**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

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

**Or**

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

**Forthe Transition Period from                   to                    **

**Mirant North America, LLC**

(Exact name of registrantas specified in its charter)

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

 

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

 

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

**None**

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

**None**

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. o  Yes  x  No

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

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.x  Yes  o  No

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

 

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**TABLEOF CONTENTS**
|              | ** ** | ** **                                                                                  | ** ** | **Page** |
|--------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
|         |       | Cautionary  Statement Regarding Forward-Looking Information                                 |       |     | 3 |   |
|         | ** ** | **PART I—FINANCIAL INFORMATION**                                                  |       |     |   |   |
| Item 1. |       | Interim Financial Statements (unaudited):                                                   |       |     |   |   |
|         |       | Condensed  Consolidated and Combined Statements of Operations                               |       |     | 5 |   |
|         |       | Condensed  Consolidated Balance Sheets                                                      |       |     | 6 |   |
|         |       | Condensed  Consolidated Statements of Member’s Equity and Comprehensive  Income        |       |     | 7 |   |
|         |       | Condensed  Consolidated and Combined Statements of Cash Flows                               |       |     | 8 |   |
|         |       | Notes to the  Condensed Consolidated and Combined Financial Statements                      |       |     | 9 |   |
| Item 2. |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |       |     | 49 |   |
| Item 3. |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       |     | 70 |   |
| Item 4. |       | Controls  and Procedures                                                                    |       |     | 70 |   |
|         | ** ** | **PART II—OTHER  INFORMATION**                                                    |       |     |   |   |
| Item 1. |       | Legal  Proceedings                                                                          |       |     | 71 |   |
| Item 1A.     |       | Risk Factors                                                                                |       |     | 78 |   |
| Item 6. |       | Exhibits                                                                                    |       |     | 87 |   |

 

2

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

The information presented in this Form 10-Qincludes forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, in addition to historical information. Thesestatements involve known and unknown risks and uncertainties and relate tofuture events, our future financial performance or our projected businessresults. In some cases, one can identify forward-looking statements byterminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,”“estimate,” “predict,” “target,” “potential” or “continue” or the negative ofthese terms or other comparable terminology.

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

·       legislative and regulatoryinitiatives regarding deregulation, regulation or restructuring of the electricutility industry; changes in state, federal and other regulations (includingrate and other regulations); changes in, or changes in the application of,environmental and other laws and regulations to which we and our subsidiariesand affiliates are or could become subject;

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

·       our ability to divest certainof our intermediate and peaking natural gas-fired assets at prices and on termsthat we would be willing to accept, as well as any adverse impact on our debtrating that may result from such sales;

·       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;

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

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

·       our ability to borrowadditional funds and access capital markets;

·       strikes, union activity orlabor unrest;

·       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 to operate our business;

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

·       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;

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

3

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·       price mitigation strategiesemployed by independent system operators (“ISOs”) or regional transmissionorganizations (“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 our operatingsubsidiaries to generate sufficient cash flow and our inability to access thatcash flow to enable us to make debt service and other payments;

·       the fact that our New Yorksubsidiaries remain 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 the Company contained in its financingagreements and restrictions on Mirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”)contained in its leveraged lease financing agreements;

·       the resolution of claimsand obligations that were not resolved during the Chapter 11 process that mayhave a material adverse effect on our results of operations;

·       our ability to negotiatefavorable terms from suppliers, counterparties and others and to retaincustomers because we were previously subject to bankruptcy protection; and

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

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

**Factors that CouldAffect Future Performance**

In addition to thediscussion of certain risks in Management’s Discussion and Analysis of Resultsof Operations and Financial Condition and the accompanying Notes to MirantNorth America, LLC’s unaudited condensed consolidated and combined financialstatements, other factors that could affect the Company’s future performance(business, financial condition or results of operations and cash flows) are setforth in this Form 10-Q.

**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.

4

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**MIRANTNORTH AMERICA, LLC AND SUBSIDIARIES**

**(Wholly-OwnedIndirect Subsidiary of Mirant Corporation)**

**SEPTEMBER 30, 2006,CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED)**

**and**

**SEPTEMBER 30, 2005, CONDENSED COMBINED STATEMENTS OFOPERATIONS (UNAUDITED)**

| ** **                                                                                                                         | ** ** | **Three Months  Ended  September 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                         | ** ** | **(in millions)**                           | ** ** |
| Operating  revenues—affiliate                                                                                                 | ** ** | **$**                                            | **18**     |                                            | $          | 64 | ** ** |   | **$** | **47** |   |   | $ | 120 |   |
| Operating  revenues—nonaffiliate                                                                                              | ** ** | **1,025**                                        |       | 482                                             | ** ** |   | **2,630** |   |   | 1,650 |   |
| Total operating revenues                                                                                                           | ** ** | **1,043**                                        |       | 546                                             | ** ** |   | **2,677** |   |   | 1,770 |   |
| Cost of fuel,  electricity and other products—affiliate                                                                       | ** ** | **50**                                           |       | 75                                              | ** ** |   | **101** |   |   | 140 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                                                                    | ** ** | **372**                                          |       | 573                                             | ** ** |   | **941** |   |   | 1,323 |   |
| Total cost of fuel, electricity and other products                                                                                 | ** ** | **422**                                          |       | 648                                             | ** ** |   | **1,042** |   |   | 1,463 |   |
| **Gross  Margin**                                                                                                                  | ** ** | **621**                                          |       | (102                                            | )          |   | **1,635** |   |   | 307 |   |
| **Operating Expenses:**                                                                                                            | ** ** | ** **                                       |       | ** **                                      | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operations and  maintenance—affiliate, including restructuring charges of $1 and  $3 in 2006 and 2005, respectively | ** ** | **72**                                           |       | 68                                              | ** ** |   | **210** |   |   | 213 |   |
| Operations and maintenance—nonaffiliate                                                                                       | ** ** | **65**                                           |       | 67                                              | ** ** |   | **213** |   |   | 201 |   |
| Depreciation and  amortization                                                                                                     | ** ** | **32**                                           |       | 28                                              | ** ** |   | **91** |   |   | 85 |   |
| Generation  facilities rent                                                                                                        | ** ** | **24**                                           |       | 24                                              | ** ** |   | **72** |   |   | 75 |   |
| Loss (gain) on  sales of assets, net                                                                                               | ** ** | **(2**                                           | )          | 2                                               | ** ** |   | **(8** | **)** |   | 1 |   |
| Impairment loss                                                                                                                    | ** ** | **118**                                          |       | —                                          | ** ** |   | **118** |   |   | — |   |
| Total operating expenses                                                                                                           | ** ** | **309**                                          |       | 189                                             | ** ** |   | **696** |   |   | 575 |   |
| **Operating  Income (Loss)**                                                                                                       | ** ** | **312**                                          |       | (291                                            | )          |   | **939** |   |   | (268 | ) |
| **Other Expense (Income), net:**                                                                                                   | ** ** | ** **                                       |       | ** **                                      | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense—affiliate                                                                                                   |       | —                                           |       | 7                                               | ** ** |   | **1** |   |   | 13 |   |
| Interest  expense—nonaffiliate                                                                                                | ** ** | **32**                                           |       | 621                                             | ** ** |   | **102** |   |   | 623 |   |
| Interest  income—affiliate                                                                                                    | ** ** | **(1**                                           | )          | —                                          | ** ** |   | **(4** | **)** |   | — |   |
| Interest  income—nonaffiliate                                                                                                 | ** ** | **(10**                                          | )          | (3                                              | )          |   | **(26** | **)** |   | (4 | ) |
| Gain on sale of  investments                                                                                                       | ** ** | **(13**                                          | )          | —                                          | ** ** |   | **(15** | **)** |   | — |   |
| Other, net                                                                                                                         |       | —                                           |       | (1                                              | )          |   | — |   |   | (3 | ) |
| Total other expense, net                                                                                                           | ** ** | **8**                                            |       | 624                                             | ** ** |   | **58** |   |   | 629 |   |
| **Income  (Loss) From Continuing Operations Before Reorganization Items and Income  Taxes**                                        | ** ** | **304**                                          |       | (915                                            | )          |   | **881** |   |   | (897 | ) |
| Reorganization  items, net                                                                                                         | ** ** | **(1**                                           | )          | 46                                              | ** ** |   | **(2** | **)** |   | 53 |   |
| Provision for  income taxes                                                                                                        | ** ** | **1**                                            |       | 5                                               | ** ** |   | **3** |   |   | 10 |   |
| **Income  (Loss) From Continuing Operations**                                                                                      | ** ** | **304**                                          |       | (966                                            | )          |   | **880** |   |   | (960 | ) |
| **Income  (Loss) From Discontinued Operations, net**                                                                               | ** ** | **(59**                                          | )          | 9                                               | ** ** |   | **(57** | **)** |   | 4 |   |
| **Net Income (Loss)**                                                                                                              | ** ** | **$**                                            | **245**    |                                            | $          | (957 | ) |   | **$** | **823** |   |   | $ | (956 | ) |

 

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

5

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**MIRANT NORTHAMERICA, LLC AND SUBSIDIARIES**

**(Wholly-Owned IndirectSubsidiary of Mirant Corporation)**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                     | ** ** | **At September 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                     | ** ** | **(Unaudited)**                      | ** ** | ** **                          | ** ** |
| ** **                                                                                     | ** ** | **(in millions)**               | ** ** |
| **ASSETS**                                                                                     | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| **Current Assets:**                                                                            | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                                                     | ** ** |                                 | **$**      | **680**                             |       |   |   | $ | 295 |   |   |
| Funds on deposit                                                                               | ** ** |                                 | **368**    |                                |       |   | 1,540 |   |   |
| Receivables:                                                                                   |       |                                 |       |                                |       |   |   |   |   |
| Affiliate                                                                                      | ** ** |                                 | **15**     |                                |       |   | 23 |   |   |
| Nonaffiliate, less  allowance for uncollectibles of $7 and $10 for 2006 and 2005, respectively | ** ** |                                 | **297**    |                                |       |   | 578 |   |   |
| Notes  receivable—affiliate                                                               | ** ** |                                 | **125**    |                                |       |   | 332 |   |   |
| Price risk  management assets—affiliate                                                   | ** ** |                                 | **3**      |                                |       |   | — |   |   |
| Price risk  management assets—nonaffiliate                                                | ** ** |                                 | **799**    |                                |       |   | 603 |   |   |
| Prepaid rent and  other payments                                                               | ** ** |                                 | **116**    |                                |       |   | 134 |   |   |
| Inventories                                                                                    | ** ** |                                 | **290**    |                                |       |   | 275 |   |   |
| Investment in  securities available for sale                                                   | ** ** |                                 | **38**     |                                |       |   | 30 |   |   |
| Assets held for  sale                                                                          | ** ** |                                 | **454**    |                                |       |   | 543 |   |   |
| Total current  assets                                                                          | ** ** |                                 | **3,185**  |                                |       |   | 4,353 |   |   |
| **Property,  Plant and Equipment, net**                                                        | ** ** |                                 | **2,202**  |                                |       |   | 2,291 |   |   |
| **Noncurrent Assets:**                                                                         | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| Intangible assets,  net                                                                        | ** ** |                                 | **214**    |                                |       |   | 221 |   |   |
| Price risk  management assets—affiliate                                                   | ** ** |                                 | **2**      |                                |       |   | — |   |   |
| Price risk  management assets—nonaffiliate                                                | ** ** |                                 | **191**    |                                |       |   | 105 |   |   |
| Prepaid rent                                                                                   | ** ** |                                 | **196**    |                                |       |   | 208 |   |   |
| Funds on deposit                                                                               | ** ** |                                 | **5**      |                                |       |   | 5 |   |   |
| Debt issuance  costs, net                                                                      | ** ** |                                 | **50**     |                                |       |   | 24 |   |   |
| Other                                                                                          | ** ** |                                 | **13**     |                                |       |   | 1 |   |   |
| Total noncurrent  assets                                                                       | ** ** |                                 | **671**    |                                |       |   | 564 |   |   |
| **Total  assets**                                                                              | ** ** |                                 | **$**      | **6,058**                           |       |   |   | $ | 7,208 |   |   |
| **LIABILITIES AND EQUITY**                                                                     | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| **Current Liabilities:**                                                                       | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| Notes  payable—affiliate                                                                  | ** ** |                                 | **$**      | **22**                              |       |   |   | $ | 132 |   |   |
| Current portion of  long-term debt                                                             | ** ** |                                 | **91**     |                                |       |   | 3 |   |   |
| Claims payable and  estimated claims accrual                                                   | ** ** |                                 | **72**     |                                |       |   | — |   |   |
| Accounts payable  and accrued liabilities                                                      | ** ** |                                 | **328**    |                                |       |   | 477 |   |   |
| Payable to  affiliate                                                                          | ** ** |                                 | **54**     |                                |       |   | 301 |   |   |
| Price risk  management liabilities—affiliate                                              | ** ** |                                 | **11**     |                                |       |   | 5 |   |   |
| Price risk  management liabilities—nonaffiliate                                           | ** ** |                                 | **458**    |                                |       |   | 791 |   |   |
| Accrued property  taxes                                                                        | ** ** |                                 | **234**    |                                |       |   | 184 |   |   |
| Other                                                                                          | ** ** |                                 | **31**     |                                |       |   | 16 |   |   |
| Total current  liabilities                                                                     | ** ** |                                 | **1,301**  |                                |       |   | 1,909 |   |   |
| **Noncurrent Liabilities:**                                                                    | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| Long-term debt                                                                                 | ** ** |                                 | **1,488**  |                                |       |   | 883 |   |   |
| Price risk  management liabilities—affiliate                                              | ** ** |                                 | **7**      |                                |       |   | — |   |   |
| Price risk  management liabilities—nonaffiliate                                           | ** ** |                                 | **41**     |                                |       |   | 27 |   |   |
| Asset retirement  obligations                                                                  | ** ** |                                 | **40**     |                                |       |   | 33 |   |   |
| Other                                                                                          | ** ** |                                 | **8**      |                                |       |   | 5 |   |   |
| Total noncurrent  liabilities                                                                  | ** ** |                                 | **1,584**  |                                |       |   | 948 |   |   |
| **Liabilities  Subject to Compromise**                                                         | ** ** |                                 | **58**     |                                |       |   | 58 |   |   |
| **Commitments and Contingencies**                                                              | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| **Equity:**                                                                                    | ** ** |                                 | ** ** | ** **                          |       |   | ** ** | ** ** |   |
| Member’s interest                                                                         | ** ** |                                 | **3,295**  |                                |       |   | 4,474 |   |   |
| Preferred stock in  affiliate                                                                  | ** ** |                                 | **(217**   | **)**                               |       |   | (208 | ) |   |
| Accumulated other  comprehensive income                                                        | ** ** |                                 | **37**     |                                |       |   | 27 |   |   |
| Total equity                                                                                   | ** ** |                                 | **3,115**  |                                |       |   | 4,293 |   |   |
| **Total  liabilities and equity**                                                              | ** ** |                                 | **$**      | **6,058**                           |       |   |   | $ | 7,208 |   |   |

 

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

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**MIRANTNORTH AMERICA, LLC AND SUBSIDIARIES**

**(Wholly-OwnedIndirect Subsidiary of Mirant Corporation)**

**CONDENSEDCONSOLIDATED STATEMENTS OF MEMBER’S EQUITY AND**

**COMPREHENSIVEINCOME (UNAUDITED)**

**(in millions)**

| ** **                                                    | ** ** | **Member’s  Interest** | ** ** | **Preferred  Stock in  Affiliate** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Comprehensive  Income** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|
| Balance,  December 31, 2005                              |       |                        | $          | 4,474                                   |       |                                          |       | $                         | (208       | ) |   |   | $ | 27 |   |   |   |   |   |   |
| Net Income                                                    | ** ** | ** **                  | **823**    | ** **                              | ** ** | ** **                                    | **—** | ** **                | ** ** | ** ** | **—** |   | ** ** | ** ** | **$** | **823** |   |   |
| Amortization of discount on preferred stock in  affiliate     | ** ** | ** **                  | **9**      | ** **                              | ** ** | ** **                                    | **(9**     | **)**                     | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Settlement of member’s obligations pursuant to the  Plan | ** ** | ** **                  | **(1,773** | **)**                                   |       |                                          |       |                      |       |   |   |   |   |   |   |   |   |
| Distribution to member                                        | ** ** | ** **                  | **(239**   | **)**                                   | ** ** | ** **                                    | **—** | ** **                | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Capital contribution pursuant to the Plan of  Reorganization  | ** ** | ** **                  | **1**      | ** **                              | ** ** | ** **                                    | **—** | ** **                | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Other comprehensive income                                    | ** ** | ** **                  | **—** | ** **                              | ** ** | ** **                                    | **—** | ** **                | ** ** | ** ** | **10** |   | ** ** | ** ** | **10** |   |   |
| Comprehensive income                                          | ** ** | ** **                  | ** ** | ** **                              | ** ** | ** **                                    | ** ** | ** **                | ** ** | ** ** | ** ** |   | ** ** | ** ** | **$** | **833** |   |   |
| **Balance, September 30,  2006**                         | ** ** | ** **                  | **$**      | **3,295**                               | ** ** | ** **                                    | ** ** | **$**                     | **(217**   | **)** | ** ** | ** ** | **$** | **37** |   | ** ** | ** ** | ** ** |   |   |

 

