSA, the Back-to-Back Agreement, and the Ancillary Agreementsconstitute a single non-severable agreement, the material breach of which wouldentitle Pepco to suspend or terminate its performance thereunder, or anydefense of Mirant and its subsidiaries to such an argument by Pepco.

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having avalue, after liquidation of the stock by Pepco, equal to $520 million,subject to certain adjustments. Upon the Settlement Agreement becomingeffective, Mirant will distribute up to 18 million shares of Mirant commonstock to Pepco to satisfy its claim and Pepco will liquidate those shares. Theshares are to be distributed to Pepco in two distributions, the first totaling13.5 million shares and the second to be determined by Mirant after theSettlement Agreement becomes effective so as to produce upon liquidation totalnet proceeds from both share distributions as near to $520 million aspossible, subject to the overall cap on the shares to be distributed of 18 millionshares. If the net proceeds received by Pepco from the liquidation of theshares are less than $520 million, Mirant will pay Pepco cash equal to thedifference. If the closing price of Mirant’s stock is less than $16.00 on fourbusiness days in a 20 consecutive business day period prior to any distributionof shares to Pepco on its claim, then Mirant can elect to have the Back-to-BackAgreement assumed and assigned to Mirant Power Purchase rather than rejectingit. If Mirant exercises this right to have the Back-to-Back Agreement assumed,then the $520 million is reduced to $70 million and Mirant PowerPurchase would continue to perform the Back-to-Back Agreement through itsexpiration in 2021 with Mirant guaranteeing its performance. The SettlementAgreement allocates the $70 million to various claims asserted by Pepcothat do not arise from the rejection of the Back-to-Back Agreement, includingclaims asserted under the Local Area Support Agreement between Pepco and MirantPotomac River, LLC (“Mirant Potomac River”).

***California and Western Power Markets***

*FERC Show Cause ProceedingRelating to Trading Practices.**  *OnJune 25, 2003, the Federal Energy Regulatory Commission (the “FERC”)issued a show cause order (the “Trading Practices Order”) to more than 50 parties,including Mirant Americas Energy Marketing and subsidiaries of Mirant AmericasGeneration, that a FERC staff report issued on March 26, 2003, identifiedas having potentially engaged in one or more trading strategies of the typeemployed by Enron Corporation and its affiliates (“Enron”), as described inEnron memos released by the FERC in May 2002. The Trading Practices Orderidentified certain specific trading practices that the FERC indicated couldconstitute gaming or anomalous market behavior in violation of the CaliforniaIndependent System Operator (“CAISO”) and California Power Exchange (“Cal PX”)tariffs. The Trading Practices Order requires the CAISO to identifytransactions between January 1, 2000, and June 20, 2001, that mayinvolve 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 sales of ancillary services, which is discussed below. In a November 14,2003, order in a different proceeding, the FERC ruled that certain allegationsof improper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in the show cause proceeding. On December 19,2003, the Mirant entities filed with the FERC for approval of an amendment tothe Trading Settlement Agreement reached with the FERC Trial Staff with respectto the sale of ancillary services. Under that amendment, the FERC 

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would have anallowed unsecured claim in Mirant Americas Energy Marketing’s bankruptcyproceeding for $3.67 million in settlement of the allegations with respectto the sale of ancillary services. The FERC approved the Trading SettlementAgreement, as amended, on June 27, 2005, and the Bankruptcy Court approvedit on August 24, 2005. Certain parties filed motions for rehearing, whichthe FERC denied on October 11, 2006.

***Environmental Matters***

*MirantPotomac River Downwash Study.**  *OnSeptember 23, 2004, the Virginia Department of Environmental Quality (the “VirginiaDEQ”) and Mirant Potomac River entered into an order by consent with respect tothe Potomac River plant under which Mirant Potomac River agreed to perform amodeling analysis to assess the potential effect of “downwash” from the plant (1) onambient concentrations of sulfur dioxide (“SO2”), nitrogen dioxide(“NO2”),carbon monoxide (“CO”) and particulate matter less than or equal to 10micrometers (“PM10”) for comparison to the applicable national ambient airquality standards (“NAAQS”) and (2) on ambient concentrations of mercuryfor comparison to Virginia Standards of Performance for Toxic Pollutants.Downwash is the effect that occurs when aerodynamic turbulence induced bynearby structures causes emissions from an elevated source, such as asmokestack, to move rapidly toward the ground resulting in higher ground levelconcentrations of emissions. If the modeling analysis indicated that emissionsfrom the facility may cause exceedances of the NAAQS for SO2, NO2, CO or PM10,or exceedances of mercury compared to Virginia Standards of Performance forToxic Pollutants, the consent order required Mirant Potomac River to submit tothe Virginia DEQ a plan and schedule to eliminate and prevent such exceedanceson a timely basis. Upon approval by the Virginia DEQ of the plan and schedule,the approved plan and schedule is to be incorporated by reference into theconsent order.

