**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

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

**Or**

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

**Forthe Transition Period from                   to                **

**Mirant Americas Generation, LLC**

(Exact name of registrantas specified in its charter)

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

 

| **1155 Perimeter Center West, Suite 100,** |   | ** ** |
|-------------------------------------------------|--------|------------|
| ** Atlanta, Georgia**                      |   | **30338**  |
| (Address of  Principal Executive Offices)       |   | (Zip Code) |
| **(678) 579-5000**                              |
| (Registrant’s  Telephone Number,           |
| Including Area  Code)                           |

 

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

**None**

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

**None**

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

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

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

 

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

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

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

 

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**TABLEOF CONTENTS**
|              | ** ** | ** **                                                                                  | ** ** | **Page** | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
|         |       | Cautionary Statement Regarding Forward-Looking  Information                                 |       |     | 3          |   |   |
| ** **   |       | **PART I—FINANCIAL INFORMATION**                                                  |       |     |       |   |   |
| Item 1. |       | Interim Financial  Statements (unaudited):                                                  |       |     |       |   |   |
|         |       | Condensed Consolidated and Combined Statements of  Operations                               |       |     | 5          |   |   |
|         |       | Condensed Consolidated Balance Sheets                                                       |       |     | 6          |   |   |
|         |       | Condensed Consolidated Statements of Member’s Equity  and Comprehensive Income         |       |     | 7          |   |   |
|         |       | Condensed Consolidated and Combined Statements of Cash  Flows                               |       |     | 8          |   |   |
|         |       | Notes to the Condensed Consolidated and Combined  Financial Statements                      |       |     | 9          |   |   |
| Item 2. |       | Management’s Discussion and Analysis of Results of  Operations and Financial Condition |       |     | 39         |   |   |
| Item 3. |       | Quantitative and Qualitative Disclosures about Market  Risk                                 |       |     | 59         |   |   |
| Item 4. |       | Controls and Procedures                                                                     |       |     | 59         |   |   |
| ** **   |       | **PART II—OTHER INFORMATION**                                                     |       |     |       |   |   |
| Item 1. |       | Legal  Proceedings                                                                          |       |     | 60         |   |   |
| Item  1A.    |       | Risk  Factors                                                                               |       |     | 68         |   |   |
| Item 6. |       | Exhibits                                                                                    |       |     | 68         |   |   |

 

2

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

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

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

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

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

·       ourimplementation of business strategies, including the acquisition of additionalassets or the disposition or alternative utilization of existing assets;

·       ourability to divest some of our intermediate and peaking gas fired assets atprices and on terms that we would be willing to accept, and any adverse impacton our debt rating that may result from such sales;

·       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;

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

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

·       ourability to borrow additional funds and access capital markets;

·       strikes,union activity or labor unrest;

·       weatherand other natural phenomena, including hurricanes and earthquakes;

·       thecost and availability of emissions allowances;

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

·       curtailmentof operations due to transmission constraints;

·       environmentalregulations that restrict our ability to operate our business;

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

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

3

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·       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 (“ISOs”) orregional transmission organizations (“RTOs”) that result in a failure tocompensate our generation units adequately for all of their costs;

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

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

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

·       thefact that our New York subsidiaries remain in bankruptcy;

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

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

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

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

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

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

**Factors that CouldAffect Future Performance**

In addition to the discussionof certain risks in Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the accompanying Notes to Mirant AmericasGeneration, LLC’s unaudited condensed consolidated and combined 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 2005 Annual Report on Form 10-K.

**Certain Terms**

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

4

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

**JUNE 30, 2006, CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)andJUNE 30, 2005, CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)**
|                                                                                                                  | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                       | ** ** | **(in millions)**                          | ** ** |
| Operating  revenues—affiliate                                                                               | ** ** | **$**                                           | **27**     |                                          | $          | 25 | ** ** | **$** | **30** |   | $ | 60 |   |
| Operating  revenues—nonaffiliate                                                                            | ** ** | **654**                                         |       | 643                                           | ** ** | **1,627** |   | 1,199 |   |
| Total operating revenues                                                                                         | ** ** | **681**                                         | ** ** | 668                                           | ** ** | **1,657** | ** ** | 1,259 |   |
| Cost of fuel,  electricity and other products—affiliate                                                     | ** ** | **35**                                          | ** ** | 35                                            | ** ** | **51** | ** ** | 65 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                                                  | ** ** | **265**                                         | ** ** | 402                                           | ** ** | **572** | ** ** | 768 |   |
| Total cost of fuel, electricity and other products                                                               | ** ** | **300**                                         | ** ** | 437                                           | ** ** | **623** | ** ** | 833 |   |
| **Gross  Margin**                                                                                                | ** ** | **381**                                         | ** ** | 231                                           | ** ** | **1,034** | ** ** | 426 |   |
| **Operating Expenses:**                                                                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operations and  maintenance—affiliate, including restructuring charges of  $2 in 2005   | ** ** | **70**                                          | ** ** | 73                                            | ** ** | **140** | ** ** | 151 |   |
| Operations and  maintenance—nonaffiliate                                                                    | ** ** | **83**                                          | ** ** | 80                                            | ** ** | **156** | ** ** | 141 |   |
| Depreciation and  amortization                                                                                   | ** ** | **35**                                          | ** ** | 32                                            | ** ** | **67** | ** ** | 65 |   |
| Generation  facilities rent                                                                                      | ** ** | **24**                                          | ** ** | 26                                            | ** ** | **48** | ** ** | 51 |   |
| Gain on sales of  assets, net                                                                                    | ** ** | **(6**                                          | **)**      | —                                        | ** ** | **(6** | **)** | (1 | ) |
| Total operating expenses                                                                                         | ** ** | **206**                                         | ** ** | 211                                           | ** ** | **405** | ** ** | 407 |   |
| **Operating  Income**                                                                                            | ** ** | **175**                                         | ** ** | 20                                            | ** ** | **629** | ** ** | 19 |   |
| **Other Expense (Income), net:**                                                                                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense—affiliate                                                                                  |       | —                                          | ** ** | 3                                             |       | **—** | ** ** | 6 |   |
| Interest expense—nonaffiliate                                                                               | ** ** | **68**                                          | ** ** | 2                                             | ** ** | **143** | ** ** | 3 |   |
| Interest income—affiliate                                                                                   | ** ** | **(1**                                          | **)**      | —                                        | ** ** | **(1** | **)** | — |   |
| Interest income—nonaffiliate                                                                                | ** ** | **(9**                                          | **)**      | —                                        | ** ** | **(16** | **)** | (1 | ) |
| Gain on sale of  investments                                                                                     | ** ** | **(2**                                          | **)**      | —                                        | ** ** | **(2** | **)** | — |   |
| Other, net                                                                                                       | ** ** | **3**                                           | ** ** | (1                                            | )          | **—** | ** ** | (2 | ) |
| Total other expense, net                                                                                         | ** ** | **59**                                          | ** ** | 4                                             | ** ** | **124** | ** ** | 6 |   |
| **Income  Before Reorganization Items and Income Taxes**                                                         | ** ** | **116**                                         | ** ** | 16                                            | ** ** | **505** | ** ** | 13 |   |
| Reorganization  items, net                                                                                       | ** ** | **(1**                                          | **)**      | (23                                           | )          | **(1** | **)** | 7 |   |
| Provision  (benefit) for income taxes                                                                            | ** ** | **2**                                           | ** ** | (1                                            | )          | **2** | ** ** | 5 |   |
| **Net Income**                                                                                                   | ** ** | **$**                                           | **115**    |                                          | $          | 40 | ** ** | **$** | **504** |   | $ | 1 |   |

 

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

5

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                     | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| ** **                                                                                     | ** ** | **(Unaudited)**           | ** ** | ** **                    | ** ** |
| ** **                                                                                     | ** ** | **(in millions)**    | ** ** |
| **ASSETS**                                                                                     | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| **Current Assets:**                                                                            | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                                                     | ** ** |                      | **$**      | **377**                       |       |   |   | $ | 424 |   |   |
| Funds on deposit                                                                               | ** ** |                      | **429**    |                          |       |   | 1,540 |   |   |
| Receivables:                                                                                   |       |                      |       |                          |       |   |   |   |   |
| Affiliate                                                                                      | ** ** |                      | **16**     |                          |       |   | 21 |   |   |
| Nonaffiliate, less  allowance for uncollectibles of $6 and $10 for 2006 and 2005, respectively | ** ** |                      | **328**    |                          |       |   | 583 |   |   |
| Price risk  management assets—affiliate                                                   | ** ** |                      | **13**     |                          |       |   | — |   |   |
| Price risk  management assets—nonaffiliate                                                | ** ** |                      | **655**    |                          |       |   | 604 |   |   |
| Prepaid rent and  other payments                                                               | ** ** |                      | **118**    |                          |       |   | 147 |   |   |
| Inventories                                                                                    | ** ** |                      | **377**    |                          |       |   | 278 |   |   |
| Assets held for  sale                                                                          |       |                      | —     |                          |       |   | 7 |   |   |
| Investment in  securities available for sale                                                   | ** ** |                      | **44**     |                          |       |   | 30 |   |   |
| Total current  assets                                                                          | ** ** |                      | **2,357**  |                          |       |   | 3,634 |   |   |
| **Property,  Plant and Equipment, net**                                                        | ** ** |                      | **2,819**  |                          |       |   | 2,808 |   |   |
| **Noncurrent Assets:**                                                                         | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Intangible assets,  net                                                                        | ** ** |                      | **216**    |                          |       |   | 221 |   |   |
| Price risk  management assets—affiliate                                                   | ** ** |                      | **3**      |                          |       |   | — |   |   |
| Price risk  management assets—nonaffiliate                                                | ** ** |                      | **116**    |                          |       |   | 105 |   |   |
| Prepaid rent                                                                                   | ** ** |                      | **220**    |                          |       |   | 208 |   |   |
| Funds on deposit                                                                               | ** ** |                      | **4**      |                          |       |   | 5 |   |   |
| Accounts  receivable, less allowance for uncollectibles of $3 for 2006 and 2005                | ** ** |                      | **5**      |                          |       |   | 2 |   |   |
| Debt issuance  costs, net                                                                      | ** ** |                      | **64**     |                          |       |   | 37 |   |   |
| Other                                                                                          | ** ** |                      | **9**      |                          |       |   | — |   |   |
| Total noncurrent  assets                                                                       | ** ** |                      | **637**    |                          |       |   | 578 |   |   |
| **Total  assets**                                                                              | ** ** |                      | **$**      | **5,813**                     |       |   |   | $ | 7,020 |   |   |
| **LIABILITIES AND EQUITY**                                                                     | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| **Current Liabilities:**                                                                       | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Notes  payable—affiliate                                                                  | ** ** |                      | **$**      | **7**                         |       |   |   | $ | 21 |   |   |
| Current portion of  long-term debt                                                             | ** ** |                      | **74**     |                          |       |   | 3 |   |   |
| Claims payable and  estimated claims accrual                                                   | ** ** |                      | **97**     |                          |       |   | 1,831 |   |   |
| Accounts payable  and accrued liabilities                                                      | ** ** |                      | **306**    |                          |       |   | 486 |   |   |
| Payable to  affiliate                                                                          | ** ** |                      | **70**     |                          |       |   | 305 |   |   |
| Price risk  management liabilities—affiliate                                              | ** ** |                      | **3**      |                          |       |   | 5 |   |   |
| Price risk  management liabilities—nonaffiliate                                           | ** ** |                      | **494**    |                          |       |   | 791 |   |   |
| Accrued property  taxes                                                                        | ** ** |                      | **216**    |                          |       |   | 186 |   |   |
| Other                                                                                          | ** ** |                      | **8**      |                          |       |   | — |   |   |
| Total current  liabilities                                                                     | ** ** |                      | **1,275**  |                          |       |   | 3,628 |   |   |
| **Noncurrent Liabilities:**                                                                    | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Long-term debt                                                                                 | ** ** |                      | **3,216**  |                          |       |   | 2,590 |   |   |
| Price risk  management liabilities—nonaffiliate                                           | ** ** |                      | **28**     |                          |       |   | 27 |   |   |
| Asset retirement  obligations                                                                  | ** ** |                      | **37**     |                          |       |   | 33 |   |   |
| Other                                                                                          | ** ** |                      | **—** |                          |       |   | 5 |   |   |
| Total noncurrent  liabilities                                                                  | ** ** |                      | **3,281**  |                          |       |   | 2,655 |   |   |
| **Liabilities  Subject to Compromise**                                                         | ** ** |                      | **34**     |                          |       |   | 34 |   |   |
| **Commitments and Contingencies**                                                              | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| **Equity:**                                                                                    | ** ** |                      | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| Member’s interest                                                                         | ** ** |                      | **1,510**  |                          |       |   | 995 |   |   |
| Preferred stock in  affiliate                                                                  | ** ** |                      | **(329**   | **)**                         |       |   | (319 | ) |   |
| Accumulated other  comprehensive income                                                        | ** ** |                      | **42**     |                          |       |   | 27 |   |   |
| Total equity                                                                                   | ** ** |                      | **1,223**  |                          |       |   | 703 |   |   |
| **Total  liabilities and equity**                                                              | ** ** |                      | **$**      | **5,813**                     |       |   |   | $ | 7,020 |   |   |

 

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

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

**CONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S EQUITYANDCOMPREHENSIVE INCOME (UNAUDITED)(in millions)**
|                                                                             | ** ** | ** **        | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                  | ** ** | ** **        | ** ** | **Preferred**     | ** ** | **Other**         | ** ** | ** **        | ** ** |
| ** **                                                                  | ** ** | **Member’s** | ** ** | **Stock in** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                  | ** ** | **Interest**      | ** ** | **Affiliate**     | ** ** | **Income**        | ** ** | **Income**        | ** ** |
| Balance,  December 31, 2005                                            |       |              | $          | 995               |       |              |       | $                 | (319       | ) |   |   | $ | 27 |   |   |   |   |   |   |
| Net Income                                                                  | ** ** | ** **        | **504**    |              |       |              | —     |              |       |   | — |   | ** ** | ** ** | **$** | **504** |   |   |
| Amortization of discount on preferred stock in  affiliate    | ** ** | ** **        | **10**     |              | ** ** | ** **        | **(10**    | **)**             |       |   | — |   |   |   | — |   |   |
| Capital contribution pursuant to the Plan of  Reorganization                | ** ** | ** **        | **1**      |              |       |              | —     |              |       |   | — |   |   |   | — |   |   |
| Other comprehensive income                                                  |       |              | —     |              |       |              | —     | ** **        | ** ** | ** ** | **15** |   | ** ** | ** ** | **15** |   |   |
| Comprehensive Income                                                        | ** ** | ** **        | ** ** |              | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** |   | ** ** | ** ** | **$** | **519** |   |   |
| **Balance, June 30, 2006**                                             | ** ** | ** **        | **$**      | **1,510**         |       | ** **        | ** ** | **$**             | **(329**   | **)** | ** ** | ** ** | **$** | **42** |   | ** ** | ** ** | ** ** |   |   |

 

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

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

**JUNE 30, 2006, CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)andJUNE 30, 2005, CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)**

| ** **                                                                     | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(in millions)**                        | ** ** |
| **Cash Flows from Operating  Activities:**                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                                     | ** ** | **$**                                         | **504**    |   | $ | 1 |   |
| Adjustments to reconcile  net income to net cash used in operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                  | ** ** | **72**                                        |       | 65 |   |
| Price risk management activities, net                                          | ** ** | **(376**                                      | **)**      | (67 | ) |
| Deferred income taxes                                                          | ** ** | **—**                                    |       | 2 |   |
| Non-cash charges for reorganization items                                      | ** ** | **—**                                    |       | (17 | ) |
| Gain on sales of assets and investments                                        | ** ** | **(8**                                        | **)**      | (1 | ) |
| Other, net                                                                     | ** ** | **—**                                    |       | 1 |   |
| Changes in  operating assets and liabilities:                                  |       |                                          |       |   |   |
| Affiliate accounts receivable, net                                             | ** ** | **5**                                         |       | (5 | ) |
| Customer accounts receivable, net                                              | ** ** | **344**                                       |       | 91 |   |
| Prepaid rent                                                                   | ** ** | **(12**                                       | **)**      | (17 | ) |
| Inventories                                                                    | ** ** | **(99**                                       | **)**      | 20 |   |
| Other assets                                                                   | ** ** | **199**                                       |       | (29 | ) |
| Accounts payable and accrued liabilities                                       | ** ** | **(219**                                      | **)**      | (110 | ) |
| Settlement of claims payable                                                   | ** ** | **(744**                                      | **)**      | — |   |
| Payable to affiliate                                                           | ** ** | **15**                                        |       | 8 |   |
| Property taxes accrued, affiliate                                              |       | —                                        |       | (5 | ) |
| Property taxes accrued, nonaffiliate                                           | ** ** | **30**                                        |       | 18 |   |
| Other liabilities                                                              | ** ** | **48**                                        |       | 5 |   |
| Total adjustments                                                              | ** ** | **(745**                                      | **)**      | (41 | ) |
| Net cash used in operating activities                                          | ** ** | **(241**                                      | **)**      | (40 | ) |
| **Cash Flows from Investing  Activities:**                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Capital expenditures                                                           | ** ** | **(63**                                       | **)**      | (62 | ) |
| Repayments on notes receivable from affiliate                                  |       | —                                        |       | 11 |   |
| Proceeds from the sales of assets and investments,  net                        | ** ** | **16**                                        |       | 4 |   |
| Net cash used in investing activities                                          | ** ** | **(47**                                       | **)**      | (47 | ) |
| **Cash Flows from Financing  Activities:**                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Proceeds from issuance of long-term debt                                       | ** ** | **2,015**                                     |       | 1 |   |
| Repayment of debt-affiliate                                                    | ** ** | **(13**                                       | **)**      | — |   |
| Repayment of long-term debt-nonaffiliate                                       | ** ** | **(470**                                      | **)**      | (1 | ) |
| Settlement of debt under the Plan                                              | ** ** | **(990**                                      | **)**      | — |   |
| Payment to affiliate under the Plan                                            | ** ** | **(250**                                      | **)**      | — |   |
| Debt issuance cost                                                             | ** ** | **(51**                                       | **)**      | — |   |
| Net cash provided by financing activities                                      | ** ** | **241**                                       |       | — |   |
| **Net Decrease in Cash and Cash Equivalents**                                  | ** ** | **(47**                                       | **)**      | (87 | ) |
| **Cash and Cash Equivalents, beginning of period**                             | ** ** | **424**                                       |       | 636 |   |
| **Cash and Cash Equivalents, end of period**                                   | ** ** | **$**                                         | **377**    |   | $ | 549 |   |
| **Supplemental Cash Flow  Disclosures:**                                       | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Cash paid for interest, net of amounts capitalized                             | ** ** | **$**                                         | **111**    |   | $ | 9 |   |
| Cash paid for claims and professional fees from  bankruptcy                    | ** ** | **$**                                         | **1,742**  |   | $ | 33 |   |
| **Financing Activity:**                                                        | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Capital  contribution—non-cash                                            | ** ** | **$**                                         | **1**      | ** ** | **$** | **—** | ** ** |

 

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

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

**A.**                Descriptionof Business

***Overview***

Mirant Americas Generation, LLC, including itssubsidiaries (collectively, the “Company” or “Mirant Americas Generation”), isa national independent power provider and an indirect wholly-owned subsidiaryof Mirant Corporation (“Mirant”). Mirant was incorporated in Delaware on September 23,2005, and is the successor to a corporation of the same name that was formed inDelaware on April 3, 1993. This succession occurred by virtue of thetransfer of substantially all of old Mirant’s assets to new Mirant inconjunction with old Mirant’s emergence from bankruptcy protection on January 3,2006. Old Mirant was then renamed and transferred to a trust which is notaffiliated with new Mirant. As used in this report “Mirant” refers to oldMirant prior to January 3, 2006, and to new Mirant on or after January 3,2006.

The Company produces and sells substantially all of theoutput from its generating facilities in the forward and spot markets and theremainder under contracts with third parties. The Company uses derivativefinancial instruments, such as commodity forwards, futures, options and swapsto manage its exposure to fluctuations in electric energy and fuel prices. TheCompany is a Delaware limited liability company and owns or leasesapproximately 12,035 megawatts (“MW”) of electric generation capacity in theUnited States. The Company operates 72 generating units at 21 plantsserving customers located near major metropolitan load centers in Maryland,California, New York, Massachusetts, Michigan, Virginia and Texas.

Pursuant to the Plan of Reorganization (the “Plan”),that was approved in conjunction with Mirant’s emergence from bankruptcy, in December 2005Mirant contributed its interest in Mirant Potomac River, LLC (“Mirant PotomacRiver”) and Mirant Peaker, LLC (“Mirant Peaker”) to our indirect wholly-ownedsubsidiary Mirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) and its interest inMirant Zeeland, LLC (“Mirant Zeeland”) and Mirant Americas Energy Marketing, LP(“Mirant Americas Energy Marketing”), Mirant Americas Development, Inc.,Mirant Americas Production Company, Mirant Americas Energy Capital, LLC, MirantAmericas Energy Capital Assets, LLC, Mirant Americas Development Capital,LLC, Mirant Americas Retail Energy Marketing, LP, and Mirant Americas GasMarketing, LLC (collectively, the “Trading Debtors”) to Mirant North America,LLC (“Mirant North America”), a newly organized holding company subsidiary. Allof the contributed subsidiaries were under the common control of Mirant and arecollectively referred to as the “Contributed Subsidiaries.” Mirant’scontribution of the Contributed Subsidiaries resulted in a change in the MirantAmericas Generation reporting entity under Accounting Principles Board Opinion No. 20*, “Accounting Changes*,” which was replaced by Statement ofFinancial Accounting Standards (“SFAS”) No. 154, *“Accounting Changes**and ErrorCorrections,”* andaccordingly the Company has restated the financial statements for all priorperiods to reflect the financial information of the new reporting entity. On January 31,2006, the trading and marketing business of the Trading Debtors was transferredto Mirant Energy Trading, LLC (“Mirant Energy Trading”), a wholly-ownedsubsidiary of Mirant North America. After these transfers took place, theTrading Debtors were transferred to a trust created under the Plan that is notaffiliated with the Company. As a result, the Company now executes theaffiliate transactions previously executed with the Trading Debtors with MirantEnergy Trading. On August 9, 2006, Mirant announced the planned sales ofour Zeeland (837 MW) and Bosque (532 MW) plants.

The Company has a numberof service agreements for labor and administrative services with MirantServices, LLC (“Mirant Services”). In addition, Mirant Energy Trading, andpreviously Mirant Americas 

9

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EnergyMarketing, provides services to other Mirant affiliates related to the sale ofelectric power and the procurement of fuel and emissions allowances.

***Basis of Presentation***

The accompanying unauditedcondensed consolidated and combined financial statements of Mirant AmericasGeneration and its wholly-owned subsidiaries have been prepared in accordancewith United States generally accepted accounting principles (“GAAP”) for interim financial information and with theinstructions for Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by GAAP for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included. Forfurther information, refer to the combined and consolidated financialstatements and footnotes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

The accompanying unauditedcondensed consolidated and combined financial statements include the accountsof Mirant Americas Generation and its wholly-owned subsidiaries and theContributed Subsidiaries as discussed above and have been prepared from recordsmaintained by Mirant Americas Generation, its subsidiaries and the ContributedSubsidiaries. All significant intercompany accounts and transactions have beeneliminated in preparing the condensed consolidated and combined financialstatements. Certain prior period amounts have been reclassified to conform tothe current year financial statement presentation.

