**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 March 31, 2007**

**Or**

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

**Forthe Transition Periodfrom              to**

**Mirant North America, LLC**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                     |   | **N/A**                   |   | **20-4514609**                        |
|------------------------------------------------------------------|--------|---------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  Incorporation or Organization) |   | (Commission File  Number) |   | (I.R.S. Employer  Identification No.) |

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. x  Yes  oNo

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

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

 

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

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

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

 

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**TABLE OF CONTENTS**

|              | ** ** |                                                                                              | ** ** | **Page** | ** ** |
|--------------|------------|----------------------------------------------------------------------------------------------|------------|----------|------------|
|         |       | Glossary of Certain Defined Terms                                                            |       | i - iv   |       |
|         |       | Cautionary Statement Regarding Forward-Looking  Information                                  |       | 3        |       |
| ** **   | ** ** | **PART I—FINANCIAL INFORMATION**                                                   |       |     |       |
| Item 1. |       | Interim Financial Statements (unaudited):                                                    |       |     |       |
|         |       | Condensed Consolidated Statements of Operations                                              |       | 5        |       |
|         |       | Condensed Consolidated Balance Sheets                                                        |       | 6        |       |
|         |       | Condensed Consolidated Statements of Member’s Equity                                    |       | 7        |       |
|         |       | Condensed Consolidated Statements of Cash Flows                                              |       | 8        |       |
|         |       | Notes to Condensed Consolidated Financial Statements                                         |       | 9        |       |
| Item 2. |       | Management’s Discussion and Analysis of Results of  Operations and Financial  Condition |       | 39       |       |
| Item 3. |       | Quantitative and Qualitative Disclosures about Market  Risk                                  |       | 53       |       |
| Item 4. |       | Controls and Procedures                                                                      |       | 54       |       |
| ** **   | ** ** | **PART II—OTHER INFORMATION**                                                      |       |     |       |
| Item 1. |       | Legal  Proceedings                                                                           |       | 55       |       |
| Item  1A.    |       | Risk Factors                                                                                 |       | 60       |       |
| Item 6. |       | Exhibits                                                                                     |       | 61       |       |

 

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**Glossary of CertainDefined Terms**

**ACO**—AdministrativeCompliance Order.

**APB**—AccountingPrinciples Board.

**APBNo. 22**—APB Opinion No. 22, Disclosure of AccountingPolicies.

**APSA**—AssetPurchase and Sale Agreement.

**Back-to-BackAgreement**—Contractual agreement with Pepco with respect tocertain PPAs.

**BankruptcyCode**—United States Bankruptcy Code.

**BankruptcyCourt**—United States Bankruptcy Court for the NorthernDistrict of Texas, Fort Worth Division.

**BaseloadGenerating Units**—Units that satisfy minimum baseload requirementsof the system and produce electricity at an essentially constant rate and runcontinuously.

**CAISO**—CaliforniaIndependent System Operator.

**CalPX**—California Power Exchange.

**CFTC**—CommodityFutures Trading Commission.

**CleanAir Act**—Federal Clean Air Act.

**CleanWater Act**—Federal Water Pollution Control Act.

**CO**—Carbonmonoxide.

**Company**—MirantNorth America, LLC and its subsidiaries.

**CPUC**—CaliforniaPublic Utilities Commission.

**DOE**—Departmentof Energy.

**DOJ**—Departmentof Justice.

**DWR**—CaliforniaDepartment of Water Resources.

**EBITDA**—Earningsbefore interest, taxes, depreciation and amortization.

**EITF**—TheEmerging Issues Task Force formed by the Financial Accounting Standards Board.

**EITF02-3**—EITF Issue No. 02-3, *Issues Involved in Accounting for Derivative Contracts Held forTrading  Purposes and Contracts Involvedin Energy Trading and Risk Management Activities.*

**EITF06-3**—EITF Issue No. 06-3, *How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation).*

**EOB**—CaliforniaElectricity Oversight Board.

**EPA**—EnvironmentalProtection Agency.

**FASB**—FinancialAccounting Standards Board.

**FCM**—Forwardcapacity market.

**FERC**—FederalEnergy Regulatory Commission.

i

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**FIN**—FASBInterpretation.

**FIN48**—FIN No. 48, *Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109.*

**GAAP**—Generallyaccepted accounting principles in the United States.

**GrossMargin**—Operating revenue less cost of fuel, electricity and otherproducts.

**HudsonValley Gas**—Hudson Valley Gas Corporation.

**IntermediateGenerating Units**—Units that meet system requirements that aregreater than baseload and less than peaking.

**ISO**—IndependentSystem Operator.

**LIBOR**—LondonInterBank Offered Rate.

**MAAC**—Mid-AtlanticArea Council.

**MDE**—MarylandDepartment of the Environment.

**Mirant**—OldMirant prior to January 3, 2006, and New Mirant on or after January 3,2006.

**MirantAmericas**—Mirant Americas, Inc.

**MirantAmericas Energy Marketing**—Mirant Americas Energy Marketing,LP.

**MirantAmericas Generation**—Mirant Americas Generation, LLC.

**MirantBowline**—Mirant Bowline, LLC.

**MirantChalk Point**—Mirant Chalk Point, LLC.

**MirantEnergy Trading**—Mirant Energy Trading, LLC.

**MirantKendall**—Mirant Kendall, LLC.

**MirantLas Vegas**—Mirant Las Vegas, LLC.

**MirantLovett**—Mirant Lovett, LLC.

**MirantMid-Atlantic**—Mirant Mid-Atlantic, LLC.

**MirantNew York**—Mirant New York, LLC (formerly, Mirant New York, Inc.).

**MirantNorth America**—Mirant North America, LLC and its subsidiaries.

**MirantNY-Gen**—Mirant NY-Gen, LLC.

**MirantPotomac River**—Mirant Potomac River, LLC.

**MirantPower Purchase**—Mirant Power Purchase, LLC.

**MirantServices**—Mirant Services, LLC.

**MirantSugar Creek**—Mirant Sugar Creek, LLC.

**MirantWest Georgia**—Mirant West Georgia, LLC.

**MirantWichita Falls**—Mirant Wichita Falls, LLC.

ii

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**MW**—Megawatt.

**MWh**—Megawatthour.

**NAAQS**—Nationalambient air quality standards.

**NewMirant**—Mirant Corporation on or after January 3, 2006.

**NO2**—Nitrogendioxide.

**NOL**—Netoperating loss.

**NOV**—Noticeof violation.

**NOx**—Nitrogenoxides.

**NSR**—Newsource review.

**NYISO**—IndependentSystem Operator of New York.

**NYSDEC**—NewYork State Department of Environmental Conservation.

**OldMirant**—MC 2005, LLC, known as Mirant Corporation prior to January 3,2006.

**Orangeand Rockland**—Orange and Rockland Utilities, Inc.

**Panda**—Panda-Brandywine,LP.

**PeakingGenerating Units**—Units used to meet demand requirementsduring the periods of greatest or peak load on the system.

**Pepco**—PotomacElectric Power Company.

**PG&E**—PacificGas & Electric Company.

**PJM**—Pennsylvania-NewJersey-Maryland Interconnection, LLC.

**Plan**—Planof Reorganization effective on January 3, 2006, for Mirant and most of itssubsidiaries that were debtors in the bankruptcy proceedings.

**PM10**—Particulatematter that is 10 microns or less in size.

**PPA**—Powerpurchase agreement.

**ReserveMargin**—Excess capacity over peak demand.

**RMR**—Reliability-must-run.

**RPM**—ReliabilityPricing Model.

**RTO**—Regionaltransmission organization.

**SCE**—SouthernCalifornia Edison Company.

**SEC**—U.S.Securities and Exchange Commission.

**SecuritiesAct**—The Securities Act of 1933.

**SFAS**—Statementof Financial Accounting Standards.

**SFASNo. 5**—SFAS No. 5, *Accountingfor Contingencies.*

iii

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**SFASNo. 109**—SFAS No. 109, *Accountingfor Income Taxes.*

**SFASNo. 144**—SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets.*

**SFASNo. 155**—SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133and 140.*

**SFASNo. 157**—SFAS No. 157, *Fair Value Measurements.*

**SFASNo. 159**—SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No 115.*

**ShadyHills**—Shady Hills Power Company, L.L.C.

**SO2**—Sulfurdioxide.

**SPDES**—StatePollutant Discharge Elimination System.

**VirginiaDEQ**—Virginia Department of Environmental Quality.

iv

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

The information presented in this Form 10-Qincludes forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934, in addition to historical information. These statements involve knownand unknown risks and uncertainties and relate to future events, our futurefinancial performance or our projected business results. In some cases, one canidentify forward-looking statements by terminology such as “may,” “will,” “should,”“expect,” “plan,” “anticipate,” “estimate,” “predict,” “target,” “potential” or“continue” or the negative of these terms or other comparable terminology.

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

·       legislative and regulatoryinitiatives regarding deregulation, regulation or restructuring of the industryof generating, transmitting and distributing electricity; changes in state,federal and other regulations (including rate and other regulations); changesin, or changes in the application of, environmental and other laws andregulations to which we and our subsidiaries and affiliates are or could becomesubject;

·       failure of our assets toperform as expected, including outages for unscheduled maintenance or repair;

·       changes in marketconditions, including developments in the supply, demand, volume and pricing ofelectricity and other commodities in the energy markets, or the extent andtiming of the entry of additional competition in our markets or those of oursubsidiaries and affiliates;

·       increased marginrequirements, market volatility or other market conditions that could increaseour obligations to post collateral beyond amounts that are expected;

·       our inability to accesseffectively the over-the-counter and exchange-based commodity markets orchanges in commodity market liquidity or other commodity market conditions,which may affect our ability to engage in asset management and proprietarytrading activities as expected, or result in material extraordinary gains orlosses from open positions in fuel oil or other commodities;

·       deterioration in thefinancial condition of our counterparties and the resulting failure to payamounts owed to us or to perform obligations or services due to us beyondcollateral posted;

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

·       price mitigation strategiesemployed by ISOs or RTOs that reduce our revenue and may result in a failure tocompensate our generation units adequately for all of their costs;

·       volatility in our grossmargin as a result of our accounting for derivative financial instruments usedin our asset management activities and volatility in our cash flow fromoperations resulting from working capital requirements, including collateral,to support our asset management and proprietary trading activities;

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

·       the inability of ouroperating subsidiaries to generate sufficient cash flow to support ouroperations;

·       our ability to borrowadditional funds and access capital markets;

·       strikes, union activity orlabor unrest;

3

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·       weather and other naturalphenomena, including hurricanes and earthquakes;

·       the cost and availabilityof emissions allowances;

·       our ability to obtainadequate supply and delivery of fuel for our facilities;

·       curtailment of operationsdue to transmission constraints;

·       environmental regulationsthat restrict our ability or render it uneconomic to operate our business,including regulations related to the emission of carbon dioxide and othergreenhouse gases;

·       our inability to completeconstruction of emissions reduction equipment by January 2010 to meet therequirements of the Maryland Healthy Air Act, which may result in reduced unitoperations and reduced cash flows and revenues from operations;

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

·       the fact that our MirantLovett subsidiary remains in bankruptcy;

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

·       restrictions on the abilityof our subsidiaries to pay dividends, make distributions or otherwise transferfunds to us, including restrictions on Mirant North America contained in itsfinancing agreements and restrictions on Mirant Mid-Atlantic contained in itsleveraged lease documents, which may affect our ability to access the cash flowof those subsidiaries to make debt service and other payments;

·       the disposition of thepending litigation described in this Form 10-Q.

Many of these risks arebeyond our ability to control or predict. All forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified intheir entirety by cautionary statements contained throughout this report.Because of these risks, uncertainties and assumptions, you should not placeundue reliance on these forward-looking statements. Furthermore, forward-lookingstatements speak only as of the date they are made.

**Factors that CouldAffect Future Performance**

We undertake no obligation to update publicly orrevise any forward-looking statements to reflect events or circumstances thatmay arise after the date of this report.

In addition to thediscussion of certain risks in Management’s Discussion and Analysis of Resultsof Operations and Financial Condition and the accompanying Notes to MirantNorth America, LLC’s unaudited condensed consolidated financial statements,other factors that could affect the Company’s future performance (business,financial condition or results of operations and cash flows) are set forth inour Annual Report on Form 10-K for the year ended December 31,2006.

**Certain Terms**

As used in this report, “we,” “us,” “our,” the “Company”and “Mirant North America” refer to Mirant North America, LLC and itssubsidiaries, unless the context requires otherwise.

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**MIRANT NORTH AMERICA, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

| ** **                                                                | ** ** | **Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                | ** ** | **(in millions)**                           | ** ** |
| Operating  revenues—affiliate                                        |       | **$**                                            | **33**     |   | $ | 3 |   |
| Operating  revenues—nonaffiliate                                     |       | **314**                                          |       | 964 |   |
| Total operating revenues                                                  |       | **347**                                          |       | 967 |   |
| Cost of fuel,  electricity and other products—affiliate              |       | **36**                                           |       | 16 |   |
| Cost of fuel,  electricity and other products—nonaffiliate           |       | **278**                                          |       | 306 |   |
| Total cost of fuel, electricity and other products                        |       | **314**                                          |       | 322 |   |
| **Gross  Margin**                                                         |       | **33**                                           |       | 645 |   |
| **Operating Expenses:**                                                   |       |                                             |       |   |   |
| Operations and  maintenance—affiliate                                |       | **65**                                           |       | 69 |   |
| Operations and  maintenance—nonaffiliate                             |       | **88**                                           |       | 93 |   |
| Depreciation and  amortization                                            |       | **30**                                           |       | 28 |   |
| Gain on sales of  assets, net                                             |       | **(2**                                           | **)**      | — |   |
| Total operating expenses                                                  |       | **181**                                          |       | 190 |   |
| **Operating  Income (Loss)**                                              |       | **(148**                                         | **)**      | 455 |   |
| **Other Expense (Income), net:**                                          |       |                                             |       |   |   |
| Interest  expense—nonaffiliate                                       |       | **29**                                           |       | 40 |   |
| Interest  income—affiliate                                           |       | **(2**                                           | **)**      | (1 | ) |
| Interest  income—nonaffiliate                                        |       | **(12**                                          | **)**      | (7 | ) |
| Other, net                                                                |       | —                                           |       | (1 | ) |
| Total other expense, net                                                  |       | **15**                                           |       | 31 |   |
| **Income  (Loss) From Continuing Operations Before Reorganization Items** |       | **(163**                                         | **)**      | 424 |   |
| Reorganization  items, net                                                |       | **(1**                                           | **)**      | — |   |
| **Income  (Loss) From Continuing Operations**                             |       | **(162**                                         | **)**      | 424 |   |
| **Loss  From Discontinued Operations**                                    |       | **(5**                                           | **)**      | (1 | ) |
| **Net Income (Loss)**                                                     |       | **$**                                            | **(167**   | **)** | $ | 423 |   |

 

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

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

| ** **                                                               | ** ** | **At**                 | ** ** | **At**                | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** | **December 31,** | ** ** |
| ** **                                                               | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                               | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| ** **                                                               | ** ** | **(in millions)** | ** ** |
| **ASSETS**                                                               | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| **Current Assets:**                                                      | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| Cash and cash  equivalents                                               | ** ** |                   | **$**      | **628**               | ** ** |   |   | $ | 753 |   |   |
| Funds on deposit                                                         | ** ** |                   | **310**    | ** **            |       |   | 233 |   |   |
| Receivables:                                                             |       |                   | ** ** | ** **            |       |   |   |   |   |
| Affiliate                                                                | ** ** |                   | **10**     | ** **            |       |   | 16 |   |   |
| Nonaffiliate, less  allowance for uncollectibles of $2 for 2007 and 2006 | ** ** |                   | **254**    | ** **            |       |   | 371 |   |   |
| Notes  receivable—affiliate                                         | ** ** |                   | **124**    | ** **            |       |   | 125 |   |   |
| Price risk  management assets—affiliate                             | ** ** |                   | **3**      | ** **            |       |   | 3 |   |   |
| Price risk  management assets—nonaffiliate                          | ** ** |                   | **369**    | ** **            |       |   | 728 |   |   |
| Prepaid rent and  other payments                                         | ** ** |                   | **122**    | ** **            |       |   | 131 |   |   |
| Inventories                                                              | ** ** |                   | **253**    | ** **            |       |   | 288 |   |   |
| Assets held for  sale                                                    | ** ** |                   | **523**    | ** **            |       |   | 527 |   |   |
| Total current  assets                                                    | ** ** |                   | **2,596**  | ** **            |       |   | 3,175 |   |   |
| **Property,  Plant and Equipment, net**                                  | ** ** |                   | **2,233**  | ** **            |       |   | 2,176 |   |   |
| **Noncurrent Assets:**                                                   | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| Intangible assets,  net                                                  | ** ** |                   | **210**    | ** **            |       |   | 212 |   |   |
| Price risk  management assets—affiliate                             | ** ** |                   | **1**      | ** **            |       |   | 1 |   |   |
| Price risk  management assets—nonaffiliate                          | ** ** |                   | **72**     | ** **            |       |   | 104 |   |   |
| Prepaid rent                                                             | ** ** |                   | **194**    | ** **            |       |   | 218 |   |   |
| Debt issuance  costs, net                                                | ** ** |                   | **46**     | ** **            |       |   | 48 |   |   |
| Other                                                                    | ** ** |                   | **9**      | ** **            |       |   | 18 |   |   |
| Total noncurrent  assets                                                 | ** ** |                   | **532**    | ** **            |       |   | 601 |   |   |
| **Total  assets**                                                        | ** ** |                   | **$**      | **5,361**             | ** ** |   |   | $ | 5,952 |   |   |
| **LIABILITIES AND EQUITY**                                               | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| **Current Liabilities:**                                                 | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| Notes payable—affiliate                                             | ** ** |                   | **$**      | **34**                | ** ** |   |   | $ | 27 |   |   |
| Current portion of  long-term debt                                       | ** ** |                   | **165**    | ** **            |       |   | 141 |   |   |
| Accounts payable  and accrued liabilities                                | ** ** |                   | **228**    | ** **            |       |   | 302 |   |   |
| Payable to  affiliate                                                    | ** ** |                   | **31**     | ** **            |       |   | 32 |   |   |
| Price risk  management liabilities—affiliate                        | ** ** |                   | **11**     | ** **            |       |   | 13 |   |   |
| Price risk management  liabilities—nonaffiliate                     | ** ** |                   | **226**    | ** **            |       |   | 286 |   |   |
| Accrued property  taxes                                                  | ** ** |                   | **1**      | ** **            |       |   | 75 |   |   |
| Other                                                                    | ** ** |                   | **18**     | ** **            |       |   | 28 |   |   |
| Total current  liabilities                                               | ** ** |                   | **714**    | ** **            |       |   | 904 |   |   |
| **Noncurrent Liabilities:**                                              | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| Long-term debt                                                           | ** ** |                   | **1,278**  | ** **            |       |   | 1,435 |   |   |
| Price risk  management liabilities—affiliate                        | ** ** |                   | **1**      | ** **            |       |   | 4 |   |   |
| Price risk  management liabilities—nonaffiliate                     | ** ** |                   | **73**     | ** **            |       |   | 39 |   |   |
| Asset retirement  obligations                                            | ** ** |                   | **42**     | ** **            |       |   | 41 |   |   |
| Other                                                                    | ** ** |                   | **6**      | ** **            |       |   | 7 |   |   |
| Total noncurrent  liabilities                                            | ** ** |                   | **1,400**  | ** **            |       |   | 1,526 |   |   |
| **Liabilities  Subject to Compromise**                                   | ** ** |                   | **12**     | ** **            |       |   | 58 |   |   |
| **Commitments and Contingencies**                                        | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| **Equity:**                                                              | ** ** |                   | ** ** | ** **            |       |   | ** ** |   |   |
| Member’s interest                                                   | ** ** |                   | **3,459**  | ** **            |       |   | 3,685 |   |   |
| Preferred stock in  affiliate                                            | ** ** |                   | **(224**   | **)**                 |       |   | (221 | ) |   |
| Total equity                                                             | ** ** |                   | **3,235**  | ** **            |       |   | 3,464 |   |   |
| **Total  liabilities and equity**                                        | ** ** |                   | **$**      | **5,361**             | ** ** |   |   | $ | 5,952 |   |   |

 

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

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**MIRANT NORTH AMERICA, LLCAND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)**

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

| ** **                                                | ** ** | ** **        | ** ** | **Preferred**     | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                | ** ** | **Member’s** | ** ** | **Stock in** | ** ** |
| ** **                                                | ** ** | **Interest**      | ** ** | **Affiliate**     | ** ** |
| Balance,  December 31, 2006                          |       |              | $          | 3,685             |       |   |   | $ | (221 | ) |   |
| Net income (loss)                                         | ** ** | ** **        | **(167**   | **)**             |       |   | — | ** ** | ** ** |
| Amortization of discount on preferred stock in  affiliate | ** ** | ** **        | **3**      | ** **        | ** ** | ** ** | **(3** | **)** |   |
| Distribution to member                                    | ** ** | ** **        | **(151**   | **)**             |       |   | — |   |   |
| Capital contribution pursuant to the Plan                 | ** ** | ** **        | **17**     |              |       |   | — |   |   |
| Adoption of FIN 48                                        | ** ** | ** **        | **51**     |              |       |   | — |   |   |
| Effect of the Supplemental Plan                           | ** ** | ** **        | **21**     |              |       |   | — |   |   |
| **Balance, March 31, 2007**                          | ** ** | ** **        | **$**      | **3,459**         | ** ** | ** ** | ** ** | **$** | **(224** | **)** | ** ** |

 

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

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**MIRANT NORTH AMERICA, LLCAND SUBSIDIARIES (Wholly-Owned Indirect Subsidiary of Mirant Corporation)**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

| ** **                                                                                                                     | ** ** | **Three Months  Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                                                                     | ** ** | **(in millions)**                           | ** ** |
| **Cash Flows from Operating Activities:**                                                                                      | ** ** |                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income (loss)                                                                                                              | ** ** |                                             | **$**      | **(167** | **)** |   |   | $ | 423 |   |   |
| Loss from discontinued  operations                                                                                             | ** ** |                                             | **(5**     | **)** |   |   | (1 | ) |   |
| Income (loss) from  continuing operations                                                                                      | ** ** |                                             | **(162**   | **)** |   |   | 424 |   |   |
| Adjustments to reconcile net income (loss) from  continuing operations to net cash provided by (used in) operating activities: |       |                                             |       | ** ** |   |   |   |   |   |
| Depreciation and  amortization                                                                                                 | ** ** |                                             | **32**     | ** ** |   |   | 30 |   |   |
| Gain on sales of  assets and investments, net                                                                                  | ** ** |                                             | **(2**     | **)** |   |   | — |   |   |
| Price risk  management activities, net                                                                                         | ** ** |                                             | **359**    | ** ** |   |   | (282 | ) |   |
| Changes in operating  assets and liabilities:                                                                                  |       |                                             |       | ** ** |   |   |   |   |   |
| Affiliate accounts  receivable, net                                                                                            | ** ** |                                             | **(3**     | **)** |   |   | (4 | ) |   |
| Customer accounts  receivable, net                                                                                             | ** ** |                                             | **117**    | ** ** |   |   | 237 |   |   |
| Prepaid rent                                                                                                                   | ** ** |                                             | **24**     | ** ** |   |   | 24 |   |   |
| Inventories                                                                                                                    | ** ** |                                             | **35**     | ** ** |   |   | (36 | ) |   |
| Other assets                                                                                                                   | ** ** |                                             | **(67**    | **)** |   |   | 267 |   |   |
| Accounts payable  and accrued liabilities                                                                                      | ** ** |                                             | **(54**    | **)** |   |   | (199 | ) |   |
| Payable to  affiliate                                                                                                          | ** ** |                                             | **(2**     | **)** |   |   | (17 | ) |   |
| Property taxes  accrued, nonaffiliate                                                                                          | ** ** |                                             | **(22**    | **)** |   |   | 15 |   |   |
| Other liabilities                                                                                                              | ** ** |                                             | **(30**    | **)** |   |   | 17 |   |   |
| Total adjustments                                                                                                              | ** ** |                                             | **387**    | ** ** |   |   | 52 |   |   |
| Net cash provided  by operating activities of continuing operations                                                            | ** ** |                                             | **225**    | ** ** |   |   | 476 |   |   |
| Net cash provided  by (used in) operating activities of discontinued operations                                                | ** ** |                                             | **(2**     | **)** |   |   | 5 |   |   |
| Net cash provided  by operating activities                                                                                     | ** ** |                                             | **223**    | ** ** |   |   | 481 |   |   |
| **Cash Flows from Investing Activities:**                                                                                      | ** ** |                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Capital expenditures                                                                                                           | ** ** |                                             | **(75**    | **)** |   |   | (20 | ) |   |
| Repayments of notes  receivable from nonaffiliate                                                                              |       |                                             | —     | ** ** |   |   | 206 |   |   |
| Proceeds from the sales  of assets and investments, net                                                                        | ** ** |                                             | **2**      | ** ** |   |   | 2 |   |   |
| Proceeds from property  insurance                                                                                              | ** ** |                                             | **2**      | ** ** |   |   | — |   |   |
| Net cash provided  by (used in) investing activities of continuing operations                                                  | ** ** |                                             | **(71**    | **)** |   |   | 188 |   |   |
| Net cash used in  investing activities of discontinued operations                                                              |       |                                             | —     | ** ** |   |   | (1 | ) |   |
| Net cash provided  by (used in) investing activities                                                                           | ** ** |                                             | **(71**    | **)** |   |   | 187 |   |   |
| **Cash Flows from Financing Activities:**                                                                                      | ** ** |                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Proceeds from issuance of  long-term debt-affiliate                                                                            | ** ** |                                             | **7**      | ** ** |   |   | — |   |   |
| Proceeds from issuance of  long-term debt-nonaffiliate                                                                         |       |                                             | —     | ** ** |   |   | 2,015 |   |   |
| Repayment of  debt-affiliate                                                                                                   |       |                                             | —     | ** ** |   |   | (112 | ) |   |
| Repayment of long-term  debt-nonaffiliate                                                                                      | ** ** |                                             | **(133**   | **)** |   |   | (468 | ) |   |
| Debt issuance costs                                                                                                            |       |                                             | —     | ** ** |   |   | (51 | ) |   |
| Settlement of debt under  the Plan                                                                                             |       |                                             | —     | ** ** |   |   | (1,776 | ) |   |
| Payment to affiliate  under the Plan                                                                                           |       |                                             | —     | ** ** |   |   | (250 | ) |   |
| Distribution to member                                                                                                         | ** ** |                                             | **(151**   | **)** |   |   | — |   |   |
| Net cash used in  financing activities of continuing operations                                                                | ** ** |                                             | **(277**   | **)** |   |   | (642 | ) |   |
| **Net Increase (Decrease) in Cash  and Cash Equivalents**                                                                      | ** ** |                                             | **(125**   | **)** |   |   | 26 |   |   |
| **Cash and Cash Equivalents,  beginning of period**                                                                            | ** ** |                                             | **753**    | ** ** |   |   | 295 |   |   |
| **Cash and Cash Equivalents, end  of period**                                                                                  | ** ** |                                             | **$**      | **628** | ** ** |   |   | $ | 321 |   |   |
| **Supplemental Cash Flow Disclosures:**                                                                                        | ** ** |                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash paid for interest,  net of amounts capitalized                                                                            | ** ** |                                             | **$**      | **44** | ** ** |   |   | $ | 20 |   |   |
| **Financing Activity:**                                                                                                        | ** ** |                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Effect of the  Supplemental Plan—non-cash                                                                                 | ** ** |                                             | **$**      | **21** | ** ** |   |   | $ | — |   |   |
| Capital contribution pursuant to the Plan—non-cash                                                                        | ** ** |                                             | **$**      | **17** | ** ** |   |   | $ | 1 |   |   |

 

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

8

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**MIRANT NORTH AMERICA, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**A.   Descriptionof Business**

Mirant North America is a national independent powerproducer, a wholly-owned subsidiary of Mirant Americas Generation and anindirect wholly-owned subsidiary of Mirant. The Company generates revenuesprimarily through the production of electricity. The Company produces and sellssubstantially all of the output from its generating facilities in the forwardand spot markets and the remainder under contracts with third parties. 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.