The computer modeling analysis predicted thatemissions from the Potomac River plant have the potential to contribute tolocalized, modeled instances of exceedances of the NAAQS for SO2, NO2 and PM10under certain conditions. Based on those results, the Virginia DEQ issued adirective to Mirant Potomac River on August 19, 2005, to undertakeimmediately such action as was necessary to ensure protection of human healthand the environment and eliminate NAAQS violations. On August 24, 2005,power production at all five units of the Potomac River generating facility wastemporarily halted in response to the directive from the Virginia DEQ. On August 25, 2005, the District of ColumbiaPublic Service Commission filed an emergency petition and complaint with theFERC and the Department of Energy (the “DOE”) to prevent the shutdown of thePotomac River facility. The matter remains pending before the FERC and the DOE.On September 21, 2005, Mirant Potomac River commenced partial operation ofone unit of the plant. On December 20, 2005, due to a determination by theDOE that an emergency situation existed with respect to the reliability of thesupply of electricity to central Washington, D.C., the DOE ordered MirantPotomac River to generate electricity at the Potomac River generating facility,as requested by Pennsylvania-New Jersey-Maryland Interconnection, LLC (“PJM”),during any period in which one or both of the transmission lines serving thecentral Washington, D.C. area are out of service due to a planned or unplannedoutage. In addition, the DOE ordered Mirant Potomac River, at all other times,for electric reliability purposes, to keep as many units in operation aspossible and to reduce the start-up time of units not in operation withoutcontributing to any NAAQS exceedances. The DOE required Mirant Potomac River tosubmit a plan, on or before December 30, 2005, that met theserequirements. The DOE advised that it would consider Mirant Potomac River’splan in consultation with the Environmental Protection Agency (the “EPA”). Theorder further provides that Mirant Potomac River and its customers should agreeto mutually satisfactory terms for any costs incurred by it under this order orjust and reasonable terms shall be established by a supplemental order. Certainparties filed for rehearing of the DOE order, and on February 17, 2006,the DOE issued an order granting rehearing solely for purposes of considering furtherthe rehearing requests. Mirant Potomac River submitted an operating plan inaccordance with the order. On January 4, 2006, the DOE issued an interimresponse to Mirant 

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PotomacRiver’s operating plan authorizing operation of the units of the Potomac Rivergenerating facility on a reduced basis, but making it possible to bring theentire plant into service within approximately 28 hours when necessary forreliability purposes. The DOE’s order expires after November 30, 2006, butMirant Potomac River expects it will be able to continue to operate these unitsafter that expiration.

In a letter received December 30,2005, the EPA invited Mirant Potomac River and the Virginia DEQ to work withthe EPA to ensure that Mirant Potomac River’s operating plan submitted to theDOE adequately addresses NAAQS issues. The EPA also asserts in its letter thatMirant Potomac River did not immediately undertake action as directed by theVirginia DEQ’s August 19, 2005, letter and failed to comply with therequirements of the Virginia State Implementation Plan established by thatletter. Mirant Potomac River received a second letter from the EPA on December 30,2005, requiring Mirant to provide certain requested information as part of anEPA investigation to determine the Clean Air Act compliance status of thePotomac River generating facility. On January 9, 2006, the FERC issued anorder directing PJM and Pepco to file a long-term plan to maintain adequatereliability in the Washington, D.C. area and surrounding region and a plan toprovide adequate reliability pending implementation of this long-term plan. On February 8,2006, PJM and Pepco filed their proposed reliability plans.