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

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

**SEPTEMBER 30, 2006, CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(UNAUDITED)andSEPTEMBER 30, 2005, CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)**

| ** **                                                                                                                      | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                                                                                                      | ** ** | **(in millions)**                          | ** ** |
| **Cash  Flows from Operating Activities:**                                                                                      | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                               | ** ** | **$**                                           | **823**    |   | $ | (956 | ) |
| Income (loss) from  discontinued operations                                                                                     | ** ** | **(57**                                         | **)**      | 4 |   |
| Income (loss) from  continuing operations                                                                                       | ** ** | **880**                                         |       | (960 | ) |
| Adjustments  to reconcile net income (loss) from continuing operations to net cash  provided by (used in) operating activities: |       |                                            |       |   |   |
| Depreciation and  amortization                                                                                                  | ** ** | **97**                                          |       | 85 |   |
| Impairment charges                                                                                                              | ** ** | **118**                                         |       | — |   |
| Non-cash post-petition  interest expense                                                                                        | ** ** | **—**                                      |       | 620 |   |
| Loss (gain) on sales of  assets and investments                                                                                 | ** ** | **(23**                                         | **)**      | 1 |   |
| Non-cash charges for  reorganization items                                                                                      | ** ** | **—**                                      |       | 22 |   |
| Price risk management  activities, net                                                                                          | ** ** | **(593**                                        | **)**      | 407 |   |
| Other, net                                                                                                                      | ** ** | **2**                                           |       | (5 | ) |
| Changes in operating assets and liabilities:                                                                                    |       |                                            |       |   |   |
| Affiliate accounts  receivable, net                                                                                             | ** ** | **8**                                           |       | (297 | ) |
| Customer accounts  receivable, net                                                                                              | ** ** | **368**                                         |       | (66 | ) |
| Noncurrent prepaid rent                                                                                                         | ** ** | **12**                                          |       | 7 |   |
| Inventories                                                                                                                     | ** ** | **(15**                                         | **)**      | 43 |   |
| Other assets                                                                                                                    | ** ** | **327**                                         |       | (736 | ) |
| Accounts payable and  accrued liabilities                                                                                       | ** ** | **(146**                                        | **)**      | 15 |   |
| Payable to affiliate                                                                                                            | ** ** | **3**                                           |       | 408 |   |
| Property taxes accrued,  affiliate                                                                                              | ** ** | **—**                                      |       | (1 | ) |
| Property taxes accrued,  nonaffiliate                                                                                           | ** ** | **50**                                          |       | 38 |   |
| Other liabilities                                                                                                               | ** ** | **7**                                           |       | 7 |   |
| Total adjustments                                                                                                               | ** ** | **215**                                         |       | 548 |   |
| Net cash provided by (used  in) operating activities of continuing operations                                                   | ** ** | **1,095**                                       |       | (412 | ) |
| Net cash provided by  operating activities of discontinued operations                                                           | ** ** | **27**                                          |       | 10 |   |
| Net cash provided by (used  in) operating activities                                                                            | ** ** | **1,122**                                       |       | (402 | ) |
| **Cash  Flows from Investing Activities:**                                                                                      | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                                            | ** ** | **(93**                                         | **)**      | (79 | ) |
| Repayments of notes  receivable from affiliate                                                                                  | ** ** | **207**                                         |       | 10 |   |
| Proceeds from the sales of  assets and investments, net                                                                         | ** ** | **33**                                          |       | 4 |   |
| Net cash provided by (used  in) investing activities of continuing operations                                                   | ** ** | **147**                                         |       | (65 | ) |
| Net cash used in investing  activities of discontinued operations                                                               | ** ** | **(4**                                          | **)**      | (3 | ) |
| Net cash provided by (used  in) investing activities                                                                            | ** ** | **143**                                         |       | (68 | ) |
| **Cash  Flows from Financing Activities:**                                                                                      | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Proceeds from issuance of  debt-affiliate                                                                                       | ** ** | **—**                                      |       | 90 |   |
| Proceeds from issuance of  long-term debt-nonaffiliate                                                                          | ** ** | **2,015**                                       |       | — |   |
| Repayment of notes  payable-affiliate                                                                                           | ** ** | **(110**                                        | **)**      | — |   |
| Repayment of long-term  debt-nonaffiliate                                                                                       | ** ** | **(472**                                        | **)**      | (2 | ) |
| Settlement of member’s  obligation pursuant to the Plan                                                                    | ** ** | **(1,773**                                      | **)**      | — |   |
| Payment to affiliate under  the Plan                                                                                            | ** ** | **(250**                                        | **)**      | — |   |
| Distribution to member                                                                                                          | ** ** | **(239**                                        | **)**      | — |   |
| Debt issuance costs                                                                                                             | ** ** | **(51**                                         | **)**      | — |   |
| Net cash provided by (used  in) financing activities of continuing operations                                                   | ** ** | **(880**                                        | **)**      | 88 |   |
| Net cash provided by  financing activities of discontinued operations                                                           | ** ** | **—**                                      |       | — |   |
| Net cash provided by (used  in) financing activities                                                                            | ** ** | **(880**                                        | **)**      | 88 |   |
| **Net Increase (Decrease)  in Cash and Cash Equivalents**                                                                       | ** ** | **385**                                         |       | (382 | ) |
| **Cash and Cash  Equivalents, beginning of period**                                                                             | ** ** | **295**                                         |       | 636 |   |
| **Cash and Cash  Equivalents, end of period**                                                                                   | ** ** | **$**                                           | **680**    |   | $ | 254 |   |
| **Supplemental Cash Flow Disclosures:**                                                                                         | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Cash paid for interest, net  of amounts capitalized                                                                             | ** ** | **$**                                           | **79**     |   | $ | 16 |   |
| Cash paid for claims and  professional fees from bankruptcy                                                                     | ** ** | **$**                                           | **—** |   | $ | 47 |   |
| **Financing  Activity:**                                                                                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Capital contribution—non-cash                                                                                              | ** ** | **$**                                           | **1**      |   | $ | — |   |

 

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

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

**A.**                Descriptionof Business

***Overview***

Mirant North America, LLC, including its subsidiaries(collectively, the “Company” or “Mirant North America”) is a wholly-ownedsubsidiary of Mirant Americas Generation, LLC (“Mirant Americas Generation”).Mirant North America is a national independent power provider and an indirectwholly-owned subsidiary of Mirant Corporation (“Mirant”). Mirant wasincorporated in Delaware on September 23, 2005, and is the successor to acorporation of the same name that was formed in Delaware on April 3, 1993.This succession occurred by virtue of the transfer of substantially all of oldMirant’s assets to new Mirant in conjunction with old Mirant’s emergence frombankruptcy protection on January 3, 2006. Old Mirant was then renamed andtransferred to a trust, which is not affiliated with new Mirant. As used inthis report “Mirant” refers to old Mirant prior to January 3, 2006, and tonew Mirant on or after January 3, 2006.

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

Pursuant to the Plan of Reorganization (the “Plan”)that was approved in conjunction with Mirant’s emergence from bankruptcy, in December 2005Mirant contributed its interest in Mirant Potomac River, LLC (“Mirant PotomacRiver”) and Mirant Peaker, LLC (“Mirant Peaker”) to the Company’s wholly-ownedsubsidiary, Mirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) and its interestin Zeeland and Mirant Americas Energy Marketing, LP (“Mirant Americas EnergyMarketing”), Mirant Americas Development, Inc., Mirant Americas ProductionCompany, Mirant Americas Energy Capital, LLC, Mirant Americas Energy CapitalAssets, LLC, Mirant Americas Development Capital, LLC, Mirant Americas RetailEnergy Marketing, LP, and Mirant Americas Gas Marketing, LLC (collectively, the“Trading Debtors”) to the Company. All of the contributed subsidiaries wereunder the common control of Mirant and are collectively referred to as the “ContributedSubsidiaries.” On January 31, 2006, the trading and marketing business ofthe Trading Debtors was transferred to Mirant Energy Trading, LLC (“MirantEnergy Trading”), a wholly-owned subsidiary of Mirant North America. Afterthese transfers took place, the Trading Debtors were transferred to a trustcreated under the Plan that is not affiliated with the Company.

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Mirant North America and its subsidiaries.The accompanying unaudited condensed combined financial statements present theresults of operations and cash flows of the Company based on the assets,liabilities and operations of the predecessor Mirant Corporation ContributedSubsidiaries and include the assets, liabilities and operations of MirantAmericas Generation. The effects of the Plan are reflected as of 

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December 31, 2005. Asa result, the Company’s condensed consolidated balance sheet as of December 31,2005, does not include the assets and liabilities of Mirant AmericasGeneration.

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

***Basis of Presentation***

The accompanying unaudited condensed consolidated andcombined financial statements of Mirant North America have been prepared inaccordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with theinstructions for Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by GAAP for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.

The accompanying unaudited condensed consolidated andcombined financial statements include the accounts of Mirant North America andits wholly-owned subsidiaries, the Contributed Subsidiaries and Mirant AmericasGeneration as discussed above and have been prepared from records maintained byMirant North America, its subsidiaries, the Contributed Subsidiaries and MirantAmericas Generation. All significant intercompany accounts and transactionshave been eliminated in preparing the unaudited condensed consolidated andcombined financial statements.

Certain prior periodamounts have been reclassified to conform to the current year financialstatement presentation. In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets,*” (“SFAS No. 144”)the results of operations of the Company’s assets to be disposed of have beenreclassified to discontinued operations and the associated assets andliabilities have been reclassified to assets and liabilities held for sale forall periods presented. See Note B for additional information regardingdiscontinued operations. In addition, the accompanying unaudited condensedconsolidated and combined statements of cash flows present the cash flows fromdiscontinued operations in each of the three major categories (operating,investing and financing activities). The unaudited condensed combined statementof cash flows for the nine months ended September 30, 2005, was revisedduring 2006, to conform to this presentation.

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

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

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***Recently Adopted Accounting Standards***

In September 2005, the Financial AccountingStandards Board (“FASB”) ratified Emerging Issues Task Force (“EITF”) Issue 04-13,“*Accounting for Purchases and Sales of Inventorywith the Same Counterparty”*(“EITF 04-13”), which requirescompanies to account for certain purchases and sales of inventory with the samecounterparty as a single transaction. The Company adopted EITF 04-13 on April 1,2006. The application of EITF 04-13 has not had a material impact on theCompany’s statement of operations, financial position or cash flows.

In April 2006, theFASB issued FASB Staff Position (“FSP”) FASB Interpretation (“FIN”) No. 46R-6,*“Determining**theVariability to be Considered in Applying FASB Interpretation No. 46R” (*“FSP FIN46R-6”). The variability that is considered in applying FIN 46 (Revised December 2003),“*Consolidation**of VariableInterest Entities—an Interpretation of Accounting Research Bulletin No. 51”*(“FIN 46R”) affects the determination of whether an entity is a variableinterest entity (“VIE”), which interests are variable interests in the entity,and which party, if any, is the primary beneficiary of the VIE. According toFSP FIN 46R-6, the variability to be considered should be based on thenature of the risks of the entity and the purpose for which the entity wascreated. The guidance in FSP FIN 46R-6 is applicable prospectively to anentity at the time a company first becomes involved with such entity and isapplicable to all entities previously required to be analyzed under FIN 46Rwhen a reconsideration event has occurred beginning with the first reportingperiod after June 15, 2006. Retrospective application to the date of theinitial application of FIN 46R is permitted but not required. The Companyadopted FSP FIN 46R-6 on July 1, 2006, on a prospective basis. Uponadoption there was no material impact on the Company’s statements ofoperations, financial position or cash flows.

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

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

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

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

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The evaluation of a tax position in accordance withFIN 48 is a two-step process. The first step is recognition based on adetermination of whether it is more likely than not that a tax position will besustained upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. Inevaluating whether a tax position has met the more-likely-than-not recognitionthreshold, the enterprise should presume that the position will be examined bythe appropriate taxing authority having full knowledge of all 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.

FIN 48 is effective for fiscal years beginning after December 15,2006. The Company will adopt FIN 48 on January 1, 2007. Upon initialadoption, the provisions of FIN 48 will be applied to all tax positions. Onlytax positions that meet the more-likely-than-not recognition threshold at theeffective date may be recognized or continue to be recognized. The Company hasnot yet determined the impact of FIN 48 on its statements of operations,financial position or cash flows.

On June 28, 2006, the FASB ratified the EITF’sconsensus reached on EITF Issue No. 06-3, “*How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation)*”(“EITF 06-3”), which relates to the income statement presentation oftaxes collected from customers and remitted to government authorities. The TaskForce affirmed as a consensus on this issue that the presentation of taxes oneither a gross basis or a net basis within the scope of EITF 06-3 is anaccounting policy decision that should be disclosed pursuant to APB Opinion No. 22,“*Disclosure of Accounting Policies.*” Acompany should disclose the amount of those taxes that is recognized on a grossbasis in interim and annual financial statements for each period for which anincome statement is presented if those amounts are significant. The Companywill adopt EITF 06-3 on January 1, 2007. The adoption of EITF 06-3is not expected to have a material impact on the Company’s statements ofoperations, financial position or cash flows.

On July 13, 2006, the FASB finalized FSP FAS 13-2,“*Accounting for a Change or Projected Change in theTiming of Cash Flows Relating to Income Taxes Generated by a Leveraged LeaseTransaction*” (“FSP FAS 13-2”), which addresses how achange or projected change in the timing of cash flows relating to income taxesgenerated by a leveraged lease transaction affects the accounting by a lessorfor that lease. The Company will adopt FSP FAS 13-2 on January 1,2007. The Company has not yet determined the impact of FSP FAS 13-2 onits statements of operations, financial position or cash flows.

On September 8,2006, the FASB issued FSP AUGAIR-1, “*Accounting for Planned Major MaintenanceActivities”*(“FSP AUG AIR-1”). FSP AUG AIR-1 permits thefollowing methods for accounting for major maintenance activities: directexpense, built-in overhaul and deferral. It specifically prohibits accruing inadvance for major maintenance. Theguidance in FSP AUG AIR-1 isto be applied to the first fiscal year beginning after December 15, 2006.The Company will adopt FSP AUG AIR-1 on January 1, 2007. Theadoption of FSP AUG AIR-1 is not expected to have a material impact onthe Company’s statements of operations, financial position or cash flows giventhat the Company currently uses the deferral method of accounting for majormaintenance activities.

On September 13, 2006, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108“*Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”*(“SAB 108”)*.* SAB 108 provides interpretive guidanceon how the effects of the carryover or reversal of prior year misstatementsshould be considered in quantifying a current year misstatement. The SEC staffthinks that registrants should quantify errors using both a balance sheet andan income statement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB 108 is effective for fiscal years ending on orafter November 15, 2006. The adoption of 

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SAB 108 is notexpected to have a material impact on the Company’s statements of operations,financial position or cash flows.

On September 15,2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*”(“SFAS No. 157”), which establishes a framework for measuring fairvalue in GAAP and expands disclosure about fair value measurements. SFAS No. 157requires companies to disclose the fair value of their financial instrumentsaccording to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined).Additionally, companies are required to provide enhanced disclosure regardingfair value measurements in the level 3 category, including a reconciliation ofthe beginning and ending balances separately for each major category of assetsand liabilities accounted for at fair value. SFAS No. 157 is effective atthe beginning of the first fiscal year after November 15, 2007. TheCompany will adopt SFAS No. 157 on January 1, 2008. At the date ofadoption, the Company will evaluate the fair value of its assets andliabilities according to the hierarchy established by the FASB. The Company hasnot yet determined the impact of SFAS No. 157 on its statements ofoperations, financial position or cash flows.

**B.**               Dispositions

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

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

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

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

 

Assets held for sale at September 30, 2006,consisted of the planned dispositions discussed above. Assets held for sale at December 31,2005, consisted of the planned dispositions discussed above plus $7 millionrelated to the Mirant Service Center. The sale of the Mirant Service Centerclosed in the second quarter of 2006, and the Company recognized a gain ofapproximately $6 million.

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

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

In accordance with SFAS No. 144, an assetclassified as held for sale shall be measured at the lower of carrying value orfair value less costs to sell. As the assets described below will be sold aspart of an auction process, the final selling price (fair value) will not bedetermined until the auction process is complete. 

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Therefore, managementdeveloped an approach for estimating the fair value of the assets to bedisposed of. The estimate will be refined in subsequent periods as the auctionprocesses proceed and more information is known about the ultimate salesprices.

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

*DiscontinuedOperations*

The Company has reclassified amounts for prior periodsin the financial statements to report separately, as discontinued operations,the revenues and expenses of components of the Company that have been disposedof or have met the required criteria for such classification atSeptember 30, 2006. In the third quarter of 2006, Mirant commenced auctionprocesses to sell certain of the Company’s natural gas-fired assets as discussedabove in *Assets and Liabilities Held for Sale*.

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

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

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

**C.**               Impairmentson Assets Held and Used

In accordance with SFASNo. 144, an asset classified as held and used shall be tested forrecoverability whenever events or changes in circumstances indicate that thecarrying amount of the asset may not be recoverable. An asset impairment chargemust be recognized if the sum of the undiscounted expected future cash flowsfrom a long-lived asset is less than the carrying value of that asset. Theamount of any impairment charge is calculated as the excess of the carryingvalue of the asset over its fair value. Fair value is estimated based on thediscounted future cash flows from that asset or determined by other valuation techniques.

*Background*

The Mirant Lovett, LLC (“Mirant Lovett”) and MirantBowline, LLC (“Mirant Bowline”) generation facilities in New York are subjectto disputes with local tax authorities regarding property tax assessments.Mirant Lovett and Mirant Bowline have been negotiating with local authoritiesto settle past taxes and to reach agreements on payments in lieu of taxes(“PILOT”) covering future years.

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

*Current PeriodEvents*

On August 11, 2006, and August 28, 2006, theNew York state court issued decisions addressing Mirant Bowline’s challenges tothe assessed values of the Bowline facility for the years 1995 to 2003 andMirant Lovett’s challenges to the assessed values of the Lovett facility forthe years 2000 to 2003. Except for 1996, where it found that Mirant Bowline hadfailed to perfect its challenge to the assessed value of the Bowline facility,the New York state court concluded that the value of the Bowline facility andthe Lovett facility in each year was substantially less than the assessed valueset by the taxing authorities.

The Company estimates that the decisions rendered bythe New York state court with respect to the tax challenges asserted by MirantBowline and Mirant Lovett will result in refunds that with interest will coverthe majority of the unpaid taxes for the Bowline and Lovett facilities, takinginto account the reduction in those unpaid taxes that would occur under thedecisions. While the decisions rendered by the New York state court found thatthe values set by the taxing authorities for the Bowline and Lovett facilitiessignificantly exceeded what the court concluded were the full values of thosefacilities for the years at issue, the values found by the court for theBowline facility still exceeded significantly what Mirant Bowline paid in 1999for that facility. For the Lovett facility, the decisions failed to take intoaccount the significant capital expenditures that would have to be made to keepthe facility operational after April 2008. Mirant Bowline and MirantLovett have appealed the decisions of the New York state court, and therelevant taxing authorities have cross-appealed. See *New York TaxProceeding*s in Note J—Litigation and Other Contingencies foradditional information.

On September 19,2006, Mirant Lovett sought Bankruptcy Court approval to discontinue operationsat units 3 and 5 of the Lovett generation facility if an alternativeenvironmental compliance mechanism on environmental controls that is agreeableto the State of New York is not approved by April 30, 2007. OnOctober 18, 2006, the Bankruptcy Court approved the Company’s request. OnOctober 19, 2006, Mirant Lovett submitted notices of its intent todiscontinue operations at units 3 and 5 of the Lovett facility onApril 30, 2007, to the New York Public Service Commission, New York IndependentSystem Operator (“NYISO”), Orange and Rockland Utilities, Inc. (“Orangeand Rockland”), and several other affected transmission and distributionutilities in New York. Mirant Lovett reserved its rights to withdraw thesenotices if a viable alternative environmental compliance mechanism is found.See *New York State Administrative Claim* inNote J—Litigation and Other Contingencies for additional information.

*Asset Grouping*

For purposes of measuringan impairment loss, a long-lived asset or assets must be grouped at the lowestlevel of independent identifiable cash flows. All of the units at Mirant Lovettare viewed as one group. For Bowline, the Company determined that the suspendedBowline unit 3 construction project is independent of the operating Bowlineunits in the current quarter. In addition, the Company’s analysis and planningaround operating Bowline units 1 and 2 do not consider the suspendedconstruction project for Bowline unit 3.

*Assumptions andResults*

In its impairment analysis of the Bowline and Lovettgeneration facilities in prior periods, the Company had assumed that the PILOTagreements would be successfully approved and implemented. The Company nolonger expects those PILOT agreements to be implemented. The August 2006decisions and 

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the appeals that followedprompted management to test for recoverability of the asset under SFASNo. 144 because additional uncertainty now exists related to achievingproperty taxation levels that allow economically feasible operation of theBowline and Lovett generation facilities. As a result of these developments,management re-reviewed the economic viability of these facilities in the thirdquarter of 2006.