As of March 31, 2007, the Company owned or leased12,099 MW of electric generating capacity. In the third quarter of 2006, Mirantcommenced auction processes to sell six of its natural gas-fired plants,including the Company’s Zeeland (903 MW) and Bosque (546 MW) natural gas-firedplants totaling 1,449 MW. On May 1, 2007, the Company completed the saleof these natural gas-fired plants. See Note C for additional informationregarding the accounting for these assets as discontinued operations. Inaddition, on May 7, 2007, the Company completed the sale of Mirant NY-Gen(121 MW).

Mirant North America’s continuing operations of 10,301MW consist of the ownership, long-term lease and operation of power generationfacilities located in markets in the Mid-Atlantic and Northeast regions of theUnited States and in California, and energy trading and marketing operations inAtlanta, Georgia.

On April 9, 2007, Mirant announced that its Boardof Directors had decided to explore strategic alternatives to enhancestockholder value. In light of the status of the disposition program, the Boardof Directors will consider in the exploration process whether the interests ofstockholders would be best served by returning excess cash from the saleproceeds to stockholders, with Mirant continuing to operate its retainedbusinesses or, alternatively, whether greater stockholder value would beachieved by entering into a transaction with another company, including a saleof Mirant in its entirety. Mirant does not expect to consider making anacquisition as part of this exploration process.

The Company has a numberof service agreements for labor and administrative services with MirantServices. In addition, Mirant Energy Trading provides services to other Mirantaffiliates related to the sale of electric power and the procurement of fueland emissions allowances.

**B.   Accountingand Reporting Policies**

***Basis of Presentation***

The accompanying unaudited condensed consolidatedfinancial statements of Mirant North America and its wholly-ownedsubsidiaries have been prepared in accordance with GAAP for interim financialinformation and with the instructions for Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by GAAP for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006.

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Mirant North America and itswholly-owned subsidiaries and have been prepared from records maintained 

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by Mirant North Americaand its subsidiaries. All significant intercompany accounts and transactionshave been eliminated in consolidation.

In accordance with SFAS No. 144, the resultsof operations of the Company’s assets to be disposed of have been reclassifiedto discontinued operations, and the associated assets and liabilities have beenreclassified to assets and liabilities held for sale for all periods presented.In addition, the accompanying unaudited condensed consolidated statements ofcash flows present the cash flows from discontinued operations in each of thethree major categories (operating, investing and financing activities). Theunaudited condensed consolidated statement of cash flows for the three monthsended March 31, 2006, was revised to conform to this presentation.

Certain prior periodamounts have been reclassified to conform to the current period financialstatement presentation.

***Recently Adopted Accounting Standards***

**Adoption of FIN 48**

On July 13, 2006, the FASB issued FIN 48, whichclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109. FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.

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

On January 1, 2007,the Company adopted the provisions of FIN 48 for all uncertain tax positions.Only tax positions that met the more-likely-than-not recognition threshold atthe effective date were recognized or will continue to be recognized. Forcontinuing operations, the adoption of FIN 48 resulted in a decrease in accruedliabilities of $51 million with a corresponding increase to member’s interestof the same amount.

**Adoptions of OtherStandards**

In February 2006, the FASB issued SFAS No. 155,which allows fair value measurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation. SFAS No. 155is effective for all financial instruments acquired, issued or subject to are-measurement event beginning in the first fiscal year after September 15,2006. At the date of adoption, any difference between the total carrying amountof the existing bifurcated hybrid financial instrument and the fair value ofthe combined hybrid financial instrument will be recognized as a cumulativeeffect adjustment to beginning retained earnings. The Company adopted SFAS No. 155on January 1, 2007. The adoption of SFAS No. 155 did not affect theCompany’s statements of operations, financial position or cash flows.

On June 28, 2006, theFASB ratified the EITF’s consensus reached on EITF 06-3, which relates tothe income statement presentation of taxes collected from customers andremitted to government authorities. The Task Force affirmed as a consensus onthis issue that the presentation of taxes on either a gross basis or a netbasis within the scope of EITF 06-3 is an accounting policy decision thatshould be disclosed pursuant to APB No. 22. A company should disclose theamount of those taxes that is recognized on a 

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grossbasis in interim and annual financial statements for each period for which anincome statement is presented if those amounts are significant. The Company adoptedEITF 06-3 on January 1, 2007. While the amounts are not material,the Company’s policy is to present such taxes on a net basis in theconsolidated statements of operations.

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

On September 15, 2006, the FASB issued SFAS No. 157,which establishes a framework for measuring fair value under GAAP and expandsdisclosure about fair value measurement. SFAS No. 157 requires companiesto disclose the fair value of their financial instruments according to a fairvalue hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companiesare required to provide enhanced disclosure regarding fair value measurementsin the level 3 category, including a reconciliation of the beginning and endingbalances separately for each major category of assets and liabilities accountedfor at fair value. SFAS No. 157 is effective at the beginning of the firstfiscal year after November 15, 2007. The Company will adopt SFAS No. 157on January 1, 2008 and, as of that date, evaluate the fair value of itsassets and liabilities according to the hierarchy established by the FASB andpresent the required disclosures. It is also expected that the adoption of SFASNo. 157 will affect the measurement of certain liabilities byincorporating the Company’s own credit standing and the accounting forinception gains and losses currently being deferred under EITF 02-3. Thenet deferred inception gains and losses at March 31, 2007, were notmaterial. The Company has not yet determined the potential effect of SFAS No. 157on its statements of operations, financial position or cash flows.

On February 15, 2007,the FASB issued SFAS No. 159, which permits an entity to measure manyfinancial instruments and certain other items at fair value by electing a fairvalue option. Once elected, the fair value option may be applied on aninstrument by instrument basis, is irrevocable and is applied only to entireinstruments. SFAS No. 159 also requires companies with trading andavailable-for-sale securities to report the unrealized gains and losses forwhich the fair value option has been elected within earnings for the periodpresented. SFAS No. 159 is effective at the beginning of the first fiscalyear after November 15, 2007. The Company will adopt SFAS No. 159 on January 1,2008. The Company has not yet determined the potential effect of SFAS No. 159on its statements of operations, financial position or cash flows.

**C.   Dispositions**

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

Assets and liabilities held for sale include discontinuedoperations and other assets that the Company expects to dispose of in the nextyear.

On May 1, 2007, Mirant completed the sale of sixU.S. natural gas-fired plants, including the Company’s Zeeland and Bosquenatural gas-fired plants, to Broadway Generating Company, LLC (formerly calledLS Power Acquisition Co. I), a member of the LS Power Group. The net proceedsto the Company from the sale after transaction costs were $524 million. Inaccordance with the Company’s debt covenants, the proceeds from the sale willbe reinvested in the Company’s business.

At March 31, 2007 and December 31, 2006,assets and liabilities held for sale consisted of the planned dispositionsdiscussed above and ancillary equipment included in the sale to the LS PowerGroup.

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Thetable below presents the components of the balance sheet accounts classified asassets and liabilities held for sale (in millions):

| ** **                     | ** ** | **At March 31,  2007** | ** ** | **At December 31,  2006** | ** ** |
|--------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| Current Assets                 |       |                             | $          | 19                                  |       |   |   | $ | 22 |   |   |
| Property, Plant  and Equipment |       |                             | 504        |                                |       |   | 505 |   |   |
| Total Assets                   |       |                             | $          | 523                                 |       |   |   | $ | 527 |   |   |
| Current  Liabilities           |       |                             | $          | 4                                   |       |   |   | $ | 5 |   |   |
| Noncurrent  Liabilities        |       |                             | 11         |                                |       |   | 11 |   |   |
| Total Liabilities              |       |                             | $          | 15                                  |       |   |   | $ | 16 |   |   |

 

***Discontinued Operations***

The Company has reclassified amounts for prior periodsin the financial statements to report separately, as discontinued operations,the revenues and expenses of components of the Company that met the requiredcriteria for such classification at March 31, 2007.

Asummary of the operating results for these discontinued operations is asfollows (in millions):

| ** **          | ** ** | **Three Months  Ended March 31,** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Operating  revenues |       |                                             | $          | 6 |   |   |   | $ | 9 |   |   |
| Operating  expenses |       |                                             | 11         |   |   |   | 10 |   |   |
| Operating loss      |       |                                             | (5         | ) |   |   | (1 | ) |   |
| Net loss            |       |                                             | $          | (5 | ) |   |   | $ | (1 | ) |   |

 

**D.   Price RiskManagement Assets and Liabilities**

Thefair values of the Company’s price risk management assets and liabilities, netof credit reserves, at March 31, 2007 and December 31, 2006, are asfollows (in millions):

| ** **                        | ** ** | **At March 31, 2007** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **Assets**                           | ** ** | **Liabilities** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Current**                          | ** ** | **Noncurrent** | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **Net Fair Value** | ** ** |
| Electricity                       |       |                                 | $          | 239 |   |   |   | $ | 73 |   |   |   | $ | (216 | ) |   |   | $ | (47 | ) |   |   | $ | 49 |   |   |
| Natural Gas                       |       |                                 | 14         |   |   |   | — |   |   |   | (11 | ) |   |   | (1 | ) |   |   | 2 |   |   |
| Oil                               |       |                                 | 112        |   |   |   | — |   |   |   | (9 | ) |   |   | (26 | ) |   |   | 77 |   |   |
| Coal                              |       |                                 | 10         |   |   |   | — |   |   |   | (1 | ) |   |   | — |   |   |   | 9 |   |   |
| Other, including  credit reserves |       |                                 | (3         | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (3 | ) |   |
| Total                             |       |                                 | $          | 372 |   |   |   | $ | 73 |   |   |   | $ | (237 | ) |   |   | $ | (74 | ) |   |   | $ | 134 |   |   |

 

| ** **                        | ** ** | **At December 31, 2006** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **Assets**                              | ** ** | **Liabilities** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Current**                             | ** ** | **Noncurrent** | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **Net Fair Value** | ** ** |
| Electricity                       |       |                                    | $          | 619 |   |   |   | $ | 104 |   |   |   | $ | (260 | ) |   |   | $ | (12 | ) |   |   | $ | 451 |   |   |
| Natural Gas                       |       |                                    | 21         |   |   |   | 1 |   |   |   | (26 | ) |   |   | (2 | ) |   |   | (6 | ) |   |
| Oil                               |       |                                    | 83         |   |   |   | — |   |   |   | (10 | ) |   |   | (29 | ) |   |   | 44 |   |   |
| Coal                              |       |                                    | 13         |   |   |   | — |   |   |   | (3 | ) |   |   | — |   |   |   | 10 |   |   |
| Other, including  credit reserves |       |                                    | (5         | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (5 | ) |   |
| Total                             |       |                                    | $          | 731 |   |   |   | $ | 105 |   |   |   | $ | (299 | ) |   |   | $ | (43 | ) |   |   | $ | 494 |   |   |

 

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Thefollowing table represents the net price risk management assets and liabilitiesby tenor as of March 31, 2007 (in millions):

| 2007                      |   | $   | 182    |   |
|---------------------------|--------|-----|--------|--------|
| 2008                      |   | (49 | )      |
| 2009                      |   | 3   |   |
| 2010                      |   | (1  | )      |
| Thereafter                |   | (1  | )      |
| Net assets  (liabilities) |   | $   | 134    |   |

 

The volumetric weighted average maturity, or weightedaverage tenor, of the price risk management portfolio at March 31, 2007,was approximately 13 months. The net notional amount of the price riskmanagement assets and liabilities at March 31, 2007, was a net shortposition of approximately 46** **millionequivalent MWh.

Thefollowing table provides a summary of the factors affecting the change in netfair value of the price risk management asset and (liability) accounts for thethree months ended March 31, 2007 (in millions):

| ** **                                             | ** ** | **Proprietary  Trading and  Fuel Oil  Management** | ** ** | **Asset  Management** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------|------------|-----------|------------|
| Net fair value of  portfolio at December 31, 2006 |       |                                                         | $          | 46                    |       |      |       | $ | 448 |   |   | $ | 494 |   |
| Changes in fair  value, net                            |       |                                                         | 7          |                  |       |      | (195       | ) |   | (188 | ) |
| Contracts settled  during the period, net              |       |                                                         | (5         | )                     |       |      | (167       | ) |   | (172 | ) |
| Net fair value of  portfolio at March 31, 2007    |       |                                                         | $          | 48                    |       |      |       | $ | 86 |   |   | $ | 134 |   |

 

**E.**   Debt

Long-termdebt is as follows (in millions):

| ** **                                         | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** | ** **             | ** ** | **Secured/**  | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|------------------------|------------|---------------|------------|
| ** **                                         | ** ** | **2007**                   | ** ** | **2006**                      | ** ** | **Interest Rate** | ** ** | **Unsecured** | ** ** |
| **Long-term debt:**                                |       |                       |       | ** **                    |       |                   | ** ** | ** **    |       | ** ** | ** ** | ** ** | ** ** |
| Mirant North America:                              |       |                       |       |                          |       |                   |       |          |       |   |   |   |   |
| Term loan, due 2007 to 2013                        |       |                       | $          | 560                           |       |                   |       | $             | 693        |   |   | LIBOR + 1.75 | % | Secured |   |
| Notes, due 2013.                                   |       |                       | 850        |                          |       |                   | 850        |          |       | 7.375 | % | Unsecured |   |
| Other:                                             |       |                       |       |                          |       |                   |       |          |       |   |   |   |   |
| Mirant Chalk Point capital lease, due 2007 to 2015 |       |                       | 33         |                          |       |                   | 33         |          |       | 8.19 | % | — |   |
| Total                                              |       |                       | 1,443      |                          |       |                   | 1,576      |          |       |   |   |   |   |
| Less: current  portion of long-term debt           |       |                       | (165       | )                             |       |                   | (141       | )             |       |   |   |   |   |
| Total long-term  debt, excluding current portion   |       |                       | $          | 1,278                         |       |                   |       | $             | 1,435      |   |   |   |   |   |   |

 

***Senior Secured Credit Facilities***

Mirant North America entered into senior securedcredit facilities in January 2006, which are comprised of an$800 million six-year senior secured revolving credit facility and a$700 million seven-year senior secured term loan. The full amount of thesenior secured revolving credit facility is available for cash draws or for theissuance of letters of credit. On January 3, 2006, Mirant North Americadrew 

13

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$465 million underits senior secured revolving credit facility. All amounts were repaid duringthe first quarter of 2006.******The seniorsecured term loan was fully drawn at closing and amortizes in quarterlyinstallments aggregating 0.25% of the original principal of the term loan perquarter for the first 27 quarters, with the remainder payable on the finalmaturity date in January 2013. At the closing, $200 million drawnunder the senior secured term loan was deposited into a cash collateral accountto support the issuance of up to $200 million of letters of credit. As of March 31,2007, there were approximately $200 million of letters of credit outstandingunder the senior secured term loan and $18 million outstanding under the seniorsecured revolving credit facility. The senior secured credit facilities areobligations of Mirant North America and the respective guarantors and arewithout recourse to any other Mirant North America entities.

In addition to thequarterly installments, Mirant North America is required to prepay a portion ofthe outstanding senior secured term loan principal balance once a year. Theprepayment is based on an adjusted EBITDA calculation that determines excessfree cash flows, as defined in the loan agreement. On March 30, 2007, theCompany made a mandatory principal prepayment of approximately $131 million onthe term loan. Based on projections for 2007, the current estimate of themandatory principal prepayment of the term loan in March 2008 isapproximately $155 million. This amount has been reclassified from long-termdebt to current portion of long-term debt at March 31, 2007.

**F.**   BankruptcyRelated Disclosures

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

The Company’s New York subsidiaries, Mirant New York,Mirant Bowline, Mirant Lovett, Hudson Valley Gas and Mirant NY-Gen, remained inbankruptcy at December 31, 2006. OnJanuary 26, 2007, Mirant New York, Mirant Bowline, and Hudson Valley Gas(collectively the “Emerging New York Entities”) filed a Supplemental JointChapter 11 Plan of Reorganization with the Bankruptcy Court and subsequentlyfiled amendments to that plan (as subsequently amended, the “SupplementalPlan”). The Supplemental Plan was confirmed by the Bankruptcy Court onMarch 23, 2007, and became effective on April 16, 2007, resulting inthe Emerging New York Entities’ emergence from bankruptcy. For financial statementpresentation purposes, Mirant North America recorded the effects of theSupplemental Plan on March 31, 2007.

At March 31, 2007, Mirant Lovett and MirantNY-Gen remained in bankruptcy. On January 31, 2007, Mirant New Yorkentered into an agreement with Alliance Energy Renewables, LLC for the sale ofMirant NY-Gen, which owns the Hillburn and Shoemaker gas turbine facilities andthe Swinging Bridge, Rio and Mongaup hydroelectric generating facilities. Thesale price of $5 million was subject to adjustments for working capital andcertain dam remediation efforts that were ongoing at the Swinging Bridgefacility. The sale closed on May 7, 2007, and Mirant NY-Gen emerged frombankruptcy under a plan of reorganization approved by the Bankruptcy Court on April 27,2007, that incorporated the sale. The timing of the filing of a plan ofreorganization for Mirant Lovett, and of its emergence from bankruptcy, isuncertain. Mirant Americas is providing Mirant Lovett with adebtor-in-possession credit facility for working capital. For furtherdiscussion see “Chapter 11 Proceedings” in Note K.

Unaudited condensedcombined financial statements of the two New York subsidiaries, Mirant Lovettand Mirant NY-Gen, that remained in bankruptcy at March 31, 2007, are setforth below:

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**MirantLovett and Mirant NY-GenUnaudited Condensed Combined Statements of Operations**

| ** **                                          | ** ** | **For the Three  Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(in millions)**                                    | ** ** |
| Operating  revenues                                 |       |                                                      | $          | 49 |   |   |   | $ | 66 |   |   |
| Total cost of  fuel, electricity and other products |       |                                                      | 22         |   |   |   | 42 |   |   |
| Operating  expenses                                 |       |                                                      | 20         |   |   |   | 24 |   |   |
| Operating income                                    |       |                                                      | 7          |   |   |   | — |   |   |
| Other expense,  net                                 |       |                                                      | 1          |   |   |   | — |   |   |
| Net Income                                          |       |                                                      | $          | 6 |   |   |   | $ | — |   |   |

 

**MirantLovett and Mirant NY-GenUnaudited Condensed Combined Balance Sheet Data**

| ** **                                  | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2007**                   | ** ** | **2006**                      | ** ** |
| ** **                                  | ** ** | **(in millions)**     | ** ** |
| Assets—affiliate                       |       |                       | $          | 55                            |       |   |   | $ | 64 |   |   |
| Assets—nonaffiliate                    |       |                       | 35         |                          |       |   | 37 |   |   |
| Property, plant  and equipment, net         |       |                       | 184        |                          |       |   | 187 |   |   |
| Total assets                                |       |                       | $          | 274                           |       |   |   | $ | 288 |   |   |
| Liabilities not  subject to compromise      |       |                       |       |                          |       |   |   |   |   |
| Liabilities—affiliate                  |       |                       | $          | 17                            |       |   |   | $ | 11 |   |   |
| Liabilities—nonaffiliate               |       |                       | 22         |                          |       |   | 50 |   |   |
| Liabilities  subject to compromise          |       |                       |       |                          |       |   |   |   |   |
| Liabilities—affiliate                  |       |                       | 28         |                          |       |   | 27 |   |   |
| Liabilities—nonaffiliate               |       |                       | 2          |                          |       |   | 2 |   |   |
| Member’s equity                        |       |                       | 205        |                          |       |   | 198 |   |   |
| Total liabilities and  member’s equity |       |                       | $          | 274                           |       |   |   | $ | 288 |   |   |

 

**MirantLovett and Mirant NY-GenUnaudited Condensed Combined Statements of Cash Flows**

| ** **                                            | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                      | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(in millions)**                                        | ** ** |
| Net cash provided by  (used in):                      |       |                                                          |       |   |   |   |   |
| Operating activities                                  |       | $                                                             | (15        | ) |   | $ | (5 | ) |   |
| Investing activities                                  |       | 7                                                             |       |   | 7 |   |   |
| Financing  activities                                 |       | 7                                                             |       |   | — |   |   |
| Net increase  (decrease) in cash and cash equivalents |       | (1                                                            | )          |   | 2 |   |   |
| Cash and cash  equivalents, beginning of period       |       | 4                                                             |       |   | — |   |   |
| Cash and cash  equivalents, end of period             |       | $                                                             | 3          |   |   | $ | 2 |   |   |

 

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**G.   RelatedParty Arrangements and Transactions**

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

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

Thetotal costs incurred under the Management, Personnel and Services Agreementwith Mirant Services have been included in the accompanying unaudited condensedconsolidated statements of operations as follows (in millions):

| ** **                                                  | ** ** | **For the Three  Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                       | ** ** | **2006** | ** ** |
| Cost of fuel, electricity and other products—affiliate |       |                                                           | $          | 2 |   |   |   | $ | 2 |   |   |
| Operations and maintenance expense—affiliate           |       |                                                           | 38         |   |   |   | 37 |   |   |
| Total                                                       |       |                                                           | $          | 40 |   |   |   | $ | 39 |   |   |

 

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

For the three months endedMarch 31, 2007 and 2006, the Company provided energy marketing and fuelprocurement services through Mirant Energy Trading to the following affiliates:Mirant Las Vegas, Mirant Sugar Creek, Shady Hills, Mirant West Georgia andMirant Wichita Falls. For the three months ended March 31, 2007 and 2006,the Company recorded a reduction to operations and maintenance of approximately$1 million, related to these agreements.