On June 1, 2006, Mirant Potomac River and the EPAexecuted an Administrative Compliance Order by Consent (the “ACO”) to resolvethe EPA’s allegations that Mirant Potomac River violated the Clean Air Act bynot immediately shutting down all units at the Potomac River facility uponreceipt of the Virginia DEQ’s August 19, 2005, letter and to assure an acceptablelevel of reliability to the District of Columbia. The ACO (i) specifiescertain operating scenarios and SO2 emissions limits for the Potomac Riverfacility, which scenarios and limits take into account whether one or both ofthe 230kV transmission lines serving Washington, D.C. are out of service; (ii) requiresthe operation of trona injection units to reduce SO2 emissions; and (iii) requiresMirant Potomac River to undertake a model evaluation study to predict ambientair quality impacts from the facility’s operations. In accordance with thespecified operating scenarios, the ACO permits the facility to operate using adaily predictive modeling protocol. This protocol allows the facility toschedule operations based on whether computer modeling predicts a NAAQSexceedance, based on weather and certain operating parameters. Also, an alarmsystem and six ambient SO2 monitors in various sites near the facility signalpotential exceedances of the NAAQS. Mirant Potomac River reports data,including modeled predictions and actual readings, to the EPA and the VirginiaDEQ. On June 2, 2006, the DOE issued a letter modifying its January 6,2006, order to direct Mirant Potomac River to comply with the ACO in order toensure adequate electric reliability to the District of Columbia. MirantPotomac River is operating the Potomac River facility in accordance with theACO and has been able to operate all five units of the facility most of thetime under the ACO.

*SuitRegarding Chalk Point Emissions.*   By letter datedJune 15, 2006, four environmental advocacy organizations—EnvironmentalIntegrity Project, Chesapeake Climate Action Network, Patuxent Riverkeeper andEnvironment Maryland Research and Policy Center—notified Mirant and MirantMid-Atlantic that they intended to file suit alleging that Mirant Chalk Pointhad violated the opacity limits set by the permits for Chalk Point unit 3and unit 4 during thousands of six minute time intervals between January 2002and March 2006. The letter indicated that the organizations intend to filesuit to enjoin the violations alleged, to obtain civil penalties for pastnoncompliance to the extent that liability for these violations was notdischarged by the bankruptcy of Mirant Chalk Point, and to recover attorneys’fees. On August 3, 2006, Mirant, Mirant Mid-Atlantic, and Mirant ChalkPoint filed a complaint in the Bankruptcy Court seeking an injunction barringthe four organizations from filing suit as threatened in the June 15,2006, notice on the grounds that the notice and any claim for civil penaltiesor other monetary relief for alleged violations occurring before January 3,2006, violated the discharge of claims and causes of action granted MirantChalk Point under the Plan. On August 14, 2006, the Bankruptcy Courtentered an order agreed to by the parties enjoining the four organizations fromseeking monetary damages for any alleged 

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violations occurring on orbefore January 3, 2006. As part of that order, the organizations agreednot to file a complaint initiating litigation concerning the alleged violationsuntil August 30, 2006.

On August 29, 2006, the Maryland Department ofthe Environment (the “MDE”) filed a complaint against Mirant Chalk Point in theCircuit Court for Prince George’s County, Maryland, based upon the allegedviolations of the opacity limits applicable to Chalk Point units 3 and 4that were the focus of the June 15, 2006, notice letter from theenvironmental organizations and seeking civil penalties, injunctive relief andcosts. Simultaneously with the filing of the complaint, Mirant Chalk Point andthe MDE filed a proposed Consent Decree to resolve the issues raised by theComplaint. That Consent Decree was approved by the Maryland court on September 11,2006. The Consent Decree subjects Chalk Point unit 3 to more stringentopacity and particulate standards and requires it when burning fuel oil to usefuel oil with lower sulfur content than previously allowed under its permits.Mirant Chalk Point agreed in the Consent Decree to burn natural gas in Chalk Pointunits 3 and 4 for 95% of their heat input during certain months, subjectto some exceptions.