*Lovett.*   Inits impairment analysis of the Lovett generation facility in prior periods, theCompany had considered multiple scenarios, including potential shutdown of thefacility. Thus, the request for approval to discontinue operations was notviewed as a potential impairment event in the third quarter but was consideredin the probability weighting of the scenarios.

The Company’s assessment of Lovett under SFASNo. 144 in the current period involved estimates related to property taxrefunds and payments and assumed that property taxes are negotiated to areasonable level for future periods. Among the multiple scenarios consideredwere the shut down of units 3 and 5 by April 30, 2007, and unit 4 byApril 30, 2008. The Company also considered scenarios that allowoperations past April 2008 because the Company continues to work with theState of New York and other parties to achieve a solution related toenvironmental controls and to allow Lovett to continue to contribute to thereliability of the electric system of the State of New York. The sum of theprobability weighted undiscounted cash flows for the Lovett generation facilityexceeded the Company’s carrying value at September 30, 2006. If aresolution is not reached on property taxes and environmental controls thatwould permit economically feasible operation, the Company will reassess therecoverability of Lovett’s carrying value.

*BowlineUnits 1 and 2.*   The Company’s assessment ofBowline units 1 and 2 under SFAS No. 144 in the current period involvedestimates related to property tax refunds and payments and assumed thatproperty taxes are negotiated to levels for future periods that allow Bowlineunits 1 and 2 to operate until the end of their remaining economic usefullives. The sum of the undiscounted cash flows exceeded the Company’s carryingvalue at September 30, 2006, for Bowline units 1 and 2. If a resolution isnot reached on property taxes that would permit economically feasibleoperation, the Company will reassess the recoverability of Bowline’s carryingvalue.

*Bowline Unit 3.*   TheCompany’s assessment of the Bowline unit 3 suspended construction projectassumed that completion of this project is remote. A strategic review of theCompany’s portfolio of assets in 2006 resulted in the conclusion that theBowline 3 project as currently configured and permitted is not economicallyviable. As a result of this conclusion, the Company determined the estimatedvalue of the equipment and project termination liabilities. AtSeptember 30, 2006, the carrying value of the development and constructioncosts for Bowline unit 3 exceeded the estimated undiscounted cash flows of theabandonment of the project. The Company recorded an impairment of $118 million,which is reflected in impairment losses on the unaudited condensed consolidatedstatements of operations for the three and nine months ended September 30,2006.

**D.**              Price RiskManagement Assets and Liabilities

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

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

 

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Of the $478 million netfair value asset at September 30, 2006, a net price risk management assetof $129 million relates to the remainder of 2006, a net price risk managementasset of $266 million relates to 2007, and a net price risk management asset of$83 million relates to periods thereafter. The volumetric weighted averagematurity, or weighted average tenor, of the price risk management portfolio atSeptember 30, 2006, was approximately 13 months. The net notional amountof the price risk management assets and liabilities at September 30, 2006,was a net short position of approximately 24** **millionequivalent megawatt-hours (“MWh”).

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

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

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

 

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

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

| ** **                               | ** ** | **At September 30,** | ** ** | **At December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2006**                       | ** ** | **2005**                      | ** ** |
| Production                               |       |                           | $          | 2,487                         |       |   |   | $ | 2,438 |   |   |
| Oil pipeline                             |       |                           | 25         |                          |       |   | 25 |   |   |
| Construction work in  progress           |       |                           | 145        |                          |       |   | 74 |   |   |
| Other                                    |       |                           | 88         |                          |       |   | 87 |   |   |
| Suspended construction  projects(1)      |       |                           | 55         |                          |       |   | 173 |   |   |
| Less accumulated  depreciation           |       |                           | (598       | )                             |       |   | (506 | ) |   |
| Total property, plant and equipment, net |       |                           | $          | 2,202                         |       |   |   | 2,291 |   |   |

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(1)          In the third quarter of2006, the Company recognized an impairment loss of $118 million related toBowline unit 3. See Note C for further discussion related to impairments oflong-lived assets. The remaining suspended construction at September 30,2006, is primarily related to Contra Costa 8 in California.

Property, plant and equipment, net of $434 million and$513 million related to assets to be sold has been reclassified to assets heldfor sale in the Company’s condensed consolidated balance sheets atSeptember 30, 2006 and December 31, 2005, respectively. See Note Bfor additional information on assets held for sale.

Depreciation of the recordedcost of property, plant and equipment is recognized on a straight-line basisover the estimated useful lives of the assets. The Company received emissionsallowances in the acquisition of the Pepco assets for both sulfur dioxide(“SO2”) and nitrogen oxide (“NOx”) emissions and the right to futureallowances. The acquired allowances related to owned facilities are included inproduction assets above, and are depreciated over the average life of therelated assets. Mirant North America does not depreciate its suspendedconstruction project costs or property, plant and equipment that has beenreclassified to assets held for sale.

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**F.**                RelatedParty Arrangements and Transactions

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

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

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

 

***Services*** andRisk Management Agreements with Affiliates

For the three and ninemonths ended September 30, 2006, the Company provided energy marketing andfuel procurement services through Mirant Energy Trading to the followingaffiliates: Mirant Las Vegas, LLC, Mirant Sugar Creek, LLC, Mirant Shady Hills,LLC, Mirant West Georgia, LLC and Mirant Wichita Falls, LP.  For the three and nine months ended September 30,2005, these services were provided by Mirant Americas Energy Marketing. Amountsdue from each affiliate under their respective services agreements are recordedas a net accounts payable-affiliate or accounts receivable-affiliate because ofeach subsidiary’s legal right to offset. For the three and nine months endedSeptember 30, 2006 and 2005, the Company recorded a reduction tooperations and maintenance of approximately $1 million and $4 million,respectively, compared to $2 million and $6 million, respectively, related tothese agreements. 

Mirant Wichita Falls wassold by Mirant in the second quarter of 2006. Mirant has commenced auctionprocesses to sell Mirant Las Vegas, LLC, Mirant Sugar Creek, LLC, Mirant ShadyHills, LLC, and Mirant West Georgia, LLC. The sales are expected to be completedby mid-2007. Subsequent to the sale of these affiliates by Mirant, 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 impacted by the sale ofthese affiliates. However, because the Company would likely discontinueproviding energy marketing and fuel procurement services to these entities, theCompany would expect its operating revenues-affiliate and cost of fuel,electricity, and other products – affiliate to decrease or be eliminatedsubsequent to the sale of these affiliates. In addition, these decreases wouldresult in corresponding decreases in cost of fuel, electricity, and other products–nonaffiliate and operating revenues-nonaffiliate, respectively, in theconsolidated statements of operations in future periods. 

***Administration Arrangements with Mirant Services***

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

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***Notes Receivable from Affiliate and Notes Payable toAffiliate***

During the pendency of theChapter 11 proceedings, Mirant and certain of its subsidiariesparticipated in an intercompany cash management program approved by theBankruptcy Court, pursuant to which cash balances at Mirant and theparticipating subsidiaries were transferred to central concentration accountsand, if necessary, lent to Mirant or any participating subsidiary to fundworking capital and other needs, subject to the intercompany borrowing limitsapproved by the Bankruptcy Court. At September 30, 2006, and December 31,2005, the Company had current notes receivable from Mirant Americas Generationof $125 million and $332 million, respectively, related to the intercompanycash management program. For the three and nine months ended September 30,2006, the Company earned $1 million and $4 million, respectively, of interestincome related to the note receivable, which is recorded in interest income–affiliatein the accompanying unaudited condensed consolidated and combined statements ofoperations. At September 30, 2006, and December 31, 2005, the Companyhad current notes payable to affiliate of $22 million and $132 million,respectively. For the nine months ended September 30, 2006, the Companyincurred $1 million of interest expense under this arrangement, compared to$7 million and $13 million, for the three and nine months ended September 30,2005, which are recorded in interest expense—affiliate in the accompanyingunaudited condensed consolidated and combined financial statements.

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

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

***Mirant Guarantees***

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

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

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

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

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***Preferred Stock in Mirant Americas***

Pursuant to the Plan,preferred stock in Mirant Americas was issued to Mirant Mid-Atlantic to providecredit support for environmental capital expenditures. For the nine monthsended September 30, 2006, the Company recorded $9 million in PreferredStock in affiliate and Member’s Interest in the unaudited condensedconsolidated balance sheet related to the amortization of the discount on thepreferred stock in Mirant Americas.

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

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

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

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

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

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**G.**              Debt

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

| ** **                                       | ** ** | **At  September 30,  2006** | ** ** | **At  December 31,  2005** | ** ** | **Interest Rate** | ** ** | **Secured/  Unsecured** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------|------------|-------------------------|------------|
| **Long-term  Debt:**                             | ** ** |                             | ** ** | ** **                      |       |                   | ** ** | ** **              |       | ** ** | ** ** | ** ** | ** ** |
| Mirant North America:                            |       |                             |       |                            |       |                   |       |                    |       |   |   |   |   |
| Term loan, due 2006 to 2013(1)                   |       |                             | $          | 695                             |       |                   |       | $                       | —     |   |   | LIBOR + 1.75 | % | Secured |   |
| Note, due 2013.                                  |       |                             | 850        |                            |       |                   | 850        |                    |       | 7.375 | % | Unsecured |   |
| Other:                                           |       |                             |       |                            |       |                   |       |                    |       |   |   |   |   |
| Mirant Peaker capital lease, due 2006 to 2015    |       |                             | 34         |                            |       |                   | 36         |                    |       | 8.19 | % |   |   |
| Total                                            |       |                             | 1,579      |                            |       |                   | 886        |                    |       |   |   |   |   |
| Less: current  portion of long-term debt         |       |                             | (91        | )                               |       |                   | (3         | )                       |       |   |   |   |   |
| Total long-term  debt, excluding current portion |       |                             | $          | 1,488                           |       |                   |       | $                       | 883        |   |   |   |   |   |   |

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(1)          Underthe senior secured term loan, $200 million was deposited into a cashcollateral account to support issuance of up to $200 million of letters ofcredit. As of September 30, 2006, there were approximately $185 million ofletters of credit outstanding.

***Senior Secured Credit Facilities***

Mirant North Americaentered into senior secured credit facilities in January 2006, which arecomprised of an $800 million six-year senior secured revolving creditfacility and a $700 million seven-year senior secured term loan. The fullamount of the senior secured revolving credit facility is available for cashdraws or for the issuance of letters of credit. On January 3, 2006, theCompany drew $465 million under its senior secured revolving credit facility.All amounts were repaid during the first quarter of 2006. The senior securedterm loan was fully drawn at closing and amortizes in quarterly installmentsaggregating 0.25% of the original principal of the term loan per quarter forthe first 27 quarters, with the remainder payable on the final maturitydate in January 2013. At the closing, $200 million drawn under thesenior secured term loan was deposited into a cash collateral account tosupport the issuance of up to $200 million of letters of credit. Thesenior secured credit facilities are obligations of Mirant North America andthe respective guarantors and are not recourse to any other Mirant NorthAmerica entity or affiliate.

Loans under the seniorsecured credit facilities are available at either of the following rates: (i) afluctuating rate of interest per annum equal to, on any given day, the greaterof (a) the interest rate per annum publicly announced by JPMorgan ChaseBank, N.A. as its prime rate in effect at its principal office in New YorkCity on that day, and (b) the federal funds rate in effect on that dayplus 0.50%, plus the applicable margin described below (the “base rate”), or (ii) afixed rate determined for selected interest periods of one, two, three or sixmonths equal to U.S. dollar London InterBank Offered Rate (“LIBOR”), plus theapplicable margin described below (the “Eurodollar rate”).

The applicable margin withrespect to loans under the senior secured revolving credit facility is 1.25% inthe case of base rate loans or 2.25% in the case of Eurodollar rate loans. Theapplicable margin is subject to a reduction of up to 0.50% based on theachievement and maintenance of certain leverage ratios by Mirant North America.This reduction became effective June 7, 2006. The applicable margin with 

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respectto the senior secured term loan is 0.75% in the case of base rate loans or1.75% in the case of Eurodollar rate loans.

Mirant North America isrequired to prepay a portion of the outstanding principal balance of the seniorsecured term loan once a year, in addition to the regularly scheduled principalpayments, based on adjusted earnings before interest, taxes, depreciation andamortization (“EBITDA”) calculation to determine excess free cash flows, asdefined in the loan agreement. At September 30, 2006, the current estimateof the mandatory principal prepayment of the term loan in April 2007 isapproximately $81 million. This amount has been reclassified fromlong-term debt to current portion of long-term debt at September 30, 2006.

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

***Senior Notes***

In December 2005, theCompany issued senior notes (the “Old Notes”) in an aggregate principal amountof $850 million that bear interest at 7.375% and mature on December 31,2013. The senior notes were issued in a private placement and were notregistered with the SEC. Interest on the notes is payable on each June 30and December 31, commencing June 30, 2006. The proceeds of the notesoffering initially were placed in escrow pending the emergence of Mirant NorthAmerica from bankruptcy. The proceeds were released from escrow in connectionwith Mirant North America’s emergence from bankruptcy and the closing of thesenior secured credit facilities. The senior notes are obligations of MirantNorth America and the respective guarantors and are not recourse to any otherMirant North America entity or affiliate.

In connection with theissuance of the Old Notes, Mirant North America entered into a registrationrights agreement under which it agreed to complete an exchange offer for theOld Notes. On June 29, 2006, Mirant North America completed itsregistration under the Securities Act of 1933 (the “Securities Act”) of$850 million of 7.375% senior notes due 2013 (the “New Notes”) andinitiated an offer to exchange all of the outstanding Old Notes for the NewNotes (the “Exchange Offer”). The Exchange Offer was completed on August 4,2006, with $849.965 million of the outstanding Old Notes being tenderedfor the New Notes. The terms of the New Notes are identical in all materialrespects to the terms of the Old Notes, except that the New Notes areregistered under the Securities Act and generally are not subject to transferrestrictions or registration rights.

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

**H.**              IncomeTaxes

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

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

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

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

**I.**                   BankruptcyRelated Disclosures

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

Pursuant to the Plan, the Company paid $1.773 billionto settle obligations of Mirant Americas Generation in the nine months ended September 30,2006.

In the nine months ended September 30, 2006,Mirant and Mirant Americas Generation contributed to the Company a $72 millionescrow account and the related $72 million bankruptcy claim. These amounts areincluded in funds on deposit and claims payable, respectively, in the unauditedcondensed consolidated balance sheet at September 30, 2006.

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

Mirant North America’s NewYork subsidiaries remain in bankruptcy and include the following entities:Mirant Lovett, Mirant Bowline, Mirant NY-Gen, Mirant New York and Hudson ValleyGas Corporation. Unaudited condensed consolidated financial statements ofMirant North America’s New York subsidiaries are set forth below:

**NewYork Subsidiaries**

**UnauditedCondensed Consolidated Statements of Operations Data**

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

 

**NewYork Subsidiaries**

**UnauditedCondensed Consolidated Balance Sheets Data**

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

 

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**NewYork Subsidiaries**

**UnauditedCondensed Consolidated Statements of Cash Flows Data**

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

 

***Liabilities Subject to Compromise***

The Company’s liabilities subject to compromise are$58 million at both September 30, 2006 and December 31, 2005, andrelate to its New York subsidiaries that remain in bankruptcy.

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

| ** **                                                                      | ** ** | **At September 30,  2006** | ** ** | **At December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| Items, absent the  bankruptcy filings, that would have been considered current: |       |                                 |       |                                |       |   |   |   |   |
| Accounts payable and accrued liabilities—affiliate                         |       |                                 | $          | 40                                  |       |   |   | $ | 40 |   |   |
| Accounts payable and accrued  liabilities—nonaffiliate                     |       |                                 | 18         |                                |       |   | 18 |   |   |
|                                                                            |       |                                 | $          | 58                                  |       |   |   | $ | 58 |   |   |

 

***Reorganization Items, net***

Forthe three and nine months ended September 30, 2006, reorganization items,net relate to the New York subsidiaries. For the three and nine monthsended September 30, 2006 and 2005, reorganization items, net representamounts that were recorded in the financial statements as a result of the bankruptcyproceedings. The following were the significant items within this category (inmillions):

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

 

**J.**                  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 

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ultimateamount of potential losses and therefore has not made any provision for suchmatters unless specifically noted below. Pursuant to SFAS No. 5, “*Accounting for Contingencies*,” 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 consolidated andcombined financial position, results of operations or cash flows.

***Chapter 11 Proceedings***

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

As of September 30, 2006, approximately 21.2million of the shares of Mirant common stock to be distributed under the Planhave not yet been distributed and have been reserved for distribution withrespect to claims that are disputed by the Mirant Debtors and have not beenresolved. A settlement entered into on May 30, 2006, among Pepco, Mirant,MC 2005, LLC f/k/a Mirant Corporation (“Old Mirant”), and various subsidiariesof Mirant, including subsidiaries of the Company, if approved by final order inthe Chapter 11 proceedings, would result in the distribution of up to 18million of the reserved shares to Pepco, as described below in *Pepco Litigation*. Under the terms of the Plan, to the extentother such unresolved 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 Lovett and Bowline generation facilitiesin New York are subject to disputes with local tax authorities regardingproperty tax assessments, as described below in *New York TaxProceedings*. The current property taxation levels of the facilitiescall into question whether their continued operation is economically feasible.In addition, Mirant Lovett is in discussions with the NYSDEC and the New YorkState Office of the Attorney General regarding environmental controls. On October 19,2006, Mirant Lovett notified the New York Public Service Commission, the NYISO,Orange and Rockland and certain other affected transmission and distributioncompanies in New York of its intent to discontinue operation of units 3 and 5of the Lovett facility in April 2007. The discontinuance of operations atunit 5 is in accordance with the requirements of a June 11, 2003, ConsentDecree (the “2003 Consent Decree”) among Mirant Lovett, the State of New Yorkand the NYSDEC that requires Mirant Lovett to install certain environmentalcontrols on unit 5 of the Lovett facility or shut down that unit by April 30,2007. The 2003 Consent Decree imposes similar requirements with respect to unit4 that have to be met by April 30, 2008. Operations at unit 3 are beingdiscontinued because it is uneconomic to continue to run unit 3 if operationsat unit 5 are discontinued. If Mirant Lovett is able to agree with the New YorkAttorney General’s office and the NYSDEC on alternative control technologiesthat would allow unit 5 to remain in operation past April 30, 2007, thenMirant Lovett may rescind the notice of its intent to discontinue operations atunits 3 and 5. Until a resolution is reached on property taxes andenvironmental controls that would permit economically feasible operation, theCompany’s subsidiaries that own the facilities, 

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Mirant Lovett andMirant Bowline, will remain in Chapter 11. Until such issues are resolved andthe companies emerge from bankruptcy, the Company will not have access to thecash from operations generated from these subsidiaries. The cash fromoperations generated by these subsidiaries is not material.