Mirant Wichita Falls wassold by Mirant in the second quarter of 2006. On May 1, 2007, Mirantcompleted the sale of Mirant Las Vegas, Mirant Sugar Creek, Shady Hills andMirant West Georgia. Subsequent to the sale of these affiliates, the Companywill no longer recognize a reduction to operations and maintenance associatedwith providing services to these affiliates.

The Company’s gross marginfor future periods is not expected to be materially affected by the sale ofthese affiliates. However, because the Company will discontinue providingenergy marketing and fuel procurement services to these entities, the Companyexpects its operating revenues-affiliate and cost of fuel, electricity, andother products—affiliate to decrease or be eliminated subsequent to the sale ofthese affiliates. In addition, these decreases will result in correspondingdecreases in cost of fuel, electricity, and other products—nonaffiliate andoperating revenues-nonaffiliate, respectively, in the consolidated statementsof operations in future periods.

***AdministrationArrangements with Mirant Services***

Substantially all ofMirant’s corporate overhead costs are allocated to Mirant’s operatingsubsidiaries. For the three months ended March 31, 2007 and 2006, theCompany incurred approximately $28 million and $33 million,respectively, in costs under these arrangements, which are included inoperations and maintenance—affiliate in the accompanying unaudited condensedconsolidated statements of operations.

***The Company’s allocation of Mirant’s overhead costs isexpected to increase as Mirant completes the dispositions of its Philippine andCaribbean businesses and six of its U.S. natural gas-fired assets in 2007.***

***Notes Receivablefrom Affiliate and Notes Payable to Affiliate***

Mirant and certain of itssubsidiaries participate in an intercompany cash management program wherebycash balances at Mirant and the participating subsidiaries are transferred tocentral concentration accounts to fund working capital and other needs. At March 31,2007 and December 31, 2006, the 

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Companyhad current notes receivable from Mirant Americas Generation of $124 millionand $125 million, respectively, related to the intercompany cash managementprogram. For the three months ended March 31, 2007 and 2006, the Companyearned $2 million and $1 million, respectively, of interest income related tothe note receivable, which is recorded in interest income—affiliate in theaccompanying unaudited condensed consolidated statements of operations. At March 31,2007 and December 31, 2006, the Company had current notes payable toaffiliate of $34 million and $27 million, respectively. Interest expense—affiliatewas less than $1 million for the three months ended March 31, 2007 and2006.

***Payable to MirantAmericas Pursuant to the Plan***

Pursuant to the Plan,Mirant North America was required to pay $250 million to Mirant Americas withinfive days of the effective date of the Plan in return for Mirant’s contributionof its interest in the following: Mirant Americas Energy Marketing, MirantAmericas Development, Inc., Mirant Americas Production Company, MirantAmericas Energy Capital, LLC, Mirant Americas Energy Capital Assets, LLC,Mirant Americas Development Capital, LLC, Mirant Americas Retail EnergyMarketing, LP, and Mirant Americas Gas Marketing I-XV, LLCs. This amount waspaid in January 2006.

***Mirant Guarantees***

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

Mirant posted apost-petition letter of credit in the amount of $5 million on behalf of MirantTexas, LP (“Mirant Texas”) as of December 31, 2004, related to a tollingagreement. This post-petition letter of credit was set to expire in January 2006.Upon emergence from bankruptcy, Mirant North America replaced thispost-petition letter of credit with a letter of credit issued under its seniorsecured credit facilities. The letter of credit expired in February 2007.

In July 2006, MirantNorth America posted a letter of credit in the amount of $14 million on behalfof Mirant Delta, LLC related to a tolling agreement. This letter of creditexpires in July 2007.

Prior to 2005, Mirantentered into pre-petition letters of credit to support the Company’s assetmanagement activities. In September 2005, several of these letters ofcredit were drawn in the amount of $39 million. In January 2006, theremaining pre-petition letter of credit of $7 million was drawn in full. Inaddition, Mirant entered into post-petition letters of credit to support itsasset management activities. In January 2006, letters of credit from theMirant North America senior secured credit facilities replaced the elevenpost-petition letters of credit outstanding at December 31, 2005.

***Preferred Stock inMirant Americas***

Mirant Americas issued mandatorilyredeemable Series A preferred shares to Mirant Mid-Atlantic for thepurpose of funding future environmental capital expenditures. For the threemonths ended March 31, 2007, the Company recorded $3 million in preferredstock in affiliate and member’s interest in the unaudited condensed consolidatedbalance sheet related to the amortization of the discount on the preferredstock in Mirant Americas.

***Debtor inPossession Financing for New York Subsidiaries***

Mirant North America andMirant Americas Energy Marketing, (the “Primary DIP Lenders”) entered into anagreement (the “Primary New York DIP Agreement”) to make secured debtor-in-

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possessionfinancing in an amount of (i) $20 million, plus (ii) an amountequal to the amount of credit support provided on behalf of Mirant New York,Mirant Bowline, Mirant Lovett, and Hudson Valley Gas (collectively, the “NewYork DIP Borrowers”), to the extent such amounts were collateralized with cashor cash equivalents by the New York DIP Borrowers. The New York DIP Borrowershad posted $21 million cash collateral with Mirant Energy Trading (successor toMirant Americas Energy Marketing) in accordance with the March 31, 2007,collateral allocation performed in good faith by Mirant Energy Trading. Thiscash collateral amount was returned to the New York DIP Borrowers, and thePrimary New York DIP Agreements were terminated in conjunction with theEmerging Subsidiaries emergence from bankruptcy on April 16, 2007.

The Bankruptcy Courtapproved a debtor-in-possession loan to Mirant NY-Gen from Mirant Americasunder which Mirant Americas, subject to certain conditions, would lend up to$16.5 million to Mirant NY-Gen to provide funding for the repairs on theSwinging Bridge dam. When Mirant NY-Gen emerged from bankruptcy and was sold onMay 7, 2007, all claims held by Mirant NY-Gen were assigned to MirantAmericas, Mirant Americas released all of its claims and liens against MirantNY-Gen, and this loan was cancelled.

On April 18, 2007, anew DIP Agreement was established between Mirant Lovett and Mirant Americas tomake secured debtor-in-possession financing in an amount of $20 million. Thefinancing has a stated maturity of 180 days and bears interest at a rate ofLIBOR plus 4.25%. In addition, Mirant Lovett posted $7 million of cashcollateral with Mirant Energy Trading to collateralize Mirant Energy Tradingfor collateral that Mirant Energy Trading has posted on Mirant Lovett’s behalf.

**H.**   Income Taxes

The Company is a limitedliability company treated as a branch of Mirant Americas for income taxpurposes. As a result, Mirant Americas and Mirant have direct liability for themajority of the federal and state income taxes relating to the Company’soperations. Through December 31, 2005, the Company has allocated currentand deferred income taxes to each regarded corporate member entity of ourconsolidated group as if each regarded corporate entity member were a singletaxpayer utilizing the asset and liability method to account for income taxesexcept with respect to recognizing certain current period tax benefits.Specifically, the Company did not record current period tax benefits on eachregarded corporate entity’s ability to carry back its separate company currentyear net operating loss as realization of such losses were dependent onreimbursements from Mirant, which were at Mirant’s discretion under the taxsharing agreement.

Several significantchanges to the Company’s tax posture occurred as a result of the Plan, includingthe conversion of certain of the Company’s regarded corporate entities tolimited liability companies coupled with the liquidation and/or merger of theseregarded corporate entities into other disregarded corporate entities forincome tax purposes, and certain partnerships owned by the regarded corporateentities were also liquidated and now form part of these disregarded entitiesfor income tax purposes. The result eliminates the Company’s recording of taxexpense and benefit beginning January 1, 2006, with respect to theliquidated regarded corporate entities. Furthermore, with respect to thoseliquidated regarded corporate entities, all previously existing deferred taxassets and liabilities were eliminated as of December 31, 2005.

Certain of the Company’sother subsidiaries continue to exist as regarded corporate entities for incometax purposes. For those corporate regarded entities, the Company allocatescurrent and deferred income taxes to each regarded corporate entity as if suchentity were a single taxpayer utilizing the asset and liability method toaccount for income taxes. To the extent the Company provides tax expense orbenefit, any related tax payable or receivable to Mirant is reclassified toequity in the same period.

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The Company adopted the provisions of FIN 48 onJanuary 1, 2007. The Company has historically recognized contingentliabilities related to tax uncertainties when it was probable that a loss hadoccurred and the loss or range of loss could be reasonably estimated. Therecognition of contingent losses for tax uncertainties required management tomake significant assumptions about the expected outcomes of certain taxcontingencies. Upon adoption of FIN 48, the Company changed its method torecognize only liabilities for uncertain tax positions that are less than orsubject to the measurement threshold of the more-likely-than-not standard. As aresult of the implementation of FIN 48, for continuing operations the Companyrecognized a decrease in accrued liabilities of approximately $51 million. Theadditional tax benefit resulted in an increase of the same amount to member’sinterest. The unrecognized tax benefit as a result of adopting FIN 48 is aninsignificant amount and would not materially affect the Company’s effectivetax rate if it were to be recognized.

If the Company was to beallocated income taxes attributable to its operations, pro forma income taxexpense attributable to income before tax would be $3 million and zero for thethree months ended March 31, 2007 and 2006, respectively. The pro formabalance of the Company’s deferred income taxes would be zero as ofMarch 31, 2007. The proforma increase in tax benefits that would have beenrecognized upon adoption of FIN 48 is $86 million. The proforma unrecognizedtax benefit as a result of adopting FIN 48 is an insignificant amount and wouldnot materially affect the company’s pro forma effective tax rate if it wererecognized.

**I.**   SegmentReporting

The Company has fouroperating segments: Mid-Atlantic, Northeast, California and Other Operations.Other Operations includes proprietary trading and fuel oil management. In thefollowing tables, eliminations are primarily related to intercompany sales ofemissions allowances and interest on intercompany notes receivable and notespayable.

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**Operating Segments**

| ** **                                                            | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                            | ** ** | **(in millions)** | ** ** |
| **Three Months Ended  March 31, 2007:**                          |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues-affiliate                                         |       |                   | $          | 230           |       |           |       | $                     | 148        |             |       |      | $          | 8 |   |   |   | $ | 347 |   |   |   | $ | (700 | ) |   | $ | 33 |   |
| Operating  revenues-nonaffiliate                                      |       |                   | (173       | )             |       |           | 7          |                  |       |             | 37         |      |       |   | 443 |   |   |   | — |   |   | 314 |   |
| Total operating revenues                                              |       |                   | 57         |          |       |           | 155        |                  |       |             | 45         |      |       |   | 790 |   |   |   | (700 | ) |   | 347 |   |
| Cost of fuel,  electricity and other products-affiliate               |       |                   | 95         |          |       |           | 27         |                  |       |             | 13         |      |       |   | 601 |   |   |   | (700 | ) |   | 36 |   |
| Cost of fuel,  electricity and other products-nonaffiliate            |       |                   | 35         |          |       |           | 86         |                  |       |             | —     |      |       |   | 163 |   |   |   | (6 | ) |   | 278 |   |
| Total cost of fuel, electricity and other products                    |       |                   | 130        |          |       |           | 113        |                  |       |             | 13         |      |       |   | 764 |   |   |   | (706 | ) |   | 314 |   |
| Gross margin                                                          |       |                   | (73        | )             |       |           | 42         |                  |       |             | 32         |      |       |   | 26 |   |   |   | 6 |   |   | 33 |   |
| Operating expenses:                                                   |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and maintenance-affiliate                                  |       |                   | 33         |          |       |           | 18         |                  |       |             | 9          |      |       |   | 5 |   |   |   | — |   |   | 65 |   |
| Operations and maintenance-nonaffiliate                               |       |                   | 50         |          |       |           | 27         |                  |       |             | 11         |      |       |   | — |   |   |   | — |   |   | 88 |   |
| Depreciation and amortization                                         |       |                   | 19         |          |       |           | 7          |                  |       |             | 3          |      |       |   | 1 |   |   |   | — |   |   | 30 |   |
| Gain on sales of assets, net                                          |       |                   | (1         | )             |       |           | (10        | )                     |       |             | (1         | )         |       |   | — |   |   |   | 10 |   |   | (2 | ) |
| Total operating expenses                                              |       |                   | 101        |          |       |           | 42         |                  |       |             | 22         |      |       |   | 6 |   |   |   | 10 |   |   | 181 |   |
| Operating income  (loss)                                              |       |                   | (174       | )             |       |           | —     |                  |       |             | 10         |      |       |   | 20 |   |   |   | (4 | ) |   | (148 | ) |
| Total other  expense (income), net                                    |       |                   | (1         | )             |       |           | (2         | )                     |       |             | (3         | )         |       |   | 21 |   |   |   | — |   |   | 15 |   |
| Income (loss)  from continuing operations before reorganization items |       |                   | (173       | )             |       |           | 2          |                  |       |             | 13         |      |       |   | (1 | ) |   |   | (4 | ) |   | (163 | ) |
| Reorganization  items, net                                            |       |                   | —     |          |       |           | (1         | )                     |       |             | —     |      |       |   | — |   |   |   | — |   |   | (1 | ) |
| Income (loss)  from continuing operations                             |       |                   | $          | (173          | )          |           |       | $                     | 3          |             |       |      | $          | 13 |   |   |   | $ | (1 | ) |   |   | $ | (4 | ) |   | $ | (162 | ) |
| Total assets of  continuing operations at March 31, 2007         |       |                   | $          | 3,288         |       |           |       | $                     | 1,133      |             |       |      | $          | 456 |   |   |   | $ | 1,414 |   |   |   | $ | (1,453 | ) |   | $ | 4,838 |   |

 

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| ** **                                                       | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                       | ** ** | **(in millions)** | ** ** |
| **Three  Months Ended March 31, 2006:**                     |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues-affiliate                                    |       |                   | $          | 552           |       |           |       | $                     | 270        |             |       |      | $          | 9 |   |   |   | $ | (67 | ) |   |   | $ | (761 | ) |   | $ | 3 |   |
| Operating  revenues-nonaffiliate                                 |       |                   | 27         |          |       |           | 7          |                  |       |             | 35         |      |       |   | 895 |   |   |   | — |   |   | 964 |   |
| Total operating revenues                                         |       |                   | 579        |          |       |           | 277        |                  |       |             | 44         |      |       |   | 828 |   |   |   | (761 | ) |   | 967 |   |
| Cost of fuel,  electricity and other products-affiliate          |       |                   | 112        |          |       |           | 83         |                  |       |             | 17         |      |       |   | 580 |   |   |   | (776 | ) |   | 16 |   |
| Cost of fuel,  electricity and other products-nonaffiliate       |       |                   | 50         |          |       |           | 47         |                  |       |             | —     |      |       |   | 209 |   |   |   | — |   |   | 306 |   |
| Total cost of fuel, electricity and other products               |       |                   | 162        |          |       |           | 130        |                  |       |             | 17         |      |       |   | 789 |   |   |   | (776 | ) |   | 322 |   |
| Gross margin                                                     |       |                   | 417        |          |       |           | 147        |                  |       |             | 27         |      |       |   | 39 |   |   |   | 15 |   |   | 645 |   |
| Operating  expenses:                                             |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and maintenance-affiliate                             |       |                   | 34         |          |       |           | 19         |                  |       |             | 10         |      |       |   | 6 |   |   |   | — |   |   | 69 |   |
| Operations and maintenance-nonaffiliate                          |       |                   | 51         |          |       |           | 35         |                  |       |             | 7          |      |       |   | — |   |   |   | — |   |   | 93 |   |
| Depreciation and amortization                                    |       |                   | 18         |          |       |           | 5          |                  |       |             | 3          |      |       |   | 2 |   |   |   | — |   |   | 28 |   |
| Gain on sales of assets, net                                     |       |                   | —     |          |       |           | (33        | )                     |       |             | —     |      |       |   | — |   |   |   | 33 |   |   | — |   |
| Total operating expenses                                         |       |                   | 103        |          |       |           | 26         |                  |       |             | 20         |      |       |   | 8 |   |   |   | 33 |   |   | 190 |   |
| Operating income                                                 |       |                   | 314        |          |       |           | 121        |                  |       |             | 7          |      |       |   | 31 |   |   |   | (18 | ) |   | 455 |   |
| Total other  expense (income), net                               |       |                   | (1         | )             |       |           | 3          |                  |       |             | —     |      |       |   | 29 |   |   |   | — |   |   | 31 |   |
| Income from  continuing operations                               |       |                   | $          | 315           |       |           |       | $                     | 118        |             |       |      | $          | 7 |   |   |   | $ | 2 |   |   |   | $ | (18 | ) |   | $ | 424 |   |
| Total assets of  continuing operations at December 31, 2006 |       |                   | $          | 3,404         |       |           |       | $                     | 1,189      |             |       |      | $          | 443 |   |   |   | $ | 1,976 |   |   |   | $ | (1,587 | ) |   | $ | 5,425 |   |

 

**J.   Guarantor/Non-GuarantorCondensed Consolidating Financial Information**

The Company’s $850 million of 7.375% senior notes,which mature on December 31, 2013, are unsecured obligations of MirantNorth America. However, they are jointly and severally and fully andunconditionally guaranteed on an unsecured senior basis by Mirant North Americaand certain of its subsidiaries (all of which are wholly-owned). Theaccompanying consolidating financial information has been prepared andpresented pursuant to SEC Regulation S-X Rule 3-10, “*Financial Statements of Guarantors and Issuers of Guaranteed SecuritiesRegistered or being Registered*.” This information is not intended topresent the financial position, results of operations and cash flows of theindividual companies or groups of companies in accordance with GAAP.

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Thefollowing sets forth unaudited condensed consolidating financial statements ofthe guarantor and non-guarantor subsidiaries:

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)Three Months Ended March 31, 2007(in millions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                           |       |       | $          | —            |       |          |       | $             | 54         |             |       |             | $          | 146 |   |   |   | $ | 479 |   |   |   | $ | (332 | ) |   |   | $ | 347 |   |   |
| Cost of fuel,  electricity and other products |       |       | (5         | )                 |       |          | 38         |          |       |             | 88         |             |       |   | 525 |   |   |   | (332 | ) |   |   | 314 |   |   |
| Gross margin                                  |       |       | 5          |              |       |          | 16         |          |       |             | 58         |             |       |   | (46 | ) |   |   | — |   |   |   | 33 |   |   |
| Operating expenses:                           |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | 1          |              |       |          | 28         |          |       |             | 38         |             |       |   | 86 |   |   |   | — |   |   |   | 153 |   |   |
| Depreciation and  amortization                |       |       | —     |              |       |          | 5          |          |       |             | 5          |             |       |   | 20 |   |   |   | — |   |   |   | 30 |   |   |
| Loss (gain) on  sales of assets, net          |       |       | 10         |              |       |          | —     |          |       |             | (11        | )                |       |   | (1 | ) |   |   | — |   |   |   | (2 | ) |   |
| Total operating  expenses                     |       |       | 11         |              |       |          | 33         |          |       |             | 32         |             |       |   | 105 |   |   |   | — |   |   |   | 181 |   |   |
| Operating Income  (Loss)                      |       |       | (6         | )                 |       |          | (17        | )             |       |             | 26         |             |       |   | (151 | ) |   |   | — |   |   |   | (148 | ) |   |
| Other Expense  (Income), net                  |       |       | 35         |              |       |          | 1          |          |       |             | (6         | )                |       |   | (10 | ) |   |   | (5 | ) |   |   | 15 |   |   |
| Reorganization  items, net                    |       |       | —     |              |       |          | (1         | )             |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | (1 | ) |   |
| Income (loss)  from continuing operations     |       |       | (41        | )                 |       |          | (17        | )             |       |             | 32         |             |       |   | (141 | ) |   |   | 5 |   |   |   | (162 | ) |   |
| Loss from  discontinued operations            |       |       | (1         | )                 |       |          | —     |          |       |             | (4         | )                |       |   | — |   |   |   | — |   |   |   | (5 | ) |   |
| Net Income (Loss)                             |       |       | $          | (42               | )          |          |       | $             | (17        | )                |       |             | $          | 28 |   |   |   | $ | (141 | ) |   |   | $ | 5 |   |   |   | $ | (167 | ) |   |

 

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**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)Three Months Ended March 31, 2006(in millions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                           |       |       | $          | —            |       |          |       | $             | 118        |             |       |             | $          | 203 |   |   |   | $ | 936 |   |   |   | $ | (290 | ) |   |   | $ | 967 |   |   |
| Cost of fuel,  electricity and other products |       |       | (15        | )                 |       |          | 54         |          |       |             | 93         |             |       |   | 480 |   |   |   | (290 | ) |   |   | 322 |   |   |
| Gross margin                                  |       |       | 15         |              |       |          | 64         |          |       |             | 110        |             |       |   | 456 |   |   |   | — |   |   |   | 645 |   |   |
| Operating expenses:                           |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | —     |              |       |          | 38         |          |       |             | 35         |             |       |   | 89 |   |   |   | — |   |   |   | 162 |   |   |
| Depreciation and  amortization                |       |       | —     |              |       |          | 4          |          |       |             | 4          |             |       |   | 20 |   |   |   | — |   |   |   | 28 |   |   |
| Loss (gain) on  sales of assets               |       |       | 33         |              |       |          | (11        | )             |       |             | (22        | )                |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Total operating  expenses                     |       |       | 33         |              |       |          | 31         |          |       |             | 17         |             |       |   | 109 |   |   |   | — |   |   |   | 190 |   |   |
| Operating Income  (Loss)                      |       |       | (18        | )                 |       |          | 33         |          |       |             | 93         |             |       |   | 347 |   |   |   | — |   |   |   | 455 |   |   |
| Other Expense  (Income), net                  |       |       | 34         |              |       |          | 1          |          |       |             | 1          |             |       |   | (5 | ) |   |   | — |   |   |   | 31 |   |   |
| Income (loss)  from continuing operations     |       |       | (52        | )                 |       |          | 32         |          |       |             | 92         |             |       |   | 352 |   |   |   | — |   |   |   | 424 |   |   |
| Loss from  discontinued operations            |       |       | —     |              |       |          | —     |          |       |             | (1         | )                |       |   | — |   |   |   | — |   |   |   | (1 | ) |   |
| Net Income (Loss)                             |       |       | $          | (52               | )          |          |       | $             | 32         |             |       |             | $          | 91 |   |   |   | $ | 352 |   |   |   | $ | — |   |   |   | $ | 423 |   |   |

 

