**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

| x                                                                                                                                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **For the Quarterly Period Ended  March 31, 2005**                                                                                                             |
| **Or**                                                                                                                                                              |
| o                                                                                                                                                                   | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| **For the Transition Period from***          *  to *          * |

 

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Mirant Americas Generation, LLC

(Exact name of registrantas specified in its charter)

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

 

| **1155 Perimeter Center  West, Suite 100,** | **30338**          |
|--------------------------------------------------|--------------------|
| **Atlanta,  Georgia**                            | (Zip Code)         |
| (Address of Principal Executive Officers)        | ** **         |
| **(678)  579-5000**                              | **www.mirant.com** |
| (Registrant’s  Telephone Number,            | (Web Page)         |
| Including Area  Code)                            | ** **         |

 

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

o Yes  x No

Indicate by check mark whether the registrant is anaccelerated filer (as defined by Rule 12b-2 of the Act).

o Yes  x No

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

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**TABLE OF CONTENTS**
| ** **   | ** ** |                                                                                             | ** ** | **Page** | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
|         |       | Cautionary  Statement Regarding Forward-Looking Information                                 |       |     | 3          |   |   |
| ** **   |       | **PART I—FINANCIAL  INFORMATION**                                                 |       |     |       |   |   |
| Item 1. |       | Interim  Financial Statements (unaudited):                                                  |       |     |       |   |   |
|         |       | Condensed  Consolidated Statements of Operations                                            |       |     | 6          |   |   |
|         |       | Condensed  Consolidated Balance Sheets                                                      |       |     | 7          |   |   |
|         |       | Condensed  Consolidated Statements of Member’s Equity                                  |       |     | 8          |   |   |
|         |       | Condensed  Consolidated Statements of Cash Flows                                            |       |     | 9          |   |   |
|         |       | Notes to the  Condensed Consolidated Financial Statements                                   |       |     | 10         |   |   |
| Item 2. |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |       |     | 37         |   |   |
| Item 3. |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       |     | 45         |   |   |
| Item 4. |       | Controls and  Procedures                                                                    |       |     | 45         |   |   |
| ** **   |       | **PART II—OTHER INFORMATION**                                                     |       |     |       |   |   |
| Item 1. |       | Legal  Proceedings                                                                          |       |     | 47         |   |   |
| Item 6. |       | Exhibits                                                                                    |       |     | 48         |   |   |

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

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

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

**General Factors**

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

·       failureof our assets to perform as expected;

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

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

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

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

·       strikes,union activity or labor unrest;

·       weatherand other natural phenomena;

·       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;

·       pricemitigation strategies employed by independent system operators that result in afailure to compensate our generation units adequately for all of their costs;

·       volatilityin our financial results as a result of our hedging activities;

·       ourinability to enter into intermediate and long-term contracts to sell power andprocure fuel on terms and prices acceptable to us;

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·       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;

·       oursubstantial indebtedness and the possibility that we or our subsidiaries mayincur 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 Mid-Atlanticcontained in its leveraged lease financing agreements; and

·       thedisposition of the pending litigation described in this Form 10-Q aswell as our Form 10-K for the year ended December 31, 2004.

**Bankruptcy-RelatedFactors**

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

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

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

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

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

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

·       ourability to successfully reject unfavorable contracts;

·       the disposition ofunliquidated claims against us;

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

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

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

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

·       theduration of our Chapter 11 proceedings.

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The ultimate outcome ofmatters with respect to which we make forward-looking statements and theterms of any reorganization plan ultimately confirmed can affect the value ofour various pre-petition liabilities and other securities. No assurance can begiven as to what values, if any, will be ascribed in the bankruptcy proceedingsto each of these constituencies. Accordingly, we urge that caution be exercisedwith respect to existing and future investments in these liabilities and/orsecurities.

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

**Factorsthat Could Affect Future Performance**

In addition to thediscussion of certain risks in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and the accompanying Notes to MirantAmericas Generation, LLC’s unaudited condensed consolidated financialstatements, other factors that could affect the Company’s future performance(business, financial condition or results of operations and cash flows) are setforth in our 2004 Annual Report on Form 10-K.

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**
| ** **                                                                           | ** ** | **Three Months  Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **(in millions)**                       | ** ** |
| **Operating Revenues:**                                                              |       | ** **                                   | ** ** |   |   |
| Affiliate                                                                            | ** ** | **$**                                        | **381**    | ** ** | $ | 471 |   |
| Nonaffiliate                                                                         | ** ** | **50**                                       | ** ** | 77 |   |
| Total operating revenues                                                             | ** ** | **431**                                      | ** ** | 548 |   |
| Cost of fuel, electricity and other products—affiliate                          | ** ** | **210**                                      | ** ** | 300 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                      | ** ** | **54**                                       | ** ** | 45 |   |
| Total cost of fuel, electricity and other products                                   | ** ** | **264**                                      | ** ** | 345 |   |
| **Gross  Margin**                                                                    | ** ** | **167**                                      | ** ** | 203 |   |
| **Operating Expenses:**                                                              |       | ** **                                   | ** ** |   |   |
| Generation  facilities rent                                                          | ** ** | **25**                                       | ** ** | 24 |   |
| Depreciation and  amortization                                                       | ** ** | **23**                                       | ** ** | 23 |   |
| Operations and  maintenance—affiliate                                           | ** ** | **62**                                       | ** ** | 70 |   |
| Operations and  maintenance—nonafiliate                                         | ** ** | **57**                                       | ** ** | 58 |   |
| Gain on sales of  assets, net                                                        | ** ** | **(1**                                       | **)**      | — |   |
| Total operating expenses                                                             | ** ** | **166**                                      | ** ** | 175 |   |
| **Operating Income**                                                                 | ** ** | **1**                                        | ** ** | 28 |   |
| **Other  (Expense) Income, net:**                                                    |       | ** **                                   | ** ** |   |   |
| Interest expense—affiliate                                                      | ** ** | **(2**                                       | **)**      | — |   |
| Other, net                                                                           | ** ** | **1**                                        | ** ** | — |   |
| Total other expense, net                                                             | ** ** | **(1**                                       | **)**      | — |   |
| **Income  from Continuing Operations Before  Reorganization Items and Income Taxes** |       | **—**                                   | ** ** | 28 |   |
| Reorganization items, net                                                            | ** ** | **15**                                       | ** ** | 13 |   |
| Provision  (benefit) for income taxes                                                | ** ** | **6**                                        | ** ** | — |   |
| **Net  (Loss) Income**                                                               | ** ** | **$**                                        | **(21**    | **)** | $ | 15 |   |

 

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

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDBALANCE SHEETS**
| ** **                                        | ** ** | **At  March 31,  2005** | ** ** | **At  December 31,  2004** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(Unaudited)**              | ** ** | ** **                      | ** ** |
| ** **                                        | ** ** | **(in millions)**       | ** ** |
| **Assets**                                        |       |                         |       | ** **                      |       |   |   |   |   |
| **Current Assets:**                               |       |                         |       | ** **                      |       |   |   |   |   |
| Cash and cash equivalents                         | ** ** | ** **                   | **$**      | **499**                         | ** ** |   |   | $ | 414 |   |   |
| Receivables:                                      |       |                         |       | ** **                      |       |   |   |   |   |
| Affiliate                                         | ** ** | ** **                   | **250**    | ** **                      |       |   | 246 |   |   |
| Customer accounts                                 | ** ** | ** **                   | **3**      | ** **                      |       |   | 11 |   |   |
| Price risk management assets—affiliate       | ** ** | ** **                   | **23**     | ** **                      |       |   | 11 |   |   |
| Prepaid rent and other payments                   | ** ** | ** **                   | **124**    | ** **                      |       |   | 133 |   |   |
| Inventory                                         | ** ** | ** **                   | **155**    | ** **                      |       |   | 162 |   |   |
| Other current assets                              | ** ** | ** **                   | **20**     | ** **                      |       |   | 35 |   |   |
| Total current assets                              | ** ** | ** **                   | **1,074**  | ** **                      |       |   | 1,012 |   |   |
| **Property, Plant and Equipment, net**            | ** ** | ** **                   | **2,106**  | ** **                      |       |   | 2,109 |   |   |
| **Noncurrent  Assets:**                           |       |                         |       | ** **                      |       |   |   |   |   |
| Other intangible assets, net                      | ** ** | ** **                   | **205**    | ** **                      |       |   | 207 |   |   |
| Notes receivable from affiliate                   | ** ** | ** **                   | **478**    | ** **                      |       |   | 478 |   |   |
| Price risk management assets—affiliate       | ** ** | ** **                   | **7**      | ** **                      |       |   | 1 |   |   |
| Prepaid rent                                      | ** ** | ** **                   | **173**    | ** **                      |       |   | 197 |   |   |
| Other noncurrent assets                           | ** ** | ** **                   | **28**     | ** **                      |       |   | 26 |   |   |
| Total noncurrent assets                           | ** ** | ** **                   | **891**    | ** **                      |       |   | 909 |   |   |
| **Total Assets**                                  | ** ** | ** **                   | **$**      | **4,071**                       | ** ** |   |   | $ | 4,030 |   |   |
| **Liabilities and Member’s Equity**          |       |                         |       | ** **                      |       |   |   |   |   |
| **Current  Liabilities:**                         |       |                         |       | ** **                      |       |   |   |   |   |
| Accounts payable and accrued liabilities          | ** ** | ** **                   | **$**      | **53**                          | ** ** |   |   | $ | 51 |   |   |
| Payable to affiliates                             | ** ** | ** **                   | **33**     | ** **                      |       |   | 52 |   |   |
| Price risk management liabilities—affiliate  | ** ** | ** **                   | **120**    | ** **                      |       |   | 62 |   |   |
| Revenue subject to refund                         | ** ** | ** **                   | **5**      | ** **                      |       |   | 5 |   |   |
| Accrued taxes—affiliate                      | ** ** | ** **                   | **70**     | ** **                      |       |   | 51 |   |   |
| Accrued taxes                                     | ** ** | ** **                   | **136**    | ** **                      |       |   | 122 |   |   |
| Other current liabilities                         | ** ** | ** **                   | **14**     | ** **                      |       |   | 8 |   |   |
| Total current liabilities                         | ** ** | ** **                   | **431**    | ** **                      |       |   | 351 |   |   |
| **Noncurrent  Liabilities:**                      |       |                         |       | ** **                      |       |   |   |   |   |
| Price risk  management liabilities—affiliate | ** ** | ** **                   | **6**      | ** **                      |       |   | 1 |   |   |
| Other noncurrent  liabilities                     | ** ** | ** **                   | **24**     | ** **                      |       |   | 46 |   |   |
| Total noncurrent liabilities                      | ** ** | ** **                   | **30**     | ** **                      |       |   | 47 |   |   |
| **Liabilities Subject to Compromise**             | ** ** | ** **                   | **3,437**  | ** **                      |       |   | 3,438 |   |   |
| **Member’s Equity:**                         |       |                         |       | ** **                      |       |   |   |   |   |
| Member’s interest                            | ** ** | ** **                   | **3,853**  | ** **                      |       |   | 3,853 |   |   |
| Accumulated deficit                               | ** ** | ** **                   | **(3,680** | **)**                           |       |   | (3,659 | ) |   |
| Total member’s equity                        | ** ** | ** **                   | **173**    | ** **                      |       |   | 194 |   |   |
| **Total  Liabilities and Member’s Equity**   | ** ** | ** **                   | **$**      | **4,071**                       | ** ** |   |   | $ | 4,030 |   |   |