The Company’s othersubsidiaries related to its New York business operations, Mirant New York, HudsonValley Gas Corporation and Mirant NY-Gen also remain in bankruptcy. MirantNY-Gen, which owns hydroelectric facilities at Swinging Bridge, Rio andMongaup, and small combustion turbine facilities at Hillburn and Shoemaker, isinsolvent. Its expenses are being funded under a debtor-in-possession facilitymade by Mirant Americas with the approval of, and under the supervision of, theBankruptcy Court. Mirant NY-Gen is proceeding with the implementation of aremediation plan for the sinkhole discovered in May 2005 in the dam at theSwinging Bridge facility. The status of the remediation effort is discussedbelow in *Other Contingencies*.

***Pepco Litigation***

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

Mirant assigned its rights and obligations under theBack-to-Back Agreement to Mirant Americas Energy Marketing. In the Chapter 11cases of the Mirant Debtors, Pepco asserted that an Assignment and AssumptionAgreement dated December 19, 2000, that includes as parties Pepco andvarious of the Company’s subsidiaries causes the Company’s subsidiaries thatare parties to the agreement to be jointly and severally liable to Pepco forvarious obligations, including the obligations under the Back-to-BackAgreement. The Mirant Debtors have sought to reject the APSA, the Back-to-BackAgreement, and the Assignment and Assumption Agreement, and the rejectionmotions have not been resolved. Under the Plan, the obligations of the MirantDebtors under the APSA (including any other agreements executed pursuant to theterms of the APSA and found by a final court order to be part of the APSA), theBack-to-Back Agreement, and the Assignment and Assumption Agreement are to beperformed by Mirant Power Purchase, LLC (“Mirant Power Purchase”), whoseperformance is guaranteed by Mirant. If any of the agreements is successfullyrejected, the obligations of Mirant Power Purchase and Mirant’s guaranteeobligations terminate with respect to that agreement, and Pepco would beentitled 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 theCompany), and a trust established pursuant to the Plan to which ownership ofOld Mirant and Mirant Americas Energy Marketing was transferred (collectivelythe “Mirant Settling Parties”) entered into a Settlement Agreement and Release(the “Settlement Agreement”) with Pepco and 

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

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

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

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

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exercisesthis right to have the Back-to-Back Agreement assumed, then the $520 million isreduced to $70 million and Mirant Power Purchase would continue to performthe Back-to-Back Agreement through its expiration in 2021 with Mirantguaranteeing its performance. The Settlement Agreement allocates the $70million to various claims asserted by Pepco that do not arise from the rejectionof the Back-to-Back Agreement, including claims asserted under the Local AreaSupport Agreement between Pepco and Mirant Potomac River, LLC (“Mirant PotomacRiver”) that are discussed below in *Pepco Assertion of Breachof Local Area Support Agreement*.

***California and Western Power Markets***

*FERCRefund Proceedings.*   On July 25, 2001, theFederal Energy Regulatory Commission (the “FERC”) issued an order requiringproceedings (the “FERC Refund Proceedings”) to determine the amount of anyrefunds and amounts owed for sales made by market participants, includingMirant Americas Energy Marketing, to the California Independent System Operator(“CAISO”) or the California Power Exchange (“Cal PX”) from October 2,2000, through June 20, 2001 (the “Refund Period”). Various parties haveappealed these FERC orders to the United States Court of Appeals for the NinthCircuit (the “Ninth Circuit”) seeking review of a number of issues, includingchanging the Refund Period to include periods prior to October 2, 2000,and expanding the sales of electricity subject to potential refund to includebilateral sales made to the California Department of Water Resources (the“DWR”) and other parties. On August 2, 2006, the Ninth Circuit issued 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 toOctober 2, 2000, at rates found to be unjust and directed the FERC to addressthe parties’ request for a market-wide remedy for tariff violations that mayhave occurred prior to October 2, 2000. In addition, the Ninth Circuitfound that the FERC had not adequately supported its decision to exclude fromthe FERC Refund Proceedings (i) sales made in the CAISO and Cal PX thathad a term of greater than 24 hours, and (ii) energy exchangetransactions, and remanded these issues to the FERC for further proceedings.The Ninth Circuit affirmed the FERC’s decision to exclude bilateral sales tothe DWR from the FERC Refund Proceeding. If the FERC grants the parties’requested relief with respect to the issues remanded by the Ninth Circuit, anyexpansion of the Refund Period to include periods prior to October 2,2000, or of the types of sales of electricity potentially subject to refundcould increase the refund exposure of Mirant Americas Energy Marketing in thisproceeding.

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

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On September 9, 2004, the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed in 2002 by the California AttorneyGeneral that sought refunds for transactions conducted in markets administeredby the CAISO and the Cal PX outside the Refund Period set by the FERC and fortransactions between the DWR and various owners of generation and powermarketers, including Mirant Americas Energy Marketing and subsidiaries of theCompany. The Ninth Circuit remanded the proceeding to the FERC for it to determinewhat remedies, including potential refunds, are appropriate where entities,including Mirant Americas Energy Marketing, purportedly did not comply withcertain filing requirements for transactions conducted under market-based ratetariffs. On July 31, 2006, the Ninth Circuit denied a petition forrehearing filed by Mirant Americas Energy Marketing and other parties.

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

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

*FERCShow Cause Proceeding Relating to Trading Practices.**  *On June 25, 2003, the FERC issued a show causeorder (the “Trading Practices Order”) to more than 50 parties, including MirantAmericas 

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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 Trading Practices Order identified certain specific trading practices thatthe FERC indicated could constitute gaming or anomalous market behavior inviolation of the CAISO and Cal PX tariffs. The Trading Practices Order requiresthe CAISO to identify transactions between January 1, 2000, andJune 20, 2001, that may involve the identified trading strategies, andthen requires the applicable sellers involved in those transactions todemonstrate why such transactions were not violations of the CAISO andCal PX tariffs. On September 30, 2003, the Mirant entities filed withthe FERC for approval of a settlement agreement (the “Trading SettlementAgreement”) entered into between certain Mirant entities and the FERC TrialStaff, under which Mirant Americas Energy Marketing would pay $332,411 tosettle the show cause proceeding, except for an issue related to sales ofancillary services, which is discussed below. In a November 14, 2003,order in a different proceeding, the FERC ruled that certain allegations of impropertrading conduct with respect to the selling of ancillary services during 2000should be resolved in the show cause proceeding. On December 19, 2003, theMirant entities filed with the FERC for approval of an amendment to the TradingSettlement Agreement reached with the FERC Trial Staff with respect to the saleof ancillary services. Under that amendment, the FERC would have an allowedunsecured claim in Mirant Americas Energy Marketing’s bankruptcy proceeding for$3.67 million in settlement of the allegations with respect to the sale ofancillary services. The FERC approved the Trading Settlement Agreement, asamended, on June 27, 2005, and the Bankruptcy Court approved it onAugust 24, 2005. Certain parties filed motions for rehearing, which theFERC denied on October 11, 2006.

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

*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 andunreasonable because, when it entered the contract, Western power markets weredysfunctional and non-competitive markets. On June 25, 2003, the FERCdismissed this proceeding. Southern California Water has appealed thatdismissal to the United States Court of Appeals for the Ninth Circuit. Thecontract with Southern California Water Company continues through 2006. Uponthe transfer of the assets of the trading and marketing business to MirantEnergy Trading under the Plan, Mirant Energy Trading assumed Mirant AmericasEnergy Marketing’s contract obligations to Southern California Water Company,including any potential refund obligations.

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

*Department of JusticeInquiries.**  *InNovember 2002, Mirant received a subpoena from the Department of Justice(the “DOJ”), acting through the United States Attorney’s office for theNorthern District of California, requesting information about its activitiesand those of its subsidiaries for the period since January 1, 1998. Thesubpoena requested information related to the California energy markets andother topics, including the reporting of inaccurate information to the tradepress that publish natural gas or electricity spot price data. The subpoena wasissued as part of a grand jury investigation. The DOJ’s 

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investigation ofthe reporting of inaccurate natural gas price information is continuing, andMirant has held discussions with the DOJ regarding the disposition of thismatter. The DOJ’s investigation is based upon the same circumstances that werethe subject of an investigation by the Commodity Futures Trading Commission(“CFTC”) that was settled in December 2004. As described****inMirant’s Annual Report on Form 10-K for the year endedDecember 31, 2004, in*Legal Proceedings—OtherGovernmental Proceedings—CFTC Inquiry*, Mirant and Mirant AmericasEnergy Marketing pursuant to the settlement consented to the entry of an orderby the CFTC in which it made findings, which are neither admitted nor denied byMirant and Mirant Americas Energy Marketing, that (1) fromJanuary 2000 through December 2001, certain Mirant Americas EnergyMarketing natural gas traders (a) knowingly reported inaccurate price,volume, and/or counterparty information regarding natural gas cash transactionsto publishers of natural gas indices and (b) inaccurately reported toindex publishers transactions observed in the market as Mirant Americas EnergyMarketing transactions and (2) from January to October 2000,certain Mirant Americas Energy Marketing west region traders knowinglydelivered the false reports in an attempt to manipulate the price of naturalgas. On June 19, 2006, two former employees of Mirant pled guilty tocharges of conspiracy to manipulate the price of natural gas in interstatecommerce during the period from July 1, 2000, until November 1, 2000,while they were west region traders for Mirant Americas Energy Marketing. TheDOJ could decide that further action against Mirant and Mirant Americas EnergyMarketing is not appropriate or could seek indictments against one or moreMirant entities, or the DOJ and Mirant could agree to a disposition that mightinvolve undertakings or a fine. Mirant has cooperated fully with the DOJ andintends to continue to do so. At this time, the Company’s view is that anyaction taken by the DOJ against Mirant or its subsidiaries related to thereporting of natural gas price information would not involve the Company or itssubsidiaries except to the extent that any disposition of this matter resultsin ongoing undertakings by Mirant Energy Trading as the recipient of the assetsof Mirant Americas Energy Marketing under the Plan.

***Environmental Matters***

*EPAInformation Request.*   In January 2001, theEnvironmental Protection Agency (the “EPA”) issued a request for information toMirant concerning the implications under the EPA’s new source review (“NSR”)regulations promulgated under the Federal Clean Air Act (the “Clean Air Act”)of past repair and maintenance activities at the Potomac River plant inVirginia and the Chalk Point, Dickerson and Morgantown plants in Maryland. Therequested information concerns the period of operations that predates theCompany subsidiaries’ ownership and lease of those plants. Mirant has respondedfully to this request. Under the APSA, Pepco is responsible for fines andpenalties arising from any violation associated with operations prior to theCompany subsidiaries’ acquisition or lease of the plants. If a violation isdetermined to have occurred at any of the plants, the Company subsidiary owningor leasing the plant may be responsible for the cost of purchasing andinstalling emissions control equipment, the cost of which may be material. TheCompany’s subsidiaries owning or leasing the Chalk Point, Dickerson andMorgantown plants in Maryland will be installing a variety of emissions controlequipment on those plants to comply with the Maryland Healthy Air Act, but thatequipment will not include all of the emissions control equipment that could berequired if a violation of the EPA’s NSR regulations is determined to haveoccurred at one or more of those plants. If such a violation is determined tohave occurred after the Company’s subsidiaries acquired or leased the plantsor, if occurring prior to the acquisition or lease, is determined to constitutea continuing violation, the Company’s subsidiary owning or leasing the plant atissue could also be subject to fines and penalties by the state or federalgovernment for the period after its acquisition or lease of the plant, the costof which may be material, although applicable bankruptcy law may bar suchliability for periods prior to January 3, 2006, when the Plan becameeffective for the Company and its subsidiaries that own or lease these plants.

*MirantPotomac River Notice of Violation.**  *OnSeptember 10, 2003, the Virginia Department of Environmental Quality(“Virginia DEQ”) issued a Notice of Violation (“NOV”) to Mirant Potomac River 

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alleging that it violatedits Virginia Stationary Source Permit to Operate by emitting NOx in excess ofthe “cap” established by the permit for the 2003 summer ozone season. MirantPotomac River responded to the NOV, asserting that the cap is unenforceable,noting that it can comply through the purchase of emissions allowances andraising other equitable defenses. Virginia’s civil enforcement statute providesfor injunctive relief and penalties. On January 22, 2004, the EPA issuedan NOV 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 MarylandDepartment of the Environment (the “MDE”), the DOJ and the EPA entered into,and filed for approval with the United States District Court for the EasternDistrict of Virginia, a proposed consent decree (the “Original Consent Decree”)that, if approved, would resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The Original Consent Decree requires Mirant Potomac River and MirantMid-Atlantic to (1) install pollution control equipment at the PotomacRiver plant in Virginia and at the Morgantown plant in Maryland leased byMirant Mid-Atlantic, (2) comply with declining system-wide ozone seasonNOx emissions caps from 2004 through 2010, (3) comply with system-wideannual NOx emissions caps starting in 2004, (4) meet seasonal systemaverage emissions rate targets in 2008 and (5) pay civil penalties andperform supplemental environmental projects in and around the Potomac Riverplant expected to achieve additional environmental benefits. Except for theinstallation of the controls planned for the Potomac River units and theinstallation of selective catalytic reduction (“SCR”) or equivalent technologyat Mirant Mid-Atlantic’s Morgantown units 1 and 2 in 2007 and 2008, theOriginal Consent Decree does not obligate the Company’s subsidiaries to installspecifically designated technology, but rather to reduce emissions sufficientlyto meet the various NOx caps. Moreover, as to the required installations ofSCRs at Morgantown, Mirant Mid-Atlantic may choose not to install thetechnology by the applicable deadlines and leave the units off eitherpermanently or until such time as the SCRs are installed. The Original ConsentDecree is subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree has not yet beenapproved and the parties have filed an amended proposed consent decree.

The owners/lessors under thelease-financing transactions covering the Morgantown and Dickerson plants (the“Owners/Lessors”) objected to the Original Consent Decree in the BankruptcyCourt and filed a motion to intervene in the district court action. As part ofa resolution of disputed matters in the Chapter 11 proceedings, theOwners/Lessors agreed not to object to the Original Consent Decree, subject tocertain terms set forth in the Plan and the order entered by the BankruptcyCourt on December 9, 2005, approving the Plan.

On July 22, 2005, thedistrict court granted a motion filed by the City of Alexandria seeking tointervene in the district court action, although the district court imposed certainlimitations on the City of Alexandria’s participation in the proceedings. OnSeptember 23, 2005, the City of Alexandria filed a motion seekingauthority to file an amended complaint in the action seeking injunctive reliefand civil penalties under the Clean Air Act for alleged violations by MirantPotomac River of its Virginia Stationary Source Permit to Operate and the Stateof Virginia’s State Implementation Plan. Based upon a computer modeling,described below in *Environmental Matters—MirantPotomac River Downwash Study,* the City of Alexandria asserted thatemissions from the Potomac River plant cause or contribute to exceedances ofnational ambient air quality standards (“NAAQS”) for SO2, nitrogen dioxide(“NO2”) and particulate matter. The City of Alexandria also contended based onits modeling analysis that the plant’s emissions of hydrogen chloride andhydrogen fluoride exceed Virginia state standards. Mirant Potomac Riverdisputes the City of Alexandria’s allegations that it has violated the CleanAir Act and Virginia law. On December 2, 2005, the district court deniedthe City of Alexandria’s motion seeking to file an amended complaint.

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

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

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

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

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beforethe FERC and the DOE. On September 21, 2005, Mirant Potomac Rivercommenced partial operation of one unit of the plant. 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 generateelectricity at the Potomac River generating facility, as requested byPennsylvania-New Jersey-Maryland Interconnection, LLC (“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. The DOEadvised that it would consider Mirant Potomac River’s plan in consultation withthe EPA. The order further provides that Mirant Potomac River and its customersshould agree to mutually satisfactory terms for any costs incurred by it underthis order or just and reasonable terms shall be established by a supplementalorder. Certain parties filed for rehearing of the DOE order, and onFebruary 17, 2006, the DOE issued an order granting rehearing solely forpurposes of considering further the rehearing requests. Mirant Potomac Riversubmitted an operating plan in accordance with the order. On January 4,2006, the DOE issued an interim response to Mirant Potomac River’s operatingplan authorizing operation of the units of the Potomac River generatingfacility on a reduced basis, but making it possible to bring the entire plantinto service within approximately 28 hours when necessary for reliabilitypurposes. The DOE’s order expires after November 30, 2006, but MirantPotomac River expects it will be able to continue to operate these units afterthat expiration.

In a letter receivedDecember 30, 2005, the EPA invited Mirant Potomac River and the VirginiaDEQ to work with the EPA to ensure that Mirant Potomac River’s operating plansubmitted to the DOE adequately addresses NAAQS issues. The EPA also asserts inits letter that Mirant Potomac River did not immediately undertake action asdirected by the Virginia DEQ’s August 19, 2005, letter and failed tocomply with the requirements of the Virginia State Implementation Planestablished by that letter. Mirant Potomac River received a second letter fromthe EPA on December 30, 2005, requiring Mirant to provide certainrequested information as part of an EPA investigation to determine the CleanAir Act compliance status of the Potomac River generating facility. On January 9,2006, the FERC issued an order directing PJM and Pepco to file a long-term planto maintain adequate reliability in the Washington D.C. area and surroundingregion and a plan to provide adequate reliability pending implementation ofthis long-term plan. On February 8, 2006, PJM and Pepco filed theirproposed reliability plans.

On June 1, 2006, Mirant Potomac River and the EPAexecuted an Administrative Compliance Order by Consent (the “ACO”) to resolvethe EPA’s allegations that Mirant Potomac River violated the Clean Air Act bynot immediately shutting down all units at the Potomac River facility uponreceipt of the Virginia DEQ’s August 19, 2005, letter and to assure anacceptable level of reliability to the District of Columbia. The ACO (i) specifiescertain operating scenarios and SO2 emissions limits for the Potomac Riverfacility, which scenarios and limits take into account whether one or both ofthe 230kV transmission lines serving Washington, D.C. are out of service;(ii) requires the operation of trona injection units to reduce SO2emissions; and (iii) requires Mirant Potomac River to undertake a modelevaluation study to predict ambient air quality impacts from the facility’soperations. In accordance with the specified operating scenarios, the ACOpermits the facility to operate using a daily predictive modeling protocol.This protocol allows the facility to schedule operations based on whethercomputer modeling predicts a NAAQS exceedance, based on weather and certainoperating parameters. Also, an alarm system and six ambient SO2 monitors invarious sites near the facility signal potential exceedances of the NAAQS.Mirant Potomac River reports data, including modeled predictions and actualreadings, to the EPA and the Virginia DEQ. On June 2, 2006, the DOE issueda letter modifying its January 6, 2006, order to direct Mirant PotomacRiver to comply with the ACO in order to ensure adequate electric reliabilityto the 

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District of Columbia.Mirant Potomac River is operating the Potomac River facility in accordance withthe ACO and has been able to operate all five units of the facility most of thetime under the ACO.