23

----

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)At March 31, 2007(in millions)**

| ** **                                      | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Assets:**                             |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                      |       |       | $          | 57                |       |          |       | $             | 133        |             |       |             | $          | — |   |   |   | $ | 438 |   |   |   | $ | — |   |   |   | $ | 628 |   |   |
| Funds on deposit                                |       |       | 201        |              |       |          | —     |          |       |             | 3          |             |       |   | 106 |   |   |   | — |   |   |   | 310 |   |   |
| Receivables—affiliate                      |       |       | 3          |              |       |          | 42         |          |       |             | 31         |             |       |   | 27 |   |   |   | (93 | ) |   |   | 10 |   |   |
| Receivables—nonaffiliate                   |       |       | —     |              |       |          | 8          |          |       |             | 3          |             |       |   | 243 |   |   |   | — |   |   |   | 254 |   |   |
| Notes  receivable—affiliate                |       |       | 22         |              |       |          | 31         |          |       |             | 563        |             |       |   | — |   |   |   | (492 | ) |   |   | 124 |   |   |
| Price risk  management assets-affiliate         |       |       | —     |              |       |          | 3          |          |       |             | 5          |             |       |   | 3 |   |   |   | (8 | ) |   |   | 3 |   |   |
| Price risk  management assets-nonaffiliate      |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 369 |   |   |   | — |   |   |   | 369 |   |   |
| Prepaid rent and  other payments                |       |       | —     |              |       |          | 11         |          |       |             | 5          |             |       |   | 106 |   |   |   | — |   |   |   | 122 |   |   |
| Inventories                                     |       |       | (12        | )                 |       |          | 19         |          |       |             | 24         |             |       |   | 222 |   |   |   | — |   |   |   | 253 |   |   |
| Assets held for  sale                           |       |       | (8         | )                 |       |          | 8          |          |       |             | 523        |             |       |   | — |   |   |   | — |   |   |   | 523 |   |   |
| Total current assets                            |       |       | 263        |              |       |          | 255        |          |       |             | 1,157      |             |       |   | 1,514 |   |   |   | (593 | ) |   |   | 2,596 |   |   |
| **Property,  Plant and Equipment, net**         |       |       | —     |              |       |          | 354        |          |       |             | 311        |             |       |   | 1,555 |   |   |   | 13 |   |   |   | 2,233 |   |   |
| **Noncurrent Assets:**                          |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill, net                                   |       |       | (799       | )                 |       |          | —     |          |       |             | —     |             |       |   | 799 |   |   |   | — |   |   |   | — |   |   |
| Intangible assets,  net                         |       |       | —     |              |       |          | —     |          |       |             | 56         |             |       |   | 154 |   |   |   | — |   |   |   | 210 |   |   |
| Price risk  management assets-affiliate         |       |       | —     |              |       |          | —     |          |       |             | 6          |             |       |   | 1 |   |   |   | (6 | ) |   |   | 1 |   |   |
| Price risk  management assets-nonaffiliate      |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 72 |   |   |   | — |   |   |   | 72 |   |   |
| Prepaid rent                                    |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 194 |   |   |   | — |   |   |   | 194 |   |   |
| Debt issuance  costs, net                       |       |       | 46         |              |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 46 |   |   |
| Other                                           |       |       | 5,633      |              |       |          | 9          |          |       |             | —     |             |       |   | — |   |   |   | (5,633 | ) |   |   | 9 |   |   |
| Total noncurrent assets                         |       |       | 4,880      |              |       |          | 9          |          |       |             | 62         |             |       |   | 1,220 |   |   |   | (5,639 | ) |   |   | 532 |   |   |
| **Total Assets**                                |       |       | $          | 5,143             |       |          |       | $             | 618        |             |       |             | $          | 1,530 |   |   |   | $ | 4,289 |   |   |   | $ | (6,219 | ) |   |   | $ | 5,361 |   |   |
| **LIABILITIES AND EQUITY**                      |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Liabilities:**                        |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes  payable—affiliate                   |       |       | $          | 470               |       |          |       | $             | 29         |             |       |             | $          | 27 |   |   |   | $ | — |   |   |   | $ | (492 | ) |   |   | $ | 34 |   |   |
| Current portion of  long-term debt              |       |       | 162        |              |       |          | —     |          |       |             | —     |             |       |   | 3 |   |   |   | — |   |   |   | 165 |   |   |
| Accounts payable  and accrued liabilities       |       |       | 17         |              |       |          | 16         |          |       |             | 17         |             |       |   | 178 |   |   |   | — |   |   |   | 228 |   |   |
| Payable to  affiliate                           |       |       | 11         |              |       |          | 5          |          |       |             | 8          |             |       |   | 82 |   |   |   | (75 | ) |   |   | 31 |   |   |
| Price risk  management liabilities-affiliate    |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 19 |   |   |   | (8 | ) |   |   | 11 |   |   |
| Price risk  management liabilities-nonaffiliate |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 226 |   |   |   | — |   |   |   | 226 |   |   |
| Accrued property  taxes                         |       |       | —     |              |       |          | —     |          |       |             | 1          |             |       |   | — |   |   |   | — |   |   |   | 1 |   |   |
| Other                                           |       |       | —     |              |       |          | 4          |          |       |             | 14         |             |       |   | — |   |   |   | — |   |   |   | 18 |   |   |
| Total current liabilities                       |       |       | 660        |              |       |          | 54         |          |       |             | 67         |             |       |   | 508 |   |   |   | (575 | ) |   |   | 714 |   |   |
| **Noncurrent Liabilities:**                     |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       |       | 1,248      |              |       |          | —     |          |       |             | —     |             |       |   | 30 |   |   |   | — |   |   |   | 1,278 |   |   |
| Price risk  management liabilities-affiliate    |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 7 |   |   |   | (6 | ) |   |   | 1 |   |   |
| Price risk  management liabilities-nonaffiliate |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 73 |   |   |   | — |   |   |   | 73 |   |   |
| Asset retirement  obligations                   |       |       | —     |              |       |          | 8          |          |       |             | 21         |             |       |   | 13 |   |   |   | — |   |   |   | 42 |   |   |
| Other                                           |       |       | —     |              |       |          | 2          |          |       |             | —     |             |       |   | 4 |   |   |   | — |   |   |   | 6 |   |   |
| Total noncurrent liabilities                    |       |       | 1,248      |              |       |          | 10         |          |       |             | 21         |             |       |   | 127 |   |   |   | (6 | ) |   |   | 1,400 |   |   |
| **Liabilities  Subject to Compromise**          |       |       | —     |              |       |          | 30         |          |       |             | —     |             |       |   | — |   |   |   | (18 | ) |   |   | 12 |   |   |
| **Commitments and Contingencies**               |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Equity**                                      |       |       | 3,235      |              |       |          | 524        |          |       |             | 1,442      |             |       |   | 3,654 |   |   |   | (5,620 | ) |   |   | 3,235 |   |   |
| **Total  Liabilities and Equity**               |       |       | $          | 5,143             |       |          |       | $             | 618        |             |       |             | $          | 1,530 |   |   |   | $ | 4,289 |   |   |   | $ | (6,219 | ) |   |   | $ | 5,361 |   |   |

 

24

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**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING BALANCE SHEETS At December 31, 2006(in millions)**

| ** **                                     | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                     | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                     |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Assets:**                            |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                      |       |       | $          | 231               |       |          |       | $             | 99         |             |       |             | $          | 2 |   |   |   | $ | 421 |   |   |   | $ | — |   |   |   | $ | 753 |   |   |
| Funds on deposit                               |       |       | 201        |              |       |          | —     |          |       |             | 3          |             |       |   | 29 |   |   |   | — |   |   |   | 233 |   |   |
| Receivables—affiliate                     |       |       | —     |              |       |          | 35         |          |       |             | 32         |             |       |   | 34 |   |   |   | (85 | ) |   |   | 16 |   |   |
| Receivables—nonaffiliate                  |       |       | —     |              |       |          | 78         |          |       |             | 1          |             |       |   | 292 |   |   |   | — |   |   |   | 371 |   |   |
| Notes receivable—affiliate                |       |       | 22         |              |       |          | 32         |          |       |             | 501        |             |       |   | 357 |   |   |   | (787 | ) |   |   | 125 |   |   |
| Price risk management assets-affiliate         |       |       | —     |              |       |          | 22         |          |       |             | 34         |             |       |   | 4 |   |   |   | (57 | ) |   |   | 3 |   |   |
| Price risk management assets-nonaffiliate      |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 728 |   |   |   | — |   |   |   | 728 |   |   |
| Prepaid rent and other payments                |       |       | —     |              |       |          | 10         |          |       |             | 6          |             |       |   | 115 |   |   |   | — |   |   |   | 131 |   |   |
| Inventories                                    |       |       | (7         | )                 |       |          | 21         |          |       |             | 23         |             |       |   | 251 |   |   |   | — |   |   |   | 288 |   |   |
| Assets held for sale                           |       |       | (8         | )                 |       |          | 8          |          |       |             | 527        |             |       |   | — |   |   |   | — |   |   |   | 527 |   |   |
| Total current assets                           |       |       | 439        |              |       |          | 305        |          |       |             | 1,129      |             |       |   | 2,231 |   |   |   | (929 | ) |   |   | 3,175 |   |   |
| **Property, Plant and Equipment, net**         |       |       | —     |              |       |          | 358        |          |       |             | 312        |             |       |   | 1,498 |   |   |   | 8 |   |   |   | 2,176 |   |   |
| **Noncurrent Assets:**                         |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill, net                                  |       |       | (799       | )                 |       |          | —     |          |       |             | —     |             |       |   | 799 |   |   |   | — |   |   |   | — |   |   |
| Intangible assets, net                         |       |       | —     |              |       |          | —     |          |       |             | 56         |             |       |   | 156 |   |   |   | — |   |   |   | 212 |   |   |
| Price risk management assets-affiliate         |       |       | —     |              |       |          | —     |          |       |             | 6          |             |       |   | 1 |   |   |   | (6 | ) |   |   | 1 |   |   |
| Price risk management assets-nonaffiliate      |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 104 |   |   |   | — |   |   |   | 104 |   |   |
| Prepaid rent                                   |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 218 |   |   |   | — |   |   |   | 218 |   |   |
| Debt issuance costs, net                       |       |       | 48         |              |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 48 |   |   |
| Other                                          |       |       | 6,178      |              |       |          | 33         |          |       |             | 3          |             |       |   | — |   |   |   | (6,196 | ) |   |   | 18 |   |   |
| Total noncurrent assets                        |       |       | 5,427      |              |       |          | 33         |          |       |             | 65         |             |       |   | 1,278 |   |   |   | (6,202 | ) |   |   | 601 |   |   |
| **Total Assets**                               |       |       | $          | 5,866             |       |          |       | $             | 696        |             |       |             | $          | 1,506 |   |   |   | $ | 5,007 |   |   |   | $ | (7,123 | ) |   |   | $ | 5,952 |   |   |
| **LIABILITIES AND EQUITY**                     |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Liabilities:**                       |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable—affiliate                   |       |       | $          | 767               |       |          |       | $             | 21         |             |       |             | $          | 26 |   |   |   | $ | — |   |   |   | $ | (787 | ) |   |   | $ | 27 |   |   |
| Current portion of long-term debt              |       |       | 138        |              |       |          | —     |          |       |             | —     |             |       |   | 3 |   |   |   | — |   |   |   | 141 |   |   |
| Accounts payable and accrued liabilities       |       |       | 42         |              |       |          | 24         |          |       |             | 13         |             |       |   | 233 |   |   |   | (10 | ) |   |   | 302 |   |   |
| Payable to affiliate                           |       |       | —     |              |       |          | 6          |          |       |             | 14         |             |       |   | 67 |   |   |   | (55 | ) |   |   | 32 |   |   |
| Price risk management liabilities-affiliate    |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 70 |   |   |   | (57 | ) |   |   | 13 |   |   |
| Price risk management liabilities-nonaffiliate |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 286 |   |   |   | — |   |   |   | 286 |   |   |
| Accrued property taxes                         |       |       | 51         |              |       |          | 22         |          |       |             | 2          |             |       |   | — |   |   |   | — |   |   |   | 75 |   |   |
| Other                                          |       |       | —     |              |       |          | 11         |          |       |             | 17         |             |       |   | — |   |   |   | — |   |   |   | 28 |   |   |
| Total current liabilities                      |       |       | 998        |              |       |          | 84         |          |       |             | 72         |             |       |   | 659 |   |   |   | (909 | ) |   |   | 904 |   |   |
| **Noncurrent Liabilities:**                    |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                 |       |       | 1,404      |              |       |          | —     |          |       |             | —     |             |       |   | 31 |   |   |   | — |   |   |   | 1,435 |   |   |
| Price risk management liabilities-affiliate    |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 10 |   |   |   | (6 | ) |   |   | 4 |   |   |
| Price risk management liabilities-nonaffiliate |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 39 |   |   |   | — |   |   |   | 39 |   |   |
| Asset retirement obligations                   |       |       | —     |              |       |          | 8          |          |       |             | 21         |             |       |   | 12 |   |   |   | — |   |   |   | 41 |   |   |
| Other                                          |       |       | —     |              |       |          | 2          |          |       |             | —     |             |       |   | 22 |   |   |   | (17 | ) |   |   | 7 |   |   |
| Total noncurrent liabilities                   |       |       | 1,404      |              |       |          | 10         |          |       |             | 21         |             |       |   | 114 |   |   |   | (23 | ) |   |   | 1,526 |   |   |
| **Liabilities Subject to Compromise**          |       |       | —     |              |       |          | 80         |          |       |             | —     |             |       |   | — |   |   |   | (22 | ) |   |   | 58 |   |   |
| **Commitments and Contingencies**              |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Equity**                                     |       |       | 3,464      |              |       |          | 522        |          |       |             | 1,413      |             |       |   | 4,234 |   |   |   | (6,169 | ) |   |   | 3,464 |   |   |
| **Total  Liabilities and Equity**              |       |       | $          | 5,866             |       |          |       | $             | 696        |             |       |             | $          | 1,506 |   |   |   | $ | 5,007 |   |   |   | $ | (7,123 | ) |   |   | $ | 5,952 |   |   |

 

25

----

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)Three Months Ended March 31, 2007(in millions)**

| ** **                                                     | ** ** | ** ** | ** ** | **Mirant  New** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                                     | ** ** | **Parent** | ** ** | **York**        | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash Flows provided by (used in):** |       |       |       |            |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Operating  activities                                          |       | $          | 49         |            |       | $             | 27         |          |       |             | $          | 51               |       |   |   | $ | (271 | ) |   |   | $ | 367 |   |   |   | $ | 223 |   |   |
| Investing  activities                                          |       | (1         | )          |            | —     |          |       |          | (53        | )                |       |             | 288        |   |   |   | (305 | ) |   |   | (71 | ) |   |
| Financing  activities                                          |       | (222       | )          |            | 7          |          |       |          | —     |             |       |             | —     |   |   |   | (62 | ) |   |   | (277 | ) |   |
| Net increase  (decrease) in cash and cash equivalents          |       | (174       | )          |            | 34         |          |       |          | (2         | )                |       |             | 17         |   |   |   | — |   |   |   | (125 | ) |   |
| Cash and cash  equivalents, beginning of period                |       | 231        |       |            | 99         |          |       |          | 2          |             |       |             | 421        |   |   |   | — |   |   |   | 753 |   |   |
| Cash and cash  equivalents, end of period                      |       | $          | 57         |            |       | $             | 133        |          |       |             | $          | —           |       |   |   | $ | 438 |   |   |   | $ | — |   |   |   | $ | 628 |   |   |

 

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)Three Months Ended March 31, 2006(in millions)**

| ** **                                                     | ** ** | ** ** | ** ** | **Mirant  New** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                                     | ** ** | **Parent** | ** ** | **York**        | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash Flows provided by (used in):** |       |       |       |            |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  activities                                          |       |       | $          | 112             |       |          |       | $             | (2         | )                |       |             | $          | (466 | ) |   |   | $ | 609 |   |   |   | $ | 228 |   |   |   | $ | 481 |   |   |
| Investing  activities                                          |       |       | (16        | )               |       |          | 74         |          |       |             | (67        | )                |       |   | (354 | ) |   |   | 550 |   |   |   | 187 |   |   |
| Financing  activities                                          |       |       | 3          |            |       |          | 2          |          |       |             | 531        |             |       |   | (400 | ) |   |   | (778 | ) |   |   | (642 | ) |   |
| Net increase  (decrease) in cash and cash equivalents          |       |       | 99         |            |       |          | 74         |          |       |             | (2         | )                |       |   | (145 | ) |   |   | — |   |   |   | 26 |   |   |
| Cash and cash  equivalents, beginning of period                |       |       | —     |            |       |          | 1          |          |       |             | 2          |             |       |   | 292 |   |   |   | — |   |   |   | 295 |   |   |
| Cash and cash  equivalents, end of period                      |       |       | $          | 99              |       |          |       | $             | 75         |             |       |             | $          | — |   |   |   | $ | 147 |   |   |   | $ | — |   |   |   | $ | 321 |   |   |

 

**K.**   Litigationand Other Contingencies

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

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***Chapter 11Proceedings***

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

As of March 31, 2007,approximately 21 million of the shares of Mirant common stock to be distributedunder the Plan have not yet been distributed and have been reserved fordistribution with respect to claims that are disputed by the Mirant Debtors andhave not been resolved. A settlement entered into on May 30, 2006, amongPepco, Mirant, Old Mirant, and various subsidiaries of Mirant, includingsubsidiaries of the Company, if approved by final order in the Chapter 11proceedings, would result in the distribution of up to 18 million of thereserved shares to Pepco, as described below in *PepcoLitigation*. Under the terms of the Plan, to the extent other suchunresolved claims are resolved now that the Company has emerged frombankruptcy, the claimants will be paid from the reserved shares on the samebasis as if they had been paid when the Plan became effective. That means thattheir allowed claims will receive the same pro rata distributions of Mirantcommon stock, cash, or both common stock and cash as previously allowed claimsin accordance with the terms of the Plan. To the extent the aggregate amount ofthe payouts determined to be due with respect to such disputed claimsultimately exceeds the amount of the funded claim reserve, Mirant would have toissue additional shares of common stock to address the shortfall, which woulddilute existing Mirant shareholders, and Mirant and Mirant Americas Generationwould have to pay additional cash amounts as necessary under the terms of thePlan to satisfy such pre-petition claims.

The Company’s subsidiariesrelated to its New York business operations, Mirant New York, Mirant Bowline,Mirant Lovett, Hudson Valley Gas and Mirant NY-Gen, remained in bankruptcy atthe end of 2006. On January 26,2007, the Emerging New York Entities filed a Supplemental Joint Chapter 11 Planof Reorganization of the Emerging New York Entities with the Bankruptcy Courtand subsequently filed amendments to that plan. The Bankruptcy Court enteredan order confirming the Supplemental Plan on March 23, 2007. TheSupplemental Plan became effective on April 16, 2007, resulting in theemergence from bankruptcy of the Emerging New York Entities. The SupplementalPlan has two main components. First, the Supplemental Plan incorporates asettlement with various New York tax jurisdictions that resolved property taxdisputes related to the Lovett and Bowline facilities. Second, the SupplementalPlan provides unsecured creditors of the Emerging New York Entities with thesame treatment afforded holders of unsecured claims against Mirant AmericasGeneration and its subsidiaries under the Plan. Such unsecured creditors of theEmerging New York Entities will receive their*pro rata* share of the pool of assets created under the Plan for thebenefit of the unsecured creditors of Mirant Americas Generation and itssubsidiaries.

On October 19, 2006,Mirant Lovett notified the New York Public Service Commission, the NYISO,Orange and Rockland and certain other affected transmission and distributioncompanies in New York of its intent to discontinue operation of units 3and 5 of the Lovett facility on April 30, 2007. The notice was prompted bythe requirements of a June 11, 2003, Consent Decree (the “2003 ConsentDecree”) among Mirant Lovett, the State of New York and the NYSDEC thatrequires Mirant Lovett to install certain environmental controls on unit 5of the Lovett facility, convert the unit to operate exclusively on natural gas,or discontinue operation of that unit by April 30, 2007. The 2003 ConsentDecree also requires that certain environmental controls be installed on unit 4by April 30, 2008, or operations at that unit must be discontinued.Operations at unit 3 have been discontinued because it is uneconomic tocontinue to run 

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unit 3.On April 30, 2007, and May 7, 2007, Mirant Lovett entered into twotolling agreements with the New York State Office of the Attorney General andthe NYSDEC to allow the operation of unit 5 to continue on coal until May 14,2007, while the parties sought to reach agreement on an amended consent decree.The second tolling agreement also required the temporary suspension ofoperations of unit 4. Mirant Lovett has advised the New York PublicService Commission, the NYISO, Orange and Rockland and other potentiallyaffected transmission and distribution companies in New York of the changes inexpected operating status of units 4 and 5. Mirant New York, Mirant Lovettand the State of New York on May 10, 2007, entered into an amendment tothe 2003 Consent Decree that switches the deadlines for units 4 and 5 sothat the deadline for compliance by unit 5 is extended until April 30,2008, and the deadline for unit 4 is shortened so that it woulddiscontinue operation as of May 7, 2007. On May 8, 2007, Mirant NewYork, Mirant Lovett, Mirant Bowline, and Hudson Valley Gas also entered into anagreement (the “Tax Assessments Agreement”) with the Town of Stony Point, theTown of Haverstraw, and the Village of Haverstraw to set the assessed valuesfor the Lovett and Bowline facilities and the pipeline owned by Hudson ValleyGas for 2007 and 2008 for property tax purposes at the values established for2006 under a settlement agreement entered into by the Mirant entities and thosetaxing authorities in December 2006 that resolved disputes regarding theassessed values of the facilities for 2006 and several earlier years. Theamendment to the 2003 Consent Decree was subject to the approval of the UnitedStates District Court for the Southern District of New York and the BankruptcyCourt. The Tax Assessments Agreement was subject to the approval of theBankruptcy Court. The Bankruptcy Court approved the amendment to the 2003Consent Decree and the Tax Assessments Agreement on May 10, 2007. Thedistrict court approved the amendment to the 2003 Consent Decree on May 11,2007. The timing of the filing of a plan of reorganization for Mirant Lovett,and of its emergence from bankruptcy, is uncertain. Until Mirant Lovett emergesfrom bankruptcy, the Company will not have access to the cash from operationsgenerated by Mirant Lovett.

Mirant NY-Gen, which ownshydroelectric facilities at Swinging Bridge, Rio and Mongaup, and smallcombustion turbine facilities at Hillburn and Shoemaker, has proceeded with theimplementation of a remediation plan for the sinkhole discovered in May 2005in the dam at the Swinging Bridge facility. The status of the remediationeffort is discussed below in *Other Contingencies*.Mirant NY-Gen’s expenses have been funded under a debtor-in-possession facilityprovided by Mirant Americas with the approval of, and under the supervision of,the Bankruptcy Court.

On January 31, 2007,Mirant New York entered into an agreement to sell Mirant NY-Gen to AllianceEnergy Renewables, LLC (the “Alliance Sale”). The sale price of approximately$5 million was subject to adjustments for working capital and certain ongoingdam remediation efforts at the Swinging Bridge facility. The Bankruptcy Courtapproved the Alliance Sale on March 8, 2007. On February 15, 2007,Mirant NY-Gen filed its proposed Chapter 11 Plan of Reorganization (the “MirantNY-Gen Plan”), which incorporated the Alliance Sale. The Bankruptcy Courtconfirmed the Mirant NY-Gen Plan by order dated April 27, 2007. The MirantNY-Gen Plan became effective and the Alliance Sale closed on May 7, 2007.Under the terms of the Mirant NY-Gen Plan and the confirmation order,approximately $2 million was reserved from the proceeds of the Alliance Sale topay in full all the claims outstanding against Mirant NY-Gen otherthan claims arising from the debtor-in-possession loan providedby Mirant Americas to Mirant NY-Gen and intercompany claims. Mirantguarantees were substituted for $1.6 million of the amount to be reserved. Theremaining sales proceeds were paid to Mirant Americas in partial satisfactionof the $16.5 million debtor-in-possession loan, all claims held by MirantNY-Gen were assigned to Mirant Americas, and Mirant Americas released all ofits claims and liens against Mirant NY-Gen.

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***Pepco Litigation***

In 2000, Mirant purchasedpower generating facilities and other assets from Pepco, including certain PPAsbetween Pepco and third parties. Under the terms of the APSA, Mirant and Pepco entered into the Back-to-BackAgreement with respect to certain PPAs, including Pepco’s long-term PPA withPanda, under which (1) Pepco agreed to resell to Mirant all capacity,energy, ancillary services and other benefits to which it is entitled underthose agreements and (2) Mirant agreed to pay Pepco each month all amountsdue from Pepco to the sellers under those agreements for the immediatelypreceding month associated with such capacity, energy, ancillary services andother benefits. The Panda PPA runs until 2021, and the Back-to-BackAgreement does not expire until all obligations have been performed under thePanda PPA. Under the Back-to-Back Agreement, Mirant is obligated to purchasepower from Pepco at prices that typically are higher than the market prices forpower.

Mirant assigned its rightsand obligations under the Back-to-Back Agreement to Mirant Americas EnergyMarketing. In the Chapter 11 cases of the Mirant Debtors, Pepco asserted thatan Assignment and Assumption Agreement dated December 19, 2000, thatincludes as parties Pepco and various of the Company’s subsidiaries causes theCompany’s subsidiaries that are parties to the agreement to be jointly andseverally liable to Pepco for various obligations, including the obligationsunder the Back-to-Back Agreement. The Mirant Debtors have sought to reject theAPSA, the Back-to-Back Agreement, and the Assignment and Assumption Agreement,and the rejection motions have not been resolved. Under the Plan, theobligations of the Mirant Debtors under the APSA (including any otheragreements executed pursuant to the terms of the APSA and found by a finalcourt order to be part of the APSA), the Back-to-Back Agreement, and theAssignment and Assumption Agreement are to be performed by Mirant PowerPurchase, whose performance is guaranteed by Mirant. If any of the agreementsis successfully rejected, the obligations of Mirant Power Purchase and Mirant’sguarantee obligations terminate with respect to that agreement, and Pepco wouldbe entitled to a claim in the Chapter 11 proceedings for any resulting damages.That claim would then be addressed under the terms of the Plan. If theBankruptcy Court were to conclude that the Assignment and Assumption Agreementimposed liability upon the Company’s subsidiaries for the obligations under theBack-to-Back Agreement and the Back-to-Back Agreement were to be rejected, theresulting rejection damages claim could result in a claim in the Chapter 11proceedings against the Company’s subsidiaries but any such claim would bereduced by the amount recovered by Pepco on its comparable claim againstMirant.

