**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 September 30, 2005**

**Or**

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

**Forthe Transition Period from               to                **

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**Mirant Americas Generation, LLC**

(Exact name of registrantas specified in its charter)

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

 

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

o Yes    x No

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

o Yes    x No

Indicate by check markwhether the registrant is a shell company (as defined by Rule 12b-2of the Act).

o Yes    x No

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

 

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**TABLE OF CONTENTS**

|                                            | ** ** | ** **                                                                                  | ** ** | **Page** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
|                                       |       | Cautionary  Statement Regarding Forward-Looking Information                                 |       | 3        |
| **PART I—FINANCIAL INFORMATION** |
| Item 1.                               |       | Interim Financial Statements (unaudited):                                                   |       |     |
|                                       |       | Condensed  Consolidated Statements of Operations                                            |       | 6        |
|                                       |       | Condensed  Consolidated Balance Sheets                                                      |       | 7        |
|                                       |       | Condensed  Consolidated Statements of Member’s Equity                                  |       | 8        |
|                                       |       | Condensed  Consolidated Statements of Cash Flows                                            |       | 9        |
|                                       |       | Notes  to the Condensed Consolidated Financial Statements                                   |       | 10       |
| Item 2.                               |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |       | 37       |
| Item 3.                               |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 53       |
| Item 4.                               |       | Controls  and Procedures                                                                    |       | 53       |
| **PART II—OTHER  INFORMATION**   |
| Item 1.                               |       | Legal  Proceedings                                                                          |       | 55       |
| Item 6.                               |       | Exhibits                                                                                    |       | 59       |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGINFORMATION**

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

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

**General Factors**

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

·       failureof our assets to perform as expected;

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

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

·       marketvolatility or other market conditions that could increase our affiliates’obligations to post collateral beyond amounts which are expected;

·       ourinability to access effectively the over-the-counter (“OTC”) and exchange-basedcommodity markets or changes in commodity market liquidity or other commoditymarket conditions, which may affect our ability to engage in asset managementactivities as expected;

·       strikes,union activity or labor unrest;

·       weatherand other natural phenomena, including the effects of Hurricane Katrina andHurricane Rita;

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

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

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

·       pricemitigation strategies employed by independent system operators (“ISOs”) orregional transmission operators (“RTOs”) that result in a failure to compensateour generation units adequately for all of their costs;

·       volatilityin our gross margin as a result of our accounting for financial instrumentsused in our asset management activities and volatility in our cash flow fromoperations resulting from working capital requirements, including collateral,to support our asset management activities;

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

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

·       oursubstantial 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; and

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

**Bankruptcy-Related Factors**

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

·       theactions and decisions of our creditors and of other third parties withinterests in the voluntary petitions for reorganization filed with the U.S.Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “BankruptcyCourt”) on July 14, 2003 and July 15, 2003 (collectively, the “PetitionDate”), August 18, 2003, October 3, 2003 and November 18, 2003,by Mirant Corporation (“Mirant”) and substantially all of its wholly-ownedand certain non wholly-owned U.S. subsidiaries (“Mirant Debtors”) underChapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”),including actions taken by our creditors and other third parties with respectto our proposed plan of reorganization, filed with the Bankruptcy Court on January 19,2005, as amended on March 25, 2005 and September 22, 2005, and anysubsequent amendments thereto (the “Plan”);

·       theMirant Debtors’ ability to satisfy the conditions precedent to the effectivenessof the proposed Plan;

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

·       theinstructions, orders and decisions of the Bankruptcy Court, the U.S. DistrictCourt for the Northern District of Texas, the U.S. Court of Appeals for theFifth Circuit, the Federal Energy Regulatory Commission (the “FERC”) and otherlegal and administrative proceedings, settlements, investigations and claims;

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

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

·       thedisposition of unliquidated claims against us;

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

·       ourability to attract and retain key employees;

·       possibledecisions by the Mirant Debtors’ pre-petition creditors who under the proposedPlan are entitled to receive Mirant common stock upon emergence from bankruptcyand therefore will have the right to select Mirant’s board members andinfluence certain aspects of our business operations;

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

·       the effects of changes in our organizationalstructure in conjunction with our emergence from Chapter 11 protection; and

·       theduration of our Chapter 11 proceedings.

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

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

**Factorsthat Could Affect Future Performance**

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

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**

| ** **                                                                                 | ** ** | **Three Months**                                    | ** ** | **Nine Months**                                     | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **Ended September 30,**                        | ** ** | **Ended September 30,**                        | ** ** |
| ** **                                                                                 | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| ** **                                                                                 | ** ** | **(in millions)**                                   | ** ** |
| **Operating Revenues:**                                                                    |       |                                                     |       | ** **                                               |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |
| Affiliate                                                                                  | ** ** | ** **                                               | **$**      | **292**                                                  | ** ** |   |   | $ | 513 |   | ** ** | ** ** | **$** | **1,122** | ** ** |   |   | $ | 1,360 |   |   |
| Nonaffiliate                                                                               | ** ** | ** **                                               | **44**     | ** **                                               |       |   | 89 |   | ** ** | ** ** | **129** | ** ** |   |   | 258 |   |   |
| Total operating revenues                                                                   | ** ** | ** **                                               | **336**    | ** **                                               |       |   | 602 |   | ** ** | ** ** | **1,251** | ** ** |   |   | 1,618 |   |   |
| Cost of fuel, electricity and other  products—affiliate                               | ** ** | ** **                                               | **460**    | ** **                                               |       |   | 282 |   | ** ** | ** ** | **885** | ** ** |   |   | 833 |   |   |
| Cost of fuel,  electricity and other products—nonaffiliate                            | ** ** | ** **                                               | **50**     | ** **                                               |       |   | 61 |   | ** ** | ** ** | **138** | ** ** |   |   | 150 |   |   |
| Total cost of fuel, electricity and other products                                         | ** ** | ** **                                               | **510**    | ** **                                               |       |   | 343 |   | ** ** | ** ** | **1,023** | ** ** |   |   | 983 |   |   |
| **Gross Margin**                                                                           | ** ** | ** **                                               | **(174**   | **)**                                                    |       |   | 259 |   | ** ** | ** ** | **228** | ** ** |   |   | 635 |   |   |
| **Operating  Expenses:**                                                                   | ** ** | ** **                                               | ** ** | ** **                                               |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |
| Generation  facilities rent                                                                | ** ** | ** **                                               | **24**     | ** **                                               |       |   | 30 |   | ** ** | ** ** | **75** | ** ** |   |   | 78 |   |   |
| Depreciation and  amortization                                                             | ** ** | ** **                                               | **23**     | ** **                                               |       |   | 23 |   | ** ** | ** ** | **68** | ** ** |   |   | 67 |   |   |
| Operations and  maintenance—affiliate                                                 | ** ** | ** **                                               | **56**     | ** **                                               |       |   | 65 |   | ** ** | ** ** | **177** | ** ** |   |   | 203 |   |   |
| Operations and  maintenance—nonaffiliated                                             | ** ** | ** **                                               | **65**     | ** **                                               |       |   | 44 |   | ** ** | ** ** | **192** | ** ** |   |   | 166 |   |   |
| Loss (gain) on  sales of assets, net                                                       | ** ** | ** **                                               | **—** | ** **                                               |       |   | 65 |   | ** ** | ** ** | **(1** | **)** |   |   | 65 |   |   |
| Total operating expenses                                                                   | ** ** | ** **                                               | **168**    | ** **                                               |       |   | 227 |   | ** ** | ** ** | **511** | ** ** |   |   | 579 |   |   |
| **Operating (Loss) Income**                                                                | ** ** | ** **                                               | **(342**   | **)**                                                    |       |   | 32 |   | ** ** | ** ** | **(283** | **)** |   |   | 56 |   |   |
| **Other  (Expense) Income, net:**                                                          | ** ** | ** **                                               | ** ** | ** **                                               |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |
| Interest expense—affiliate                                                            | ** ** | ** **                                               | **(5**     | **)**                                                    |       |   | (1 | ) | ** ** | ** ** | **(9** | **)** |   |   | (3 | ) |   |
| Interest expense—nonaffiliate                                                         | ** ** | ** **                                               | **(560**   | **)**                                                    |       |   | — |   | ** ** | ** ** | **(561** | **)** |   |   | (1 | ) |   |
| Interest income—affiliate                                                             | ** ** | ** **                                               | **2**      | ** **                                               |       |   | — |   | ** ** | ** ** | **2** | ** ** |   |   | — |   |   |
| Other, net                                                                                 | ** ** | ** **                                               | **—** | ** **                                               |       |   | — |   | ** ** | ** ** | **2** | ** ** |   |   | 1 |   |   |
| Total other expense, net                                                                   | ** ** | ** **                                               | **(563**   | **)**                                                    |       |   | (1 | ) | ** ** | ** ** | **(566** | **)** |   |   | (3 | ) |   |
| **(Loss) Income from Continuing Operations Before Reorganization  Items and Income Taxes** | ** ** | ** **                                               | **(905**   | **)**                                                    |       |   | 31 |   | ** ** | ** ** | **(849** | **)** |   |   | 53 |   |   |
| Reorganization items, net                                                                  | ** ** | ** **                                               | **37**     | ** **                                               |       |   | 23 |   | ** ** | ** ** | **(98** | **)** |   |   | 67 |   |   |
| Provision for  income taxes                                                                | ** ** | ** **                                               | **4**      | ** **                                               |       |   | 2 |   | ** ** | ** ** | **10** | ** ** |   |   | 3 |   |   |
| **Net  (Loss) Income**                                                                     | ** ** | ** **                                               | **$**      | **(946**                                                 | **)**      |   |   | $ | 6 |   | ** ** | ** ** | **$** | **(761** | **)** |   |   | $ | (17 | ) |   |

 

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

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**MIRANT AMERICASGENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDBALANCE SHEETS**

| ** **                                        | ** ** | **At September 30,** | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **2005**                       | ** ** | **2004**                      | ** ** |
| ** **                                        | ** ** | **(Unaudited)**                | ** ** | ** **                    | ** ** |
| ** **                                        | ** ** | **(in millions)**         | ** ** |
| **Assets**                                        | ** ** |                           | ** ** | ** **                    |       |   | ** ** | ** ** |   |
| **Current Assets:**                               |       |                           | ** ** | ** **                    |       |   |   | ** ** |   |
| Cash and cash  equivalents                        | ** ** |                           | **$**      | **159**                       | ** ** |   |   | $ | 414 | ** ** |   |
| Funds on deposit                                  | ** ** |                           | **54**     | ** **                    |       |   | — | ** ** |   |
| Receivables:                                      |       |                           | ** ** | ** **                    |       |   |   | ** ** |   |
| Affiliate                                         | ** ** |                           | **181**    | ** **                    |       |   | 246 | ** ** |   |
| Customer accounts                                 | ** ** |                           | **3**      | ** **                    |       |   | 11 | ** ** |   |
| Notes receivable  from affiliate                  | ** ** |                           | **482**    | ** **                    |       |   | — | ** ** |   |
| Price risk  management assets—affiliate      | ** ** |                           | **—** | ** **                    |       |   | 11 | ** ** |   |
| Prepaid rent and  other payments                  | ** ** |                           | **123**    | ** **                    |       |   | 133 | ** ** |   |
| Inventory                                         | ** ** |                           | **156**    | ** **                    |       |   | 162 | ** ** |   |
| Assets held for  sale                             | ** ** |                           | **8**      | ** **                    |       |   | 8 | ** ** |   |
| Other current  assets                             | ** ** |                           | **21**     | ** **                    |       |   | 35 | ** ** |   |
| Total current  assets                             | ** ** |                           | **1,187**  | ** **                    |       |   | 1,020 | ** ** |   |
| **Property,  Plant and Equipment, net**           | ** ** |                           | **2,101**  | ** **                    |       |   | 2,101 | ** ** |   |
| **Noncurrent Assets:**                            |       |                           | ** ** | ** **                    |       |   |   | ** ** |   |
| Funds on deposit                                  | ** ** |                           | **5**      | ** **                    |       |   | — | ** ** |   |
| Other intangible  assets, net                     | ** ** |                           | **201**    | ** **                    |       |   | 207 | ** ** |   |
| Accounts  receivable from affiliate               | ** ** |                           | **6**      | ** **                    |       |   | — | ** ** |   |
| Notes receivable  from affiliate                  | ** ** |                           | **478**    | ** **                    |       |   | 478 | ** ** |   |
| Price risk  management assets—affiliate      | ** ** |                           | **18**     | ** **                    |       |   | 1 | ** ** |   |
| Prepaid rent                                      | ** ** |                           | **190**    | ** **                    |       |   | 197 | ** ** |   |
| Other noncurrent  assets                          | ** ** |                           | **60**     | ** **                    |       |   | 26 | ** ** |   |
| Total noncurrent  assets                          | ** ** |                           | **958**    | ** **                    |       |   | 909 | ** ** |   |
| **Total  Assets**                                 | ** ** |                           | **$**      | **4,246**                     | ** ** |   |   | $ | 4,030 | ** ** |   |
| **Liabilities  and Member’s Equity**         |       |                           | ** ** | ** **                    |       |   |   | ** ** |   |
| **Current Liabilities:**                          |       |                           | ** ** | ** **                    |       |   |   | ** ** |   |
| Accounts payable  and accrued liabilities         | ** ** |                           | **$**      | **56**                        | ** ** |   |   | $ | 51 | ** ** |   |
| Payable to  affiliate                             | ** ** |                           | **45**     | ** **                    |       |   | 52 | ** ** |   |
| Price risk  management liabilities—affiliate | ** ** |                           | **509**    | ** **                    |       |   | 62 | ** ** |   |
| Revenue subject to  refund                        | ** ** |                           | **—** | ** **                    |       |   | 5 | ** ** |   |
| Accrued taxes—affiliate                      | ** ** |                           | **57**     | ** **                    |       |   | 51 | ** ** |   |
| Accrued taxes—nonaffiliate                   | ** ** |                           | **170**    | ** **                    |       |   | 122 | ** ** |   |
| Other current  liabilities                        | ** ** |                           | **68**     | ** **                    |       |   | 8 | ** ** |   |
| Total current  liabilities                        | ** ** |                           | **905**    | ** **                    |       |   | 351 | ** ** |   |
| **Noncurrent Liabilities:**                       |       |                           | ** ** | ** **                    |       |   |   | ** ** |   |
| Price risk  management liabilities—affiliate | ** ** |                           | **5**      | ** **                    |       |   | 1 | ** ** |   |
| Other noncurrent  liabilities                     | ** ** |                           | **31**     | ** **                    |       |   | 46 | ** ** |   |
| Total noncurrent  liabilities                     | ** ** |                           | **36**     | ** **                    |       |   | 47 | ** ** |   |
| **Liabilities  Subject to Compromise**            | ** ** |                           | **3,872**  | ** **                    |       |   | 3,438 | ** ** |   |
| **Member’s Equity:**                         |       |                           | ** ** | ** **                    |       |   |   | ** ** |   |
| Member’s interest                            | ** ** |                           | **3,853**  | ** **                    |       |   | 3,853 | ** ** |   |
| Accumulated  deficit                              | ** ** |                           | **(4,420** | **)**                         |       |   | (3,659 | ) |   |
| Total member’s  equity                       | ** ** |                           | **(567**   | **)**                         |       |   | 194 | ** ** |   |
| **Total  Liabilities and Member’s Equity**   | ** ** |                           | **$**      | **4,246**                     | ** ** |   |   | $ | 4,030 | ** ** |   |

 

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

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDSTATEMENTS of MEMBER’S EQUITY (UNAUDITED)**

| ** **                            | ** ** | **Member’s**      | ** ** | **Accumulated** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------|------------|
| ** **                            | ** ** | **Interest**           | ** ** | **Deficit**     | ** ** |
| ** **                            | ** ** | **(in millions)** | ** ** |
| Balance,  December 31, 2004      |       |                   | $          | 3,853           |       |   |   | $ | (3,659 | ) |   |
| Net loss                              |       |                   | —     |            |       |   | (761 | ) |   |
| **Balance,  September 30, 2005** | ** ** | ** **             | **$**      | **3,853**       |       | ** ** | ** ** | **$** | **(4,420** | **)** |   |

 

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

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**MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)(Debtor-in-Possession)CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

| ** **                                                                                      | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| ** **                                                                                      | ** ** | **(in millions)**                                   | ** ** |
| **Cash Flows from Operating Activities:**                                                       |       |                                                     |       | ** ** |   |   |   | ** ** |   |
| Net loss                                                                                        | ** ** | ** **                                               | **$**      | **(761** | **)** |   |   | $ | (17 | ) |   |
| Adjustments to reconcile net loss to net cash  provided by operating activities:                |       |                                                     |       | ** ** |   |   |   | ** ** |   |
| Depreciation and  amortization                                                                  | ** ** | ** **                                               | **68**     | ** ** |   |   | 67 | ** ** |   |
| Unrealized losses (gains)  on price risk management assets and  liabilities—affiliate, net | ** ** | ** **                                               | **445**    | ** ** |   |   | 44 |   |   |
| Non-cash charge for  reorganization items                                                       | ** ** | ** **                                               | **(134**   | **)** |   |   | 40 |   |   |
| Deferred income taxes                                                                           | ** ** | ** **                                               | **3**      | ** ** |   |   | (3 | ) |   |
| (Gain) loss on sales of  assets, net                                                            | ** ** | ** **                                               | **(1**     | **)** |   |   | 65 |   |   |
| Post-petition interest                                                                          | ** ** | ** **                                               | **561**    | ** ** |   |   | — |   |   |
| Changes in certain assets and liabilities:                                                      |       |                                                     |       | ** ** |   |   |   |   |   |
| Affiliate receivables                                                                           | ** ** | ** **                                               | **(14**    | **)** |   |   | (58 | ) |   |
| Customer accounts  receivable                                                                   | ** ** | ** **                                               | **7**      | ** ** |   |   | (4 | ) |   |
| Other current assets                                                                            | ** ** | ** **                                               | **—** | ** ** |   |   | (5 | ) |   |
| Inventory                                                                                       | ** ** | ** **                                               | **26**     | ** ** |   |   | 1 |   |   |
| Prepaid rent                                                                                    | ** ** | ** **                                               | **8**      | ** ** |   |   | 11 |   |   |
| Other assets                                                                                    | ** ** | ** **                                               | **(36**    | **)** |   |   | 13 |   |   |
| Accounts payable and  accrued liabilities                                                       | ** ** | ** **                                               | **10**     | ** ** |   |   | (27 | ) |   |
| Payable to affiliate                                                                            | ** ** | ** **                                               | **70**     | ** ** |   |   | 100 |   |   |
| Accrued taxes—affiliate                                                                    | ** ** | ** **                                               | **(1**     | **)** |   |   | 4 |   |   |
| Accrued taxes—nonaffiliate                                                                 | ** ** | ** **                                               | **38**     | ** ** |   |   | 51 |   |   |
| Other liabilities                                                                               | ** ** | ** **                                               | **4**      | ** ** |   |   | — |   |   |
| Total adjustments                                                                               | ** ** | ** **                                               | **1,054**  | ** ** |   |   | 299 |   |   |
| Net cash provided by  operating activities                                                      | ** ** | ** **                                               | **293**    | ** ** |   |   | 282 |   |   |
| **Cash Flows from Investing Activities:**                                                       |       |                                                     |       | ** ** |   |   |   |   |   |
| Capital expenditures                                                                            | ** ** | ** **                                               | **(70**    | **)** |   |   | (48 | ) |   |
| Issuance of notes  receivables from affiliate                                                   | ** ** | ** **                                               | **(482**   | **)** |   |   | (33 | ) |   |
| Proceeds from the sale  of assets                                                               | ** ** | ** **                                               | **4**      | ** ** |   |   | — |   |   |
| Net cash used in  investing activities                                                          | ** ** | ** **                                               | **(548**   | **)** |   |   | (81 | ) |   |
| **Cash Flows from Financing Activities:**                                                       |       |                                                     |       | ** ** |   |   |   | ** ** |   |
| Net cash provided by  financing activities                                                      | ** ** | ** **                                               | **—** | ** ** |   |   | — | ** ** |   |
| **Net  (Decrease) increase in Cash and Cash Equivalents**                                       | ** ** | ** **                                               | **(255**   | **)** |   |   | 201 | ** ** |   |
| **Cash and Cash Equivalents,  beginning of period**                                             | ** ** | ** **                                               | **414**    | ** ** |   |   | 324 | ** ** |   |
| **Cash and Cash Equivalents, end  of period**                                                   | ** ** | ** **                                               | **$**      | **159** | ** ** |   |   | $ | 525 | ** ** |   |
| **Supplemental Cash Flow Disclosures:**                                                         |       |                                                     |       | ** ** |   |   |   | ** ** |   |
| Cash refund received for  income taxes                                                          | ** ** | ** **                                               | **$**      | **—** | ** ** | ** ** | ** ** | $ | (1 | ) |   |
| Cash paid for interest                                                                          | ** ** | ** **                                               | **$**      | **10** | ** ** | ** ** | ** ** | $ | 4 |   |   |
| Cash paid for reorganization items                                                              | ** ** | ** **                                               | **$**      | **47** | ** ** | ** ** | ** ** | $ | 49 |   |   |

 

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

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**MIRANTAMERICAS GENERATION, LLC AND SUBSIDIARIES(Debtor-in-Possession)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2005 and 2004**

**A. Description of Business**

***Overview***

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

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

***Basis of Presentation***

The accompanying condensed consolidated financialstatements (unaudited) of Mirant Americas Generation and its wholly-ownedsubsidiaries have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interim financial information and with theinstructions for Form 10-Q and Article 10 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 consolidated financial statements andfootnotes thereto included in the Company’s Form 10-K for the yearended December 31, 2004.