*Cityof Alexandria Nuisance Suit.**  *OnOctober 7, 2005, the City of Alexandria filed a suit against MirantPotomac River and Mirant Mid-Atlantic in the Circuit Court for the City ofAlexandria. The suit asserts nuisance claims, alleging that the Potomac Riverplant’s emissions of coal dust, flyash, NOx, SO2, particulate matter, hydrogenchloride, hydrogen fluoride, mercury and oil pose a health risk to thesurrounding community and harm property owned by the City. The City seeksinjunctive relief, damages and attorneys’ fees. On February 17, 2006, theCity amended its complaint to add additional allegations in support of itsnuisance claims relating to noise and lighting, interruption of traffic flow bytrains delivering coal to the Potomac River plant, particulate matter from thetransport and storage of coal and flyash, and potential coal leachate into thesoil and groundwater from the coal pile.

*SuitRegarding Chalk Point Emissions.**  *Byletter dated June 15, 2006, four environmental advocacy organizations—EnvironmentalIntegrity Project, Chesapeake Climate Action Network, Patuxent Riverkeeper andEnvironment Maryland Research and Policy Center—notified Mirant and MirantMid-Atlantic that they intended to file suit alleging that Mirant Chalk Pointhad violated the opacity limits set by the permits for Chalk Point unit 3 andunit 4 during thousands of six minute time intervals between January 2002and March 2006. The letter indicated that the organizations intend to filesuit to enjoin the violations alleged, to obtain civil penalties for past noncomplianceto the extent that liability for these violations was not discharged by thebankruptcy of Mirant Chalk Point, and to recover attorneys’ fees. OnAugust 3, 2006, Mirant, Mirant Mid-Atlantic, and Mirant Chalk Point fileda complaint in the Bankruptcy Court seeking an injunction barring the fourorganizations from filing suit as threatened in the June 15, 2006, noticeon the grounds that the notice and any claim for civil penalties or othermonetary relief for alleged violations occurring before January 3, 2006,violated the discharge of claims and causes of action granted Mirant ChalkPoint under the Plan. On August 14, 2006, the Bankruptcy Court entered anorder agreed to by the parties enjoining the four organizations from seeking monetarydamages for any alleged violations occurring on or before January 3, 2006.As part of that order, the organizations agreed not to file a complaintinitiating litigation concerning the alleged violations until August 30,2006.

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

On August 30, 2006, the four environmental organizationsfiled suit in the United States District Court for the District of Marylandagainst Mirant, Mirant Mid-Atlantic, and Mirant Chalk Point asserting thatemissions from Chalk Point units 3 and 4 had violated opacity limits set underthe Clean Air Act and state law on numerous occasions since January 4,2006. The plaintiffs seek an injunction prohibiting further violations by ChalkPoint units 3 and 4 of the Clean Air Act, civil penalties of up to $32,500 foreach violation of the Clean Air Act, additional civil penalties for mitigationprojects, and attorneys’ fees. On September 22, 2006, the Mirantdefendants filed a motion to dismiss, arguing that under the Clean Air Act theMDE’s prosecution of the same alleged violations in the Maryland state courtproceeding and their resolution through the Consent Decree barred theplaintiffs’ suit.

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*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 Yorkalleges that during the pendency of the Chapter 11 proceedings the MirantDebtors that have emerged from bankruptcy made decisions on behalf of theCompany’s subsidiaries owning generating facilities in New York and did notappropriately maintain the corporate separateness between themselves and thosesubsidiaries. The Company disputes those allegations. The State of New Yorkcites various existing outstanding matters between the State and the Company’ssubsidiaries owning generating facilities in New York related to compliancewith environmental laws and regulations, most of which are not material. Themost significant compliance obligation identified by the State of New York inits notice of administrative claim relates to a consent decree entered into onJune 11, 2003 (the “2003 Consent Decree”), by Mirant New York and MirantLovett with the State of New York to resolve issues related to NSR requirementsunder the Clean Air Act related to the Lovett plant. Under the 2003 ConsentDecree, Mirant Lovett is required to make an election to install certainenvironmental controls on units 5 and 4 of the Lovett facility or shut downthose units by 2007 to 2008, respectively. The State of New York notes in itsnotice of administrative claim that the cost of implementing such environmentalcontrols could exceed $200 million. On October 19, 2006, Mirant Lovettnotified the New York Public Service Commission and the NYISO of its intent todiscontinue operation of unit 5 of the Lovett facility in April 2007 inaccordance with the requirements of the 2003 Consent Decree. If Mirant Lovettis able to agree with the State of New York and the NYSDEC on alternativecontrol technologies that would allow unit 5 to remain in operation pastApril 30, 2007, then Mirant Lovett may rescind the notice of its intent todiscontinue operations at unit 5. The State of New York and the NYSDEC haveexecuted a stipulated order with the Company, its New York subsidiaries and theother Mirant Debtors to stay resolution of this administrative claim. Thatstipulated order was approved by the Bankruptcy Court on February 23,2006.

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

***City of Alexandria Zoning Action***

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

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

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

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

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

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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.

***New York Tax Proceedings***

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

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

Collectively, Mirant Bowline and Mirant Lovett havenot paid approximately $58 million assessed by local taxing authorities on theBowline and Lovett generating facilities for 2003, which fell due on September 30,2003, and January 30, 2004, approximately $53 million assessed by localtaxing authorities on the generating facilities for 2004 that fell due on September 30,2004, and January 30, 2005, approximately $59 million assessed by localtaxing authorities on the generating facilities for 2005 that fell due on September 30,2005, and January 30, 2006, and $40 million assessed by local taxingauthorities on the generating facilities for 2006 that fell due on September 30,2006, in order to preserve their respective rights to offset the overpaymentsof taxes made in earlier years against the sums payable on account of currenttaxes. The failure to pay the taxes due on September 30, 2003, January 30,2004, September 30, 2004, January 30, 2005, September 30, 2005, January 30,2006, and September 30, 2006, could subject Mirant Bowline and MirantLovett to additional penalties and interest.

On June 23, 2006, the Bankruptcy Court entered anorder indicating that it would determine the disputed property tax liabilitiesin response to the Tax Determination Motion if the New York state court inwhich the Tax Certiorari Proceedings are pending had not issued a ruling by October 21,2006. On 

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August 11, 2006, and August 28,2006, the New York state court issued decisions addressing Mirant Bowline’schallenges to the assessed values of the Bowline facility for the years 1995 to2003 and Mirant Lovett’s challenges to the assessed values of the Lovettfacility for the years 2000 to 2003. Except for 1996, where it found thatMirant Bowline had failed to perfect its challenge to the assessed value of theBowline facility, the New York state court concluded that the value of theBowline facility and the Lovett facility in each year was substantially lessthan the assessed value set by the taxing authorities. The Company estimatesthat the decisions rendered by the New York state court with respect to the taxchallenges asserted by Mirant Bowline and Mirant Lovett will result in refundsthat with interest will cover the majority of the unpaid taxes for the Bowlineand Lovett facilities, taking into account the reduction in those unpaid taxesthat would occur under the decisions. Mirant Bowline and Mirant Lovett haveappealed the decisions of the New York state court, and the relevant taxingauthorities have cross-appealed.

On October 3, 2006,the County of Rockland, New York, filed a motion with the Bankruptcy Courtasking it to compel Mirant Bowline and Mirant Lovett to pay the real propertytaxes owed for 2003 through 2006 based upon the values of the Bowline and Lovettfacilities for 2003 determined by the New York state court. The County ofRockland asserts that the New York state court’s determination of the value ofthose facilities for 2003 should also fix their assessed values for thesubsequent three years under section 727 of New York Real Property Tax Law. TheCounty asserts that the unpaid taxes total $111 million, with penaltiesand interest. On October 5, 2006, Mirant, Mirant New York, Mirant Bowlineand Mirant Lovett filed a complaint with the Bankruptcy Court requesting thatit determine the real property taxes owed by Mirant Bowline and Mirant Lovettfor 2004 through 2006, that any refunds owed to Mirant Bowline and MirantLovett should be treated as payments of or set off against the unpaid taxes,and that the penalties and interest potentially owed on the unpaid taxes shouldbe reduced or eliminated. The Mirant plaintiffs argue that the pending appealsof the rulings entered by the New York state court and exceptions set out insection 727 of New York Real Property Tax Law cause the rulings by the New Yorkstate court not to be determinative of the values of the plants for any yearafter 2003.

***Other Legal Matters***

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

***Other Contingencies***

*SwingingBridge.*   On May 5,2005, Mirant NY-Gen discovered a sinkhole at its Swinging Bridge dam, locatedin Sullivan County, New York. In response, Mirant NY-Gen filled this sinkhole,inspected the dam’s penstock and slopes for damage, drew down the lake level,and cleaned the diversion tunnel. Mirant NY-Gen’s analysis indicates that themost probable cause of the sinkhole was erosion of soil comprising the dam fromwater flow through a hole in the penstock. The dam is currently stabilized, andMirant NY-Gen is performing additional remediation repairs. Mirant NY-Gencurrently expects to incur additional costs to repair the dam that could bematerial and to recover insurance proceeds for a portion of these repair costs.By letter dated June 14, 2006, the FERC authorized Mirant NY-Gen toproceed with its remediation plan for the sinkhole. The FERC has also concurredwith the results of Mirant NY-Gen’s flood study for its New York SwingingBridge, Rio and Mongaup generation facilities, which study concluded that noadditional remediation is required. The Bankruptcy Court authorized MirantNY-Gen to proceed with implementation of the remediation plan on June 29,2006. The current estimated cost to remediate the dam at Swinging Bridge isapproximately $23 million of which approximately $17 million had been incurredthrough September 30, 2006. TheBankruptcy Court has approved a debtor-in-possession loan to MirantNY-Gen from Mirant Americas under which Mirant Americas, subject 

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tocertain conditions, would lend up to $9.5 million to Mirant NY-Gen to providefunding for the repairs on the Swinging Bridge dam.

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

The California Settlementprovides that if the transfer of the CC8 Assets to PG&E does not occur onor before June 30, 2008, then the CC8 Alternative Consideration is to bepaid to PG&E and the Mirant Settling Parties will retain the CC8 Assets. IfPG&E closes on its acquisition of the CC8 Assets, the funds in the escrowaccount will be paid to Mirant Delta. The transfer is expected to be completedbefore the end of 2006. In the period that the CC8 Assets are transferred toPG&E and the $70 million escrow account is paid to Mirant Delta, the Companyexpects to recognize a gain for the amount by which the escrow account exceedsthe carrying amount of the CC8 Assets. The estimated amount of that gain isapproximately $24 million and will be included in other income in the Company’sconsolidated statements of operations.

**K.**   Condensed Consolidating and CombiningFinancial Information

In December 2005, the Company’s wholly-ownedsubsidiary Mirant North America Escrow, LLC (“Mirant North America Escrow”) andits wholly-owned subsidiary MNA Finance Corp. issued $850 million of7.375% senior notes, which mature on December 31, 2013. Upon Mirant’s andthe Company’s emergence from bankruptcy, Mirant North America Escrow was mergedwith and into Mirant North America with Mirant North America as the survivingentity. See Note G for further discussion of the notes.

The notes are unsecured obligations of Mirant NorthAmerica. However, they are jointly and severally and fully and unconditionallyguaranteed on an unsecured senior basis by Mirant North America and certain ofits subsidiaries (all of which are wholly-owned). The accompanying condensedconsolidating and combining 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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The following sets forthcondensed consolidating and combining financial statements of the guarantor andnon-guarantor subsidiaries:

**MIRANT NORTHAMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)Three Months Ended September 30, 2006(in millions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non**       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                           |       | $          | —     |              |       | $             | 98         |          |       |             | $          | 173              |       |   |   | $ | 1,124 |   |   |   | $ | (352 | ) |   |   | $ | 1,043 |   |   |
| Cost of fuel,  electricity and other products |       | (5         | )          |              | 48         |          |       |          | 97         |             |       |             | 634        |   |   |   | (352 | ) |   |   | 422 |   |   |
| Gross margin                                  |       | 5          |       |              | 50         |          |       |          | 76         |             |       |             | 490        |   |   |   | — |   |   |   | 621 |   |   |
| Operating expenses:                           |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       | —     |       |              | 44         |          |       |          | 34         |             |       |             | 59         |   |   |   | — |   |   |   | 137 |   |   |
| Depreciation and  amortization                |       | —     |       |              | 5          |          |       |          | 6          |             |       |             | 21         |   |   |   | — |   |   |   | 32 |   |   |
| Generation  facilities rent                   |       | —     |       |              | —     |          |       |          | —     |             |       |             | 24         |   |   |   | — |   |   |   | 24 |   |   |
| Loss (gain) on  sales of assets, net          |       | 2          |       |              | —     |          |       |          | (2         | )                |       |             | (2         | ) |   |   | — |   |   |   | (2 | ) |   |
| Impairment loss                               |       | —     |       |              | 118        |          |       |          | —     |             |       |             | —     |   |   |   | — |   |   |   | 118 |   |   |
| Total operating  expenses                     |       | 2          |       |              | 167        |          |       |          | 38         |             |       |             | 102        |   |   |   | — |   |   |   | 309 |   |   |
| Operating Income  (Loss)                      |       | 3          |       |              | (117       | )             |       |          | 38         |             |       |             | 388        |   |   |   | — |   |   |   | 312 |   |   |
| Other Expense  (Income), net                  |       | (314       | )          |              | —     |          |       |          | (4         | )                |       |             | (20        | ) |   |   | 346 |   |   |   | 8 |   |   |
| Reorganization  items, net                    |       | —     |       |              | —     |          |       |          | —     |             |       |             | —     |   |   |   | (1 | ) |   |   | (1 | ) |   |
| Provision for  income tax                     |       | 1          |       |              | —     |          |       |          | —     |             |       |             | —     |   |   |   | — |   |   |   | 1 |   |   |
| Income (Loss)  from Continuing Operations     |       | 316        |       |              | (117       | )             |       |          | 42         |             |       |             | 408        |   |   |   | (345 | ) |   |   | 304 |   |   |
| Income (Loss)  from Discontinued Operations   |       | —     |       |              | —     |          |       |          | (59        | )                |       |             | —     |   |   |   | — |   |   |   | (59 | ) |   |
| Net Income (Loss)                             |       | $          | 316        |              |       | $             | (117       | )             |       |             | $          | (17              | )          |   |   | $ | 408 |   |   |   | $ | (345 | ) |   |   | $ | 245 |   |   |

 

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**MIRANT NORTHAMERICAGUARANTOR/NON-GUARANTORCONDENSED COMBINING STATEMENTS OF OPERATIONS (UNAUDITED)Three Months Ended September 30, 2005(in millions)**

| ** **                                    | ** ** | ** **        | ** ** | ** **    | ** ** | ** **    | ** ** | **Mirant**       | ** ** | ** **   | ** ** |
|-----------------------------------------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|--------------|------------|
| ** **                                    | ** ** | ** **        | ** ** | ** **    | ** ** | ** **    | ** ** | **Americas**     | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | ** **        | ** ** | ** **    | ** ** | ** **    | ** ** | **Generation**   | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non**       | ** ** | **and**          | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Combined** | ** ** |
| Operating  revenues                           |       |              | $          | 107           |       |          |       | $                | 62         |         |       |   | $ | 1,008 |   |   |   | $ | (631 | ) |   |   | $ | 546 |   |   |
| Cost of fuel,  electricity and other products |       |              | 133        |          |       |          | 121        |             |       |         | 1,027      |   |   |   | (633 | ) |   |   | 648 |   |   |
| Gross margin                                  |       |              | (26        | )             |       |          | (59        | )                |       |         | (19        | ) |   |   | 2 |   |   |   | (102 | ) |   |
| Operating expenses:                           |       |              |       |          |       |          |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |              | 39         |          |       |          | 38         |             |       |         | 58         |   |   |   | — |   |   |   | 135 |   |   |
| Depreciation and  amortization                |       |              | 5          |          |       |          | 4          |             |       |         | 19         |   |   |   | — |   |   |   | 28 |   |   |
| Generation  facilities rent                   |       |              | —     |          |       |          | —     |             |       |         | 24         |   |   |   | — |   |   |   | 24 |   |   |
| Loss on sale of  assets, net                  |       |              | —     |          |       |          | —     |             |       |         | 2          |   |   |   | — |   |   |   | 2 |   |   |
| Total operating  expenses                     |       |              | 44         |          |       |          | 42         |             |       |         | 103        |   |   |   | — |   |   |   | 189 |   |   |
| Operating income  (loss)                      |       |              | (70        | )             |       |          | (101       | )                |       |         | (122       | ) |   |   | 2 |   |   |   | (291 | ) |   |
| Other expense,  net                           |       |              | —     |          |       |          | 26         |             |       |         | 41         |   |   |   | 557 |   |   |   | 624 |   |   |
| Reorganization  items, net                    |       |              | —     |          |       |          | (1         | )                |       |         | 8          |   |   |   | 39 |   |   |   | 46 |   |   |
| Provision for  income taxes                   |       |              | —     |          |       |          | 3          |             |       |         | —     |   |   |   | 2 |   |   |   | 5 |   |   |
| Loss from  Continuing Operations              |       |              | (70        | )             |       |          | (129       | )                |       |         | (171       | ) |   |   | (596 | ) |   |   | (966 | ) |   |
| Income from  Discontinued Operations          |       |              | —     |          |       |          | 9          |             |       |         | —     |   |   |   | — |   |   |   | 9 |   |   |
| Net Loss                                      |       |              | $          | (70           | )          |          |       | $                | (120       | )            |       |   | $ | (171 | ) |   |   | $ | (596 | ) |   |   | $ | (957 | ) |   |

 

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**MIRANT NORTH AMERICA**

**GUARANTOR/NON-GUARANTOR**

**CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS(UNAUDITED)Nine Months Ended September 30, 2006(in millions)**

| ** **                                    | ** ** | **Parent** | ** ** | **Mirant  New  York** | ** ** | **Guarantor** | ** ** | **Non  Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------|------------|---------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| Operating revenues                            |       | $          | —     |                  |       | $             | 287        |               |       |             | $          | 514              |       |   |   | $ | 2,777 |   |   |   | $ | (901 | ) |   |   | $ | 2,677 |   |   |
| Cost of fuel,  electricity and other products |       | 5          |       |                  | 132        |          |       |               | 241        |             |       |             | 1,565      |   |   |   | (901 | ) |   |   | 1,042 |   |   |
| Gross margin                                  |       | (5         | )          |                  | 155        |          |       |               | 273        |             |       |             | 1,212      |   |   |   | — |   |   |   | 1,635 |   |   |
| Operating expenses:                           |       |       |       |                  |       |          |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       | —     |       |                  | 130        |          |       |               | 104        |             |       |             | 189        |   |   |   | — |   |   |   | 423 |   |   |
| Depreciation and  amortization                |       | —     |       |                  | 14         |          |       |               | 14         |             |       |             | 63         |   |   |   | — |   |   |   | 91 |   |   |
| Generation  facilities rent                   |       | —     |       |                  | —     |          |       |               | —     |             |       |             | 72         |   |   |   | — |   |   |   | 72 |   |   |
| Loss (gain) on  sales of assets,  net         |       | 2          |       |                  | —     |          |       |               | (3         | )                |       |             | (7         | ) |   |   | — |   |   |   | (8 | ) |   |
| Impairment loss                               |       | —     |       |                  | 118        |          |       |               | —     |             |       |             | —     |   |   |   | — |   |   |   | 118 |   |   |
| Total operating  expenses                     |       | 2          |       |                  | 262        |          |       |               | 115        |             |       |             | 317        |   |   |   | — |   |   |   | 696 |   |   |
| Operating Income  (Loss)                      |       | (7         | )          |                  | (107       | )             |       |               | 158        |             |       |             | 895        |   |   |   | — |   |   |   | 939 |   |   |
| Other Expense  (Income), net                  |       | (904       | )          |                  | 2          |          |       |               | (6         | )                |       |             | (33        | ) |   |   | 999 |   |   |   | 58 |   |   |
| Reorganization  items, net                    |       | —     |       |                  | (2         | )             |       |               | —     |             |       |             | —     |   |   |   | — |   |   |   | (2 | ) |   |
| Provision for  income tax                     |       | 3          |       |                  | —     |          |       |               | —     |             |       |             | —     |   |   |   | — |   |   |   | 3 |   |   |
| Income (Loss)  from Continuing Operations     |       | 894        |       |                  | (107       | )             |       |               | 164        |             |       |             | 928        |   |   |   | (999 | ) |   |   | 880 |   |   |
| Income (Loss)  from Discontinued Operations   |       | —     |       |                  | —     |          |       |               | (57        | )                |       |             | —     |   |   |   | — |   |   |   | (57 | ) |   |
| Net Income (Loss)                             |       | $          | 894        |                  |       | $             | (107       | )                  |       |             | $          | 107              |       |   |   | $ | 928 |   |   |   | $ | (999 | ) |   |   | $ | 823 |   |   |