On August 30, 2006,the four environmental organizations filed suit in the United States DistrictCourt for the District of Maryland against Mirant, Mirant Mid-Atlantic, andMirant Chalk Point asserting that emissions from Chalk Point units 3 and 4had violated opacity limits set under the Clean Air Act and state law onnumerous occasions since January 4, 2006. The plaintiffs seek aninjunction prohibiting further violations by Chalk Point units 3 and 4 ofthe Clean Air Act, civil penalties of up to $32,500 for each violation of theClean Air Act, additional civil penalties for mitigation projects, andattorneys’ fees. On September 22, 2006, the Mirant defendants filed amotion to dismiss, arguing that under the Clean Air Act the MDE’s prosecutionof the same alleged violations in the Maryland state court proceeding and theirresolution through the Consent Decree barred the plaintiffs’ suit.

***City of Alexandria Zoning Action***

On January 18, 2005,Mirant Potomac River and Mirant Mid-Atlantic filed a complaint against the Cityof Alexandria and the City Council in the Circuit Court for the City ofAlexandria. The complaint sought to overturn the actions taken by the CityCouncil on December 18, 2004, changing the zoning status of Mirant PotomacRiver’s generating plant and approving revocation of certain special usepermits (the “1989 SUPs”), on the grounds that those actions violated federal,state and city laws. On February 24, 2006, the court entered judgment infavor of Mirant Potomac River and Mirant Mid-Atlantic declaring the change inthe zoning status of Mirant Potomac River’s generating plant adopted December 18,2004, to be invalid and vacating the City Council’s revocation of the 1989SUPs. The City of Alexandria filed a petition with the Virginia Supreme Courtseeking to appeal this judgment, and on September 11, 2006, the VirginiaSupreme Court agreed to hear the appeal.

***New York Tax Proceedings***

The Company’s subsidiaries that own the Bowline andLovett generating plants in New York are the petitioners in variousproceedings (“Tax Certiorari Proceedings”) initially brought in the New Yorkstate courts challenging the assessed value of those generating plants determinedby their respective local taxing authorities. Mirant Bowline has challenged theassessed value of the Bowline generating facility and the resulting local taxassessments for tax years 1995 through 2006. Mirant Bowline succeeded to rightsheld by Orange & Rockland Utilities, Inc. (“Orange &Rockland”) for the tax years prior to its acquisition of the Bowline Plant in1999 under its agreement with Orange & Rockland for the purchase ofthat plant. Mirant Lovett has initiated proceedings challenging the assessedvalue of the Lovett facility for each of the years 2000 through 2006. If theTax Certiorari Proceedings result in a reduction of the assessed value of thegenerating facility at issue in each proceeding, the New York Debtorowning the facility would be entitled to a refund with interest of any excesstaxes paid for those tax years.

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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 and for theLovett generating facility in each of the years 2000 through 2003. The basesfor the relief requested in the Tax Determination Motion on behalf of MirantBowline and Mirant Lovett were that the assessed values of the generatingfacilities made by the relevant taxing authorities had no justifiable basis andwere far in excess of their actual value. The local taxing authorities haveopposed the Tax Determination Motion, arguing that the Bankruptcy Court eitherlacks jurisdiction over the matters addressed by the Tax Determination Motionor should abstain from addressing those issues so that they can be addressed bythe state courts in which the Tax Certiorari Proceedings described in thepreceding paragraph were originally filed. On December 10, 2003, theBankruptcy Court ruled that it would retain joint jurisdiction with the New Yorkstate courts over the issues raised by the Tax Certiorari Proceedings and theTax Determination Motion.

Collectively, Mirant Bowline and Mirant Lovett havenot paid approximately $58 million assessed by local taxing authorities onthe Bowline and Lovett generating facilities for 2003, which fell due on September 30,2003, and January 30, 2004, approximately $53 million assessed bylocal taxing authorities on the generating facilities for 2004 that fell due onSeptember 30, 2004, and January 30, 2005, approximately $59 millionassessed by local taxing authorities on the generating facilities for 2005 thatfell due on September 30, 2005, and January 30, 2006, and $40 millionassessed by local taxing authorities on the generating facilities for 2006 thatfell due on September 30, 2006, in order to preserve their respective rightsto offset the overpayments of taxes made in earlier years against the sumspayable on account of current taxes. The failure to pay the taxes due on September 30,2003, January 30, 2004, September 30, 2004, January 30, 2005, September 30,2005, January 30, 2006, and September 30, 2006, could subject MirantBowline and Mirant Lovett to additional penalties and interest.