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

***Recently Adopted Accounting Standards***

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 153 (“SFAS 153”), *Exchanges ofProductive Assets: an*

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*Amendment of APB Opinion No. 29.* SFAS 153 addresses the measurement of exchangesof certain nonmonetary assets. It amends APB Opinion No. 29, *Accounting for Nonmonetary Exchanges*, and requires thatnonmonetary exchanges (except for certain exchanges of products or propertyheld for sale in the ordinary course of business) be accounted for at the fairvalue of the assets exchanged, with gains or losses being recognized, if thefair value is determinable within reasonable limits and the transaction hascommercial substance. The provisions of SFAS 153 are effective for transactionsinvolving nonmonetary exchanges that occur in fiscal periods beginning after June 15,2005. The Company has determined that certain exchanges of emissions creditsthat the Company may periodically transact would qualify as nonmonetaryexchanges under SFAS 153. For the quarter ended September 30, 2005, theCompany identified certain transactions involving exchanges of emissionscredits of one vintage year for a different year. Because the fair value of theassets exchanged approximated the fair value of the assets received in eachtrade, no material gain or loss was recorded. As a result, the adoption of SFAS153 had no impact on the Company’s consolidated results of operations, cashflows or financial position as of September 30, 2005.

***New Accounting Standard Not Yet Adopted***

In March 2005, theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations* (“FIN 47”). Theinterpretation requires companies to recognize a liability for the fair valueof a legal obligation to perform asset retirement activities that areconditional on a future event if the amount can be reasonably estimated. FIN 47is effective for fiscal years ending after December 15, 2005. The Companywill adopt the provisions of FIN 47 on the earlier of its emergence from bankruptcyor the effective date of FIN 47. The Company has identified potentialliabilities for additional evaluation, but has not yet quantified the impact ofFIN 47 on its financial statements.

**B. Bankruptcy Related Disclosures**

On January 19, 2005, Mirant Corporation andsubstantially all of its wholly-owned and certain non wholly-ownedU.S. subsidiaries (“Mirant Debtors”) filed a proposed Plan and DisclosureStatement (as amended, the “Disclosure Statement”) with the Bankruptcy Court. AFirst Amended Plan and a First Amended Disclosure Statement were filed on March 25,2005.

On September 7, 2005, the Mirant Debtors reachedan agreement with the statutory committees representing the key constituenciesin their Chapter 11 case, including the committees representing the unsecuredcreditors of Mirant, the unsecured creditors of Mirant Americas Generation andthe equity security holders of Mirant (collectively, the “Statutory Committees”),regarding the terms upon which the Mirant Debtors will emerge from bankruptcyprotection. A Second Amended Plan and a Second Amended Disclosure Statementwere filed on September 22, 2005 and subsequently updated on September 30,2005. On September 30, 2005, the Bankruptcy Court approved the DisclosureStatement and authorized its use in connection with the solicitation of voteson the proposed Plan from those creditors, security holders and interestholders who are entitled to vote on the proposed Plan.

The proposed Plansets forth the proposed structure of the Mirant Debtors at emergence andoutlines how the claims of creditors and stockholders are proposed to betreated. The proposed Plan is built around the following key elements:

·       thebusiness of the Mirant Debtors will continue to be operated in substantiallyits current form, subject to (1) certain internal structural changes thatthe Mirant Debtors believe will improve operational efficiency, facilitate andoptimize their ability to meet financing requirements and accommodate theenterprise’s debt structure as contemplated at emergence and (2) organizinga new parent entity for the Mirant Debtors’ ongoing business operations (“NewMirant”);

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·       theconsolidated business will have approximately $4.258 billion of debt, comprisedof (1) $1.063 billion of debt obligations associated with non-debtorinternational subsidiaries of Mirant; (2) $145 million of miscellaneousdomestic indebtedness; (3) $1.7 billion of reinstated debt at MirantAmericas Generation; and (4) $1.35 billion of new debt issued by MirantNorth America, LLC (“Mirant North America”), a newly organized holding companysubsidiary of Mirant Americas Generation, in partial satisfaction of certainexisting Mirant Americas Generation debt. The foregoing amounts exclude (a) theobligations of Mirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) under thelease-financing transactions covering the Morgantown Power Station and theDickerson Power Station and (b) any amounts drawn on a new $1 billionsenior secured revolving credit facility that is part of the exit financing tobe provided to Mirant North America under the Plan;

·       insettlement of the intercompany claims and potential causes of action arisingfrom the complex historical relationships between and among the Mirant Debtors,(1) the estates of the Mirant Debtors (excluding Mirant AmericasGeneration and its debtor subsidiaries) (collectively, the “Consolidated MirantDebtors”) will be treated as comprising a single estate, (a) eliminatingany distributions under the Plan in respect of intercompany claims between andamong the Consolidated Mirant Debtors and (b) limiting a creditor holdinga base claim against a Consolidated Mirant Debtor and a guarantee of such baseclaim from another Consolidated Mirant Debtor to a single recovery thereon; (2) theestates of Mirant Americas Generation and its debtor subsidiaries(collectively, the “Consolidated Mirant Americas Generation Debtors”) will betreated as a single estate, eliminating intercompany claim distributions andmultiple recoveries on guarantee claims, as described in (a) and (b) abovewith respect to the Consolidated Mirant Debtors; and (3) all claims andactions between the Consolidated Mirant Debtors and the Consolidated MirantAmericas Generation Debtors will be released;

·       theholders of unsecured claims against the Consolidated Mirant Debtors (excludingcertain de minimis claims that will be paid in cash) will receive (1) apro rata share of 96.25% of the shares of New Mirant common stock to be issuedunder the Plan, excluding: (a) certain shares to be issued to the holdersof certain claims against the Consolidated Mirant Americas Generation Debtors,as described below, and (b) the shares reserved for issuance pursuant tothe New Mirant employee stock programs; and (2) the right to receive cashpayments equal to 50% of the cash recoveries realized by New Mirant, if any, inconnection with certain designated avoidance actions, subject to certainadjustments for offsets, expenses and certain tax consequences to New Mirant;

·       asettlement of the contractual subordination provisions among the holders ofcertain senior unsecured obligations of Mirant and the beneficial holders ofcertain subordinated notes of Mirant pursuant to which, in lieu of the sharesof New Mirant common stock they would otherwise receive absent subordination, (1) theholders of such subordinated notes will receive (a) 3.5% of the New Mirantcommon stock issued under the Plan (which shares are included in the 96.25%referred to in the immediately preceding paragraph and subject to theexclusions noted above for Mirant’s general unsecured creditors, as applicable)and (b) warrants to purchase an additional 5% of New Mirant common stock,and (2) the holders of such subordinated notes will share pari passu withMirant’s general unsecured creditors in the recoveries under the designatedavoidance actions, if any;

·       theoutstanding equity interests in Mirant will be cancelled and the holdersthereof will receive (1) 3.75% of the shares of New Mirant common stock(subject to the exclusions noted above for Mirant’s general unsecured creditorsas applicable), (2) warrants to purchase up to an additional 10% of theNew Mirant common stock and (3) the right to receive cash payments equalto 50% of the cash recoveries realized by New Mirant, if any, in connection withcertain designated avoidance 

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actions, subject tocertain adjustments for offsets, expenses and certain tax consequences to NewMirant;

·       theholders of unsecured claims against the Consolidated Mirant Americas GenerationDebtors will be paid in full (including post petition interest) through (1) theissuance to general unsecured creditors and holders of the Mirant AmericasGeneration revolving credit facilities and senior notes maturing in 2006 and2008 of (a) $1.35 billion cash proceeds from third-party financingtransactions or, at the option of the Mirant Debtors, new debt securities ofMirant North America and (b) receipt of a pro rata share of 2.3% of theshares of New Mirant common stock issued under the Plan, excluding sharesreserved for issuance pursuant to the New Mirant employee stock programs, and (2) thereinstatement of the Mirant Americas Generation senior notes maturing in 2011,2021 and 2031;

·       inconsideration of the agreement of the committee representing the unsecuredcreditors of Mirant Americas Generation to support the Plan and to help ensurethe feasibility of the Plan, the establishment of certain additional covenantprotections with respect to the Mirant Americas Generation senior notesmaturing in 2011, 2021 and 2031;

·       tofurther support the feasibility of the Plan with respect to the ConsolidatedMirant Americas Generation Debtors, Mirant will contribute (or cause to becontributed) value to Mirant Americas Generation, including (1) thetransfer of Mirant’s trading and marketing business to Mirant North America(subject to the transfer to New Mirant or Mirant Americas, Inc. (“MirantAmericas”) of $250 million of cash and certain receivables), (2) thetransfer of Mirant Peaker, LLC (“Mirant Peaker”) and Mirant Potomac River, LLC (“MirantPotomac River”) to Mirant Mid-Atlantic, (3) the transfer of MirantZeeland, LLC to Mirant North America and (4) commitments to makeprospective capital contributions of $150 million for refinancing of certainMirant Americas Generation debt that matures in 2011 and, under certaincircumstances, up to $265 million to Mirant North America for environmentalcapital expenditures;

·       theMirant Debtors that own our New York assets, including Mirant Lovett, LLC (“MirantLovett”), Mirant Bowline, LLC (“Mirant Bowline”) and Mirant NY-Gen, LLC (“MirantNY-Gen”) will remain in Chapter 11 until the resolution of issues arising outof the sinkhole at Swinging Bridge owned by Mirant NY-Gen and the related floodstudy and the disputes regarding the ad valorem real property taxes for theBowline and Lovett facilities are settled and resolved on terms that permit thefeasible operation of these assets;

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

·       theMirant Debtors’ obligations under all agreements with Potomac Electric PowerCompany (“PEPCO”) will be performed on an interim basis pending a finaldetermination of the Mirant Debtors’ right to reject, recharacterize, avoid orrecover payments under a contractual arrangement (the “Back-to-Back Agreement”),the Asset Purchase and Sale Agreement (“APSA”) and certain Assignment andAssumption Agreements (collectively the “Assumption/Assignment Agreement”)entered into by various Mirant Debtors in December 2000 related to theasset purchases that were the subject of the APSA. If the Mirant Debtors do notreject, recharacterize, avoid or recover payments under the Back-to-BackAgreement, APSA and the Assumption/Assignment Agreement, and such agreementsconstitute executory contracts under the Bankruptcy Code, the Mirant Debtorswill assume such agreements (and the Back-to-Back Agreement, APSA and theAssumption/Assignment Agreement will be assigned to Mirant Power Purchase, LLC(“Mirant 

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Power Purchase”) andguaranteed by New Mirant) and any cure obligations will be performed pursuantto the Plan.

Between April 18, 2005 and June 27,2005, the Mirant Debtors, the Statutory Committees and representatives ofcertain other interests were party to proceedings before the Bankruptcy Courtwith respect to the valuation of the Mirant Debtors. Pursuant to a letter datedJune 30, 2005, as subsequently amended, the Bankruptcy Court instructedthe Mirant Debtors and their financial advisors, The Blackstone Group, to makecertain modifications to the business plan of the Mirant Debtors and thevaluation report prepared by The Blackstone Group. The Bankruptcy Courtindicated that it intended to use the modified business plan and valuationreport to generate an enterprise value for the Mirant Debtors which could beused for purposes of confirmation of a plan of reorganization for the MirantDebtors. Due to the agreement reached on September 7, 2005, the BankruptcyCourt ordered that the previously ordered modifications to the business planand valuation report not be completed and stated that it would not issue aformal opinion regarding valuation unless required to do so in connection withconfirmation of the Plan.

Pursuant to the BankruptcyCourt’s order of September 30, 2005, approving the Disclosure Statement,the Mirant Debtors mailed solicitation materials to all known holders ofimpaired claims and equity interests against the Mirant Debtors entitled tovote on the Plan. In addition, the Bankruptcy Court fixed December 1, 2005as the date for the hearing to consider confirmation of the Plan and relatedmatters. Properly executed ballots and any objections to the Plan are due by November 10,2005. Until such time as the Plan is confirmed by the Bankruptcy Court, it isnot possible to accurately predict if or when some or all of the Mirant Debtorsmay emerge from bankruptcy protection under Chapter 11.

***Accounting for Reorganization***

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

*Interest Expense*

TheMirant Debtors discontinued recording interest on liabilities subject tocompromise on the Petition Date and since filing for bankruptcy have disclosedthe contractual interest on liabilities subject to compromise in excess ofreported interest for each period. In the third quarter of 2005, the Companydetermined that it was probable that contractual interest on liabilitiessubject to compromise from the Petition Date would be incurred for certainclaims expected to be allowed under the Plan. As a result, the Company recordedinterest expense of approximately $560 million on liabilities subject tocompromise. This amount represents interest from the Petition Date through September 30,2005, and is included in accounts payable and accrued liabilities in the tablebelow. The interest amount was calculated based on the provisions of theproposed Plan. The $560 million expense amount includes approximately $373million related to Mirant Americas Generation senior notes maturing in 2011,2021 and 2031, which would be reinstated under the proposed Plan.

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*ReorganizationItems*

Reorganization items, net represents expense or incomeamounts that were recorded in the consolidated financial statements as a resultof the bankruptcy proceedings primarily related to estimated claims andprofessional fees for accounting and legal services. For the three and ninemonths ended September 30, 2005, the Company recorded a net expense of $37million and a net gain of $98 million, respectively, and net expenses of$23 million and $67 million for the same periods in 2004, in the accompanyingunaudited condensed consolidated statements of operations.Forthe three and nine months ended September 30, 2005 and 2004, the followingrepresents the significant items within this category (in millions):

| ** **                                    | ** ** | **Three Months Ended**                              | ** ** | **Nine Months Ended**                          | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                    | ** ** | **September 30,**                                   | ** ** | **September 30,**                                   | ** ** |
| ** **                                    | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Professional fees  and administrative expense |       |                                                     | $          | 12                                                       |       |   |   | $ | 9 |   |   |   | $ | 47 |   |   |   | $ | 30 |   |   |
| Estimated claims                              |       |                                                     | 30         |                                                     |       |   | 15 |   |   |   | (134 | ) |   |   | 40 |   |   |
| Interest income,  net                         |       |                                                     | (5         | )                                                        |       |   | (1 | ) |   |   | (11 | ) |   |   | (3 | ) |   |
| Total                                         |       |                                                     | $          | 37                                                       |       |   |   | $ | 23 |   |   |   | $ | (98 | ) |   |   | $ | 67 |   |   |

 

*Liabilities Subjectto Compromise*

Theamounts subject to compromise consisted of the following items(in millions):

| ** **                                                                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Items, absent the  bankruptcy filings, that would have been considered current at:    |       |                         |       |                        |       |   |   |   |   |
| Accounts payable and accrued liabilities—affiliate                               |       |                         | $          | 233                         |       |   |   | $ | 169 |   |   |
| Accounts payable and accrued liabilities—nonaffiliate                            |       |                         | 838        |                        |       |   | 498 |   |   |
| Current portion of long-term debt                                                     |       |                         | 800        |                        |       |   | 300 |   |   |
| Items, absent the  bankruptcy filings, that would have been considered noncurrent at: |       |                         |       |                        |       |   |   |   |   |
| Long-term debt                                                                        |       |                         | 2,000      |                        |       |   | 2,470 |   |   |
| Other noncurrent liabilities                                                          |       |                         | 1          |                        |       |   | 1 |   |   |
| Total                                                                                 |       |                         | $          | 3,872                       |       |   |   | $ | 3,438 |   |   |

 

***PEPCO Litigation***

In 2000, Mirant purchased certain power generatingassets and certain other assets from PEPCO, including certain power purchaseagreements (“PPAs”). Under the terms of the APSA, Mirant and PEPCO entered into the Back-to-Back Agreement with respect tocertain PPAs, including PEPCO’s long-term PPAs with Ohio Edison Company (“Ohio Edison”) and Panda-BrandywineL.P. (“Panda”), under which (1) PEPCO agreed to resell to Mirant allcapacity, energy, ancillary services and other benefits to which it is entitledunder those agreements; and (2) Mirant agreed to pay PEPCO each month allamounts due from PEPCO to the sellers under those agreements for theimmediately preceding month associated with such capacity, energy, ancillaryservices and other benefits. The Panda and Ohio Edison PPAs run until2021 and December 2005, respectively. Under the Back-to-Back Agreement,Mirant is obligated to purchase power from PEPCO at prices that are typicallyhigher than the market prices for power. Mirant assigned its rights and obligationsunder the Back-to-Back Agreement to Mirant Americas Energy Marketing. In theChapter 11 cases of the Mirant Debtors, PEPCO has asserted that an Assignmentand Assumption Agreement dated December 19, 2000 that includes as partiesPEPCO, various subsidiaries of the Company, Mirant Potomac River, and MirantAmericas Energy Marketing, causes the Company’s subsidiaries that are partiesto the agreement to be jointly and severally liable to PEPCO for various 

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obligations, including theobligations under the Back-to-Back Agreement. PEPCO also asserts that theAssignment and Assumption Agreement causes the Company’s subsidiaries to bejointly and severally liable for a claim of $105 million filed by PEPCO in theChapter 11 cases related to modifications agreed to between Mirant AmericasEnergy Marketing and PEPCO related to the Transition Power Agreements in placebetween PEPCO and Mirant Americas Energy Marketing through January 2005.Mirant Americas Generation is disputing this interpretation of the Assignmentand Assumption Agreement in proceedings before the Bankruptcy Court, but theoutcome of those proceedings is uncertain. If the Company’s subsidiaries aredetermined to be jointly and severally liable for the obligations of Mirant andMirant Americas Energy Marketing to PEPCO under the Assignment and AssumptionAgreement, then the claim related to the Transition Power Agreements and theproceedings described below involving the Back-to-Back Agreementcould have an adverse effect upon the Company’s financial condition, althoughsuch an effect would be mitigated by Mirant also having responsibility forthose obligations.