 

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**MIRANT NORTHAMERICAGUARANTOR/NON-GUARANTORCONDENSED COMBINING STATEMENTS OF OPERATIONS (UNAUDITED)Nine Months Ended September 30, 2005(in millions)**

| ** **                                    | ** ** | **Mirant  New  York** | ** ** | **Guarantor** | ** ** | **Non  Guarantor** | ** ** | **Mirant  Americas  Generation  and  Eliminations** | ** ** | **Combined** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|---------------|------------|--------------------|------------|-----------------------------------------------------|------------|--------------|------------|
| Operating  revenues                           |       |                  | $          | 257           |       |               |       | $                                                   | 381        |         |       |   | $ | 2,539 |   |   |   | $ | (1,407 | ) |   |   | $ | 1,770 |   |   |
| Cost of fuel,  electricity and other products |       |                  | 252        |          |       |               | 300        |                                                |       |         | 2,324      |   |   |   | (1,413 | ) |   |   | 1,463 |   |   |
| Gross margin                                  |       |                  | 5          |          |       |               | 81         |                                                |       |         | 215        |   |   |   | 6 |   |   |   | 307 |   |   |
| Operating expenses:                           |       |                  |       |          |       |               |       |                                                |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |                  | 115        |          |       |               | 112        |                                                |       |         | 187        |   |   |   | — |   |   |   | 414 |   |   |
| Depreciation and  amortization                |       |                  | 16         |          |       |               | 12         |                                                |       |         | 57         |   |   |   | — |   |   |   | 85 |   |   |
| Generation  facilities rent                   |       |                  | —     |          |       |               | —     |                                                |       |         | 75         |   |   |   | — |   |   |   | 75 |   |   |
| Loss (gain) on  sales of assets, net          |       |                  | (1         | )             |       |               | —     |                                                |       |         | 2          |   |   |   | — |   |   |   | 1 |   |   |
| Total operating  expenses                     |       |                  | 130        |          |       |               | 124        |                                                |       |         | 321        |   |   |   | — |   |   |   | 575 |   |   |
| Operating Income  (Loss)                      |       |                  | (125       | )             |       |               | (43        | )                                                   |       |         | (106       | ) |   |   | 6 |   |   |   | (268 | ) |   |
| Other Expense,  net                           |       |                  | 1          |          |       |               | 29         |                                                |       |         | 45         |   |   |   | 554 |   |   |   | 629 |   |   |
| Reorganization  items, net                    |       |                  | (1         | )             |       |               | (170       | )                                                   |       |         | 150        |   |   |   | 74 |   |   |   | 53 |   |   |
| Provision for  income taxes                   |       |                  | 1          |          |       |               | 7          |                                                |       |         | —     |   |   |   | 2 |   |   |   | 10 |   |   |
| Income (Loss)  from Continuing Operations     |       |                  | (126       | )             |       |               | 91         |                                                |       |         | (301       | ) |   |   | (624 | ) |   |   | (960 | ) |   |
| Income from  Discontinued Operations          |       |                  | —     |          |       |               | 4          |                                                |       |         | —     |   |   |   | — |   |   |   | 4 |   |   |
| Net Income (Loss)                             |       |                  | $          | (126          | )          |               |       | $                                                   | 95         |         |       |   | $ | (301 | ) |   |   | $ | (624 | ) |   |   | $ | (956 | ) |   |

 

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**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)At September 30, 2006(in millions)**

| ** **                                   | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non**       | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                   | ** ** | ** ** | ** ** |              | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Current Assets:**                          | ** ** | ** ** | ** ** |              | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                   |       | $          | 171        |              |       | $             | 107        | ** **    |       |             | $          | —           | ** ** |   |   | $ | 402 | ** ** |   |   | $ | — |   |   |   | $ | 680 | ** ** |   |
| Funds on deposit                             |       | 201        |       |              | —     | ** **    |       |          | 75         | ** **       |       |             | 92         | ** ** |   |   | — |   |   |   | 368 | ** ** |   |
| Receivables—affiliate                   |       | 1          |       |              | 32         | ** **    |       |          | 33         | ** **       |       |             | 36         | ** ** |   |   | (87 | ) |   |   | 15 | ** ** |   |
| Receivables—nonaffiliate                |       | —     |       |              | 6          | ** **    |       |          | 1          | ** **       |       |             | 290        | ** ** |   |   | — |   |   |   | 297 | ** ** |   |
| Notes  receivable—affiliate             |       | 20         |       |              | 32         | ** **    |       |          | 411        | ** **       |       |             | 357        | ** ** |   |   | (695 | ) |   |   | 125 | ** ** |   |
| Price risk  management assets                |       | —     |       |              | 11         | ** **    |       |          | 23         | ** **       |       |             | 803        | ** ** |   |   | (35 | ) |   |   | 802 | ** ** |   |
| Prepaid rent and  other payments             |       | —     |       |              | 1          | ** **    |       |          | 4          | ** **       |       |             | 111        | ** ** |   |   | — |   |   |   | 116 | ** ** |   |
| Inventories                                  |       | (9         | )          |              | 19         | ** **    |       |          | 23         | ** **       |       |             | 257        | ** ** |   |   | — |   |   |   | 290 | ** ** |   |
| Investment in  securities available for sale |       | —     |       |              | —     | ** **    |       |          | —     | ** **       |       |             | 38         | ** ** |   |   | — |   |   |   | 38 | ** ** |   |
| Assets held for  sale                        |       | —     |       |              | —     | ** **    |       |          | 454        | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 454 | ** ** |   |
| Total current  assets                        |       | 384        |       |              | 208        | ** **    |       |          | 1,024      | ** **       |       |             | 2,386      | ** ** |   |   | (817 | ) |   |   | 3,185 | ** ** |   |
| **Property,  Plant and Equipment, net**      |       | —     |       |              | 370        | ** **    |       |          | 360        | ** **       |       |             | 1,466      | ** ** |   |   | 6 |   |   |   | 2,202 | ** ** |   |
| **Noncurrent Assets:**                       | ** ** | ** ** | ** ** |              | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Goodwill, net                                |       | (799       | )          |              | —     | ** **    |       |          | —     | ** **       |       |             | 799        | ** ** |   |   | — |   |   |   | — | ** ** |   |
| Intangible assets,  net                      |       | —     |       |              | —     | ** **    |       |          | 57         | ** **       |       |             | 157        | ** ** |   |   | — |   |   |   | 214 | ** ** |   |
| Price risk  management assets                |       | —     |       |              | 2          | ** **    |       |          | 7          | ** **       |       |             | 193        | ** ** |   |   | (9 | ) |   |   | 193 | ** ** |   |
| Prepaid rent                                 |       | —     |       |              | —     | ** **    |       |          | —     | ** **       |       |             | 196        | ** ** |   |   | — |   |   |   | 196 | ** ** |   |
| Funds on deposit                             |       | —     |       |              | 5          | ** **    |       |          | —     | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 5 | ** ** |   |
| Debt issuance  costs, net                    |       | 50         |       |              | —     | ** **    |       |          | —     | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 50 | ** ** |   |
| Other                                        |       | 5,847      |       |              | 26         | ** **    |       |          | 3          | ** **       |       |             | 2          | ** ** |   |   | (5,865 | ) |   |   | 13 | ** ** |   |
| Total noncurrent  assets                     |       | 5,098      |       |              | 33         | ** **    |       |          | 67         | ** **       |       |             | 1,347      | ** ** |   |   | (5,874 | ) |   |   | 671 | ** ** |   |
| **Total  Assets**                            |       | $          | 5,482      |              |       | $             | 611        | ** **    |       |             | $          | 1,451            | ** ** |   |   | $ | 5,199 | ** ** |   |   | $ | (6,685 | ) |   |   | $ | 6,058 | ** ** |   |
| **LIABILITIES AND EQUITY**                   | ** ** | ** ** | ** ** |              | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Current Liabilities:**                     | ** ** | ** ** | ** ** |              | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Notes payable—affiliate                 |       | $          | 676        |              |       | $             | 17         | ** **    |       |             | $          | 25               | ** ** |   |   | $ | — | ** ** |   |   | $ | (696 | ) |   |   | $ | 22 | ** ** |   |
| Current portion of  long-term debt           |       | 88         |       |              | —     | ** **    |       |          | —     | ** **       |       |             | 3          | ** ** |   |   | — |   |   |   | 91 | ** ** |   |
| Claims payable and  estimated claims accrual |       | —     |       |              | —     | ** **    |       |          | 72         | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 72 | ** ** |   |
| Accounts payable  and accrued liabilities    |       | 25         |       |              | 27         | ** **    |       |          | 7          | ** **       |       |             | 278        | ** ** |   |   | (9 | ) |   |   | 328 | ** ** |   |
| Payable to  affiliate                        |       | —     |       |              | 5          | ** **    |       |          | 19         | ** **       |       |             | 86         | ** ** |   |   | (56 | ) |   |   | 54 | ** ** |   |
| Price risk  management liabilities           |       | —     |       |              | —     | ** **    |       |          | 1          | ** **       |       |             | 502        | ** ** |   |   | (34 | ) |   |   | 469 | ** ** |   |
| Accrued property  taxes                      |       | 50         |       |              | 178        | ** **    |       |          | 1          | ** **       |       |             | 5          | ** ** |   |   | — |   |   |   | 234 | ** ** |   |
| Other                                        |       | —     |       |              | 9          | ** **    |       |          | 22         | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 31 | ** ** |   |
| Total current  liabilities                   |       | 839        |       |              | 236        | ** **    |       |          | 147        | ** **       |       |             | 874        | ** ** |   |   | (795 | ) |   |   | 1,301 | ** ** |   |
| **Noncurrent Liabilities:**                  | ** ** | ** ** | ** ** |              | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Long-term debt                               |       | 1,457      |       |              | —     | ** **    |       |          | —     | ** **       |       |             | 31         | ** ** |   |   | — |   |   |   | 1,488 | ** ** |   |
| Price risk  management liabilities           |       | —     |       |              | —     | ** **    |       |          | —     | ** **       |       |             | 58         | ** ** |   |   | (10 | ) |   |   | 48 | ** ** |   |
| Asset retirement  obligations                |       | —     |       |              | 8          | ** **    |       |          | 20         | ** **       |       |             | 12         | ** ** |   |   | — |   |   |   | 40 | ** ** |   |
| Long-term  payable—affiliate            |       | —     |       |              | —     | ** **    |       |          | —     | ** **       |       |             | 17         | ** ** |   |   | (17 | ) |   |   | — | ** ** |   |
| Other                                        |       | —     |       |              | 3          | ** **    |       |          | —     | ** **       |       |             | 6          | ** ** |   |   | (1 | ) |   |   | 8 | ** ** |   |
| Total noncurrent  liabilities                |       | 1,457      |       |              | 11         | ** **    |       |          | 20         | ** **       |       |             | 124        | ** ** |   |   | (28 | ) |   |   | 1,584 | ** ** |   |
| **Liabilities  Subject to Compromise**       |       | —     |       |              | 79         | ** **    |       |          | —     | ** **       |       |             | —     | ** ** |   |   | (21 | ) |   |   | 58 | ** ** |   |
| **Commitments and Contingencies**            | ** ** | ** ** | ** ** |              | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Equity**                                   |       | 3,186      |       |              | 285        | ** **    |       |          | 1,284      | ** **       |       |             | 4,201      | ** ** |   |   | (5,841 | ) |   |   | 3,115 | ** ** |   |
| **Total  Liabilities and Equity**            |       | $          | 5,482      |              |       | $             | 611        | ** **    |       |             | $          | 1,451            | ** ** |   |   | $ | 5,199 | ** ** |   |   | $ | (6,685 | ) |   |   | $ | 6,058 | ** ** |   |

 

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**MIRANT NORTH AMERICACONDENSED CONSOLIDATING BALANCE SHEETSAt December 31, 2005(in millions)**

| ** **                                   | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non**       | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                   |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Assets:**                          |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                   |       |       | $          | —            |       |          |       | $             | 1          |             |       |             | $          | 2 |   |   |   | $ | 292 |   |   |   | $ | — |   |   |   | $ | 295 |   |   |
| Funds on deposit                             |       |       | 854        |              |       |          | —     |          |       |             | 4          |             |       |   | 682 |   |   |   | — |   |   |   | 1,540 |   |   |
| Receivables—affiliate                   |       |       | 3          |              |       |          | 26         |          |       |             | 51         |             |       |   | 33 |   |   |   | (90 | ) |   |   | 23 |   |   |
| Receivables—nonaffiliate                |       |       | —     |              |       |          | 8          |          |       |             | 2          |             |       |   | 567 |   |   |   | 1 |   |   |   | 578 |   |   |
| Notes  receivable—affiliate             |       |       | 1          |              |       |          | 106        |          |       |             | 225        |             |       |   | — |   |   |   | — |   |   |   | 332 |   |   |
| Price risk  management assets                |       |       | 8          |              |       |          | —     |          |       |             | —     |             |       |   | 625 |   |   |   | (30 | ) |   |   | 603 |   |   |
| Prepaid rent and  other payments             |       |       | —     |              |       |          | 2          |          |       |             | 4          |             |       |   | 128 |   |   |   | — |   |   |   | 134 |   |   |
| Inventories                                  |       |       | (2         | )                 |       |          | 19         |          |       |             | 21         |             |       |   | 237 |   |   |   | — |   |   |   | 275 |   |   |
| Investment in  securities available for sale |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 30 |   |   |   | — |   |   |   | 30 |   |   |
| Assets held for  sale                        |       |       | —     |              |       |          | —     |          |       |             | 536        |             |       |   | 7 |   |   |   | — |   |   |   | 543 |   |   |
| Total current  assets                        |       |       | 864        |              |       |          | 162        |          |       |             | 845        |             |       |   | 2,601 |   |   |   | (119 | ) |   |   | 4,353 |   |   |
| **Property,  Plant and Equipment, net**      |       |       | —     |              |       |          | 502        |          |       |             | 369        |             |       |   | 1,420 |   |   |   | — |   |   |   | 2,291 |   |   |
| **Noncurrent Assets:**                       |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in  subsidiaries                 |       |       | 5,375      |              |       |          | —     |          |       |             | (2         | )                |       |   | — |   |   |   | (5,373 | ) |   |   | — |   |   |
| Goodwill, net                                |       |       | (799       | )                 |       |          | —     |          |       |             | —     |             |       |   | 799 |   |   |   | — |   |   |   | — |   |   |
| Intangible assets,  net                      |       |       | —     |              |       |          | —     |          |       |             | 58         |             |       |   | 163 |   |   |   | — |   |   |   | 221 |   |   |
| Price risk  management assets                |       |       | 12         |              |       |          | 1          |          |       |             | —     |             |       |   | 105 |   |   |   | (13 | ) |   |   | 105 |   |   |
| Prepaid rent                                 |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 208 |   |   |   | — |   |   |   | 208 |   |   |
| Funds on deposit                             |       |       | —     |              |       |          | 4          |          |       |             | 1          |             |       |   | — |   |   |   | — |   |   |   | 5 |   |   |
| Debt issuance  costs, net                    |       |       | 22         |              |       |          | —     |          |       |             | 2          |             |       |   | — |   |   |   | — |   |   |   | 24 |   |   |
| Other                                        |       |       | —     |              |       |          | 17         |          |       |             | —     |             |       |   | 1 |   |   |   | (17 | ) |   |   | 1 |   |   |
| Total noncurrent  assets                     |       |       | 4,610      |              |       |          | 22         |          |       |             | 59         |             |       |   | 1,276 |   |   |   | (5,403 | ) |   |   | 564 |   |   |
| **Total  Assets**                            |       |       | $          | 5,474             |       |          |       | $             | 686        |             |       |             | $          | 1,273 |   |   |   | $ | 5,297 |   |   |   | $ | (5,522 | ) |   |   | $ | 7,208 |   |   |
| **LIABILITIES AND EQUITY**                   |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Liabilities:**                     |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes  payable—affiliate                |       |       | $          | 6                 |       |          |       | $             | 12         |             |       |             | $          | 35 |   |   |   | $ | 79 |   |   |   | $ | — |   |   |   | $ | 132 |   |   |
| Current portion of  long—term debt      |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 3 |   |   |   | — |   |   |   | 3 |   |   |
| Accounts payable  and accrued liabilities    |       |       | 22         |              |       |          | 31         |          |       |             | 16         |             |       |   | 408 |   |   |   | — |   |   |   | 477 |   |   |
| Payable to  affiliate                        |       |       | 255        |              |       |          | 6          |          |       |             | 20         |             |       |   | 87 |   |   |   | (67 | ) |   |   | 301 |   |   |
| Price risk  management liabilities           |       |       | —     |              |       |          | 19         |          |       |             | 3          |             |       |   | 804 |   |   |   | (30 | ) |   |   | 796 |   |   |
| Accrued property  taxes                      |       |       | 48         |              |       |          | 136        |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 184 |   |   |
| Other                                        |       |       | —     |              |       |          | —     |          |       |             | 16         |             |       |   | — |   |   |   | — |   |   |   | 16 |   |   |
| Total current liabilities                    |       |       | 331        |              |       |          | 204        |          |       |             | 90         |             |       |   | 1,381 |   |   |   | (97 | ) |   |   | 1,909 |   |   |
| **Noncurrent Liabilities:**                  |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                               |       |       | 850        |              |       |          | —     |          |       |             | —     |             |       |   | 33 |   |   |   | — |   |   |   | 883 |   |   |
| Price risk  management liabilities           |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 39 |   |   |   | (12 | ) |   |   | 27 |   |   |
| Long term  liabilities—affiliate        |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 17 |   |   |   | (17 | ) |   |   | — |   |   |
| Asset retirement  obligations                |       |       | —     |              |       |          | 5          |          |       |             | 19         |             |       |   | 9 |   |   |   | — |   |   |   | 33 |   |   |
| Other noncurrent  liabilities                |       |       | —     |              |       |          | 4          |          |       |             | 1          |             |       |   | 1 |   |   |   | (1 | ) |   |   | 5 |   |   |
| Total noncurrent  liabilities                |       |       | 850        |              |       |          | 9          |          |       |             | 20         |             |       |   | 99 |   |   |   | (30 | ) |   |   | 948 |   |   |
| **Liabilities  Subject to Compromise**       |       |       | —     |              |       |          | 80         |          |       |             | —     |             |       |   | — |   |   |   | (22 | ) |   |   | 58 |   |   |
| **Commitments and Contingencies**            |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Equity**                                   |       |       | 4,293      |              |       |          | 393        |          |       |             | 1,163      |             |       |   | 3,817 |   |   |   | (5,373 | ) |   |   | 4,293 |   |   |
| **Total  Liabilities and Equity**            |       |       | $          | 5,474             |       |          |       | $             | 686        |             |       |             | $          | 1,273 |   |   |   | $ | 5,297 |   |   |   | $ | (5,522 | ) |   |   | $ | 7,208 |   |   |