 

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

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDSTATEMENTS of MEMBER’S EQUITY(UNAUDITED)**
| ** **                        | ** ** | **Member’s  Interest** | ** ** | **Accumulated  Deficit** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **(in millions)**      | ** ** |
| Balance,  December 31, 2004  |       |                        | $          | 3,853                    |       |   |   | $ | (3,659 | **)** |   |
| Net loss                          |       |                        | —     |                     |       |   | (21 | **)** |   |
| **Balance,  March 31, 2005** | ** ** | ** **                  | **$**      | **3,853**                |       | ** ** | ** ** | **$** | **(3,680** | **)** |   |

 

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

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**
| ** **                                                                                 | ** ** | **Three Months  Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **                                                                                 | ** ** | **(in millions)**                       | ** ** |
| **Cash Flows from Operating  Activities:**                                                 |       |                                         |       |   |   |
| Net (loss) income                                                                          | ** ** | **$**                                        | **(21**    | **)** | $ | 15 |   |
| Adjustments to  reconcile net (loss) income to  net cash provided by operating activities: |       |                                         |       |   |   |
| Depreciation and amortization                                                              | ** ** | **23**                                       |       | 23 |   |
| Unrealized losses on price risk management  assets and liabilities—affiliate,  net    |       | **45**                                       |       | 38 |   |
| Restructuring charges, net of amounts paid                                                 | ** ** | **—**                                   |       | 4 |   |
| Non-cash charge for reorganization items                                                   | ** ** | **3**                                        |       | — |   |
| Deferred income taxes                                                                      | ** ** | **1**                                        |       | — |   |
| Gain on sale of assets, net                                                                | ** ** | **(1**                                       | **)**      | — |   |
| Changes in  certain assets and liabilities:                                                |       |                                         |       |   |   |
| Affiliate receivables                                                                      | ** ** | **(4**                                       | **)**      | (45 | ) |
| Customer accounts receivable                                                               | ** ** | **13**                                       |       | (2 | ) |
| Inventory                                                                                  | ** ** | **7**                                        |       | 5 |   |
| Prepaid rent                                                                               | ** ** | **25**                                       |       | 24 |   |
| Other assets                                                                               | ** ** | **10**                                       |       | 16 |   |
| Accounts payable and accrued liabilities                                                   | ** ** | **—**                                   |       | (6 | ) |
| Payable to affiliate                                                                       | ** ** | **(18**                                      | **)**      | (1 | ) |
| Accrued taxes—affiliate                                                               | ** ** | **31**                                       |       | — |   |
| Accrued taxes—nonaffiliate                                                            | ** ** | **(15**                                      | **)**      | 16 |   |
| Total adjustments                                                                          | ** ** | **120**                                      |       | 72 |   |
| Net cash provided by operating activities                                                  | ** ** | **99**                                       |       | 87 |   |
| **Cash  Flows from Investing Activities:**                                                 |       |                                         |       |   |   |
| Capital expenditures                                                                       | ** ** | **(18**                                      | **)**      | (14 | ) |
| Proceeds from sale of assets                                                               | ** ** | **4**                                        |       | — |   |
| Net cash used in investing activities                                                      | ** ** | **(14**                                      | **)**      | (14 | ) |
| **Cash  Flows from Financing Activities:**                                                 |       |                                         |       |   |   |
| Net cash provided by financing activities                                                  | ** ** | **—**                                   |       | — |   |
| **Net Increase in Cash and Cash Equivalents**                                              | ** ** | **85**                                       |       | 73 |   |
| **Cash  and Cash Equivalents, beginning of period**                                        | ** ** | **414**                                      |       | 324 |   |
| **Cash and Cash Equivalents, end of period**                                               | ** ** | **$**                                        | **499**    |   | $ | 397 |   |
| **Supplemental  Cash Flow Disclosures:**                                                   |       |                                         |       |   |   |
| (Cash refund received) cash paid for income taxes                                          |       | **$**                                        | **—** |   | $ | (1 | ) |
| Cash paid for  interest                                                                    | ** ** | **$**                                        | **2**      |   | $ | 1 |   |

 

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

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**MIRANTAMERICAS GENERATION, LLC AND SUBSIDIARIES**

**(Debtor-in-Possession)**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**March 31, 2005and 2004**

**A.   Descriptionof Business**

***Overview***

Mirant AmericasGeneration, LLC, including its subsidiaries (collectively, the “Company” or “Mirant Americas Generation”), is a national independent power provider and anindirect wholly-owned subsidiary of Mirant Corporation (“Mirant”). The Companyproduces and sells electricity in the United States under fixed price contractsand on the spot market to its energy marketing affiliate Mirant Americas EnergyMarketing L.P. (“Mirant Americas Energy Marketing”), utilities and energymerchants. The Company sells substantially all of the output from itsgenerating facilities in the forward and spot markets and the remainder undercontracts with third parties. In addition, Mirant Americas Energy Marketingarranges for the supply of substantially all of the fuel used by the Company’sgenerating units and emissions allowances which are utilized in connection withthe business. The Company uses derivative financial instruments, such ascommodity forwards, futures, options and swaps to manage its exposure tofluctuations in electric energy and fuel prices. The Company is a Delaware limitedliability company and owns or leases approximately 11,000 megawatts (“MW”) ofelectric generation capacity in the United States. The Company operates56 generating units at 19 plants serving customers located near majormetropolitan load centers in Maryland, Virginia, California, New York,Massachusetts and Texas.

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

***Basis ofPresentation***

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

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

***New AccountingStandard Not Yet Adopted***

In March 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47,*Accounting for Conditional Asset RetirementObligations* (“FIN 47”). The interpretation requires companies torecognize a liability for the fair value of a legal obligation to perform assetretirement activities that are conditional on a future event if the amount canbe reasonably estimated. FIN 47 is effective for the fiscal years ending after December 15,2005. The Company will adopt the provisions of 

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FIN 47on the earlier of its emergence from bankruptcy or the effective date. TheCompany has not yet determined the impact, if any, of FIN 47 on its financialstatements.

**B.   BankruptcyRelated Disclosures**

On January 19, 2005,the Mirant Debtors filed a proposed Plan of Reorganization (as amended, the “Plan”)and Disclosure Statement (as amended, the “Disclosure Statement”) with theBankruptcy Court. A First Amended Plan and a First Amended Disclosure Statementwere filed on March 25, 2005. The proposed Plan sets forth the proposedstructure of the Mirant Debtors at emergence and outlines how the claims ofcreditors and stockholders are proposed to be treated. If the DisclosureStatement is found by the Bankruptcy Court to contain adequate information,then the Mirant Debtors will solicit votes on the proposed Plan from thosecreditors, security holders and interest holders who are entitled to vote onthe proposed Plan.

Under the proposed Plan, (1) theintermediate holding company subsidiaries of Mirant Americas Generation (excludingMirant Mid-Atlantic and, absent a resolution of certain outstanding propertytax disputes, Mirant New York) will be merged and consolidated to form MirantNorth America, LLC (“Mirant North America”), a single intermediate holdingcompany subsidiary of Mirant Americas Generation; (2) Mirant Mid-Atlanticwill be merged into a subsidiary of Mirant North America and (3) in theevent it is excluded from the Plan, the capital stock of Mirant New York willbe contributed to Mirant North America. Mirant North America will directly orindirectly own 100% of the equity interests in the operating subsidiaries ofMirant Americas Generation, including Mirant Mid-Atlantic.

Theproposed Plan implements and is built around the following key elements:

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

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

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

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

·       theunsecured claims against the Mirant Americas Generation Debtors will be paid infull through (1) the issuance to general unsecured creditors and holdersof the Mirant Americas Generation revolving credit facilities and senior notesmaturing in 2006 and 2008 of (a) new debt securities of Mirant NorthAmerica or, at the option of the Mirant Debtors, cash proceeds from third-partyfinancing transactions, in an amount equal to 90% of the full amount owed tosuch creditors (as 

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determined by theBankruptcy Court) and (b) common stock in New Mirant having a value equalto 10% of such amount owed; and (2) the reinstatement of Mirant AmericasGeneration senior notes maturing in 2011, 2021 and 2031;

·       allowedconvenience claims (unsecured claims up to $25,000 in amount) shall receive asingle cash payment equal to the claim amount;

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

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

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

·       thedisputes regarding the Mirant Debtors’ ad valorem real property taxes for theBowline and Lovett facilities will be settled and resolved on terms that permitthe feasible operation of these assets, or the Mirant Debtors that own suchassets will remain in Chapter 11 until such matters are resolved by settlementor through litigation;

·       the bulk of the contingent liabilities of theMirant Debtors associated with the California energy crisis and certain relatedmatters are resolved pursuant to a global settlement as described in “Item 3. Legal Proceedings” of Mirant AmericasGeneration’s Form 10-K for the year ended December 31, 2004;

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

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

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

At present, the proposedPlan has not been approved by any of the Statutory Committees. As such, theMirant Debtors anticipate that negotiations will continue between the MirantDebtors and each of the Statutory Committees. Negotiations with the StatutoryCommittees, whether or not successful, could lead to material changes tocertain components of the proposed Plan.

Since April 2005, theMirant Debtors, the Statutory Committees and representatives of certain otherinterests have been party to proceedings before the Bankruptcy Court withrespect to the valuation of the Mirant Debtors. Pursuant to a letter dated June 30,2005, the Bankruptcy Court instructed the Mirant Debtors and their financialadvisors, The Blackstone Group, to make certain modifications to the 2005business plan of the Mirant Debtors and the valuation report prepared by TheBlackstone Group. The Bankruptcy Court indicated that it intends to use themodified business plan and valuation report to generate an enterprise value forthe Mirant Debtors which can be used for all purposes for confirmation of aplan of reorganization for the Mirant Debtors. Absent a settlement among theMirant Debtors, the Statutory Committees and the other parties, the MirantDebtors do not expect that they and The Blackstone Group will complete themodifications ordered by the Bankruptcy Court before the end of September 2005.

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

***Accounting forReorganization***

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

*Interest Expense*

The Mirant Debtors havediscontinued recording interest on liabilities subject to compromise.Contractual interest on liabilities subject to compromise in excess of reportedinterest was approximately $64 million for the three months ended March 31,2005. Contractual interest on liabilities subject to compromise in excess ofreported interest for the period from the Petition Date through March 31,2005 is approximately $429 million. This amount includes approximately $262 millionof interest related to Mirant Americas Generation long-dated bonds, which wouldbe reinstated under the proposed Plan.