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

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

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

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

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Second Rejection Motionand would itself hear that motion. On August 16, 2005, the district courtinformally stayed the Second Rejection Motion pending rulings by the FifthCircuit on the Mirant Debtors’ appeals from the district court’s December 9,2004 decision denying the First Rejection Motion and from the district court’s March 1,2005 order as subsequently modified as described below.

*Suspensionof PEPCO Back-to-Back Payments.**  *OnDecember 9, 2004, in an effort to halt further out-of-marketpayments under the Back-to-Back Agreement while awaiting resolution of issuesrelated to the potential rejection of the Back-to-Back Agreement (but prior tonotice of entry of the district court’s order of December 9, 2004), theMirant Debtors filed a notice in the Bankruptcy Court stating that the MirantDebtors were suspending further payments to PEPCO under the Back-to-BackAgreement absent further order of the court (the “Suspension Notice”). On December 10,2004, in response to the Suspension Notice, PEPCO filed a motion in thedistrict court seeking a temporary restraining order and injunctive relief torequire the Mirant Debtors to perform under the Back-to-Back Agreement (the “InjunctiveRelief Motion”). On December 13, 2004, the district court issued an orderreferring the Injunctive Relief Motion to the Bankruptcy Court. On December 21,2004, the Bankruptcy Court issued an order denying the temporary restrainingorder sought by PEPCO.

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

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

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

On March 16, 2005, the Mirant Debtors filed apetition for writ of mandamus with the Fifth Circuit asking it to order thedistrict court to vacate the March 1, 2005 order, as modified, and toreinstate PEPCO’s appeal of the Bankruptcy Court’s order of January 19,2005 denying the Administrative Expense Motion. The petition asked the FifthCircuit alternatively to stay the March 1, 2005 order until the Mirant 

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Debtors’ appeal of thatorder was resolved. Also on March 16, 2005 the district court furthermodified its order of March 1, 2005 to clarify that the amounts to be paidby the Mirant Debtors by March 18, 2005 did not include any amounts thatbecame due prior to the filing of the Chapter 11 cases on July 14, 2003.On March 16, 2005, the Mirant Debtors also appealed the district court’s March 1,2005 order, as modified, to the Fifth Circuit. On March 17, 2005, theFifth Circuit issued a temporary stay of the March 1, 2005 order, asmodified. On April 11, 2005, the Fifth Circuit vacated the temporary stayentered on March 17, 2005, denied the petition for writ of mandamus anddenied the Mirant Debtors’ request for a stay pending appeal. In its order, theFifth Circuit concluded that the Mirant Debtors’ challenges to the districtcourt’s order of March 1, 2005, as modified, could be remedied in theirpending appeals and that the Mirant Debtors had not shown they would sufferirreparable harm if the order was not stayed pending appeal. On April 20,2005, the district court entered an order directing the Mirant Debtors to payPEPCO by April 25, 2005 all unpaid amounts due under the Back-to-BackAgreement accruing since the Petition Date to the extent they had not alreadydone so, and to continue performance of all obligations under the agreementuntil further order of the district court. The Mirant Debtors have paid allamounts due under the Back-to-Back Agreement accruing since thePetition Date.

*PotentialAdjustment Related to Panda Power Purchase Agreement.**  *At the time of the acquisition of the MirantMid-Atlantic assets from PEPCO, Mirant also entered into an agreement withPEPCO that, as subsequently modified, provided that the price paid by Mirantfor its December 2000 acquisition of PEPCO assets would be adjusted if by April 8,2005 a binding court order had been entered finding that the Back-to-BackAgreement violated PEPCO’s power purchase agreement with Panda (the “Panda PPA”)as a prohibited assignment, transfer or delegation of the Panda PPA or becauseit effected a prohibited delegation or transfer of rights, duties orobligations under the Panda PPA that was not severable from the rest of theBack-to-Back Agreement. Panda initiated legal proceedings in 2000 assertingthat the Back-to-Back Agreement violated provisions in the Panda PPAprohibiting PEPCO from assigning the Panda PPA or delegating its duties underthe Panda PPA to a third party without Panda’s prior written consent. On June 10,2003, the Maryland Court of Appeals, Maryland’s highest court, ruled that theassignment of certain rights and delegation of certain duties by PEPCO toMirant did violate the non-assignment provision of the Panda PPA and wasunenforceable. The court, however, left open the issues whether the provisionsfound to violate the Panda PPA could be severed and the rest of the Back-to-BackAgreement enforced and whether Panda’s refusal to consent to the assignment ofthe Panda PPA by PEPCO to Mirant was unreasonable and violated the Panda PPA.The Company believes that the June 10, 2003 decision by the Maryland Courtof Appeals does not suffice to trigger a purchase price adjustment under theagreement between Mirant and PEPCO. If that court order were found to havetriggered the purchase price adjustment, the agreement between Mirant and PEPCOprovides that the amount of the adjustment would be negotiated in good faith bythe parties or determined by binding arbitration so as to compensate PEPCO forthe termination of the benefit of the Back-to-Back Agreement while also holdingMirant economically indifferent from such court order.

*PEPCO Avoidance Action.**  *On July 13, 2005, Mirant and several of itssubsidiaries, including Mirant Mid-Atlantic and Mirant Americas Generation,filed a lawsuit against PEPCO before the Bankruptcy Court to avoid and recoverfraudulent transfers under 11 U.S.C. §§ 544 and 550 and applicable state law inconnection with the acquisition of PEPCO’s assets by Mirant inDecember 2000 and disallow PEPCO’s proofs of claim. The suit asserts thatMirant did not receive fair value in return for the purchase price paid for thePEPCO assets and that the acquisition occurred at a time when Mirant was eitherinsolvent or was rendered insolvent as a result of the transaction. OnNovember 3, 2005, the district court granted a motion filed by PEPCOseeking to have the suit heard by the district court rather than the BankruptcyCourt. The likely outcome of this proceeding cannot now be determined, and theCompany cannot estimate what recovery, if any, it may obtain in this action.

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**C.Related Party Arrangements and Transactions**

***Services and Administration Arrangements***

TheCompany and its subsidiaries utilize the services of Mirant, Mirant AmericasEnergy Marketing and Mirant Services. Amounts due to Mirant Americas EnergyMarketing and due from Mirant Americas Energy Marketing under the ServiceAgreements are recorded by each subsidiary of the Company as a net accountspayable-affiliate or accounts receivable-affiliatebecause of the Company’s legal right of offset. The following table summarizesthe amounts incurred under the arrangements that are recorded in theaccompanying unaudited condensed consolidated statements of operations asoperations and maintenance-affiliate (in millions):

| ** **                          | ** ** | **Three Months Ended**                         | ** ** | **Nine Months Ended**                          | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **September 30,**                                   | ** ** | **September 30,**                                   | ** ** |
| ** **                          | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Management,  personnel and services |       |                                                     | $          | 31                                                       |       |   |   | $ | 33 |   |   |   | $ | 98 |   |   |   | $ | 103 |   |   |
| Services  agreements                |       |                                                     | 11         |                                                     |       |   | 13 |   |   |   | 34 |   |   |   | 43 |   |   |
| Administration  arrangement         |       |                                                     | 14         |                                                     |       |   | 19 |   |   |   | 45 |   |   |   | 57 |   |   |
| Total                               |       |                                                     | $          | 56                                                       |       |   |   | $ | 65 |   |   |   | $ | 177 |   |   |   | $ | 203 |   |   |

 

*Management,Personnel and Services Agreement with Mirant Services*

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

| ** **                                              | ** ** | **Three Months Ended**                         | ** ** | **Nine Months Ended**                          | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                              | ** ** | **September 30,**                                   | ** ** | **September 30,**                                   | ** ** |
| ** **                                              | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Cost of fuel,  electricity and other products-affiliate |       |                                                     | $          | 2                                                        |       |   |   | $ | 2 |   |   |   | $ | 6 |   |   |   | $ | 6 |   |   |
| Operations and  maintenance expense-affiliate           |       |                                                     | 31         |                                                     |       |   | 33 |   |   |   | 98 |   |   |   | 103 |   |   |
| Total                                                   |       |                                                     | $          | 33                                                       |       |   |   | $ | 35 |   |   |   | $ | 104 |   |   |   | $ | 109 |   |   |

 

***Notes Receivable from Affiliates***

At September 30,2005, the Company has current notes receivable from an affiliate, MirantAmericas Energy Marketing, of $482 million, related to the intercompanycash management program. During the pendency of the Chapter 11proceedings, Mirant and certain of its subsidiaries are participating in anintercompany cash management program approved by the Bankruptcy Court, pursuantto which cash balances at Mirant and the participating subsidiaries aretransferred to central concentration accounts and, if necessary, lent to Mirantor any participating subsidiary to fund working capital and other needs,subject to the intercompany borrowing limits approved by the Bankruptcy Court.Under the intercompany cash management program, the Bankruptcy Court imposedborrowing limits for intercompany loans among the respective subsidiarysubgroups. In December 2004, the Bankruptcy Court amended the intercompanycash management program to exclude from the intercompany borrowing limitsamounts borrowed by Mirant Americas Energy Marketing from the non-MirantAmericas Energy Marketing subgroups to fund cash collateral posted and cash prepaymentsmade to third parties on account of transactions entered into by MirantAmericas Energy Marketing for the benefit of the members of the non-MirantAmericas Energy Marketing subgroups. All intercompany transfers by such Mirantentities are recorded as intercompany loans on a junior superpriorityadministrative basis and are secured by junior liens on the assets of therelevant borrowing group.

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***Mirant TexasTolling Arrangements with Mirant Americas Energy Marketing***

Mirant Texas Investments, Inc.and Mirant Texas Management, Inc. (collectively “Mirant Texas”),wholly-owned subsidiaries, and Mirant Americas Energy Marketing entered intotwo tolling agreements, under which Mirant Americas Energy Marketing was to payMirant Texas annual capacity based payments on the guaranteed capacity ofMirant Texas’ generating units in Texas and a fee for each megawatt-hour(“MWh”) of energy generated. For the three and nine months ended September 30,2004, revenue from Mirant Americas Energy Marketing under the tolling agreementwas approximately $2 million and $9 million, respectively. The amounts due fromMirant Americas Energy Marketing for the three months ended September 30,2004 are recorded as an intercompany account receivable. In August 2004,Mirant Texas entered into a tolling agreement with a third party through December 2006.

***Purchased EmissionsAllowances from Mirant Americas Energy Marketing***

The Company purchasesemissions allowances from Mirant Americas Energy Marketing at Mirant AmericasEnergy Marketing’s original cost to purchase the emissions allowances. Whereallowances have been purchased by Mirant Americas Energy Marketing from aMirant affiliate, the price paid by Mirant Americas Energy Marketing isdetermined by market indices. For the nine months ended September 30, 2005and 2004, the Company purchased $12 million and $43 million, respectively, ofemissions allowances from Mirant Americas Energy Marketing. For the nine monthsended September 30, 2005 and 2004, the Company sold allowances to MirantAmericas Energy Marketing for $6 million and $4 million, respectively. Theallowances sold in the nine months ended September 30, 2005 had a bookvalue of $4 million resulting in a gain of $2 million, which is reflected ingross margin. Emissions allowances either purchased from Mirant Americas EnergyMarketing or accrued that were utilized in the three and nine months ended September 30,2005 were $23 million and $43 million, respectively, compared to $28 millionand $51 million for the same periods in 2004, and are recorded in cost of fuel,electricity and other products—affiliate in the accompanying unauditedcondensed consolidated statements of operations. Amounts expensed as a resultof writing down emissions allowances to the lower of cost or market were $0 and$4 million for the three and nine months ended September 30, 2005,respectively. There was no expense recorded for the same periods in 2004 forlower of cost or market write downs. As of September 30, 2005, the Companyhad emissions allowances purchased from Mirant Americas Energy Marketing of $21million, which are recorded in inventory in the accompanying unauditedcondensed consolidated balance sheets. In addition, emissions allowances of $20million related to the Company’s California assets were recorded in inventoryas a result of the California Settlement. As of September 30, 2005, theCompany had an accrual of $2 million for 2005 nitrogen oxide (“NOx”) emissionsallowance expense at Mirant Mid-Atlantic, for which the necessary allowanceshad not yet been acquired by Mirant Americas Energy Marketing and sold to theCompany.

***Fuel Oil Sales toMirant Peaker***

Forthe three and nine months ended September 30, 2005, the Companysold $2 million and $11 million, respectively, of fuel oil inventory fromits Chalk Point facility to Mirant Peaker, which approximated book value,compared to $5 million and $12 million for the same periods in 2004.

**D. Assets Held forSale**

On September 13,2005, Mirant Mid-Atlantic executed an agreement to sell its Mirant servicecenter building and accompanying 68 acres located in Upper Marlboro, Marylandfor $13 million. The execution of the agreement initiated a 30-day duediligence period, which concluded with no substantive issues. The Company ispursuing Bankruptcy Court approval of the sale and anticipates a closing byyear-end.

The Company hasreclassified $8 million related to the service center building from property,plant and equipment to assets held for sale as of September 30, 2005 and December 31,2004 in the accompanying unaudited condensed consolidated balance sheets.

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**E.Price Risk Management Assets and Liabilities**

Thefair values of Mirant Americas Generation’s price risk managementassets-affiliate and price risk management liabilities-affiliate, net of reserves,as of September 30, 2005 are included in the following table(in millions):

| ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **      | ** ** | **Net Fair Value at** | ** ** |
|-------------|------------|----------------|------------|-----------------|------------|-----------------|------------|--------------------------------------|------------|
| ** **  | ** ** | **Noncurrent** | ** ** | **Current**     | ** ** | **Noncurrent**  | ** ** | **September 30,**               | ** ** |
| ** **  | ** ** | **Assets**     | ** ** | **Liabilities** | ** ** | **Liabilities** | ** ** | **2005**                             | ** ** |
| Electricity |       |           | $          | (4              | )          |            |       | $                                    | (612       | ) |   |   | $ | (5 | ) |   |   | $ | (621 | ) |   |
| Natural gas |       |           | 3          |            |       |            | 8          |                                 |       |   | — |   |   |   | 11 |   |   |
| Oil         |       |           | —     |            |       |            | 73         |                                 |       |   | — |   |   |   | 73 |   |   |
| Coal        |       |           | 19         |            |       |            | 22         |                                 |       |   | — |   |   |   | 41 |   |   |
| Total       |       |           | $          | 18              |       |            |       | $                                    | (509       | ) |   |   | $ | (5 | ) |   |   | $ | (496 | ) |   |

 

Of the total $496 million net value liability at September 30,2005, a net price risk management liability of $229 million relates tocontracts to be settled in 2005, a net price risk management liability of $294million relates to contracts to be settled in 2006 and a net price riskmanagement asset of $27 million relates to contracts to be settled in periodsthereafter. The volumetric weighted average maturity, or weighted averagetenor, of the price risk management portfolio at September 30, 2005, wasapproximately seven months. The net notional amount of the price riskmanagement assets and liabilities at September 30, 2005, was a net shortposition of approximately 9** **millionequivalent MWh.

A significant portion ofthese positions relate to the fourth quarter of 2005 and to 2006 and the lossesare expected to reverse as the Company generates power and settles thesepositions in future periods. For forward contracts physically settled, theunrealized loss will be reversed and the Company will also recognize andreceive revenue based on the fixed price of the forward contract in the periodthat it delivers the power. For contracts financially settled, the Company willsettle the contracts and separately recognize and receive the spot market pricefor power generated and delivered. The financial impact is the same in that theCompany realizes the fixed price for which it previously contracted (throughthe use of a financial instrument to provide an economic hedge of its expectedgeneration output).

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

In conjunction with the acquisition of certain assetsfrom PEPCO, Mirant Mid-Atlantic has leased the Morgantown and the Dickersonbaseload units and associated property for terms of 33.75 and 28.5 years,respectively. In addition, Mirant Mid-Atlantic has an option to extend theleases. Any extensions of the respective leases would be limited to 75% of theeconomic useful life of the facility, as measured from the beginning of theoriginal lease term through the end of the proposed remaining lease term.Mirant Mid-Atlantic is accounting for these leases as operating leases.Rent expenses associated with the Morgantown and Dickerson operating leasestotaled approximately $24 million and $75 million for the three and nine monthsended September 30, 2005, respectively, as compared to $30 million and $78million for the same periods in 2004, and are recorded as generation facilitiesrent expense in the accompanying unaudited condensed consolidated statements ofoperations. While there is variability in the scheduled payment amounts overthe lease term, Mirant Mid-Atlantic recognizes rental expense for these leaseson a straight-line basis. As of September 30, 2005 and December 31,2004, Mirant Mid-Atlantic had paid approximately $271 million and$285 million, respectively, of actual operating lease payments inaccordance with the lease agreements in excess of rent expense recognized, andreported these amounts as prepaid rent in the accompanying unaudited condensedconsolidated balance sheets. A further $12 million of scheduled rent due on June 30,2005 was funded through a draw made by the lease trustee on letters of creditarranged by Mirant and recorded as prepaid rent in the condensed consolidatedbalance sheets. In addition to the regularly scheduled rent payments, MirantMid-Atlantic paid an additional $5 million and $11 million as of September 30,2005 and December 31, 2004, respectively, as required by the lease 

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agreements. In September 2005,the lease trustees made an additional draw of $49 million prior to the lettersof credit expiration in September 2005. This amount is recorded in fundson deposit in the condensed consolidated balance sheets.

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

As a result of Mirant Mid-Atlantic’s bankruptcyfiling, a lease event of default has occurred under the leases. The leasesprovide that, upon a lease event of default, the owner lessors’ remediesinclude (1) terminating the leases and repossessing the leased assets, (2) sellingtheir interests in the leased assets, (3) demanding payment by Mirant Mid-Atlanticof the excess, if any, of the termination value over the fair market salesvalue of the leased assets or the discounted fair market rental value of theleased assets and (4) demanding payment of the termination value mitigatedby a sale of the leased assets for the account of Mirant Mid-Atlantic. Theability of the owner lessors to exercise their remedies under the leases iscurrently stayed as a result of Mirant Mid-Atlantic’s Chapter 11 filing.

The proposed Plan provides that, solely for purposesof the Plan, the Mirant Mid-Atlantic leases shall be treated as unexpired trueleases under section 365 of the Bankruptcy Code. The proposed Plan furtherprovides that on or before the effective date of the proposed Plan, the MirantMid-Atlantic leases will be assumed and all cure obligations and allobligations to provide adequate assurance of future performance will besatisfied as required by the Bankruptcy Code. Under the proposed Plan MirantMid-Atlantic will (i) assign the Mirant Mid-Atlantic leases to a legalentity that will be formed as a direct wholly-owned subsidiary of MirantMid-Atlantic (“MD Leaseco”) pursuant to section 365(f) of the BankruptcyCode, and (ii) be relieved of any obligations under the MirantMid-Atlantic leases pursuant to section 365(k) of the Bankruptcy Code.