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

Mirant Americas Generation evaluates long-livedassets, such as property, plant and equipment and purchased intangible assetssubject to amortization, for impairment whenever events or changes incircumstances indicate that the carrying amount of the asset may not berecoverable. Such evaluations are performed in accordance with SFAS No. 144,“*Accounting for the Impairment or Disposal ofLong-Lived Assets.*” Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to the estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated undiscounted future cashflows, an impairment charge is recognized as the amount by which the carryingamount of the asset exceeds the discounted future cash flows of the asset.Assets to be disposed of are separately presented in the accompanying condensedconsolidated balance sheets and are reported at the lower of the carryingamount or fair value less costs to sell, and are not depreciated. The assetsand liabilities of a disposal group classified as held for sale are presentedseparately in the appropriate asset and liability sections of the accompanyingcondensed consolidated balance sheets.

On August 9, 2006,Mirant announced the planned sale of various gas fired assets. The MirantAmericas Generation assets to be sold include the Zeeland (837 MW) and Bosque(532MW) intermediate and peaking gas fired plants. The planned sales willresult in the reclassification of the long-lived assets related to these plantsas held for sale beginning in the third quarter of 2006. Initial estimatesindicate that for each of these plants an impairment loss will need to be recordedin the third quarter to reduce the carrying value of these plants to the fairvalue less costs to sell. While the amount of the impairment loss has not yetbeen determined, the Company currently estimates the total impairment loss forthese two plants will range from $100 million to $200 million and will bereflected as a loss from discontinued operations in the Company’s condensedconsolidated statements of operations for the third quarter of 2006.

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***Recently Adopted Accounting Standard***

In September 2005,the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues TaskForce (“EITF”) Issue 04-13, *“Accounting for Purchasesand Sales of Inventory with the Same Counterparty”*(“EITF 04-13”),which requires companies to account for certain purchases and sales ofinventory with the same counterparty as a single transaction. The Companyadopted EITF 04-13 on April 1, 2006. The adoption of EITF 04-13did not have a material impact on the Company’s statements of operations,financial position or cash flows during the quarter.

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

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

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

In April 2006, the FASB issued FASB StaffPosition (“FSP”) FASB Interpretation (“FIN”) 46R-6, *“Determiningthe Variability to be Considered in Applying FASB Interpretation No. 46R”*(“FSPFIN 46R-6”). The variability that is considered in applying FIN 46(Revised December 2003), “*Consolidation**of Variable Interest Entities—an Interpretation of Accounting ResearchBulletin No. 51*” (“FIN 46R”) affects the determination ofwhether an entity is a variable interest entity (“VIE”), which interests arevariable interests in the entity, and which party, if any, is the primarybeneficiary of the VIE. According to FSP FIN 46R-6, the variability to beconsidered should be based on the nature of the risks of the entity and thepurpose for which the entity was created. The guidance in FSP FIN 46R-6is applicable prospectively to an entity at the time a company first becomesinvolved with such entity and is applicable to all entities previously requiredto be analyzed under FIN 46R when a reconsideration event has occurredbeginning with the first reporting period after June 15, 2006.Retrospective application to the date of the initial application of FIN 46R ispermitted but not required. The Company adopted FSP FIN 46R-6 on July 1,2006, on a prospective basis. Upon adoption there was no impact on the Company’sstatements of operations, financial position or cash flows.

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

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The evaluation of a tax position in accordance withFIN 48 is a two-step process. The first step is recognition based on adetermination of whether it is more likely than not that a tax position will besustained upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. Inevaluating whether a tax position has met the more-likely-than-not recognitionthreshold, the enterprise should presume that the position will be examined bythe appropriate taxing authority having full knowledge of all relevant information.The second step is to measure a tax position that meets themore-likely-than-not threshold. The tax position is measured at the largestamount of benefit that is greater than 50% likely of being realized uponultimate settlement.

FIN 48 is effective forfiscal years beginning after December 15, 2006. The Company will adopt FIN48 on January 1, 2007. The provisions of FIN 48 will be applied to all taxpositions upon initial adoption of this Interpretation. Only tax positions thatmeet the more-likely-than-not recognition threshold at the effective date maybe recognized or continue to be recognized upon adoption of the Interpretation.The Company has not yet determined the impact of FIN 48 on its statements ofoperations, financial position or cash flows.

**B.**               BankruptcyRelated Disclosures

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

At June 30, 2006 and December 31,2005, amounts related to allowed claims, estimated unresolved claims andprofessional fees associated with the bankruptcy that are to be settled in cashare $97 million and $1.831 billion, respectively, and these amounts arerecorded in claims payable and estimated claims accrual on the accompanyingunaudited condensed consolidated balance sheets. These amounts do not includeunresolved claims that will be settled in Mirant common stock. During the sixmonths ended June 30, 2006, the Company paid approximately $1.734 billionin cash related to bankruptcy claims. Of this amount approximately $990 millionis reflected in cash flows from financing activities and represents theprincipal amount of debt claims. The remaining $744 million is reflected incash flows from operating activities and represents other bankruptcy claims andinterest.

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

Mirant Americas Generation’sNew York subsidiaries remain in bankruptcy and include the following entities:Mirant Lovett, LLC (“Mirant Lovett”), Mirant Bowline, LLC (“Mirant Bowline”),Mirant NY-Gen, LLC (“Mirant NY-Gen”), Mirant New York, Inc. (“MirantNew York”) and Hudson Valley Gas Corporation. Unaudited condensed consolidatedfinancial statements of Mirant Americas Generation’s New York subsidiaries areset forth below.

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**New YorkSubsidiaries**

**UnauditedCondensed Consolidated Statements of Operations**

| ** **                                    | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(in millions)**                          | ** ** |
| Operating  revenues                           |       | $                                               | 71         |                                          | $          | 85 |   | $ | 189 |   | $ | 150 |   |
| Cost of fuel,  electricity and other products |       | 41                                              |       | 70                                            |       | 84 |   | 119 |   |
| Operating expenses                            |       | 53                                              |       | 48                                            |       | 95 |   | 86 |   |
| Operating income  (loss)                      |       | (23                                             | )          | (33                                           | )          | 10 |   | (55 | ) |
| Other expense,  net                           |       | —                                          |       | 1                                             |       | 2 |   | 1 |   |
| Reorganization  items, net                    |       | (1                                              | )          | (1                                            | )          | (2 | ) | (1 | ) |
| Provision for  income taxes                   |       | —                                          |       | —                                        |       | — |   | 1 |   |
| Net income (loss)                             |       | $                                               | (22        | )                                             | $          | (33 | ) | $ | 10 |   | $ | (56 | ) |

 

**New YorkSubsidiaries**

**UnauditedCondensed Consolidated Balance Sheets**

| ** **                                           | ** ** | **At June 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **(in millions)**          | ** ** |
| Current assets                                       |       |                            | $          | 99                                  |       |   |   | $ | 31 |   |   |
| Receivables—affiliate                           |       |                            | 102        |                                |       |   | 149 |   |   |
| Property, plant  and equipment, net                  |       |                            | 494        |                                |       |   | 502 |   |   |
| Other                                                |       |                            | 12         |                                |       |   | 4 |   |   |
| Total assets                                         |       |                            | $          | 707                                 |       |   |   | $ | 686 |   |   |
| Liabilities not subject to compromise                |       |                            |       |                                |       |   |   |   |   |
| Current liabilities                                  |       |                            | $          | 192                                 |       |   |   | $ | 168 |   |   |
| Affiliate payables                                   |       |                            | 23         |                                |       |   | 36 |   |   |
| Other noncurrent liabilities                         |       |                            | 10         |                                |       |   | 9 |   |   |
| Liabilities  subject to compromise—affiliate    |       |                            | 61         |                                |       |   | 62 |   |   |
| Liabilities  subject to compromise—nonaffiliate |       |                            | 18         |                                |       |   | 18 |   |   |
| Member’s equity                                 |       |                            | 403        |                                |       |   | 393 |   |   |
| Total Liabilities and  Member’s Equity          |       |                            | $          | 707                                 |       |   |   | $ | 686 |   |   |

 

**New YorkSubsidiaries**

**UnauditedCondensed Consolidated Statements of Cash Flows**

| ** **                                      | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in millions)**                        | ** ** |
| Net cash provided  by (used in):                |       |                                          |       |   |   |   |   |   |   |
| Operating activities                            |       |                                          | $          | (7 | ) |   |   | $ | — |   |   |
| Investing activities                            |       |                                          | 73         |   |   |   | (3 | ) |   |
| Financing activities                            |       |                                          | 5          |   |   |   | 3 |   |   |
| Net increase in  cash and cash equivalents      |       |                                          | 71         |   |   |   | — |   |   |
| Cash and cash  equivalents, beginning of period |       |                                          | 1          |   |   |   |   |   |   |
| Cash and cash  equivalents, end of period       |       |                                          | $          | 72 |   |   |   | $ | — |   |   |

 

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***Liabilities Subject to Compromise***

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

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

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

 

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***Reorganization Items, net***

Forthe three and six months ended June 30, 2006, reorganization items, netwere $1 million, and relate to the New York subsidiaries. For the three and sixmonths ended June 30, 2006 and 2005, reorganization items, net represent amountsthat were recorded in the financial statements as a result of the bankruptcyproceedings. The following were the significant items within this category (inmillions): 

| ** **                                                     | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Estimated claims  and losses on rejected and amended contracts |       |                                            | $          | —                                        |       |   | $ | (36 | ) |   | $ | — |   |   | $ | (17 | ) |
| Professional fees  and administrative expense                  |       |                                            | —     |                                          |       | 19 |   |   | — |   |   | 35 |   |
| Interest income,  net                                          |       |                                            | (1         | )                                             |       | (6 | ) |   | (1 | ) |   | (11 | ) |
| Total                                                          |       |                                            | $          | (1                                            | )          |   | $ | (23 | ) |   | $ | (1 | ) |   | $ | 7 |   |

 

**C.**               Changein Reporting Entity

As discussed in Note A, pursuant to the Plan, Mirantcontributed its interest in the Contributed Subsidiaries to the Companyresulting in a change in the Mirant Americas Generation reporting entity atDecember 31, 2005.

The followingtables and discussion summarize the effects of the Contributed Subsidiaries onthe previously reported Mirant Americas Generation’s unaudited condensedcombined statements of operations for the three and six months ended June 30,2005:

| ** **                                                               | ** ** | **Three Months Ended June 30, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **As Previously  Reported**                              | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| ** **                                                               | ** ** | **(in millions)**                                        | ** ** |
| Operating  revenues—affiliate                                       |       |                                                          | $          | 452 |   |   |   | $ | (427 | ) |   |   | $ | 25 |   |   |
| Operating  revenues—nonaffiliate                                    |       |                                                          | 32         |   |   |   | 611 |   |   |   | 643 |   |   |
| Total operating revenues                                                 |       |                                                          | 484        |   |   |   | 184 |   |   |   | 668 |   |   |
| Cost of fuel,  electricity and other products—affiliate             |       |                                                          | 215        |   |   |   | (180 | ) |   |   | 35 |   |   |
| Cost of fuel,  electricity and other products—nonaffiliate          |       |                                                          | 34         |   |   |   | 368 |   |   |   | 402 |   |   |
| Total cost of fuel, electricity and other products                       |       |                                                          | 249        |   |   |   | 188 |   |   |   | 437 |   |   |
| Gross Margin                                                             |       |                                                          | 235        |   |   |   | (4 | ) |   |   | 231 |   |   |
| Operating Expenses:                                                      |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance—affiliate, including restructuring      |       |                                                          | 59         |   |   |   | 14 |   |   |   | 73 |   |   |
| Operations and  maintenance—nonaffiliate, including   restructuring |       |                                                          | 70         |   |   |   | 10 |   |   |   | 80 |   |   |
| Depreciation and  amortization                                           |       |                                                          | 22         |   |   |   | 10 |   |   |   | 32 |   |   |
| Generation  facilities rent                                              |       |                                                          | 26         |   |   |   | — |   |   |   | 26 |   |   |
| Total operating expenses                                                 |       |                                                          | 177        |   |   |   | 34 |   |   |   | 211 |   |   |
| Operating Income                                                         |       |                                                          | 58         |   |   |   | (38 | ) |   |   | 20 |   |   |
| Other Expense,  net                                                      |       |                                                          | 2          |   |   |   | 2 |   |   |   | 4 |   |   |
| Income before  Reorganization Items and Income Taxes                     |       |                                                          | 56         |   |   |   | (40 | ) |   |   | 16 |   |   |
| Reorganization  items, net                                               |       |                                                          | (150       | ) |   |   | 127 |   |   |   | (23 | ) |   |
| Benefit for  income taxes                                                |       |                                                          | —     |   |   |   | (1 | ) |   |   | (1 | ) |   |
| Net income                                                               |       |                                                          | $          | 206 |   |   |   | $ | (166 | ) |   |   | $ | 40 |   |   |

 

15

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| ** **                                                               | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **As Previously  Reported**                            | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| ** **                                                               | ** ** | **(in millions)**                                      | ** ** |
| Operating  revenues—affiliate                                       |       |                                                        | $          | 833 |   |   |   | $ | (773 | ) |   |   | $ | 60 |   |   |
| Operating  revenues—nonaffiliate                                    |       |                                                        | 82         |   |   |   | 1,117 |   |   |   | 1,199 |   |   |
| Total operating revenues                                                 |       |                                                        | 915        |   |   |   | 344 |   |   |   | 1,259 |   |   |
| Cost of fuel,  electricity and other products—affiliate             |       |                                                        | 425        |   |   |   | (360 | ) |   |   | 65 |   |   |
| Cost of fuel,  electricity and other products—nonaffiliate          |       |                                                        | 88         |   |   |   | 680 |   |   |   | 768 |   |   |
| Total cost of fuel, electricity and other products                       |       |                                                        | 513        |   |   |   | 320 |   |   |   | 833 |   |   |
| Gross Margin                                                             |       |                                                        | 402        |   |   |   | 24 |   |   |   | 426 |   |   |
| Operating Expenses:                                                      |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance—affiliate, including restructuring      |       |                                                        | 121        |   |   |   | 30 |   |   |   | 151 |   |   |
| Operations and  maintenance—nonaffiliate, including   restructuring |       |                                                        | 127        |   |   |   | 14 |   |   |   | 141 |   |   |
| Depreciation and  amortization                                           |       |                                                        | 45         |   |   |   | 20 |   |   |   | 65 |   |   |
| Generation  facilities rent                                              |       |                                                        | 51         |   |   |   | — |   |   |   | 51 |   |   |
| Gain on sales of  assets, net                                            |       |                                                        | (1         | ) |   |   | — |   |   |   | (1 | ) |   |
| Total operating expenses                                                 |       |                                                        | 343        |   |   |   | 64 |   |   |   | 407 |   |   |
| Operating Income                                                         |       |                                                        | 59         |   |   |   | (40 | ) |   |   | 19 |   |   |
| Other Expense,  net                                                      |       |                                                        | 3          |   |   |   | 3 |   |   |   | 6 |   |   |
| Income before  Reorganization Items and Income Taxes                     |       |                                                        | 56         |   |   |   | (43 | ) |   |   | 13 |   |   |
| Reorganization  items, net                                               |       |                                                        | (135       | ) |   |   | 142 |   |   |   | 7 |   |   |
| Provision for  income taxes                                              |       |                                                        | 6          |   |   |   | (1 | ) |   |   | 5 |   |   |
| Net income                                                               |       |                                                        | $          | 185 |   |   |   | $ | (184 | ) |   |   | $ | 1 |   |   |

 

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

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Thefollowing table summarizes the effects of the Contributed Subsidiaries on thepreviously reported Mirant Americas Generation’s unaudited condensed combinedstatements of cash flows for the six months ended June 30, 2005:

| ** **                                                                                   | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **As Previously  Reported**                            | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| ** **                                                                                   | ** ** | **(in millions)**                                      | ** ** |
| **Cash Flows from Operating  Activities:**                                                   |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                   |       |                                                        | $          | 185 |   |   |   | $ | (184 | ) |   |   | $ | 1 |   |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                |       |                                                        | 45         |   |   |   | 20 |   |   |   | 65 |   |   |
| Unrealized losses on price risk management assets  and   liabilities                         |       |                                                        | (24        | ) |   |   | (43 | ) |   |   | (67 | ) |   |
| Deferred income taxes                                                                        |       |                                                        | 2          |   |   |   | — |   |   |   | 2 |   |   |
| Non-cash charges for reorganization items                                                    |       |                                                        | (164       | ) |   |   | 147 |   |   |   | (17 | ) |   |
| Gain on sales of assets and investments                                                      |       |                                                        | (1         | ) |   |   | — |   |   |   | (1 | ) |   |
| Other, net                                                                                   |       |                                                        |       |   |   |   | 1 |   |   |   | 1 |   |   |
| Changes in  certain assets and liabilities:                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Affiliate accounts receivable                                                                |       |                                                        | (42        | ) |   |   | 37 |   |   |   | (5 | ) |   |
| Customer accounts receivable                                                                 |       |                                                        | 15         |   |   |   | 76 |   |   |   | 91 |   |   |
| Prepaid rent                                                                                 |       |                                                        | (17        | ) |   |   | — |   |   |   | (17 | ) |   |
| Inventories                                                                                  |       |                                                        | 14         |   |   |   | 6 |   |   |   | 20 |   |   |
| Other assets                                                                                 |       |                                                        | 20         |   |   |   | (49 | ) |   |   | (29 | ) |   |
| Accounts payable and accrued liabilities                                                     |       |                                                        | 18         |   |   |   | (128 | ) |   |   | (110 | ) |   |
| Payable to affiliate.                                                                        |       |                                                        | (4         | ) |   |   | 12 |   |   |   | 8 |   |   |
| Property taxes accrued, affiliate                                                            |       |                                                        | (5         | ) |   |   | — |   |   |   | (5 | ) |   |
| Property taxes accrued, nonaffiliate                                                         |       |                                                        | 19         |   |   |   | (1 | ) |   |   | 18 |   |   |
| Other liabilities                                                                            |       |                                                        | —     |   |   |   | 5 |   |   |   | 5 |   |   |
| Total adjustments                                                                            |       |                                                        | (124       | ) |   |   | 83 |   |   |   | (41 | ) |   |
| Net cash provided by (used in) operating activities                                          |       |                                                        | 61         |   |   |   | (101 | ) |   |   | (40 | ) |   |
| **Cash Flows from Investing  Activities:**                                                   |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       |                                                        | (50        | ) |   |   | (12 | ) |   |   | (62 | ) |   |
| Repayments on  notes receivable from affiliate                                               |       |                                                        | —     |   |   |   | 11 |   |   |   | 11 |   |   |
| Proceeds from the  sale of assets, net                                                       |       |                                                        | 4          |   |   |   | — |   |   |   | 4 |   |   |
| Net cash used in investing activities                                                        |       |                                                        | (46        | ) |   |   | (1 | ) |   |   | (47 | ) |   |
| **Cash Flows from Financing  Activities:**                                                   |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from  issuance of debt—affiliate                                               |       |                                                        | —     |   |   |   | 1 |   |   |   | 1 |   |   |
| Repayment of debt—nonaffiliate                                                          |       |                                                        | —     |   |   |   | (1 | ) |   |   | (1 | ) |   |
| Net cash provided by financing activities                                                    |       |                                                        | —     |   |   |   | — |   |   |   | — |   |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                    |       |                                                        | 15         |   |   |   | (102 | ) |   |   | (87 | ) |   |
| **Cash  and Cash Equivalents, beginning of period**                                          |       |                                                        | 414        |   |   |   | 222 |   |   |   | 636 |   |   |
| **Cash and Cash Equivalents, end  of period**                                                |       |                                                        | $          | 429 |   |   |   | $ | 120 |   |   |   | $ | 549 |   |   |

 

**D.**              RelatedParty Arrangements and Transactions

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

MirantServices provides the Company with various management, personnel and otherservices. The Company reimburses Mirant Services for amounts equal to MirantServices’ direct costs of providing such 

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services. The total costs incurred under theManagement, Personnel and Services Agreement with Mirant Services have beenincluded in the accompanying unaudited condensed consolidated and combinedstatements of operations for the three and six months ended June 30, 2006and 2005 as follows (in millions): 

| ** **                                                  | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of fuel, electricity and other products—affiliate |       |                                            | $          | 2                                             |       |   |   | $ | 2 |   |   |   | $ | 4 |   |   |   | $ | 5 |   |   |
| Operations and maintenance expense—affiliate           |       |                                            | 40         |                                          |       |   | 45 |   |   |   | 78 |   |   |   | 87 |   |   |
| Total                                                       |       |                                            | $          | 42                                            |       |   |   | $ | 47 |   |   |   | $ | 82 |   |   |   | $ | 92 |   |   |

 

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

For the three and sixmonths ended June 30, 2006, the Company provided energy marketing and fuelprocurement services through Mirant Energy Trading to the following affiliates:Mirant Las Vegas, LLC, Mirant Sugar Creek, LLC, Mirant Shady Hills, LLC, MirantWest Georgia, LLC and Mirant Wichita Falls, LP. For the three and sixmonths ended June 30, 2005, these services were provided by MirantAmericas Energy Marketing. Amounts due from each affiliate under theirrespective services agreements are recorded as a net accounts payable-affiliateor accounts receivable-affiliate because of each subsidiary’s legal right tooffset. For the three and six months ended June 30, 2006, the Companyearned approximately $2 million and $3 million, respectively, compared to$2 million and $4 million, respectively, for the same periods in 2005, underthese agreements with affiliates which are recorded as a reduction tooperations and maintenance in Mirant Americas Generation’s unaudited condensedconsolidated and combined statements of operations.

***Administration Arrangements with Mirant Services***

Substantially all ofMirant’s corporate overhead costs are allocated to Mirant’s operatingsubsidiaries. For the three and six months ended June 30, 2006, theCompany incurred approximately $32 million and $65 million,respectively, compared to $30 million and $68 million, respectively, for thesame periods in 2005, in costs under these arrangements, which are included inoperations and maintenance—affiliate in the accompanying unaudited condensedconsolidated and combined statements of operations.

***Notes Payable to Affiliate***

During the pendency of theChapter 11 proceedings, Mirant and certain of its subsidiariesparticipated in an intercompany cash management program approved by theBankruptcy Court, pursuant to which cash balances at Mirant and theparticipating subsidiaries were transferred to central concentration accountsand, if necessary, lent to Mirant or any participating subsidiary to fundworking capital and other needs, subject to the intercompany borrowing limitsapproved by the Bankruptcy Court. At June 30, 2006, and December 31,2005, the Company had current notes payable to affiliate of $7 million and$21 million, respectively. For the three and six months ended June 30,2006, the Company incurred less than $1 million of interest expense under thisarrangement, compared to $3 million and $6 million, for the sameperiods in 2005, which are recorded in interest expense—affiliate in theaccompanying unaudited condensed consolidated and combined financialstatements.

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

Pursuant to the Plan, theCompany was required to pay $250 million to Mirant Americas, Inc. (“MirantAmericas”) within five days of the effective date of the Plan in return forMirant’s contribution of the Trading Debtors. This amount is included inpayable to affiliate at December 31, 2005, in the consolidated balancesheet and was paid in January 2006.

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***Mirant Guarantees***

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

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

Prior to 2005, Mirantentered into pre-petition letters of credit to support the Company’s assetmanagement activities. In September 2005, several of these letters ofcredit were drawn in the amount of $39 million. In January 2006, theremaining pre-petition letter of credit of $7 million was drawn in full. Inaddition, Mirant entered into post-petition letters of credit to support itsasset hedging activities. In January 2006, letters of credit from theMirant North America senior secured credit facilities replaced the elevenpost-petition letters of credit outstanding at December 31, 2005. See “FinancialCondition, *Cash Collateral and Letters of Credit”*fordetails on letters of credit outstanding at June 30, 2006*.*

***Preferred Stock in Mirant Americas***

For the six months ended June 30,2006, the Company recorded $10 million in Preferred Stock in affiliate andMember’s Interest in the unaudited condensed consolidated balance sheet relatedto the amortization of the discount on the preferred stock in Mirant Americas.