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*Reorganization Items*

Reorganizationitems, net represents expense or income amounts that were recorded in theconsolidated financial statements as a result of the bankruptcy proceedingsprimarily related to estimated claims and losses on rejected and amendedcontracts and professional fees for accounting and legal services. For thethree months ended March 31, 2005 and 2004 the Company recorded $15million and $13 million, respectively, in the accompanying unauditedcondensed consolidated statements of operations.
| ** **                                                     | ** ** | **Three Months  Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| Professional fees and administrative expense                   |       |                                         | $          | 15 |   |   |   | $ | 10 |   |   |
| Estimated claims and losses on rejected and amended  contracts |       |                                         | 3          |   |   |   | 4 |   |   |
| Interest income, net                                           |       |                                         | (3         | ) |   |   | (1 | ) |   |
| Total                                                          |       |                                         | $          | 15 |   |   |   | $ | 13 |   |   |

 

*Liabilities Subject to Compromise*

Theamounts subject to compromise at March 31, 2005 and December 31, 2004,consisted of the following items (in millions):
| ** **                                                                              | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Items, absent the bankruptcy filings, that would  have been considered current at: | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Accounts payable  and accrued liabilities—affiliate                                |       |                     | $          | 172                         | ** ** |   |   | $ | 169 | ** ** |   |
| Accounts payable  and accrued liabilities—nonaffiliate                             |       |                     | 494        | ** **                  |       |   | 498 | ** ** |   |
| Current portion  of long-term debt                                                      |       |                     | 300        | ** **                  |       |   | 300 | ** ** |   |
| Items, absent the  bankruptcy filings, that would have been considered noncurrent at:   |       |                     |       | ** **                  |       |   |   | ** ** |   |
| Long-term  debt                                                                         |       |                     | 2,470      | ** **                  |       |   | 2,470 | ** ** |   |
| Other noncurrent  liabilities                                                           |       |                     | 1          | ** **                  |       |   | 1 | ** ** |   |
|                                                                                    |       |                     | $          | 3,437                       | ** ** |   |   | $ | 3,438 | ** ** |   |

 

**C.   RelatedParty Arrangements and Transactions**

***Services andAdministration Arrangements***

TheCompany and its subsidiaries utilize the services of Mirant, Mirant AmericasEnergy Marketing and Mirant Services. The significant arrangements with theseaffiliated companies are described below. The following table summarizes theamounts incurred under the arrangements that are recorded in the accompanyingunaudited condensed consolidated statements of operations as operations andmaintenance—affiliate (in millions):
| ** **                                    | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| Management, personnel and  services agreement |       |                                         | $          | 33 |   |   |   | $ | 35 |   |   |
| Services agreements                           |       |                                         | 11         |   |   |   | 15 |   |   |
| Administration arrangement                    |       |                                         | 18         |   |   |   | 20 |   |   |
| Total                                         |       |                                         | $          | 62 |   |   |   | $ | 70 |   |   |

 

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*Management,Personnel and Services Agreement with Mirant Services*

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

Thetotal costs incurred under the Management, Personnel and Services Agreementwith Mirant Services have been included in the accompanying unaudited condensedconsolidated statements of operations as follows (in millions):
| ** **                                                  | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| Cost of fuel, electricity and other products—affiliate |       |                                         | $          | 2 |   |   |   | $ | 2 |   |   |
| Operations and maintenance—affiliate                   |       |                                         | 33         |   |   |   | 35 |   |   |
| Total                                                       |       |                                         | $          | 35 |   |   |   | $ | 37 |   |   |

 

*Services Agreementswith Mirant Americas Energy Marketing*

The Company, through itssubsidiaries, is a party to separate services agreements with Mirant AmericasEnergy Marketing. Mirant Americas Energy Marketing is responsible for fuelprocurement for the Company’s facilities, as well as for executing contracts,including economic hedges, to reduce price risk. Each subsidiary of the companyrecords amounts due to Mirant Americas Energy Marketing and due from MirantAmericas Energy Marketing under the service agreements as a net accountspayable-affiliate or accounts receivable-affiliate because of each subsidiarieslegal right of offset. During the period of the ECSA, services to MirantMid-Atlantic were provided under separate services and risk managementagreements. Since May 1, 2003, these services have been provided under thePower and Fuel Agreements for 2003 and 2004. Beginning January 1, 2004,Mirant changed its allocation methodology related to its energy marketingoverhead expenses. Under the new methodology, substantially all energymarketing overhead costs are now allocated to Mirant’s operating subsidiaries.For the three months ended March 31, 2005 and 2004, the Company incurredapproximately $11 million and $15 million, respectively, in costs underthese agreements. These costs are included in operations and maintenance — affiliatein the accompanying unaudited condensed consolidated statements of operations.

*AdministrationArrangements with Mirant Services*

Beginning January 1,2004, Mirant changed its allocation methodology related to the allocation ofits corporate overhead expenses. Under the new methodology, substantially allof Mirant’s corporate overhead costs are now allocated to Mirant’s operatingsubsidiaries. For the three months ended March 31, 2005 and 2004, theCompany incurred approximately $18 million and $20 million, respectively,in costs under these arrangements, which are included in operations andmaintenance — affiliate in the accompanying unaudited condensed consolidatedstatements of operations.

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

Mirant Texas Investments, Inc.and Mirant Texas Management, Inc. (collectively “Mirant Texas”),wholly-owned subsidiaries, and Mirant Americas Energy Marketing entered intotwo tolling agreements, under which Mirant Americas Energy Marketing paidMirant Texas annual capacity based payments on the guaranteed capacity ofMirant Texas’ generating units in Texas. Mirant Americas Energy Marketing paidMirant Texas a fee for each megawatt-hour (“MWh”) of energy generated.For the three months ended March 31, 2004, revenue from Mirant AmericasEnergy Marketing under the tolling agreement was approximately $3 million.In August 2004, Mirant Texas entered into a tolling agreement with a thirdparty 

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through December 2006.For the three months ended March 31, 2005, revenue under this third partytolling agreement was approximately $2 million.

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

The Company purchasesemissions allowances from Mirant Americas Energy Marketing at Mirant Americas EnergyMarketing’s original cost to purchase the emissions allowances. Whereallowances have been purchased by Mirant Americas Energy Marketing from aMirant affiliate, the price paid by Mirant Americas Energy Marketing isdetermined by market indices. For the three months ended March 31, 2005and 2004, the Company purchased $2 million and $11 million, respectively, ofemissions allowances from Mirant Americas Energy Marketing. For the threemonths ended March 31, 2005 and 2004, the Company sold allowances toMirant Americas Energy Marketing for $5 million and $1 million, respectively.The allowances sold in the three months ended March 31, 2005 had a bookvalue of $4 million resulting in a gain of $1 million, which is reflected ingross margin. Emissions allowances purchased from Mirant Americas EnergyMarketing that were utilized in the three months ended March 31, 2005 and2004 were $8 million and $7 million, respectively, and are recorded in cost offuel, electricity and other products — affiliate in the accompanying unauditedcondensed consolidated statements of operations. As of March 31, 2005, theCompany had emissions allowances purchased from Mirant Americas EnergyMarketing of $48 million, which are recorded in inventory in the accompanyingunaudited condensed consolidated balance sheets.

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

Forthe three months ended March 31, 2005 and 2004, Mirant Mid-Atlanticsold approximately $9 million and $4 million, respectively, of fuel oilinventory from its Chalk Point facility to Mirant Peaker which approximatedbook value.

**D.   PriceRisk Management Assets and Liabilities**

Thefair values of Mirant Americas Generation’s price risk managementassets-affiliate and price risk management liabilities-affiliate as of March 31,2005 are included in the following table (in millions):
| ** **     | ** ** | **Assets**  | ** ** | **Liabilities** | ** ** | **Net Value at** | ** ** |
|----------------|------------|-------------|------------|-----------------|------------|----------------------------|------------|
| ** **     | ** ** | **Current** | ** ** | **Noncurrent**  | ** ** | **Current**                | ** ** | **Noncurrent** | ** ** | **March 31, 2005** | ** ** |
| Electricity    |       |        | $          | (44             | )          |                       |       | $ | 2 |   |   |   | $ | (135 | ) |   |   | $ | (6 | ) |   |   | $ | (183 | ) |   |
| Natural gas    |       |        | 8          |            |       |                       | 4          |   |   |   | 2 |   |   |   | — |   |   |   | 14 |   |   |
| Crude oil      |       |        | 26         |            |       |                       | 1          |   |   |   | 3 |   |   |   | — |   |   |   | 30 |   |   |
| Residual/other |       |        | 33         |            |       |                       | —     |   |   |   | 10 |   |   |   | — |   |   |   | 43 |   |   |
| Total          |       |        | $          | 23              |       |                       |       | $ | 7 |   |   |   | $ | (120 | ) |   |   | $ | (6 | ) |   |   | $ | (96 | ) |   |

 

Of the total $96 millionnet value liability at March 31, 2005, a net price risk managementliability of $97 million relates to contracts to be settled in 2005, a $6million net price risk management liability relates to contracts to be settledin 2006 and a $7 million net price risk management asset relates to contractsto be settled in periods thereafter. The volumetric weighted average maturity,or weighted average tenor, of the price risk management portfolio at March 31,2005, was approximately six months. The net notional amount of the price riskmanagement assets and liabilities at March 31, 2005, was a net short positionof approximately 12** **millionequivalent MWh.

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**E.   Other Intangible Assets**

Followingis a summary of other intangible assets as of (in millions): 
| ** **                           | ** ** | **Weighted**     | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Average**      | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Amortization** | ** ** | **Gross**                    | ** ** | ** **                      | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Amount**       | ** ** | **Carrying**                 | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Lives**        | ** ** | **Amortization**             | ** ** | **Amount**                      | ** ** | **Amortization** | ** ** | **Accumulated** | ** ** |
| Trading rights                       |       |             | 26 years   |                         |       |                            | $          | 27 |   |   |   | $ | (2 | ) |   |   | $ | 27 |   |   |   | $ | (1 | ) |   |
| Development  rights                  |       |             | 40 years   |                         |       |                            | 62         |   |   |   | (7 | ) |   |   | 62 |   |   |   | (7 | ) |   |
| Acquired  emissions allowances  |       |             | 32 years   |                         |       |                            | 131        |   |   |   | (16 | ) |   |   | 131 |   |   |   | (15 | ) |   |
| Other intangibles                    |       |             | 30 years   |                         |       |                            | 12         |   |   |   | (2 | ) |   |   | 12 |   |   |   | (2 | ) |   |
| Total other  intangible assets  |       |             |       |                         |       |                            | $          | 232 |   |   |   | $ | (27 | ) |   |   | $ | 232 |   |   |   | $ | (25 | ) |   |

 

**F.**   MirantMid-Atlantic Operating Leases

In conjunction with the acquisition of certain assetsfrom PEPCO, Mirant Mid-Atlantic has leased the Morgantown and the Dickersonbaseload units and associated property for terms of 33.75 and 28.5 years,respectively. Mirant Mid-Atlantic has an option to renew the leases for aperiod that would cover up to 75% of the economic useful life of thefacilities, as measured from the beginning of the original lease term throughthe end of the proposed remaining lease term. Mirant Mid-Atlantic is accountingfor these leases as operating leases. Rent expenses associated with theMorgantown and Dickerson operating leases totaled approximately $25 millionand $24 million for the three months ended March 31, 2005 and 2004,respectively, and are recorded as generation facilities rent expense in theaccompanying unaudited condensed consolidated statements of operations. Becauseof the variability in the scheduled payment amounts over the lease term, MirantMid-Atlantic records rental expense for these leases on a straight-line basis.As of March 31, 2005 and December 31, 2004, Mirant Mid-Atlantic haspaid approximately $260 million and $285 million, respectively, ofactual operating lease payments in accordance with the lease agreements inexcess of rent expense recognized, and has reported these amounts as prepaidrent in the accompanying unaudited condensed consolidated balance sheets. Inaddition to the regularly-scheduled rent payments, Mirant Mid-Atlantic paid anadditional $11 million as of March 31, 2005 and December 31,2004, as required by the lease agreements. Of the $11 million payment madein 2005, $8 million is included in the long-term prepaid rent balance andthe remaining $3 million is included in the current portion of the prepaidrent balance in the accompanying unaudited condensed consolidated balancesheets.