The Mirant Debtors believe that, with the possiblelimited exception of reimbursement of fees and expenses incurred by the ownerlessors and the indenture trustee for the Mirant Mid-Atlantic leases, as of September 30,2005, Mirant Mid-Atlantic was current with respect to all monetary obligationsowing under the Mirant Mid-Atlantic leases. The owner lessors and the indenturetrustee for the Mirant Mid-Atlantic leases have informed the Mirant Debtorsthat they incurred approximately $20 million in the aggregate of fees andexpenses in connection with the Chapter 11 cases and that each will seek tohave its respective share reimbursed as part of cure obligations of MirantMid-Atlantic owing upon assumption of the leases. Mirant Mid-Atlantic disputesthat the full amount of such fees and expenses is compensable appropriatelyunder the terms of the leases and pursuant to applicable law. In addition, as aresult of the pro rata application of the lease payment proceeds by theindenture trustee to the payment of the lessor notes during the pendency of thebankruptcy, the owner lessors and the indenture trustee have indicated thatthey may claim that additional amounts are owed to the owner lessors and/orlessor noteholders as a result of potential adverse impacts caused by such prorata application.  Although the Companyexpects that it would dispute its liability with respect to any such claims,absent a better understanding of the basis of any potential claim, the Companycannot form a definitive view with respect thereto.  While the basis and amount of any potentialclaims cannot be determined at this time, such potential claims could besubstantial. To the extent that the Bankruptcy Court determines that all orpart of such fees and expenses is due and owing under the leases and applicablelaw, or Mirant Mid-Atlantic agrees to pay such amounts in connection with asettlement with the lease parties, Mirant Mid-Atlantic will pay such amountsbefore or 

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upon assumption of theleases. The Mirant Debtors believe that no other material obligations arerequired to be cured as a condition to assumption of the leases. The ownerlessors and the indenture trustee for the Mirant Mid-Atlantic leases may assertthat additional obligations remain owing or otherwise require cure. In suchevent, cure obligations of Mirant Mid-Atlantic will be subject to adetermination of the Bankruptcy Court. Mirant Mid-Atlantic has reserved theright to seek alternative relief from the Bankruptcy Court, including areconsideration of the recharacterization of the leases in the event MirantMid-Atlantic determines that such cure obligations are unduly burdensome. Theimpact of any of these events will be reflected in the Company’s financialstatements if and when they occur.

Mirant Mid-Atlantic has taken the position thatcertain provisions relating to the creditworthiness of the lessee contained inthe lease documentation are unenforceable under applicable bankruptcy law onand after the effective date of the proposed Plan, as to Mirant Mid-Atlanticand MD Leaseco as Mirant Mid-Atlantic’s assignee as de facto anti assignmentclauses, provisions relating to the financial condition of the debtor andotherwise statutorily superseded by the debtor’s (and its assignee’s)obligation to provide adequate assurance of future performance upon assumptionand assignment of the unexpired lease. These provisions, (the “unenforceablecovenants”), include the sections of the respective participation agreementsrelating to “qualifying credit support”, limitations on the incurrence ofliens, limitations on the incurrence of indebtedness and limitations on theability to make certain restricted payments, including dividends. MirantMid-Atlantic and MD Leaseco have reserved the right under the proposed Plan atany time, including after the effective date of the proposed Plan, to seek adetermination that other provisions of the lease documentation areunenforceable under the Bankruptcy Code.

The Mirant Debtorsanticipate that the owner lessors and the indenture trustee for the MirantMid-Atlantic leases will contest the assertions of the Mirant Debtors as to theunenforceability of the unenforceable covenants. In the event that theBankruptcy Court were to determine that some or all of the unenforceablecovenants are in fact enforceable against MD Leaseco upon assignment of theleases thereto, the Mirant Debtors have taken the position that as a result ofsuch assignment, none of the unenforceable covenants will apply directly orindirectly to any entity that is not a wholly owned subsidiary of MD Leaseco,including Mirant Chalk Point, LLC (“Mirant Chalk Point”), Mirant Potomac Riverand Mirant Peaker. The Mirant Debtors anticipate that the owner lessors and theindenture trustee for the Mirant Mid-Atlantic leases will dispute suchconclusions.

In connection with entryof the confirmation order with respect to the proposed Plan, the Mirant Debtorsintend to seek from the Bankruptcy Court certain findings of fact andconclusions of law, as appropriate, providing that (i) the Dickersonleases constitute a single integrated transaction, (ii) the Morgantownleases constitute a single integrated transaction, (iii) the abovereferenced sections of the relevant participation agreement in respect of theleases are unenforceable against Mirant Mid-Atlantic or MD Leaseco, asassignee, pursuant to sections 365 (b) (2), (e) (1) and/or (f) (1) ofthe Bankruptcy Code, (iv) upon assignment of the leases, Mirant ChalkPoint, Mirant Peaker and Mirant Potomac River or any other entity other than awholly owned subsidiary of MD Leaseco shall not be considered “designatedsubsidiaries” or “subsidiaries” as such terms are used in the relevantparticipation agreement in respect of the leases, and (v) any failure ofMirant Mid-Atlantic and/or MD Leaseco to comply with the unenforceablecovenants shall not constitute a default or event of default under any of theleases. Further, the Mirant Debtors would seek an order from the BankruptcyCourt providing that all parties to the Mirant Mid-Atlantic leases arepermanently enjoined from taking any action or exercising any remedies againstany other party to the leases on account of the Mirant Debtors’ and/or MDLeaseco’s failure to comply with the unenforceable covenants.

During the pendency of thechapter 11 cases, Mirant Mid-Atlantic has not made any distributions or otherrestricted payments and, thus, has not been required to determine and reportthe fixed charge coverage ratio (“FCCR”) under the Mirant Mid-Atlantic leases.The restricted payments test under the Mirant Mid-Atlantic lease documentation,described above under “Restricted Payments”, includes a 

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historicallook-back of actual business performance as well as a look forward component ofprojected performance. Pursuant to the terms of the lease documentation, MirantMid-Atlantic is, subject to certain conditions, permitted to reserve EBITDA ina current period and treat such cash as available for the payment of capitalexpenditures in a future period. In the event that the Bankruptcy Courtdetermines that the restricted payments provisions are enforceable againstMirant Mid-Atlantic or MD Leaseco on and after the effective date of theproposed Plan, for the purposes of determining the historical FCCR under the restrictedpayments test, Mirant Mid-Atlantic intends to treat EBITDA generated and notdistributed during the chapter 11 cases as being reserved in such period forthe payment of capital expenditures in future periods. Furthermore, ambiguityexists as to whether certain sources of income (or loss), such as unrealizedmark-to-market gains and losses, should be considered in determining “consolidatedEBITDA,” which is a component of the FCCR under the participation agreements.The Mirant Debtors believe that the phrase “similar non-cash charges andreserves” as used in the definition of “consolidated EBITDA” is intended todeduct all non cash income (or loss) when calculating consolidated EBITDA underthe participation agreement. The inclusion or exclusion of these non-cashcharges materially impacts the calculated EBITDA. As of September 30,2005, Mirant Mid-Atlantic would be unable to make distributions and otherrestricted payments if certain non-cash charges were included in thecalculation. It is a condition of the commitment of the lenders for theproposed revolving credit facility for Mirant North America that such lendersshall have received certification that Mirant Mid-Atlantic is not prohibitedand not projected to be prohibited from making distributions or dividends.TheMirant Debtors are seeking a determination of the Bankruptcy Court inconnection with the entry of the confirmation order that the interpretationsset forth in this paragraph are fair and appropriate. In the event that therestricted payments test is not revised and continues to apply to MirantMid-Atlantic, the Bankruptcy Court does not make the requested determinationsand the unrealized losses are included in the calculation of the restrictedpayments tests, the Mirant Debtors may not be able to emerge from bankruptcyunder the proposed Plan.

The Mirant Debtors and the owner lessors have engagedin active discussions regarding the settlement of all disputes between theparties, including all issues relating to the assumption and assignment of theMirant Mid-Atlantic leases by Mirant Mid-Atlantic to MD Leaseco, theenforceability of the unenforceable covenants and Mirant Mid-Atlantic’s cureobligations and obligations to provide adequate assurance of futureperformance. To the extent the parties are unable to reach an affirmativeagreement, to avoid the expense and risk associated with litigation of thesecomplicated issues, the proposed Plan constitutes an offer of settlement by theMirant Debtors, which, in light of the non-voting status of the owner lessors,will be deemed to have been accepted and consented to by the owner lessorsunless confirmation of the proposed Plan is affirmatively objected to by any ofthe owner lessors. The terms of the proposed settlement include adequate assuranceof future performance with respect to the Mirant Mid-Atlantic leases, (A) inlieu of assigning the leases to MD Leaseco, Mirant Mid-Atlantic will assume,affirm and agree to be bound from and after the effective date by the leases,including each section identified as an unenforceable covenant, except for (I) therestricted payments provisions shall be deemed to be unenforceable undersections 365(b)(2), (e)(1) and/or (f)(1) of the Bankruptcy Code,provided that in lieu thereof Mirant Mid-Atlantic will agree to be bound by theprovisions thereof subject to (aa) the threshold of the “fixed charge coverageratio” being lowered, (bb) “consolidated EBITDA” as used therein shall have thesame meaning as set forth in the relevant documentation, except that the word “similar”shall be deleted, (cc) Mirant Mid-Atlantic may treat “consolidated EBITDA”generated and not distributed during the chapter 11 cases as being specificallyreserved in such period for the payment of “capital expenditures” in futureperiods, and (dd) Mirant Mid-Atlantic may make restricted payments based uponthe “fixed charge coverage ratios” for the most recently ended four full fiscalquarters for which financial statements are available, and (II) theprovisions with respect to qualifying credit support in the leasedocumentation, shall be deemed to be unenforceable under sections 365(b)(2),(e)(1) and/or (f)(1) of the Bankruptcy Code, provided that in lieuthereof Mirant Mid-Atlantic will agree to be bound by 

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the provisions thereofexcept that an irrevocable, unconditional, collateralized stand by letter ofcredit shall also constitute “qualifying credit support” as such term is usedtherein; and (B) as set forth in the proposed Plan, the Mirant Americas Series APreferred Shares will be contributed to Mirant Mid-Atlantic.

If an affirmativeagreement is reached, which agreement may differ materially from the proposedsettlement set forth herein, Mirant Mid-Atlantic will seek appropriate approvalof such agreement at or before the confirmation hearing and such agreementshall be deemed to be incorporated into the proposed Plan. Mirant Mid-Atlanticreserved the right to alter the structure of the proposed settlement, providedthat such alteration does not have a material negative economic impact on theowner lessors as compared with the current proposed settlement structure,including providing for Mirant Mid-Atlantic to assume and assign the leases toMD Leaseco and to contribute all of its assets to MD Leaseco, including all ofMirant Mid-Atlantic’s equity interests in Mirant Chalk Point, Mirant PotomacRiver and Mirant Peaker and providing for each to be considered a “designatedsubsidiary” or “subsidiary” under the leases.

The owner lessors andindenture trustee for the leases have not consented to, and oppose theproposals for assuming and assigning the leases under the proposed Plan. Suchparties contend that, pursuant to section 365 of the Bankruptcy Code, theleases cannot be assumed and assigned in accordance with the Mirant Debtors’proposal. The owner lessors and indenture trustee for the leases believe thatthe subject power plants are a critical component of the proposed Plan in thatthe proposed Plan assumes that the power plants will continue to be operated byMirant Mid-Atlantic or its assignee post-confirmation. Further, the ownerlessors and indenture trustee for the leases contend that Mirant Mid-Atlanticcan perform all of its obligations under the leases pursuant to their presentterms, including the terms and provisions which Mirant Mid-Atlantic seekspursuant to the proposed Plan to eliminate or otherwise preclude the ownerlessors and indenture trustee for the leases from enforcing pursuant to theproposed Plan. If the Bankruptcy Court does not permit Mirant Mid-Atlantic to assumeand assign the leases pursuant to the terms and conditions proposed in theproposed Plan, or the Mirant Debtors and the owner lessors and indenturetrustee for the leases do not reach an agreement on the terms and conditions ofassumption, or assumption and assignment of the leases, confirmation of theproposed Plan may not be possible.

**G.Litigation and Other Contingencies**

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

***Effect of Chapter11 Proceedings***

On July 14, 2003 and July 15,2003 (the “Petition Date”), August 18, 2003, October 3, 2003 and November 18,2003, the Mirant Debtors filed voluntary petitions for relief underChapter 11 of the Bankruptcy Code. As of the Petition Date, most pendinglitigation (including some of the actions described below) is stayed, andabsent further order of the Bankruptcy Court, no party, subject to certain exceptions,may take any action, again subject to certain exceptions, to recover onpre-petition claims against the Mirant Debtors. One exception to this stay oflitigation is for an action or proceeding by a governmental agency to enforceits police or regulatory power. The claims asserted in litigation andproceedings to which the stay applies may be fully and finally resolved inconnection with the administration of the bankruptcy proceedings and, to theextent not resolved, will need to be addressed in 

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the Plan.On November 19, 2003, the Bankruptcy Court entered an order staying mostlitigation pending against current or former officers, directors and managersof the Mirant Debtors arising out of the performance of their duties andagainst certain potential indemnitees of the Mirant Debtors. The BankruptcyCourt took that action to avoid the risk that the continuation of suchlitigation would impede the Mirant Debtors’ ability to reorganize or would havea negative impact upon the assets of the Mirant Debtors. At this time, it isnot possible to predict the outcome of the Chapter 11 proceedings or theireffect on the business of the Mirant Debtors or outstanding legal proceedings.The Mirant Debtors intend to resolve as many of these claims as possiblethrough the claims resolution process in the bankruptcy proceeding or the Plan.

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***California and Western Power Markets***

*FERCRefund Proceedings:**  *OnJuly 25, 2001, the FERC issued an order requiring proceedings (the “FERCRefund Proceedings”) to determine the amount of any refunds and amounts owedfor sales made by market participants, including Mirant Americas EnergyMarketing, to the California Independent System Operator (the “CAISO”) or theCalifornia Power Exchange (the “Cal PX”) from October 2, 2000 throughJune 20, 2001 (the “Refund Period”). Various parties have appealed theseFERC orders to the United States Court of Appeals for the Ninth Circuit (the“Ninth Circuit”) seeking review of a number of issues, including changing theRefund Period to include periods prior to October 2, 2000 and expandingthe sales of electricity subject to potential refund to include bilateral salesmade to the California Department of Water Resources (the “DWR”) and otherparties. Any such expansion of the Refund Period or the types of sales ofelectricity potentially subject to refund could significantly increase therefund exposure of Mirant Americas Energy Marketing in this proceeding.Although Mirant Americas Energy Marketing is the Mirant entity that engaged intransactions with the CAISO and the Cal PX, the orders issued by the FERC inthe refund proceedings, and the filings made by other parties in thoseproceedings, generally refer to the Mirant entity involved as Mirant withoutbeing more specific. Mirant believes that the Mirant entity that would actuallybe liable to third parties for any refunds determined by the FERC to be owed,or that would be due any receivables found to be owed to Mirant, is MirantAmericas Energy Marketing. Agreements that were in effect at the time of thetransactions at issue between Mirant Americas Energy Marketing and theCompany’s subsidiaries that own generating facilities in California would shiftsome of the economic burden of such refunds or the benefit of such receivablesfrom Mirant Americas Energy Marketing to those subsidiaries.

In the July 25, 2001 order, the FERC also orderedthat a preliminary evidentiary proceeding be held to develop a factual recordon whether there had been unjust and unreasonable charges for spot marketbilateral sales in the Pacific Northwest from December 25, 2000 throughJune 20, 2001. In that proceeding, the California Attorney General, theCalifornia Public Utility Commission (the “CPUC”) and the CaliforniaElectricity Oversight Board (the “EOB”) filed to recover certain refunds fromparties, including Mirant Americas Energy Marketing, for bilateral sales ofelectricity to the DWR at the California/Oregon border, claiming that suchsales 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. OnNovember 10, 2003, the FERC denied requests for rehearing filed byvarious parties. Various parties have appealed the FERC’s decision to theNinth Circuit.

On September 9, 2004 the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed in 2002 by the California AttorneyGeneral that sought refunds for transactions conducted in markets administeredby the CAISO and the Cal PX outside the Refund Period set by the FERC and fortransactions between the DWR and various owners of generation and 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 and subsidiaries of the Company,purportedly did not comply with certain filing requirements for transactionsconducted under market-based rate tariffs. Mirant Americas Energy Marketing andother parties have filed a petition for rehearing with the Ninth Circuit.

On January 14, 2005,Mirant and certain of its subsidiaries entered into a Settlement and Release ofClaims Agreement (the “California Settlement”) with Pacific Gas and ElectricCompany (“PG&E”), Southern California Edison Company (“SCE”), San Diego Gasand Electric Company, the CPUC, the DWR, the EOB and the Attorney General ofthe State of California (collectively, the “California Parties”) and with theOffice of Market Oversight and Investigations of the FERC settling a variety ofdisputed matters. The Mirant entities that are parties to the CaliforniaSettlement are Mirant, Mirant Americas, Mirant Americas Energy Marketing,Mirant Americas Energy Marketing Investments, Inc., the Company, MirantCalifornia Investments, Inc., Mirant California, LLC, Mirant Delta, LLC,Mirant Potrero, LLC, 

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MirantSpecial Procurement, Inc., Mirant Services and Mirant Americas Development, Inc.(collectively, the “Mirant Settling Parties”). The California Settlement wasapproved by the FERC on April 13, 2005 and became effective April 15,2005 upon its approval by the Bankruptcy Court. The California Settlementresults in the release of most of Mirant Americas Energy Marketing’s andtherefore the Company’s potential liability (1) in the FERC RefundProceedings for sales made in the CAISO or the Cal PX markets, (2) in theproceeding also initiated by the FERC in July 2001 to determine whetherthere had been unjust and unreasonable charges for spot market bilateral salesin the Pacific Northwest from December 25, 2000 through June 20, 2001and (3) in any proceedings at the FERC resulting from the Ninth Circuit’sreversal of the FERC’s dismissal of the complaint filed in 2002 by theCalifornia Attorney General. Under the California Settlement, the CaliforniaParties and those other market participants who have opted into the settlementhave released Mirant and its subsidiaries from any liability for refundsrelated to sales of electricity and natural gas in the western markets from January 1,1998 through July 14, 2003. Also, the California Parties will assumethe obligation of Mirant Americas Energy Marketing to pay any refundsdetermined by the FERC to be owed by Mirant Americas Energy Marketing to otherparties that do not opt into the settlement for transactions in the CAISO andCal PX markets during the Refund Period, with the liability of the CaliforniaParties for such refund obligation limited to the amount of certain receivablesassigned by Mirant Americas Energy Marketing to the California Parties underthe California Settlement. Subject to applicable bankruptcy law, however,Mirant Americas Energy Marketing will continue to be liable for any refundsthat FERC determines it to owe (1) to participants in the Cal PX andCAISO markets that are not California Parties (or that did not elect to optinto the settlement) for periods outside of the Refund Period and (2) toparticipants in bilateral transactions with Mirant Americas Energy Marketingthat are not California Parties (or that did not elect to opt into thesettlement). This liability of Mirant Americas Energy Marketing could result inadditional liability of the Company’s subsidiaries to Mirant Americas EnergyMarketing under the intercompany agreements referred to above.