On May 30, 2006,Mirant, Mirant Power Purchase, Old Mirant, various subsidiaries of Mirant(including subsidiaries of the Company), and a trust established pursuant tothe Plan to which ownership of Old Mirant and Mirant Americas Energy Marketingwas transferred (collectively the “Mirant Settling Parties”) entered into aSettlement Agreement and Release (the “Settlement Agreement”) with Pepco andvarious affiliates of Pepco (collectively the “Pepco Settling Parties”). Onceit becomes effective, the Settlement Agreement will fully resolve the contractrejection motions that remain pending in the bankruptcy proceedings, as well asother matters currently disputed between Pepco and Mirant and its subsidiaries.The Pepco Settling Parties and the Mirant Settling Parties will release eachother from all claims known as of May 30, 2006, including the fraudulenttransfer claims brought by Old Mirant and several of its subsidiaries againstPepco in July 2005. The Settlement Agreement will become effective once ithas been approved by the Bankruptcy Court and that approval order has become afinal order no longer subject to appeal. On August 9, 2006, the BankruptcyCourt entered an order approving the Settlement Agreement, but certain holdersof unsecured claims against Old Mirant in the bankruptcy proceedings appealedthat order. On December 26, 2006, the United States District Court for theNorthern District of Texas affirmed the bankruptcy court order approving thesettlement, but the claims holders have appealed that ruling to the UnitedStates Court of Appeals for the Fifth Circuit, and the approval order has notyet become a final order.

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Under the SettlementAgreement, Mirant Power Purchase will perform any remaining obligations underthe APSA, and Mirant will guaranty its performance. The Back-to-Back Agreementwill be rejected and terminated effective as of May 31, 2006, unlessMirant exercises an option given to it under the Settlement Agreement to havethe Back-to-Back Agreement assumed under certain conditions. If the closingprice of Mirant’s stock is less than $16.00 on four business days in a 20consecutive business day period prior to any distribution of shares to Pepco onits claim, then Mirant can elect to have the Back-to-Back Agreement assumed andassigned to Mirant Power Purchase rather than rejecting it, and the claimreceived by Pepco will be reduced as described below.

With respect to the otheragreements executed as part of the closing of the APSA (the “AncillaryAgreements”) and other agreements between Pepco and subsidiaries of Mirant,including subsidiaries of the Company, the Mirant subsidiary that is a party toeach agreement will assume the agreement and Mirant will guaranty thatsubsidiary’s performance. Mirant Power Purchase’s obligations under the APSA donot include any obligations related to the Ancillary Agreements. If theBack-to-Back Agreement is rejected pursuant to the terms of the SettlementAgreement, the Settlement Agreement provides that a future breach of the APSAor any Ancillary Agreement by a party to such agreement will not entitle thenon-defaulting party to terminate, suspend performance under, or exercise anyother right or remedy under or with respect to any of the remainder of suchagreements. If, however, Mirant elects to have the Back-to-Back Agreementassumed and assigned to Mirant Power Purchase under the conditions set out inthe Settlement Agreement, then the Settlement Agreement provides that nothingin its terms prejudices the argument currently being made by Pepco in thecontract rejection proceedings that the APSA, the Back-to-Back Agreement, andthe Ancillary Agreements constitute a single non-severable agreement, thematerial breach of which would entitle Pepco to suspend or terminate itsperformance thereunder, or any defense of Mirant and its subsidiaries to suchan argument by Pepco.

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having avalue, after liquidation of the stock by Pepco, equal to $520 million, subjectto certain adjustments. Upon the Settlement Agreement becoming effective,Mirant will distribute up to 18 million shares of Mirant common stock to Pepcoto satisfy its claim and Pepco will liquidate those shares. The shares to bedistributed to Pepco will be determined by Mirant after the SettlementAgreement becomes effective so as to produce upon liquidation total netproceeds as near to $520 million as possible, subject to the overall cap on theshares to be distributed of 18 million shares. If the net proceeds received byPepco from the liquidation of the shares are less than $520 million, Mirantwill pay Pepco cash equal to the difference. If Mirant exercises the option tohave the Back-to-Back Agreement assumed, then the $520 million is reduced to$70 million, Mirant Power Purchase would continue to perform the Back-to-BackAgreement through its expiration in 2021, and Mirant would guarantee itsperformance. The Settlement Agreement allocates the $70 million to variousclaims asserted by Pepco that do not arise from the rejection of theBack-to-Back Agreement, including claims asserted under the Local Area SupportAgreement between Pepco and Mirant Potomac River that are discussed below in *Pepco Assertion of Breach of Local Area Support Agreement*.

**California and Western Power Markets**

*FERC Refund 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 CAISO or the Cal PX from October 2, 2000, through June 20,2001 (the “Refund Period”). Various parties have appealed these FERC orders tothe United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”)seeking review of a number of issues, including changing the Refund Period toinclude periods prior to October 2, 2000, and 

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expanding the salesof electricity subject to potential refund to include bilateral sales made tothe DWR and other parties. On August 2, 2006, the Ninth Circuit issued anopinion addressing some of the issues raised by these appeals. The NinthCircuit remanded to the FERC for further proceedings the FERC’s denial ofrelief for sales of electricity made in the CAISO and Cal PX markets prior to October 2,2000, at rates found to be unjust and directed the FERC to address the parties’request for a market-wide remedy for tariff violations that may have occurredprior to October 2, 2000. In addition, the Ninth Circuit found that theFERC had not adequately supported its decision to exclude from the FERC RefundProceedings (i) sales made in the CAISO and Cal PX that had a term ofgreater than 24 hours, and (ii) energy exchange transactions, and remandedthese issues to the FERC for further proceedings. The Ninth Circuit affirmedthe FERC’s decision to exclude bilateral sales to the DWR from the FERC RefundProceeding. If the FERC grants the parties’ requested relief with respect tothe issues remanded by the Ninth Circuit, any expansion of the Refund Period toinclude periods prior to October 2, 2000, or of the types of sales ofelectricity potentially subject to refund could increase the refund exposure ofMirant Americas Energy Marketing in this proceeding.

In the July 25, 2001,order, the FERC also ordered that a preliminary evidentiary proceeding be heldto develop a factual record on whether there had been unjust and unreasonablecharges for spot market bilateral sales in the Pacific Northwest from December 25,2000, through June 20, 2001. In that proceeding, the California AttorneyGeneral, the CPUC and the EOB filed to recover certain refunds from parties,including Mirant Americas Energy Marketing, for bilateral sales of electricityto the DWR at the California/Oregon border, claiming that such sales took placein the Pacific Northwest. In an order issued June 25, 2003, the FERC ruledthat no refunds were owed and terminated the proceeding. On November 10,2003, the FERC denied requests for rehearing filed by various parties. Variousparties appealed the FERC’s decision to the Ninth Circuit.

On September 9, 2004,the Ninth Circuit reversed the FERC’s dismissal of a complaint filed in 2002 bythe California Attorney General that sought refunds for transactions conductedin markets administered by the CAISO and the Cal PX outside the Refund Periodset by the FERC and for transactions between the DWR and various owners ofgeneration and power marketers, including Mirant Americas Energy Marketing andsubsidiaries of the Company. The Ninth Circuit remanded the proceeding to theFERC for it to determine what remedies, including potential refunds, areappropriate where entities, including Mirant Americas Energy Marketing,purportedly did not comply with certain filing requirements for transactionsconducted under market-based rate tariffs. On July 31, 2006, the NinthCircuit denied a petition for rehearing filed by Mirant Americas EnergyMarketing and other parties. Various parties to the proceeding have filed apetition for writ of certiorari with the United States Supreme Court requestingit to review the Ninth Circuit’s September 9, 2004, decision.

On January 14, 2005,**Mirant and certain of its subsidiaries, including theCompany, entered into a Settlement and Release of Claims Agreement (the “CaliforniaSettlement”) with PG&E, SCE, San Diego Gas and Electric Company, the CPUC,the DWR, the EOB and the Attorney General of the State of California(collectively, the “California Parties”) and with the Office of MarketOversight and Investigations of the FERC. The California Settlement settled anumber of disputed lawsuits and regulatory proceedings that were pursuedoriginally in state and federal courts and before the FERC. The Mirant entitiesthat are parties to the California Settlement (collectively, the “MirantSettling Parties”) include Mirant Corporation, Mirant Americas EnergyMarketing, Mirant Americas Generation,and the Company (as the successor to Mirant California Investments, Inc.).The California Settlement was approved by the FERC on April 13, 2005, andbecame effective April 15, 2005, upon its approval by the BankruptcyCourt. The California Settlement resulted in the release of most of MirantAmericas Energy Marketing’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 

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December 25,2000, through June 20, 2001, and (3) in any proceedings at the FERCresulting from the Ninth Circuit’s reversal of the FERC’s dismissal of thecomplaint filed in 2002 by the California Attorney General. Under theCalifornia Settlement, the California Parties and those other marketparticipants who have opted into the settlement have released the MirantSettling Parties from any liability for refunds related to sales of electricityand natural gas in the western markets from January 1, 1998, through July 14,2003. Also, the California Parties have assumed the obligation of MirantAmericas Energy Marketing to pay any refunds determined by the FERC to be owedby Mirant Americas Energy Marketing to other parties that do not opt into thesettlement for transactions in the CAISO and Cal PX markets during the RefundPeriod, with the liability of the California Parties for such refund obligationlimited to the amount of certain receivables assigned by Mirant Americas EnergyMarketing to the California Parties under the California Settlement. Thesettlement did not relieve Mirant Americas Energy Marketing of liability forany refunds that the FERC determines it to owe (1) to participants in theCal PX and CAISO markets that are not California Parties (or that did not electto opt into the settlement) for periods outside of the Refund Period and (2) toparticipants in bilateral transactions with Mirant Americas Energy Marketingthat are not California Parties (or that did not elect to opt into thesettlement).

The Company’s view is thatthe bulk of any obligations of Mirant Americas Energy Marketing to make refundsas a result of sales completed prior to July 14, 2003, in the CAISO or CalPX markets or in bilateral transactions either have been addressed by theCalifornia Settlement or have been resolved as part of Mirant Americas EnergyMarketing’s bankruptcy proceedings. To the extent that Mirant Americas EnergyMarketing’s potential refund liability arises from contracts that weretransferred to Mirant Energy Trading as part of the transfer of the trading andmarketing business under the Plan, Mirant Energy Trading may have exposure toany refund liability related to transactions under those contracts.

*FERC Show Cause ProceedingRelating to Trading Practices.**  *OnJune 25, 2003, the FERC issued a show cause order (the “Trading PracticesOrder”) to more than 50 parties, including Mirant Americas Energy Marketing andsubsidiaries of the Company, that a FERC staff report issued on March 26,2003, identified as having potentially engaged in one or more tradingstrategies of the type employed by Enron Corporation and its affiliates (“Enron”),as described in Enron memos released by the FERC in May 2002. The TradingPractices Order identified certain specific trading practices that the FERCindicated could constitute gaming or anomalous market behavior in violation ofthe CAISO and Cal PX tariffs. The Trading Practices Order requires the CAISO toidentify transactions between January 1, 2000, and June 20, 2001,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 sales of ancillary services, which is discussed below. In a November 14,2003, order in a different proceeding, the FERC ruled that certain allegationsof improper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in the show cause proceeding. On December 19,2003, the Mirant entities filed with the FERC for approval of an amendment tothe Trading Settlement Agreement reached with the FERC Trial Staff with respectto the sale of ancillary services. Under that amendment, the FERC would have anallowed unsecured claim in Mirant Americas Energy Marketing’s bankruptcyproceeding for $3.67 million in settlement of the allegations with respectto the sale of ancillary services. The FERC approved the Trading SettlementAgreement, as amended, on June 27, 2005, and the Bankruptcy Court approvedit on August 24, 2005. Certain parties filed motions for rehearing, whichthe FERC denied on October 11, 2006. A party to the proceeding hasappealed the FERC’s June 27, 2005, order to the Ninth Circuit.

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*MirantAmericas Energy Marketing Contract Dispute with Nevada Power.**  *On December 5, 2001, Nevada Power Co. filed acomplaint at the FERC seeking reformation of the purchase price of energy undera contract it had entered with Mirant Americas Energy Marketing, claiming thatthe prices under that contract were unjust and unreasonable because, when itentered into the contract, western power markets were dysfunctional andnon-competitive markets. On June 25, 2003, the FERC dismissed thiscomplaint. Nevada Power appealed that dismissal to the United States Court ofAppeals for the Ninth Circuit, which on December 19, 2006, reversed thedismissal of the complaint and remanded the proceeding to the FERC. The salesmade under the contract with Nevada Power have been completed, and the Companyexpects that any refund claim related to that contract, if not now barred, willbe addressed in the Chapter 11 proceedings.

*Mirant Americas EnergyMarketing Contract Dispute with Southern California Water.**  *On December 21, 2001, Southern California WaterCo. filed a complaint at the FERC seeking reformation of the purchase price ofenergy under a long-term contract it had entered with Mirant Americas EnergyMarketing, claiming that the prices under that contract were unjust and unreasonablebecause, when it entered the contract, western power markets were dysfunctionaland non-competitive markets. The contract was for the purchase of 15 MWs duringthe period April 1, 2001, through December 31, 2006. On June 25,2003, the FERC dismissed this proceeding. Southern California Water appealedthat dismissal to the United States Court of Appeals for the Ninth Circuit,which on December 19, 2006, reversed the dismissal of the complaint andremanded the proceeding to the FERC. Upon the transfer of the assets of thetrading and marketing business to Mirant Energy Trading under the Plan, MirantEnergy Trading assumed Mirant Americas Energy Marketing’s contract obligationsto Southern California Water Company, including any potential refund obligations.

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

*Department of JusticeInquiries.**  *In November 2002,Mirant received a subpoena from the DOJ, acting through the United StatesAttorney’s office for the Northern District of California, requestinginformation about its activities and those of its subsidiaries for the periodsince January 1, 1998. The subpoena requested information related to theCalifornia energy markets and other topics, including the reporting ofinaccurate information to trade publications that publish natural gas orelectricity spot price data. The subpoena was issued as part of a grand juryinvestigation. The DOJ’s investigation is based upon the same circumstancesthat were the subject of an investigation by the CFTC that was settled in December 2004,****as described****in Mirant’sAnnual Report on Form 10-K for the year ended December 31,2004, in*Legal Proceedings—Other Governmental Proceedings—CFTCInquiry*. On June 19, 2006, two former employees of Mirant pledguilty to charges of conspiracy to manipulate the price of natural gas ininterstate commerce during the period from July 1, 2000, until November 1,2000, while they were west region traders for Mirant Americas Energy Marketing.Mirant is discussing the disposition of this matter with the DOJ. If Mirant isunable to reach a consensual resolution with the DOJ, it is possible that theDOJ could seek indictments against one or more Mirant entities for allegedviolations of the Commodity Exchange Act. A consensual resolution of thismatter could involve a deferred prosecution agreement and payment of a fine orpenalty. The Company’s current assessment is that any such fine or penaltywould be paid by Mirant, not the Company or its subsidiaries.

***Environmental Matters***

*EPAInformation Request.**  *InJanuary 2001, the EPA issued a request for information to Mirantconcerning the implications under the EPA’s NSR regulations promulgated underthe Clean Air Act of past repair and maintenance activities at the PotomacRiver plant in Virginia and the Chalk Point, Dickerson and Morgantown plants inMaryland. The requested information concerns the period of operations thatpredates the Company subsidiaries’ ownership and lease of those plants. Mirantresponded 

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fully to this request.Under the APSA, Pepco is responsible for fines and penalties arising from anyviolation associated with operations prior to the Company subsidiaries’acquisition or lease of the plants. If a violation is determined to haveoccurred at any of the plants, the Company subsidiary owning or leasing theplant may be responsible for the cost of purchasing and installing emissionscontrol equipment, the cost of which may be material. The Company’ssubsidiaries owning or leasing the Chalk Point, Dickerson and Morgantown plantsin Maryland will be installing a variety of emissions control equipment onthose plants to comply with the Maryland Healthy Air Act, but that equipmentwill not include all of the emissions control equipment that could be requiredif a violation of the EPA’s NSR regulations is determined to have occurred atone or more of those plants. If such a violation is determined to have occurredafter the Company’s subsidiaries acquired or leased the plants or, if occurringprior to the acquisition or lease, is determined to constitute a continuingviolation, the Company’s subsidiary owning or leasing the plant at issue couldalso be subject to fines and penalties by the state or federal government forthe period after its acquisition or lease of the plant, the cost of which maybe material, although applicable bankruptcy law may bar such liability forperiods prior to January 3, 2006, when the Plan became effective for theCompany and its subsidiaries that own or lease these plants.

*MirantPotomac River 2003 Notice of Violation.**  *On September 10, 2003, the Virginia DEQ issuedan NOV to Mirant Potomac River alleging that it violated its VirginiaStationary Source Permit to Operate by emitting NOx in excess of the “cap”established by the permit for the 2003 summer ozone season. Mirant PotomacRiver responded to the NOV, asserting that the cap was unenforceable, notingthat when the cap was made part of the permit it could comply through thepurchase of emissions allowances and raising other equitable defenses. Virginia’scivil enforcement statute provides for injunctive relief and penalties. On January 22,2004, the EPA issued an NOV to Mirant Potomac River alleging the same violationof its Virginia Stationary Source Permit to Operate as set out in the NOVissued by the Virginia DEQ.

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MDE, the DOJand the EPA entered into, and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia, a proposed consent decree(the “Original Consent Decree”) that, if approved, would have resolved MirantPotomac River’s potential liability for matters addressed in the NOVspreviously issued by the Virginia DEQ and the EPA. The Original Consent Decreewould have required Mirant Potomac River and Mirant Mid-Atlantic to (1) installpollution control equipment at the Potomac River plant in Virginia and at theMorgantown plant in Maryland leased by Mirant Mid-Atlantic, (2) complywith declining system-wide ozone season NOx emissions caps from 2004 through2010, (3) comply with system-wide annual NOx emissions caps starting in2004, (4) meet seasonal system average emissions rate targets in 2008 and (5) paycivil penalties and perform supplemental environmental projects in and aroundthe Potomac River plant expected to achieve additional environmental benefits.Except for the installation of the controls planned for the Potomac River unitsand the installation of selective catalytic reduction (“SCR”) or equivalenttechnology at Mirant Mid-Atlantic’s Morgantown units 1 and 2 in 2007 and 2008,the Original Consent Decree would not have obligated the Company’s subsidiariesto install specifically designated technology, but rather to reduce emissionssufficiently to meet the various NOx caps. Moreover, as to the requiredinstallations of SCRs at Morgantown, Mirant Mid-Atlantic may choose not toinstall the technology by the applicable deadlines and leave the units offeither permanently or until such time as the SCRs are installed. The Original ConsentDecree was subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree was not approved and theparties filed an amended proposed consent decree that superseded the OriginalConsent Decree.

On July 22, 2005, thedistrict court granted a motion filed by the City of Alexandria seeking tointervene in the district court action, although the district court imposedcertain limitations on the City of Alexandria’s participation in theproceedings. On September 23, 2005, the City of Alexandria filed a motionseeking authority to file an amended complaint in the action seeking injunctiverelief and civil 

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penaltiesunder the Clean Air Act for alleged violations by Mirant Potomac River of itsVirginia Stationary Source Permit to Operate and the State of Virginia’s StateImplementation Plan. Based upon a computer modeling described below in *Mirant Potomac River Downwash Study*, the City of Alexandriaasserted that emissions from the Potomac River plant cause or contribute toexceedances of NAAQS for SO2, NO2 and particulate matter. The City ofAlexandria also contended based on its modeling analysis that the plant’semissions of hydrogen chloride and hydrogen fluoride exceed Virginia statestandards. Mirant Potomac River disputes the City of Alexandria’s allegationsthat it has violated the Clean Air Act and Virginia law. On December 2,2005, the district court denied the City of Alexandria’s motion seeking to filean amended complaint.

In early May 2006, theparties to the Original Consent Decree and Mirant Chalk Point entered into andfiled for approval with the United States District Court for the EasternDistrict of Virginia an amended consent decree (the “Amended Consent Decree”)to resolve Mirant Potomac River’s potential liability for matters addressed inthe NOVs previously issued by the Virginia DEQ and the EPA. The Amended ConsentDecree includes the requirements that were to be imposed under the terms of theOriginal Consent Decree as described above. It also defines the rights andremedies of the parties in the event of a rejection in bankruptcy or othertermination of any of the long-term leases under which Mirant Mid-Atlanticleases the coal units at the Dickerson and Morgantown plants. The AmendedConsent Decree provides that if Mirant Mid-Atlantic rejects or otherwise losesone or more of its leasehold interests in the Morgantown and Dickerson plantsand ceases to operate one or both of the plants, Mirant Mid-Atlantic, MirantChalk Point and/or Mirant Potomac River will (i) provide the EPA, VirginiaDEQ and the MDE with the written agreement of the new owner or operator of theaffected plant or plants to be bound by the obligations of the Amended ConsentDecree and (ii) where the affected plant is the Morgantown plant, offer toany and all prospective owners and/or operators of the Morgantown plant to payfor completion of engineering, construction and installation of the SCRsrequired by the Amended Consent Decree. If the new owner or operator of theaffected plant or plants does not agree to be bound by the obligations of theAmended Consent Decree, it requires Mirant Mid-Atlantic, Mirant Chalk Pointand/or Mirant Potomac River to install an alternative suite of environmentalcontrols at the plants they continue to own. The City of Alexandria and certainindividuals and organizations opposed entry of the Amended Consent Order. TheBankruptcy Court approved the Amended Consent Decree on June 1, 2006. Thedistrict court approved the Amended Consent Decree on April 20, 2007.

*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, CO and PM10 for comparison to the applicable NAAQS and (2) on ambientconcentrations of mercury for comparison to Virginia Standards of Performancefor Toxic Pollutants. Downwash is the effect that occurs when aerodynamicturbulence induced by nearby structures causes emissions from an elevatedsource, such as a smokestack, to move rapidly toward the ground resulting inhigher ground-level concentrations of emissions.

The computer modeling analysis predicted thatemissions from the Potomac River plant have the potential to contribute tolocalized, modeled instances of exceedances of the NAAQS for SO2, NO2 and PM10under certain conditions. Based on those results, the Virginia DEQ issued adirective to Mirant Potomac River on August 19, 2005, to undertakeimmediately such action as was necessary to ensure protection of human healthand the environment and eliminate NAAQS exceedances. On August 24, 2005,power production at all five units of the Potomac River generating facility wastemporarily halted in response to the directive from the Virginia DEQ. On August 25, 2005, the District of ColumbiaPublic Service Commission filed an emergency petition and complaint with theFERC and the DOE to prevent the shutdown of the Potomac River facility. Thematter remains pending before the FERC and the DOE. On December 20, 2005,due to a determination by the DOE that an emergency situation existed with 

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respectto the reliability of the supply of electricity to central Washington, D.C.,the DOE ordered Mirant Potomac River to generate electricity at the PotomacRiver generating facility, as requested by PJM, during any period in which oneor both of the transmission lines serving the central Washington, D.C. area areout of service due to a planned or unplanned outage. In addition, the DOEordered Mirant Potomac River, at all other times, for electric reliabilitypurposes, to keep as many units in operation as possible and to reduce thestart-up time of units not in operation without contributing to any NAAQSexceedances. The DOE required Mirant Potomac River to submit a plan, on orbefore December 30, 2005, that met these requirements. The order furtherprovides that Mirant Potomac River and its customers should agree to mutuallysatisfactory terms for any costs incurred by it under this order or just andreasonable terms shall be established by a supplemental order. Certain partiesfiled for rehearing of the DOE order, and on February 17, 2006, the DOEissued an order granting rehearing solely for purposes of considering furtherthe rehearing requests. Mirant Potomac River submitted an operating plan inaccordance with the order. On January 4, 2006, the DOE issued an interimresponse to Mirant Potomac River’s operating plan authorizing operation of theunits of the Potomac River generating facility on a reduced basis, but makingit possible to bring the entire plant into service within approximately 28hours when necessary for reliability purposes. The DOE’s order expires July 1,2007.