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

At this time, the Mirant Debtors maintain that theleases are not true leases for bankruptcy purposes. However, based on theBankruptcy Court’s comments in its April 2005 ruling, the Mirant Debtorsmay determine to modify their proposed Plan (and related Disclosure Statement)to propose that the leases be assumed conditioned upon certain provisions inthe leases—including the limitations on restricted payments and therestrictions on the incurrence of indebtedness and liens—being modified,stricken or determined to be unenforceable and certain alleged defaultsdetermined as not requiring “cure” as a 

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condition to assumption.In order to assume leases, a debtor-lessee must obtain bankruptcy courtapproval and, subject to certain exceptions set forth in the Bankruptcy Code,must cure any existing defaults under the applicable leases (unless suchdefaults are duly waived). It would be the Mirant Debtors’ objective thatassumption would be approved at or before confirmation of the Plan, and that aspart of the assumption or confirmation order, Mirant Mid-Atlantic would berelieved of the obligation to cure certain defaults and of the obligation toperform certain covenants. If it is not feasible for Mirant Mid-Atlantic toassume the leases because relief from certain defaults and/or covenants is notavailable, the two remaining alternatives are rejection and revisiting theissue of recharacterization. In the latter circumstance, if the BankruptcyCourt recharacterizes the leases as indebtedness, Mirant Mid-Atlantic may berequired to re-evaluate the accounting for the leases. If, on the other hand,recharacterization is not sought or is not available, and/or MirantMid-Atlantic cannot or does not assume the leases, then the leases will berejected. In that event, the owner lessors would be entitled to a return of theleased assets and would have a claim for damages, if any, arising from suchrejection, subject to the limitation on allowed claims under section 502(b)(6) ofthe Bankruptcy Code applicable to leases of real property. Any claims arisingon account of rejection would be subject to compromise in Mirant Mid-Atlantic’sChapter 11 case. The impact of any of these events would be reflected in theCompany’s consolidated financial statements if and when the events occur.

As a result of MirantMid-Atlantic’s bankruptcy filing, a lease event of default has occurred underthe leases. The leases provide that, upon a lease event of default, the ownerlessors’ remedies include (1) terminating the leases and repossessing theleased assets, (2) selling their interests in the leased assets, (3) demandingpayment by Mirant Mid-Atlantic of the excess, if any, of the termination valueover the fair market sales value of the leased assets or the discounted fairmarket rental value of the leased assets and (4) demanding payment of thetermination value mitigated by a sale of the leased assets for the account ofMirant Mid-Atlantic. The termination value for the leases approximated$1.4 billion at March 31, 2005 and generally decreases over time. Theability of the owner lessors to exercise their remedies under the leases iscurrently stayed as a result of Mirant Mid-Atlantic’s Chapter 11 filing.

**G.   Litigationand Other Contingencies**

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

***Effect of Chapter 11 Proceedings***

On July 14, 2003 and July 15,2003 (the “Petition Date”), August 18, 2003, October 3, 2003 and November 18,2003, the Mirant Debtors filed voluntary petitions for relief underChapter 11 of the Bankruptcy Code. As of thePetition Date, most pending litigation (including some of the actions describedbelow) is stayed, and absent further order of the Bankruptcy Court, no party,subject to certain exceptions, may take any action, again subject to certainexceptions, to recover on pre-petition claims against the Mirant Debtors. Oneexception to this stay of litigation is for an action or proceeding by agovernmental agency to enforce its police or regulatory power. The claimsasserted in litigation and proceedings to which the stay applies may be fullyand finally resolved in connection with the administration of the bankruptcyproceedings and, to the extent not resolved, will need to be addressed in thePlan. On November 19, 2003, the Bankruptcy Court entered an order stayingmost litigation pending against current or former officers, directors andmanagers of the Mirant Debtors arising out of the performance of their dutiesand against certain potential indemnitees of the Mirant Debtors. The BankruptcyCourt took that action to avoid the risk that the continuation of suchlitigation would 

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impede the Mirant Debtors’ ability to reorganizeor would have a negative impact upon the assets of the Mirant Debtors. At thistime, it is not possible to predict the outcome of the Chapter 11 proceedingsor their effect on the business of the Mirant Debtors or outstanding legalproceedings. The Mirant Debtors intend to resolve as many of these claims aspossible through the claims resolution process in the bankruptcy proceeding orthe Plan.

***California and Western Power Markets***

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

*California Receivables:  *In2001, Southern California Edison Company (“SCE”) and Pacific Gas and ElectricCompany (“PG&E”) suspended payments to the California Power Exchange Corporation(“Cal PX”) and the California Independent System Operator Corporation (“CAISO”)for certain power purchases, including purchases from Mirant Americas EnergyMarketing. Both the Cal PX and PG&E filed for bankruptcy protection in2001. As discussed below under *California Settlement*,on January 14, 2005,**Mirant andcertain of its subsidiaries entered into a Settlement and Release of ClaimsAgreement (the “California Settlement”) with PG&E, SCE, San Diego Gas andElectric Company, the CPUC, the California Department of Water Resources (“DWR”),the EOB and the Attorney General of the State of California (collectively, the “CaliforniaParties”) and with the Office of Market Oversight and Investigations of theFERC. On April 15, 2005, the California Settlement became effective, andit resulted in Mirant Americas Energy Marketing assigning to the CaliforniaParties its outstanding receivables for sales made in the Cal PX and CAISOmarkets from January 1, 2000 through June 20, 2001. Underintercompany agreements between the Company’s subsidiaries and Mirant AmericasEnergy Marketing, this assignment of receivables by Mirant Americas EnergyMarketing may result in the termination of Mirant Americas Energy Marketing’sliability on receivables held by those subsidiaries against Mirant AmericasEnergy Marketing related to the sales made by Mirant Americas Energy Marketingin Cal PX and CAISO markets.

*FERC Refund Proceedings:  *Asa result of the increase in electricity prices in 2000 and 2001, the CaliforniaParties have pursued litigation at the FERC, claiming that the prices chargedby Mirant Americas Energy Marketing and other market participants in theCalifornia energy markets during certain periods in 2000 and 2001 wereexcessive. On July 25, 2001, the FERC issued an order requiringproceedings (the “FERC Refund Proceedings”) to determine the amount of anyrefunds and amounts owed for sales made to the CAISO or the Cal PX from October 2,2000 through June 20, 2001 (the “Refund Period”). Various parties haveappealed these FERC orders to the United States Court of Appeals for the NinthCircuit (the “Ninth Circuit”) seeking review of a number of issues, including 

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changing the Refund Periodto include periods prior to October 2, 2000 and expanding the sales ofelectricity subject to potential refund to include bilateral sales made to theDWR. Any such expansion of the Refund Period or the types of sales ofelectricity potentially subject to refund could significantly increase therefund exposure of Mirant Americas Energy Marketing in this proceeding.Although Mirant Americas Energy Marketing is the Mirant entity that engaged intransactions with the CAISO and the Cal PX, the orders issued by the FERC inthe refund proceedings, and the filings made by other parties in thoseproceedings, generally refer to the Mirant entity involved as Mirant withoutbeing more specific. Mirant believes that the Mirant entity that would actuallybe liable to third parties for any refunds determined by the FERC to be owed,or that would be due any receivables found to be owed to Mirant, is MirantAmericas Energy Marketing. Agreements that were in effect at the time of thetransactions at issue between Mirant Americas Energy Marketing and the Company’ssubsidiaries that own generating facilities in California would shift some ofthe economic burden of such refunds or the benefit of such receivables fromMirant Americas Energy Marketing to those subsidiaries. 

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

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

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

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Marketing will continue tobe liable for any refunds that FERC determines it to owe (1) toparticipants in the Cal PX and CAISO markets that are not California Parties(or that do not elect to opt into the settlement) for periods outside of theRefund Period and (2) to participants in bilateral transactions withMirant Americas Energy Marketing that are not California Parties (or that donot elect to opt into the settlement). This liability of Mirant Americas EnergyMarketing could result in additional liability of the Company’s subsidiaries toMirant Americas Energy Marketing under the intercompany agreements referred toabove.

*FERC Show Cause Proceeding Relating to TradingPractices:  *On June 25, 2003, the FERCissued a show cause order (the “Trading Practices Order”)to more than 50parties, including Mirant Americas Energy Marketing and subsidiaries of theCompany, that a FERC staff report issued on March 26, 2003 identified ashaving potentially engaged in one or more trading strategies of the typeemployed by Enron Corporation and its affiliates (“Enron”),as described in the Enron memos released by the FERC in May 2002. TheTrading Practices Order identified certain specific trading practices that theFERC indicated could constitute gaming or anomalous market behavior inviolation of the CAISO and Cal PX tariffs. The Trading Practices Order requiresthe CAISO to identify transactions between January 1, 2000 and June 20,2001 that may involve the identified trading strategies, and then requires theapplicable sellers involved in those transactions to demonstrate why suchtransactions were not violations of the CAISO and Cal PX tariffs.On September 30, 2003, the Mirant entities filed with the FERC forapproval of a settlement agreement (the “Trading SettlementAgreement”)entered into between certain Mirant entities and the FERC Trial Staff, underwhich Mirant Americas Energy Marketing would pay $332,411 to settle the showcause proceeding, except for an issue related to selling of ancillary services,which is discussed below. In a November 14, 2003 order in a differentproceeding, the FERC ruled that certain allegations of improper trading conductwith respect to the selling of ancillary services during 2000 should beresolved in the show cause proceeding. On December 19, 2003, the Mirantentities filed with the FERC for approval of an amendment to the Trading SettlementAgreement reached with the FERC Trial Staff with respect to thesale of ancillary services. Under that amendment the FERC would have anallowed unsecured claim in Mirant Americas Energy Marketing’s bankruptcyproceeding for $3.67 million in settlement of the allegations with respectto the sale of ancillary services (the “Ancillary Amount”). TheTrading Settlement Agreement, as amended, must be approved by theFERC and the Bankruptcy Court to become effective.

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

*FERC Bidding Investigation:  *OnJune 25, 2003, the FERC issued an order (the “Bidding Order”) initiatingan investigation by its staff into bidding practices in the Cal PX and CAISOmarkets between May 1, 2000 and October 1, 2000 of more than 50parties, including Mirant Americas Energy Marketing. These entities werepreviously identified in a report issued by the FERC Staff on March 26,2003 as having bid generation resources to the Cal PX and CAISO at pricesunrelated to costs. Under the contractual arrangements pursuant to which MirantAmericas Energy Marketing bought and resold electricity produced by the Company’sCalifornia generation assets, the Company’s subsidiaries could have had toreimburse Mirant Americas Energy Marketing for the amount of any disgorgementof profits required or other remedy imposed by the FERC upon Mirant AmericasEnergy Marketing. As discussed below under *California Settlement*,on April 15, 2005 the California Settlement became effective, and it hasresulted in the termination of the FERC Staff’s investigation of MirantAmericas Energy Marketing’s bidding practices that was initiated under theBidding Order.

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

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

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

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what payments wouldeffectively be made to the Company’s subsidiaries under the RMR Agreementsduring the period those power purchase agreements are in effect, which ispotentially through 2012.