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

Mirant North America and Mirant Americas EnergyMarketing, (the “Primary DIP Lenders”) entered into an agreement (the ‘‘PrimaryNew York DIP Agreement’’) to make secured debtor-in-possessionfinancing in an amount of (i) $20 million, plus (ii) an amountequal to the amount of credit support provided on behalf of Mirant New York,Mirant Bowline, Mirant Lovett, and Hudson Valley Gas Corporation (collectively,the ‘‘New York DIP Borrowers’’), to the extent such amounts are collateralizedwith cash or cash equivalents by the New York DIP Borrowers. The facility isavailable on a joint and several basis to the New York DIP Borrowers. On January 31,2006, all the assets of Mirant Americas Energy Marketing were transferred toMirant Energy Trading, with Mirant Energy Trading to succeed to all rights andassume all obligations of Mirant Americas Energy Marketing under the PrimaryNew York DIP Agreement. The New York DIP Borrowers have posted $18.3 millioncash collateral with Mirant Energy Trading in accordance with the June 30,2006, collateral allocation performed in good faith by Mirant Energy Trading.To the extent that the required level of credit support provided to the NewYork DIP Borrowers is reduced, the amount of such reduction is required to bereturned to the New York DIP Borrowers.

Contemporaneous with their entry into the Primary NewYork DIP Agreement, the New York DIP Borrowers also entered into an agreementfor secured financing with Mirant (the “Secondary New York DIP Agreement”). TheSecondary New York DIP Agreement permits Mirant to make secured debtor-in-possessionfinancing in the maximum amount of $50 million to the New York DIP Borrowers, 

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and the borrowings areavailable solely for cash collateral postings by any one or more of the NewYork DIP Borrowers.

The Bankruptcy Court hasapproved a debtor-in-possession loan to Mirant NY-Gen from Mirant Americasunder which Mirant Americas, subject to certain conditions, would lend up to$9.5 million to Mirant NY-Gen to provide funding for the repairs on theSwinging Bridge dam.

For further discussion see“Item 2. Management’s Discussion and Analysis—Financial Condition.”

**E.**               PriceRisk Management Assets and Liabilities

Thefair values of Mirant Americas Generation’s price risk management assets andliabilities, net of credit reserves, at June 30, 2006, are included in thefollowing table (in millions):

| ** **  | ** ** | **Net Price Risk Management Assets(Liabilities)** | ** ** |
|-------------|------------|-----------------------------------------------------------------------|------------|
| ** **  | ** ** | **Assets  Current**                                                   | ** ** | **Assets  Noncurrent** | ** ** | **Liabilities  Current** | ** ** | **Liabilities  Noncurrent** | ** ** | **Net Fair Value** | ** ** |
| Electricity |       |                                                                  | $          | 603 |   |   |   | $ | 106 |   |   |   | $ | (449 | ) |   |   | $ | (16 | ) |   |   | $ | 244 |   |   |
| Natural gas |       |                                                                  | 43         |   |   |   | 6 |   |   |   | (37 | ) |   |   | (8 | ) |   |   | 4 |   |   |
| Oil         |       |                                                                  | 16         |   |   |   | — |   |   |   | (1 | ) |   |   | (3 | ) |   |   | 12 |   |   |
| Coal/other  |       |                                                                  | 6          |   |   |   | 7 |   |   |   | (10 | ) |   |   | (1 | ) |   |   | 2 |   |   |
| Total       |       |                                                                  | $          | 668 |   |   |   | $ | 119 |   |   |   | $ | (497 | ) |   |   | $ | (28 | ) |   |   | $ | 262 |   |   |

 

Of the $262 million net fair value asset atJune 30, 2006, a net price risk management asset of $96 million relates tothe remainder of 2006, a net price risk management asset of $109 millionrelates to 2007 and a net price risk management asset of $57 million relates toperiods thereafter. The volumetric weighted average maturity, or weightedaverage tenor, of the price risk management portfolio at June 30, 2006,was approximately 14 months. The net notional amount of the price riskmanagement assets and liabilities at June 30, 2006, was a net shortposition of approximately 28** **millionequivalent megawatt-hours (“MWh”).

In January 2006, the Company entered intofinancial swap transactions with a counterparty, the effect of which was tohedge its Mid-Atlantic expected on-peak coal fired generation by approximately80%, 50% and 50% for 2007, 2008 and 2009, respectively.

Thefollowing table provides a summary of the factors impacting the change in netfair value of the price risk management asset and liability accounts for thesix months ended June 30, 2006 (in millions):

| ** **                                             | ** ** | **Proprietary  Trading** | ** ** | **Asset  Management** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-----------|------------|
| Net fair value of  portfolio at December 31, 2005 |       |                     | $          | 40                    |       |      |       | $ | (154 | ) |   | $ | (114 | ) |
| Gains recognized  in the period, net                   |       |                     | 23         |                  |       |      | 284        |   |   | 307 |   |
| Contracts settled  during the period, net              |       |                     | (10        | )                     |       |      | 79         |   |   | 69 |   |
| Net fair value of  portfolio at June 30, 2006     |       |                     | $          | 53                    |       |      |       | $ | 209 |   |   | $ | 262 |   |

 

**F.**                AssetsHeld for Sale

No assets were held forsale as of June 30, 2006. Assets held for sale as of December 31,2005, included $7 million related to the Mirant Service Center building andaccompanying land. The sale of the Mirant Service Center closed onJune 30, 2006, and the Company recognized a gain of approximately $6million.

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***Planned Asset Dispositions***

On August 9, 2006, Mirant announced the plannedsale of various gas fired assets including the Company’s Zeeland (837 MW) andBosque (532 MW) intermediate and peaking gas fired plants. See Note A “*Impairment of Long-Lived Assets”* for discussion ofimpairment losses related to these plants.

Theplanned sales will result in the reclassification of the revenues and expensesof these assets to discontinued operations and the reclassification of therelated assets and liabilities to assets held for sale and liabilities held forsale, respectively, in the third quarter of 2006. The following table presentsa pro forma summary of the operating results for these assets for the three andsix months ended June 30, 2006 and 2005 (in millions):

| ** **                                                 | ** ** | **Three Months   Ended  June 30,** | ** ** | **Six Months   Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                          | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating  revenues                                        |       |                                              | $          | 13                                              |       |   |   | $ | 21 |   |   |   | $ | 22 |   |   |   | $ | 31 |   |   |
| Operating  expenses, including other (expense) income, net | ** ** | ** **                                        | 11         |                                            |       |   | 24 |   | ** ** | ** ** | 20 |   |   |   | 37 |   |   |
| Income (loss)  before income taxes                         | ** ** | ** **                                        | 2          |                                            |       |   | (3 | ) | ** ** | ** ** | 2 |   |   |   | (6 | ) |   |
| Provision for  income taxes                                |       |                                              | —     |                                            |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)                                          |       |                                              | $          | 2                                               |       |   |   | $ | (3 | ) |   |   | $ | 2 |   |   |   | $ | (6 | ) |   |

 

**G.**              Debt

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

| **Long-term debt:**                         | ** ** | ** ** | ** ** | **At  June 30,  2006** | ** ** | **At  December 31,  2005** | ** ** | **Interest Rate** | ** ** | **Secured/  Unsecured** | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------------|------------|-------------------------|------------|
| Mirant Americas  Generation:                     |       |       |       |                        |       |                            |       |                   |       |                    |       |   |   |
| Senior notes:                                    |       |       |       |                        |       |                            |       |                   |       |                    |       |   |   |
| Due 2011                                         |       |       | $          | 850                         |       |                            |       | $                      | 850        |                    |       | 8.30 | % | Unsecured |   |
| Due 2021                                         |       |       | 450        |                        |       |                            | 450        |                   |       | 8.50                    | %          | Unsecured |   |
| Due 2031                                         |       |       | 400        |                        |       |                            | 400        |                   |       | 9.125                   | %          | Unsecured |   |
| Unamortized debt discount                        |       |       | (3         | )                           |       |                            | (4         | )                      |       |                    |       |   |   |
| Mirant North  America:                           |       |       |       |                        |       |                            |       |                   |       |                    |       |   |   |
| Term loan, due 2006 to 2013(1)                   |       |       | 696        |                        |       |                            | —     |                   |       | LIBOR + 1.75            | %          | Secured |   |
| Senior note, due 2013                            |       |       | 850        |                        |       |                            | 850        |                   |       | 7.375                   | %          | Unsecured |   |
| Mirant Zeeland capital lease, due 2006 to 2012   |       |       | 12         |                        |       |                            | 11         |                   |       | 9.50                    | %          | — |   |
| Other :                                          |       |       |       |                        |       |                            |       |                   |       |                    |       |   |   |
| Mirant Peaker capital lease, due 2006 to   2015  |       |       | 35         |                        |       |                            | 36         |                   |       | 8.19                    | %          | — |   |
| Total                                            |       |       | 3,290      |                        |       |                            | 2,593      |                   |       |                    |       |   |   |
| Less: current  portion of long-term debt         |       |       | (74        | )                           |       |                            | (3         | )                      |       |                    |       |   |   |
| Total long-term  debt, excluding current portion |       |       | $          | 3,216                       |       |                            |       | $                      | 2,590      |                    |       |   |   |   |   |

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       (1) Under the senior secured term loan, $200 million was deposited intoa cash collateral account to support issuance of up to $200 million of lettersof credit.

Pursuant to the Plan, theCompany reinstated $1.7 billion of senior notes maturing in 2011, 2021and 2031.

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***Senior Secured Credit Facilities***

Mirant North America, a wholly-owned subsidiary of theCompany entered into senior secured credit facilities in January 2006,which are comprised of an $800 million six-year senior secured revolvingcredit facility and a $700 million seven-year senior secured term loan.The full amount of the senior secured revolving credit facility is availablefor cash draws or for the issuance of letters of credit. On January 3,2006, Mirant North America drew $465 million under its senior secured revolvingcredit facility. All amounts were repaid during the first quarter of 2006.******The senior secured term loan wasfully drawn at closing and amortizes in quarterly installments aggregating0.25% of the original principal of the term loan per quarter for the first27 quarters, with the remainder payable on the final maturity date in January 2013.At the closing, $200 million drawn under the senior secured term loan wasdeposited into a cash collateral account to support the issuance of up to$200 million of letters of credit. The senior secured credit facilitiesare obligations of Mirant North America and the respective guarantors and arenot recourse to any other Mirant Americas Generation entities.

Loans under the senior secured credit facilities areavailable at either of the following rates: (i) a fluctuating rate ofinterest per annum equal to, on any given day, the greater of (a) theinterest rate per annum publicly announced by JPMorgan Chase Bank, N.A. asits prime rate in effect at its principal office in New York City on that day,and (b) the federal funds rate in effect on that day plus 0.50%, plus theapplicable margin described below (the “base rate”), or (ii) a fixed ratedetermined for selected interest periods of one, two, three or six months equalto U.S. dollar London InterBank Offered Rate (“LIBOR”), plus the applicablemargin described below (the “Eurodollar rate”).

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

Mirant North America is requiredto prepay a portion of the outstanding principal balance of the senior securedterm loan once a year, in addition to the regularly scheduled principalpayments, based on adjusted earnings before interest, taxes, depreciation andamortization (“EBITDA”) calculation to determine excess free cash flows, asdefined in the loan agreement. At June 30, 2006, the current estimate ofthe mandatory principal prepayment of the term loan in April 2007 isapproximately $63 million. This amount has been reclassified from long-termdebt to current portion of long-term debt as of June 30, 2006.

***Senior Notes***

In December 2005, Mirant North America issuedsenior notes (the “Old Notes”) in an aggregate principal amount of $850 millionthat bear interest at 7.375% and mature on December 31, 2013. The seniornotes were issued in a private placement and were not registered with theSecurities and Exchange Commission. Interest on the notes is payable on each June 30and December 31, commencing June 30, 2006. The proceeds of the notesoffering initially were placed in escrow pending the emergence of Mirant NorthAmerica from bankruptcy. The proceeds were released from escrow in connectionwith Mirant North America’s emergence from bankruptcy and the closing of thesenior secured credit facilities. The senior notes are obligations of MirantNorth America and the respective guarantors and are not recourse to any otherMirant Americas Generation entities.

In connection with theissuance of the Old Notes, Mirant North America entered into a registrationrights agreement under which it agreed to complete an exchange offer for theOld Notes. On June 29, 2006, Mirant North America completed itsregistration under the Securities Act of $850 million of 7.375% senior notesdue 2013 (the “New Notes”) and initiated an offer to exchange all of theoutstanding Old 

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Notesfor the New Notes (the “Exchange Offer”). The Exchange Offer was completed on August 4,2006, with $849.965 million of the outstanding Old Notes being tendered for theNew Notes. The terms of the New Notes are identical in all material respects tothe terms of the Old Notes, except that the New Notes are registered under theSecurities Act and generally are not subject to transfer restrictions orregistration rights.

**H.**              Litigationand Other Contingencies

The Company is involved ina number of significant legal proceedings. In certain cases plaintiffs seek torecover large and sometimes unspecified damages, and some matters may beunresolved for several years. The Company cannot currently determine theoutcome of the proceedings described below or the ultimate amount of potentiallosses and therefore has not made any provision for such matters unlessspecifically noted below. Pursuant to SFAS No. 5, “*Accountingfor Contingencies*,” management provides for estimated losses to theextent information becomes available indicating that losses are probable andthat the amounts are reasonably estimable. Additional losses could have amaterial adverse effect on the Company’s consolidated financial position,results of operations or cash flows.

***Chapter 11 Proceedings***

On July 14, 2003 (the “Petition Date”), andvarious dates thereafter, Mirant Corporation and certain of its subsidiaries(collectively, the “Mirant Debtors”), including the Company and itssubsidiaries, filed voluntary petitions for relief under Chapter 11 of theBankruptcy Code in the Bankruptcy Court. Most of the material claims filedagainst the Mirant Debtors’ estates were disallowed or were resolved and became“allowed” claims before confirmation of the Plan that became effective forMirant, the Company, and most of the Mirant Debtors on January 3, 2006.Mirant, as the distribution agent under the Plan, has made distributionspursuant to the terms of the Plan on those allowed claims. Some claims,however, remain unresolved.

As of June 30, 2006, approximately 21.3 millionof the shares of Mirant common stock to be distributed under the Plan have notyet been distributed and have been reserved for distribution with respect toclaims that are disputed by the Mirant Debtors and have not been resolved. Asettlement entered into on May 30, 2006, among Pepco, Mirant, MC 2005, LLCf/k/a Mirant Corporation (“Old Mirant”), and various subsidiaries of Mirant,including subsidiaries of the Company, if approved by final order in theChapter 11 proceedings, would result in the distribution of up to 18 million ofthe reserved shares to Pepco, as described below in *PepcoLitigation*. Under the terms of the Plan, to the extent other suchunresolved claims are resolved now that the Company has emerged frombankruptcy, the claimants will be paid from the reserved shares on the samebasis as if they had been paid when the Plan became effective. That means thattheir allowed claims will receive the same pro rata distributions of Mirantcommon stock, cash, or both common stock and cash as previously allowed claimsin accordance with the terms of the Plan. To the extent the aggregate amount ofthe payouts determined to be due with respect to such disputed claimsultimately exceeds the amount of the funded claim reserve, Mirant would have toissue additional shares of common stock to address the shortfall, which woulddilute existing Mirant shareholders, and Mirant and the Company would have topay additional cash amounts as necessary under the terms of the Plan to satisfysuch pre-petition claims. The Company will continue to monitor its obligationsas the disputed claims are resolved.

The Company’s Lovett and Bowline generation facilitiesin New York are subject to disputes with local tax authorities regardingproperty tax assessments. In addition, Mirant Lovett is in discussions with theNew York State Department of Environmental Conservation (“NYSDEC”) and the NewYork State Office of the Attorney General regarding environmental controls.Mirant Lovett is also in discussions with the State of New York and otherparties regarding an agreement that would compensate Mirant Lovett for thecontribution of the Lovett facility to the reliability of the New York electricpower system. The facilities 

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are forecasted to havenegative operating cash flows at their current property taxation levels. Untila resolution is reached on property taxes and environmental controls that wouldpermit economically feasible operation, the Company’s subsidiaries that own thefacilities, Mirant Lovett and Mirant Bowline, will remain in Chapter 11. Untilsuch issues are resolved and the companies emerge from bankruptcy, the Companywill not have access to the cash from operations generated from thesesubsidiaries.

The Company’s other subsidiaries related to its NewYork business operations, Mirant New York, Hudson Valley Gas Corporation andMirant NY-Gen also remain in bankruptcy. Mirant NY-Gen, which ownshydroelectric facilities at Swinging Bridge, Rio and Mongaup, and smallcombustion turbine facilities at Hillburn and Shoemaker, is insolvent. Itsexpenses are being funded under a debtor-in-possession facility made by MirantAmericas with the approval of, and under the supervision of, the BankruptcyCourt. Mirant NY-Gen is proceeding with the implementation of a remediationplan for the sinkhole discovered in May 2005 in the dam at the SwingingBridge facility. The status of the remediation effort is discussed below inOther Contingencies.

***Pepco Litigation***

In 2000, Mirant purchased power generating facilitiesand other assets from Pepco, including certain power purchase agreements(“PPAs”) between Pepco and third parties. Under the terms of the Asset Purchaseand Sale Agreement (“APSA”), Mirant andPepco entered into a contractual agreement (the “Back-to-Back Agreement”) withrespect to certain PPAs, including Pepco’s long-term PPA with Panda-Brandywine L.P. (“Panda”), underwhich (1) Pepco agreed to resell to Mirant all capacity, energy, ancillaryservices and other benefits to which it is entitled under those agreements and(2) Mirant agreed to pay Pepco each month all amounts due from Pepco tothe sellers under those agreements for the immediately preceding monthassociated with such capacity, energy, ancillary services and other benefits.The Panda PPA runs until 2021, and the Back-to-Back Agreement does not expireuntil all obligations have been performed under the Panda PPA. Under theBack-to-Back Agreement, Mirant is obligated to purchase power from Pepco atprices that typically are higher than the market prices for power.

Mirant assigned its rights and obligations under theBack-to-Back Agreement to Mirant Americas Energy Marketing. In the Chapter 11cases of the Mirant Debtors, Pepco asserted that an Assignment and AssumptionAgreement dated December 19, 2000, that includes as parties Pepco andvarious subsidiaries of ours causes our subsidiaries that are parties to theagreement to be jointly and severally liable to Pepco for various obligations,including the obligations under the Back-to-Back Agreement. The Mirant Debtorshave sought to reject the APSA, the Back-to-Back Agreement, and the Assignmentand Assumption Agreement, and the rejection motions have not been resolved.Under the Plan, the obligations of the Mirant Debtors under the APSA (includingany other agreements executed pursuant to the terms of the APSA and found by afinal court order to be part of the APSA), the Back-to-Back Agreement, and theAssignment and Assumption Agreement are to be performed by Mirant PowerPurchase, LLC (“Mirant Power Purchase”), whose performance is guaranteed byMirant. If any of the agreements is successfully rejected, the obligations ofMirant Power Purchase and Mirant’s guarantee obligations terminate with respectto that agreement, and Pepco would be entitled to a claim in the Chapter 11proceedings for any resulting damages. That claim would then be addressed underthe terms of the Plan. If the Bankruptcy Court were to conclude that theAssignment and Assumption Agreement imposed liability upon the Company’ssubsidiaries for the obligations under the Back-to-Back Agreement and theBack-to-Back Agreement were to be rejected, the resulting rejection damagesclaim could result in a claim in the Chapter 11 proceedings against theCompany’s subsidiaries but any such claim would be reduced by the amountrecovered by Pepco on its comparable claim against Mirant.

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

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

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

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having avalue, after liquidation of the stock by Pepco, equal to $520 million, subjectto certain adjustments. Upon the Settlement Agreement becoming effective,Mirant will distribute up to 18 million shares of Mirant common stock to Pepcoto satisfy its claim and Pepco will liquidate those shares. The shares are tobe distributed to Pepco in two distributions, the first totaling 13.5 millionshares and the second to be determined by Mirant after the Settlement Agreementbecomes effective so as to produce upon liquidation total net proceeds fromboth share distributions as near to $520 million as possible, subject to the overallcap on the shares to be distributed of 18 million shares. If the net proceedsreceived by Pepco from the 

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liquidationof the shares are less than $520 million, Mirant will pay Pepco cash equal tothe difference. If the closing price of Mirant’s stock is less than $16.00 onfour business days in a 20 consecutive business day period prior to anydistribution of shares to Pepco on its claim, then Mirant can elect to have theBack-to-Back Agreement assumed and assigned to Mirant Power Purchase rather thanrejecting it. If Mirant exercises this right to have the Back-to-Back Agreementassumed, then the $520 million is reduced to $70 million and Mirant PowerPurchase would continue to perform the Back-to-Back Agreement through itsexpiration in 2021 with Mirant guaranteeing its performance. The SettlementAgreement allocates the $70 million to various claims asserted by Pepco that donot arise from the rejection of the Back-to-Back Agreement, including claimsasserted under the Local Area Support Agreement between Pepco and MirantPotomac River that are discussed below in *Pepco Assertion of Breachof Local Area Support Agreement*.

***California and Western Power Markets***

*CaliforniaRate Payer Litigation.**  *Certainof our subsidiaries have been subject to litigation related to their activitiesin California and the western power markets and the high prices for wholesaleelectricity experienced in the western markets during 2000 and 2001. Variouslawsuits were filed in 2000 through 2003 that asserted claims under Californialaw based on allegations that certain owners of electricity generationfacilities in California and energy marketers, including the Company, MirantAmericas Energy Marketing and our subsidiaries owning generating facilities inCalifornia, engaged in various unlawful and anti-competitive acts that servedto manipulate wholesale power markets and inflate wholesale electricity pricesin California. All of these suits had been dismissed by final orders except forsix such suits that were filed between November 27, 2000, and May 2,2001, in various California Superior Courts and consolidated before theSuperior Court for the County of San Diego for pretrial purposes. Although theplaintiffs dismissed Mirant from those suits, they had not filed to dismisscertain of the Company’s subsidiaries that were also defendants. On October 3,2005, the California state court dismissed those six consolidated suits on thegrounds that the plaintiffs’ claims were barred by federal preemption as aresult of the Federal Power Act. On December 5, 2005, the plaintiffs filedan appeal of the dismissal. On April 14, 2006, the California Court ofAppeal dismissed the appeal as to the remaining Mirant defendants pursuant to astipulation and remanded the suits to the superior court. On May 9, 2006,the California state court dismissed the suits with respect to the remainingMirant defendants.

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

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expansion of the RefundPeriod to include periods prior to October 2, 2000, or of the types ofsales of electricity potentially subject to refund could increase the refundexposure of Mirant Americas Energy Marketing in this proceeding.

In the July 25, 2001, order, the FERC alsoordered that a preliminary evidentiary proceeding be held to develop a factualrecord on whether there had been unjust and unreasonable charges for spotmarket bilateral sales in the Pacific Northwest from December 25, 2000,through June 20, 2001. In that proceeding, the California AttorneyGeneral, the California Public Utility Commission (the “CPUC”) and theCalifornia Electricity Oversight Board (the “EOB”) filed to recover certainrefunds from parties, including Mirant Americas Energy Marketing, for bilateralsales of electricity to the DWR at the California/Oregon border, claiming thatsuch sales took place in the Pacific Northwest. In an order issued June 25,2003, the FERC ruled that no refunds were owed and terminated the proceeding.On November 10, 2003, the FERC denied requests for rehearing filed byvarious parties. Various parties have appealed the FERC’s decision to the NinthCircuit.