*FERC Show Cause ProceedingRelating to Trading Practices:  *On June 25,2003, the FERC issued a show cause order (the “Trading Practices Order”) tomore than 50 parties, including Mirant Americas Energy Marketing andsubsidiaries of the Company, that a FERC staff report issued on March 26,2003 identified as having potentially engaged in one or more trading strategiesof the type employed by Enron Corporation and its affiliates (“Enron”), asdescribed in the Enron memos released by the FERC in May 2002. The TradingPractices Order identified certain specific trading practices that the FERCindicated could constitute gaming or anomalous market behavior in violation ofthe CAISO and Cal PX tariffs. The Trading Practices Order requires theCAISO to identify transactions between January 1, 2000 and June 20,2001 that may involve the identified trading strategies, and then requires theapplicable sellers involved in those transactions to demonstrate why suchtransactions were not violations of the CAISO and Cal PX tariffs. On September 30,2003, the Mirant entities filed with the FERC for approval of a settlementagreement (the “Trading Settlement Agreement”) entered into between certainMirant entities and the FERC Trial Staff, under which Mirant Americas EnergyMarketing would pay $332,411 to settle the show cause proceeding, except for anissue related to selling of ancillary services, which is discussed below. In a November 14,2003 order in a different proceeding, the FERC ruled that certain allegationsof improper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in the show cause proceeding. On December 19,2003, the Mirant entities filed with the FERC for approval of an amendmentto the Trading Settlement Agreement reached with the FERC Trial Staff withrespect to the sale of ancillary services. Under that amendment the FERC wouldhave an allowed unsecured claim in Mirant Americas Energy Marketing’sbankruptcy proceeding for $3.67 million in settlement of the allegations withrespect to the sale of ancillary services (the “Ancillary Amount”). The TradingSettlement Agreement, as amended, must be approved by the FERC and theBankruptcy Court to become effective. On April 15, 2005 the CaliforniaSettlement became effective, and, as a result, the California Parties withdrewtheir opposition to the Trading Settlement Agreement as amended and supportedapproval of the Trading Settlement Agreement as proposed by the Mirant entitiesthat are 

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parties to thatagreement and the FERC Trial Staff without change or modification. The FERCapproved the Trading Settlement Agreement, as amended, on June 27, 2005,and the Bankruptcy Court approved it on August 24, 2005. Certain partieshave filed motions for rehearing with the FERC, which motions remain pending.

***Mirant Americas Generation Bondholder Suit***

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

In December 2003, Lehman Commercial Paper Inc. (“Lehman”),as agent for various lenders under certain pre-petition credit agreements,filed a claim against the Company in the bankruptcy proceedings. In December 2003,Wells Fargo Bank, N.A. (“Wells Fargo”) also filed claims in the bankruptcyproceedings as successor indenture trustee for bond indebtedness under acertain indenture against the Company. In addition to their original claims,Lehman and Wells Fargo filed contingent, unliquidated supplemental claimsagainst the Company, Mirant and a number of other subsidiaries of Mirant (the “SupplementalClaims”) seeking recovery of principal, interest, fees, and costs under theCompany loan documents and bond documents, respectively. In theirSupplemental Claims, Lehman and Wells Fargo essentially seek to preservewhatever rights and remedies they may have, if any, based upon the claimspreviously sought to be asserted by the Mirant Americas Generation CreditorCommittee or other claims identified through discovery.

On November 3, 2004,the Mirant Debtors objected to the Supplemental Claims against the Company andthe other Mirant entities on the grounds that: (1) Lehman and Wells Fargolack standing to pursue the Supplemental Claims, which are derivative claimsbelonging to each respective Mirant Debtor’s estate; (2) there is nofactual basis for any of the “potential” causes of action against the Companyand no basis 

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whatsoeverfor the claims against any other Mirant entities; and (3) the SupplementalClaims are duplicative and contingent. In addition to the objection, theMirant Debtors also filed a motion to dismiss the Supplemental Claims on thebasis that the Supplemental Claims do not allege any independent harm to Lehmanand Wells Fargo and assert nothing more than derivative claims belonging to theMirant Debtors’ estates that cannot be asserted by Lehman and Wells Fargo. TheBankruptcy Court issued an order on April 12, 2005, ruling that (A) theSupplemental Claims will be withdrawn without prejudice, (B) the date setby the Bankruptcy Court by which claims against the Mirant Debtors must befiled not to be barred is extended for the Supplemental Claims, to the extentthat they are not property of the estates of or derivative of a Mirant Debtor(the “Withdrawn Claims”), through the date of confirmation of a plan in theMirant Debtors’ Chapter 11 proceedings, (C) to the extent the SupplementalClaims are derivative, the rights of Lehman, Wells Fargo or any other party ininterest to assert the Supplemental Claims or any issue relating thereto inconnection with the confirmation of a plan of reorganization would be preservedand (D) the rights of Lehman, Wells Fargo and the Mirant AmericasGeneration Committee to seek leave to assert the Supplemental Claims would bepreserved.

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

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

The Company and theplaintiff have entered into a stipulation of settlement of the Wisniak suit andthe claim filed against the Company that was approved by the Bankruptcy Courton January 19, 2005. Under the terms of the stipulation of settlement, theplaintiff will seek certification of a class by the district court that willreceive $2.25 million to be paid by insurers for the Company and an allowed,unsecured claim for $2 million against Mirant, subordinated to the claims of itsother unsecured creditors. On September 6, 2005 the district court enteredan order approving the settlement and dismissing the action.

***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 regulationspromulgated under the Clean Air Act (“NSR”) of past repair and maintenanceactivities at Mirant Potomac River’s plant in Virginia and Mirant Mid-Atlantic’sChalk Point, Dickerson and Morgantown plants in Maryland. The requestedinformation concerns the period of operations that predates Mirant PotomacRiver’s or Mirant Mid-Atlantic’s 

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ownership or lease of theplants. Mirant has responded fully to this request. Under the sales agreementwith PEPCO for those plants, PEPCO is responsible for fines and penaltiesarising from any violation associated with historical operations prior toMirant Potomac River’s or Mirant Mid-Atlantic’s acquisition or lease of theplants. If a violation is determined to have occurred at any of the plants, theMirant entity owning or leasing the plant may be responsible for the cost ofpurchasing and installing emissions control equipment, the cost of which may bematerial. If such violation is determined to have occurred after the Mirantentity acquired or leased the plants or, if occurring prior to the acquisition orlease, is determined to constitute a continuing violation, the Mirant entityowning or leasing the plant at issue would also be subject to fines andpenalties by the state or federal government for the period subsequent to itsacquisition or lease of the plant, the cost of which may be material.

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

On September 27, 2004, Mirant Potomac River,Mirant Mid-Atlantic, the Virginia DEQ, the Maryland Department of theEnvironment, the United States Department of Justice (the “DOJ”) and the EPAentered into, and filed for approval with the United States District Court forthe Eastern District of Virginia, a consent decree that, if approved, willresolve Mirant Potomac River’s potential liability for matters addressed in theNOVs previously issued by the Virginia DEQ and the EPA. The consent decreerequires Mirant Potomac River and Mirant Mid-Atlantic to (1) installpollution control equipment at the Potomac River plant and at the Morgantownplant leased by Mirant Mid-Atlantic in Maryland, (2) comply with decliningsystem-wide ozone season NOx emissions caps from 2004 through 2010, (3) complywith system-wide annual NOx emissions caps starting in 2004, (4) meetseasonal system average emissions rate targets in 2008 and (5) pay civilpenalties and perform supplemental environmental projects in and around thePotomac River plant expected to achieve additional environmental benefits.Except for the installation of the controls planned for the Potomac River unitsand the installation of selective catalytic reduction (“SCR”) or equivalenttechnology at Mirant Mid-Atlantic’s Morgantown Units 1 and 2 in 2007 and 2008,the consent decree does not obligate the Mirant entities to installspecifically designated technology, but rather to reduce emissions sufficientlyto meet the various NOx caps. Moreover, as to the required installations ofSCRs at Morgantown, Mirant Mid-Atlantic may choose not to install thetechnology by the applicable deadlines and leave the units off eitherpermanently or until such time as the SCRs are installed. The aggregate amountof the civil penalties to be paid and costs to be incurred by Mirant PotomacRiver for the supplemental environmental projects is $1.5 million. The consentdecree is subject to the approval of the district court and the BankruptcyCourt.

The owners/lessors under the lease-financingtransactions covering the Morgantown and Dickerson plants (the “Owners/Lessors”)have objected to the proposed consent decree in the Bankruptcy Court and fileda motion to intervene in the district court action. The Owners/Lessors arguethat the consent decree unjustly imposes financial hardships on them andsignificantly affects the economic value of the Morgantown and Dickerson plantsby requiring capital investments to install pollution control equipment andimposing significant operating limitations.

On July 22, 2005, the district court granted amotion filed by the City of Alexandria seeking to intervene in the districtcourt action, although the district court imposed certain limitations on theCity of Alexandria’s participation in the proceedings. On September 23,2005, the City of Alexandria filed a 

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motion seeking authorityto file an amended complaint in the action seeking injunctive relief and civilpenalties under the Clean Air Act for alleged violations by Mirant PotomacRiver of its Virginia Stationary Source Permit To Operate and the State ofVirginia’s State Implementation Plan. Based upon a computer modeling, the Cityof Alexandria asserts that emissions from the Potomac River plant exceednational ambient air quality standards (“NAAQS”) for sulfur dioxide (“SO2”),nitrogen dioxide (“NO2”), and particulate matter. The City of Alexandria alsocontends based on its modeling analysis that the plant’s emissions of hydrogenchloride and hydrogen fluoride exceed Virginia state emission standards. MirantPotomac River disputes the City of Alexandria’s allegations that it hasviolated the Clean Air Act and Virginia law.

*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 pollutants from anelevated source, such as a smokestack, to be mixed rapidly toward the groundresulting in higher ground level concentrations of pollutants. 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. In response to adirective from the Virginia DEQ, Mirant Potomac River temporarily shut down thePotomac River plant on August 24, 2005 pending identification andimplementation of modifications to the plant or its operations, whichmodifications could be material. On September 21, 2005, MirantPotomac River commenced partial operation of one unit of the plant. Thefinancial and operational implications of the discontinued or limited operationof the Potomac River plant or any such modifications are not known at thistime, but could be material depending on the length of time that operations arediscontinued or limited.

*City of Alexandria Nuisance Suit.**  **On October 7, 2005, the City ofAlexandria filed a suit against Mirant Potomac River and Mirant Mid-Atlantic inthe Circuit Court for the City of Alexandria. The suit asserts nuisance claims,alleging that the Potomac River plant’s emissions of coal dust, fly ash, NOx,SO2, particulate matter, hydrogen chloride, hydrogen fluoride, mercury and oilpose a health risk to the surrounding community and harm property owned by theCity. The City seeks injunctive relief, damages and attorneys’ fees.*

*MirantNY-Gen Pipeline Leak.*   In the fall of 2003,Mirant NY-Gen discovered a leaking underground pipeline at the Hillburngenerating facility in Ramapo, New York. The underground line was used forsupplying kerosene fuel to the gas turbines located on site. After confirmatorytesting revealed a potential leak, the line was removed from service and planswere undertaken to excavate and sample portions of the line to determine theextent of the line damage and the possible soil contamination. Upon initialdiscovery the leak was reported to the New York State Department ofEnvironmental Conservation (“NYSDEC”) and the Rockland County HealthDepartment. In the summer of 2004 soil contamination was discovered and asubsequent testing of portions of the line revealed a small hole.

On May 19, 2005, the NYSDEC issued a Notice ofHearing and Complaint to Mirant NY-Gen seeking an order requiring Mirant NY-Gento implement its approved remediation plan, to pay all costs 

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relating to the cleanup(including all costs incurred by the NYSDEC) and to pay a civil penalty in theamount of $100,000. On August 1, 2005,Mirant NY-Gen and the NYSDEC entered into a consent order regarding theremediation of the pipeline leak. That consent order requires Mirant NY-Gen to (1) determineto what extent, if any, the leak impacted the groundwater in the area of theHillburn facility and (2) design and install equipment to remediateimpacted soil and groundwater. Mirant NY-Gen and the NYSDEC entered into asecond consent order on September 15, 2005 to address penalties and costreimbursement to the NYSDEC relating to the remediation of the pipeline leak.Under the September 15, 2005 consent order, Mirant NY-Gen will (1) paya penalty of $50,000, (2) reimburse the NYSDEC for costs to date andfuture costs in an amount not to exceed $20,000 and (3) pay costsassociated with an independent, third-party environmental audit of the Hillburnfacility, which is expected to cost approximately $35,000. The consent orderswere approved on September 22, 2005.

Currently, investigations are continuing to determinethe extent of contamination and possible remedial activities to clean up thearea. Additionally, Mirant NY-Gen is working under the direction of the NYSDECto remove all free product contamination from the groundwater and undertakeremediation actions for additional on-site and off-site contamination. Thecurrent estimate of the cost of cleanup and subsequent monitoring is at least$3 million; however, due to the ongoing evaluation to determine the extent ofthe off-site contamination, the exact cost of remediation is unknown at thistime. Mirant NY-Gen may remain in Chapter 11 until these matters are resolved.

*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 theFederal Water Pollution Control Act (the “Clean Water Act”). The suit allegesthat Mirant 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.

***PEPCO Assertion of Breach of Local Area SupportAgreement***

Following the shut down ofthe Potomac River plant on August 24, 2005, Mirant Potomac River notifiedPEPCO on August 30, 2005 that it considered the circumstances resulting inthe shut down of the plant to constitute a force majeure event under the LocalArea Support Agreement dated December 19, 2000 between PEPCO andMirant Potomac River. That agreement imposes obligations upon Mirant PotomacRiver to dispatch the Potomac River plant under certain conditions, to givePEPCO several years advance notice of any indefinite or permanent shutdownof the plant, and to pay all or a portion of certain costs incurred by PEPCOfor transmission additions or upgrades when an indefinite or permanent shutdownof the plant occurs prior to December 19, 2010. On September 13,2005, PEPCO notified Mirant Potomac River that it considers Mirant PotomacRiver’s shutdown of the plant to be a material breach of the Local Area SupportAgreement that is not excused under the force majeure provisions of theagreement. Mirant Potomac River disputes PEPCO’s interpretation of theagreement. The outcome of this matter cannot be determined at this time.

***City of Alexandria Zoning Action***

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

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to “nonconforming usesubject to abatement.” Under the nonconforming use status, unless MirantPotomac River applies for and is granted a special use permit for the plantduring the seven-year abatement period, the operation of the plant must beterminated within a seven-year period, and no alterations that directly prolongthe life of the plant will be permitted during the seven-year period. If MirantPotomac River were to apply for and receive a special use permit for the plant,the City Council would likely impose various conditions and stipulations as tothe permitted use of the plant and seek to limit the period for which it couldcontinue to operate.

At its December 18, 2004 meeting, the City Councilalso approved revocation of two special use permits issued in 1989 (the “1989SUPs”), one applicable to the administrative office space at Mirant PotomacRiver’s plant and the other for the plant’s transportation management plan.Under the terms of the approved action, the revocation of the 1989 SUPs was totake effect 120 days after the City Council revocation, provided, however, thatif Mirant Potomac River within such 120-day period filed an applicationfor the necessary special use permits to bring the plant into compliance withthe zoning ordinance provisions then in effect, the effective date of therevocation of the 1989 SUPs would be stayed until the final decision by theCity Council on such application. The approved action further provides that ifsuch special use permit application is approved by the City Council, revocationof the 1989 SUPs will be dismissed as moot, and if the City Council does notapprove the application, the revocation of the 1989 SUPs will become effectiveand the plant will be considered a nonconforming use subject to abatement. On July 7,2005, the Circuit Court for the City of Alexandria entered a consent orderagreed to by the City of Alexandria and Mirant Potomac River in the suitdescribed in the next paragraph that extends through October 17, 2005 theperiod within which Mirant Potomac River may file an application for thenecessary special use permits. The City of Alexandria and Mirant Potomac Riverhave submitted to the court for its approval another consent order that wouldfurther extend that time period to January 31, 2006.

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

***New York Tax Proceedings***

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

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generating facility atissue in each proceeding, the New York Debtor owning the facility would beentitled to a refund with interest of any excess taxes paid for those taxyears.

On September 30, 2003, the Mirant Debtors filed amotion (the “Tax Determination Motion”) with the Bankruptcy Court requestingthat it determine what the property tax liability should have been for theBowline generating facility in each of the years 1995 through 2003, for theLovett generating facility in each of the years 2000 through 2003, and for thegenerating facilities owned by Mirant NY-Gen in each of the years 2000 through2003. The bases for the relief requested in the Tax Determination Motion on behalfof each of the New York Debtors were that the assessed values of generatingfacilities located in New York made by the relevant taxing authorities had nojustifiable basis and were far in excess of their actual value. The localtaxing authorities have opposed the Tax Determination Motion, arguing that theBankruptcy Court either lacks jurisdiction over the matters addressed by theTax Determination Motion or should abstain from addressing those issues so thatthey can be addressed by the state courts in which the Tax CertiorariProceedings described in the preceding paragraph were originally filed.

Collectively, the New York Debtors have not paidapproximately $62 million assessed by local taxing authorities on the Bowlineand Lovett generating facilities for 2003, which fell due on September 30,2003 and January 30, 2004, 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 $45 million assessed by localtaxing authorities on the generating facilities for 2005 that fell due on September 30,2005, 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 and September 30,2005 could subject Mirant Bowline and Mirant Lovett to additional penalties andinterest.

All of the Tax CertiorariProceedings related to the generating facilities owned by Mirant NY-Gen havebeen resolved on terms favorable to the New York Debtors, but the TaxCertiorari Proceedings related to the Bowline and Lovett generating facilitiesremain unresolved.

***Asbestos Cases***

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

***Other Governmental Proceedings***

*Department of Justice Inquiries:*   InNovember 2002, Mirant received a subpoena from the Department of Justice (“DOJ”),acting through the United States Attorney’s office for the Northern District ofCalifornia, requesting information about the activities of Mirant and itssubsidiaries, including the Company and its subsidiaries, for the period since January 1,1998. The subpoena requested information related to the California energymarkets and other topics, including the reporting of inaccurate information tothe trade press that publish natural gas or electricity spot price data. Thesubpoena was issued as part of a grand jury investigation. The DOJ’sinvestigation of the reporting of inaccurate natural gas price information iscontinuing, and Mirant has held preliminary discussions with DOJ regarding thedisposition of this matter. The DOJ could decide that further action againstMirant is not appropriate or could seek indictments against one or more Mirantentities, or the DOJ and Mirant could agree to a disposition that might involveundertakings or fines, the amount of which cannot be 

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reasonablyestimated at this time but which could be material. At this time, the Companybelieves that any action taken by the DOJ against Mirant or its subsidiariesrelated to the reporting of natural gas price information would not involve theCompany and its subsidiaries. Mirant has cooperated fully with the DOJ andintends to continue to do so.

***Other Legal Matters***

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

***Other Contingencies***

On May 5, 2005, MirantNY-Gen discovered a sinkhole at its Swinging Bridge dam, located in SullivanCounty, New York. In response to finding the sinkhole, Mirant NY-Gen filledthis sinkhole, inspected the dam’s penstock and slopes for damage, drew downthe lake level by 40 feet, and cleaned the diversion tunnel. Mirant NY-Gen’sanalysis indicates that the most probable cause of the sinkhole was erosion ofsoil comprising the dam through a hole in the penstock. The dam is currentlystabilized, but is in need of additional repairs before lake levels can berestored to normal. Mirant NY-Gen currently expects to spend approximately$11 million in order to properly repair the dam, but the cost of therepairs could be in excess of this amount. It expects these repairs to be completeby the second quarter of 2006. Mirant NY-Gen currently expects to recoverinsurance proceeds equal to a significant portion of these repair costs. As aresult of the sinkhole, Mirant NY-Gen was required to perform and provide tothe FERC a flood study relating to the Swinging Bridge, Rio and Mongaupreservoirs to determine the maximum capacity of the reservoirs and the downstream consequences of a rain event resulting in a greater than the maximumcapacity event. The flood study found that under the very extreme weatherconditions assumed for the study (which included rainfall over a short periodin amounts well in excess of the highest rainfall amounts recorded for such aperiod historically), the water flowing into the reservoirs could cause thelevel of the reservoirs to exceed the height of the dams at Mirant NY-Gen’shydro facilities, leading to downstream flooding. Mirant NY-Gen is evaluatingthe results of the flood study and determining what modifications may bewarranted to its hydro facilities based on those results. The costs of suchmodifications, if any are necessary, are unknown at this time, but could besignificant. Mirant NY-Gen may remain in Chapter 11 until these matters areresolved.