*California Settlement.  *On January 14,2005,**Mirant and certain of its subsidiariesentered into the California Settlement with the California Parties and theOffice of Market Oversight and Investigations of the FERC settling a variety ofdisputed matters. The Mirant entities that are parties to the CaliforniaSettlement are Mirant, Mirant Americas, Mirant Americas Energy Marketing,Mirant Americas Energy Marketing Investments, Inc., the Company, MirantCalifornia Investments, Inc., Mirant California, LLC, Mirant Delta, LLC,Mirant Potrero, LLC, Mirant Special Procurement, Inc., Mirant Services andMirant Americas Development, Inc. (collectively, the “Mirant SettlingParties”). The California Parties are PG&E, SCE, San Diego Gas and ElectricCompany, the CPUC, the DWR, the EOB and the Attorney General of the State ofCalifornia. The effectiveness of the California Settlement was conditioned uponits approval by the CPUC, the Bankruptcy Court, the bankruptcy court havingjurisdiction over PG&E’s bankruptcy proceedings initiated in 2001, and theFERC. The CPUC’s execution of the California Settlement signified its approval.The PG&E bankruptcy court approved the California Settlement on March 24,2005, the FERC approved it on April 13, 2005, and the Bankruptcy Courtapproved it by order entered April 15, 2005, causing the settlement tobecome effective April 15, 2005.

Under the California Settlement, (1) MirantAmericas Energy Marketing and the other Mirant Settling Parties have assignedto the California Parties all receivables owed to Mirant Americas EnergyMarketing for transactions in the markets administered by the Cal PX or theCAISO for the period January 1, 2000 through June 20, 2001, which arecurrently estimated by the parties to the California Settlement to beapproximately $283 million and (2) the California Parties received anallowed, unsecured claim against Mirant Americas Energy Marketing in itsChapter 11 case for $175 million and the DWR received an additional allowed,unsecured claim against Mirant Americas Energy Marketing of $2.25 million. Inreturn, the California Parties released all claims they may have against theMirant Settling Parties related to sales of electricity or natural gas atwholesale in western markets in the period from January 1, 1998 through July 14,2003, including all such claims filed by the California Parties in the MirantDebtors’ Chapter 11 cases, in proceedings before the FERC, or in the four suitsfiled against Mirant, the Company and certain of its subsidiaries by theCalifornia Attorney General in March and April 2002 and August 2004.The Company estimates that, excluding duplicative claims, this settlement hascompromised the bulk of the California energy market claims against MirantAmericas Energy Marketing at issue in the FERC Refund Proceedings. Also, theCalifornia Parties have assumed Mirant Americas Energy Marketing’s obligationto pay any refunds determined by the FERC to be owed by Mirant Americas EnergyMarketing to other parties for transactions in the CAISO and Cal PX marketsduring the Refund Period, with the liability of the California Parties for suchrefund obligation limited to the amount of the receivables assigned by MirantAmericas Energy Marketing to the California Parties under the CaliforniaSettlement. Subject to applicable bankruptcy law, Mirant Americas EnergyMarketing continues to be liable for any refunds that the FERC determines it toowe to (1) participants in the Cal PX or CAISO markets other than theCalifornia Parties (or other parties that have opted into the CaliforniaSettlement) for periods outside the Refund Period or (2) parties withwhich Mirant Americas Energy Marketing engaged in bilateral electricity ornatural gas transactions other than the California Parties (or other partiesthat have opted into the California Settlement). This liability of MirantAmericas Energy Marketing could result in additional liability of the Company’ssubsidiaries to Mirant Americas Energy Marketing under intercompany agreementsbetween those subsidiaries and Mirant Americas Energy Marketing.

Some of the consideration to be received by theCalifornia Parties under the California Settlement is available to other marketparticipants that choose to opt into the California Settlement, and severalhave done so. Those market participants that have elected to opt into theCalifornia Settlement have, as a result, given releases of liability to theMirant Settling Parties that are the same as those given by the California 

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Parties. In addition tothe claims filed by the California Parties seeking to recover refunds fromMirant Americas Energy Marketing and other Mirant entities for sales ofelectricity made by Mirant Americas Energy Marketing into the CAISO and Cal PXmarkets in 2000 and 2001, the CAISO and the Cal PX have filed claims againstMirant Americas Energy Marketing and other Mirant Settling Parties seeking torecover refunds on behalf of participants in the markets for which they wereresponsible. While the CAISO and the Cal PX are not parties to the CaliforniaSettlement, the FERC’s approval of the California Settlement constitutes itsdirection to the CAISO and the Cal PX to conform their books and records to theterms of the settlement and to withdraw with prejudice all claims filed by themin the Chapter 11 cases that seek to recover amounts or otherwise obtain reliefon behalf of, or for the benefit of, any of the California Parties or any othermarket participants that opt into the California Settlement. In addition, theCAISO separately agreed with Mirant to release its claims upon the CaliforniaSettlement becoming effective. The California Parties also released the MirantSettling Parties from any liability or refund claims related to the DWRContract, including claims asserted in the complaints filed by CPUC and EOBwith the FERC in February 2002. The FERC’s approval of the CaliforniaSettlement, under its terms, also had the effect of terminating any pendinginvestigations by the FERC of the conduct of the Mirant Settling Parties in thewestern energy markets in 2000 and 2001.

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

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

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

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

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

*Accounting Impact of California Settlement**.  ***At March 31, 2005, theCompany had recorded receivables and related reserves associated with amountsdue to Mirant Americas Energy Marketing from the CAISO and Cal PX related tothe period from October 2000 to June 2001 and reserves related torefunds under the RMR Agreements. The California Settlement resulted in anon-cash gain to the Company of approximately $161 million, to be recorded inthe second quarter of 2005.

***Mirant Americas Generation Bondholder Suit***

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

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On December 15, 2003, Lehman Commercial PaperInc. (“Lehman”), as agent for various lenders under certain pre-petition creditagreements, filed a claim against the Company in the bankruptcyproceedings. On December 15, 2003, Wells Fargo Bank, N.A. (“WellsFargo”) also filed claims in the bankruptcy proceedings as successor indenturetrustee for bond indebtedness under a certain indenture against the Company. Inaddition to their original claims, on that same date, Lehman and Wells Fargofiled supplemental claims against the Company, Mirant and a number of othersubsidiaries of Mirant (the “Supplemental Claims”) seeking recovery ofprincipal, interest, fees, and costs under the Mirant Americas Generation loandocuments and bond documents, respectively. In their Supplemental Claims,Lehman and Wells Fargo essentially seek to preserve for themselves the claimspreviously sought to be asserted by the Mirant Americas Generation CreditorCommittee.

On November 3, 2004,the Mirant Debtors objected to the Supplemental Claims against the Company andthe other Mirant entities on the grounds that: (1) Lehman and Wells Fargolack standing to pursue the Supplemental Claims, which are derivative claimsbelonging to each respective Mirant Debtor’s estate; (2) there is nofactual basis for any of the “potential” causes of action against the Companyand no basis whatsoever for the claims against any other Mirant entities; and (3) theSupplemental Claims are duplicative and contingent. In addition to theobjection, the Mirant Debtors also filed a motion to dismiss the SupplementalClaims on the basis that the Supplemental Claims do not allege any independentharm to Lehman and Wells Fargo and assert nothing more than derivative claimsbelonging to the Mirant Debtors’ estates that cannot be asserted by Lehman andWells Fargo. The Bankruptcy Court issued an order on April 12, 2005,ruling that (A) the Supplemental Claims will be withdrawn, (B) thewithdrawal of the Supplemental Claims, to the extent that they are not propertyof the estates or derivative of a Mirant Debtor (the “Withdrawn Claims”), willbe without prejudice and the Bar Date shall be extended through the date ofconfirmation of a plan in the Mirant Debtors Chapter 11 proceedings, and (C) thewithdrawal of the Supplemental Claims does not impair the ability of Lehman orWells Fargo to raise those claims as issues in the plan confirmation process.

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

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

The Company and theplaintiff have entered into a stipulation of settlement of the Wisniak suit andthe claim filed against the Company that was approved by the Bankruptcy Courton January 19, 2005. Under the terms of the stipulation of settlement, theplaintiff will seek certification of a class by the district 

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courtthat will receive $2.25 million to be paid by insurers for the Company and anallowed, unsecured claim for $2 million against Mirant, subordinated to theclaims of its other unsecured creditors. Members of the plaintiff class willhave the opportunity to opt out of the settlement, and if class members whochoose to opt out own in the aggregate more than 1% of the Company’s bonds thatare the subject of the suit, then the Mirant defendants have the option towithdraw from the settlement. The stipulation of settlement must also beapproved by the district court to become effective. On June 27, 2005, thedistrict court entered an order granting preliminary approval to thesettlement, certifying a settlement class, and scheduling a hearing for finalapproval of the settlement for September 6, 2005.

***PEPCO Litigation***

In 2000, Mirant purchased certain power generatingassets and certain other assets from Potomac Electric Power Company (“PEPCO”),including certain power purchase agreements (“PPAs”). Under the terms of theAsset Purchase and Sale Agreement (the “APSA”), Mirant and PEPCO entered into acontractual arrangement (the “Back-to-Back Agreement”) with respect to certainPPAs, including PEPCO’s long-term PPAs with Ohio Edison Company (“Ohio Edison”)and Panda-Brandywine L.P. (“Panda”), under which (1) PEPCO agreed toresell to Mirant all capacity, energy, ancillary services and other benefits towhich it is entitled under those agreements; and (2) Mirant agreed to payPEPCO each month all amounts due from PEPCO to the sellers under thoseagreements for the immediately preceding month associated with such capacity,energy, ancillary services and other benefits. The Panda and Ohio Edison PPAsrun until 2021 and 2005, respectively. Under the Back-to-Back Agreement, Mirantis obligated to purchase power from PEPCO at prices that are significantlyhigher than existing market prices for power. In the Chapter 11 cases of theMirant Debtors, PEPCO has asserted that an Assignment and Assumption Agreementdated December 19, 2000 that includes as parties PEPCO, varioussubsidiaries of the Company, Mirant Potomac River, and Mirant Americas Energy Marketing,causes the Company’s subsidiaries that are parties to the agreement to bejointly and severally liable to PEPCO for various obligations, including theobligations under the Back-to-Back Agreement. PEPCO also asserts that theAssignment and Assumption Agreement causes the Company’s subsidiaries to bejointly and severally liable for a claim of $105 million filed by PEPCO in theChapter 11 cases related to modifications agreed to between Mirant AmericasEnergy Marketing and PEPCO related to the Transition Power Agreements in placebetween PEPCO and Mirant Americas Energy Marketing through January 2005.The Company is disputing this interpretation of the Assignment and AssumptionAgreement in proceedings before the Bankruptcy Court, but the outcome of thoseproceedings is uncertain. If the Company’s subsidiaries are determined to bejointly and severally liable for the obligations of Mirant and Mirant AmericasEnergy Marketing to PEPCO under the Assignment and Assumption Agreement, thenthe claim related to the Transition Power Agreements and the proceedingsdescribed below involving the Back-to-Back Agreement could have an adverseeffect upon the Company’s financial condition, although such an effect would bemitigated by Mirant and Mirant Americas Energy Marketing also havingresponsibility for those obligations.