On September 9, 2004, the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed in 2002 by the California AttorneyGeneral that sought refunds for transactions conducted in markets administeredby the CAISO and the Cal PX outside the Refund Period set by the FERC and fortransactions between the DWR and various owners of generation and power marketers,including Mirant Americas Energy Marketing and subsidiaries of the Company. TheNinth Circuit remanded the proceeding to the FERC for it to determine whatremedies, including potential refunds, are appropriate where entities,including Mirant Americas Energy Marketing, purportedly did not comply withcertain filing requirements for transactions conducted under market-based ratetariffs. Mirant Americas Energy Marketing and other parties have filed apetition for rehearing with the Ninth Circuit that remains pending.

On January 14, 2005,**Mirantand certain of its subsidiaries, including the Company, entered into aSettlement and Release of Claims Agreement (the “California Settlement”) withPG&E, Southern California Edison Company (“SCE”), San Diego Gas andElectric Company, the CPUC, the DWR, the EOB and the Attorney General of theState of California (collectively, the “California Parties”) and with theOffice of Market Oversight and Investigations of the FERC. The CaliforniaSettlement settled a number of disputed lawsuits and regulatory proceedingsthat were pursued originally in state and federal courts and before the FERC.The Mirant entities that are parties to the California Settlement(collectively, the “Mirant Settling Parties”) include Mirant Corporation,Mirant Americas Energy Marketing, the Company, and Mirant North America (as thesuccessor to Mirant California Investments, Inc.). The CaliforniaSettlement was approved by the FERC on April 13, 2005, and becameeffective April 15, 2005, upon its approval by the Bankruptcy Court. TheCalifornia Settlement resulted in the release of most of Mirant Americas EnergyMarketing’s potential liability (1) in the FERC Refund Proceedings forsales made in the CAISO or the Cal PX markets, (2) in the proceeding alsoinitiated by the FERC in July 2001 to determine whether there had beenunjust and unreasonable charges for spot market bilateral sales in the PacificNorthwest from December 25, 2000, through June 20, 2001, and (3) inany proceedings at the FERC resulting from the Ninth Circuit’s reversal of theFERC’s dismissal of the complaint filed in 2002 by the California AttorneyGeneral. Under the California Settlement, the California Parties and thoseother market participants who have opted into the settlement have released theMirant Settling Parties from any liability for refunds related to sales ofelectricity and natural gas in the western markets from January 1, 1998,through July 14, 2003. Also, the California Parties have assumed theobligation of Mirant Americas Energy Marketing to pay any refunds determined bythe FERC to be owed by Mirant Americas Energy Marketing to other parties 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 certain receivables assigned byMirant Americas Energy Marketing to the California Parties under the CaliforniaSettlement. Subject to applicable bankruptcy law, however, Mirant 

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Americas Energy Marketingwill continue to be liable for any refunds that the FERC determines it to owe (1) toparticipants in the Cal PX and CAISO markets that are not California Parties(or that did 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 didnot elect to opt into the settlement).

The Company’s view is that the bulk of any obligationsof Mirant Americas Energy Marketing to make refunds as a result of salescompleted prior to July 14, 2003, in the CAISO or Cal PX markets or inbilateral transactions either have been addressed by the California Settlementor have been resolved as part of Mirant Americas Energy Marketing’s bankruptcyproceedings. To the extent that Mirant Americas Energy Marketing’s potentialrefund liability arises from contracts that were transferred to Mirant EnergyTrading as part of the transfer of the trading and marketing business under thePlan, Mirant Energy Trading may have exposure to any refund liability relatedto transactions under those contracts.

*FERCShow Cause Proceeding Relating to Trading Practices.**  *On June 25, 2003, the FERC issued a show causeorder (the “Trading Practices Order”) to more than 50 parties, including MirantAmericas Energy Marketing and subsidiaries of Mirant Americas Generation, thata FERC staff report issued on March 26, 2003, identified as havingpotentially engaged in one or more trading strategies of the type employed byEnron Corporation and its affiliates (“Enron”), as described in Enron memosreleased by the FERC in May 2002. The Trading Practices Order identifiedcertain specific trading practices that the FERC indicated could constitutegaming or anomalous market behavior in violation of the CAISO and Cal PXtariffs. The Trading Practices Order requires the CAISO to identifytransactions between January 1, 2000, and June 20, 2001, that mayinvolve the identified trading strategies, and then requires the applicablesellers involved in those transactions to demonstrate why such transactionswere not violations of the CAISO and Cal PX tariffs. On September 30,2003, the Mirant entities filed with the FERC for approval of a settlementagreement (the “Trading Settlement Agreement”) entered into between certainMirant entities and the FERC Trial Staff, under which Mirant Americas EnergyMarketing would pay $332,411 to settle the show cause proceeding, except for anissue related to sales of ancillary services, which is discussed below. In a November 14,2003, order in a different proceeding, the FERC ruled that certain allegationsof improper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in the show cause proceeding. On December 19,2003, the Mirant entities filed with the FERC for approval of an amendment tothe Trading Settlement Agreement reached with the FERC Trial Staff with respectto the sale of ancillary services. Under that amendment, the FERC would have anallowed unsecured claim in Mirant Americas Energy Marketing’s bankruptcyproceeding for $3.67 million in settlement of the allegations with respectto the sale of ancillary services. The FERC approved the Trading SettlementAgreement, as amended, on June 27, 2005, and the Bankruptcy Court approvedit on August 24, 2005. Certain parties have filed motions for rehearingwith the FERC, which motions remain pending.

*MirantAmericas Energy Marketing Contract Dispute with Nevada Power.**  *On December 5, 2001, Nevada Power Co. filed acomplaint at the FERC seeking reformation of the purchase price of energy undera contract it had entered with Mirant Americas Energy Marketing, claiming thatthe prices under that contract were unjust and unreasonable because, when itentered into the contract, Western power markets were dysfunctional andnon-competitive markets. On June 25, 2003, the FERC dismissed thiscomplaint. Nevada Power has appealed that dismissal to the United States Courtof Appeals for the Ninth Circuit. The sales made under the contract with NevadaPower have been completed, and we expect that any refund claim related to thatcontract, if not now barred, will be addressed in the Chapter 11 proceedings.

*Mirant Americas EnergyMarketing Contract Dispute with Southern California Water.**  *On December 21, 2001, Southern California WaterCo. filed a complaint at the FERC seeking reformation of the purchase price ofenergy under a long-term contract it had entered with Mirant Americas EnergyMarketing, 

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claiming that theprices under that contract were unjust and unreasonable because, when itentered the contract, Western power markets were dysfunctional andnon-competitive markets. On June 25, 2003, the FERC dismissed thisproceeding. Southern California Water has appealed that dismissal to the UnitedStates Court of Appeals for the Ninth Circuit. The contract with SouthernCalifornia Water Company continues through 2006. Upon the transfer of theassets of the trading and marketing business to Mirant Energy Trading under thePlan, Mirant Energy Trading assumed Mirant Americas Energy Marketing’s contractobligations to Southern California Water Company, including any potentialrefund obligations.

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

*Department of JusticeInquiries.*   In November 2002,Mirant received a subpoena from the Department of Justice (the “DOJ”), actingthrough the United States Attorney’s office for the Northern District ofCalifornia, requesting information about its activities and those of 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. The DOJ’s investigation of the reporting ofinaccurate natural gas price information is continuing, and Mirant has helddiscussions with the DOJ regarding the disposition of this matter. The DOJ’sinvestigation is based upon the same circumstances that were the subject of aninvestigation by the Commodity Futures Trading Commission (“CFTC”) that wassettled in December 2004. As described in Mirant’s Annual Report on Form 10-Kfor the year ended December 31, 2004, in *LegalProceedings—Other Governmental Proceedings—CFTC Inquiry*, Mirant andMirant Americas Energy Marketing pursuant to the settlement consented to theentry of an order by the CFTC in which it made findings, which are neitheradmitted nor denied by Mirant and Mirant Americas Energy Marketing, that (1) fromJanuary 2000 through December 2001, certain Mirant Americas EnergyMarketing natural gas traders (a) knowingly reported inaccurate price,volume, and/or counterparty information regarding natural gas cash transactionsto publishers of natural gas indices and (b) inaccurately reported toindex publishers transactions observed in the market as Mirant Americas EnergyMarketing transactions and (2) from January to October 2000,certain Mirant Americas Energy Marketing west region traders knowinglydelivered the false reports in an attempt to manipulate the price of naturalgas. Under the settlement, the CFTC received a subordinated allowed, unsecuredclaim against Mirant Americas Energy Marketing of $12.5 million in the Chapter11 proceedings. On June 19, 2006, two former employees of Mirant pledguilty to charges of conspiracy to manipulate the price of natural gas ininterstate commerce during the period from July 1, 2000, until November 1,2000, while they were west region traders for Mirant Americas Energy Marketing.The DOJ could decide that further action against Mirant and Mirant AmericasEnergy Marketing is not appropriate or could seek indictments against one ormore Mirant entities, or the DOJ and Mirant could agree to a disposition thatmight involve undertakings or a fine. Mirant’s current assessment is that theamount of any such fine would not be material. Mirant has cooperated fully withthe DOJ and intends to continue to do so. At this time, the Company’s view isthat any action taken by the DOJ against Mirant or its subsidiaries related tothe reporting of natural gas price information would not involve the Company orits subsidiaries except to the extent that any disposition of this matterresults in ongoing undertakings by Mirant Energy Trading as the recipient ofthe assets of Mirant Americas Energy Marketing under the Plan.

***Environmental Matters***

*EPAInformation Request.**  *InJanuary 2001, the Environmental Protection Agency (the “EPA”) issued arequest for information to Mirant concerning the air permitting and airemissions control implications under the EPA’s new source review (“NSR”)regulations promulgated under the Federal Clean Air Act (the “Clean Air Act”)of past repair and maintenance activities at the Potomac River plant inVirginia and the Chalk Point, Dickerson and Morgantown plants in Maryland. Therequested information concerns the period of operations that predates theCompany subsidiaries’ ownership and 

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lease of those plants.Mirant has responded fully to this request. Under the APSA, Pepco isresponsible for fines and penalties arising from any violation associated withhistorical operations prior to the Company subsidiaries’ acquisition or leaseof the plants. If a violation is determined to have occurred at any of theplants, the Company subsidiary 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’s subsidiaries acquired or leased the plants or, if occurringprior to the acquisition or lease, is determined to constitute a continuingviolation, the Company subsidiary owning or leasing the plant at issue wouldalso be subject to fines and penalties by the state or federal government forthe period subsequent to its acquisition or lease of the plant, the cost ofwhich may be material.

*NewYork State Administrative Claim.**  *OnJanuary 24, 2006, the State of New York and the NYSDEC filed a notice ofadministrative claims in the Mirant Debtors’ Chapter 11 proceedings asserting aclaim seeking to require the Mirant Debtors to provide funding to the Company’ssubsidiaries owning generating facilities in New York to satisfy certainspecified environmental compliance obligations. The State of New York allegesthat during the pendency of the Chapter 11 proceedings the Mirant Debtors thathave emerged from bankruptcy made decisions on behalf of the Company’ssubsidiaries owning generating facilities in New York and did not appropriatelymaintain the corporate separateness between themselves and those subsidiaries.The Company disputes those allegations. The State of New York cites variousexisting outstanding matters between the State and the Company’s subsidiariesowning generating facilities in New York related to compliance withenvironmental laws and regulations, most of which are not material. The mostsignificant compliance obligation identified by the State of New York in itsnotice of administrative claim relates to a consent decree entered into on June 11,2003 (the “2003 Consent Decree”), by Mirant New York and Mirant Lovett with theState of New York to resolve issues related to NSR requirements under the CleanAir Act related to the Lovett plant. Under the 2003 Consent Decree, MirantLovett is required to make an election to install certain environmentalcontrols on units 4 and 5 of the Lovett facility or shut down those units by2007 to 2008. The State of New York notes in its notice of administrative claimthat the cost of implementing such environmental controls could exceed $200million. The State of New York and the NYSDEC have executed a stipulated orderwith the Company, its New York subsidiaries and the other Mirant Debtors tostay resolution of this administrative claim. That stipulated order wasapproved by the Bankruptcy Court on February 23, 2006.

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

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MarylandDepartment of the Environment (the “MDE”), the DOJ and the EPA entered into,and filed for approval with the United States District Court for the EasternDistrict of Virginia, a proposed consent decree (the “Original Consent Decree”)that, if approved, would resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The Original Consent Decree requires Mirant Potomac River and MirantMid-Atlantic to (1) install pollution control equipment at the PotomacRiver plant and at the Morgantown plant leased by Mirant Mid-Atlantic inMaryland, (2) comply with declining system-wide ozone season NOx emissionscaps from 2004 through 2010, (3) comply with system-wide annual NOxemissions caps starting in 2004, (4) meet seasonal system 

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averageemissions rate targets in 2008 and (5) pay civil penalties and performsupplemental environmental projects in and around the Potomac River plantexpected to achieve additional environmental benefits. Except for theinstallation of the controls planned for the Potomac River units and theinstallation of selective catalytic reduction (“SCR”) or equivalent technologyat Mirant Mid-Atlantic’s Morgantown Units 1 and 2 in 2007 and 2008, theOriginal Consent Decree does not obligate the Company’s subsidiaries to installspecifically designated technology, but rather to reduce emissions sufficientlyto meet the various NOx caps. Moreover, as to the required installations ofSCRs at Morgantown, Mirant Mid-Atlantic may choose not to install thetechnology by the applicable deadlines and leave the units off eitherpermanently or until such time as the SCRs are installed. The Original ConsentDecree is subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree has not yet beenapproved and the parties have filed an amended proposed consent decree.

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

On July 22, 2005, thedistrict court granted a motion filed by the City of Alexandria seeking tointervene in the district court action, although the district court imposedcertain limitations on the City of Alexandria’s participation in theproceedings. On September 23, 2005, the City of Alexandria filed a motionseeking authority to file an amended complaint in the action seeking injunctiverelief and civil penalties under the Clean Air Act for alleged violations byMirant Potomac River of its Virginia Stationary Source Permit to Operate andthe State of Virginia’s State Implementation Plan. Based upon a computermodeling, the City of Alexandria asserted that emissions from the Potomac Riverplant cause or contribute to exceedances of national ambient air qualitystandards (“NAAQS”) for sulfur dioxide (“SO2”), nitrogen dioxide (“NO2”) andparticulate matter. The City of Alexandria also contended based on its modelinganalysis that the plant’s emissions of hydrogen chloride and hydrogen fluorideexceed Virginia state standards. Mirant Potomac River disputes the City ofAlexandria’s allegations that it has violated the Clean Air Act and Virginialaw. On December 2, 2005, the district court denied the City of Alexandria’smotion seeking to file an amended complaint.

In early May 2006, the parties to the Original ConsentDecree and Mirant Chalk Point, LLC (“Mirant Chalk Point”) entered into andfiled for approval with the United States District Court for the EasternDistrict of Virginia an amended consent decree (the “Amended Consent Decree”)that, if approved, will resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The district court and the Bankruptcy Court must approve the AmendedConsent Decree for it to become effective. The Bankruptcy Court approved theAmended Consent Decree on June 1, 2006. The Amended Consent Decree includes therequirements that were to be imposed under the terms of the Original ConsentDecree as described above. It also defines the rights and remedies of theparties in the event of a rejection in bankruptcy or other termination of anyof the long-term leases under which Mirant Mid-Atlantic leases the coal unitsat the Dickerson and Morgantown plants. The Amended Consent Decree providesthat if Mirant Mid-Atlantic rejects or otherwise loses one or more of itsleasehold interests in the Morgantown and Dickerson plants and ceases tooperate one or both of the plants, Mirant Mid-Atlantic, Mirant Chalk Pointand/or Mirant Potomac will (i) provide the EPA, Virginia DEQ and the MDE withthe written agreement of the new owner or operator of the affected plant orplants to be bound by the obligations of the Amended Consent Decree and (ii) wherethe affected plant is the Morgantown plant, offer to any and all prospectiveowners and/or operators of the Morgantown plant to pay for completion ofengineering, construction and installation of the SCRs required by the AmendedConsent Decree. If the new owner or operator of the affected plant or plantsdoes not agree to be bound 

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by the obligations of the Amended Consent Decree, itrequires Mirant Mid-Atlantic, Mirant Chalk Point and/or Mirant Potomac toinstall an alternative suite of environmental controls at the plants theycontinue to own.

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

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

On August 24, 2005, power production at all fiveunits of the Potomac River generating facility was temporarily halted inresponse to a directive from the Virginia DEQ. The decision to temporarily shutdown the facility arose from findings of a study commissioned under the orderby consent referred to above. The Virginia DEQ’s directive was based on resultsfrom the study’s computer modeling showing that air emissions from the facilityhave the potential to contribute to localized, modeled exceedances of thehealth-based NAAQS under certain conditions. On August 25, 2005, the District of Columbia Public ServiceCommission filed an emergency petition and complaint with the FERC and theDepartment of Energy (the “DOE”) to prevent the shutdown of the Potomac Riverfacility. The matter remains pending before the FERC and the DOE. On September 21,2005, Mirant Potomac River commenced partial operation of one unit of theplant. On December 20, 2005, due to a determination by the DOE that anemergency situation existed with respect to a shortage of electric energy, theDOE ordered Mirant Potomac River to generate electricity at the Potomac Rivergenerating facility, as requested by Pennsylvania-New Jersey-MarylandInterconnection, LLC (“PJM”), during any period in which one or both of thetransmission lines serving the central Washington, D.C. area are out of servicedue to a planned or unplanned outage. In addition, the DOE ordered MirantPotomac River, at all other times, for electric reliability purposes, to keepas many units in operation as possible and to reduce the start-up time of unitsnot in operation without contributing to any NAAQS exceedances. The DOErequired Mirant Potomac River to submit a plan, on or before December 30,2005, that met these requirements. The DOE advised that it would considerMirant Potomac River’s plan in consultation with the EPA. The order furtherprovides that Mirant Potomac River and its customers should agree to mutuallysatisfactory terms for any costs incurred by it under this order or just andreasonable terms shall be established by a supplemental order. Certain partiesfiled for rehearing of the DOE order, and on February 17, 2006, the DOEissued an order granting rehearing solely for purposes of considering therehearing requests further. Mirant Potomac River submitted an operating plan inaccordance with the order. On January 4, 2006, the 

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DOEissued an interim response to Mirant Potomac River’s operating plan authorizingoperation of the units of the Potomac River generating facility on a reducedbasis, but making it possible to bring the entire plant into service withinapproximately 28 hours when necessary for reliability purposes. The DOE’s orderexpires after September 30, 2006, but Mirant Potomac River expects it willbe able to continue to operate these units after that expiration. In a letterreceived December 30, 2005, the EPA invited Mirant Potomac River and theVirginia DEQ to work with the EPA to ensure that Mirant Potomac River’soperating plan submitted to the DOE adequately addresses NAAQS issues. The EPAalso asserts in its letter that Mirant Potomac River did not immediatelyundertake action as directed by the Virginia DEQ’s August 19, 2005, letterand failed to comply with the requirements of the Virginia State ImplementationPlan established by that letter. Mirant Potomac River received a second letterfrom the EPA on December 30, 2005, requiring Mirant to provide certainrequested information as part of an EPA investigation to determine the CleanAir Act compliance status of the Potomac River generating facility. On January 9,2006, the FERC issued an order directing PJM and Pepco to file a long-term planto maintain adequate reliability in the Washington D.C. area and surroundingregion and a plan to provide adequate reliability pending implementation ofthis long-term plan. On February 8, 2006, PJM and Pepco filed theirproposed reliability plans.

On June 1, 2006, Mirant Potomac River and the EPAexecuted an Administrative Compliance Order by Consent (the “ACO”) to resolvethe EPA’s allegations that Mirant Potomac River violated the Clean Air Act bynot immediately shutting down all units at the Potomac River facility uponreceipt of the Virginia DEQ’s August 19, 2005, letter and to assure anacceptable level of reliability to the District of Columbia. The ACO (i) specifiescertain operating scenarios and SO2 emissions limits for the Potomac Riverfacility, which scenarios and limits take into account whether one or both ofthe 230kV transmission lines serving Washington, D.C. are out of service; (ii) requiresthe operation of trona injection units to help reduce SO2 emissions; and (iii) requiresMirant Potomac River to undertake a model evaluation study to predict ambientair quality impacts from the facility’s operations. In accordance with thespecified operating scenarios, the ACO permits the facility to operate using adaily predictive modeling protocol. This protocol allows the facility toschedule operations based on whether computer modeling predicts a NAAQSexceedance, based on weather and certain operating parameters. Additional precautionssuch as an alarm system and the installation of a total of six ambient SO2monitors in various sites near the facility by July 31, 2006, will signalpotential exceedances of the NAAQS. Mirant Potomac River reports data,including modeled and actual readings, to the EPA and the Virginia DEQ. On June 2,2006, the DOE issued a letter modifying its January 6, 2006, order todirect Mirant Potomac River to comply with the ACO in order to ensure adequateelectric reliability to the District of Columbia On July 27, 2006, MirantPotomac River sent a letter to the EPA to request an extension of ten businessdays to install the sixth ambient SO2 monitor. Mirant Potomac River isoperating the Potomac River facility in accordance with the ACO and, dependingon weather conditions, has been able to operate all five units of the facilityunder the ACO.

*Cityof Alexandria Nuisance Suit.*   On October 7, 2005, the City of Alexandria filed a suitagainst Mirant Potomac River and Mirant Mid-Atlantic in the Circuit Court forthe City of Alexandria. The suit asserts nuisance claims, alleging that thePotomac River plant’s emissions of coal dust, flyash, NOx, SO2, particulatematter, hydrogen chloride, hydrogen fluoride, mercury and oil pose a healthrisk to the surrounding community and harm property owned by the City. The Cityseeks injunctive relief, damages and attorneys’ fees. On February 17,2006, the City amended its complaint to add additional allegations in supportof its nuisance claims relating to noise and lighting, interruption of trafficflow by trains delivering coal to the Potomac River plant, particulate matterfrom the transport and storage of coal and flyash, and potential coal leachateinto the soil and groundwater from the coal pile.

*Noticeof Intent to Sue Regarding Chalk Point Emissions.**  *Mirant and Mirant Mid-Atlantic have received a letterdated June 15, 2006, from four environmental advocacy organizationsproviding notice 

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that they intended to filesuit alleging that Mirant Chalk Point had violated the opacity limits imposedby the permits for Chalk Point Unit 3 and Unit 4 during thousands of six minutetime intervals between January 2002 and March 2006. The letterindicates that the organizations intend to file suit to enjoin the violationsalleged, to obtain civil penalties for past noncompliance to the extent thatliability for these violations was not discharged by the bankruptcy of MirantChalk Point, and to recover attorneys’ fees. On August 3, 2006, Mirant,Mirant Mid-Atlantic, and Mirant Chalk Point filed a complaint in the BankruptcyCourt seeking an injunction barring the four organizations from filing suit asthreatened in the June 15, 2006, notice on the grounds that the notice andany claim for civil penalties or other monetary relief for alleged violationsoccurring before January 3, 2006, violated the discharge of claims andcauses of action granted Mirant Chalk Point under the Plan.

*Riverkeeper Suit AgainstMirant Lovett.**  *On March 11,2005, Riverkeeper, Inc. filed suit against Mirant Lovett in the UnitedStates District Court for the Southern District of New York under the FederalWater Pollution Control Act (the “Clean Water Act”). The suit alleges thatMirant Lovett’s failure to implement a marine life exclusion system at itsLovett generating plant and to perform monitoring for the exclusion of certainaquatic organisms from the plant’s cooling water intake structures violatesMirant Lovett’s water discharge permit issued by the State of New York. Theplaintiff requests the court to enjoin Mirant Lovett from continuing to operatethe Lovett generating plant in a manner that allegedly violates the Clean WaterAct, to impose civil penalties of $32,500 per day of violation, and to awardthe plaintiff attorney’s fees. On April 20, 2005, the district courtapproved a stipulation agreed to by the plaintiff and Mirant Lovett that staysthe suit until 60 days after entry of an order by the Bankruptcy Courtconfirming a plan of reorganization for Mirant Lovett becomes final andnon-appealable.