In a letter received December 30,2005, the EPA invited Mirant Potomac River and the Virginia DEQ to work withthe EPA to ensure that Mirant Potomac River’s operating plan submitted to theDOE adequately addressed NAAQS issues. The EPA also asserted in its letter thatMirant Potomac River did not immediately undertake action as directed by theVirginia DEQ’s August 19, 2005, letter and failed to comply with therequirements of the Virginia State Implementation Plan established by thatletter. Mirant Potomac River received a second letter from the EPA on December 30,2005, requiring Mirant to provide certain requested information as part of anEPA investigation to determine the Clean Air Act compliance status of thePotomac River generating facility.

On June 1, 2006, Mirant Potomac River and the EPAexecuted an ACO by Consent to resolve the EPA’s allegations that Mirant PotomacRiver violated the Clean Air Act by not immediately shutting down all units atthe Potomac River facility upon receipt of the Virginia DEQ’s August 19,2005, letter and to assure an acceptable level of reliability to the Districtof Columbia. The ACO (i) specifies certain operating scenarios and SO2emissions limits for the Potomac River facility, which scenarios and limitstake into account whether one or both of the 230kV transmission lines servingWashington, D.C. are out of service; (ii) requires the operation of tronainjection units to reduce SO2 emissions; and (iii) requires Mirant PotomacRiver to undertake a model evaluation study to predict ambient air qualityimpacts from the facility’s operations. In accordance with the specifiedoperating scenarios, the ACO permits the facility to operate using a dailypredictive modeling protocol. This protocol allows Mirant Potomac River toschedule the facility’s level of operations based on whether computer modelingpredicts a NAAQS exceedance, based on weather and certain operating parameters.On June 2, 2006, the DOE issued a letter modifying its January 6,2006, order to direct Mirant Potomac River to comply with the ACO in order toensure adequate electric reliability to the District of Columbia. MirantPotomac River is operating the Potomac River facility in accordance with theACO and has been able to operate all five units of the facility most of thetime under the ACO. This ACO expires on June 1, 2007. Mirant Potomac Riveris in discussions with the Virginia DEQ and the Virginia State Air PollutionControl Board to determine the manner in which the Potomac River facility willbe permitted to operate after the ACO expires.

*NewYork State Administrative Claim.**  *OnJanuary 24, 2006, the State of New York and the NYSDEC filed a notice ofadministrative claims in the Mirant Debtors’ Chapter 11 proceedings asserting aclaim seeking to require the Mirant Debtors to provide funding to the Company’ssubsidiaries owning generating facilities in New York to satisfy certainspecified environmental compliance obligations. The State of New York allegesthat during the pendency of the Chapter 11 proceedings the Mirant Debtors thatemerged from bankruptcy in January 2006 made decisions on behalf of theCompany’s subsidiaries owning 

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generating facilities inNew York and did not appropriately maintain the corporate separateness betweenthemselves and those subsidiaries. The Company disputes those allegations. TheState of New York cites various existing outstanding matters between the Stateand the Company’s subsidiaries owning generating facilities in New York relatedto compliance with environmental laws and regulations, most of which are notmaterial. The most significant compliance obligation identified by the State ofNew York in its notice of administrative claim relates to the 2003 ConsentDecree entered into by Mirant New York and Mirant Lovett with the State of NewYork to resolve issues related to NSR requirements under the Clean Air Actrelated to the Lovett plant. For further discussion of the status of the 2003Consent Decree see “Chapter 11 Proceedings” above. The State of New York andthe NYSDEC have executed a stipulated order with the Company’s New Yorksubsidiaries and the other Mirant Debtors to stay resolution of thisadministrative claim. That stipulated order was approved by the BankruptcyCourt on February 23, 2006.

*Riverkeeper Suit AgainstMirant Lovett.**  *On March 11,2005, Riverkeeper, Inc. filed suit against Mirant Lovett in the UnitedStates District Court for the Southern District of New York under the CleanWater Act. The suit alleges that Mirant Lovett failed to implement a marinelife exclusion system at its Lovett generating plant and to perform monitoringfor the exclusion of certain aquatic organisms from the plant’s cooling waterintake structures in violation of Mirant Lovett’s water discharge permit issuedby the State of New York. The plaintiff requests the court to enjoin MirantLovett from continuing to operate the Lovett generating plant in a manner thatallegedly violates the Clean Water Act, to impose civil penalties of $32,500per day of violation, and to award the plaintiff attorneys’ fees. On April 20,2005, the district court approved a stipulation agreed to by the plaintiff andMirant Lovett that stays the suit until 60 days after entry of an order by theBankruptcy Court confirming a plan of reorganization for Mirant Lovett becomesfinal and non-appealable.

***City of Alexandria Zoning Action***

On December 18, 2004, the City Council for theCity of Alexandria, Virginia (the “City Council”) adopted certain zoningordinance amendments that resulted in the zoning status of Mirant Potomac River’sgenerating plant being changed from “noncomplying use” to “nonconforming usesubject to abatement.” Under the nonconforming use status, unless MirantPotomac River applied for and received a special use permit for the plantduring the seven-year abatement period, the operation of the plant would havehad to be terminated within a seven-year period, and no alterations thatdirectly prolonged the life of the plant would be permitted during theseven-year period. The City Council also approved revocation of two special usepermits issued in 1989 (the “1989 SUPs”), one applicable to the administrativeoffice space at Mirant Potomac River’s plant and the other for the plant’stransportation management plan.

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 seeking to overturn the actions taken by the City Council on December 18,2004, on the grounds that those actions violated federal, state and city laws.On February 24, 2006, the court entered judgment in favor of MirantPotomac River and Mirant Mid-Atlantic declaring the change in the zoning statusof Mirant Potomac River’s generating plant to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. On April 20, 2007, the VirginiaSupreme Court affirmed the rulings by the trial court. The City of Alexandriahas indicated that it intends to file a motion for rehearing with the VirginiaSupreme Court.

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

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

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advance notice of anyindefinite or permanent shutdown of the plant and to pay all or a portion ofcertain costs incurred by Pepco for transmission additions or upgrades when anindefinite or permanent shutdown of the plant occurs prior to December 19,2010. On September 13, 2005, Pepco notified Mirant Potomac River that itconsiders Mirant Potomac River’s shutdown of the plant to be a material breachof the Local Area Support Agreement that is not excused under the force majeureprovisions of the agreement. Pepco contends that Mirant Potomac River’s actionsentitle Pepco to recover as damages the cost of constructing additionaltransmission facilities. Pepco, on January 24, 2006, filed a notice of administrativeclaims in the bankruptcy proceedings asserting that Mirant Potomac River’sshutdown of the Potomac River plant causes Mirant Potomac River to be liablefor the cost of such transmission facilities, which cost it estimates to be inexcess of $70 million. Mirant Potomac River disputes Pepco’s interpretation ofthe agreement. The outcome of this matter cannot be determined at this time.

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

***Other Legal Matters***

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

***Other Contingencies***

*SwingingBridge.*   On May 5,2005, Mirant NY-Gen discovered a sinkhole at its Swinging Bridge dam, locatedin Sullivan County, New York. In response, Mirant NY-Gen filled this sinkhole,inspected for damage the dam’s slopes and the enclosed pipe that delivers waterfrom the reservoir to the generator, drew down the lake level, and cleaned thediversion tunnel. Mirant NY-Gen’s analysis indicated that the most probablecause of the sinkhole was erosion of soil comprising the dam from water flowthrough a hole in the pipe that delivers water from the reservoir to thegenerator. The dam is currently stabilized, and Mirant NY-Gen has performedadditional remediation repairs. By letter dated June 14, 2006, theFERC authorized Mirant NY-Gen to proceed with its remediation plan for thesinkhole. The FERC has also concurred with the results of Mirant NY-Gen’s floodstudy for its New York Swinging Bridge, Rio and Mongaup generation facilities,which study concluded that no additional remediation is required. TheBankruptcy Court authorized Mirant NY-Gen to proceed with implementation of theremediation plan on June 29, 2006. Through March 31, 2007, $27million had been incurred to remediate the dam at Swinging Bridge. Upon theclosing of the Alliance Sale on May 7, 2007, the new owner of MirantNY-Gen assumed responsibility for completing the remediation work. MirantAmericas, which was assigned Mirant NY-Gen’s claims against third parties underMirant NY-Gen’s plan of reorganization, expects to recover insurance proceedsfor a portion of the repair costs incurred prior to the sale of Mirant NY-Gen.

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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 accompanying unaudited condensedconsolidated financial statements and the notes thereto, which are includedelsewhere in this report*.*

***Overview***

We are a competitive energy company that produces andsells electricity. We are an indirect wholly-owned subsidiary of Mirant. On May 1,2007, Mirant completed the sale of six U.S. natural gas-fired intermediate andpeaking plants, including our Zeeland and Bosque facilities. In addition, on May 7,2007, we completed the sale of Mirant NY-Gen. Our continuing operations of10,301 MW consist of the ownership, long-term lease and operation of powergeneration facilities located in markets in the Mid-Atlantic and Northeastregions of the United States and in California, and energy trading andmarketing operations in Atlanta, Georgia.

On April 9, 2007, Mirant announced that its Boardof Directors had decided to explore strategic alternatives to enhancestockholder value. In light of the status of the disposition program, the Boardof Directors will consider in the exploration process whether the interests ofstockholders would be best served by returning excess cash from the saleproceeds to stockholders, with Mirant continuing to operate its retainedbusinesses or, alternatively, whether greater stockholder value would beachieved by entering into a transaction with another company, including a saleof Mirant in its entirety. Mirant does not expect to consider making anacquisition as part of this exploration process.

OurMid-Atlantic operations contributed 63% of our $392 million realized grossmargin for the three months ended March 31, 2007. Our power plants locatedin the Mid-Atlantic region that sell power into the PJM market will participatein the RPM forward capacity market. Due to the increasing demand for power andthe continuing reduction in available capacity in this area, the RPM isdesigned to provide prices for capacity that are intended to ensure thatadequate resources are in place to meet the demand requirements. PJM held itsfirst annual capacity auction in April 2007, for delivery of capacity fromJune 1, 2007 to May 31, 2008, and the resource clearing price in theSouthwestern MAAC for delivery of capacity from June 1, 2007 to May 31,2008, was $188.54 per MW-day. Two more auctions will be conducted this year andrelate to the delivery periods for June 1, 2008 to May 31, 2009 andfrom June 1, 2009 to May 31, 2010. Thereafter, annual auctions willbe conducted to procure capacity three years prior to the delivery period.

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**Results ofOperations**

The following discussion of our performance is organizedby reportable segment, which is consistent with the way we manage our business.

*ConsolidatedFinancial Performance*

Wereported a net loss of $167 million and net income of $423 million for theperiods ended March 31, 2007 and 2006, respectively. For the three monthsended March 31, 2007, as compared to the same period in 2006, a decreasein unrealized gross margin reduced net income by $641 million. We engage inasset hedging activities to reduce our exposure to commodity price fluctuationsand to achieve more predictable realized gross margins. The decrease in unrealizedgross margins from these activities was principally due to rising power pricesin the three months ended March 31, 2007, as compared to declining powerprices during the three months ended March 31, 2006. For the same periods,all other activity combined resulted in a $51 million increase in net income.The change in net income is detailed as follows (in millions):

| ** **                                                                  | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **Increase/     (Decrease)** | ** ** |
| Realized gross  margin                                                      |       | $                                                                      | 392        |   | $ | 363 |   |   | $ | 29 |   |   |
| Unrealized gross  margin                                                    |       | (359                                                                   | )          | 282 |   |   | (641 | ) |   |
| Total gross  margin                                                         |       | 33                                                                     |       | 645 |   |   | (612 | ) |   |
| Operating  expenses:                                                        |       |                                                                   |       |   |   |   |   |   |   |
| Operations and maintenance                                                  |       |                                                                   |       |   |   |   |   |   |   |
| Affiliate                                                                   |       | 65                                                                     |       | 69 |   |   | (4 | ) |   |
| Nonaffiliate                                                                |       | 88                                                                     |       | 93 |   |   | (5 | ) |   |
| Depreciation and amortization                                               |       | 30                                                                     |       | 28 |   |   | 2 |   |   |
| Gain on sales of assets, net                                                |       | (2                                                                     | )          | — |   |   | (2 | ) |   |
| Total operating  expenses                                                   |       | 181                                                                    |       | 190 |   |   | (9 | ) |   |
| Operating income  (loss)                                                    |       | (148                                                                   | )          | 455 |   |   | (603 | ) |   |
| Other expense  (income), net                                                |       |                                                                   |       |   |   |   |   |   |   |
| Affiliate                                                                   |       | (2                                                                     | )          | (1 | ) |   | (1 | ) |   |
| Nonaffiliate                                                                |       | 17                                                                     |       | 32 |   |   | (15 | ) |   |
| Total other expense(income),  net                                           |       | 15                                                                     |       | 31 |   |   | (16 | ) |   |
| Income (loss) from  continuing operations before  reorganization items, net |       | (163                                                                   | )          | 424 |   |   | (587 | ) |   |
| Reorganization  items, net                                                  |       | (1                                                                     | )          | — |   |   | (1 | ) |   |
| Income (loss)  from continuing operations                                   |       | (162                                                                   | )          | 424 |   |   | (586 | ) |   |
| Loss from discontinued  operations                                          |       | (5                                                                     | )          | (1 | ) |   | (4 | ) |   |
| Net Income (Loss)                                                           |       | $                                                                      | (167       | ) | $ | 423 |   |   | $ | (590 | ) |   |

 

In the tables below, theMid-Atlantic region includes our Chalk Point, Morgantown, Dickerson and PotomacRiver facilities. The Northeast region includes our Bowline, Canal, Lovett,Kendall, Hillburn, Shoemaker, Martha’s Vineyard, Swinging Bridge, Rio, Mongaupand Wyman facilities. The California region includes our Pittsburg, ContraCosta and Potrero facilities. Other Operations includes proprietary trading andfuel oil management activities.

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*OperatingStatistics*

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

| ** **   | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** |
|--------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **   | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       |                                             | 37         | %             |       |   | 35 | % |   |   | 2 | % |   |
| Northeast    |       |                                             | 27         | %             |       |   | 15 | % |   |   | 12 | % |   |
| California   |       |                                             | 3          | %             |       |   | 5 | % |   |   | (2 | )% |   |
| Total        |       |                                             | 26         | %             |       |   | 23 | % |   |   | 3 | % |   |

 

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

| ** **   | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** |
|--------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **   | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       | 4,234                                            |       | 4,083         |       |   | 151 |   |   |
| Northeast    |       | 1,777                                            |       | 994           |       |   | 783 |   |   |
| California   |       | 145                                              |       | 243           |       |   | (98 | ) |   |
| Total        |       | 6,156                                            |       | 5,320         |       |   | 836 |   |   |

 

***Three Months Ended March 31, 2007 versus March 31,2006***

*Gross Margin*

Thefollowing table details gross margin by realized and unrealized margin (inmillions):

| ** **       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **       | ** ** | **Realized**                                         | ** ** | **Unrealized** | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic     |       |                                                 | $          | 246 |   |   |   | $ | (319 | ) |   | $ | (73 | ) |   | $ | 191 |   |   |   | $ | 226 |   |   | $ | 417 |   |
| Northeast        |       |                                                 | 91         |   |   |   | (49 | ) |   | 42 |   |   | 113 |   |   |   | 34 |   |   | 147 |   |
| California       |       |                                                 | 32         |   |   |   | — |   |   | 32 |   |   | 26 |   |   |   | 1 |   |   | 27 |   |
| Other Operations |       |                                                 | 17         |   |   |   | 9 |   |   | 26 |   |   | 18 |   |   |   | 21 |   |   | 39 |   |
| Eliminations     |       |                                                 | 6          |   |   |   | — |   |   | 6 |   |   | 15 |   |   |   | — |   |   | 15 |   |
| Total            |       |                                                 | $          | 392 |   |   |   | $ | (359 | ) |   | $ | 33 |   |   | $ | 363 |   |   |   | $ | 282 |   |   | $ | 645 |   |

 

Grossmargin for the three months ended March 31, 2007, is detailed as follows(in millions):

| ** **                            | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **Mid-  Atlantic**                    | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy                                |       |                                  | $          | 165 |   |   |   | $ | 31 |   |   |   | $ | 1 |   |   |   | $ | 17 |   |   |   | $ | 6 |   |   | $ | 220 |   |
| Contracted and capacity               |       |                                  | 11         |   |   |   | 24 |   |   |   | 31 |   |   |   | — |   |   |   | — |   |   | 66 |   |
| Incremental  realized value of hedges |       |                                  | 70         |   |   |   | 36 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 106 |   |
| Unrealized gains  (losses)            |       |                                  | (319       | ) |   |   | (49 | ) |   |   | — |   |   |   | 9 |   |   |   | — |   |   | (359 | ) |
| Total                                 |       |                                  | $          | (73 | ) |   |   | $ | 42 |   |   |   | $ | 32 |   |   |   | $ | 26 |   |   |   | $ | 6 |   |   | $ | 33 |   |

 

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Grossmargin for the three months ended March 31, 2006, is detailed as follows(in millions):

| ** **                            | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                            | ** ** | **Mid-  Atlantic**                                             | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy                                |       |                                                           | $          | 137 |   |   |   | $ | 22 |   |   |   | $ | — |   |   |   | $ | 18 |   |   |   | $ | 15 |   |   | $ | 192 |   |
| Contracted and  capacity              |       |                                                           | 14         |   |   |   | 12 |   |   |   | 26 |   |   |   | — |   |   |   | — |   |   | 52 |   |
| Incremental  realized value of hedges |       |                                                           | 40         |   |   |   | 79 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 119 |   |
| Unrealized gains                      |       |                                                           | 226        |   |   |   | 34 |   |   |   | 1 |   |   |   | 21 |   |   |   | — |   |   | 282 |   |
| Total                                 |       |                                                           | $          | 417 |   |   |   | $ | 147 |   |   |   | $ | 27 |   |   |   | $ | 39 |   |   |   | $ | 15 |   |   | $ | 645 |   |

 

Energy represents gross margin from the generation ofelectricity, emissions allowances sales and purchases, fuel sales, fuelpurchases and handling, steam sales and our proprietary trading and fuel oilmanagement activities.

Contracted and capacity represents revenue receivedthrough RMR contracts and other installed capacity arrangements and revenuefrom ancillary services.

Incremental realized value of hedges represents theactual margin upon the settlement of our power and fuel hedging derivativecontracts.

Unrealized gains/losses represent the unrealizedportion of our derivative contracts.

Ourgross margin for the three months ended March 31, 2007, was $33 million ascompared to $645 million for the same period in 2006. Gross margin includes netunrealized gains and losses from our hedging activities. We engage in assethedging activities to reduce our exposure to commodity price fluctuations andto achieve more predictable realized gross margins. Net unrealized losses fromhedging activities were $359 million for the three months ended March 31,2007, primarily due to rising power prices. Of this amount, $188 millionis due to a decrease in value associated with forward power contracts for future periods as aresult of increases in forward power prices in 2007 and $171 million is due tothe settlement of power and fuel contracts during the period for which netunrealized gains had been recorded in prior periods. For the three months ended March 31, 2006, we recognized netunrealized gains from hedging activities of $282 million primarily due todeclining power prices in that period. Our realized gross margin for the threemonths ended March 31, 2007, was $392 million, an increase of $29 millioncompared to the same period in 2006 primarily due to an increase in generationvolumes and higher energy prices.

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***Mid-Atlantic***

Our Mid-Atlanticsegment, which accounts for approximately half our generating capacity,includes four generation facilities with total generation capacity of 5,256 MW.The following table summarizes our Mid-Atlantic segment (in millions):

| ** **                                                                             | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase**/ | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **                                                                             | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                                 |       | $                                                | 246        |          | $          | 191 |   |   | $ | 55 |   |   |
| Unrealized gross  margin                                                               |       | (319                                             | )          | 226           |       |   | (545 | ) |   |
| Total gross  margin                                                                    |       | (73                                              | )          | 417           |       |   | (490 | ) |   |
| Operating expenses:                                                                    |       |                                             |       |          |       |   |   |   |   |
| Operations and maintenance                                                             |       | 83                                               |       | 85            |       |   | (2 | ) |   |
| Depreciation and amortization                                                          |       | 19                                               |       | 18            |       |   | 1 |   |   |
| Gain on sales of assets, net                                                           |       | (1                                               | )          | —        |       |   | (1 | ) |   |
| Total operating  expenses                                                              |       | 101                                              |       | 103           |       |   | (2 | ) |   |
| Operating income  (loss)                                                               |       | (174                                             | )          | 314           |       |   | (488 | ) |   |
| Total other  income, net                                                               |       | (1                                               | )          | (1            | )          |   | — |   |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       | $                                                | (173       | )             | $          | 315 |   |   | $ | (488 | ) |   |

 

*Gross Margin*

Gross margin decreased by $490 million for thethree months ended March 31, 2007, compared to the same period for 2006and is detailed as follows (in millions):

| ** **                            | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                                | 165        |          | $          | 137 |   |   | $ | 28 |   |   |
| Contracted and  capacity              |       | 11                                               |       | 14            |       |   | (3 | ) |   |
| Incremental  realized value of hedges |       | 70                                               |       | 40            |       |   | 30 |   |   |
| Unrealized gains  (losses)            |       | (319                                             | )          | 226           |       |   | (545 | ) |   |
| Total                                 |       | $                                                | (73        | )             | $          | 417 |   |   | $ | (490 | ) |   |

 

The significant decreasein the gross margin for our Mid-Atlantic operations is primarily due to thefollowing:

·       a decrease of$545 million related to unrealized gains and losses on hedging activities.In 2007, unrealized losses of $319 million were primarily due to $197million from a decrease in value associated with forward power contracts for future periods as aresult of increases in forward power prices in 2007 and $122 million due to thesettlement of power and fuel contracts during the period for which netunrealized gains had been recorded in prior periods. In 2006, unrealized gainsof $226 million were primarily due to $175 million from an increase in valueassociated with forward power contracts for future periods due to decreases inpower prices and $51 million due to the settlement of contracts during theperiod for which unrealized losses had been recorded in prior periods;

·       an increase of $28 millionin energy due to an increase in power prices and a slight increase ingeneration volumes. Average power prices increased by 7% and generation volumesincreased by 4% for the three months ended March 31, 2007, compared to thesame period in 2006. Our baseload coal units accounted for 92% of ourgeneration volumes for the first quarter of 2007 compared to 98% in the firstquarter of 2006; and

·       anincrease of $30 million in incremental realized value of hedges of ourgeneration output primarily due to an increase in the amount by which thesettlement value of power contracts exceeded market prices.

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***Northeast***

Our Northeast segment is comprised of our assetslocated in New York and New England with total generation capacity of 3,047 MW.The following table summarizes the operations of our Northeast segment for thethree months ended March 31, 2007 and 2006 (in millions):

 

| ** **                                                                      | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **                                                                      | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                          |       | $                                                | 91         |          | $          | 113 |   |   | $ | (22 | ) |   |
| Unrealized gross  margin                                                        |       | (49                                              | )          | 34            |       |   | (83 | ) |   |
| Total gross  margin                                                             |       | 42                                               |       | 147           |       |   | (105 | ) |   |
| Operating  expenses:                                                            |       |                                             |       |          |       |   |   |   |   |
| Operations and maintenance                                                      |       | 45                                               |       | 54            |       |   | (9 | ) |   |
| Depreciation and amortization                                                   |       | 7                                                |       | 5             |       |   | 2 |   |   |
| Gain on sales of assets, net                                                    |       | (10                                              | )          | (33           | )          |   | 23 |   |   |
| Total operating  expenses                                                       |       | 42                                               |       | 26            |       |   | 16 |   |   |
| Operating income                                                                |       | —                                           |       | 121           |       |   | (121 | ) |   |
| Total other  expense (income), net                                              |       | (2                                               | )          | 3             |       |   | (5 | ) |   |
| Income from continuing  operations before reorganization items and income taxes |       | $                                                | 2          |          | $          | 118 |   |   | $ | (116 | ) |   |

 

*Gross Margin*

Grossmargin decreased by $105 million for the three months ended March 31,2007, compared to the same period for 2006 and is detailed as follows (inmillions):

| ** **                            | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                                | 31         |          | $          | 22 |   |   | $ | 9 |   |   |
| Contracted and  capacity              |       | 24                                               |       | 12            |       |   | 12 |   |   |
| Incremental  realized value of hedges |       | 36                                               |       | 79            |       |   | (43 | ) |   |
| Unrealized gains  (losses)            |       | (49                                              | )          | 34            |       |   | (83 | ) |   |
| Total                                 |       | $                                                | 42         |          | $          | 147 |   |   | $ | (105 | ) |   |

 

The decrease ingross margin is primarily due to the following:

·       adecrease of $83 million related to unrealized gains and losses on hedgingactivities. In 2007, unrealized losses of $49 million were primarily dueto the settlement of power and fuel contracts during the period for whichunrealized gains had been recorded in prior periods. In 2006, unrealized gainsof $34 million were primarily due to $29 million from an increase in valueassociated with forward power contracts for future periods due to decreases inpower prices and $5 million due to the settlement of contracts during theperiod for which unrealized losses had been recorded in prior periods;

·       adecrease of $43 million in incremental realized value of hedges of ourgeneration output primarily due to a decrease in the amount by which thesettlement value of power contracts exceeded market prices;

·       anincrease of $12 million in contracted and capacity primarily due to theimplementation of FCM. See “Item 1. Regulatory Environment” in our AnnualReport on Form 10-K for the year ended December 31, 2006, forfurther information on the implementation of FCM; and

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·       an increase of $9 millionin energy due to higher generation volumes that resulted from colder weatherand wider conversion spreads for our oil units. While average power pricesdecreased by 17%, volumes increased by 79%.