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

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

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

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

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

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

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

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

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

*Potential Adjustment Related to Panda Power PurchaseAgreement.  *At the time of the acquisition of the MirantMid-Atlantic assets from PEPCO, Mirant also entered into an agreement withPEPCO that, as subsequently modified, provided that the price paid by Mirantfor its December 2000 acquisition of PEPCO assets would be adjusted if by April 8,2005 a binding court order had been entered finding that the Back-to-BackAgreement violated PEPCO’s power purchase agreement with Panda (the “Panda PPA”)as a prohibited assignment, transfer or delegation of the Panda PPA or becauseit effected a prohibited delegation or transfer of rights, duties orobligations under the Panda PPA that was not severable from the rest of theBack-to-Back Agreement. Panda initiated legal proceedings in 2000 assertingthat the Back-to-Back Agreement violated provisions in the Panda PPAprohibiting PEPCO from assigning the Panda PPA or delegating its duties underthe Panda PPA to a third party without Panda’s prior written consent. On June 10,2003, the Maryland Court of Appeals, Maryland’s highest court, ruled 

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that the assignment ofcertain rights and delegation of certain duties by PEPCO to Mirant did violatethe non-assignment provision of the Panda PPA and was unenforceable. The court,however, left open the issues whether the provisions found to violate the PandaPPA could be severed and the rest of the Back-to-Back Agreement enforced andwhether Panda’s refusal to consent to the assignment of the Panda PPA by PEPCOto Mirant was unreasonable and violated the Panda PPA. The Company believesthat the June 10, 2003 decision by the Maryland Court of Appeals does notsuffice to trigger a purchase price adjustment under the agreement betweenMirant and PEPCO. If that court order were found to have triggered the purchaseprice adjustment, the agreement between Mirant and PEPCO provides that theamount of the adjustment would be negotiated in good faith by the parties ordetermined by binding arbitration so as to compensate PEPCO for the terminationof the benefit of the Back-to-Back Agreement while also holding Miranteconomically indifferent from such court order.

*PEPCO Avoidance Action.  *On July 13, 2005, Mirant and several of its subsidiaries, includingMirant Mid-Atlantic and Mirant Americas Generation, filed a lawsuit againstPEPCO before the Bankruptcy Court to avoid and recover fraudulent transfersunder 11 U.S.C. §§ 544 and 550 and applicable state law in connection with theacquisition of PEPCO’s assets by Mirant in December 2000 and disallowPEPCO’s proofs of claim. The suit asserts that Mirant did not receive fairvalue in return for the PEPCO assets  andthat the acquisition occurred at a time when Mirant was either insolvent or wasrendered insolvent as a result of the transaction. The likely outcome of thisproceeding cannot now be determined, and the Company cannot estimate whatrecovery, if any, it may obtain in this action.

***Environmental Matters***

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

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

On September 27, 2004, Mirant Potomac River,Mirant Mid-Atlantic, the Virginia DEQ, the Maryland Department of theEnvironment, the DOJ and the EPA entered into, and filed for approval with theUnited States District Court for the Eastern District of Virginia, a consentdecree that, if approved, 

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

*Mirant Potomac River Downwash Study.**  *On September 23, 2004, the Virginia DEQand Mirant Potomac River entered into an order by consent with respect to thePotomac 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 SO2, nitrogen dioxide (“NO2”), carbon monoxide (“CO”)and particulate matter less than or equal to 10 micrometers (“PM10”) forcomparison to the applicable national ambient air quality standards (“NAAQS”)and (2) on ambient concentrations of mercury for comparison to VirginiaStandards of Performance for Toxic Pollutants. Downwash is the effect thatoccurs when aerodynamic turbulence induced by nearby structures causespollutants from an elevated source, such as a smokestack, to be mixed rapidlytoward the ground resulting in higher ground level concentrations ofpollutants. If the modeling analysis indicates that emissions from the facilitymay cause exceedances of the NAAQS for SO2, NO2, CO or PM10, or exceedances ofmercury compared to Virginia Standards of Performance for Toxic Pollutants, theconsent order requires Mirant Potomac River to submit to the Virginia DEQ aplan and schedule to eliminate and prevent such exceedances on a timely basis.Upon approval by the Virginia DEQ of the plan and schedule, the approved planand schedule is to be incorporated by reference into the consent order. To theextent that the downwash study indicates that emissions from the Potomac Riverplant exceed either the NAAQS or the Virginia Standards of Performance forToxic Pollutants, the remedial actions required could include materialmodifications to the plant or to its operation. The financial and operationalimplications of any such remedial actions are not known at this time. MirantPotomac River received the Virginia DEQ’s approval of the modeling protocol on June 20,2005 and has 60 days from that date to complete the modeling analysis.

*Mirant NY-Gen Pipeline Leak.**  * In the fall of 2003, Mirant NY-Gen, LLC(“Mirant NY-Gen”) discovered a leaking underground pipeline at the Hillburngenerating facility in Ramapo, New York. The underground line was used forsupplying kerosene fuel to the gas turbines located on site. After confirmatorytesting revealed a potential leak, the line was removed from service and planswere undertaken to excavate and sample portions of the line to determine theextent of the line damage and the possible soil contamination. Upon initialdiscovery the leak was reported to the New York State Department ofEnvironmental Conservation (“NYSDEC”) and the Rockland County HealthDepartment. In the summer of 2004 soil contamination was discovered and asubsequent testing of portions of the line revealed a small hole. Currently,investigations are continuing to determine the extent of contamination andpossible remedial activities to clean up the area. Additionally, Mirant NY-Genis working under the direction of the NYSDEC to remove all free product contaminationfrom the groundwater and undertake remediation actions for additional on-siteand off-site contamination. The current estimate of the cost of 

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cleanup is greater than$3 million; however, due to the ongoing evaluation to determine the extentof the contamination, the exact cost of remediation is unknown at this time.

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

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

***New York Tax Proceedings***

The Company’s subsidiaries that own generating plantsin New York are or were (in the settled proceedings discussed below) thepetitioners in forty-one proceedings (“Tax Certiorari Proceedings”) initiallybrought in various New York state courts challenging the assessed value ofthose generating plants determined by their respective local taxingauthorities. Mirant Bowline LLC, (“Mirant Bowline”) has challenged the assessedvalue of the Bowline generating facility and the resulting local taxassessments paid for tax years 1995 through 2003. Mirant Bowline succeeded torights held 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 2003. MirantNY-Gen (collectively with Mirant Bowline and Mirant Lovett, the “New YorkDebtors”) has settled its tax certiorari proceedings with respect to thecombustion turbine and hydroelectric facilities it owns for each of the years2000 through 2003. If the remaining 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.

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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, for theLovett generating facility in each of the years 2000 through 2003, and for thegenerating facilities owned by Mirant NY-Gen in each of the years 2000 through2003. The bases for the relief requested in the Tax Determination Motion on behalfof each of the New York Debtors were that the assessed values of generatingfacilities located in New York made by the relevant taxing authorities had nojustifiable basis and were far in excess of their actual value. The localtaxing authorities have opposed the Tax Determination Motion, arguing that theBankruptcy Court either lacks jurisdiction over the matters addressed by theTax Determination Motion or should abstain from addressing those issues so thatthey can be addressed by the state courts in which the Tax CertiorariProceedings described in the preceding paragraph were originally filed.

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

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

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

On February 18, 2005, two providers ofelectricity at retail in Texas, Utility Choice, L.P. and Cirro Group, Inc.,filed a suit in the United States District Court for the Southern District ofTexas, entitled Utility Choice, L.P., et al. v. TXU Corp., et al., againstnumerous owners of generating facilities and power marketers in Texas,including Mirant Americas Energy Marketing, Mirant Americas Development, Inc.,and two subsidiaries of the Company owning generating facilities in Texas. Theplaintiffs allege that the defendants, including the Mirant defendants, actingindividually and in collusion with each other, engaged in various types ofunlawful manipulation of the short-term and bilateral wholesale power marketsin the Electric Reliability Council of Texas region beginning in 2001 andcontinuing to the period immediately prior to the filing of the suit thatcaused the plaintiffs to pay significantly higher prices for power theypurchased and to incur other significant costs. The types of conduct that theplaintiffs allege were engaged in by the defendants, including the Mirantdefendants, include submitting false schedules and bids, “hockey stick”bidding, withholding generation resources from the market and biddinggeneration resources at artificially high prices, in each case with the intentto create artificially high market prices. The complaint asserts various causesof action, including without limitation claims under the federal and Texasantitrust acts and the federal Racketeer Influenced and Corrupt Organizations (“RICO”)Act, as well as state law claims for fraud, negligent misrepresentation, andpromissory estoppel. The plaintiffs seek lost profits and other compensatorydamages of an unspecified amount, treble damages, exemplary damages andattorneys’ fees.

On March 21, 2005,the plaintiffs filed a motion with the district court seeking to dismisswithout prejudice the Mirant defendants, noting that those Mirant defendantsare the subject of pending bankruptcy proceedings. The district court grantedthat motion on March 21, 2005. On April 1, 2005, the plaintiffs fileda motion with the Bankruptcy Court seeking leave to file claims in the Chapter11 cases against Mirant Americas Energy Marketing, Mirant Americas Development, Inc.,and the two subsidiaries of the Company based upon the same allegations made inthe suit filed February 18, 2005 and seeking to 

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assert claimsin excess of $100 million. The Mirant Debtors are opposing that motion. On June 29,2005, Mirant Americas Energy Marketing entered into a settlement agreement withthe plaintiffs under which the plaintiffs agreed to release all claims againstthe Mirant Debtors in return for allowed claims against Mirant Americas EnergyMarketing totaling $20,000. The settlement agreement is subject to the approvalof the Bankruptcy Court.

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

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

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

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

***City of Alexandria Zoning Action***

On December 18, 2004, the City Council for theCity of Alexandria, Virginia (the “City Council”) adopted certain zoningordinance amendments recommended by the City Planning Commission that result inthe zoning status of Mirant Potomac River’s generating plant being changed from“noncomplying use” to “nonconforming use subject to abatement.” Under thenonconforming use status, unless Mirant 

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Potomac River applies forand is granted a special use permit for the plant during the seven-yearabatement period, the operation of the plant must be terminated within aseven-year period, and no alterations that directly prolong the life of theplant will be permitted during the seven-year period. Typically, the CityCouncil grants special use permits with various conditions and stipulations asto the permitted use.

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

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

***Asbestos Cases***

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

***Other Governmental Proceedings***

*Departmentof Justice Inquiries.  *In November 2002, Mirantreceived a subpoena from the DOJ, acting through the United States Attorney’soffice for the Northern District of California, requesting information aboutthe activities of Mirant and its subsidiaries, including the Company and itssubsidiaries, for the period since January 1, 1998. The subpoena requestedinformation related to the California energy markets and other topics,including the reporting of inaccurate information to the trade press thatpublish natural gas or electricity spot price data. The subpoena was issued aspart of a grand jury investigation. 

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Miranthas continued to receive additional requests for information from the UnitedStates Attorney’s office, and it intends to continue to cooperate fully withthe United States Attorney’s office in this investigation.

***Other Legal Matters***

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

***Environmental Contingency***

***Swinging Bridge Sinkhole***

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

Mirantcurrently expects to spend approximately $5.6 million in order to properlyrepair the dam and expects these repairs to be complete by the second quarterof 2006. The Company currently expects to recover insurance proceeds of $3.3 millionwith regard to these repair costs.

**H.**   Income Taxes

The Company is a limited liability company and istreated as a branch of Mirant Americas for income tax purposes. As a result,Mirant Americas, the Company’s ultimate parent, has sole direct liability forthe federal and state income taxes related to the Company’s operations, exceptfor the Company’s subsidiaries that are separate tax payers. The Companyallocates current and deferred taxes to each tax regarded member of itsconsolidated group as if each member were a single taxpayer utilizing the assetand liability method to account for income taxes except with respect torecognizing certain current period tax benefits. Specifically, the Company hasnot recorded current period tax benefits based on a member’s ability to carryback its separate company current period net operating loss as the realizationof such current period tax benefits are dependent on reimbursements fromMirant, at Mirant’s discretion under the tax sharing agreement. If the Companywere to be allocated income taxes attributable to all its operations, the proforma income tax expense attributable to income before tax is $3 million and $6million for the periods ending March 31, 2005 and 2004, respectively. Thepro forma balance of the Company’s deferred income taxes is a net asset of $4million as of March 31, 2005.