***City of Alexandria Zoning Action***

On December 18, 2004, the City Council for theCity of Alexandria, Virginia (the “City Council”) adopted certain zoningordinance amendments recommended by the City Planning Commission that resultedin the zoning status of Mirant Potomac River’s generating plant being changedfrom “noncomplying use” to “nonconforming use subject to abatement.” Under thenonconforming use status, unless Mirant Potomac River applies for and isgranted a special use permit for the plant during the seven-year abatementperiod, the operation of the plant must be terminated within a seven-yearperiod, and no alterations that directly prolong the life of the plant will bepermitted during the seven-year period. If Mirant Potomac River were to applyfor and receive a special use permit for the plant, the City Council wouldlikely impose various conditions and stipulations as to the permitted use ofthe plant and seek to limit the period for which it could continue to operate.

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

On January 18, 2005,Mirant Potomac River and Mirant Mid-Atlantic filed a complaint against the Cityof Alexandria and the City Council in the Circuit Court for the City ofAlexandria. The complaint sought to overturn the actions taken by the CityCouncil on December 18, 2004, changing the zoning status of Mirant PotomacRiver’s generating plant and approving revocation of the 1989 SUPs, on thegrounds 

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thatthose actions violated federal, state and city laws. The complaint asserted,among other things, that the actions taken by the City Council constitutedunlawful spot zoning, were arbitrary and capricious, constituted an unlawfulattempt by the City Council to regulate emissions from the plant, and violatedMirant Potomac River’s due process rights. Mirant Potomac River and MirantMid-Atlantic requested the court to enjoin the City of Alexandria and the CityCouncil from taking any enforcement action against Mirant Potomac River or fromrequiring it to obtain a special use permit for the continued operation of itsgenerating plant. On January 18, 2006, the court issued an oral rulingfollowing a trial that the City of Alexandria acted unreasonably andarbitrarily in changing the zoning status of Mirant Potomac River’s generatingplant and in revoking the 1989 SUPs. On February 24, 2006, the courtentered judgment in favor of Mirant Potomac River and Mirant Mid-Atlanticdeclaring the change in the zoning status of Mirant Potomac River’s generatingplant adopted December 18, 2004, to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. The City of Alexandria has filed noticeseeking to appeal this judgment.

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

Following the shutdown of the Potomac River plant on August 24,2005, Mirant Potomac River notified Pepco on August 30, 2005, that it consideredthe circumstances resulting in the shutdown of the plant to constitute a forcemajeure event under the Local Area Support Agreement dated December 19,2000, between Pepco and Mirant Potomac River. That agreement imposesobligations upon Mirant Potomac River to dispatch the Potomac River plant undercertain conditions, to give Pepco several years advance notice of anyindefinite or permanent shutdown of the plant and to pay all or a portion ofcertain costs incurred by Pepco for transmission additions or upgrades when anindefinite or permanent shutdown of the plant occurs prior to December 19,2010. On September 13, 2005, Pepco notified Mirant Potomac River that itconsiders Mirant Potomac River’s shutdown of the plant to be a material breachof the Local Area Support Agreement that is not excused under the force majeureprovisions of the agreement. Pepco contends that Mirant Potomac River’s actionsentitle Pepco to recover as damages the cost of constructing additionaltransmission facilities. Pepco, on January 24, 2006, filed a notice ofadministrative claims asserting that Mirant Potomac River’s shutdown of thePotomac River plant causes Mirant Potomac River to be liable for the cost ofsuch transmission facilities, which cost it estimates to be in excess of $70million. Mirant Potomac River disputes Pepco’s interpretation of the agreement.The outcome of this matter cannot be determined at this time.

If it is approved by afinal order of the Bankruptcy Court, the Settlement Agreement entered into on May 30,2006, by the Mirant Settling Parties and the Pepco Settling Parties, willresolve all claims asserted by Pepco against Mirant Potomac River arising outof the suspension of operations of the Potomac River plant in August 2005.On August 9, 2006, the Bankruptcy Court entered an order approving theSettlement Agreement, but the period within which an appeal can be filed fromthat order has not expired, and the order has not yet become a final order.Under the Settlement Agreement, Pepco would release all claims it has assertedagainst Mirant Potomac River related to the shutdown of the plant in return forthe claim Pepco receives in the Mirant bankruptcy proceeding.

***New York Tax Proceedings***

The Company’s subsidiaries that own the Bowline andLovett generating plants in New York are the petitioners in various proceedings(“Tax Certiorari Proceedings”) initially brought in the New York state courtschallenging the assessed value of those generating plants determined by theirrespective local taxing authorities. Mirant Bowline has challenged the assessedvalue of the Bowline generating facility and the resulting local taxassessments paid for tax years 1995 through 2005. 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. 

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Mirant Lovett hasinitiated proceedings challenging the assessed value of the Lovett facility foreach of the years 2000 through 2005. If the Tax Certiorari Proceedings resultin a reduction of the assessed value of the generating facility at issue ineach proceeding, the New York Debtor owning the facility would be entitled to arefund with interest of any excess taxes paid for those tax years.

On September 30, 2003, the Mirant Debtors filed amotion (the “Tax Determination Motion”) with the Bankruptcy Court requestingthat it determine what the property tax liability should have been for theBowline generating facility in each of the years 1995 through 2003 and for theLovett generating facility in each of the years 2000 through 2003. The basesfor the relief requested in the Tax Determination Motion on behalf of MirantBowline and Mirant Lovett were that the assessed values of the generatingfacilities made by the relevant taxing authorities had no justifiable basis andwere far in excess of their actual value. The local taxing authorities haveopposed the Tax Determination Motion, arguing that the Bankruptcy Court eitherlacks jurisdiction over the matters addressed by the Tax Determination Motionor should abstain from addressing those issues so that they can be addressed bythe state courts in which the Tax Certiorari Proceedings described in the precedingparagraph were originally filed. On June 23, 2006, the Bankruptcy Courtentered an order indicating that it would determine the disputed property taxliabilities in response to the Tax Determination Motion if the New York statecourt in which the Tax Certiorari Proceedings are pending had not issued aruling by October 21, 2006. The New York state court has indicated itsintention to issue a ruling by that date.

Collectively, MirantBowline and Mirant Lovett have not paid approximately $62 million assessed bylocal taxing authorities on the Bowline and Lovett generating facilities for2003, which fell due on September 30, 2003, and January 30, 2004,approximately $53 million assessed by local taxing authorities on thegenerating facilities for 2004 that fell due on September 30, 2004, and January 30,2005, and approximately $59 million assessed by local taxing authorities on thegenerating facilities for 2005 that fell due on September 30, 2005, and January 30,2006, in order to preserve their respective rights to offset the overpaymentsof taxes made in earlier years against the sums payable on account of currenttaxes. The failure to pay the taxes due on September 30, 2003, January 30,2004, September 30, 2004, January 30, 2005, September 30, 2005,and January 30, 2006, could subject Mirant Bowline and Mirant Lovett toadditional penalties and interest.

***Other Legal Matters***

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

***Other Contingencies***

*SwingingBridge.*   On May 5,2005, Mirant NY-Gen discovered a sinkhole at its Swinging Bridge dam, locatedin Sullivan County, New York. In response, Mirant NY-Gen filled this sinkhole,inspected the dam’s penstock and slopes for damage, drew down the lake level,and cleaned the diversion tunnel. Mirant NY-Gen’s analysis indicates that themost probable cause of the sinkhole was erosion of soil comprising the damthrough a hole in the penstock. The dam is currently stabilized, and MirantNY-Gen is performing additional remediation repairs. Mirant NY-Gen currentlyexpects to incur additional costs to repair the dam that could be material andto recover insurance proceeds for a portion of these repair costs. As a resultof the sinkhole, Mirant NY-Gen was required to perform and provide to the FERCa flood study relating to the Swinging Bridge, Rio and Mongaup reservoirs todetermine the maximum capacity of the reservoirs and the downstreamconsequences of a rain event resulting in a “greater than the maximum capacity”event. The flood study found that under the very extreme weather conditionsassumed for the study (which included rainfall over a short period in amountswell in excess of the highest rainfall amounts recorded for such a periodhistorically), the water flowing into the reservoirs could cause the level ofthe 

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reservoirsto exceed the height of the dams at Mirant NY-Gen’s hydro facilities, leadingto downstream flooding. By letter dated June 14, 2006, the FERC authorizedMirant NY-Gen to proceed with its remediation plan for the sinkhole. The FERChas also concurred with the results of Mirant NY-Gen’s flood study for its NewYork Swinging Bridge, Rio and Mongaup generation facilities, which studyconcluded that no additional remediation is required. The Bankruptcy Courtauthorized Mirant NY-Gen to proceed with implementation of the remediation planon June 29, 2006. The current estimated cost to remediate the dam atSwinging Bridge is approximately $20 million of which approximately $12 millionhad been incurred through June 30, 2006. The Bankruptcy Court has approveda debtor-in-possession loan to Mirant NY-Gen from Mirant Americas under whichMirant Americas, subject to certain conditions, would lend up to $9.5 millionto Mirant NY-Gen to provide funding for the repairs on the Swinging Bridge dam.

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

The California Settlementprovides that if the transfer of the CC8 Assets to PG&E does not occur onor before June 30, 2008, then the CC8 Alternative Consideration is to bepaid to PG&E and the Mirant Settling Parties will retain the CC8 Assets. IfPG&E closes on its acquisition of the CC8 Assets, the funds in the escrowaccount will be paid to Mirant Delta. In the period that the CC8 Assets aretransferred to PG&E and the $70 million escrow account is paid to MirantDelta, the Company expects to recognize a gain for the amount by which theescrow account exceeds the carrying amount of the CC8 Assets. The transfer isexpected to be completed before the end of 2006. The estimated amount of thatgain is approximately $24 million and will be included in other income in theCompany’s consolidated statement of operations.

**I.**                   IncomeTaxes

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

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

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corporate entities, allpreviously existing deferred tax assets and liabilities were eliminated as of December 31,2005.

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

If the Company were to be allocated income taxesattributable to its operations, pro forma income tax expense attributable toincome before tax is $2 million for the three and six months ending June 30,2006, respectively, compared to $1 million and $2 million for the same periodsin 2005. The pro forma balance of the Company’s deferred income taxes is zeroas of June 30, 2006.

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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 the Company’s accompanying unauditedcondensed consolidated and combined financial statements and the notes thereto,which are included elsewhere in this report*.*

***Overview***

We are a national independentpower provider whose revenues and gross margin primarily are generated throughthe production of electricity in the United States. We are an indirect wholly-ownedsubsidiary of Mirant Corporation (“Mirant”), which emerged from Chapter 11 on January 3,2006.

On July 11, 2006, Mirant announced thecommencement of auction processes to sell its Philippines and Caribbeanbusinesses and a modified “Dutch Auction” tender offer to repurchase Mirantcommon stock. On August 9, 2006, Mirant announced the planned sale ofvarious gas fired assets. The assets to be sold include our Zeeland (837 MW)and Bosque (532 MW) intermediate and peaking gas fired plants. These sales areexpected to close by mid-2007.

In the tender offer, Mirant is offering to repurchaseup to 43 million shares of Mirant common stock for an aggregate purchase price of up to $1.25 billion. Mirant’sshareholders can, subject to certain conditions, sell all or a portion of theirshares of Mirant common stock to Mirant at a price not less than $25.75 and notmore than $29.00 per share. Mirant intends to pay for the shares tendered inthe offer and related expenses with approximately $300 million of cash on handat Mirant Corporation and approximately $950 million of distributions fromsubsidiaries, including approximately $175 million and $740 million to bedistributed from us and Mirant Asia-Pacific Limited and its subsidiaries,respectively, as well as approximately $35 million from other subsidiaries. Thetender offer will expire on August 21, 2006.

Our gross margin for the six months ended June 30,2006, was $1.034 billion. This amount included $376 million of unrealized gainsfrom hedging activities primarily due to the decline in forward power pricesfrom December 31, 2005 levels. The primary factors impacting the realized grossmargin and cash flows of our operations are the prices for power, coal, oil andnatural gas, which are driven largely by supply and demand. Demand for powervaries regionally and seasonally due to, among other things, weather andgeneral economic conditions.

Prior to 2006, we hedged a substantial portion of ourMirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) baseload coal fired generationand our New England intermediate oil fired generation through over-the-countertransactions. As a result, we achieved a significant increase in our realizedgross margin for the six months ended June 30, 2006, as compared to thesame period in 2005 because our generation was hedged at higher gross marginsfor this period than for the same period in 2005. Our intermediate and peakinggeneration volumes generally were lower in the six months ended June 30,2006, than in the same period of 2005, primarily due to mild weather and higheroil prices.

In January 2006, our Mirant Mid-Atlanticsubsidiary entered into financial swap transactions with a counterpartypursuant to which Mirant Mid-Atlantic economically hedged approximately 80%,50% and 50% of its expected on-peak coal fired baseload generation for 2007,2008 and 2009, respectively. The financial swap transactions are seniorunsecured obligations of Mirant Mid-Atlantic and do not require the posting ofcash collateral either for initial margin or for securing exposure due tochanges in power prices.

Cash flows from operationsfor the six months ended June 30, 2006, were a net use of $241 million,which includes $744 million paid for bankruptcy claims and interest onbankruptcy claims. Our cash flows from financing activities reflect our exitfinancing as part of our bankruptcy emergence and the payment of approximately$990 million of bankruptcy claims related to outstanding indebtedness.

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**Results ofOperations**

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

| ** **                            | ** ** | **Three Months  Ended June 30,** | ** ** | ** ** | ** ** | **Six Months  Ended June 30,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2006**                                        | ** ** | **2005**   | ** ** | **Increase/  (Decrease)**                     | ** ** | **2006**   | ** ** | **2005** | ** ** | **Increase/(Decrease)** | ** ** |
| Gross margin                          |       |                                            |       |       |       |                                          |       |       |       |   |   |   |   |   |   |   |   |
| Affiliate                             |       | $                                               | (8         | )          | $          | (10                                           | )          |       | $          | 2 |   |   | $ | (21 | ) | $ | (5 | ) |   | $ | (16 | ) |   |
| Nonaffiliate                          |       | 389                                             |       | 241        |       |                                          | 148        |       |       | 1,055 |   | 431 |   |   | 624 |   |   |
| Total gross  margin                   |       | 381                                             |       | 231        |       |                                          | 150        |       |       | 1,034 |   | 426 |   |   | 608 |   |   |
| Operating expenses:                   |       |                                            |       |       |       |                                          |       |       |       |   |   |   |   |   |   |   |   |
| Operations and  maintenance           |       |                                            |       |       |       |                                          |       |       |       |   |   |   |   |   |   |   |   |
| Affiliate                             |       | 70                                              |       | 73         |       |                                          | (3         | )          |       | 140 |   | 151 |   |   | (11 | ) |   |
| Nonaffiliate                          |       | 83                                              |       | 80         |       |                                          | 3          |       |       | 156 |   | 141 |   |   | 15 |   |   |
| Depreciation and  amortization        |       | 35                                              |       | 32         |       |                                          | 3          |       |       | 67 |   | 65 |   |   | 2 |   |   |
| Generation  facilities rent           |       | 24                                              |       | 26         |       |                                          | (2         | )          |       | 48 |   | 51 |   |   | (3 | ) |   |
| Gain on sales of  assets, net         |       | (6                                              | )          | —     |       |                                          | (6         | )          |       | (6 | ) | (1 | ) |   | (5 | ) |   |
| Total operating  expenses             |       | 206                                             |       | 211        |       |                                          | (5         | )          |       | 405 |   | 407 |   |   | (2 | ) |   |
| Operating income                      |       | 175                                             |       | 20         |       |                                          | 155        |       |       | 629 |   | 19 |   |   | 610 |   |   |
| Other expense (income),  net          |       |                                            |       |       |       |                                          |       |       |       |   |   |   |   |   |   |   |   |
| Affiliate                             |       | (1                                              | )          | 3          |       |                                          | (4         | )          |       | (1 | ) | 6 |   |   | (7 | ) |   |
| Nonaffiliate                          |       | 60                                              |       | 1          |       |                                          | 59         |       |       | 125 |   | — |   |   | 125 |   |   |
| Reorganization  items, net            |       | (1                                              | )          | (23        | )          |                                          | 22         |       |       | (1 | ) | 7 |   |   | (8 | ) |   |
| Provision  (benefit) for income taxes |       | 2                                               |       | (1         | )          |                                          | 3          |       |       | 2 |   | 5 |   |   | (3 | ) |   |
| Net Income                            |       | $                                               | 115        |       | $          | 40                                            |       |       | $          | 75 |   |   | $ | 504 |   | $ | 1 |   |   | $ | 503 |   |   |

 

In the tables below, theMid-Atlantic region includes our Chalk Point, Morgantown, Dickerson and PotomacRiver facilities. The Northeast region includes our Lovett, Bowline,Grahamsville, Hillburn, Mongaup, Rio, Shoemaker, Swinging Bridge, Canal,Kendall, Martha’s Vineyard and Wyman facilities. The West and Mid-Continent regionincludes our Contra Costa, Pittsburg, Potrero, Bosque and Zeeland facilities.Energy Trading includes proprietary trading and Eliminations include theelimination of intercompany transactions between Mirant Americas Generationsubsidiaries.

*OperatingStatistics*

The following tablesummarizes capacity factor (average percentage of full capacity used over aspecific period) by region for the three and six months ended June 30,2006 and 2005: 

| ** **             | ** ** | **Three Months   Ended June 30,** | ** ** | ** ** | ** ** | **Six Months   Ended June 30,** | ** ** | ** ** | ** ** |
|------------------------|------------|-------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2006**                                              | ** ** | **2005**   | ** ** | **Increase/  (Decrease)**                           | ** ** | **2006**   | ** ** | **2005** | ** ** | **Increase/  (Decrease)** | ** ** |
| Mid-Atlantic           |       |                                                  | 28         | %          |       |                                                | 31         | %          |       |   | (3 | )% |   |   | 32 | % |   |   | 35 | % |   |   | (3 | )% |   |
| Northeast              |       |                                                  | 17         | %          |       |                                                | 23         | %          |       |   | (6 | )% |   |   | 16 | % |   |   | 31 | % |   |   | (15 | )% |   |
| West and Mid-Continent |       |                                                  | 10         | %          |       |                                                | 9          | %          |       |   | 1 | % |   |   | 9 | % |   |   | 9 | % |   |   | — | % |   |

 

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

| ** **              | ** ** | **Three Months  Ended June 30,** | ** ** | ** ** | ** ** | **Six Months  Ended June 30,** | ** ** | ** ** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **2006**                                        | ** ** | **2005**   | ** ** | **Increase/  (Decrease)**                     | ** ** | **2006**   | ** ** | **2005** | ** ** | **Increase/  (Decrease)** | ** ** |
| Mid-Atlantic            |       | 3,236                                           |       | 3,603      |       |                                          | (367       | )          |       | 7,319 |   | 8,042 |   |   | (723 | ) |   |
| Northeast               |       | 1,169                                           |       | 1,523      |       |                                          | (354       | )          |       | 2,164 |   | 4,130 |   |   | (1,966 | ) |   |
| West and  Mid-Continent |       | 863                                             |       | 772        |       |                                          | 91         |       |       | 1,427 |   | 1,520 |   |   | (93 | ) |   |
| Total United  States    |       | 5,268                                           |       | 5,898      |       |                                          | (630       | )          |       | 10,910 |   | 13,692 |   |   | (2,782 | ) |   |

 

*Gross Margin*

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

| ** **              | ** ** | **Three Months   Ended June 30, 2006** | ** ** | **Three Months  Ended June 30, 2005** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **              | ** ** | **Realized**                                                    | ** ** | **Unrealized**                                            | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic            |       |                                                            | $          | 139                                                       |       |   |   | $ | 99 |   |   | $ | 238 |   |   | $ | 102 |   |   |   | $ | 66 |   |   | $ | 168 |   |
| Northeast               |       |                                                            | 69         |                                                      |       |   | (1 | ) |   | 68 |   |   | 47 |   |   |   | 4 |   |   | 51 |   |
| West and  Mid-Continent |       |                                                            | 39         |                                                      |       |   | — |   |   | 39 |   |   | 30 |   |   |   | — |   |   | 30 |   |
| Energy Trading          |       |                                                            | 30         |                                                      |       |   | (3 | ) |   | 27 |   |   | (26 | ) |   |   | 7 |   |   | (19 | ) |
| Eliminations            |       |                                                            | 9          |                                                      |       |   | — |   |   | 9 |   |   | 2 |   |   |   | (1 | ) |   | 1 |   |
| Total                   |       |                                                            | $          | 286                                                       |       |   |   | $ | 95 |   |   | $ | 381 |   |   | $ | 155 |   |   |   | $ | 76 |   |   | $ | 231 |   |

 

| ** **              | ** ** | **Six Months   Ended June 30, 2006** | ** ** | **Six Months  Ended June 30, 2005** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **              | ** ** | **Realized**                                                  | ** ** | **Unrealized**                                          | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic            |       |                                                          | $          | 330                                                     |       |   |   | $ | 325 |   |   | $ | 655 |   |   | $ | 242 |   |   |   | $ | 10 |   |   | $ | 252 |   |
| Northeast               |       |                                                          | 215        |                                                    |       |   | 33 |   |   | 248 |   |   | 107 |   |   |   | 13 |   |   | 120 |   |
| West and  Mid-Continent |       |                                                          | 74         |                                                    |       |   | — |   |   | 74 |   |   | 58 |   |   |   | 4 |   |   | 62 |   |
| Energy Trading          |       |                                                          | 48         |                                                    |       |   | 18 |   |   | 66 |   |   | (53 | ) |   |   | 40 |   |   | (13 | ) |
| Eliminations            |       |                                                          | (9         | )                                                       |       |   | — |   |   | (9 | ) |   | 5 |   |   |   | — |   |   | 5 |   |
| Total                   |       |                                                          | $          | 658                                                     |       |   |   | $ | 376 |   |   | $ | 1,034 |   |   | $ | 359 |   |   |   | $ | 67 |   |   | $ | 426 |   |

 

*Three Months ended June 30,2006 versus June 30, 2005*

Ourgross margin increased by $150 million for the three months ended June 30,2006, compared to the same period for 2005 and is detailed as follows (inmillions): 

| ** **                               | ** ** | **Three Months Ended June 30, 2006** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                            | ** ** | **Northeast** | ** ** | **West and  Mid-  Continent** | ** ** | **Energy  Trading** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                          | $          | 76 |   |   |   | $ | 46 |   |   |   | $ | 1 |   |   |   | $ | 30 |   |   |   | $ | 9 |   |   | $ | 162 |   |
| Contracted and capacity(2)               |       |                                                          | 10         |   |   |   | 11 |   |   |   | 39 |   |   |   | — |   |   |   | — |   |   | 60 |   |
| Incremental  realized value of hedges(3) |       |                                                          | 53         |   |   |   | 12 |   |   |   | (1 | ) |   |   | — |   |   |   | — |   |   | 64 |   |
| Unrealized gains  (losses)(4)            |       |                                                          | 99         |   |   |   | (1 | ) |   |   | — |   |   |   | (3 | ) |   |   | — |   |   | 95 |   |
| Total                                    |       |                                                          | $          | 238 |   |   |   | $ | 68 |   |   |   | $ | 39 |   |   |   | $ | 27 |   |   |   | $ | 9 |   |   | $ | 381 |   |

 

41

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| ** **                               | ** ** | **Three Months Ended June 30, 2005** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                            | ** ** | **Northeast** | ** ** | **West and  Mid-  Continent** | ** ** | **Energy  Trading** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                          | $          | 105 |   |   |   | $ | 33 |   |   |   | $ | — |   |   |   | $ | (6 | ) |   |   | $ | 2 |   |   | $ | 134 |   |
| Contracted and  capacity(2)              |       |                                                          | 21         |   |   |   | 9 |   |   |   | 36 |   |   |   | (20 | ) |   |   | — |   |   | 46 |   |
| Incremental realized  value of hedges(3) |       |                                                          | (24        | ) |   |   | 5 |   |   |   | (6 | ) |   |   | — |   |   |   | — |   |   | (25 | ) |
| Unrealized gains  (losses)(4)            |       |                                                          | 66         |   |   |   | 4 |   |   |   | — |   |   |   | 7 |   |   |   | (1 | ) |   | 76 |   |
| Total                                    |       |                                                          | $          | 168 |   |   |   | $ | 51 |   |   |   | $ | 30 |   |   |   | $ | (19 | ) |   |   | $ | 1 |   |   | $ | 231 |   |

 

| ** **                               | ** ** | **Three Months Ended June 30, 2006 vs. 2005** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                               | ** ** | **Northeast** | ** ** | **West and  Mid-  Continent** | ** ** | **Energy  Trading** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                                             | $          | (29 | ) |   |   | $ | 13 |   |   |   | $ | 1 |   |   |   | $ | 36 |   |   |   | $ | 7 |   |   | $ | 28 |   |
| Contracted and  capacity(2)              |       |                                                                             | (11        | ) |   |   | 2 |   |   |   | 3 |   |   |   | 20 |   |   |   | — |   |   | 14 |   |
| Incremental realized  value of hedges(3) |       |                                                                             | 77         |   |   |   | 7 |   |   |   | 5 |   |   |   | — |   |   |   | — |   |   | 89 |   |
| Unrealized gains  (losses)(4)            |       |                                                                             | 33         |   |   |   | (5 | ) |   |   | — |   |   |   | (10 | ) |   |   | 1 |   |   | 19 |   |
| Total                                    |       |                                                                             | $          | 70 |   |   |   | $ | 17 |   |   |   | $ | 9 |   |   |   | $ | 46 |   |   |   | $ | 8 |   |   | $ | 150 |   |

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(1)        Energy includes gross margin from thegeneration of electricity, emissions allowances sales and purchases, fuelsales, steam sales and our proprietary trading activities.