 

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**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)Nine Months Ended September 30, 2006(in millions)**

| **Cash Flows Provided By (Used In):** | ** ** | ** ** | ** ** | **Parent** | ** ** | **Mirant  New  York** | ** ** | **Guarantor(1)** | ** ** | **Non-  Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |   |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------|------------|---------------------|------------|------------------|------------|------------------|------------|--------|
| Operating  Activities                                          |       |       | $          | 288        |       |                  |       | $                | 28         |                |       |             | $          | 204              |       |   |   | $ | 1,164 |   |   |   | $ | (562 | ) |   |   | $ | 1,122 |   |   |
| Investing  Activities                                          |       |       | (19        | )          |       |                  | 73         |             |       |                | (196       | )                |       |             | (410       | )      |   |   | 695 |   |   |   | 143 |   |   |
| Financing  Activities                                          |       |       | (98        | )          |       |                  | 5          |             |       |                | (10        | )                |       |             | (644       | )      |   |   | (133 | ) |   |   | (880 | ) |   |
| Net increase  (decrease) in cash and cash equivalents     |       |       | 171        |       |       |                  | 106        |             |       |                | (2         | )                |       |             | 110        |   |   |   | — |   |   |   | 385 |   |   |
| Cash and cash  equivalents, beginning of period                |       |       | —     |       |       |                  | 1          |             |       |                | 2          |             |       |             | 292        |   |   |   |   |   |   |   | 295 |   |   |
| Cash and cash  equivalents, end of period                 |       |       | $          | 171        |       |                  |       | $                | 107        |                |       |             | $          | —           |       |   |   | $ | 402 |   |   |   | $ | — |   |   |   | $ | 680 |   |   |
|                                                                |            |            |            |            |            |                       |            |                  |            |                     |            |                  |            |                  |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          cashflow related to discontinued operations is included in the guarantor column.

**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED COMBINING STATEMENTS OF CASH FLOWS (UNAUDITED)Nine Months Ended September 30, 2005(in millions)**

| **Cash Flows Provided By (Used In):** | ** ** | ** ** | ** ** | **Mirant  New  York** | ** ** | **Guarantor(1)** | ** ** | **Non  Guarantor** | ** ** | **Mirant  Americas  Generations  and  Eliminations** | ** ** | **Combined** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------|------------|------------------|------------|--------------------|------------|------------------------------------------------------|------------|--------------|------------|
| Operating  Activities                                          |       |       | $          | 22                    |       |             |       | $                  | 88         |                                                 |       |         | $          | (464 | ) |   |   | $ | (48 | ) |   |   | $ | (402 | ) |   |
| Investing  Activities                                          |       |       | (26        | )                     |       |             | (116       | )                  |       |                                                 | (54        | )            |       |   | 128 |   |   |   | (68 | ) |   |
| Financing  Activities                                          |       |       | 4          |                  |       |             | 27         |               |       |                                                 | 238        |         |       |   | (181 | ) |   |   | 88 |   |   |
| Net decrease in  cash and cash equivalents                     |       |       | —     |                  |       |             | (1         | )                  |       |                                                 | (280       | )            |       |   | (101 | ) |   |   | (382 | ) |   |
| Cash and cash  equivalents, beginning of period           |       |       | —     |                  |       |             | 2          |               |       |                                                 | 466        |         |       |   | 168 |   |   |   | 636 |   |   |
| Cash and cash equivalents,  end of period                      |       |       | $          | —                |       |             |       | $                  | 1          |                                                 |       |         | $          | 186 |   |   |   | $ | 67 |   |   |   | $ | 254 |   |   |

----

(1)          cash flow related todiscontinued operations is included in the guarantor column.

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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 and combined financial statements and the notes thereto, which areincluded elsewhere in this report.

***Overview***

We are a competitive energycompany that produces and sells electricity in the United States. We are anindirect wholly-owned subsidiary of Mirant Corporation (“Mirant”), whichemerged from Chapter 11 on January 3, 2006.Our operations consist of power generation facilities andour energy trading and marketing operations. During the thirdquarter of 2006, Mirant commenced auction processes to sell our Mirant Zeeland,LLC (“Zeeland”) (837 megawatts (“MW”) and Mirant Texas, LP (“Bosque”) (536 MW) naturalgas-fired intermediate and peaking plants. These sales are expected to close bymid-2007. Ourcontinuing business is approximately 10,700 MW located in highly concentratedmarkets that are characterized by low and declining reserve margins. 

The sale of our Zeeland and Bosque plants is subjectto the terms of our indebtedness, including provision with respect to themandatory prepayment and/or reinvestment of the sale proceeds and therequirement to secure a credit rating affirmation.

During the third quarter of2006, Mirant repurchased 43 million shares of its common stock for an aggregatepurchase price of approximately $1.23 billion. To pay for the shares tenderedin the offer and related expenses, Mirant utilized approximately $315 millionof cash on hand at Mirant Corporation and approximately $915 million ofdistributions or repayments from its subsidiaries, including approximately $175million and $740 million distributed or repaid from Mirant Americas Generationand Mirant Asia-Pacific Limited and its subsidiaries, respectively. 

Our gross margin for the threeand nine months ended September 30, 2006, was $621 million and $1.635billion, respectively. These amounts included significant unrealized gains fromhedging activities primarily due to the decline in forward power prices fromDecember 31, 2005 levels. Our realized gross margin for the threeand nine months ended September 30, 2006, was $405 million and $1.042 billionrespectively, compared to $369 million and $714 million, respectively, for thesame periods in 2005.

Prior to 2006, we hedged a substantial portion of ourMirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) baseload coal-fired generationand our New England intermediate oil-fired generation through over-the-countertransactions. As a result, we achieved a significant increase in our realizedgross margin for the nine months ended September 30, 2006, as compared tothe same period in 2005 because our generation was hedged at higher grossmargins for this period than for the same period in 2005. Our intermediate andpeaking generation volumes generally were lower in the nine months endedSeptember 30, 2006, than in the same period of 2005, due primarily tolower generation from our oil-fired units as a result of lower power pricescombined with sharply higher oil prices in 2006.

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

Cash flows from operationsprovided $1.122 billion for the nine months ended September 30, 2006,which was comprised of cash provided by continuing operations of $1.095 billionand cash provided by discontinued operations of $27 million. Included in cashprovided by continued operations were $1.042 billon of realized gross marginand a decrease of $529 million in the amount of cash collateral posted tosupport energy trading and marketing activities. 

49

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**Results ofOperations**

Our continuing operations consist primarily of powergeneration (approximately 10,700 MW of generating capacity) and energy tradingand marketing activities managed as a combined business. In the third quarterof 2006, Mirant announced the planned sales of our Zeeland and Bosque naturalgas-fired plants. The results of operations related to the planned dispositionshave been reclassified to discontinued operations in the unaudited condensedconsolidated and combined statements of operations for each period. 

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

| ** **                                  | ** ** | **Three Months  Ended September 30,**     | ** ** | **Increase/**                                            | ** ** | **Nine Months  Ended September 30,** | ** ** | **Increase/**                                            | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **(Decrease)**                                      | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **(Decrease)** | ** ** |
| Gross margin                                |       |                                                     |       |                                                     |       |                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                   |       |                                                     | $          | (32                                                      | )          |                                                |       | $                                                        | (11        | ) |   |   | $ | (21 | ) |   |   | $ | (54 | ) |   |   | $ | (20 | ) |   |   | $ | (34 | ) |   |
| Nonaffiliate                                |       |                                                     | 653        |                                                     |       |                                                | (91        | )                                                        |       |   | 744 |   |   |   | 1,689 |   |   |   | 327 |   |   |   | 1,362 |   |   |
| Total gross  margin                         |       |                                                     | 621        |                                                     |       |                                                | (102       | )                                                        |       |   | 723 |   |   |   | 1,635 |   |   |   | 307 |   |   |   | 1,328 |   |   |
| Operating expenses:                         |       |                                                     |       |                                                     |       |                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                 |       |                                                     |       |                                                     |       |                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                   |       |                                                     | 72         |                                                     |       |                                                | 68         |                                                     |       |   | 4 |   |   |   | 210 |   |   |   | 213 |   |   |   | (3 | ) |   |
| Nonaffiliate                                |       |                                                     | 65         |                                                     |       |                                                | 67         |                                                     |       |   | (2 | ) |   |   | 213 |   |   |   | 201 |   |   |   | 12 |   |   |
| Depreciation and  amortization              |       |                                                     | 32         |                                                     |       |                                                | 28         |                                                     |       |   | 4 |   |   |   | 91 |   |   |   | 85 |   |   |   | 6 |   |   |
| Generation  facilities rent                 |       |                                                     | 24         |                                                     |       |                                                | 24         |                                                     |       |   | — |   |   |   | 72 |   |   |   | 75 |   |   |   | (3 | ) |   |
| Loss (gain) on  sales of assets, net        |       |                                                     | (2         | )                                                        |       |                                                | 2          |                                                     |       |   | (4 | ) |   |   | (8 | ) |   |   | 1 |   |   |   | (9 | ) |   |
| Impairment loss                             |       |                                                     | 118        |                                                     |       |                                                | —     |                                                     |       |   | 118 |   |   |   | 118 |   |   |   | — |   |   |   | 118 |   |   |
| Total operating  expenses                   |       |                                                     | 309        |                                                     |       |                                                | 189        |                                                     |       |   | 120 |   |   |   | 696 |   |   |   | 575 |   |   |   | 121 |   |   |
| Operating income                            |       |                                                     | 312        |                                                     |       |                                                | (291       | )                                                        |       |   | 603 |   |   |   | 939 |   |   |   | (268 | ) |   |   | 1,207 |   |   |
| Other expense (income),  net                |       |                                                     |       |                                                     |       |                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate                                   |       |                                                     | (1         | )                                                        |       |                                                | 7          |                                                     |       |   | (8 | ) |   |   | (3 | ) |   |   | 13 |   |   |   | (16 | ) |   |
| Nonaffiliate                                |       |                                                     | 9          |                                                     |       |                                                | 617        |                                                     |       |   | (608 | ) |   |   | 61 |   |   |   | 616 |   |   |   | (555 | ) |   |
| Reorganization  items, net                  |       |                                                     | (1         | )                                                        |       |                                                | 46         |                                                     |       |   | (47 | ) |   |   | (2 | ) |   |   | 53 |   |   |   | (55 | ) |   |
| Provision  (benefit) for income  taxes      |       |                                                     | 1          |                                                     |       |                                                | 5          |                                                     |       |   | (4 | ) |   |   | 3 |   |   |   | 10 |   |   |   | (7 | ) |   |
| Income (Loss)  from Continuing Operations   |       |                                                     | 304        |                                                     |       |                                                | (966       | )                                                        |       |   | 1,270 |   |   |   | 880 |   |   |   | (960 | ) |   |   | 1,840 |   |   |
| Income (Loss)  from Discontinued Operations |       |                                                     | (59        | )                                                        |       |                                                | 9          |                                                     |       |   | (68 | ) |   |   | (57 | ) |   |   | 4 |   |   |   | (61 | ) |   |
| Net Income (Loss)                           |       |                                                     | $          | 245                                                      |       |                                                |       | $                                                        | (957       | ) |   |   | $ | 1,202 |   |   |   | $ | 823 |   |   |   | $ | (956 | ) |   |   | $ | 1,779 |   |   |

                                                                                                                                                                                                                                                                                             

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

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*OperatingStatistics*

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

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

 

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

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

 

*Gross Margin*

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

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

 

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

 

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

Ourgross margin increased by $723 million for the three months endedSeptember 30, 2006, compared to the same period for 2005 and is detailed asfollows (in millions): 

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

 

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

 

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

----

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

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

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

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

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

·       an increase of$459 million related to hedging activities as a result of $186 million ofunrealized gains for the three months ended September 30, 2006, compared tounrealized losses of $273 million for the same period in 2005. Unrealized gainsin 2006 are primarily due to the increased value associated with forward powercontracts for future periods as a result of decreases in forward power pricesin the period, partially offset by the settlement of power contracts for whichunrealized gains had previously been recorded. Unrealized losses for the thirdquarter of 2005 were primarily due to increases in power prices as a result ofincreased gas prices;

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

·       adecrease of $129 million in energy primarily related to lower power prices andlower generation volumes. Power prices were lower due to significantly lowergas prices in 2006 compared to the same period in 2005. Our baseload coal unitsvolumes decreased slightly and our 14% total decrease in generation volumes wasdriven by significantly lower volumes generated by our oil-fired units. A sharpdecrease in power prices combined with average oil prices that were somewhathigher than in 2005, resulted in our oil-fired units not being able to dispatcheconomically for most of the period. 

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

·       an increase of $202 millionrelated to hedging activities as a result of $8 million of unrealized gains forthe three months ended September 30, 2006, as compared to unrealizedlosses of $194 million for the same period in 2005. Unrealized losses for thethird quarter of 2005 were primarily due to increases in power prices as aresult of increased gas prices;

·       an increase of $43 millionin incremental realized value of hedges primarily related to the settlement ofpower contracts at higher prices than market prices for the period, partiallyoffset by less favorable results from the settlement of fuel contracts comparedto the prior period; and

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

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

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

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

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

·       an increase of $22 millionrelated to unrealized gains on our proprietary trading activities. For thethree months ended September 30, 2006, we had unrealized gains of $21million. For the same period in 2005, we had unrealized gains related to theBack-to-Back Agreement of $63 million and unrealized losses of $64 million fromour proprietary trading activities.

*Operating Expense,net*

Our operating expensesincreased by $120 million for the three months ended September 30, 2006,compared to the same period in 2005 primarily due to the $118 millionwrite-down of the Bowline unit 3 suspended construction project. See Note C forfurther discussion of this impairment loss.

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*Other Expense, net*

Our other expense,net decreased by $616 million for the three months ended September 30,2006, compared to the same period in 2005 primarily due to the following:

·       interest expense decreasedby $596 million primarily due to the inclusion of $620 million of interest onliabilities subject to compromise in 2005; and

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

*ReorganizationItems, net*

Reorganization items, netof $46 million for the three months ended September 30, 2005, representedamounts that were recorded in the financial statements as a result of thebankruptcy proceedings.

*DiscontinuedOperations*

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

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

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

See Note B for additionalinformation related to planned dispositions and discontinued operations.

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

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

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

 

54

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

 

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

----

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

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

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

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

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

·       an increase of$774 million related to hedging activities as a result of $511 million ofunrealized gains for the nine months ended September 30, 2006, compared tounrealized losses of $263 million for the same period in 2005. Unrealized gainsin 2006 are primarily due to the increased value associated with forward powercontracts for future periods as a result of decreases in forward power pricesin the period and the settlement of power contracts in 2006 for whichunrealized losses had been recognized in prior periods. In the nine monthsended September 30, 2005, increases in power prices as a result ofincreased gas prices were the primary driver for the unrealized losses for thatperiod, partially offset by the settlement of power contracts for whichunrealized losses had previously been recognized and an increase in the valueof fuel hedges due to higher fuel prices;

·       an increase of$337 million in incremental realized value of hedges primarily related tothe settlement of power contracts at prices higher than market prices for theperiod; and

·       a decrease of $179 millionin energy primarily related to lower power prices and lower generation volumesas well as increased expenses for sulfurdioxide (“SO2”) emissions allowances. Power prices were lower due tosignificantly lower gas prices in 2006 compared to the same period in 2005. Ourbaseload coal units’ volumes were relatively unchanged and our 11% totaldecrease in generation volumes was driven by significantly lower volumesgenerated by our oil-fired units. A slight decrease in power prices combinedwith average oil prices that were sharply higher than in 2005, resulted in ouroil-fired units not being able to dispatch economically for most of the period.

55

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

·       an increase of $222 millionrelated to hedging activities as a result of $41 million of unrealized gainsfor the nine months ended September 30, 2006, as compared to unrealizedlosses of $181 million for the same period in 2005. Unrealized losses for 2005were primarily due to increases in power prices as a result of increased gasprices, partially offset by an increase in the value of fuel hedges due tohigher fuel prices;

·       an increase of $125 millionin incremental realized value of hedges primarily related to the settlement ofpower contracts at higher than market prices for the period, compared to thesettlement of power contracts at lower than market prices in 2005, partiallyoffset by less favorable results on fuel hedges; and

·       a decrease of $26 millionin energy primarily related to lower generation volumes. Our 47% decrease ingeneration volumes was driven by significantly lower volumes generated by ouroil-fired units. A 12% decrease in power prices combined with average oilprices that were 21% higher than in 2005, resulted in our oil-fired units notbeing able to dispatch economically for most of the period. This decrease waspartially offset by a $38 million increase in intercompany sales of emissionsallowances.

California operations gross margin increased by $18million primarily due to several days of extreme heat in July 2006, whichallowed us to earn incremental gross margin on units that were under a tolling agreementfor the same period in 2005.

Other gross marginincreased $71 million and includes the following:

·       anincrease of $15 million in energy primarily consisting of 1) an increase of $27million in realized margin from our proprietary trading activities whichincludes a $19 million lower of cost or market adjustment on our oil inventoryduring the third quarter due to a decline in oil prices and 2) a decrease of$13 million due to the elimination of intercompany emissions allowancestransactions;

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

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

*Operating Expense,net*

Our operating expensesincreased by $121 million for the nine months ended September 30, 2006,compared to the same period in 2005 primarily due to the $118 millionimpairment loss on the Bowline unit 3 suspended construction project. See NoteC for further discussion regarding impairment losses.

*Other Expense, net*

Our other expense,net decreased by $571 million for the nine months ended September 30,2006, compared to the same period in 2005 primarily due to the following:

·       interestexpense decreased by $533 million primarily due to the inclusion of $667million of interest on liabilities subject to compromise in 2005; and

·       other, net includes a gainon sale of investments of $15 million related to the sale of a portion of ourinvestment in InterContinental Exchange, Inc. We sold our remaininginvestment in 

56

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InterContinentalExchange, Inc. in October 2006 and will recognize a gain ofapproximately $40 million during the fourth quarter of 2006.