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**Item 2.**                        Management’sDiscussion and Analysis of Results of Operations and Financial Condition

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

**Executive Summary**

We operate as adebtor-in-possession under the jurisdiction of the Bankruptcy Court inaccordance with Chapter 11 of the Bankruptcy Code. As a result, our financialstatements include the results of Bankruptcy Court actions, probable claimsagainst our estate and professional and administrative costs related to thebankruptcy process. On January 19, 2005, Mirant Corporation filed a Planof Reorganization with the Bankruptcy Court, which was amended on March 25,2005.

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

Our gross margin is $36 millionlower for the first quarter of 2005 compared to first quarter 2004.

Gross margin for theMid-Atlantic region is $53 million lower in first quarter 2005 compared tofirst quarter 2004. Of this decrease, $24 million relates to higher unrealizedlosses on our derivative contracts primarily due to increases in forwardelectricity prices in both periods, $22 million relates to lower generationvolumes, $25 million relates to higher realized losses on economic power hedgesand $15 million relates to increased emissions and fuel expenses due tohigher unit prices. These decreases were partially offset by an increase of $15million due to higher settlement prices on energy, a $12 million gain due to acash settlement in lieu of receiving certain volumes of coal from a coal supplieras a result of rail car transportation scheduling issues which resulted inlower cost of fuel—affiliate in the first quarter of 2005 and an increase of $9million due to higher prices for capacity and ancillary services.

Grossmargin for the Northeast region is $20 million higher in first quarter 2005compared to first quarter 2004. Of this increase, $21 million relates to lowerrealized losses on economic power hedges, bilateral contracts and load deals,$15 million relates to net unrealized gains on our derivative contracts, and$13 million relates to realized gains on fuel hedges. These increases wereoffset by decreases of $17 million due to lower generation volumes as aresult of reduction in spark spreads, $8 million due to gas sales in 2004 thatwere not repeated in 2005 and $6 million resulting from an increase in fuelprices greater than the increase in energy prices.

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**Results ofOperations**

Ouroperating revenues and expenses from affiliates and nonaffiliates aggregated byclassification are as follows (in millions):
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **Increase/  Decrease** | ** ** |
| Operating Revenues:                                 |       |                                             |       |   |   |   |   |   |   |
| Affiliate                                           |       | $                                                | 381        |   | $ | 471 |   |   | $ | (90 | ) |   |
| Nonaffiliate                                        |       | 50                                               |       | 77 |   |   | (27 | ) |   |
| Total operating  revenues                           |       | 431                                              |       | 548 |   |   | (117 | ) |   |
| Cost of fuel,  electricity and other products:      |       |                                             |       |   |   |   |   |   |   |
| affiliate                                           |       | 210                                              |       | 300 |   |   | (90 | ) |   |
| nonaffiliate                                        |       | 54                                               |       | 45 |   |   | 9 |   |   |
| Total cost of  fuel, electricity and other products |       | 264                                              |       | 345 |   |   | (81 | ) |   |
| Gross Margin                                        |       | 167                                              |       | 203 |   |   | (36 | ) |   |
| Operating Expenses:                                 |       |                                             |       |   |   |   |   |   |   |
| Generation facilities rent                          |       | 25                                               |       | 24 |   |   | 1 |   |   |
| Depreciation and amortization                       |       | 23                                               |       | 23 |   |   | — |   |   |
| Operations and  maintenance                         |       |                                             |       |   |   |   |   |   |   |
| affiliate                                           |       | 62                                               |       | 70 |   |   | (8 | ) |   |
| nonaffiliate                                        |       | 57                                               |       | 58 |   |   | (1 | ) |   |
| Gain on sales of assets, net                        |       | (1                                               | )          | — |   |   | (1 | ) |   |
| Total operating  expenses                           |       | 166                                              |       | 175 |   |   | (9 | ) |   |
| Operating Income                                    |       | 1                                                |       | 28 |   |   | (27 | ) |   |
| Other (Expense) Income,  net:                       |       | (1                                               | )          | — |   |   | (1 | ) |   |
| Reorganization  items, net                          |       | 15                                               |       | 13 |   |   | 2 |   |   |
| Provision  (benefit) for income taxes               |       | 6                                                |       | — |   |   | 6 |   |   |
| Net (Loss) Income                                   |       | $                                                | (21        | ) | $ | 15 |   |   | $ | (36 | ) |   |

 

The following table summarizes gross margin by region(in millions):
| ** **     | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------|------------|------------------------------------------------------|------------|
| ** **     | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** |
| Mid-Atlantic   |       | $                                                    | 65         |   | $118 |   |   | $(53 | ) |   |
| Northeast      |       | 71                                                   |       | 51 |   |   | 20 |   |   |
| West and other |       | 31                                                   |       | 34 |   |   | (3 | ) |   |
| Total          |       | $                                                    | 167        |   | $203 |   |   | $(36 | ) |   |

 

Thefollowing table summarizes capacity factor (average percentage of full capacityused over a specific period) by region:
| ** **   | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------|------------|------------------------------------------------------|------------|
| ** **   | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **Decrease** | ** ** |
| Mid-Atlantic |       |                                                 | 42         | % |   |   | 50 | % |   |   | (8 | )% |   |
| Northeast    |       |                                                 | 40         | % |   |   | 48 | % |   |   | (8 | )% |   |
| West         |       |                                                 | 10         | % |   |   | 16 | % |   |   | (6 | )% |   |

 

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Thefollowing table summarizes power generation volumes by region (in gigawatthours):
| ** **   | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------|------------|------------------------------------------------------|------------|
| ** **   | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **Decrease** | ** ** |
| Mid-Atlantic |       | 3,916                                                |       | 4,685 |   |   | (769 | ) |   |
| Northeast    |       | 2,608                                                |       | 3,257 |   |   | (649 | ) |   |
| West         |       | 651                                                  |       | 1,049 |   |   | (398 | ) |   |
| Total        |       | 7,175                                                |       | 8,991 |   |   | (1,816 | ) |   |

 

*Gross Margin.  *Ourgross margin decreased by $36 million for the three months ended March 31,2005 compared to the same period for 2004 primarily due to the following:

·                    Mid-Atlanticoperations gross margin decreased $53 million primarily due to the following:

·                     Adecrease of $22 million due to lower generation volumes. This decrease ingeneration volumes is primarily due to a narrowing of the spark spread. Theincrease in spot market prices for coal and oil exceeded the increases in spotmarket prices for electricity.

·                     Adecrease of $25 million related to realized losses on economic power hedges,partially offset by an increase of $15 million resulting from higher settlementprices received on energy sold in the spot market.

·                     Adecrease of $6 million resulting from increased emissions expense, primarilydue to higher prices for SO2 emissions allowances.

·                     Adecrease of $9 million related to higher unit prices for fuel.

·                     Anincrease of $12 million due to a cash settlement in lieu of receiving certainvolumes of coal from a coal supplier as a result of rail car transportationscheduling issues which resulted in lower cost of fuel-affiliate.

·                     Anincrease of $9 million due to higher prices for capacity and ancillaryservices.

·                     A decrease of$24 million related to higher unrealized losses from derivative instruments of$56 million in 2005 compared to $32 million in 2004. These unrealized lossesare primarily due to increases in forward electricity prices in both periods.As we primarily have fixed price coal contracts, we primarily use derivativeinstruments to economically hedge future power prices.

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

·                     Anincrease of $21 million resulting from lower realized losses on economic powerhedges, bilateral contracts and load deals.

·                     Anincrease of $13 million due to realized gains on fuel hedges.

·                     Anincrease of $2 million related to capacity income earned under a newreliability-must-run contract for Kendall.

·                     Adecrease of $17 million due to lower generation volumes as a result of areduction in spark spreads.

·                     Adecrease of $6 million resulting from an increase in fuel prices that wasgreater than the increase in energy prices.

·                     Adecrease of $8 million due to no gas sales in 2005 compared to a gain of$8 million in 2004.

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·                     An increaseof $15 million related to net unrealized gains on derivative instruments resulting from increased gains on fuel hedgesmainly due to higher forward oil prices which were partially offset byincreased losses on power hedges resulting from higher forward power prices.

·       Westoperations gross margin decreased $3 million primarily due to one of ourgeneration facilities no longer running under a reliability-must-run contractbeginning in 2005. Under these contracts, revenues are based on a fixed rate ofreturn and the units’ operating costs.

*Operating Expenses.  *Ouroperating expenses decreased by $9 million for the three months ended March 31,2005 compared to the same period in 2004 primarily due to lower allocatedcorporate costs reflected in operations and maintenance—affiliate from MirantServices of $2 million and Mirant Americas Energy Marketing of $4 million.

**Financial Condition**

***Liquidity and Capital Resources***

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

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

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

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

Under the leveragedleases, Mirant Mid-Atlantic is not permitted to make any dividends,distributions and other restricted payments unless (1) it satisfies thefixed charge coverage ratio on a historical basis for the last period of fourfiscal quarters, (2) it is projected to satisfy the fixed charge coverageratio for the next two periods of four fiscal quarters, and (3) nosignificant lease default or event of default has occurred and is continuing.The projected fixed charge coverage ratios are based on projections that werenot prepared to conform to the guidelines established by the American Instituteof Certified Public Accountants regarding forecasts, and were not audited,reviewed, or compiled by our independent registered public accounting firm. Itshould be noted that the forecasts, market assumptions and many other factorsare inherently inaccurate and should not be relied on. If Mirant Mid-Atlantic wereto calculate the fixed charge coverage ratios under the leveraged leases as of June 30,2005, we expect that Mirant Mid-Atlantic would meet the required 1.7 to 1.0ratio for restricted payments, both on an historical and projected basis.However, the expected historical ratio for June 30, 2005 and the projectedhistorical ratio for September 30, 2005 are close to the required ratio.Further, the calculation of the fixed charge coverage ratio requires thedetermination of the “Consolidated EBITDA”, as defined in the lease agreement,of Mirant Mid-Atlantic exclusive of depreciation, amortization and similarnon-cash charges. Management has calculated the fixed charge coverage ratioexcluding certain non-cash charges that management believes to be reasonableand appropriate. The relevance of the restricted payments test under theleveraged leases post-bankruptcy is unclear given the potential determinationof the Mirant Debtors to modify their proposed Plan to provide for theassumption of the leveraged leases conditioned upon certain provisions thereofbeing modified, stricken or determined to be unenforceable—including thelimitations on restricted payments. In the event the resolution of theoutstanding litigation with respect to the treatment of the leveraged leasesresults in Mirant Mid-Atlantic assuming the leases with the same or similarlimitations on restricted payments, Mirant Mid-Atlantic intends to seekconfirmation of its application of the calculation of the fixed charge coverageratio.