**H. Income Taxes**

The Company is a limited liability company and istreated as a branch of Mirant Americas for income tax purposes. As a result,Mirant Americas, the Company’s ultimate parent, has sole direct liability forthe federal and state income taxes related to the Company’s operations, exceptfor the Company’s subsidiaries that are separate taxpayers. The Companyallocates current and deferred taxes to each tax regarded member of itsconsolidated group as if each member were a single taxpayer utilizing the assetand liability method to account for income taxes except with respect torecognizing certain current period tax benefits. Specifically, the Company hasnot recorded current period tax benefits based on a member’s ability to carryback its separate company current period net operating loss as the realizationof such current period tax benefits are dependent on reimbursements fromMirant, at Mirant’s discretion under the tax sharing agreement. If the Companywere to be allocated income taxes attributable to all its operations, the proforma income tax (benefit) expenseattributable to income before tax is $(7) million and $(5) millionfor the three and nine months ended September 30, 2005, respectively, and$6 million and $17 million for the same periods in 2004. The proforma balance of the Company’s deferred income taxes is zero as of September 30,2005.

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

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

**Overview**

We operate as adebtor-in-possession under the jurisdiction of the Bankruptcy Court inaccordance with Chapter 11 of the Bankruptcy Code. As a result, ourfinancial statements include the results of Bankruptcy Court actions, probableclaims against our estate and professional and administrative costs related tothe bankruptcy process.

On January 19, 2005, we filed our initialproposed plan of reorganization with the Bankruptcy Court, which we amended on March 25,2005. On September 7, 2005 the Mirant Debtors reached an agreement with anumber of the key constituencies in their Chapter 11 case, including all threeStatutory Committees, regarding the terms upon which the Mirant Debtors willemerge from bankruptcy protection. A Second Amended Plan and a Second AmendedDisclosure Statement were filed on September 22, 2005, which wassubsequently updated on September 30, 2005. The proposed Plan sets forththe proposed structure of the Mirant Debtors at emergence and outlines how theclaims of creditors and stockholders are proposed to be treated. On September 30,2005, the Bankruptcy Court approved the Disclosure Statement and authorized itsuse in connection with the solicitation of votes on the proposed Plan fromthose creditors, security holders and interest holders who are entitled to voteon the proposed Plan. At this time, we are unable to predict the timing of ouremergence from bankruptcy protection.

Our financial results for the three and nine monthsended September 30, 2005 reflect the impact of sharply higher energyprices, particularly during the third quarter when hurricane activity and abovenormal temperatures in the Eastern United States caused fuel prices and powerprices to rise drastically. Specifically, for the quarter our results included$470 million of unrealized losses, primarily attributable to forward economichedge positions of our generating assets. As forward power prices increased inthe third quarter, we recognized losses on short power positions used to hedgethe expected output of our power plants. A significant portion of thesepositions relate to the fourth quarter of 2005 and to 2006 and the losses areexpected to reverse as we generate power and settle these positions in thesefuture periods.

Excluding the above described financial effect ofunrealized economic hedges, we performed better in the third quarter of 2005compared to the same period in 2004. We achieved a $56 million increase inrealized gross margin that stems from higher energy prices, increasedgeneration volumes and above normal temperatures in the Eastern United Statesin the summer of 2005.

In the third quarter of 2005, we recognized $560 million of interest expense onliabilities subject to compromise for the period from the Petition Date throughSeptember 30, 2005. We determined that it was probable that contractualinterest on liabilities subject to compromise from the Petition Date would beincurred for certain claims expected to be allowed under the Plan. The interestamount was calculated based on the provisions of the proposed Plan.

In the third quarter of2005, our strong operating performance reversed the trend of the first sixmonths of 2005 related to our cash from operations. While our cash flow fromoperations for the first six months of 2005 reflected a decrease compared to2004, our third quarter cash flow was a large enough increase to improve ourcash flow from operations for the nine months ended September 30, 2005 ascompared to the same period of 2004.

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**Results of Operations**

Ourgross margin and expenses from affiliates and nonaffiliates aggregated byclassification are as follows (in millions):

| ** **                          | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** |
| ** **                          | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **(Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Gross Margin                        |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                           | ** ** | **$**                                                | **(168**   | **)**                                               | $          | 231 |   |   | $ | (399 | ) | ** ** | **$** | **240** |   | $ | 527 |   |   | $ | (287 | ) |   |
| Nonaffiliate                        | ** ** | **(6**                                               | **)**      | 28                                                  |       |   | (34 | ) | ** ** | **(12** | **)** | 108 |   |   | (120 | ) |   |
| Total gross  margin                 | ** ** | **(174**                                             | **)**      | 259                                                 |       |   | (433 | ) | ** ** | **228** |   | 635 |   |   | (407 | ) |   |
| Operating Expenses:                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Generation facilities rent          | ** ** | **24**                                               |       | 30                                                  |       |   | (6 | ) | ** ** | **75** |   | 78 |   |   | (3 | ) |   |
| Depreciation and amortization       | ** ** | **23**                                               |       | 23                                                  |       |   | — |   | ** ** | **68** |   | 67 |   |   | 1 |   |   |
| Operations and  maintenance         |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                           | ** ** | **56**                                               |       | 65                                                  |       |   | (9 | ) | ** ** | **177** |   | 203 |   |   | (26 | ) |   |
| Nonaffiliate                        | ** ** | **65**                                               |       | 44                                                  |       |   | 21 |   | ** ** | **192** |   | 166 |   |   | 26 |   |   |
| Loss (gain) on sales of assets, net | ** ** | **—**                                           |       | 65                                                  |       |   | (65 | ) | ** ** | **(1** | **)** | 65 |   |   | (66 | ) |   |
| Total operating  expenses           | ** ** | **168**                                              |       | 227                                                 |       |   | (59 | ) | ** ** | **511** |   | 579 |   |   | (68 | ) |   |
| Operating (Loss)  Income            | ** ** | **(342**                                             | **)**      | 32                                                  |       |   | (374 | ) | ** ** | **(283** | **)** | 56 |   |   | (339 | ) |   |
| Other (Expense)  Income , net       | ** ** | **(563**                                             | **)**      | (1                                                  | )          |   | (562 | ) | ** ** | **(566** | **)** | (3 | ) |   | (563 | ) |   |
| Reorganization  items, net          | ** ** | **37**                                               |       | 23                                                  |       |   | 14 |   | ** ** | **(98** | **)** | 67 |   |   | (165 | ) |   |
| Provision for  income taxes         | ** ** | **4**                                                |       | 2                                                   |       |   | 2 |   | ** ** | **10** |   | 3 |   |   | 7 |   |   |
| Net (Loss) Income                   | ** ** | **$**                                                | **(946**   | **)**                                               | $          | 6 |   |   | $ | (952 | ) | ** ** | **$** | **(761** | **)** | $ | (17 | ) |   | $ | (744 | ) |   |

 

Thefollowing table summarizes gross margin by region (in millions):

| ** **     | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** |
| ** **     | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **(Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic   |       | $                                                    | (99        | )                                                   | $          | 107 |   |   | $ | (206 | ) |   | $ | 120 |   | $ | 298 |   |   | $ | (178 | ) |   |
| Northeast      |       | (113                                                 | )          | 101                                                 |       |   | (214 | ) |   | 8 |   | 202 |   |   | (194 | ) |   |
| West and other |       | 38                                                   |       | 51                                                  |       |   | (13 | ) |   | 100 |   | 135 |   |   | (35 | ) |   |
| Total          |       | $                                                    | (174       | )                                                   | $          | 259 |   |   | $ | (433 | ) |   | $ | 228 |   | $ | 635 |   |   | $ | (407 | ) |   |

 

Thefollowing table summarizes capacity factor (average percentage of full capacityused over a specific period) by region:

| ** **   | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** |
| ** **   | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **(Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       |                                                 | 57         | %                                                   |       |   | 48 | % |   |   | 9 | % |   |   | 44 | % |   |   | 46 | % |   |   | (2 | )% |   |
| Northeast    |       |                                                 | 40         | %                                                   |       |   | 30 | % |   |   | 10 | % |   |   | 34 | % |   |   | 35 | % |   |   | (1 | )% |   |
| West         |       |                                                 | 21         | %                                                   |       |   | 22 | % |   |   | (1 | )% |   |   | 14 | % |   |   | 20 | % |   |   | (6 | )% |   |

 

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Thefollowing table summarizes power generation volumes by region (in gigawatthours):

| ** **   | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** |
| ** **   | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **(Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       | 5,331                                                |       | 4,530                                               |       |   | 801 |   |   | 12,420 |   | 12,976 |   |   | (556 | ) |   |
| Northeast    |       | 2,712                                                |       | 2,062                                               |       |   | 650 |   |   | 6,843 |   | 7,089 |   |   | (246 | ) |   |
| West         |       | 1,322                                                |       | 1,394                                               |       |   | (72 | ) |   | 2,583 |   | 3,782 |   |   | (1,199 | ) |   |

 

*Three Months ended September 30,2005 versus 2004*

*Gross Margin.**  *Our gross margin decreased by $433 million forthe three months ended September 30, 2005 compared to the same period for2004. The following table details gross margin by realized and unrealizedmargin for the three months ended September 30, 2005 and 2004 (inmillions):

| ** **   | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Three Months Ended  September 30, 2004** | ** ** |
|--------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **   | ** ** | **Realized**                                                   | ** ** | **Unrealized**                                                 | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic |       |                                                           | $          | 174                                                            |       |   |   | $ | (273 | ) |   | $ | (99 | ) |   | $ | 135 |   |   |   | $ | (28 | ) |   | $ | 107 |   |
| Northeast    |       |                                                           | 81         |                                                           |       |   | (194 | ) |   | (113 | ) |   | 55 |   |   |   | 46 |   |   | 101 |   |
| West         |       |                                                           | 41         |                                                           |       |   | (3 | ) |   | 38 |   |   | 50 |   |   |   | 1 |   |   | 51 |   |
| Total        |       |                                                           | $          | 296                                                            |       |   |   | $ | (470 | ) |   | $ | (174 | ) |   | $ | 240 |   |   |   | $ | 19 |   |   | $ | 259 |   |

 

Thefollowing table summarizes the change in realized and unrealized gross marginfor the three months ended September 30, 2005 compared to same period in2004 (in millions):

| ** **   | ** ** | **Increase/(Decrease) for Three Months  Ended September 30, 2005 versus 2004** | ** ** |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** ** | **  Realized  **                                                                                   | ** ** | **  Unrealized  ** | ** ** | ** Total ** | ** ** |
| Mid-Atlantic |       |                                                                                                                   | $          | 39 |   |   |   | $ | (245 | ) |   | $ | (206 | ) |
| Northeast    |       |                                                                                                                   | 26         |   |   |   | (240 | ) |   | (214 | ) |
| West         |       |                                                                                                                   | (9         | ) |   |   | (4 | ) |   | (13 | ) |
| Total        |       |                                                                                                                   | $          | 56 |   |   |   | $ | (489 | ) |   | $ | (433 | ) |

 

During the three months ended September 30, 2005,most of our generating facilities had increased realized gross margin primarilydue to higher energy prices, which contributed to wider conversion spreads. Inaddition, our volumes increased due to warmer weather in the third quarter of2005 that increased demand. This increase in energy demand allowed certaincycling and peaking generating units to run more in 2005.

We also recorded significant unrealized losses onpower sales contracts for future periods used to economically hedge our futuregeneration primarily due to large forward price increases on short powerpositions during the period. A significant portion of these positions relate tothe fourth quarter of 2005 and to 2006 and the losses are expected to reverseas we generate power and settle these positions in future periods. For forwardcontracts physically settled, the unrealized loss will be reversed and we willalso recognize and receive revenue based on the fixed price of the forwardcontract in the period that we deliver the power. For contracts financiallysettled, we will settle the contracts and separately recognize and receive thespot market price for power generated and delivered. The financial impact isthe same in that we realize the fixed price for which we previously contracted(through the use of a financial instrument to provide an economic hedge of ourexpected generation output).

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·       Mid-Atlantic operationsgross margin decreased $206 million primarily due to the following:

·        Anincrease of $39 million in realized gross margin primarily due to highercommodity prices and 18% higher generation volumes. Conversion spreads werewider in 2005 due to warmer weather in this region and the impact of hurricaneactivity on natural gas prices used to fuel power plants. Significantcomponents of the $39 million increase are as follows:

·       Anincrease of $267 million related to higher spot market prices forelectricity. Average peak prices in the Pennsylvania-New Jersey-MarylandInterconnection, LLC (“PJM”) market increased by 116% and off-peak pricesincreased by 82%.

·       Anincrease of $17 million due to higher prices for ancillary services.

·       Anincrease of $7 million due to higher generation volumes.

·       Adecrease of $182 million related to the settlement of electricitycontracts used to economically hedge our generation output during this period.This reflects the increase in spot market prices mentioned above coupled withour strategy of hedging a large portion of our expected generation.

·       Adecrease of $61 million related to higher unit prices for fuel. Thisincludes the impact of a change in the mix of generation, with the widerconversion spreads resulting in gas and oil fired generation increasing ingreater proportion than coal fired generation.

·       Adecrease of $6 million due to realized economic hedging of gas and oil.

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

·        Adecrease of $245 million related to unrealized losses from derivativeinstruments utilized to economically hedge expected generation in futureperiods.

·       OurNortheast operations gross margin decreased by $214 million primarily dueto the following:

·        Anincrease of $26 million in realized gross margin primarily due to higher powerprices, net of losses on power hedges, exceeding the impact of higher fuelprices, net of gains on fuel hedges. Significant components of the$26 million increase were as follows:

·       Anincrease of $135 million related to higher spot market prices forelectricity. Peak prices in the spot markets for power increased an average of92% and off-peak power prices increased by an average of 75%.

·       Anincrease of $29 million due to settlements on contracts to economicallyhedge our fuel costs during the period.

·       Anincrease of $5 million related to adjustments received from the ISO in thecurrent period related to 2000-2003.

·       Anincrease of $5 million due to the receipt of insurance proceeds related to anoutage at the Bowline facility in 2004.

·       Anincrease of $4 million related to capacity income earned under a newreliability-must-run (“RMR”) contract for our Kendall facility.

·       Adecrease of $80 million related to the settlement of electricity contractsused to economically hedge our generation output during the period. Thisreflects the increase in spot market prices mentioned above coupled with ourstrategy of hedging a large portion of our generation.

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·       Adecrease of $69 million related to higher unit prices for fuel. Thisincludes the impact of a change in the mix of generation, with the widerconversion spreads resulting in gas and oil fired generation increasing ingreater proportion than coal fired generation.

·       Adecrease of $5 million due to lower capacity prices.

·        Adecrease of $240 million related to net unrealized losses on derivativeinstruments utilized to economically hedge expected generation in futureperiods.

·       OurWest and other operations gross margin decreased by $13 million primarilydue to the following:

·        Adecrease of $9 million in realized gross margin which includes the followingsignificant components:

·        Anincrease of $4 million in tolling revenue in Texas due to the full quarterimpact in 2005 of a tolling agreement entered into in August 2004.

·        Adecrease of $11 million due to the expiration of an RMR contract for oneof our California generation facilities and a reduction in the amounts receivedfor the remaining facilities, partially offset by capacity income receivedunder a new tolling agreement.

·        Adecrease of $3 million as a result of lower gains on settlements of powerhedges and merchant generation activity.

·        Adecrease of $4 million related to net unrealized losses on derivativeinstruments.

*Operating Expenses.**  *Our operating expenses decreased $59 million for thethree months ended September 30, 2005 compared to the same period in 2004primarily due to the loss on sales of assets of $65 million in 2004, areduction in generation rent expense of $6 million and reductions in allocatedcorporate costs from Mirant Services of $5 million, Mirant Americas EnergyMarketing of $2 million and a reduction in labor and severance costs of $2million, reflected in operations and maintenance-affiliate, partially offset byan increase in operations and maintenance-nonaffiliate of $21 million. Themajor components of the increase in operations and maintenance-nonaffiliatewere an increase of $8 million due to property tax settlements for New York andCalifornia in 2004, an expense of $5 million recorded in 2005 for additionalcosts related to the repairs at Swinging Bridge, an increase of $3 million inthird party maintenance costs in New England and an increase of $3 million inthird party operations costs in New England.

*Interest Expense.**  *Interest expense increased by $564 million primarilydue to the recognition in 2005 of $560 million of interest on liabilitiessubject to compromise for the period from the Petition Date through September 30,2005. See Note B to our unaudited condensed consolidated financial statementscontained elsewhere in this report for further discussion.

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*Nine Months endedSeptember 30, 2005 versus 2004*

*Gross Margin.**  *Our gross margin decreased by $407 million forthe nine months ended September 30, 2005 compared to the same period for2004. The following table details gross margin by realized and unrealizedmargin for the nine months ended September 30, 2005 and 2004 (inmillions):

| ** **   | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|--------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **   | ** ** | **Realized**                                                  | ** ** | **Unrealized**                                                | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic |       |                                                          | $          | 383                                                           |       |   |   | $ | (263 | ) |   | $ | 120 |   |   | $ | 393 |   |   |   | $ | (95 | ) |   | $ | 298 |   |
| Northeast    |       |                                                          | 189        |                                                          |       |   | (181 | ) |   | 8 |   |   | 154 |   |   |   | 48 |   |   | 202 |   |
| West         |       |                                                          | 102        |                                                          |       |   | (2 | ) |   | 100 |   |   | 133 |   |   |   | 2 |   |   | 135 |   |
| Total        |       |                                                          | $          | 674                                                           |       |   |   | $ | (446 | ) |   | $ | 228 |   |   | $ | 680 |   |   |   | $ | (45 | ) |   | $ | 635 |   |

 

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Thefollowing table summarizes the change in realized and unrealized gross marginfor the nine months ended September 30, 2005 compared to same period in2004 (in millions):

| ** **   | ** ** | **Increase/(Decrease) for Nine Months  Ended September 30, 2005 versus 2004** | ** ** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** ** | **   Realized   **                                                                      | ** ** | **   Unrealized   ** | ** ** | **   Total   ** | ** ** |
| Mid-Atlantic |       |                                                                                                                  | $          | (10 | ) |   |   | $ | (168 | ) |   |   | $ | (178 | ) |   |
| Northeast    |       |                                                                                                                  | 35         |   |   |   | (229 | ) |   |   | (194 | ) |   |
| West         |       |                                                                                                                  | (31        | ) |   |   | (4 | ) |   |   | (35 | ) |   |
| Total        |       |                                                                                                                  | $          | (6 | ) |   |   | $ | (401 | ) |   |   | $ | (407 | ) |   |

 

During the ninemonths ended September 30, 2005 we recognized significant unrealizedlosses on power sales contracts for future periods used to economically hedgeour expected future generation primarily due to large forward price increaseson short power positions during the period, partially offset by the recognitionof the fair value of certain coal contracts in the second quarter of 2005. Asignificant portion of these positions relate to the fourth quarter of 2005 andto 2006 and the losses are expected to reverse as we generate power and settlethese positions in future periods. For forward contracts physically settled,the unrealized loss will be reversed and we will also recognize and receiverevenue based on the fixed price of the forward contract in the period that wedeliver the power. For contracts financially settled, we will settle thecontracts and separately recognize and receive the spot market price for powergenerated and delivered. The financial impact is the same in that we realizethe fixed price for which we previously contracted (through the use of afinancial instrument to provide an economic hedge of our expected generationoutput).

·       Mid-Atlanticoperations gross margin decreased $178 million primarily due to the following:

·        Adecrease of $10 million in realized gross margin primarily due to narrowerconversion spreads in the first two quarters and the consequent reduction ingeneration volumes, partially offset by the widening of the conversion spreadand the increased generation volumes in the third quarter. Overall for the ninemonths ended September 30, 2005, generation volumes were 4% less than forthe same period in 2004. Significant components of the $10 million decrease areas follows:

·       Anincrease of $329 million related to higher spot market prices for electricity.Average peak prices in the PJM market increased by an average of 44% andoff-peak prices increased by an average of 36%.