(2)        Contracted and capacity relates to revenuereceived through reliability must run contracts (“RMR”) and other installedcapacity mechanisms, revenues from ancillary services and revenue from theBack-to-Back Agreement in 2005.

(3)        Incremental realized value of hedges reflectsthe actual margin upon the settlement of our power and fuel hedging contracts.

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

Mid-Atlanticoperations gross margin increased by $70 million primarily due to thefollowing:

·       a decrease of $29 millionin energy primarily related to higher emissions allowances expense, principallyto reflect inventory at the lower of its historical cost or current marketvalue and a reduction in power prices;

·       anincrease of $77 million in incremental realized value of hedges primarilyrelated to the settlement of power contracts at prices higher than marketprices for the period; and

·       anincrease of $33 million related to unrealized gains from hedgingactivities primarily due to the increased value associated with forward powercontracts for future periods as a result of decreases in forward power pricesin the period, partially offset by the adverse impact of changes in fuel pricesrelative to the changes in the previous year.

Northeastoperations gross margin increased by $17 million primarily due to anincrease of $13 million in energy, which includes an $8 million increase inintercompany sales of surplus emissions allowances to our Mid-Atlanticoperations.

Westand Mid-Continent operations gross margin increased by $9 million primarily dueto an increase of $5 million in incremental realized hedges primarily relatedto the expiration of unfavorable load deals in 2005.

EnergyTrading gross margin increased $46 million primarily due to an increase inenergy of $36 million in realized margin in our proprietary trading. Contractedand capacity included $20 million in realized margin on the Back-to-Back Agreementin 2005. In 2006, the Back-to-Back Agreement was transferred to Mirant PowerPurchase, LLC (“Mirant Power Purchase”).

Eliminationsgross margin increased by $8 million due primarily to an increase of$6 million related to the elimination of intercompany emissions allowancestransactions.

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*Operating Expenses*

Our operating expensesdecreased by $5 million for the three months ended June 30, 2006, comparedto the same period in 2005 primarily due to a $6 million gain on sales ofassets, net, related to the sale of the Mirant Service Center which closed on June 30,2006.

*Other Expense, net*

Our other expense, netincreased by $55 million for the three months ended June 30, 2006,compared to the same period in 2005 primarily due to interest expense on thedebt at Mirant North America, LLC (“Mirant North America”) and Mirant AmericasGeneration.

*ReorganizationItems, net*

The net favorable effectof reorganization items, decreased by $22 million due to our emergence fromChapter 11.

*Six Months ended June 30,2006 versus June 30, 2005*

Ourgross margin increased $608 million for the six months ended June 30,2006, compared to the same period for 2005 and is detailed as follows (inmillions): 

| ** **                               | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                          | ** ** | **Northeast** | ** ** | **West and  Mid-  Continent** | ** ** | **Energy  Trading** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                        | $          | 213 |   |   |   | $ | 106 |   |   |   | $ | 1 |   |   |   | $ | 48 |   |   |   | $ | (9 | ) |   | $ | 359 |   |
| Contracted and  capacity(2)              |       |                                                        | 24         |   |   |   | 18 |   |   |   | 74 |   |   |   | — |   |   |   | — |   |   | 116 |   |
| Incremental  realized value of hedges(3) |       |                                                        | 93         |   |   |   | 91 |   |   |   | (1 | ) |   |   | — |   |   |   | — |   |   | 183 |   |
| Unrealized gains  (losses)(4)            |       |                                                        | 325        |   |   |   | 33 |   |   |   | — |   |   |   | 18 |   |   |   | — |   |   | 376 |   |
| Total                                    |       |                                                        | $          | 655 |   |   |   | $ | 248 |   |   |   | $ | 74 |   |   |   | $ | 66 |   |   |   | $ | (9 | ) |   | $ | 1,034 |   |

 

| ** **                               | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                          | ** ** | **Northeast** | ** ** | **West and  Mid-  Continent** | ** ** | **Energy  Trading** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                        | $          | 250 |   |   |   | $ | 81 |   |   |   | $ | — |   |   |   | $ | (5 | ) |   |   | $ | 5 |   |   | $ | 331 |   |
| Contracted and  capacity(2)              |       |                                                        | 46         |   |   |   | 17 |   |   |   | 67 |   |   |   | (48 | ) |   |   | — |   |   | 82 |   |
| Incremental  realized value of hedges(3) |       |                                                        | (54        | ) |   |   | 9 |   |   |   | (9 | ) |   |   | — |   |   |   | — |   |   | (54 | ) |
| Unrealized gains  (losses)(4)            |       |                                                        | 10         |   |   |   | 13 |   |   |   | 4 |   |   |   | 40 |   |   |   | — |   |   | 67 |   |
| Total                                    |       |                                                        | $          | 252 |   |   |   | $ | 120 |   |   |   | $ | 62 |   |   |   | $ | (13 | ) |   |   | $ | 5 |   |   | $ | 426 |   |

 

| ** **                               | ** ** | **Six Months Ended June 30, 2006 vs. 2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Mid-  Atlantic**                                                             | ** ** | **Northeast** | ** ** | **West and  Mid-  Continent** | ** ** | **Energy  Trading** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy(1)                                |       |                                                                           | $          | (37 | ) |   |   | $ | 25 |   |   |   | $ | 1 |   |   |   | $ | 53 |   |   |   | $ | (14 | ) |   | $ | 28 |   |
| Contracted and  capacity(2)              |       |                                                                           | (22        | ) |   |   | 1 |   |   |   | 7 |   |   |   | 48 |   |   |   | — |   |   | 34 |   |
| Incremental  realized value of hedges(3) |       |                                                                           | 147        |   |   |   | 82 |   |   |   | 8 |   |   |   | — |   |   |   | — |   |   | 237 |   |
| Unrealized gains  (losses)(4)            |       |                                                                           | 315        |   |   |   | 20 |   |   |   | (4 | ) |   |   | (22 | ) |   |   | — |   |   | 309 |   |
| Total                                    |       |                                                                           | $          | 403 |   |   |   | $ | 128 |   |   |   | $ | 12 |   |   |   | $ | 79 |   |   |   | $ | (14 | ) |   | $ | 608 |   |

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(1)          Energyincludes gross margin from the generation of electricity, emissions allowancessales and purchases, fuel sales, steam sales and our proprietary tradingactivities.

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(2)          Contractedand capacity relates to revenue received through reliability must run contracts(“RMR”) and other installed capacity mechanisms, revenues from ancillaryservices and revenue from the Back-to-Back Agreement in 2005.

(3)          Incrementalrealized value of hedges reflects the actual margin upon the settlement of ourpower and fuel hedging contracts.

(4)          Unrealizedgains (losses) reflect the unrealized portion of our derivative hedgingcontracts.

Mid-Atlanticoperations gross margin increased by $403 million primarily due to thefollowing:

·       adecrease of $37 million in energy primarily due to higher emissions allowancesexpense, principally to reflect inventory at the lower of its historical costor current market value as well as a higher average cost for sulfur dioxide (“SO2”)allowances as compared to the previous year and higher oil prices;

·       anincrease of $147 million in incremental realized value of hedges primarilyrelated to the settlement of power contracts at prices higher than marketprices for the period; and

·       anincrease of $315 million related to unrealized gains from hedging activitiesof $325 million for the six months ended June 30, 2006, as compared to $10million for the same period in 2005 due to the settlement of contracts forwhich unrealized losses had previously been recognized and due to the increasedvalue associated with forward power contracts for future periods as a result ofdecreases in forward power prices in the period.

Northeastoperations gross margin increased by $128 million primarily due to thefollowing:

·       anincrease of $25 million in energy which included $40 million in increasedintercompany sales of emissions allowances, offset by a decrease in generationvolumes due to increased oil prices;

·       anincrease of $82 million in incremental realized value of hedges primarilyrelated to the settlement of power contracts at higher than market prices; and

·       anincrease of $20 million related to unrealized gains from hedging activities of$33 million for the six months ended June 30, 2006, as compared to $13million for the same period in 2005, primarily due to the settlement ofcontracts for which unrealized losses had previously been recognized and due tothe increased value associated with forward power contracts for future periodsas a result of decreases in forward power prices in the period.

West and Mid-Continent operations gross marginincreased by $12 million primarily due to an increase of $8 million inincremental realized value of hedges primarily related to the expiration ofunfavorable load deals in 2005.

Energy Trading gross margin increased $79 millionprimarily due to an increase in energy of $53 million in realized margin in ourproprietary trading business. Contracted and capacity includes $48 million inrealized margin on the Back-to-Back Agreement in 2005. In 2006, theBack-to-Back Agreement was transferred to Mirant Power Purchase. Unrealizedgains on the Back-to-Back Agreement decreased by $45 million and unrealizedgains on our proprietary trading increased by $23 million.

Eliminations gross margindecreased by $14 million due primarily to a decrease of $15 million related tothe elimination of intercompany emissions allowances transactions.

*Other Expense, net*

Our other expense, netincreased by $118 million for the six months ended June 30, 2006, comparedto the same period in 2005 primarily due to interest expense on the debt atMirant North America and 

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MirantAmericas Generation offset by increased interest income due to higher cashbalances and lower collateral requirements.

*ReorganizationItems, net*

The net favorable effectof reorganization items, decreased by $8 million due to our emergence fromChapter 11.

**Financial Condition**

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

On December 23, 2005,our subsidiary Mirant North America issued $850 million of 7.375% seniorunsecured notes due 2013 (the “Old Notes”). These notes were issued in aprivate placement and were not registered with the Securities and ExchangeCommission. The funds from this issuance initially were placed in escrow andwere released from escrow on January 3, 2006. On August 4, 2006,Mirant North America completed an exchange offer for the Old Notes, whereby$849.965 million of senior notes registered under the Securities Act (the “NewNotes”) were exchanged for an equal amount of the Old Notes. The terms of theNew Notes are identical in all material respects to the Old Notes, except thatthe New Notes are registered under the Securities Act and generally are notsubject to transfer restrictions or registration rights. On January 3,2006, Mirant North America also entered into an $800 million seniorsecured revolving credit facility and a $700 million senior secured termloan. At the closing, $200 million drawn under the senior secured termloan was deposited into a cash collateral account to support the issuance of upto $200 million of letters of credit.

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

MirantNorth America and Mirant Americas Energy Marketing, LP (“Mirant Americas EnergyMarketing”) (the “Primary DIP Lenders”) entered into an agreement (the ‘‘PrimaryNew York DIP Agreement’’) to make secured debtor-in-possession financing in anamount of (i) $20 million, plus (ii) an amount equal to theamount of credit support provided on behalf of Mirant New York, Inc. (“MirantNew York”), Mirant Bowline, LLC (“Mirant Bowline”), Mirant Lovett, LLC (“MirantLovett”) and Hudson Valley Gas Corporation (collectively, the ‘‘New York DIPBorrowers’’), to the extent such amounts are collateralized with cash or cashequivalents by the New York DIP Borrowers. The facility is available on a jointand several basis to the New York DIP Borrowers. On January 31, 2006, allthe assets of Mirant Americas Energy Marketing were transferred to MirantEnergy Trading, with Mirant Energy Trading to succeed to all rights and assumeall obligations of Mirant Americas Energy Marketing under the Primary New YorkDIP Agreement. The financing under the Primary New York DIP Agreement can beutilized through borrowings by the New York DIP Borrowers, the issuance ofletters of credit for the account of any of the New York DIP Borrowers or insupport of commercial transactions entered into by Mirant Energy Trading forthe benefit of the New York DIP Borrowers, the posting of cash in respect ofobligations incurred for the benefit of any of the New York DIP Borrowers,including the making of prepayments for fuel and other commodities for thebenefit of any of the New York DIP Borrowers. Under the Primary New York DIPAgreement, the amount which represents the excess on the effective date of thePlan of (x) credit support posted for the benefit of the New York DIPBorrowers by the lenders in respect of transactions entered into on theirbehalf over (y) the amount of cash collateral posted by the New York DIPBorrowers to the lenders is deemed to be a loan made to the New York DIPBorrowers on such date. The New York DIP Borrowers have posted $18.3 millioncash collateral with Mirant Energy Trading in accordance with the June 30,2006, collateral allocation performed in good faith by Mirant Energy Trading.To the extent that the required level of credit support provided to the NewYork DIP Borrowers is reduced, the amount of such reduction is required to bereturned to the New York DIP Borrowers. The financing under the Primary NewYork DIP Agreement has a stated maturity of 180 days, subject to renewal orextension, and is available until the earlier of (x) the expiration ofsuch period or (y) with respect to each of the New York DIP Borrowers, theeffective date of a confirmed Plan of 

45

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Reorganization (the “Plan”) for such New York DIPBorrower in its Chapter 11 case. The loan was extended for an additional180 days in July 2006. Subject to the authorization of the United StatesBankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”),the obligations of the New York DIP Borrowers under the Primary New York DIP Agreement,pursuant to Section 364(c) of the Chapter11 of Title 11 of the United States Bankruptcy Code (as amended, the “BankruptcyCode”), (i) constitutes a claim having priority over any or alladministrative expenses of the kind specified in sections 503(b) or 507(b) ofBankruptcy Code, (ii) is secured by a lien on property of the estates ofthe New York DIP Borrowers that is not otherwise subject to a lien and (iii) issecured by a junior lien on property of the estates of the New York DIPBorrowers that is subject to a lien. The financing bears interest at a rate ofLondon Interbank Offered Rate (“LIBOR”) plus 2.25%. The Primary New York DIPAgreement contains certain events of default, and the ability of the New YorkDIP Borrowers to borrow thereunder is subject to certain conditions precedent.In addition, the Primary New York DIP Agreement contains covenants that, amongother things, restrict the ability of the New York DIP Borrowers to engage inmergers, acquisitions and asset sales, to make investments and to incurindebtedness.

Contemporaneouswith their entry into the Primary New York DIP Agreement, the New York DIPBorrowers also entered into an agreement for secured financing with Mirant (the“Secondary New York DIP Agreement”). The Secondary New York DIP Agreementpermits Mirant to make secured debtor-in-possession financing in the maximumamount of $50 million to the New York DIP Borrowers, and the borrowings areavailable solely for cash collateral postings by any one or more of the New YorkDIP Borrowers. The terms of the Secondary New York DIP Agreement aresubstantially similar to the terms of the Primary New York DIP Agreement.However, (i) the rights of the Primary DIP Lenders to payment out of cashcollateral posted by the New York DIP Borrowers pursuant to the Primary NewYork DIP Agreement as may be repaid shall at all times rank senior to therights of Mirant under the Secondary New York DIP Agreement and (ii) certainclaims and liens granted under the Primary New York DIP Agreement in respect ofcash collateral posted by the New York DIP Borrowers shall at all times besenior to similar claims and liens granted under the Secondary New York DIPAgreement. The loan was extended for an additional 180 days in July 2006.

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

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

On August 9, 2006, Mirant announced the plannedsale of various gas fired assets. The assets to be sold include our Zeeland(837 MW) and Bosque (532 MW) intermediate and peaking gas fired plants. Proceedsfrom the sales of the Zeeland and Bosque units will be utilized pursuant to thecovenants contained in our Mirant North America debt instruments.

***Cash Flows***

*Operating Activities.  *Ourcash provided by operating activities is impacted by seasonality, changes inenergy prices and fluctuations in our working capital requirements. Cashprovided by operating activities decreased $201 million for the six monthsended June 30, 2006, compared to the same period in 2005 and reflected thepayment of $744 million in bankruptcy claims. Net cash used in operatingactivities for the six months ended June 30, 2006, was $241 million andincluded the following:

*Sources of Cash*

·       realizedgross margin of $658 million; and

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·       a decrease of $464 millionin the amount of cash collateral posted to support energy trading and marketingactivities due to the settlement of contracts and a decline in power pricesduring the period.

*Uses of Cash*

·       bankruptcyclaims payments of $744 million;

·       operationsand maintenance expenses of $296 million, partially offset by $30 millionaccrued for New York property taxes but not paid;

·       interestpayments of $111 million; and

·       $200 milliondrawn under the senior secured term loan that was deposited into a cashcollateral account to support the issuance of letters of credit.

Net cash used in operatingactivities for the six months ended June 30, 2005, was $40 million andincluded the following:

*Sources of Cash*

·       realizedgross margin of $359 million; and

·       a decrease of $5 million inthe amount of cash collateral posted to support energy trading and marketingactivities.

*Uses of Cash*

·       operationsand maintenance expenses of $292 million partially offset by $27 millionaccrued for New York property taxes but not paid;

·       interestpayments of $9 million;

·       paymentsof claims and professional fees related to bankruptcy of $33 million; and

·       paymentto Pepco of $57 million related to suspended payments under the Back-to-BackAgreements.

*Investing Activities.*   Netcash used by investing activities was $47 million for the six months ended June 30,2006 and 2005 and included the following:

·       in2006, we had capital expenditures of $63 million compared to capitalexpenditures of $62 million in 2005;

·       in2006, we received proceeds of $16 million from the sale of assets andinvestments, and in 2005, we received proceeds of $4 million from the 2004 saleof the Bowline gas turbines; and

·       in2005, we received $11 million from the repayment of notes receivable fromaffiliate.

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*CapitalExpenditures.**  *We expect to incurcapital expenditures of approximately $300 million in 2006. Approximately$200 million of our 2006 capital expenditures are for environmentalcompliance. See *“ Environmental Regulation”* foradditional discussion of expected environmental capital expenditures

*Financing Activities.**  *Net cash provided by financing activities was $241million for the six months ended June 30, 2006, compared to $0 for thesame period in 2005. This difference was primarily due to the following:

·       in2006, proceeds from issuance of debt were approximately $2 billion. The debtproceeds in 2006 included $850 million from the Mirant North America debtoffering that was released from escrow on January 3, 2006, $700 million fromthe Mirant North America senior secured loan and $465 million drawn on theMirant North America senior secured revolving credit facility. We also incurred$51 million in debt issuance costs associated with these debt facilities; and

·       in 2006, we repaid debt of$1.5 billion, which included $465 million on the Mirant North America seniorsecured revolving credit facility and approximately $990 million of principalpayments for debt settled under the plan. We also made a payment of $250million to Mirant Americas, Inc. (“Mirant Americas”) under the Plan.

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

As of June 30,2006, we have total cash, cash equivalents, and credit facility availability ofapproximately $1.1 billion. The table below sets forth total cash, cashequivalents and availability of credit facilities of Mirant Americas Generationand its subsidiaries as of June 30, 2006 and December 31, 2005 (inmillions):

| ** **                                                                                                                     | ** ** | **At June 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| Cash and Cash  Equivalents:                                                                                                    |       |                            |       |                                |       |   |   |   |   |
| Mirant Americas Generation                                                                                                     |       |                            | $          | 4                                   |       |   |   | $ | 129 |   |   |
| Mirant Mid-Atlantic                                                                                                            |       |                            | 72         |                                |       |   | 276 |   |   |
| Mirant North America                                                                                                           |       |                            | 301        |                                |       |   | 19 |   |   |
| Total cash and  cash equivalents                                                                                               |       |                            | 377        |                                |       |   | 424 |   |   |
| Less: Cash  required for operating, working capital or other purposes or restricted by  the subsidiaries’ debt agreements |       |                            | 81         |                                |       |   | 1 |   |   |
| Total available  cash and cash equivalents                                                                                     |       |                            | 296        |                                |       |   | 423 |   |   |
| Available under  credit facilities                                                                                             |       |                            | 818        |                                |       |   | — |   |   |
| Available under  the DIP Facility                                                                                              |       |                            | —     |                                |       |   | 249 |   |   |
| Total cash, cash  equivalents and credit facilities availability                                                               |       |                            | $          | 1,114                               |       |   |   | $ | 672 |   |   |

 

*Tender Offer.**  *On July 11, 2006, Mirant announced thecommencement of a modified “Dutch Auction” tender offer to repurchase up to 43million shares of Mirant common stock foran aggregate purchase price of up to $1.25 billion. Mirant’sshareholders can, subject to certain conditions, sell all or a portion of theirshares of Mirant common stock to Mirant at a price not less than $25.75 and notmore than $29.00 per share. Mirant intends to pay for the shares tendered inthe offer and related expenses with approximately $300 million of cash on hand at Mirant Corporation andapproximately $950 million of distributions from subsidiaries, includingapproximately $175 million and $740 million to be distributed from us andMirant Asia-Pacific Limited and its subsidiaries, respectively, as well asapproximately $35 million from other subsidiaries of Mirant Corporation.

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

In order to sell power and purchase fuel in theforward markets and perform other energy trading and marketing activities, we oftenare required to provide trade credit support to our counterparties or makedeposits with brokers. In addition, we often are required to provide tradecredit support for access to the transmission grid, to participate in powerpools, to fund debt service reserves and for other operating activities. Tradecredit support includes cash collateral, letters of credit and financialguarantees. In the event that we default, the counterparty can draw on a letterof credit or apply cash collateral held to satisfy the existing amountsoutstanding under an open contract. As of June 30, 2006, our outstandingissued letters of credit totaled $182 million.

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

| ** **                                                   | ** ** | **At June 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| Cash collateral  posted—energy trading and marketing(1) |       |                            | $          | 155                                 |       |   |   | $ | 619 |   |   |
| Cash collateral  posted—debt service and rent reserves  |       |                            | —     |                                |       |   | 56 |   |   |
| Cash collateral  posted—other operating activities      |       |                            | 7          |                                |       |   | 10 |   |   |
| Letters of  credit—energy trading and marketing         |       |                            | 100        |                                |       |   | 51 |   |   |
| Letters of  credit—debt service and rent reserves       |       |                            | 75         |                                |       |   | — |   |   |
| Letters of  credit—other operating activities           |       |                            | 7          |                                |       |   | 5 |   |   |
| Total                                                        |       |                            | $          | 344                                 |       |   |   | $ | 741 |   |   |

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(1)          Theamount includes approximately $130 million deposited with J.P. Morgan Futures, Inc.as clearing broker as of June 30, 2006.