**Cash Flows**

*OperatingActivities.  *Cash provided by operating activitiesincreased $12 million for the three months ended March 31, 2005 comparedto the same period in 2004. The change is detailed as follows (in millions):
| ** **                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **Increase  (Decrease)** | ** ** |
| Cash provided by  operating activities excluding working capital and other assets and  liabilities |       |                                                 | $50        |   |   |   | $80 |   |   |   | $ | (30 | ) |   |
| Cash provided by  working capital and other assets and liabilities                                 |       |                                                 | 49         |   |   |   | 7 |   |   |   | 42 |   |   |
| Net cash provided by  operating activities                                                         |       |                                                 | $99        |   |   |   | $87 |   |   |   | $ | 12 |   |   |

 

Net cash provided by operating activities excludingthe effects of working capital was $50 million for the three months ended March 31,2005 compared to $80 million for the same period in 2004. Our gross margindecreased $36 million, which included $7 million of higher unrealized losses onderivative instruments. The decrease in cash related to lower realized grossmargin is primarily due to lower 

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generation volumes, higherunit prices for fuel and emissions and losses on realized economic powerhedges, partially offset by a cash settlement on a coal contract, gains onrealized economic fuel hedges and higher prices for capacity and ancillaryservices at our Mid-Atlantic facilities.

During the three months ended March 31, 2005,working capital changes, which are reflected as changes in operating assets andliabilities, provided $49 million in cash compared to $7 million of cashfor the same period in 2004. This increase of $42 million is primarily due tofavorable changes in receivables from affiliate of $41 million, customeraccounts receivable of $15 million, accounts payable and accrued liabilities of$6 million offset by an unfavorable change in payables to affiliate of $17million.

*Investing activities:  *Netcash used in investing activities was $14 million for the three months ended March 31,2005 and March 31, 2004. An increase in capital expenditures of $4 millionwas offset by $4 million in proceeds received in 2005 from the sale of ourBowline gas turbines in 2004.

*Financing Activities.  *Therewere no financing activities for the three months ended March 31, 2005 and2004.

**Other Developments**

***Plan of Reorganization***

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

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

***Environmental***

*Regional Greenhouse GasInitiative*

Nine Northeast andMid-Atlantic states created a cooperative to discuss the design of a regionalcap and trade program initially covering carbon dioxide emissions from powerplants in the region, the Regional Greenhouse Gas Initiative (“RGGI”). In thefuture, RGGI may be extended to include other sources of greenhouse gasemissions, and greenhouse gases other than carbon dioxide.

*Clean Water Act*

The Clean Water Act andrenewal of National and State Pollution Discharge Elimination System willrequire additional investment at many of the Mirant facilities. In the nextyear we expect draft permits to be issued for our Canal and Bowline facilitiesthat require additional capital investment and operational changes. The Kendallfacility is in advanced stages of the permitting process and the United StatesEnvironmental Protection Agency is reviewing the response received from thedraft permit issued in 2004. 

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Theeffects of new Clean Water Act regulations and permit renewal process at otherfacilities is currently under review.

*Maryland 4Pollutant Legislation*

The Maryland StateLegislature introduced a “multi-pollutant” bill during the 2005 session, whichsought to reduce emissions of NOx, SO2, mercury (“Hg”), and CO2 from the sevencoal fired generating stations in Maryland. The Morgantown plant, Chalk Pointplant, and Dickerson plant were included in the list of affected facilities.The bill set forth strict plant-specific emissions limits with no opportunityto purchase or trade emissions allowances to comply. Ultimately, the bill didnot reach the House floor for a full vote, however legislation of this kindgains increasing support each year it is introduced. If a multi-pollutant billwere to be passed into law in Maryland, actions required to comply couldinclude material modifications to the plants located in the state.

**CriticalAccounting Policies and Estimates**

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

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

We may be required, as partof our emergence from bankruptcy protection, to adopt fresh start accounting ina future period. If fresh start accounting is applicable, our assets andliabilities will be recorded at fair value as of the fresh start reportingdate. The fair value of our assets and liabilities may differ materially fromthe recorded values of assets and liabilities on our unaudited condensedconsolidated balance sheets. In addition, if fresh start accounting isrequired, our financial results after the application of fresh start accountingwill be different from historical trends and these differences may be material.

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

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

Most of these activities are reflected in ourfinancial statements at fair value, with changes in fair value recognizedcurrently in earnings. The fair value of these contracts is included in pricerisk management assets and liabilities—affiliatein our unaudited condensed consolidated balance sheets. Certain transactions donot meet the definition of a derivative or are considered normal purchases ornormal sales and, therefore, qualify for the use of accrual accounting.

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

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calculate the price of thecontract’s delivery point. The degree of complexity of our pricing modelsincreases for longer duration contracts, contracts with multiple pricingfeatures and off-hub delivery points.

The fair value of price risk management assets—affiliateand price risk management liabilities—affiliatein our unaudited condensed consolidated balance sheets are also impacted by ourassumptions regarding interest rate and counterparty credit risk. The nominalvalue of the contracts is discounted using a forward interest rate curve basedon the London InterBank Offered Rate (“LIBOR”). In addition, the fair value ofour derivative contracts is reduced to reflect the estimated risk of default ofcounterparties on their contractual obligations to us.

The amounts recorded asrevenues—affiliate and as cost of fuel, electricity and other products—affiliatechange as estimates are revised to reflect actual results and changes in marketconditions or other factors, many of which are beyond our control. Because weuse derivatives that do not qualify for cash flow or fair value hedgeaccounting under SFAS 133, our financial statements—including gross margin,operating income and balance sheet ratios—are, at times, volatile and subjectto fluctuations in value primarily due to changes in energy and fuel prices.

***Bankruptcy Claims Assessment***

Our accompanying unaudited condensed consolidatedfinancial statements include, as liabilities subject to compromise, ourestimated pre-petition liabilities and settlements approved by the BankruptcyCourt prior to March 31, 2005. In addition, we also reflect as liabilitiessubject to compromise the probable claim amounts relating to liabilities forrejected contracts, litigation, accounts payable and accrued liabilities, anddebt and other liabilities (the “Probable Claims Estimates”). These ProbableClaims Estimates require management to estimate the likely claim amount thatwill be allowed by the Bankruptcy Court prior to the Bankruptcy Court’s rulingon the individual claims. These estimates are based on reviews of claimants’supporting material and assessments by management and outside experts. Weexpect that our estimates, although based on the best available information,will change as the claims are resolved in the Bankruptcy Court.

Thefollowing table summarizes the claims filed in our Chapter 11 case as of March 31,2005:
| ** **                       | ** ** | **Total number  of Claims** | ** ** | **Total Claims  Exposure** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                            | ** ** | **(in millions)**          | ** ** |
| Total Claims Filed               |       |                                  | 822        |                            |       |   | $ | 91,110 |   |   |
| Less:                            |       |                                  |       |                            |       |   |   |   |   |
| Redundant claims                 |       |                                  | 43         |                            |       |   | 1,859 |   |   |
| Claims with basis for  objection |       |                                  | 312        |                            |       |   | 86,271 |   |   |
| Total Claims                     |       |                                  | 467        |                            |       |   | 2,980 |   |   |
| Additional scheduled liabilities |       |                                  |       |                            |       |   | 15 |   |   |
| Remaining  Claims                |       |                                  |       |                            |       |   | $ | 2,995 |   |   |

 

The amount of the claims,net of redundancies and amounts for which we have identified a basis forobjection, totals approximately $3 billion, as summarized above. This amountplus approximately $1.2 billion of estimated liabilities for which claimseither have not been filed or have been filed with an undetermined amountrepresents the total estimate of current claims exposure as of March 31,2005. The $1.2 billion of estimated liabilities is mainly related to ouroperating leases.

***Long-Lived Assets***

We evaluate our long-lived assets (property, plant andequipment) and definite-lived intangibles for impairment wheneverindicators of impairment exist or when we commit to sell the asset. The accounting

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standards require that ifthe sum of the undiscounted expected future cash flows from a long-lived assetor definite-lived intangible is less than the carrying value of thatasset, an asset impairment charge must be recognized. 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 flowsfrom that asset or in the case of assets we expect to sell, at fair value lesscosts to sell.

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

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

***Litigation***

We are currently involvedin certain legal proceedings. These legal proceedings are discussed Note G tothe unaudited condensed consolidated financial statements contained elsewherein this report. We estimate the range of liability through discussions withlegal counsel and analysis of applicable case law and legal precedents. Werecord our best estimate of a loss, if estimable, when the loss is consideredprobable, or the low end of our range if no estimate is better than anotherestimate within a range of estimates. As additional information becomesavailable, we reassess the potential liability related to our pendinglitigation and revise our estimates. Revisions in our estimates of thepotential liability could materially impact our results of operations, and theultimate resolution may be materially different from the estimates that wemake.

**Item 3.   Quantitativeand Qualitative Disclosures about Market Risk**

We are exposed to market risks associated with changes incommodity prices. We are also exposed to counterparty credit risk. Weare exposed to energy commodity price risk associated with the acquisition offuel needed to generate electricity, as well as the electricity produced andsold. A portion of our fuel requirements is purchased in the spot market and aportion of the electricity we produce is also sold in the spot market. As aresult, our financial performance varies depending on changes in the prices ofenergy and energy-related commodities. See “Critical Accounting Policies andEstimates” for a discussion of the accounting treatment for our price riskmanagement activities and see Note D to the unaudited condensed consolidatedfinancial statements for detail of our price risk management assets andliabilities as of March 31, 2005.

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

**Item 4.   Controls and Procedures**

**InherentLimitations in Control Systems**

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or 

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morepeople, or by management override of the control. The design of any system ofcontrols also is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Over time,controls may become inadequate because of changes in conditions, or the degreeof compliance with the policies or procedures may deteriorate. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected. As a result, our management,including the Chief Executive Officer and Chief Financial Officer, does notexpect that our disclosure controls and procedures, or our internal controlover financial reporting, will prevent all error and all fraud.

**Effectivenessof Disclosure Controls and Procedures**

As required by Exchange Act Rule 13a-15(b),our management, including our Chief Executive Officer and our Chief FinancialOfficer, conducted an assessment of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined by Rules 13a-15(e) and15d-15(e) under the Exchange Act), as of March 31, 2005. Basedupon this assessment, our management concluded that, as of March 31, 2005,the design and operation of these disclosure controls and procedures wereeffective in timely alerting us to material information relating to the Company(including our consolidated subsidiaries) required to be included in ourperiodic SEC filings.

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-OxleyAct of 2002.

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**PART II**

**Item 1.**                        LegalProceedings

Therehave been no material developments in legal proceedings involving the Companyor its subsidiaries since those reported in Mirant Americas Generation’s AnnualReport on Form 10-K for the year ended December 31, 2004.

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**Item 6.**                        Exhibits

***(a)***   Exhibits.
| 2.2  | *      | First Amendment to the  Joint Chapter 11 Plan of Reorganization for Mirant Corporation and its  Affiliated Debtors (Designated on Form 8-K of Mirant Corporation filed  March 25, 2005 as Exhibit 2.1). |   |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 31.1 |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter  63 of Title 18, United States Code)        |   |
| 31.2 |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter  63 of Title 18, United States Code)        |   |
| 32.1 |   | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter  63 of Title 18, United States Code)        |   |
| 32.2 |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections  (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code)        |   |

 

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*                    Asteriskindicates exhibits incorporated by reference.

48

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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 26th day of July, 2005.
|          |     | MIRANT AMERICAS  GENERATION, LLC |
|----------|----------|----------------------------------|
|     |     | By:                              | /s/  DAN STREEK |
|     |     |                             | Dan Streek |
| * * | * * | * *                         | *Vice  President and Controller  Principal Accounting Officer)* |

 

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