On June 23, 2006, the Bankruptcy Court entered anorder indicating that it would determine the disputed property tax liabilitiesin response to the Tax Determination Motion if the New York state court inwhich the Tax Certiorari Proceedings are pending had not issued a ruling by October 21,2006. On August 11, 2006, and August 28, 2006, the New Yorkstate court issued decisions addressing Mirant Bowline’s challenges to theassessed values of the Bowline facility for the years 1995 to 2003 and MirantLovett’s challenges to the assessed values of the Lovett facility for the years2000 to 2003. Except for 1996, where it found that Mirant Bowline had failed toperfect its challenge to the assessed value of the Bowline facility, the New Yorkstate court concluded that the value of the Bowline facility and the Lovettfacility in each year was substantially less than the assessed value set by thetaxing authorities. The Company estimates that the decisions rendered by the New Yorkstate court with respect to the tax challenges asserted by Mirant Bowline andMirant Lovett will result in refunds that with interest will cover the majorityof the unpaid taxes for the Bowline and Lovett facilities, taking into accountthe reduction in those unpaid taxes that would occur under the decisions.Mirant Bowline and Mirant Lovett have appealed the decisions of the New Yorkstate court, and the relevant taxing authorities have cross-appealed.

On October 3, 2006, the County of Rockland, New York,filed a motion with the Bankruptcy Court asking it to compel Mirant Bowline andMirant Lovett to pay the real property taxes owed for 2003 through 2006 basedupon the values of the Bowline and Lovett facilities for 2003 determined by theNew York state court. The County of Rockland asserts that the New Yorkstate court’s determination of the value of those facilities for 2003 shouldalso fix their assessed values for the subsequent three years under section 727of New York Real Property Tax Law. The County asserts that the unpaidtaxes total $111 million, with penalties and interest. On October 5,2006, Mirant, Mirant New York, Mirant Bowline and Mirant Lovett filed acomplaint with the Bankruptcy Court requesting that it determine the realproperty taxes owed by Mirant Bowline and Mirant Lovett for 2004 through 2006,that any refunds owed to Mirant Bowline and Mirant Lovett should be treated aspayments of or set off against the unpaid taxes, and that the penalties andinterest potentially owed on the unpaid taxes should be reduced or eliminated. 

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The Mirant plaintiffsargue that the pending appeals of the rulings entered by the New Yorkstate court and exceptions set out in section 727 of New York RealProperty Tax Law cause the rulings by the New York state court not to bedeterminative of the values of the plants for any year after 2003.

There have been no othermaterial developments in legal proceedings involving the Company or itssubsidiaries since those reported in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005, and Form 10-Qs for thequarters ended March 31, 2006, and June 30, 2006.

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

There have been nomaterial changes in risk factors since those reported in Mirant AmericasGeneration’s Annual Report on Form 10-K for the year ended December 31,2005.

**Item 6.**                        Exhibits

(a)          *Exhibits*.

| Exhibit  Number | ** ** | **Exhibit Name** | ** ** |
|-----------------|------------|-----------------------|------------|
|            | 2.1        | *                     |       | Amended  and Restated Joint Chapter 11 Plan of Reorganization for Registrant and  its Affiliated Debtors (Designated on Form 8-K filed  December 15, 2005, as Exhibit 2.1) |   |
|            | 3.1        | *                     |       | Certificate of  Formation for Mirant Americas Generation, LLC, filed with the Delaware  Secretary of State on November 1, 2001(designated in Mirant Americas  Generation, LLC Form 10-Q for the Quarter Ended  September 30, 2001 as Exhibit 3.1) |   |
|            | 3.2        |                  |       | Amended and  Restated Limited Liability Company Agreement for Mirant Americas Generation, LLC  dated January 3, 2006. |   |
|            | 31.1       |                  |       | Certification of  Chief Executive Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). |   |
|            | 31.2       |                  |       | Certification of  Chief Financial Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). |   |
|            | 32.1       |                  |       | Certification of  the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)). |   |
|            | 32.2       |                  |       | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)). |   |

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*                    Asteriskindicates exhibits incorporated by reference.

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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 13th day of November, 2006.
|        | MIRANT AMERICAS GENERATION,  LLC |
|--------|----------------------------------|
|   | By:                              | /s/  THOMAS LEGRO |
|   |                             | Thomas Legro |
|   | * *                         | *Senior  Vice President and Controller (Principal Accounting Officer)* |

 

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