On July 13, 2006,Moody’s Investors Service reduced Mirant’s credit rating to “B2.” Our debtratings and our subsidiaries debt ratings were also lowered. Standard and Poor’sannounced that they also might reduce Mirant’s credit rating and our debtratings as well as those of our subsidiaries.

**Other Developments**

***Locational Installed Capacity Proposal***

Our New England plantsparticipate in a market administered by the Independent System Operator-NewEngland (“ISO-NE”). Mirant Energy Trading, LLC (“Mirant Energy Trading”) is amember of the New England Power Pool (“NEPOOL”), which is a voluntaryassociation of electric utilities and other market participants in Connecticut,Maine, Massachusetts, New Hampshire, Rhode Island and Vermont and whichfunctions as an advisory organization to ISO-NE. The Federal Energy RegulatoryCommission (“FERC”) approved ISO-NE as the Regional Transmission Organization (“RTO”)for the New England region effective on February 1, 2005, making ISO-NEresponsible for market rule filings at the FERC. In addition, ISO-NE isresponsible for the operation of transmission systems and administration and settlementof the wholesale electric energy, capacity and ancillary services markets.ISO-NE utilizes a locational marginal pricing model, with a price mitigationmethod similar to the New York Independent System Operators (“NYISO”) AutomatedMitigation Procedure, although it is implemented via manual processes ratherthan the automated process employed in New York. In 2004, the FERC approved alocational installed capacity market for ISO-NE (the ‘‘LICAP proposal’’) basedon the demand curve concept used by the NYISO to be implemented in January 2006.Demand curves are administrative mechanisms used to establish electricitygeneration capacity prices. A hearing on the demand curve parameters was heldin February and March 2005, and an initial decision issued by thepresiding administrative law judge ruled in favor of many of the suppliers’issues in the hearing. A subsequent FERC order issued on October 21, 2005,pushed back the LICAP implementation date to no sooner than 

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October 1,2006, and put in place procedures to pursue a settlement on alternatives to theLICAP mechanism. Any such alternatives were to be submitted to the FERC by January 31,2006. On January 31, 2006, a FERC settlement judge reported that anagreement in principle had been reached among the majority of the parties inthe LICAP proceeding and requested an extension of the January 31, 2006deadline so that a final settlement could be filed with the FERC by March 6,2006. On March 6, 2006, a comprehensive settlement proposal was filed withthe FERC on behalf of numerous parties to the LICAP proceeding. The settlementwould replace the LICAP proposal with a Forward Capacity Market (“FCM”) underwhich annual capacity auctions would be conducted for supply three years inadvance of delivery. In addition, the settlement provides for a four yeartransition period under which capacity suppliers receive a set price for theircapacity commencing on December 1, 2006, and continuing with priceescalators through May 31, 2010. The settlement will go into effect uponapproval, without modification, by the FERC. On June 16, 2006, theCommission issued a decision accepting the proposed FCM settlement withoutmodification. The FCM will result in increased opportunities for our NewEngland generators to receive more revenues for their capacity commencing in December 2006.

***Reliability Pricing Model***

Our Mid-Atlantic facilities sell power into themarkets operated by Pennsylvania-NewJersey-Maryland Interconnection, LLC (“PJM”), which the FERC approved tooperate as an independent system operator (“ISO”) in 1997 and as an RTO in2002. We have access to the PJM transmission system pursuant to PJM’s OpenAccess Transmission Tariff. PJM operates the PJM Interchange Energy Market,which is the region’s spot market for wholesale electricity, provides ancillaryservices for its transmission customers, performs transmission planning for theregion and dispatches generators accordingly. PJM administers day-ahead andreal-time marginal cost clearing price markets and calculates electricityprices based on a locational marginal pricing model. A locational marginalpricing model determines a price for energy at each node in a particular zonetaking into account the limitations on transmission of electricity and lossesinvolved in transmitting energy into the zone, resulting in a higher zonalprice when cheaper power cannot be imported from another zone. Generationowners in PJM are subject to mitigation, which limits the prices that they mayreceive under certain specified conditions.

Load serving entities in PJM are required to haveadequate sources of capacity. PJM operates a capacity market whereby loadserving entities can procure their capacity requirements through a system-widesingle clearing price auction. In PJM, all capacity is assumed to beuniversally deliverable, regardless of its location. PJM has greatly expandedits system over the last three years to include Allegheny Power, CommonwealthEdison, American Electric Power, Inc., Duquesne Light, Dayton Power &Light (“DP&L”) and Dominion-Virginia Power. As a result, capacity priceshave significantly declined. The PJM expansions have resulted in an apparentsystem-wide surplus of capacity, despite the fact that certain regions in PJM,including the Mid-Atlantic area in which our Morgantown, Chalk Point, Dickersonand Potomac River Plants are located, will need capacity additions within thenext few years.

On August 31, 2005,PJM filed its Reliability Pricing Model (‘‘RPM’’) with the FERC to replace itscurrent capacity market rules. The RPM proposal would provide for a four-yearforward capacity auction using a demand curve and locational deliverabilityzones for capacity phased in over a several year period beginning on June 1,2006. On November 5, 2005, PJM proposed to delay the effective date of theRPM until June 1, 2007. On April 20, 2006, FERC issued an ordergenerally finding aspects of PJM’s RPM filing to be just and reasonable, butFERC also established further procedures including a paper hearing and stafftechnical conference to resolve the remaining issues and encouraged the partiesto seek a negotiated resolution. Settlement talks under the supervision of aFERC-appointed settlement judge began on June 5, 2006. On August 3,2006, the Settlement Judge issued a report stating that most of the activeparties to the case have reached a confidential agreement in principle, andwill work to develop a more detailed settlement agreement to be filed by September 27,2006. It is impossible to predict whether a final 

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settlementagreement will be filed with the FERC by September 27, 2006. It islikewise impossible to predict the outcome of litigation, and whether RPM or asimilar proposal would be adopted by FERC should settlement efforts fail. If asettlement agreement is filed and approved by FERC without conditions ormodifications, or if FERC approves RPM in a form not materially different fromwhat was filed, increased opportunities for our power plants located in theMid-Atlantic region to receive more revenues for their capacity will result.

***Environmental Regulation***

*MarylandHealthy Air Act.*   In April 2006, theGovernor of Maryland signed into law the Healthy Air Act, which requires moresignificant reductions in emissions of nitrogen oxide (“NOx”), SO2 and mercury than the recentlyfinalized federal Clean Air Interstate Rule (“CAIR”) and Clean Air MercuryRule (“CAMR”). The Act also accelerates the timeframe for such reductionsbeyond what is required by CAIR and CAMR and eliminates the ability to useallowances to attain compliance for NOx, SO2and mercury. The law requires thatMaryland join the Regional Greenhouse Gas Initiative (“RGGI”) in 2007, subjectto completion of a study of the costs and benefits of such participation.Participation in the RGGI would require reductions in carbon dioxide emissionsbeginning in 2009, but we can use allowances to attain compliance.

The Maryland Department of the Environment (the “MDE”)will be issuing the regulations that will implement the Healthy Air Act inseveral phases. The first phase of regulations has been proposed and addressesNOx, SO2andmercury.

This legislation affectsour Chalk Point, Dickerson and Morgantown facilities and we are currentlyassessing our options for compliance and their financial impacts. We may needto request additional time to comply, which is provided for in the legislation.Because the law limits our ability to use emissions allowances to comply, wewill be required to increase substantially our capital expenditures in order toremediate our units. We anticipate that the capital expenditures required toachieve compliance will be approximately $1.3 billion to $1.5 billion in 2006through 2009.

***SO2 Emissions Reductions***

On August 3, 2006, weannounced a plan that will reduce SO2 emissions by as much as 95% at ourMaryland power plants. We will install flue gas desulfurization (“FGD”)emissions controls at our three Maryland power plants: Chalk Point GeneratingStation located in Prince George’s County, Dickerson Generating Station locatedin Montgomery County, and Morgantown Generating Station located in CharlesCounty. In addition, we will install a selective catalytic reduction (“SCR”)system at the Chalk Point facility that will further reduce NOx emissions byapproximately 92%. Together, the FGDs and the SCR will reduce by approximately90% the emissions of ionic mercury from the three power plants.

***Clean Air Mercury Rule***

The Environmental Protection Agency (the “EPA”) promulgatedthe CAMR on March 15, 2005, which utilizes a market-based cap and tradeapproach under Section 111 of the Federal Clean Air Act (the “Clean AirAct”). It requires emissions reductions in two phases, with the first phasegoing into effect in 2010 and the more stringent cap going into effect in 2018.In October 2005, the EPA issued a notice of proposed rulemaking toreconsider certain aspects of the CAMR. On May 31, 2006, the EPA tookfinal action on petitions to reconsider two actions regarding the air pollutantmercury. The EPA was asked to regulate electric steam generating units under Section 112of the Clean Air Act, which would have required each coal unit to apply controltechnology to reduce emissions from mercury and the cap-and-trade of mercuryemissions would not have been allowed. Instead, the EPA determined thatregulation under Section 112 of the Clean Air Act was not appropriate.This means the allowance trading program for 

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mercurywill stay intact. For Mirant, and the Company, we will receive an allocation ofmercury emissions allowances associated with our coal units nationwide andunless there are state restrictions, under the federal program, Mirant and theCompany will be allowed to use and trade those allowances. The EPA also mademinor technical changes to the CAMR including a recalculation of mercuryallocations for the State of Alaska, which resulted in a slight recalculation ofallowances for each state.

***Virginia Mercury Rule***

On April 19, 2006, the Governor of Virginiasigned into law HB 1055, an air emissions control law implementing generallythe federal rules, CAIR and CAMR. However, the state law limits Mirant PotomacRiver generating station’s ability to fully utilize CAMR allowances to meetcompliance obligations.

The state-specific mercurylaw restricts our ability to use allowances allocated to the Potomac River,generating station for compliance purposes because the facility is located in anon-attainment region. The restriction specifically limits the use ofallowances for compliance to credits, if any are available, allocated to MirantAmericas Generation’s Maryland facilities which are located within 200 km ofVirginia’s border. Restrictions to the federal cap-and-trade programs reducepower plant flexibility in meeting compliance obligations. Potomac Rivergenerating station is not prohibited in selling allowances allocated under theCAMR; just in the use of showing compliance with the Virginia State law.

***Faulkner Ash Storage Zoning Matter***

On June 8, 2006, theBoard of Zoning Appeals for Charles County, Maryland, ruled on Mirant MD AshManagement, LLC’s (“Mirant MD Ash Management”) application to extend theSpecial Exception for the Faulkner Ash Storage Site for an additional fiveyears. The Board approved a three-year extension with new conditions. Thenew conditions include a requirement to reduce ash transported to and stored onthe site by a minimum of 10% per year. Mirant MD Ash Management filed a Motionfor the Reconsideration on June 23, 2006, which was denied by Order dated July 24,2006. Mirant may appeal the Order. The Faulkner Ash Storage site serves theMorgantown generating facility. The economic impact of this requirement is notknown at this time.

***California Generation Facilities***

On May 4, 2006, we filed a 90-day notice ofour intent to shut down Pittsburg Unit 7 and Contra Costa Unit 6 with theCalifornia Public Utilities Commission and the California Independent SystemOperator (the “CAISO”) in accordance with California law and agreementsgoverning operations with the CAISO. On August 1, 2006 we withdrew thisnotice, because we reached an agreement to sell approximately 2,000 MW of theoutput of the Pittsburg Unit 7 and the Contra Costa Unit 6 facilities toPacific Gas & Electric Company (“PG&E”), as described below.

On July 28, 2006, wesigned two tolling agreements with PG&E to provide electricity from ournatural gas fired units at Pittsburg and Contra Costa, including Pittsburg Unit7 and Contra Costa Unit 6. The agreements are for 100% of the capacity fromthese assets, approximately 2,000 MW. The contracts have varying tenors rangingfrom one to four years, beginning in 2007. We will receive monthly capacitypayments with bonuses and/or penalties based on guaranteed heat rate andavailability tolerances.

**Critical AccountingPolicies and Estimates**

The accountingestimates described below are considered critical to obtaining an understandingof our unaudited condensed consolidated and combined financial statementsbecause their application requires significant estimates and judgments bymanagement in preparing our unaudited condensed consolidated and combinedfinancial statements. Management’s estimates and judgments are inherentlyuncertain and 

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maydiffer significantly from actual results achieved. Management considers anaccounting estimate to be critical if the following conditions apply:

·       theestimate requires significant assumptions; and

·       changesin the estimate could have a material effect on our consolidated results ofoperations or financial condition; or,

·       ifdifferent estimates that could have been selected had been used, there could bea material impact on our consolidated results of operations or financialcondition.

We have discussed theselection and application of these accounting estimates with the Board ofManagers and our independent auditors. It is management’s view that the currentassumptions and other considerations used to estimate amounts reflected in ourunaudited condensed consolidated and combined financial statements areappropriate. However, actual results can differ significantly from thoseestimates under different assumptions and conditions. The sections belowcontain information about our most critical accounting estimates, as well asthe effects of hypothetical changes in the material assumptions used to developthe estimates.

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

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

The accrual model has historically been used toaccount for our generation revenue from the sale of energy and integratedutilities and also to account for distribution revenue from the sale anddistribution of energy. We recognize revenue when earned and collection isprobable as a result of electric power delivered to customers pursuant tocontractual commitments that specify volume, price and delivery requirements.Sales of energy are based on economic dispatch, or they may be ‘as-ordered’ byan ISO, based on member participation agreements, but without an underlyingcontractual commitment. ISO revenues and revenues for sales of energy based oneconomic-dispatch are recorded on the basis of megawatt hours (“MWh”)delivered, at the relevant day-ahead or real-time prices. The Company alsorecognizes affiliate and nonaffiliate revenue when ancillary services have beenperformed and collection of such revenue is probable.

The fair value model has historically been used forderivative energy contracts that economically hedge our electricity generationassets and that engage in proprietary trading activities. We use a variety ofderivative contracts, such as futures, swaps and option contracts, in themanagement of our business. Such derivative contracts have varying terms anddurations, or tenors, which range from a few days to a number of years,depending on the instrument.

Pursuant to Statementof Financial Accounting Standards (“SFAS”) No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*” (“SFAS No. 133”),derivative contracts are reflected in our financial statements at fair value,with changes in fair value recognized currently in earnings unless they qualifyfor a scope exception. Management considers fair value techniques, valuationadjustments related to credit and liquidity and judgments related to theprobability of completing forecasted transactions to be critical accounting estimates.These estimates are considered significant because they are highly susceptibleto change from period to period and are dependent on many subjective factors.The fair value of derivative contracts is included in price risk managementassets and liabilities affiliate and nonaffiliate in our unaudited condensedconsolidated balance sheets. Transactions that do not qualify for accountingunder SFAS No. 133, either because they are not derivatives or becausethey qualify for a scope exception, are accounted for under accrual accountingas described above.

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*KeyAssumptions and Approach Used.**  *Determiningthe fair value of derivatives involves significant estimates based largely onthe mid-point of quoted prices in active markets. The mid-point may varysignificantly from the bid or ask price for some delivery points. If no activemarket exists, we estimate the fair value of certain derivative contracts usingquantitative pricing models. Fair value estimates involve uncertainties andmatters of significant judgment. Our modeling techniques for fair value estimationinclude assumptions for market prices, supply and demand market data,correlation and volatility. The degree of complexity of our pricing modelsincreases for longer duration contracts, contracts with multiple pricingfeatures, option contracts and off-hub delivery points.

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

*Effectif Different Assumptions Used.**  *Theamounts recorded as revenues and cost of fuel, electricity and other productschange as estimates are revised to reflect actual results and changes in marketconditions or other factors, many of which are beyond our control. Because weuse derivative financial instruments and have not elected cash flow or fairvalue hedge accounting under SFAS No. 133, certain components of ourfinancial statements, including gross margin, operating income and balancesheet ratios, are at times volatile and subject to fluctuations in valueprimarily due to changes in energy and fuel prices. Due to the complexity ofthe models used to value the derivative instruments each period, a significantchange in estimate could have a material impact on our results of operationsand cash flows at the time contracts are ultimately settled. See Note E toour unaudited condensed consolidated and combined financial statements forfurther information on financial instruments related to energy trading andmarketing activities.

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

***Long-Lived Assets***

**Estimated UsefulLives**

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

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

*Effect if DifferentAssumptions Used.**  *Thedetermination of estimated useful lives is dependent on subjective factors suchas expected market conditions, commodity prices and anticipated capitalexpenditures. Since composite depreciation is used, the actual useful life of aparticular asset may differ materially from the useful life estimated for therelated group of assets. In the event the useful lives of 

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significant assetswere found to be shorter than originally estimated, depreciation expense mayincrease, liabilities recognized for future asset retirement obligations may beinsufficient and impairments in the carrying value of tangible and intangibleassets may result.

**Asset RetirementObligations**

*Natureof Estimates Required.**  *Weaccount for asset retirement obligations under SFAS No. 143, “*Accounting for Asset Retirement Obligations*” (“SFAS No. 143”),and under Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 47,“*Accounting for Conditional Asset**Retirements, an Interpretation of FASB Statement No. 143”*(“FIN47”). SFAS No. 143 and FIN 47 require an entity to recognize the fairvalue of a liability for conditional and unconditional asset retirementobligations in the period in which they are incurred. Retirement obligationsassociated with long-lived assets included within the scope of SFAS No. 143and FIN 47 are those obligations for which a requirement exists under enactedlaws, statutes and written or oral contractions, including obligations arisingunder the doctrine of promissory estoppel. Asset retirement obligations areestimated using the estimated current cost to satisfy the retirementobligation, increased for inflation through the expected period of retirementand discounted back to present value at our credit-adjusted risk-free rate. Wehave identified certain retirement obligations within our power generationoperations. These asset retirement obligations are primarily related toasbestos abatement at some of our generating facilities, equipment on leasedproperty and other environmental obligations related to the closing of ashdisposal sites.

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

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

**Asset Impairments**

*Natureof Estimates Required.**  *We evaluateour long-lived assets, including goodwill and indefinite-lived intangible assetsfor impairment in accordance with applicable accounting guidance. Generally, animpairment occurs when the fair value of the asset or reporting unit is lessthan its carrying value. The amount of an impairment charge is calculated asthe excess of the asset’s carrying value over its fair value, which generallyrepresents the discounted expected future cash flows attributable to the assetor in the case of assets we expect to sell, at fair value less costs to sell.

SFAS No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*” (“SFAS No. 144”),requires management to recognize an impairment charge if the sum of theundiscounted expected future cash flows from a long-lived asset ordefinite-lived intangible is less than the carrying value of that asset. Weevaluate our long-lived assets (property, plant and equipment) anddefinite-lived intangibles for impairment whenever indicators of impairmentexist or when we commit to sell the asset. These evaluations of long-livedassets and definite-lived intangibles may result from significant decreases inthe market price of an asset, a significant adverse change in the extent ormanner in which an asset is being used or in its physical condition, asignificant adverse change in legal factors or in the business climate thatcould affect the value of an asset, as well as other economic or operationsanalyses. If the carrying amount is not recoverable, an impairment charge isrecorded.

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

On August 9, 2006, Mirant announced the plannedsale of various gas fired assets. The assets to be sold include our Zeeland(837 MW) and Bosque (532 MW) intermediate and peaking gas fired plants. Theplanned sales will result in the reclassification of the long-lived assetsrelated to these plants as held for sale beginning in the third quarter of2006. Initial estimates indicate that for each of these plants an impairmentloss will need to be recorded in the third quarter to reduce the carrying valueof these plants to the fair value less costs to sell. While the amount of theimpairment loss has not yet been determined, we currently estimate the totalimpairment loss for these two plants will range from $100 million to $200million and will be reflected as a loss from discontinued operations in ourcondensed consolidated statements of operations for the third quarter of 2006.

*Effect if Different AssumptionsUsed.*   The estimates and assumptions used todetermine whether an impairment exists are subject to a high degree ofuncertainty. The estimated fair value of an asset would change if differentestimates and assumptions are used in our applied valuation techniques,including estimated undiscounted cash flows, discount rates and remaininguseful lives. If actual results are not consistent with the assumptions used inestimating future cash flows and asset fair values, we may be exposed toadditional losses that could be material to our results of operations.

**Income Taxes**

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

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

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

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

Additionally, we have contingent liabilities relatedto tax uncertainties arising in the ordinary course of business. Weperiodically assess our contingent liabilities in connection with theseuncertainties based on the latest information available. For thoseuncertainties where it is probable that a loss has occurred and the loss orrange of loss can be reasonably estimated, a liability is recognized in the financialstatements. The recognition of contingent losses for tax uncertainties requiresmanagement to make significant assumptions about the expected outcomes ofcertain tax contingencies. See Note A to our consolidated financialstatements for further information on FIN No. 48, “*Accountingfor Uncertainty in Income Taxes: an Interpretation of FASB StatementNo. 109”*(“FIN 48”)

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

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

***Loss Contingencies***

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

*KeyAssumptions and Approach Used.**  *Thedetermination of a loss contingency requires significant judgment as to theexpected outcome of each contingency in future periods. In making thedetermination as to potential losses and probability of loss, we consider allavailable positive and negative evidence including the expected outcome ofpotential litigation. We record our best estimate of a loss, or the low 

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end of our range if noestimate is better than another estimate within a range of estimates, when theloss is considered probable. As additional information becomes available, wereassess the potential liability related to the contingency and revise ourestimates. In our evaluation of legal matters, management holds discussionswith applicable legal counsel and relies on analysis of case law and legalprecedents.

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

***Litigation***

We are currently involvedin certain legal proceedings. These legal proceedings are discussed in Part IIItem 1. “Legal Proceedings,” and Note H to the unaudited condensedconsolidated and combined financial statements contained elsewhere in thisreport. We estimate the range of liability through discussions with legalcounsel and analysis of applicable case law and legal precedents. We record ourbest estimate of a loss, if estimable, when the loss is considered probable, orthe low end of our range if no estimate is better than another estimate withina range of estimates. As additional information becomes available, we reassessthe potential liability related to our pending litigation and revise ourestimates. Revisions in our estimates of the potential liability couldmaterially impact our results of operations, and the ultimate resolution may bematerially different from the estimates that we make.

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

In connection with our powergenerating business, we are exposed to energy commodity price riskassociated with the acquisition of fuel needed to generate electricity, as wellas the electricity produced and sold. A portion of our fuel requirements ispurchased in the spot market and a portion of the electricity we produce alsois sold in the spot market. In addition, the open positions in our proprietarytrading portfolio expose us to risks associated with the changes in energycommodity prices. As a result, our financial performance varies depending onchanges in the prices of energy and energy-related commodities. See “CriticalAccounting Policies and Estimates” for a discussion of the accounting treatmentfor our energy trading and marketing activities and see Note E to the unauditedcondensed consolidated and combined financial statements for detail of ourprice risk management assets and liabilities.

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

**Item 4.****   *Controls and Procedures***

**InherentLimitations in Control Systems**

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected. As a result, our management, including the Chief ExecutiveOfficer and Chief Financial Officer, does not expect that our disclosurecontrols and procedures, or our internal control over financial reporting, willprevent all error and all fraud.

**Effectiveness ofDisclosure Controls and Procedures**

As required by Exchange Act Rule 13a-15(b),our management, including our Chief Executive Officer and our Chief FinancialOfficer, conducted an assessment of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined by Rules 13a-15(e) and15d-15(e) under the Exchange Act), as of June 30, 2006. Basedupon this assessment, our management concluded that, as of June 30, 2006,the design and operation of these disclosure controls and procedures wereeffective.

Appearing as exhibits to this report are thecertifications of the Chief Executive Officer and the Chief Financial Officerrequired in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.