·       Anincrease of $26 million due to higher prices for ancillary services.

·       Anincrease of $13 million due to a net settlement with a coal supplier related torail car transportation schedule issues that resulted in lower fuel expense.

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

·       Adecrease of $250 million related to settlement of electricity contracts used toeconomically hedge our generation output during the period. This reflects theincrease in spot market prices mentioned above coupled with our strategy ofhedging a large portion of our expected generation.

·       Adecrease of $84 million related to higher unit prices for fuel.

·       Adecrease of $27 million due to lower generation volumes.

·       Adecrease of $10 million related to the settlement of fuel contracts used toeconomically hedge some of our fuel purchase requirements.

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·       Adecrease of $7 million resulting from increased emissions prices for SO2 andNOx emissions allowances.

·       Adecrease of $5 million due to lower capacity prices.

·        Adecrease of $168 million related to higher unrealized losses from derivativeinstruments of $263 million in 2005 compared to unrealized losses of $95million in 2004. The $263 million loss in 2005 includes a $6 million loss dueto the sale of a power option for 2006.

·       OurNortheast operations gross margin decreased by $194 million primarily dueto the following:

·        Anincrease of $35 million in realized gross margin primarily due to higher powerprices, net of losses on power hedges, exceeding the impact of higher fuelprices, net of gains on fuel hedges and the effects of a 3% reduction ingeneration volumes. Significant components are as follows:

·       Anincrease of $178 million related to higher spot market prices forelectricity. Peak prices in the spot markets for power increased an average of38% and off-peak power prices increased by an average of 36%.

·       Anincrease of $45 million due to settlements on contracts to economically hedgeour fuel costs.

·       Anincrease of $8 million related to capacity income earned under a new RMRcontract for our Kendall facility.

·       Anincrease of $5 million related to ISO adjustments from 2000-2003.

·       Anincrease of $5 million due to the receipt of insurance proceeds related to anoutage at the Bowline facility in 2004.

·       Anincrease of $3 million due to a reduction in gas transport costs.

·       Adecrease of $114 million related to higher unit prices for fuel.

·       Adecrease of $66 million related to settlement of electricity contracts used toeconomically hedge our generation output during the period. This reflects theincrease in spot market prices mentioned above coupled with our strategy ofhedging a large portion of our expected generation.

·       Adecrease of $13 million due to lower generation volumes.

·       Adecrease of $10 million due to lower net gains on gas sales in 2005 compared to2004.

·       Adecrease of $8 million due to lower capacity prices.

·        Adecrease of $229 million related to net unrealized losses on derivativeinstruments.

·       Our West and otheroperations gross margin decreased by $35 million primarily due to thefollowing:

·        Adecrease of $31 million in realized gross margin which includes the followingsignificant components:

·       Anincrease of $8 million due to the elimination of intercompany emissionsallowance purchases.

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·       Adecrease of $21 million due to the expiration of an RMR contract for oneof our California generation facilities partially offset by capacity incomereceived under a new tolling agreement for that unit and one other Californiagenerating unit.

·       Adecrease of $17 million due to the effect on RMR income of an extended plannedoutage of one of our California units, as well as lower contractual pricesbeing received under the 2005 RMR agreement.

·       Adecrease of $1 million as a result of lower gains on settlements of powerhedges and merchant generation activity.

·        Adecrease of $4 million related to net unrealized losses on derivativeinstruments utilized to economically hedge expected generation in futureperiods.

*OperatingExpenses.**  *Ouroperating expenses decreased by $68 million for the nine months ended September 30,2005 compared to the same period in 2004 primarily due to the loss on sales ofassets of $65 million in 2004, a reduction in generation facilities rent of $3million and reductions in allocated corporate costs from Mirant Services of $12million and Mirant Americas Energy Marketing of $9 million and a reductionin labor and severance costs of $5 million reflected in operations andmaintenance-affiliate, partially offset by an increase in operations andmaintenance-nonaffiliate of $26 million. The major components of theincrease in operations and maintenance-nonaffiliate are an expense of $7million recorded in 2005 for repairs at Swinging Bridge, environmental remediationcosts of $5 million recorded in New York in 2005, an increase of $4 million forthird party maintenance costs at Mirant Mid-Atlantic, an increase of $8 milliondue to property tax settlements for New York and California in 2004, and anincrease of $3 million in New England third party operations costs.

*Interest Expense.**  *Interest expense increased by $566 million primarilydue to the recognition in 2005 of $560 million of interest on liabilitiessubject to compromise for the period from the Petition Date through September 30,2005. See Note B to our unaudited condensed consolidated financial statementscontained elsewhere in this report for further discussion.

**Financial Condition**

***Liquidity and Capital Resources***

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

The Company and its subsidiaries continue toparticipate in the intercompany cash management program for the Mirant Debtorsapproved by the Bankruptcy Court and to be parties to the debtor-in-possessioncredit facility, dated November 5, 2003 (the “DIP Facility”). Under theintercompany cash management program, the Bankruptcy Court imposed borrowinglimits for intercompany loans among the respective subsidiary sub-groups. In December 2004,the Bankruptcy Court amended the intercompany cash management program toexclude from the intercompany borrowing limits amounts borrowed by Mirant AmericasEnergy Marketing from the non-Mirant Americas Energy Marketing sub-groups tofund cash collateral posted and cash prepayments made to third parties onaccount of transactions entered into by Mirant Americas Energy Marketing forthe benefit of the members of the non-Mirant Americas Energy Marketingsub-groups. All intercompany transfers by such Mirant entities are recorded asintercompany loans on a junior superpriority administrative basis and aresecured by junior liens on the assets of the relevant borrowing group. As of September 30,2005, Mirant Americas Energy 

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Marketing had borrowed$482 million from us under the collateral borrowings. The parties to the DIPFacility, including the Company, were in compliance with the DIP Facilitycovenants, or had received affirmative waivers of compliance where compliancewas not attained, as of September 30, 2005. The borrowing base as of December 31,2004 was $724 million. The borrowing base decreased $48 million in January 2005and decreased another $37 million in September 2005, following theconsummation of sales of certain assets of Mirant. In addition, the Companyestimates that the reserve for property taxes that decreases the borrowing basehas increased by $14 million. The effect of the changes since December 31,2004 resulted in a borrowing base of $625 million at September 30, 2005.The orders entered by the Bankruptcy Court approving the DIP Facility permit upto $300 million of borrowings, which amount may be increased to$500 million upon written approval of each of the Statutory Committees orfurther order of the Bankruptcy Court. The DIP Facility also contains anoption, exercisable by Mirant or the Company, to remove the Company and itssubsidiaries as borrowers and obligors under the DIP Facility and reduce theDIP Facility commitment to a maximum of $200 million of borrowings.Borrowings under the DIP Facility are secured by substantially all of theassets of the DIP Borrowers. In October 2005, the Bankruptcy Courtapproved an extension of the DIP facility through January 31, 2006.

We and, upon formation, our Mirant North Americasubsidiary, are holding companies and as a result, we are dependent upondividends, distributions and other payments from our subsidiaries to generatethe funds necessary to meet our obligations. The ability of certain of oursubsidiaries to pay dividends and distributions is restricted under the termsof their debt or other agreements. In particular, a substantial portion of thecash provided by operating activities is generated by Mirant Mid-Atlantic.The Mirant Mid-Atlantic leveraged leases as currently constituted containa number of covenants, including limitations on dividends, distributions andother restricted payments. Under its leveraged leases, Mirant Mid-Atlanticis not permitted to pay any dividends or make any distributions and otherrestricted payments unless (1) it satisfies the fixed charge coverageratio on a historical basis for the last period of four fiscal quarters, (2) itis projected to satisfy the fixed charge coverage ratio for the next twoperiods of four fiscal quarters, and (3) no significant lease default orevent of default has occurred and is continuing. The projected fixed chargecoverage ratios are based on projections that are not prepared to conform tothe guidelines established by the American Institute of Certified PublicAccountants regarding forecasts, and are not audited, reviewed or compiled byour independent registered public accounting firm. It should be noted that theforecasts, market assumptions and many other factors are inherently inaccurateand should not be relied on. In the event of a default under the leveragedleases or if the restricted payments test is not satisfied, the cash of MirantMid-Atlantic would not be able to be distributed. The calculation of the fixedcharge coverage ratio requires the determination of the “Consolidated EBITDA,”as defined in the lease agreements, of Mirant Mid-Atlantic exclusive ofdepreciation, amortization and similar non-cash charges. Management hascalculated the fixed charge coverage ratio excluding certain non-cash chargesthat management believes to be reasonable and appropriate. Based on ourcalculation of the fixed charge coverage ratios under the leveraged leases asof September 30, 2005 and December 31, 2005, Mirant Mid-Atlanticwould fail to meet the required 1.7 to 1.0 ratio for restricted payments ifcertain non-cash charges are included in the calculation. It is a condition tothe commitments of the lenders for the proposed revolving credit facility forMirant North America that such lenders shall have received certification thatMirant Mid-Atlantic is not prohibited, and is not projected to be prohibited,from making distributions or dividends. The Mirant Debtors are seeking a determinationof the Bankruptcy Court in connection with the entry of the confirmation orderthat the interpretations set forth in Note F with respect to the calculation ofthe FCCR in connection with the restricted payments test are fair andappropriate. In the event that the restricted payments test is not revised andcontinues to apply to Mirant Mid-Atlantic, the Bankruptcy Court does not makethe requested determinations and the unrealized losses are included in thecalculation of the restricted payments test, the Mirant Debtors may not be ableto emerge from bankruptcy under the proposed Plan.

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

**Cash Flows**

*OperatingActivities.**  *Cashprovided by operating activities increased $11 million for the nine monthsended September 30, 2005 compared to the same period in 2004. Net cashprovided by operating activities excluding the changes in operating assets andliabilities decreased by $15 million for the nine months ended September 30,2005 compared to the same period in 2004. Our gross margin, excludingunrealized gains and losses was $674 million in 2005 compared to $680 millionin 2004. The decrease in cash related to lower realized gross margin in thefirst six months of 2005 was partially offset for the nine months ended September 30,2005 by our substantial increase in realized gross margin in the third quarterof 2005 compared to the same period in 2004.

During the nine months ended September 30, 2005,changes in operating assets and liabilities provided $112 million in cashcompared to $86 million for the same period in 2004. In both periods, we hadfavorable net changes in our payable to affiliates, offset substantially byincreases in our receivables from affiliates due generally to higher grossmargin accruals in September of each period as compared to the precedingDecember. Prepaid rent on our leases also provided a favorable change of $8million in 2005 compared to $11 million for the same period in 2004. As of September 30,2005, $61 million had been drawn on letters of credit arranged by the Companyand is reflected in liabilities subject to compromise.

*InvestingActivities.**  *Inthe nine months ended September 30, 2005, capital expenditures increased$22 million and notes receivable from Mirant Americas Energy Marketingincreased $449 million compared to the same period in 2004 due to collateralborrowings of $482 million in 2005. Proceeds from the sale of assets provided$4 million cash in 2005.

*Financing Activities.**  *There were no financing activities for the ninemonths ended September 30, 2005 and 2004.

**Other Developments**

***Plan of Reorganization***

On January 19, 2005, the Mirant Debtors filed aproposed Plan of Reorganization (as amended, the “Plan”) and Disclosure Statement(as amended, the “Disclosure Statement”) with the Bankruptcy Court. A FirstAmended Plan and a First Amended Disclosure Statement were filed on March 25,2005. On September 7, 2005 the Mirant Debtors reached an agreement with anumber of the key constituencies in 

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their Chapter 11 case,including all three Statutory Committees, regarding the terms upon which theMirant Debtors will emerge from bankruptcy protection. A Second Amended Planand a Second Amended Disclosure Statement were filed on September 22, 2005and subsequently updated on September 30, 2005. The proposed Plan setsforth the proposed structure of the Mirant Debtors at emergence and outlineshow the claims of creditors and stockholders are proposed to be treated. On September 30,2005, the Bankruptcy Court approved the Disclosure Statement and authorized itsuse in connection with the solicitation of votes on the proposed Plan fromthose creditors, security holders and interest holders who are entitled to voteon the proposed Plan. Subsequently, the Mirant Debtors mailed solicitationmaterials to all known holders of impaired claims and equity interests againstthe Mirant Debtors entitled to vote on the Plan. In addition, the BankruptcyCourt fixed December 1, 2005 as the date for the hearing to considerconfirmation of the Plan and related matters. Properly executed ballots and anyobjections to the confirmation of the Plan are due by November 10, 2005.Until such time as the Plan is confirmed by the Bankruptcy Court, we are unableto predict the timing of our emergence from bankruptcy protection.

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

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

TheEnergy Policy Act of 2005 (“Energy Policy Act”) was passed by the U.S. Congressin July 2005 and was signed into law in August 2005. Thiscomprehensive legislation, in pertinent part, repeals the Public UtilitiesHolding Company Act (“PUHCA”) effective six months after enactment of theEnergy Policy Act, establishes transmission reliability standards, offersincentives for transmission grid improvements and renewables, and prohibitsmarket manipulation. The law does not contain provisions that would prevent orotherwise significantly impair the continuation of competitive markets. Mirantdoes not believe the legislation will have a demonstrable impact on Mirant’sbusiness, but would eliminate limitations imposed by PUHCA, such as limitationscurrently imposed on Mirant’s exempt wholesale generator subsidiaries andforeign utility companies. In addition, the repeal of PUHCA would removelimitations on the ability of a public utility or any other entity to acquirepublic utility assets.

***Tolling Arrangement for California Plants***

Weare currently seeking proposals for a one-, two- or three-year tollingarrangement and/or resource adequacy capacity sale on two of our Californianatural gas fired generating facilities, Pittsburg 7 and Contra Costa 6.Pittsburg 7’s capacity is 682 MW; Contra Costa 6’s capacity is 337 MW.

***Consent Decree with State of New York***

On June 11, 2003,Mirant New York, Mirant Lovett and the State of New York entered into a consentdecree to resolve alleged violations of New Source Review requirements underthe Clean Air Act by the prior owner of the Lovett facility. Under the consentdecree, Mirant Lovett committed to install on Lovett’s two coal fired units by2007 through 2008: (1) emission control technology consisting of selectivecatalytic reduction technology to reduce NOx emissions; (2) alkalinein-duct injection technology to reduce SO2 emissions, and (3) a baghouse.The consent decree allows Mirant Lovett to shut down or convert one of theunits to burning natural gas only rather than install the prescribed emissioncontrols on the unit. For one of the units, Mirant Lovett also has the optionto convert the unit to operate exclusively as a gas fired boiler and limit thehours of operation rather than install the prescribed emission controls. Theconsent 

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decreerequired Mirant Lovett to notify the state of its selected option by August 1,2004, which date was extended by the State of New York to August 1, 2005.On November 2, 2005, the State of New York extended the deadline to December 23,2005. Based on Mirant Lovett’s expected compliance technology, if Mirant Lovettelects to install the prescribed environmental controls, the cost is expectedto exceed $200 million.

***Environmental***

*RegionalGreenhouse Gas Initiative.**  *NineNortheast and Mid-Atlantic states have created a cooperative known as theRegional Greenhouse Gas Initiative (“RGGI”) to develop a template for aregional cap and trade program for carbon dioxide emissions from power plantsof 25 MW or greater. Similar to the northeast NOx Budget Rule, this initiativeenvisions participating states executing a memorandum of understanding and thenpromulgating implementing regulations substantially the same as the RGGItemplate. The RGGI, released in August 2005, proposes that the memorandumof understanding requires that aggregate carbon dioxide emissions in the regionbe capped at current levels from 2009 through 2015, followed by a second phasereduction of 10% that would be implemented between 2015 and 2020. The recommendedallocation scheme calls for allocation of 20% of allowances to a public benefitpurpose and 5% to a regional strategic carbon fund, thereby further reducingallowances available to affected facilities. In the future, the RGGI mayinclude other sources of greenhouse gas emissions and greenhouse gases otherthan carbon dioxide. If the RGGI results in mandatory regulations in stateswhere Mirant has affected generating units, the costs of implementation couldbe material.

*CleanAir Interstate Rule**.*   On March 10, 2005, the EPA promulgated theClean Air Interstate Rule (“CAIR”), which establishes a year-round cap andallowance trading program primarily applicable to electric power plants in 28eastern states and Washington, D.C. The EPA has established a federal frameworkfor the CAIR program that will be administered by the states through theirstate implementation plans, due in 2006. These cap and trade programs will beimplemented in two phases, with the first NOx phase going into effect in 2009,SO2 in 2010 and more stringent caps going into effect in 2015 for both NOx andSO2. On August 1, 2005, to ensure emissions reductions required under theCAIR are achieved, the EPA proposed a federal implementation plan toutilize in the event subject states do not submit appropriate StateImplementation Plans. Mirant will monitor the implementation of this rulemakingand develop compliance plans as necessary.

*CleanAir Mercury Rule.**  *On March 15, 2005, the EPApromulgated the Clean Air Mercury Rule (“CAMR”) to reduce mercuryemissions from coal fired plants. The EPA withdrew its earlier finding that itwas necessary and appropriate to regulate coal fired power plants under theClean Air Act (“CAA”) Section 112 hazardous air pollutant rules andopted instead to utilize its authority under the CAA Sections 110 and 111 toestablish a federal framework for what will ultimately be a mercury cap andtrade program administered by states through their state implementation plans.The CAMR establishes a first phase of mercury reductions required by 2010.These reductions are anticipated to occur as “co-benefits” of the reductions inNOx and SO2 that will result from pollution controls added to meet therequirements of the CAIR rule, discussed above. The second phase of the CAMRcap and trade program for mercury emissions will require substantial furtherreductions from power plants by 2018. When fully implemented, the CAMR willrequire a 70% reduction in mercury emissions from power plants. In addition tothe cap and trade program, the CAMR establishes standards of performancelimiting mercury emissions from new, reconstructed and modified power plants.The EPA announced on October 21, 2005 that it has granted severalpetitions to reconsider seven issues in the CAMR rulemaking. The EPA is alsoproposing to reconsider certain aspects of its decision not to regulateelectric utility steam generating units under the CAA Section 112hazardous air pollution rules.

*NewSource Review.*   The Clean Air Act provides for amajor source permitting program, known as “New Source Review” (“NSR”). For thepast several years, the EPA has pursued an enforcement policy 

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that resulted inapproximately 50 civil suits challenging physical changes made at power plantsacross the country on the theory that a major source permit was required butnot obtained. Among other defenses, the power plant owners asserted that thesechanges were exempt from the permit requirements because they constitutedroutine maintenance, repair and replacement of old equipment. If the EPA wereto prevail in these cases, the NSR permit would require the addition ofstate-of-the-art pollution controls at affected power plants as well aspenalties. Since the inception of these cases, the EPA has promulgated rules thathelp clarify what constitutes routine maintenance, repair and replacement andhas recently proposed a clarifying standard for assessing whether the NSRpermit requirement would apply to physical changes at a power plant. In lightof these actions and the CAIR rulemaking, the EPA recently announced that inthe future it will focus on cases that violate the proposed, clarified rule andnot pursue its earlier theories except that it will conclude the alreadypending cases.

*Regulationsunder the Federal Water Pollution Control Act.**  *The EPA has issued new regulations under section316(b) of the Federal Water Pollution Control Act, establishingperformance standards reflecting the “best technology available” for coolingwater intake structures to minimize adverse environmental impacts. Theseregulations apply to all existing steam electric power plants that withdrawmore than 50 million gallons per day of cooling water from surface waters ofthe United States. The EPA’s new section 316(b) rules for existingfacilities are intended to reduce the losses of aquatic organisms inadvertentlyimpinged (i.e., trapped against) or entrained (i.e., pulled into) by coolingwater intake structures at existing facilities, as compared to a “baseline”condition. The performance standard the EPA has adopted requires exitingfacilities to reduce impingement mortality by 80 to 95 percent, and entrainmentby 60 to 90 percent.