*Operating Expenses*

Gains on sales of assetsdecreased $23 million due to lower sales of emissions allowances to affiliatesthat are eliminated in the consolidated statement of operations. This amount ispartially offset by a $9 million decrease in operations and maintenanceexpense, of which $8 million is due to a decrease in property taxes. For MirantBowline, Mirant Lovett and Hudson Valley Gas the property tax expenserecognized for the three months ended March 31, 2006, was at the assessedlevel while the 2007 property tax expense is at the level reflected in a December 2006property tax settlement.

***California***

OurCalifornia segment consists of the Pittsburg, Contra Costa and Potrerofacilities with total generation capacity of 2,347 MW. The following tablesummarizes our California segment for the three months ended March 31,2007 and 2006 (in millions):

| ** **                                                                      | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **                                                                      | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                          |       |                                             | $          | 32            |       |   |   | $ | 26 |   |   |   | $ | 6 |   |   |
| Unrealized gross  margin                                                        |       |                                             | —     |          |       |   | 1 |   |   |   | (1 | ) |   |
| Total gross  margin                                                             |       |                                             | 32         |          |       |   | 27 |   |   |   | 5 |   |   |
| Operating  expenses:                                                            |       |                                             |       |          |       |   |   |   |   |   |   |   |   |
| Operations and maintenance                                                      |       |                                             | 20         |          |       |   | 17 |   |   |   | 3 |   |   |
| Depreciation and amortization                                                   |       |                                             | 3          |          |       |   | 3 |   |   |   | — |   |   |
| Gain on sales of assets, net                                                    |       |                                             | (1         | )             |       |   | — |   |   |   | (1 | ) |   |
| Total operating  expenses                                                       |       |                                             | 22         |          |       |   | 20 |   |   |   | 2 |   |   |
| Operating income                                                                |       |                                             | 10         |          |       |   | 7 |   |   |   | 3 |   |   |
| Total other  income, net                                                        |       |                                             | (3         | )             |       |   | — |   |   |   | (3 | ) |   |
| Income from continuing  operations before reorganization items and income taxes |       |                                             | $          | 13            |       |   |   | $ | 7 |   |   |   | $ | 6 |   |   |

 

*Gross Margin*

Grossmargin increased by $5 million for the three months ended March 31, 2007,compared to the same period for 2006 and is detailed as follows (in millions):

| ** **               | ** ** | **Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|---------------|------------|
| ** **               | ** ** | **2007**                                         | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                   |       |                                             | $          | 1             |       |   |   | $ | — |   |   |   | $ | 1 |   |   |
| Contracted and  capacity |       |                                             | 31         |          |       |   | 26 |   |   |   | 5 |   |   |
| Unrealized gains         |       |                                             | —     |          |       |   | 1 |   |   |   | (1 | ) |   |
| Total                    |       |                                             | $          | 32            |       |   |   | $ | 27 |   |   |   | $ | 5 |   |   |
|                          |            |                                                  |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in ourcontracted and capacity gross margin is primarily due to the commencement of anew tolling agreement in the first quarter of 2007 at our Contra Costa andPittsburg facilities. See “Item 1. Business Segments” in our Annual Report on Form 10-Kfor the year ended December 31, 2006, for additional information regardingthe tolling agreement.

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***Other Operations***

OtherOperations includes proprietary trading and fuel oil management. The followingtable summarizes our Other Operations segment (in millions):

| ** **                                                                             | ** ** | **Three Months  Ended March 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                                                             | ** ** | **2007**                                         | ** ** | **2006**   | ** ** | **Decrease** | ** ** |
| Realized gross  margin                                                                 |       |                                             | $          | 17         |       |   |   | $ | 18 |   |   |   | $ | (1 | ) |   |
| Unrealized gross  margin                                                               |       |                                             | 9          |       |       |   | 21 |   |   |   | (12 | ) |   |
| Total gross  margin                                                                    |       |                                             | 26         |       |       |   | 39 |   |   |   | (13 | ) |   |
| Operating  expenses:                                                                   |       |                                             |       |       |       |   |   |   |   |   |   |   |   |
| Operations and maintenance                                                             |       |                                             | 5          |       |       |   | 6 |   |   |   | (1 | ) |   |
| Depreciation and amortization                                                          |       |                                             | 1          |       |       |   | 2 |   |   |   | (1 | ) |   |
| Total operating  expenses                                                              |       |                                             | 6          |       |       |   | 8 |   |   |   | (2 | ) |   |
| Operating income                                                                       |       |                                             | 20         |       |       |   | 31 |   |   |   | (11 | ) |   |
| Total other  expense, net                                                              |       |                                             | 21         |       |       |   | 29 |   |   |   | (8 | ) |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       |                                             | $          | (1         | )          |   |   | $ | 2 |   |   |   | $ | (3 | ) |   |

 

*Gross Margin*

Grossmargin decreased by $13 million for the three months ended March 31,2007, compared to the same period for 2006 and is detailed as follows (inmillions):

| ** **       | ** ** | **Three Months  Ended March 31,** | ** ** | ** ** | ** ** |
|------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **2007**                                         | ** ** | **2006**   | ** ** | **Decrease** | ** ** |
| Energy           |       |                                             | $          | 17         |       |   |   | $ | 18 |   |   |   | $ | (1 | ) |   |
| Unrealized gains |       |                                             | 9          |       |       |   | 21 |   |   |   | (12 | ) |   |
| Total            |       |                                             | $          | 26         |       |   |   | $ | 39 |   |   |   | $ | (13 | ) |   |

 

***The decrease in gross margin is primarily due to a decreaseof $12 million in unrealized gains on proprietary trading and fuel oilmanagement activities compared to the same period in 2006.***

*Other expense, net*

Our other expense, netdecreased by $8 million for the three months ended March 31, 2007,compared to the same period in 2006 primarily due to lower interest expense onour debt.

*DiscontinuedOperations*

For the three months endedMarch 31, 2007 and 2006, loss from discontinued operations was $5 millionand $1 million, respectively and included Mirant Zeeland, LLC and Mirant Texas.See Note C to our unaudited condensed consolidated financial statements foradditional information related to planned dispositions and discontinuedoperations. The decrease of $4 million is primarily due to unrealized gains andlosses on hedging activities.

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**Financial Condition**

**Liquidity andCapital Resources**

***Overview***

Our liquidity and capitalrequirements are primarily a function of our debt maturities and debt servicerequirements, capital expenditures, collateral requirements, fuel procurementand power sale contract obligations, legal settlements and working capitalneeds. Net cash flow provided by operating activities totaled $223 million and$481 million for the three months ended March 31, 2007 and 2006,respectively.

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

Mirant North America and Mirant Americas EnergyMarketing, (the “Primary DIP Lenders”) entered into an agreement (the “PrimaryNew York DIP Agreement”) to make secured debtor-in-possession financing in anamount of (i) $20 million, plus (ii) an amount equal to theamount of credit support provided on behalf of Mirant New York, Mirant Bowline,Mirant Lovett, and Hudson Valley Gas (collectively, the “New York DIP Borrowers”),to the extent such amounts were collateralized with cash or cash equivalents bythe New York DIP Borrowers. The New York DIP Borrowers had posted $21 millioncash collateral with Mirant Energy Trading (successor to Mirant Americas EnergyMarketing) in accordance with the March 31, 2007, collateral allocationperformed in good faith by Mirant Energy Trading. This cash collateral amountwas returned to the New York DIP Borrowers and the Primary New York DIPAgreements were terminated in conjunction with the Emerging Subsidiariesemergence from bankruptcy on April 16, 2007.

The Bankruptcy Court approved a debtor-in-possessionloan to Mirant NY-Gen from Mirant Americas under which Mirant Americas, subjectto certain conditions, would lend up to $16.5 million to Mirant NY-Gen toprovide funding for the repairs on the Swinging Bridge dam. When Mirant NY-Gen emergedfrom bankruptcy and was sold on May 7, 2007, all claims held by MirantNY-Gen were assigned to Mirant Americas, Mirant Americas released all of itsclaims and liens against Mirant NY-Gen, and this loan was cancelled.

On April 18, 2007, anew DIP Agreement was established between Mirant Lovett and Mirant Americas tomake secured debtor-in-possession financing in an amount of $20 million. Thefinancing has a stated maturity of 180 days and bears interest at a rate ofLIBOR plus 4.25%. In addition, Mirant Lovett posted $7 million of cashcollateral with Mirant Energy Trading to collateralize Mirant Energy Tradingfor collateral that Mirant Energy Trading has posted on Mirant Lovett’s behalf.

***Cash Flows***

*ContinuingOperations*

*Operating Activities.*   Our cash providedby operating activities is affected by seasonality, changes in energy pricesand fluctuations in our working capital requirements. Cash provided byoperating activities from continuing operations decreased $251 million forthe three months ended March 31, 2007, compared to the same period in2006, primarily due to the following:

·       anincrease in realized gross margin of $29 million in 2007, compared to thesame period in 2006. See *Results of Operations*foradditional discussion of our performance in 2007 compared to the same period in2006;

·       anincrease due to the receipt in 2007 of a net refund of $48 million related tothe New York property tax settlement;

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·       anincrease of $71 million related to changes in our fuel oil inventory. Ourinventory levels increased in 2006 as a result of higher fuel oil prices andlower generation volumes in that period. In 2007, our fuel oil inventory levelsdecreased due to higher generation volumes from our oil units and emissionsallowances decreased due to an increase in 2006 resulting from purchases andlower generation volumes;

·       adecrease of $314 million due to changes in posted collateral levels. For thethree months ended March 31, 2007, we posted an additional $77 million ofcash collateral to support energy marketing activities. For the three monthsended March 31, 2006, we had a net reduction in collateral of $237 millioncomprised of a decrease in cash collateral to support energy marketingactivities of $381 million, a reduction of $56 million in cash collateralposted in connection with the Mirant Mid-Atlantic lease upon posting $75million of letters of credit, and the deposit of $200 million into a cashcollateral account to support the issuance of letters of credit;

·       adecrease of $46 million primarily due to the return in 2007 of depositspreviously posted by our counterparties; and

·       adecrease of $29 million due to changes in accounts receivable and accountspayable.

*InvestingActivities.*   Net cash used ininvesting activities from continuing operations was $71 million for thethree months ended March 31, 2007, compared to net cash provided of$188 million in 2006. This difference was primarily due to an increase of$55 million in capital expenditures primarily due to our environmentalcapital expenditures for our Mid-Atlantic generation facilities, offset by adecrease of $206 million in repayments of notes receivable from affiliates.

*Financing Activities.**  *Net cash used in financing activities from continuingoperations was $277 million for the three months ended March 31,2007, compared to $642 million for the same period in 2006. This difference wasprimarily due to the following:

·       adecrease in proceeds from the issuance of long-term debt of approximately$2 billion. Proceeds from the issuance of long-term debt in 2006 included$850 million from the Mirant North America debt offering that was releasedfrom escrow on January 3, 2006, $700 million from the Mirant NorthAmerica senior secured loan and $465 million drawn on the Mirant NorthAmerica senior secured revolving credit facility. In 2006 we also incurred $51million in debt issuance costs;

·       adecrease in the repayments of long-term debt of approximately $2.1 billion. In2007, we repaid $133 million on the Mirant North America senior secured termloan. In 2006 we repaid $465 million on the Mirant North America seniorsecured revolving credit facility and $1.776 billion to settle obligationsof Mirant Americas Generation under the Plan;

·       wemade a payment of $250 million in 2006 under the Plan to Mirant Americas;and

·       we distributed$151 million to our member in 2007.

*DiscontinuedOperations*

Cash used in operatingactivities from discontinued operations increased $7 million for the threemonths ended March 31, 2007, compared to the same period in 2006.

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

At March 31,2007, we had total cash, cash equivalents, and credit facility availability ofapproximately $1.3 billion. The table below sets forth total cash, cashequivalents and availability of credit facilities of Mirant Americas Generationand its subsidiaries (in millions):

| ** **                                                                                                             | ** ** | **At  March 31,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Cash and Cash  Equivalents:                                                                                            |       |                         |       |                            |       |   |   |   |   |
| Mirant North America                                                                                                   |       |                         | $          | 394                             |       |   |   | $ | 678 |   |   |
| Mirant Mid-Atlantic                                                                                                    |       |                         | 234        |                            |       |   | 75 |   |   |
| Total cash and  cash equivalents                                                                                       |       |                         | 628        |                            |       |   | 753 |   |   |
| Less: Cash  restricted due to bankruptcy of New York entities and reserved for working  capital and other purposes (1) |       |                         | 133        |                            |       |   | 102 |   |   |
| Total available  cash and cash equivalents                                                                             |       |                         | 495        |                            |       |   | 651 |   |   |
| Available under  credit facilities                                                                                     |       |                         | 783        |                            |       |   | 796 |   |   |
| Total cash, cash  equivalents and credit facilities availability                                                       |       |                         | $          | 1,278                           |       |   |   | $ | 1,447 |   |   |

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(1)          At March 31, 2007,this amount included approximately $118 million of cash related to the New Yorkentities that emerged from bankruptcy on April 16, 2007. Post-emergencethis cash was no longer restricted due to bankruptcy.

Our ability and theability of our subsidiary Mirant Mid-Atlantic to pay dividends is restrictedunder the terms of our debt agreements and leverage lease documentation,respectively. At March 31, 2007, we had distributed to Mirant AmericasGeneration all available cash that was permitted to be distributed under theterms of our debt agreements, leaving us and our subsidiaries withapproximately $628 million. Approximately $234 million of such amount was heldby Mirant Mid-Atlantic which, as of March 31, 2007, met the ratio testsunder the leveraged lease documents for distribution. After taking into accountour financial results for the three months ended March 31, 2007, we expectto be able to distribute approximately $142 million in May 2007.

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

In order to sell power and purchase fuel in theforward markets and perform other energy trading and marketing activities, weare often required to provide trade credit support to our counterparties ormake deposits with brokers. In addition, we are often required to provide cashcollateral or letters of credit for access to the transmission grid, toparticipate in power pools, to fund debt service reserves and for otheroperating activities. Trade credit support includes cash collateral, letters ofcredit and financial guarantees. In the event that we default, the counterpartycan draw on a letter of credit or apply cash collateral held to satisfy theexisting amounts outstanding under an open contract. At March 31, 2007,our outstanding issued letters of credit totaled $218 million.

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Thefollowing table summarizes cash collateral posted with counterparties andbrokers and letters of credit issued as of March 31, 2007 and December 31,2006 (in millions):

| ** **                                                | ** ** | **At  March 31,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Cash collateral  posted—energy trading and marketing |       |                         | $          | 104                             |       |   |   | $ | 27 |   |   |
| Cash collateral  posted—other operating activities   |       |                         | 11         |                            |       |   | 11 |   |   |
| Letters of  credit—energy trading and marketing      |       |                         | 120        |                            |       |   | 100 |   |   |
| Letters of  credit—debt service and rent reserves    |       |                         | 75         |                            |       |   | 84 |   |   |
| Letters of  credit—other operating activities        |       |                         | 23         |                            |       |   | 15 |   |   |
|                                                      |       |                         | 333        |                            |       |   | 237 |   |   |
| Discontinued operations:                                  |       |                         |       |                            |       |   |   |   |   |
| Assets held for  sale—letters of credit              |       |                         | —     |                            |       |   | 5 |   |   |
| Total                                                     |       |                         | $          | 333                             |       |   |   | $ | 242 |   |   |

 

**Critical Accounting Policies and Estimates**

The sections below containmaterial updates to the summary of our critical accounting policies andestimates contained in Item 7, Management’s Discussion and Analysis of Resultsof Operations and Financial Condition in our Annual Report on Form 10-Kfor the year ended December 31, 2006.

***Long-Lived Asset Impairments***

*Nature of EstimatesRequired.**  *We evaluateour long-lived assets, including goodwill and indefinite-lived intangibleassets for impairment in accordance with applicable accounting guidance. Theamount of an impairment charge is calculated as the excess of the asset’scarrying value over its fair value, which generally represents the discountedexpected future cash flows attributable to the asset or in the case of assetswe expect to sell, at fair value less costs to sell.

SFAS No. 144 requiresmanagement to recognize an impairment charge if the sum of the undiscountedexpected future cash flows from a long-lived asset or definite-lived intangibleis less than the carrying value of that asset. We evaluate our long-livedassets (property, plant and equipment) and definite-lived intangibles forimpairment whenever indicators of impairment exist or when we commit to sellthe asset. These evaluations of long-lived assets and definite-livedintangibles may result from significant decreases in the market price of anasset, a significant adverse change in the extent or manner in which an assetis being used or in its physical condition, a significant adverse change inlegal factors or in the business climate that could affect the value of anasset, as well as other economic or operations analyses. If the carrying amountis not recoverable, an impairment charge is recorded.

*Key Assumptions andApproach Used.**  *The fairvalue of an asset is the amount at which the asset could be bought or sold in acurrent transaction between willing parties, that is, other than in a forced orliquidation sale. Quoted market prices in active markets are the best evidenceof fair value and are used as the basis for the measurement, when available. Inthe absence of quoted prices for identical or similar assets, fair value isestimated using various internal and external valuation methods. These methodsinclude discounted cash flow analyses and reviewing available information oncomparable transactions. The determination of fair value requires management toapply judgment in estimating future energy prices, environmental andmaintenance expenditures and other cash flows. Our estimates of the fair valueof the assets include significant assumptions about the timing of future cashflows, remaining useful lives and selecting a discount rate that reflects therisk inherent in future cash flows.

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*Continuing Operations*

Under the 2003 ConsentDecree, we were required to install certain environmental controls on units 5and 4 of the Lovett facility or discontinue operation of those units by April 30,2007 and April 30, 2008, respectively. On October 19, 2006, afterBankruptcy Court approval, we submitted notices of our intent to discontinueoperations at units 3 and 5 of the Lovett facility on April 30, 2007,to the New York Public Service Commission, NYISO, Orange and Rockland andcertain other affected transmission and distribution utilities in New York. OnMay 10, 2007, Mirant Lovett entered into an amendment to the 2003 ConsentDecree with the State of New York that switches the deadlines for units 4and 5 so that the deadline for compliance by unit 5 is extended untilApril 30, 2008, and the deadline for unit 4 is shortened so that itwould discontinue operation as of May 7, 2007. Mirant Lovett also enteredinto an agreement (the “Tax Assessments Agreement”) that sets the assessedvalue of the Lovett facility for 2007 and 2008 for property tax purposes at thevalues established under the 2006 settlement agreement between Mirant Lovett,other Mirant entities and the local taxing authorities. The amendment to the2003 Consent Decree was subject to the approval of the United States DistrictCourt for the Southern District of New York and the Bankruptcy Court. The TaxAssessments Agreement was subject to the approval of the Bankruptcy Court. TheBankruptcy Court approved the amendment and the Tax Assessments Agreement onMay 10, 2007. The district court approved the amendment to the 2003Consent Decree on May 11, 2007.

**Basedon the agreements above, we will test for recoverability of the Lovett facilityunder SFAS No. 144 in the second quarter of 2007. In addition, we willreview the remaining useful life of the asset and adjust depreciation asappropriate. The carrying value of the Lovett facility as of March 31,2007, is $181 million.**

*Discontinued Operations*

On August 9, 2006,Mirant announced the planned sale of certain of its intermediate and peakingnatural gas-fired plants which included our Zeeland and Bosque plants. Theplanned sales resulted in the reclassification of the long-lived assets relatedto these plants as held for sale at March 31, 2007.

On January 15, 2007,we entered into a definitive purchase and sale agreement with BroadwayGenerating Company, LLC, (formerly called LS Power Acquisition Co. I), a memberof the LS Power Group., for the sale of our Zeeland and Bosque naturalgas-fired plants and ancillary equipment for a purchase price of $512 million,which includes estimated working capital at the closing. The updated fairvalues along with changes to the working capital calculation in the draftpurchase and sale agreement provided to the bidders, resulted in a netimpairment loss of $8 million in 2006. We recorded an additional impairment of$1 million in the first quarter of 2007. The sale was completed on May 1,2007. The net proceeds to the Company from the sale, after transaction costs,were $524 million.

*Effect if DifferentAssumptions Used.*   The estimates andassumptions used to determine whether an impairment exists are subject to ahigh degree of uncertainty. The estimated fair value of an asset would changeif different estimates and assumptions were used in our applied valuationtechniques, including estimated undiscounted cash flows, discount rates andremaining useful lives for assets held and used.

***Income Taxes***

We are a limited liabilitycompany treated as a branch for income tax purposes. As a result, MirantAmericas and Mirant have direct liability for the majority of the federal andstate income taxes relating to our operations. Through December 31, 2005,we have allocated current and deferred income taxes to each regarded corporatemember entity of our consolidated group as if each regarded corporate entitymember were a single taxpayer utilizing the asset and liability method toaccount for income taxes except with 

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respectto recognizing certain current period tax benefits. Specifically, we did notrecord current period tax benefits on each regarded corporate entity’s abilityto carry back its separate company current year net operating loss asrealization of such losses were dependent on reimbursements from Mirant, whichwere at Mirant’s discretion under the tax sharing agreement. Deferred taxassets and liabilities are recognized for future tax consequences attributableto differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases and net tax operatinglosses and tax credit carryforwards. When necessary, deferred tax assets arereduced by a valuation allowance to reflect the amount that is estimated to berecoverable. In assessing the recoverability of our deferred tax assets, weconsider whether it is likely that some portion or all of the deferred taxassets will be realized. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enacted change.

The determination of avaluation allowance requires significant judgment as to the generation offuture taxable income during future periods for which temporary differences areexpected to be deductible. In making this determination, management considersall available positive and negative evidence affecting specific deferred taxassets, including our past and anticipated future performance, the reversal ofdeferred tax liabilities and the implementation of tax planning strategies.

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

Additionally, we have notrecognized any tax benefits relating to tax uncertainties arising in theordinary course of business that are less than or subject to the measurementthreshold of the more-likely-than-not standard prescribed in FIN 48. Theseunrecognized tax benefits may be either a tax liability or an adjustment to theCompany’s NOLs based on the specific facts of each tax uncertainty. Weperiodically assess our tax uncertainties based on the latest informationavailable. The amount of the unrecognized tax benefit requires management tomake significant assumptions about the expected outcomes of certain taxpositions included in the Company’s filed or yet to be filed tax returns. SeeNote B to our unaudited condensed consolidated financial statements forinformation about our adoption  of  FIN 48.

When it emerged frombankruptcy, Mirant terminated the tax sharing agreement with its direct andindirect wholly owned regarded corporate entities. As a result, Mirant’s directand indirect wholly owned regarded corporate entities are no longer responsiblefor reimbursing Mirant for their intercompany tax obligations attributable totheir operations. Accordingly, our income tax receivables and payables withMirant or Mirant Americas were resolved pursuant to a global settlement underthe Plan whereby intercompany receivables and payables received no distribution.Income tax payables and receivables related to Mirant New York which emergedfrom bankruptcy on April 16, 2007, were also resolved pursuant to theMirant New York Plan.

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For those subsidiaries that continue to exist ascorporate regarded entities, we allocate current and deferred income taxes toeach corporate regarded entity as if such entity were a single taxpayerutilizing the asset and liability method to account for income taxes. To theextent we provide tax expense or benefit, any related tax payable or receivableto Mirant is reclassified to equity in the same period.

The determination of avaluation allowance requires significant judgment as to the generation offuture taxable income during future periods for which temporary differences areexpected to be deductible. In making this determination, management considersall available positive and negative evidence affecting specific deferred taxassets, including our past and anticipated future performance, the reversal ofdeferred tax liabilities and the implementation of tax planning strategies.

**Litigation**

See “Part II. Item 1. Legal Proceedings” and NoteK to our unaudited condensed consolidated financial statements for furtherinformation related to our legal proceedings.