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**PART II**

**Item 1.**   Legal Proceedings

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

***Chapter 11 Proceedings***

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

As of June 30, 2006,approximately 21.3 million of the shares of Mirant common stock to bedistributed under the Plan have not yet been distributed and have been reservedfor distribution with respect to claims that are disputed by the Mirant Debtorsand have not been resolved. A settlement entered into on May 30, 2006,among Pepco, Mirant, MC 2005, LLC f/k/a Mirant Corporation (“Old Mirant”), andvarious subsidiaries of Mirant, including subsidiaries of the Company, ifapproved by final order in the Chapter 11 proceedings, would result in thedistribution of up to 18 million of the reserved shares to Pepco, as describedbelow in *Pepco Litigation*. Under the terms of thePlan, to the extent other such unresolved claims are resolved now that theCompany has emerged from bankruptcy, the claimants will be paid from thereserved shares on the same basis as if they had been paid when the Plan becameeffective. That means that their allowed claims will receive the same pro ratadistributions of Mirant common stock, cash, or both common stock and cash aspreviously allowed claims in accordance with the terms of the Plan. To theextent the aggregate amount of the payouts determined to be due with respect tosuch disputed claims ultimately exceeds the amount of the funded claim reserve,Mirant would have to issue additional shares of common stock to address theshortfall, which would dilute existing Mirant shareholders, and Mirant and theCompany would have to pay additional cash amounts as necessary under the termsof the Plan to satisfy such pre-petition claims. The Company will continue tomonitor its obligations as the disputed claims are resolved.

***Pepco Litigation***

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

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Mirant assigned its rights and obligations under theBack-to-Back Agreement to Mirant Americas Energy Marketing. In the Chapter 11cases of the Mirant Debtors, Pepco asserted that an Assignment and AssumptionAgreement dated December 19, 2000, that includes as parties Pepco andvarious subsidiaries of ours causes our subsidiaries that are parties to theagreement to be jointly and severally liable to Pepco for various obligations,including the obligations under the Back-to-Back Agreement. The Mirant Debtorshave sought to reject the APSA, the Back-to-Back Agreement, and the Assignmentand Assumption Agreement, and the rejection motions have not been resolved.Under the Plan, the obligations of the Mirant Debtors under the APSA (includingany other agreements executed pursuant to the terms of the APSA and found by afinal court order to be part of the APSA), the Back-to-Back Agreement, and theAssignment and Assumption Agreement are to be performed by Mirant PowerPurchase, LLC (“Mirant Power Purchase”), whose performance is guaranteed byMirant. If any of the agreements is successfully rejected, the obligations ofMirant Power Purchase and Mirant’s guarantee obligations terminate with respectto that agreement, and Pepco would be entitled to a claim in the Chapter 11proceedings for any resulting damages. That claim would then be addressed underthe terms of the Plan. If the Bankruptcy Court were to conclude that theAssignment and Assumption Agreement imposed liability upon the Company’ssubsidiaries for the obligations under the Back-to-Back Agreement and theBack-to-Back Agreement were to be rejected, the resulting rejection damagesclaim could result in a claim in the Chapter 11 proceedings against the Company’ssubsidiaries but any such claim would be reduced by the amount recovered byPepco on its comparable claim against Mirant.

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

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

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

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rejected pursuant to theterms of the Settlement Agreement, the Settlement Agreement provides that afuture breach of the APSA or any Ancillary Agreement by a party to suchagreement will not entitle the non-defaulting party to terminate, suspendperformance under, or exercise any other right or remedy under or with respectto any of the remainder of such agreements. If, however, Mirant elects to havethe Back-to-Back Agreement assumed and assigned to Mirant Power Purchase underthe conditions set out in the Settlement Agreement, then the SettlementAgreement provides that nothing in its terms prejudices the argument currentlybeing made by Pepco in the contract rejection proceedings that the APSA, theBack-to-Back Agreement, and the Ancillary Agreements constitute a singlenon-severable agreement, the material breach of which would entitle Pepco tosuspend or terminate its performance thereunder, or any defense of Mirant andits subsidiaries to such an argument by Pepco.

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having a value,after liquidation of the stock by Pepco, equal to $520 million, subject tocertain adjustments. Upon the Settlement Agreement becoming effective, Mirantwill distribute up to 18 million shares of Mirant common stock to Pepco tosatisfy its claim and Pepco will liquidate those shares. The shares are to bedistributed to Pepco in two distributions, the first totaling 13.5 millionshares and the second to be determined by Mirant after the Settlement Agreementbecomes effective so as to produce upon liquidation total net proceeds fromboth share distributions as near to $520 million as possible, subject to theoverall cap on the shares to be distributed of 18 million shares. If the netproceeds received by Pepco from the liquidation of the shares are less than$520 million, Mirant will pay Pepco cash equal to the difference. If theclosing price of Mirant’s stock is less than $16.00 on four business days in a20 consecutive business day period prior to any distribution of shares to Pepcoon its claim, then Mirant can elect to have the Back-to-Back Agreement assumedand assigned to Mirant Power Purchase rather than rejecting it. If Mirantexercises this right to have the Back-to-Back Agreement assumed, then the $520million is reduced to $70 million and Mirant Power Purchase would continue toperform the Back-to-Back Agreement through its expiration in 2021 with Mirantguaranteeing its performance. The Settlement Agreement allocates the $70million to various claims asserted by Pepco that do not arise from therejection of the Back-to-Back Agreement, including claims asserted under theLocal Area Support Agreement between Pepco and Mirant Potomac River, LLC (“MirantPotomac River”) that are discussed below in *Pepco Assertion of Breachof Local Area Support Agreement*.

***California and Western Power Markets***

*California Rate PayerLitigation.**  *On April 14,2006, the California Court of Appeal dismissed the appeal of the sixconsolidated suits as to the remaining Mirant defendants pursuant to thestipulation of the plaintiffs and the Mirant defendants and remanded the suitsto the superior court. On May 9, 2006, the California state courtdismissed the suits with respect to the remaining Mirant defendants.

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

*Department of JusticeInquiries.**  *In November 2002,Mirant received a subpoena from the Department of Justice (the “DOJ”), actingthrough the United States Attorney’s office for the Northern District ofCalifornia, requesting information about its activities and those of 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. The DOJ’s investigation of the reporting ofinaccurate natural gas price information is continuing, and Mirant has helddiscussions with the DOJ regarding the disposition of this matter. The DOJ’s investigationis based upon the same circumstances that were the subject of an investigationby the Commodity Futures Trading Commission (“CFTC”) that was settled in December 2004.As described****in Mirant’sAnnual Report on 

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Form 10-Kfor the year ended December 31, 2004, in*LegalProceedings—Other Governmental Proceedings—CFTC Inquiry*, Mirant andMirant Americas Energy Marketing pursuant to the settlement consented to theentry of an order by the CFTC in which it made findings, which are neitheradmitted nor denied by Mirant and Mirant Americas Energy Marketing, that (1) fromJanuary 2000 through December 2001, certain Mirant Americas EnergyMarketing natural gas traders (a) knowingly reported inaccurate price,volume, and/or counterparty information regarding natural gas cash transactionsto publishers of natural gas indices and (b) inaccurately reported toindex publishers transactions observed in the market as Mirant Americas EnergyMarketing transactions and (2) from January to October 2000,certain Mirant Americas Energy Marketing west region traders knowinglydelivered the false reports in an attempt to manipulate the price of naturalgas. Under the settlement, the CFTC received a subordinated allowed, unsecuredclaim against Mirant Americas Energy Marketing of $12.5 million in the Chapter11 proceedings. On June 19, 2006, two former employees of Mirant pledguilty to charges of conspiracy to manipulate the price of natural gas ininterstate commerce during the period from July 1, 2000, until November 1,2000, while they were west region traders for Mirant Americas Energy Marketing.The DOJcould decide that further action against Mirant and Mirant Americas EnergyMarketing is not appropriate or could seek indictments against one or moreMirant entities, or the DOJ and Mirant could agree to a disposition that mightinvolve undertakings or a fine. Mirant has cooperated fully with the DOJ andintends to continue to do so. At this time, the Company’s view is that anyaction taken by the DOJ against Mirant or its subsidiaries related to thereporting of natural gas price information would not involve the Company or itssubsidiaries except to the extent that any disposition of this matter resultsin ongoing undertakings by Mirant Energy Trading as the recipient of the assetsof Mirant Americas Energy Marketing under the Plan.

***Environmental Matters***

*MirantPotomac River Notice of Violation.**  *On September 10,2003, the Virginia Department of Environmental Quality (“Virginia DEQ”) issueda Notice of Violation (“NOV”) to Mirant Potomac River, alleging that itviolated its Virginia Stationary Source Permit to Operate by emitting nitrogenoxide (“NOx”) in excess of the “cap” established by the permit for the 2003summer ozone season. Mirant Potomac River responded to the NOV, asserting thatthe cap is unenforceable, noting that it can comply through the purchase ofemissions allowances and raising other equitable defenses. Virginia’s civilenforcement statute provides for injunctive relief and penalties. On January 22,2004, the EPA issued an NOV to Mirant Potomac River alleging the same violationof its Virginia Stationary Source Permit to Operate as set out in the NOVissued by the Virginia DEQ.

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MDE, the DOJand the EPA entered into, and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia, a proposed consent decree(the “Original Consent Decree”) that, if approved, would resolve Mirant PotomacRiver’s potential liability for matters addressed in the NOVs previously issuedby the Virginia DEQ and the EPA. The Original Consent Decree requires MirantPotomac River and Mirant Mid-Atlantic to (1) install pollution controlequipment at the Potomac River plant and at the Morgantown plant leased byMirant 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, theOriginal Consent Decree does not obligate the Company’s subsidiaries to installspecifically designated technology, but rather to reduce emissions sufficientlyto meet the various NOx caps. Moreover, as to the required installations ofSCRs at Morgantown, Mirant Mid-Atlantic may choose not to install the technologyby the 

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applicabledeadlines and leave the units off either permanently or until such time as theSCRs are installed. The Original Consent Decree is subject to the approval ofthe district court and the Bankruptcy Court. As described below, the OriginalConsent Decree has not yet been approved and the parties have filed an amendedproposed consent decree.

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

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

On August 24, 2005, power production at all fiveunits of the Potomac River generating facility was temporarily halted inresponse to a directive from the Virginia DEQ. The decision to temporarily shutdown the facility arose from findings of a study commissioned under the orderby consent referred to above. The Virginia DEQ’s directive was based on resultsfrom the study’s computer modeling showing that air emissions from the facilityhave the potential to contribute to localized, modeled exceedances of thehealth-based NAAQS under certain conditions. On August 25, 2005, the District of Columbia Public 

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ServiceCommission filed an emergency petition and complaint with the FERC and theDepartment of Energy (the “DOE”) to prevent the shutdown of the Potomac Riverfacility. The matter remains pending before the FERC and the DOE. On September 21,2005, Mirant Potomac River commenced partial operation of one unit of theplant. On December 20, 2005, due to a determination by the DOE that anemergency situation existed with respect to a shortage of electric energy, theDOE ordered Mirant Potomac River to generate electricity at the Potomac Rivergenerating facility, as requested by PJM, during any period in which one orboth of the transmission lines serving the central Washington, D.C. area areout of service due to a planned or unplanned outage. In addition, the DOEordered Mirant Potomac River, at all other times, for electric reliabilitypurposes, to keep as many units in operation as possible and to reduce thestart-up time of units not in operation without contributing to any NAAQSexceedances. The DOE required Mirant Potomac River to submit a plan, on orbefore December 30, 2005, that met these requirements. The DOE advisedthat it would consider Mirant Potomac River’s plan in consultation with theEPA. The order further provides that Mirant Potomac River and its customersshould agree to mutually satisfactory terms for any costs incurred by it underthis order or just and reasonable terms shall be established by a supplementalorder. Certain parties filed for rehearing of the DOE order, and on February 17,2006, the DOE issued an order granting rehearing solely for purposes ofconsidering the rehearing requests further. Mirant Potomac River submitted anoperating plan in accordance with the order. On January 4, 2006, the DOEissued an interim response to Mirant Potomac River’s operating plan authorizingoperation of the units of the Potomac River generating facility on a reducedbasis, but making it possible to bring the entire plant into service withinapproximately 28 hours when necessary for reliability purposes. The DOE’s orderexpires after September 30, 2006, but Mirant Potomac River expects it willbe able to continue to operate these units after that expiration. In a letterreceived December 30, 2005, the EPA invited Mirant Potomac River and theVirginia DEQ to work with the EPA to ensure that Mirant Potomac River’soperating plan submitted to the DOE adequately addresses NAAQS issues. The EPAalso asserts in its letter that Mirant Potomac River did not immediatelyundertake action as directed by the Virginia DEQ’s August 19, 2005, letterand failed to comply with the requirements of the Virginia State ImplementationPlan established by that letter. Mirant Potomac River received a second letterfrom the EPA on December 30, 2005, requiring Mirant to provide certainrequested information as part of an EPA investigation to determine the CleanAir Act compliance status of the Potomac River generating facility. On January 9,2006, the FERC issued an order directing PJM and Pepco to file a long-term planto maintain adequate reliability in the Washington D.C. area and surroundingregion and a plan to provide adequate reliability pending implementation ofthis long-term plan. On February 8, 2006, PJM and Pepco filed theirproposed reliability plans.

On June 1, 2006, MirantPotomac River and the EPA executed an Administrative Compliance Order byConsent (the “ACO”) to resolve the EPA’s allegations that Mirant Potomac Riverviolated the Clean Air Act by not immediately shutting down all units at thePotomac River facility upon receipt of the Virginia DEQ’s August 19, 2005,letter and to assure an acceptable level of reliability to the District ofColumbia. The ACO (i) specifies certain operating scenarios and SO2 emissionslimits for the Potomac River facility, which scenarios and limits take intoaccount whether one or both of the 230kV transmission lines serving Washington,D.C. are out of service; (ii) requires the operation of trona injectionunits to help reduce SO2 emissions; and (iii) requires Mirant PotomacRiver to undertake a model evaluation study to predict ambient air qualityimpacts from the facility’s operations. In accordance with the specifiedoperating scenarios, the ACO permits the facility to operate using a dailypredictive modeling protocol. This protocol allows the facility to scheduleoperations based on whether computer modeling predicts a NAAQS exceedance,based on weather and certain operating parameters. Additional precautions suchas an alarm system and the installation of a total of six ambient SO2 monitorsin various sites near the facility by July 31, 2006, will signal potentialexceedances of the NAAQS. Mirant Potomac River reports data, including modeledand actual readings, to the EPA and the Virginia DEQ. On June 2, 2006, theDOE issued a letter modifying its January 6, 2006, order to direct MirantPotomac River to comply with the 

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ACOin order to ensure adequate electric reliability to the District of Columbia OnJuly 27, 2006, Mirant Potomac River sent a letter to the EPA to request anextension of ten business days to install the sixth ambient SO2 monitor. MirantPotomac River is operating the Potomac River facility in accordance with theACO and, depending on weather conditions, has been able to operate all fiveunits of the facility under the ACO.

*Noticeof Intent to Sue Regarding Chalk Point Emissions.**  *Mirant and Mirant Mid-Atlantic have received aletter dated June 15, 2006, from four environmental advocacy organizationsproviding notice that they intended to file suit alleging that Mirant ChalkPoint had violated the opacity limits imposed by the permits for Chalk PointUnit 3 and Unit 4 during thousands of six minute time intervals between January 2002and March 2006. The letter indicates that the organizations intend to filesuit to enjoin the violations alleged, to obtain civil penalties for past noncomplianceto the extent that liability for these violations was not discharged by thebankruptcy of Mirant Chalk Point, and to recover attorneys’ fees. On August 3,2006, Mirant, Mirant Mid-Atlantic, and Mirant Chalk Point filed a complaint inthe Bankruptcy Court seeking an injunction barring the four organizations fromfiling suit as threatened in the June 15, 2006, notice on the grounds thatthe notice and any claim for civil penalties or other monetary relief foralleged violations occurring before January 3, 2006, violated thedischarge of claims and causes of action granted Mirant Chalk Point under thePlan.

*MorgantownEmissions Observation NOV.**  *On June 30,2006, the MDE issued an NOV to Mirant Mid-Atlantic indicating that it hadfailed to comply with the air permit for the Morgantown facility by operatingthe combustion turbines at the facility for more than 168 hours withoutperforming an EPA Reference Method 9 observation of stack emissions foran 18-minute period. The NOV did notseek a specific penalty amount but noted that the violation identified couldsubject Mirant Mid-Atlantic to a civil penalty of up to $25,000 per day.

*MorgantownSO2 Exceedances.**  *Mirant Mid-Atlantic has received an NOV dated March 8,2006, asserting that on three days in June 2005 and January 2006, theMorgantown facility exceeded SO2 emission limitations specified in its airpermit. The NOV indicates that on two of those days the SO2 emission limitationwas exceeded by two different units of the Morgantown facility each day. TheNOV did not seek a specific penalty amount but noted that the violationsidentified could subject Mirant Mid-Atlantic to a civil penalty of up to $25,000per day.

*MirantLovett Coal Ash Management Facility.**  *On July 8, 2004, the New York State Departmentof Environmental Conservation (“NYSDEC”) issued an NOV for improper closure ofthe coal ash management facility (“CAMF”) at the Lovett plant. On June 1,2006, the NYSDEC and Mirant Lovett, LLC (“Mirant Lovett”) entered into an Orderon Consent that will resolve the NOV. The Order on Consent requires theapproval of the Bankruptcy Court in order to become effective. It provides forpayment by Mirant Lovett of a penalty of $20,000, with $5,000 to be paid withinthirty days of obtaining the Bankruptcy Court’s approval of the Order onConsent, and the remaining $15,000 to be suspended provided Mirant Lovettcompletes certain remedial actions specified in the Order on Consent. TheBankruptcy Court approved the Order on Consent on July 12, 2006.

*Mirant Bowline Oil StorageNOV.**  *OnJanuary 4, 2006, the NYSDEC issued an NOV asserting various violations ofregulations relating to a major oil storage facility, secondary containment,compliance report, underground storage tanks and a small oil storage facilityat the Bowline plant. The NOV identified issues with labeling, maintenance andmonitoring procedures and leak detection. The NOV did not seek a specificpenalty amount but noted that the violations identified could each subjectMirant Bowline to a civil penalty of up to $37,500 per day. On July 20,2006, the NYSDEC and Mirant Bowline executed a Consent Order resolving the NOVthat requires Mirant Bowline to pay a civil penalty of $20,000 within sixtydays of approval of the Bankruptcy Court. The Bankruptcy Court approved theConsent Order on August 1, 2006.

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

If it is approved by afinal order of the Bankruptcy Court, the Settlement Agreement entered into on May 30,2006, by the Mirant Settling Parties and the Pepco Settling Parties willresolve all claims asserted by Pepco against Mirant Potomac River arising outof the suspension of operations of the Potomac River plant in August 2005.On August 9, 2006, the Bankruptcy Court entered an order approving theSettlement Agreement, but the period within which an appeal can be filed fromthat order has not expired, and the order has not yet become a final order.Under the Settlement Agreement, Pepco would release all claims it has assertedagainst Mirant Potomac River related to the shutdown of the plant in return forthe claim Pepco receives in the Mirant bankruptcy proceeding.

***New York Tax Proceedings***

The Company’s subsidiaries that own the Bowline andLovett generating plants in New York are the petitioners in various proceedings(“Tax Certiorari Proceedings”) initially brought in the New York state courtschallenging the assessed value of those generating plants determined by theirrespective local taxing authorities. Mirant Bowline has challenged the assessedvalue of the Bowline generating facility and the resulting local taxassessments paid for tax years 1995 through 2005. 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 2005. If theTax Certiorari Proceedings result in a reduction of the assessed value of thegenerating facility at issue in each proceeding, the New York Debtor owning thefacility would be entitled to a refund with interest of any excess taxes paidfor those tax years.

On September 30, 2003, the Mirant Debtors filed amotion (the “Tax Determination Motion”) with the Bankruptcy Court requestingthat it determine what the property tax liability should have been for theBowline generating facility in each of the years 1995 through 2003 and for theLovett generating facility in each of the years 2000 through 2003. The basesfor the relief requested in the Tax Determination Motion on behalf of MirantBowline and Mirant Lovett were that the assessed values of the generatingfacilities made by the relevant taxing authorities had no justifiable basis andwere far in excess of their actual value. The local taxing authorities haveopposed the Tax Determination Motion, arguing that the Bankruptcy Court eitherlacks jurisdiction over the matters addressed by the Tax Determination Motionor should abstain from addressing those issues so that they can be addressed bythe state courts in which the Tax Certiorari Proceedings described in thepreceding paragraph were originally filed. On June 23, 2006, theBankruptcy Court entered an order indicating that it would determine thedisputed property tax liabilities in response to the Tax Determination Motionif the New York state court in which the Tax Certiorari Proceedings are pendinghad not issued a ruling by October 21, 2006. The New York state court hasindicated its intention to issue a ruling by that date.

Collectively, Mirant Bowline and Mirant Lovett havenot paid approximately $62 million assessed by local taxing authorities on theBowline and Lovett generating facilities for 2003, which fell due on September 30,2003, and January 30, 2004, approximately $53 million assessed by localtaxing authorities on the generating facilities for 2004 that fell due on September 30,2004, and January 30, 2005, and approximately $59 million assessed bylocal taxing authorities on the generating facilities for 2005 that fell due onSeptember 30, 2005, and January 30, 2006, in order to preserve theirrespective rights to offset the overpayments of taxes made in earlier yearsagainst the sums payable on account of current taxes. The failure to pay thetaxes due on September 30, 2003, January 30, 2004, September 30,2004, January 30, 2005, September 30, 2005, and January 30,2006, could subject Mirant Bowline and Mirant Lovett to additional penaltiesand interest.

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There have been no othermaterial developments in legal proceedings involving the Company or itssubsidiaries since those reported in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

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

There have been no materialchanges in risk factors since those reported in Mirant Americas Generation’sAnnual Report on Form 10-K for the year ended December 31,2005.

**Item 6.**   Exhibits

(a)          *Exhibits.*
| Exhibit  Number | ** ** | **Exhibit Name** | ** ** |
|-----------------|------------|-----------------------|------------|
|            | 2.1        | *                     |       | Amended  and Restated Joint Chapter 11 Plan of Reorganization for Registrant and its  Affiliated Debtors (designated on Form 8-K filed December 15,  2005 as Exhibit 2.1) |   |
|            | 3.1        | *                     |       | Certificate of  Formation for Mirant Americas Generation, LLC, filed with the Delaware  Secretary of State on November 1, 2001(designated in Mirant Americas  Generation, LLC Form 10-Q for the Quarter Ended  September 30, 2001 as Exhibit 3.1) |   |
|            | 3.2        | *                     |       | Limited Liability  Company Agreement for Mirant Americas Generation, LLC dated  October 31, 2001 (designated in Mirant Americas Generation, LLC  Form 10-Q for the Quarter Ended September 30, 2001 as  Exhibit 3.2) |   |
|            | 10.1       | *                     |       | Settlement  Agreement and Release dated as of May 30, 2006 by and among the Mirant  Settling Parties and the Pepco Settling Parties (Designated on Form 8-K  filed May 30, 2006 as Exhibit 10.1) |   |
|            | 31.1       |                  |       | Certification of  Chief Executive Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). |   |
|            | 31.2       |                  |       | Certification of  Chief Financial Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). |   |
|            | 32.1       |                  |       | Certification of  the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)). |   |
|            | 32.2       |                  |       | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)). |   |

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*                    Asteriskindicates exhibits incorporated by reference.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on this 11th day of August, 2006.
|        | MIRANT AMERICAS GENERATION,  LLC |
|--------|----------------------------------|
|   | By:                              | /s/  THOMAS LEGRO |
|   |                             | Thomas Legro |
|   | * *                         | *Senior  Vice President and Controller  (Principal Accounting Officer)* |

 

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