Thesection 316(b) regulations for existing facilities give power plants flexibilityto choose among different compliance alternatives for meeting the performancestandards. Potential compliance alternatives can include using existingtechnologies, selecting additional fish protection technologies, usingrestoration measures or demonstrating that alternative standards are warranted.Over the next few years, our power plants subjected to this cooling waterintake regulation (Lovett, Bowline, Canal, Kendall, Pittsburg, Contra Costa,Potrero, Chalk Point, Morgantown and Dickerson) will be in the process ofevaluating and implementing the requirements of the section 316 (b) existingfacility regulations by completing impingement and entrainment studies,evaluating technologies, operational measures, restoration measures and collectingother required information. At this time, and until the aquatic studies andevaluation of compliance options are completed, the costs to comply with the316(b) existing facility regulations are not known. The regulatorydeadline for completing those studies and presenting a proposal for compliance(known as a Compliance Demonstration Study or “CDS”) varies depending on theduration of the current National Pollutant Discharge Elimination System permit.Facilities whose permits expire before January 9, 2008 are entitled torequest an extension until January 7, 2008 to submit the CDS, while thosewith four or more years remaining must submit the CDS as part of the normalpermit renewal process.

**CriticalAccounting Policies and Estimates**

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

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

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

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

Our business uses derivative financial instruments andother energy contracts to economically hedge our electricity generation assets.We use a variety of derivative contracts, such as futures, swaps and optioncontracts in the management of our business. Such derivative contracts have varyingterms and durations, or tenors, which range from a few days to a number ofyears, depending on the instrument.

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

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

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

The amounts recorded asrevenues-affiliate and as cost of fuel, electricity and otherproducts-affiliate change as estimates are revised to reflect actual results andchanges in market conditions or other factors, many of which are beyond ourcontrol. Because we use derivatives that do not currently qualify for cash flowor fair value hedge accounting under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,our financial 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. We plan to implement cashflow hedge accounting during 2006 and expect reduced gross margin volatilityrelated to commodity contracts.

***Bankruptcy Claims Assessment***

Our accompanying unaudited condensed consolidatedfinancial statements include, as liabilities subject to compromise, our estimatedpre-petition liabilities and settlements approved by the Bankruptcy Court priorto September 30, 2005. In addition, we also reflect as liabilities subjectto compromise the probable claim amounts relating to liabilities for rejectedcontracts, litigation, accounts payable and 

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accrued liabilities, debtand other liabilities (the “Probable Claims Estimates”). These Probable ClaimsEstimates require management to estimate the likely claim amount that will beallowed by the Bankruptcy Court prior to the Bankruptcy Court’s ruling on theindividual claims. These estimates are based on assumptions of future commodityprices, reviews of claimants’ supporting material and assessments by managementand outside experts. We expect that our estimates, although based on the bestavailable information, will change as the claims are resolved in the BankruptcyCourt.

Thefollowing table summarizes the claims filed in our Chapter 11 case as of September 30,2005:

| ** **                       | ** ** | **Total Number  of Claims** | ** ** | **Total Claims  Exposure** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| Total Claims  Filed              |       |                                  | 1,108      |                            |       |   | $ | 91,263 |   |   |
| Less:                            |       |                                  |       |                            |       |   |   |   |   |
| Redundant claims                 |       |                                  | 5          |                            |       |   | — |   |   |
| Claims with basis for objection  |       |                                  | 758        |                            |       |   | 88,193 |   |   |
| Total Claims                     |       |                                  | 345        |                            |       |   | 3,070 |   |   |
| Additional scheduled liabilities |       |                                  |       |                            |       |   | 4 |   |   |
| Remaining Claims                 |       |                                  |       |                            |       |   | $ | 3,074 |   |   |

                                                

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

***Long-Lived Assets***

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

Our evaluations for impairment require us to applyjudgment in estimating future energy prices, environmental and othermaintenance expenditures and other cash flows. Our estimates of the fair valueof the assets require estimating useful lives and selecting a discount ratethat reflects the risk inherent in future cash flows. If actual results are notconsistent with our assumptions used in estimating future cash flows and assetfair values, we may be exposed to additional losses that could be material toour results of operations.

During the current period,market prices of natural gas have increasedsubstantially in most markets. The prices were mainly influenced by fuel supplyshortages that resulted from hurricane activity and by abnormally warm weatherin the Eastern half of the United States. As a result of the increases in ourcost of fuel for our natural gas and oil fired generation facilities, weconsidered these long-lived assets for potential impairment. While ourestimated cost of fuel in future periods has increased, at this time we do notview that the spark spreads in the markets in which we operate have narrowedsignificantly in the long-term. In addition, our natural gas fired generationfacilities have remaining useful lives that are long enough such that theundiscounted expected cash flows on these assets would need to decreasedramatically for the amounts to be less than the carrying value of theseassets.

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**Litigation**

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

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

We are exposed to market risks associated with changesin commodity prices. We are also exposed to counterparty credit risk. We areexposed to energy commodity price risk associated with the acquisition of fuelneeded to generate electricity, as well as the electricity produced and sold. Aportion of our fuel requirements is purchased in the spot market and a portionof the electricity we produce also is sold in the spot market. As a result, ourfinancial performance varies depending on changes in the prices of energy andenergy-related commodities. See “Critical Accounting Policies and Estimates”for a discussion of the accounting treatment for our price risk managementactivities and see Note E to the unaudited condensed consolidated financialstatements for detail of our price risk management assets and liabilities as ofSeptember 30, 2005.

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

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

**InherentLimitations in Control Systems**

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

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**Effectivenessof Disclosure Controls and Procedures**

As required by Rule 13a-15(b) underthe Securities Exchange Act of 1934 (the “Exchange Act”),ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, conducted an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined by Rules 13a-15(e) and15d-15(e) under the Exchange Act), as of September 30, 2005.Based upon this evaluation, our management concluded that, as of September 30,2005, the design and operation of these disclosure controls and procedures wereeffective.

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

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**PART II**

**Item 1.**                        *Legal Proceedings*

The descriptions belowupdate and should be read in conjunction with the complete descriptions in thesection titled “Legal Proceedings” in the Company’s Form 10-K forthe year ended December 31, 2004 and the Company’s Form 10-Qsfor the quarters ended March 31, 2005 and June 30, 2005. Also seeNote G “Litigation and Other Contingencies” to the unaudited condensedconsolidated financial statements contained elsewhere in this report forfurther discussion.

***California Litigation by Governmental Units andCertain Other Parties***

*FERCShow Cause Proceeding Relating to Trading Practices.**  *On June 27, 2005, the FERC approved thesettlement agreement entered into between certain Mirant entities and the FERCTrial Staff filed with the FERC for its approval on September 30, 2003 (asamended in the filing made by the Mirant entities and the FERC Trial Staff on December 19,2003 to include issues related to the selling of ancillary services) (the “TradingSettlement Agreement”). The Bankruptcy Court approved the Trading SettlementAgreement on August 24, 2005. Certain parties have filed motions forrehearing with the FERC, which motions remain pending.

*California Settlement.**  *Under the California Settlement, PG&E and MirantDelta, LLC were to negotiate by September 30, 2005 (extended by theparties from the original date of April 30, 2005) an agreement (the “OptionAgreement”) under which PG&E would have separate options to purchase eachof Mirant Delta’s existing Contra Costa generating plant and its existingPittsburg generating plant, in both cases once no unit at the plant hasoperated for a certain period of years. The Option Agreement was not finalized,and Mirant Delta and the other Mirant parties to the California Settlement haveno further obligations to PG&E with respect to the Option Agreement or therights it was to provide to PG&E.

***Rate Payer Litigation***

*California Rate PayerLitigation.**  *Variouslawsuits were filed in 2000 through 2003 that assert claims under Californialaw based on allegations that certain owners of electric generation facilitiesin California and energy marketers, including Mirant, Mirant Americas EnergyMarketing and several Mirant Americas Generation subsidiaries, engaged invarious unlawful and anti-competitive acts that served to manipulate wholesalepower markets and inflate wholesale electricity prices in California. Withrespect to the six such suits that were filed between November 27, 2000and May 2, 2001 in various California Superior Courts, on October 3,2005 the California state court dismissed the six consolidated suits on thegrounds that the plaintiffs’ claims were barred by federal preemption as aresult of the Federal Power Act. The period within which the plaintiffs mayappeal that dismissal has not yet expired.

***Shareholder-Bondholder Litigation***

*Mirant Americas GenerationSecurities Class Action.**  *OnSeptember 6, 2005, the district court entered an order approving thesettlement entered into by Mirant Americas Generation and the plaintiff in the *Wisniak* suit, certifying a settlement class, and dismissingthe action.

***City of Alexandria Zoning Action***

On July 7, 2005, theCircuit Court for the City of Alexandria entered a consent order agreed to bythe City of Alexandria and Mirant Potomac River in the suit filed on January 18,2005 by Mirant Potomac River and Mirant Mid-Atlantic against the City ofAlexandria and the City Council. The consent order extends through October 17,2005, the period within which Mirant Potomac River may file an application forsuch special use permits as may be necessary as a result of the actions takenby the City Council for the City of Alexandria on December 18, 2004changing the zoning status of the Potomac River plant and revoking certainspecial use permits issued to Mirant Potomac River in 1989. The City ofAlexandria and 

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MirantPotomac River have submitted to the court for its approval another consentorder that would further extend that time period to January 31, 2006.

***Environmental Proceedings***

*NewYork Opacity.**  *On June 8,2005, the New York State Department of Environmental Conservation (“NYSDEC”)entered an order agreed to by the Mirant defendants that set penalty amounts forfuture violations of opacity standards by Mirant Bowline and Mirant Lovett andrequired the Mirant defendants to pay a penalty of $44,100 for emissionsviolations occurring prior to January 1, 2005. The Bankruptcy Courtapproved the agreed to order on August 17, 2005.

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

On September 27, 2004, Mirant Potomac River,Mirant Mid-Atlantic, the Virginia DEQ, the Maryland Department of theEnvironment, the DOJ and the EPA entered into, and filed for approval with theUnited States District Court for the Eastern District of Virginia, a consentdecree that, if approved, will resolve Mirant Potomac River’s potentialliability for matters addressed in the NOVs previously issued by the VirginiaDEQ and the EPA. The 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 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, the consentdecree does not obligate the Company’s subsidiaries to install specificallydesignated technology, but rather to reduce emissions sufficiently to meet thevarious NOx caps. Moreover, as to the required installations of SCRs atMorgantown, Mirant Mid-Atlantic may choose not to install the technology by theapplicable deadlines and leave the units off either permanently or until suchtime as the SCRs are installed. The aggregate amount of the civil penalties to bepaid and costs to be incurred by Mirant Potomac River for the supplementalenvironmental projects is $1.5 million. The consent decree is subject to theapproval of the district court and the Bankruptcy Court.

The owners/lessors under the lease-financingtransactions covering the Morgantown and Dickerson plants (the “Owners/Lessors”)have objected to the proposed consent decree in the Bankruptcy Court and fileda motion to intervene in the district court action. The Owners/Lessors arguethat the consent decree unjustly imposes financial hardships on them andsignificantly affects the economic value of the Morgantown and Dickerson plantsby requiring capital investments to install pollution control equipment andimposing significant operating limitations.

On July 22, 2005, the district court granted amotion filed by the City of Alexandria seeking to intervene in the districtcourt action, although the district court imposed certain limitations on theCity of Alexandria’s participation in the proceedings. On September 23,2005, the City of Alexandria filed a motion seeking authority to file anamended complaint in the action seeking injunctive relief and civil penaltiesunder the Clean Air Act for alleged violations by Mirant Potomac River of itsVirginia Stationary 

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Source Permit To Operateand the State of Virginia’s State Implementation Plan. Based upon a computermodeling, the City of Alexandria asserts that emissions from the Potomac Riverplant exceed national ambient air quality standards (“NAAQS”) for SO2, nitrogendioxide (“NO2”), and particulate matter. The City of Alexandria also contendsbased on its modeling analysis that the plant’s emissions of hydrogen chlorideand hydrogen fluoride exceed Virginia state emission standards. Mirant PotomacRiver disputes the City of Alexandria’s allegations that it has violated theClean Air Act and Virginia law.

*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 pollutants from anelevated source, such as a smokestack, to be mixed rapidly toward the groundresulting in higher ground level concentrations of pollutants. 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. In response to adirective from the Virginia DEQ, Mirant Potomac River temporarily shut down thePotomac River plant on August 24, 2005 pending identification andimplementation of modifications to the plant or its operations, whichmodifications could be material. On September 21, 2005, Mirant PotomacRiver commenced partial operation of one unit of the plant. The financial andoperational implications of the discontinued or limited operation of thePotomac River plant or any such modifications are not known at this time, butcould be material depending on the length of time that operations arediscontinued or limited.

*Cityof Alexandria Nuisance Suit.**  *OnOctober 7, 2005, the City of Alexandria filed a suit against MirantPotomac River and Mirant Mid-Atlantic in the Circuit Court for the City ofAlexandria. The suit asserts nuisance claims, alleging that the Potomac Riverplant’s emissions of coal dust, fly ash, NOx, SO2, particulate matter, hydrogenchloride, hydrogen fluoride, mercury, and oil pose a health risk to thesurrounding community and harm property owned by the City. The City seeksinjunctive relief, damages and attorneys’ fees.

*MirantNY-Gen Pipeline Leak.**  *Inthe fall of 2003, Mirant NY-Gen discovered a leaking underground pipelineat the Hillburn generating facility in Ramapo, New York. The underground linewas used for supplying kerosene fuel to the gas turbines located on site. Afterconfirmatory testing revealed a potential leak, the line was removed fromservice and plans were undertaken to excavate and sample portions of the lineto determine the extent of the line damage and the possible soil contamination.Upon initial discovery the leak was reported to the NYSDEC and the RocklandCounty Health Department. In the summer of 2004 soil contamination wasdiscovered and a subsequent testing of portions of the line revealed a smallhole.

On May 19, 2005, the NYSDECissued a Notice of Hearing and Complaint to Mirant NY-Gen seeking an orderrequiring Mirant NY-Gen to implement its approved remediation plan, to pay allcosts relating to the cleanup (including all costs incurred by the NYSDEC), andto pay a civil penalty in the amount of $100,000. On August 1, 2005,Mirant NY-Gen and the NYSDEC entered into a consent order regarding theremediation of the pipeline leak. That consent order requires Mirant NY-Gen to (1) determineto what extent, if any, the leak impacted the groundwater in the area of theHillburn facility and (2) design and install equipment to remediateimpacted soil and groundwater. Mirant NY-Gen and 

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theNYSDEC entered into a second consent order on September 15, 2005 toaddress penalties and cost reimbursement to the NYSDEC relating to the remediationof the pipeline leak. Under the September 15, 2005 consent order, MirantNY-Gen will (1) pay a penalty of $50,000, (2) reimburse the NYSDECfor costs to date and future costs in an amount not to exceed $20,000 and (3) paycosts associated with an independent, third-party environmental audit of theHillburn facility, which is expected to cost approximately $35,000. The consentorders were subject to the approval of the Bankruptcy Court, which was obtainedon September 22, 2005.

Currently, investigations are continuing to determinethe extent of contamination and possible remedial activities to clean up thearea. Additionally, Mirant NY-Gen is working under the direction of the NYSDECto remove all free product contamination from the groundwater and undertakeremediation actions for additional on-site and off-site contamination. Thecurrent estimate of the cost of cleanup and subsequent monitoring is at least$3 million; however, due to the ongoing evaluation to determine the extent ofthe off-site contamination, the exact cost of remediation is unknown at thistime. Mirant NY-Gen may remain in Chapter 11 until these matters are resolved.

*New York Oil StorageAssessment.**  *MirantBowline and Mirant Lovett have undertaken a program to review compliance withfederal and state regulations applicable to oil storage at the Bowline andLovett plants. Results of the Lovett assessment indicate the secondarycontainment capacity may not be adequate for the design capacity of the tanks,although it is sufficient for the working volume. Additionally, approximately10% of the liner may need repair. At Bowline, the secondary containment isadequate; however, an evaluation of the liner permeability is currently beingundertaken. The cost of any repairs of the facilities is unknown at this time.

***New York Tax Proceedings***

Collectively, the New YorkDebtors have not paid approximately $62 million assessed by local taxingauthorities on the Bowline and Lovett generating facilities for 2003, whichfell due on September 30, 2003 and January 30, 2004, approximately$53 million assessed by local taxing authorities on the generating facilitiesfor 2004 that fell due on September 30, 2004 and January 30, 2005,and approximately $45 million assessed by local taxing authorities on thegenerating facilities for 2005 that fell due on September 30, 2005, inorder to preserve their respective rights to offset the overpayments of taxesmade in earlier years against the sums payable on account of current taxes. Thefailure to pay the taxes due on September 30, 2003, January 30, 2004,September 30, 2004, January 30, 2005 and September 30, 2005could subject Mirant Bowline and Mirant Lovett to additional penalties andinterest.

***Other Governmental Proceedings***

Department of Justice Inquiries:   InNovember 2002, Mirant received a subpoena from the Department of Justice (“DOJ”),acting through the United States Attorney’s office for the Northern District ofCalifornia, requesting information about the activities of Mirant and itssubsidiaries, including the Company and its subsidiaries, for the period since January 1,1998. The subpoena requested information related to the California energymarkets and other topics, including the reporting of inaccurate information tothe trade press that publish natural gas or electricity spot price data. Thesubpoena was issued as part of a grand jury investigation. The DOJ’sinvestigation of the reporting of inaccurate natural gas price information iscontinuing, and Mirant has held preliminary discussions with DOJ regarding thedisposition of this matter. The DOJ could decide that further action againstMirant is not appropriate or could seek indictments against one or more Mirantentities, or the DOJ and Mirant could agree to a disposition that might involveundertakings or fines, the amount of which cannot be reasonably estimated atthis time but which could be material. At this time, the Company believes thatany action taken by the DOJ against Mirant or its subsidiaries related to thereporting of natural gas price information would not involve the Company andits subsidiaries. Mirant has cooperated fully with the DOJ and intends tocontinue to do so.

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Therehave been no other material developments in legal proceedings involving theCompany or its subsidiaries since those reported in Mirant Americas Generation’sAnnual Report on Form 10-K for the year ended December 31, 2004and its Form 10-Qs for the quarters ended March 31, 2005 and June 30,2005.

**Item 6.**                        Exhibits

***(a)   Exhibits.***
| 2.1  | *      | Second Amendment to the Joint Chapter 11 Plan  of Reorganization for Mirant Corporation and its Affiliated Debtors  (Exhibit A to the Second Amended Disclosure Statement Relating to the  Debtors’ Second Amended Joint Chapter 11 Plan of Reorganization  Designated on Form 8-K filed October 7, 2005 as Exhibit 99.1) |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Subsection  (a) of Section 7241, Chapter 98 of Title 15, United States Code)                                                                                                                                                             |
| 31.2 |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Subsection  (a) of Section 7241, Chapter 98 of Title 15, United States Code)                                                                                                                                                             |
| 32.1 |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections  (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code)                                                                                                                                              |
| 32.2 |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections  (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code)                                                                                                                                              |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on this 9th day of November, 2005.
|          | MIRANT  AMERICAS GENERATION, LLC |
|----------|----------------------------------|
|     | By:                              | /s/ DAN STREEK |
| * * |                             | *Vice President and Controller  (Principal Accounting Officer)* |

 

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