We are currently involvedin certain legal proceedings. We estimate the range of liability throughdiscussions with applicable legal counsel and analysis of case law and legalprecedents. We record our best estimate of a loss, or the low end of our rangeif no estimate is better than another estimate within a range of estimates,when the loss is considered probable. As additional information becomesavailable, we reassess the potential liability related to our pendinglitigation and revise our estimates. Revisions in our estimates of thepotential liability could materially affect our results of operations, and theultimate resolution may be materially different from the estimates that wemake.

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

Inconnection with our power generating business, we are exposed to energycommodity price risk associated with the acquisition of fuel needed to generateelectricity, as well as the electricity produced and sold. A portion of ourfuel requirements is purchased in the spot market and a portion of theelectricity we produce also is sold in the spot market. In addition, the openpositions in our proprietary trading and fuel management portfolios expose usto risks associated with the changes in energy commodity prices. As a result,our financial performance varies depending on changes in the prices of energyand energy-related commodities. See “Critical Accounting Policies andEstimates” in our Annual Report on Form 10-K for the year endedDecember 31, 2006, for a discussion of the accounting treatment for ourenergy trading and marketing activities and see Note D to our unauditedcondensed consolidated financial statements for detail of our price riskmanagement assets and liabilities.

For a further discussionof market risks, our risk management policy and our use of Value at Risk tomeasure some of these risks, see Item 7A. “Quantitative and QualitativeDisclosures about Market Risk” in our Annual Report on Form 10-K forthe year ended December 31, 2006.

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***Item 4. Controlsand Procedures***

**Inherent Limitations in Control Systems**

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

**Effectiveness of Disclosure Controls and Procedures**

As required by ExchangeAct Rule 13a-15(b), our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, conducted an assessment of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined by Rules 13a-15(e) and 15d-15(e) underthe Exchange Act), as of March 31, 2007. Based upon this assessment, ourmanagement concluded that, as of March 31, 2007, the design and operationof these disclosure controls and procedures were effective.

Appearing as exhibits tothis report are the certifications of the Chief Executive Officer and theChief Financial Officer required in accordance with Section 302 ofthe Sarbanes-Oxley Act of 2002.

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**PART II**

**Item 1.**   *Legal Proceedings*

The descriptions belowupdate and should be read in conjunction with the complete descriptions in thesection titled “Legal Proceedings” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006.

***Chapter 11Proceedings***

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

As of March 31, 2007,approximately 21 million of the shares of Mirant common stock to be distributedunder the Plan have not yet been distributed and have been reserved fordistribution with respect to claims that are disputed by the Mirant Debtors andhave not been resolved. A settlement entered into on May 30, 2006, amongPepco, Mirant, Old Mirant, and various subsidiaries of Mirant, includingcertain of our subsidiaries, if approved by final order in the Chapter 11proceedings, would result in the distribution of up to 18 million of thereserved shares to Pepco, as described below in *PepcoLitigation*. Under the terms of the Plan, to the extent other suchunresolved claims are resolved now that we have emerged from bankruptcy, theclaimants will be paid from the reserved shares on the same basis as if theyhad been paid when the Plan became effective. That means that their allowedclaims will receive the same pro rata distributions of Mirant common stock,cash, or both common stock and cash as previously allowed claims in accordancewith the terms of the Plan. To the extent the aggregate amount of the payoutsdetermined to be due with respect to such disputed claims ultimately exceedsthe amount of the funded claim reserve, Mirant would have to issue additionalshares of common stock to address the shortfall, which would dilute existingMirant shareholders, and Mirant and MirantAmericas Generation would have to pay additional cash amounts asnecessary under the terms of the Plan to satisfy such pre-petition claims.

Our subsidiaries relatedto our New York business operations, Mirant New York, Mirant Bowline, MirantLovett, Hudson Valley Gas and Mirant NY-Gen, remained in bankruptcy at the endof 2006. On January 26, 2007,Mirant New York, Mirant Bowline, and Hudson Valley Gas (collectively the “EmergingNew York Entities”) filed a Supplemental Joint Chapter 11 Plan ofReorganization of the Emerging New York Entities with the Bankruptcy Court andsubsequently filed amendments to that plan (as subsequently amended, the “SupplementalPlan”). The Bankruptcy Court entered an order confirming the SupplementalPlan on March 23, 2007. The Supplemental Plan became effective on April 16,2007, resulting in the emergence from bankruptcy of the Emerging New YorkEntities. The Supplemental Plan has two main components. First, theSupplemental Plan incorporates a settlement with various New York taxjurisdictions that resolved property tax disputes related to the Lovett andBowline facilities. Second, the Supplemental Plan provides unsecured creditorsof the Emerging New York Entities with the same treatment afforded holders ofunsecured claims against Mirant Americas Generation and its subsidiaries underthe Plan. Such unsecured creditors of the Emerging New York Entities willreceive their*pro rata* share ofthe pool of assets created under the Plan for the benefit of the unsecuredcreditors of Mirant Americas Generation and its subsidiaries.

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On October 19, 2006, Mirant Lovett notified theNew York Public Service Commission, the NYISO, Orange and Rockland and certainother affected transmission and distribution companies in New York of itsintent to discontinue operation of units 3 and 5 of the Lovett facility onApril 30, 2007. The notice was prompted by the requirements of a June 11,2003, Consent Decree (the “2003 Consent Decree”) among Mirant Lovett, the Stateof New York and the NYSDEC that requires Mirant Lovett to install certainenvironmental controls on unit 5 of the Lovett facility, convert the unitto operate exclusively on natural gas, or discontinue operation of that unit byApril 30, 2007. The 2003 Consent Decree also requires that certainenvironmental controls be installed on unit 4 by April 30, 2008, oroperations at that unit must be discontinued. Operations at unit 3 havebeen discontinued because it is uneconomic to continue to run unit 3. OnApril 30, 2007, and May 7, 2007, Mirant Lovett entered into twotolling agreements with the New York State Office of the Attorney General andthe NYSDEC to allow the operation of unit 5 to continue on coal until May 14,2007, while the parties sought to reach agreement on an amended consent decree.The second tolling agreement also required the temporary suspension ofoperations of unit 4. Mirant Lovett has advised the New York PublicService Commission, the NYISO, Orange and Rockland and other potentiallyaffected transmission and distribution companies in New York of the changes inexpected operating status of units 4 and 5. Mirant New York, Mirant Lovettand the State of New York on May 10, 2007, entered into an amendment tothe 2003 Consent Decree that switches the deadlines for units 4 and 5 sothat the deadline for compliance by unit 5 is extended until April 30,2008, and the deadline for unit 4 is shortened so that it woulddiscontinue operation as of May 7, 2007. On May 8, 2007, Mirant NewYork, Mirant Lovett, Mirant Bowline, and Hudson Valley Gas also entered into anagreement (the “Tax Assessments Agreement”) with the Town of Stony Point, theTown of Haverstraw, and the Village of Haverstraw to set the assessed valuesfor the Lovett and Bowline facilities and the pipeline owned by Hudson ValleyGas for 2007 and 2008 for property tax purposes at the values established for2006 under a settlement agreement entered into by the Mirant entities and thosetaxing authorities in December 2006 that resolved disputes regarding theassessed values of the facilities for 2006 and several earlier years. Theamendment to the 2003 Consent Decree was subject to the approval of the UnitedStates District Court for the Southern District of New York and the BankruptcyCourt. The Tax Assessments Agreement was subject to the approval of theBankruptcy Court. The Bankruptcy Court approved the amendment to the 2003Consent Decree and the Tax Assessments Agreement on May 10, 2007. Thedistrict court approved the amendment to the 2003 Consent Decree on May 11,2007. The timing of the filing of a plan of reorganization for Mirant Lovett,and of its emergence from bankruptcy, is uncertain. Until Mirant Lovett emergesfrom bankruptcy, the Company will not have access to the cash from operationsgenerated by Mirant Lovett.

Mirant NY-Gen, which ownshydroelectric facilities at Swinging Bridge, Rio and Mongaup, and smallcombustion turbine facilities at Hillburn and Shoemaker, has proceeded with theimplementation of a remediation plan for the sinkhole discovered in May 2005in the dam at the Swinging Bridge facility. The status of the remediationeffort is discussed in “Other Contingencies” in Note K to the consolidatedfinancial statements. Mirant NY-Gen’s expenses have been funded under adebtor-in-possession facility provided by Mirant Americas with the approval of,and under the supervision of, the Bankruptcy Court.

On January 31, 2007,Mirant New York entered into an agreement to sell Mirant NY-Gen to AllianceEnergy Renewables, LLC (the “Alliance Sale”). The sale price of approximately$5 million was subject to adjustments for working capital and certain ongoingdam remediation efforts at the Swinging Bridge facility. The Bankruptcy Courtapproved the Alliance Sale on March 8, 2007. On February 15, 2007,Mirant NY-Gen filed its proposed Chapter 11 Plan of Reorganization (the “MirantNY-Gen Plan”), which incorporated the Alliance Sale. The Bankruptcy Courtconfirmed the Mirant NY-Gen Plan by order dated April 27, 2007. The MirantNY-Gen Plan became effective and the Alliance Sale closed on May 7, 2007.Under the terms of the Mirant NY-Gen Plan and the confirmation order,approximately $2 million was reserved from the proceeds of the Alliance Sale topay in full all the claims outstanding against Mirant NY-Gen otherthan claims arising from the debtor-in-possession loan providedby Mirant Americas to Mirant 

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NY-Genand intercompany claims. Mirant guarantees were substituted for $1.6 million ofthe amount to be reserved. The remaining sales proceeds were paid to MirantAmericas in partial satisfaction of the $16.5 million debtor-in-possessionloan, all claims held by Mirant NY-Gen were assigned to Mirant Americas, andMirant Americas released all of its claims and liens against Mirant NY-Gen.

***EnvironmentalMatters***

*Mirant Potomac River 2003Notice of Violation.**  *OnSeptember 10, 2003, the Virginia DEQ issued an NOV to Mirant Potomac Riveralleging that it violated its Virginia Stationary Source Permit to Operate byemitting NOx in excess of the “cap” established by the permit for the 2003summer ozone season. Mirant Potomac River responded to the NOV, asserting thatthe cap was unenforceable, noting that when the cap was made part of the permitit could comply through the purchase of emissions allowances and raising otherequitable defenses. Virginia’s civil enforcement statute provides forinjunctive relief and penalties. On January 22, 2004, the EPA issued anNOV to Mirant Potomac River alleging the same violation of its VirginiaStationary Source Permit to Operate as set out in the NOV issued by theVirginia DEQ.

On September 27,2004, Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MDE, theDOJ and the EPA entered into, and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia, a proposed consent decree(the “Original Consent Decree”) that, if approved, would have resolved MirantPotomac River’s potential liability for matters addressed in the NOVspreviously issued by the Virginia DEQ and the EPA. The Original Consent Decreewould have required Mirant Potomac River and Mirant Mid-Atlantic to (1) installpollution control equipment at the Potomac River plant in Virginia and at theMorgantown plant in Maryland leased by Mirant Mid-Atlantic, (2) complywith declining system-wide ozone season NOx emissions caps from 2004 through2010, (3) comply with system-wide annual NOx emissions caps starting in2004, (4) meet seasonal system average emissions rate targets in 2008 and (5) paycivil penalties and perform supplemental environmental projects in and aroundthe Potomac River plant expected to achieve additional environmental benefits.Except for the installation of the controls planned for the Potomac River unitsand the installation of selective catalytic reduction (“SCR”) or equivalenttechnology at Mirant Mid-Atlantic’s Morgantown units 1 and 2 in 2007 and 2008,the Original Consent Decree would not have obligated our subsidiaries toinstall specifically designated technology, but rather to reduce emissionssufficiently to meet the various NOx caps. Moreover, as to the requiredinstallations of SCRs at Morgantown, Mirant Mid-Atlantic may choose not toinstall the technology by the applicable deadlines and leave the units offeither permanently or until such time as the SCRs are installed. The OriginalConsent Decree was subject to the approval of the district court and theBankruptcy Court. As described below, the Original Consent Decree was notapproved and the parties filed an amended proposed consent decree thatsuperseded the Original Consent Decree.

On July 22,2005, the district court granted a motion filed by the City of Alexandriaseeking to intervene in the district court action, although the district courtimposed certain limitations on the City of Alexandria’s participation in theproceedings. On September 23, 2005, the City of Alexandria filed a motionseeking authority to file an amended complaint in the action seeking injunctiverelief and civil penalties under the Clean Air Act for alleged violations byMirant Potomac River of its Virginia Stationary Source Permit to Operate andthe State of Virginia’s State Implementation Plan. Based upon a computermodeling described below in *Mirant Potomac RiverDownwash Study*, the City of Alexandria asserted that emissions fromthe Potomac River plant cause or contribute to exceedances of NAAQS for SO2,NO2 and particulate matter. The City of Alexandria also contended based on itsmodeling analysis that the plant’s emissions of hydrogen chloride and hydrogenfluoride exceed Virginia state standards. Mirant Potomac River disputes theCity of Alexandria’s allegations that it has violated the Clean Air Act andVirginia law. On December 2, 2005, the district court denied the City ofAlexandria’s motion seeking to file an amended complaint.

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Inearly May 2006, the parties to the Original Consent Decree and MirantChalk Point entered into and filed for approval with the United States DistrictCourt for the Eastern District of Virginia an amended consent decree (the “AmendedConsent Decree”) to resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The Amended Consent Decree includes the requirements that were to beimposed under the terms of the Original Consent Decree as described above. Italso defines the rights and remedies of the parties in the event of a rejectionin bankruptcy or other termination of any of the long-term leases under whichMirant Mid-Atlantic leases the coal units at the Dickerson and Morgantownplants. The Amended Consent Decree provides that if Mirant Mid-Atlanticrejects or otherwise loses one or more of its leasehold interests in theMorgantown and Dickerson plants and ceases to operate one or both of theplants, Mirant Mid-Atlantic, Mirant Chalk Point and/or Mirant Potomac Riverwill (i) provide the EPA, Virginia DEQ and the MDE with the writtenagreement of the new owner or operator of the affected plant or plants to bebound by the obligations of the Amended Consent Decree and (ii) where theaffected plant is the Morgantown plant, offer to any and all prospective ownersand/or operators of the Morgantown plant to pay for completion of engineering,construction and installation of the SCRs required by the Amended ConsentDecree. If the new owner or operator of the affected plant or plants does notagree to be bound by the obligations of the Amended Consent Decree, it requiresMirant Mid-Atlantic, Mirant Chalk Point and/or Mirant Potomac River to installan alternative suite of environmental controls at the plants they continue toown. The City of Alexandria and certain individuals and organizations opposedentry of the Amended Consent Order. The Bankruptcy Court approved the AmendedConsent Decree on June 1, 2006. The district court approved the AmendedConsent Decree on April 20, 2007.

*Mirant Potomac RiverDownwash Study.**  *On September 23,2004, the Virginia DEQ and Mirant Potomac River entered into an order byconsent with respect to the Potomac River plant under which Mirant PotomacRiver agreed to perform a modeling analysis to assess the potential effect of “downwash”from the plant (1) on ambient concentrations of SO2, NO2, CO and PM10 forcomparison to the applicable NAAQS and (2) on ambient concentrations ofmercury for comparison to Virginia Standards of Performance for ToxicPollutants. Downwash is the effect that occurs when aerodynamic turbulenceinduced by nearby structures causes emissions from an elevated source, such asa smokestack, to move rapidly toward the ground resulting in higherground-level concentrations of emissions.

The computer modelinganalysis predicted that emissions from the Potomac River plant have thepotential to contribute to localized, modeled instances of exceedances of theNAAQS for SO2, NO2 and PM10 under certain conditions. Based on those results,the Virginia DEQ issued a directive to Mirant Potomac River on August 19,2005, to undertake immediately such action as was necessary to ensureprotection of human health and the environment and eliminate NAAQS exceedances.On August 24, 2005, power production at all five units of the Potomac Rivergenerating facility was temporarily halted in response to the directive fromthe Virginia DEQ. On August 25, 2005,the District of Columbia Public Service Commission filed an emergency petitionand complaint with the FERC and the DOE to prevent the shutdown of the PotomacRiver facility. The matter remains pending before the FERC and the DOE. On December 20,2005, due to a determination by the DOE that an emergency situation existedwith respect to the reliability of the supply of electricity to centralWashington, D.C., the DOE ordered Mirant Potomac River to generate electricityat the Potomac River generating facility, as requested by PJM, during anyperiod in which one or both of the transmission lines serving the centralWashington, D.C. area are out of service due to a planned or unplanned outage.In addition, the DOE ordered Mirant Potomac River, at all other times, forelectric reliability purposes, to keep as many units in operation as possibleand to reduce the start-up time of units not in operation without contributingto any NAAQS exceedances. The DOE required Mirant Potomac River to submit aplan, on or before December 30, 2005, that met these requirements. Theorder further provides that Mirant Potomac River and its customers should agreeto mutually satisfactory terms for any costs incurred by it under this order orjust and reasonable terms shall 

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be established by a supplemental order. Certain partiesfiled for rehearing of the DOE order, and on February 17, 2006, the DOEissued an order granting rehearing solely for purposes of considering furtherthe rehearing requests. Mirant Potomac River submitted an operating plan inaccordance with the order. On January 4, 2006, the DOE issued an interimresponse to Mirant Potomac River’s operating plan authorizing operation of theunits of the Potomac River generating facility on a reduced basis, but makingit possible to bring the entire plant into service within approximately 28hours when necessary for reliability purposes. The DOE’s order expires July 1,2007.

In aletter received December 30, 2005, the EPA invited Mirant Potomac Riverand the Virginia DEQ to work with the EPA to ensure that Mirant Potomac River’soperating plan submitted to the DOE adequately addressed NAAQS issues. The EPAalso asserted in its letter that Mirant Potomac River did not immediatelyundertake action as directed by the Virginia DEQ’s August 19, 2005, letterand failed to comply with the requirements of the Virginia State ImplementationPlan established by that letter. Mirant Potomac River received a second letterfrom the EPA on December 30, 2005, requiring Mirant to provide certainrequested information as part of an EPA investigation to determine the CleanAir Act compliance status of the Potomac River generating facility.

On June 1, 2006,Mirant Potomac River and the EPA executed an ACO by Consent to resolve the EPA’sallegations that Mirant Potomac River violated the Clean Air Act by notimmediately shutting down all units at the Potomac River facility upon receipt ofthe Virginia DEQ’s August 19, 2005, letter and to assure an acceptablelevel of reliability to the District of Columbia. The ACO (i) specifiescertain operating scenarios and SO2 emissions limits for the Potomac Riverfacility, which scenarios and limits take into account whether one or both ofthe 230kV transmission lines serving Washington, D.C. are out of service; (ii) requiresthe operation of trona injection units to reduce SO2 emissions; and (iii) requiresMirant Potomac River to undertake a model evaluation study to predict ambientair quality impacts from the facility’s operations. In accordance with thespecified operating scenarios, the ACO permits the facility to operate using adaily predictive modeling protocol. This protocol allows Mirant Potomac Riverto schedule the facility’s level of operations based on whether computermodeling predicts a NAAQS exceedance, based on weather and certain operatingparameters. On June 2, 2006, the DOE issued a letter modifying its January 6,2006, order to direct Mirant Potomac River to comply with the ACO in order toensure adequate electric reliability to the District of Columbia. MirantPotomac River is operating the Potomac River facility in accordance with theACO and has been able to operate all five units of the facility most of thetime under the ACO. This ACO expires on June 1, 2007. Mirant Potomac Riveris in discussions with the Virginia DEQ and the Virginia State Air PollutionControl Board to determine the manner in which the Potomac River facility willbe permitted to operate after the ACO expires.

*Mirant Potomac River NAAQSExceedance.**  *On March 23, 2007, the Virginia DEQ issuedan NOV to Mirant Potomac River alleging that it violated Virginia’s AirPollution Control Law and regulations on February 23, 2007, by operatingthe Potomac River facility in a manner that resulted in a monitored exceedancein a twenty-four hour period of the NAAQS for SO2. As noted in the NOV, MirantPotomac River was operating on February 23, 2007, under the direction of PJMin accordance with the DOE order described above in Mirant Potomac River 2003NOV during a scheduled outage of the Pepco transmission lines servingWashington, D.C. The NOV asserts that plant operators did not implementappropriate actions to minimize SO2 emissions. The NOV did not seek aspecific penalty amount but noted that the violations identified could subjectMirant Mid-Atlantic to civil penalties of varying amounts under differentprovisions of the Virginia Code, including a potential civil fine of up to$100,000.

*Lovett/Bowline SPDESNotices of Violation.*   On March 8, 2007, Mirant Lovett and Mirant Bowline receivedNotices of Violation from the NYSDEC alleging certain violations of their SPDESpermits. On April 6, 2007, the NYSDEC filed a complaint against MirantLovett and Mirant Bowline based on these 

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allegations. The complaint seeks a penalty of $500,000. Mirant Lovett andMirant Bowline have not yet responded to the complaint.

***City of AlexandriaZoning Action***

On December 18, 2004,the City Council for the City of Alexandria, Virginia (the “City Council”)adopted certain zoning ordinance amendments that resulted in the zoning statusof Mirant Potomac River’s generating plant being changed from “noncomplying use”to “nonconforming use subject to abatement.” Under the nonconforming usestatus, unless Mirant Potomac River applied for and received a special usepermit for the plant during the seven-year abatement period, the operation ofthe plant would have had to be terminated within a seven-year period, and noalterations that directly prolonged the life of the plant would be permittedduring the seven-year period. The City Council also approved revocation of twospecial use permits issued in 1989 (the “1989 SUPs”), one applicable to theadministrative office space at Mirant Potomac River’s plant and the other forthe plant’s transportation management plan.

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 seeking to overturn the actions taken by the City Council on December 18,2004, on the grounds that those actions violated federal, state and city laws.On February 24, 2006, the court entered judgment in favor of MirantPotomac River and Mirant Mid-Atlantic declaring the change in the zoning statusof Mirant Potomac River’s generating plant to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. On April 20, 2007, the VirginiaSupreme Court affirmed the rulings by the trial court. The City of Alexandriahas indicated that it intends to file a motion for rehearing with the VirginiaSupreme Court.

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

**Item1A.**   *Risk Factors*

There have been nomaterial changes in risk factors since those reported in Mirant North America’sAnnual Report on Form 10-K for the year ended December 31,2006.

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**Item 6.**                        Exhibits

**(a) Exhibits.**
| Exhibit  Number | ** ** | **Exhibit Name**                                                                                                                                                                                   |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1*            |       | Purchase and Sale Agreement, dated as of  January 15, 2007, by and between Mirant Americas, Inc. and LS Power  (Designated on Form 8-K dated January 18, 2007 as  Exhibit 2.1) |
|            |       |                                                                                                                                                                                                    |
| 3.1*            |       | Certificate of Incorporation of Mirant North America  (designated on Form S-4 filed June 5, 2006 as  Exhibit 3.1)                                                                        |
|            |       |                                                                                                                                                                                                    |
| 3.2*            |       | Limited Liability Company Agreement of Mirant North  America (designated on Form S-4 filed June 5, 2006 as  Exhibit 3.2)                                                                 |
|            |       |                                                                                                                                                                                                    |
| 3.3*            |       | Certificate of Incorporation of MNA Finance Corp.  (designated on Form S-4 filed June 5, 2006 as  Exhibit 3.3)                                                                           |
|            |       |                                                                                                                                                                                                    |
| 3.4*            |       | Bylaws of MNA Finance Corp. (designated on  Form S-4 filed June 5, 2006 as Exhibit 3.4)                                                                                                  |
|            |       |                                                                                                                                                                                                    |
| 10.1            |       | Membership Interest Purchase and Sale Agreement,  dated as of January 31, 2007, by and between Mirant New York, Inc.  and Alliance Energy Renewables, LLC                                     |
|            |       |                                                                                                                                                                                                    |
| 31.1            |       | Certification of Chief Executive Officer Pursuant to  15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).                    |
|            |       |                                                                                                                                                                                                    |
| 31.2            |       | Certification of Chief Financial Officer Pursuant to  15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).                    |
|            |       |                                                                                                                                                                                                    |
| 32.1            |       | Certification of the Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).           |
|            |       |                                                                                                                                                                                                    |
| 32.2            |       | Certification of the Chief Financial Officer  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).           |

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*                    Asteriskindicates exhibits incorporated by reference.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on this 14th dayof May, 2007.
|          | MIRANT NORTH AMERICA, LLC |
|----------|---------------------------|
|     |                      |   |
|     | By:                       | /s/ Thomas E. Legro |
|     |                      | Thomas E. Legro |
| * * | * *                  | *Senior Vice President and Controller (Principal  Accounting Officer)* |

 

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