*ReorganizationItems, net*

Reorganization items, netof $53 million for the nine months ended September 30, 2005, representedamounts that were recorded in the financial statements as a result of thebankruptcy proceedings.

*DiscontinuedOperations*

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

For the nine months ended September 30, 2006, wereported a loss from discontinued operations of $57 million, which includes thereclassification of the results of operations related to the planned dispositions.Included in the loss from discontinued operations is an impairment loss of $71million to write-down the Zeeland natural gas-fired asset to estimated fairvalue.

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

See Note B for additionalinformation related to planned dispositions and discontinued operations.

**Financial Condition**

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

On December 23, 2005,we issued $850 million of 7.375% senior unsecured notes due 2013 (the “Old Notes”).These notes were issued in a private placement and were not registered with theSecurities and Exchange Commission. The funds from this issuance initially wereplaced in escrow and were released from escrow on January 3, 2006. On August 4,2006, we completed an exchange offer for the Old Notes, whereby $849.965million of senior notes registered under the Securities Act (the “New Notes”)were exchanged for an equal amount of the Old Notes. The terms of the New Notesare identical in all material respects to the Old Notes, except that the NewNotes are registered under the Securities Act and generally are not subject to transferrestrictions or registration rights. On January 3, 2006, we also enteredinto an $800 million senior secured revolving credit facility and a $700million senior secured term loan. At the closing, $200 million drawn under thesenior secured term loan was deposited into a cash collateral account tosupport the issuance of up to $200 million of letters of credit. As of September 30,2006, there were approximately $185 million of letters of credit outstandingand $800 million available under the senior secured revolving credit facility.

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

We and Mirant Americas Energy Marketing, LP (“MirantAmericas Energy Marketing”) (the “Primary DIP Lenders”) entered into anagreement (the “Primary New York DIP Agreement”) to make secureddebtor-in-possession financing in an amount of (i) $20 million, plus (ii) anamount equal to the amount of credit support provided on behalf of Mirant NewYork, Inc. (“Mirant New York”), Mirant Bowline, LLC (“Mirant Bowline”),Mirant Lovett, LLC (“Mirant Lovett”) and Hudson Valley Gas Corporation(collectively, the “New York DIP Borrowers”), to the extent such amounts arecollateralized with cash or cash equivalents by the New York DIP Borrowers. Thefacility is available on a joint and several basis to the New York DIPBorrowers. On January 31, 2006, all the assets of Mirant Americas 

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Energy Marketing weretransferred to Mirant Energy Trading, with Mirant Energy Trading to succeed toall rights and assume all obligations of Mirant Americas Energy Marketing underthe Primary New York DIP Agreement. The financing under the Primary New YorkDIP Agreement can be utilized through borrowings by the New York DIP Borrowers,the issuance of letters of credit for the account of any of the New York DIPBorrowers or in support of commercial transactions entered into by MirantEnergy Trading for the benefit of the New York DIP Borrowers, the posting ofcash in respect of obligations incurred for the benefit of any of the New YorkDIP Borrowers, including the making of prepayments for fuel and othercommodities for the benefit of any of the New York DIP Borrowers. Under thePrimary New York DIP Agreement, the amount which represents the excess on theeffective date of the Plan of (x) credit support posted for the benefit ofthe New York DIP Borrowers by the lenders in respect of transactions enteredinto on their behalf over (y) the amount of cash collateral posted by theNew York DIP Borrowers to the lenders is deemed to be a loan made to the New YorkDIP Borrowers on such date. The New York DIP Borrowers have posted $24 millioncash collateral with Mirant Energy Trading in accordance with the September 30,2006, collateral allocation performed in good faith by Mirant Energy Trading.To the extent that the required level of credit support provided to the NewYork DIP Borrowers is reduced, the amount of such reduction is required to bereturned to the New York DIP Borrowers. The financing under the Primary NewYork DIP Agreement has a stated maturity of 180 days, subject to renewal orextension, and is available until the earlier of (x) the expiration ofsuch period or (y) with respect to each of the New York DIP Borrowers, theeffective date of a confirmed Plan of Reorganization (the “Plan”) for such NewYork DIP Borrower in its Chapter 11 case. The loan was extended for anadditional 180 days in July 2006. Subject to the authorization of theUnited States Bankruptcy Court for the Northern District of Texas (the “BankruptcyCourt”), the obligations of the New York DIP Borrowers under the Primary NewYork DIP Agreement, pursuant to Section 364(c) of the Chapter 11 of Title 11 of the United StatesBankruptcy Code (as amended, the “Bankruptcy Code”), (i) constitutea claim having priority over any or all administrative expenses of the kindspecified in sections 503(b) or 507(b) of Bankruptcy Code, (ii) aresecured by a lien on property of the estates of the New York DIP Borrowers thatis not otherwise subject to a lien and (iii) are secured by a junior lienon property of the estates of the New York DIP Borrowers that is subject to alien. The financing bears interest at a rate of London Interbank Offered Rate (“LIBOR”)plus 2.25%. The Primary New York DIP Agreement contains certain events ofdefault, and the ability of the New York DIP Borrowers to borrow thereunder issubject to certain conditions precedent. In addition, the Primary New York DIPAgreement contains covenants that, among other things, restrict the ability ofthe New York DIP Borrowers to engage in mergers, acquisitions and asset sales,to make investments and to incur indebtedness.

Contemporaneously with their entry into the PrimaryNew York DIP Agreement, the New York DIP Borrowers also entered into anagreement for secured financing with Mirant (the “Secondary New York DIPAgreement”). The Secondary New York DIP Agreement permits Mirant to makesecured debtor-in-possession financing in the maximum amount of $50 million tothe New York DIP Borrowers, and the borrowings are available solely for cashcollateral postings by any one or more of the New York DIP Borrowers. The termsof the Secondary New York DIP Agreement are substantially similar to the termsof the Primary New York DIP Agreement. However, (i) the rights of thePrimary DIP Lenders to payment out of cash collateral posted by the New YorkDIP Borrowers pursuant to the Primary New York DIP Agreement as may be repaidshall at all times rank senior to the rights of Mirant under the Secondary NewYork DIP Agreement and (ii) certain claims and liens granted under thePrimary New York DIP Agreement in respect of cash collateral posted by theNew York DIP Borrowers shall at all times be senior to similar claims and liensgranted under the Secondary New York DIP Agreement. The loan was extended foran additional 180 days in July 2006.

TheBankruptcy Court has approved a debtor-in-possession loan to Mirant NY-Gen, LLC(“Mirant NY-Gen”) from Mirant Americas under which Mirant Americas,subject to certain conditions, 

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would lend up to $9.5 million to Mirant NY-Gen toprovide funding for the repairs on the Swinging Bridge dam. The loan wasextended for an additional 180 days in July 2006.

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

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

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

***Cash Flows***

*ContinuingOperations*

*Operating Activities.  *Ourcash provided by operating activities is impacted by seasonality, changes inenergy prices and fluctuations in our working capital requirements. Cashprovided by operating activities from continuing operations increased $1.507billion for the nine months ended September 30, 2006, compared to the sameperiod in 2005, primarily due to the following:

·       an increase in realizedgross margin of $328 million for the nine months ended September 30, 2006,compared to the same period in 2005. See *Results of Operations*for additional discussion of our improved performance in 2006 compared to thesame period in 2005;

·       a change in collaterallevels of $1.226 billion in the nine months ended September 30, 2006,compared to the same period in 2005. The decrease in collateral requirements isdue to the settlement of energy contracts combined with energy price declinesin the nine months ended September 30, 2006, as compared to the sameperiod in 2005. For the nine months ended September 30, 2006, $529 millionof cash collateral from brokers and counterparties has been returned to us.Significant increases in energy prices in the third quarter of 2005 and theresulting large unrealized losses on our forward power sales contracts requiredus to post additional collateral of $697 million during the nine months ended September 30,2005; and

·       adecrease in bankruptcy related claims and expenses of $47 million. We paid $47million in the nine months ended September 30, 2005 related toprofessional fees and other expenses associated with the bankruptcyproceedings. Our remaining claims payable and estimated claims accrual is $72 millionat September 30, 2006.

*Investing Activities.**  *Net cash provided by investing activities fromcontinuing operations was $147 million for the nine months ended September 30,2006, compared to $65 million used in 2005. The difference was primarily due tothe following:

·       an increase of $14 millionin capital expenditures for 2006 compared to 2005;

·       an increase in therepayment of notes receivable from affiliate of $197 million compared to thesame period in 2005; and

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

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*Financing Activities.**  *Net cash used in financing activities of continuingoperations was $880 million for the nine months ended September 30, 2006,compared to $88 million provided for the same period in 2005. This differencewas primarily due to the following:

·       an increase in proceedsfrom the issuance of long-term debt of $2.015 billion. Proceeds from theissuance of long-term debt in 2006 included $850 million from our debt offeringthat was released from escrow on January 3, 2006, $700 million from oursenior secured loan, and $465 million drawn on our senior secured revolvingcredit facility. 

·       in2005, proceeds from the issuance of debt-affiliate of $90 million representedadvances under the intercompany cash management program; and

·       an increase in repaymentsof long-term debt comprised of the repayment of $465 million drawn on oursenior secured revolving credit facility and approximately $1.773 billion and$239 million to settle obligations of Mirant Americas Generation pursuant tothe plan. We also made a payment of $250 million to Mirant Americas, Inc.(“Mirant Americas”) under the Plan and repaid $110 million of the notes payableto affiliate.

*Discontinued Operations.*

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

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

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

| ** **                                                                                                                          | ** ** | **At September 30,   2006** | ** ** | **At December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| Cash and Cash  Equivalents:                                                                                                         |       |                                       |       |                                |       |   |   |   |   |
| Mirant Mid-Atlantic                                                                                                                 |       |                                       | $          | 130                                 |       |   |   | $ | 276 |   |   |
| Mirant North America                                                                                                                |       |                                       | 550        |                                |       |   | 19 |   |   |
| Total cash and cash equivalents                                                                                                     |       |                                       | 680        |                                |       |   | 295 |   |   |
| Less: Cash  required for operating, working capital or other purposes or restricted  by the subsidiaries’ debt agreements |       |                                       | 115        |                                |       |   | 1 |   |   |
| Total available cash and cash equivalents                                                                                           |       |                                       | 565        |                                |       |   | 294 |   |   |
| Available under  credit facilities                                                                                                  |       |                                       | 815        |                                |       |   | — |   |   |
| Available under  the DIP Facility                                                                                                   |       |                                       | —     |                                |       |   | 249 |   |   |
| Total cash, cash  equivalents and credit facilities availability                                                                    |       |                                       | $          | 1,380                               |       |   |   | $ | 543 |   |   |

* *

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

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

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

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

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

On July 13, 2006,Moody’s Investors Service reduced Mirant’s corporate credit rating to “B2”, andour debt ratings were also lowered. Standard and Poor’s also announced thatthey had placed Mirant’s corporate credit rating and our debt ratings on creditwatch.

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

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

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

| ** **                                                                          | ** ** | **Total** | ** **  | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **>5 years** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------------|------------|
| Operating leases                                                                    |       | $         |  2,322 |     | $          | 46       |       | $        | 116        |     | $          | 124      |       | $                    | 146        |   | $ | 144 |   |   | $ | 1,746 |   |   |
| Long-term debt                                                                      |       | 2,322     |        | 32       |       | 201      |       | 118      |       | 118      |       | 118      |       |                 | 1,735      |   |   |
| Claims payable  and estimated claims accrual                                        |       | 72        |        | 72       |       | —   |       | —   |       | —   |       | —   |       |                 | —     |   |   |
| Purchase commitments:                                                               |       |      |        |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Long-term service agreements                                                        |       | 117       |        | 1        |       | 3        |       | 2        |       | 4        |       | 5        |       |                 | 102        |   |   |
| Fuel and transportation commitments                                                 |       | 500       |        | 94       |       | 227      |       | 89       |       | 90       |       | —   |       |                 | —     |   |   |
| Other purchase commitments                                                          |       | 168       |        | 168      |       | —   |       | —   |       | —   |       | —   |       |                 | —     |   |   |
| Total excluding  liabilities subject to compromise                                  |       | 5,501     |        | 413      |       | 547      |       | 333      |       | 358      |       | 267      |       |                 | 3,583      |   |   |
| Liabilities  subject to compromise                                                  |       | 58        |        |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Discontinued  operations                                                            |       | 149       |        |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |
| Total debt  obligations, off-balance sheet arrangements and contractual obligations |       | $         | 5,708       |     |       |     |       |     |       |     |       |     |       |                 |       |   |   |   |
|                                                                                     |            |           |             |          |            |          |            |          |            |          |            |          |            |                      |            |  |  |  |  |  |  |  |  |  |

 

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

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

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

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

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

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

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

Discontinued operations include the debt andobligations related to our Zeeland and Bosque natural gas-fired plants.

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**Other Developments**

***Reliability Pricing Model***

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

***Environmental Regulation***

*MarylandHealthy Air Act.  *On August 3, 2006, weannounced a plan to comply with the requirements of the Maryland Healthy AirAct by reducing SO2 emissions by as much as 95% at our Maryland power plants.We will install flue gas desulfurization (“FGD”) emissions controls at ourthree Maryland power plants: Chalk Point generating station located in PrinceGeorge’s County, Dickerson generating station located in Montgomery County, andMorgantown generating station located in Charles County. In addition, we willinstall a selective catalytic reduction (“SCR”) system at the Chalk Pointfacility that will further reduce nitrogenoxide (“NOx”) emissions by approximately 92%. Together, the FGDs and theSCR will reduce by approximately 90% the emissions of ionic mercury from thethree power plants. We anticipate that the capital expenditures required toachieve compliance will be approximately $1.3 billion to $1.5 billion from 2006through 2009. We expect that cash flows from operations will be sufficient tofund these capital expenditures.

*RegionalGreenhouse Gas Initiative and State CO2 Regulation.**  *Concern over climate change, deemed by many to beinduced by rising levels of greenhouse gases in the atmosphere, continues toresult in significant legislative and regulatory efforts to limit greenhousegas emissions.

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

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

See Note B for otherdevelopments related to the planned dispositions.

**Critical AccountingPolicies and Estimates**

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

·       the estimate requiressignificant assumptions; and

·       changes in the estimatecould have a material effect on our consolidated and combined results ofoperations or financial condition; or,

·       if different estimates thatcould have been selected had been used, there could be a material impact on ourconsolidated and combined results of operations or financial condition.

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

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

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

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

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

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business. Such derivativecontracts have varying terms and durations, or tenors, which range from a fewdays to a number of years, depending on the instrument.

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

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

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

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

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

***Long-Lived Assets***

**Estimated UsefulLives**

*Natureof Estimates Required.**  *Theestimated useful lives of our long-lived assets are used to computedepreciation expense, determine the carrying value of asset retirementobligations, and estimate expected future cash flows attributable to an assetfor the purposes of impairment testing. Estimated useful lives are based, inpart, on the assumption that we provide an appropriate level of capitalexpenditures while the 

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assets are still inoperation. Without these continued capital expenditures, the useful lives ofthese assets could decrease significantly.

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

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

**Asset RetirementObligations**

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

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

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

**Asset Impairments**

*Nature of EstimatesRequired.**  *We evaluateour long-lived assets, including definite-lived intangible assets for impairmentin accordance with applicable accounting guidance. The amount of an impairmentcharge is calculated as the excess of the asset’s carrying value over its fairvalue, which generally represents 

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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.

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

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

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

On August 9, 2006, Mirant announced the plannedsale of our Zeeland and Bosque natural gas-fired intermediate and peakingplants which total 1,373 MW. The planned sales resulted in the reclassificationof the long-lived assets related to these plants as held for sale at September 30,2006. In determining our estimate of fair value, we utilized non-bindingindicative bids as our basis for determining the impairment amount. Given thenature of the assets and the current marketplace, a best estimate of fair valuewas assigned to each individual asset within the portfolio of all the Mirantassets to be sold. Based on the fair value assigned to each asset, an impairmentloss of $71 million was recorded in discontinued operations in our condensedconsolidated financial statements of operations during the quarter to reducethe carrying value of our assets to their estimated fair value less costs tosell.

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

*Effect if DifferentAssumptions Used.*   The estimates and assumptionsused to determine whether an impairment exists are subject to a high degree ofuncertainty. The estimated fair value of an asset would change if differentestimates and assumptions are used in our applied valuation techniques,including estimated undiscounted cash flows, discount rates and remaininguseful lives. Due to the nature of the auction process for the assets held forsale, the ultimate sales price at the end of the auction could differ from ourcurrent estimates of fair value determined through discounted cash flows ornon-binding indicative bids for those assets. If actual results are not consistentwith the assumptions used in estimating future cash flows and asset fairvalues, we may be exposed to additional losses that could be material to our 

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results ofoperations. See Notes B and C for additional information on impairmentsrecorded during the third quarter of 2006.

**Income Taxes**

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

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

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

Additionally, we have contingent liabilities relatedto tax uncertainties arising in the ordinary course of business. Weperiodically assess our contingent liabilities in connection with theseuncertainties based on the latest information available. For thoseuncertainties where it is probable that a loss has occurred and the loss orrange of loss can be reasonably estimated, a liability is recognized in the financialstatements. The recognition of contingent losses for tax uncertainties requiresmanagement to make significant assumptions about the expected outcomes ofcertain tax contingencies. See Note A to our 

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consolidated financialstatements for further information on FIN No. 48, “*Accountingfor Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109.”*

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

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

***Loss Contingencies***

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

*KeyAssumptions and Approach Used.**  *Thedetermination of a loss contingency requires significant judgment as to theexpected outcome of each contingency in future periods. In making thedetermination as to potential losses and probability of loss, we consider allavailable positive and negative evidence including the expected outcome ofpotential litigation. We record our best estimate of a loss, or the low end ofour range if no estimate is better than another estimate within a range ofestimates, when the loss is considered probable. As additional informationbecomes available, we reassess the potential liability related to thecontingency and revise our estimates. In our evaluation of legal matters,management holds discussions with applicable legal counsel and relies onanalysis of case law and legal precedents.

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

***Litigation***

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

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

In connection with ourpower generating business, we are exposed to energy commodity price risk associated with theacquisition of fuel needed to generate electricity, as well as the electricityproduced and sold. A portion of our fuel requirements is purchased in the spotmarket and a portion of the electricity we produce also is sold in the spotmarket. In addition, the open positions in our proprietary trading portfolioexpose us to risks associated with the changes in energy commodity prices. As aresult, our financial performance varies depending on changes in the prices ofenergy and energy-related commodities. See “Critical Accounting Policies andEstimates” for a discussion of the accounting treatment for our energy tradingand marketing activities and see Note D to the unaudited condensed consolidatedand combined financial statements for detail of our price risk managementassets and liabilities.

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

**InherentLimitations in Control Systems**

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

**Effectiveness ofDisclosure Controls and Procedures**

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

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

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**PART II**

**Item 1.**                        *Legal Proceedings*

The descriptions belowupdate and should be read in conjunction with the complete descriptions in thesection titled “Legal Proceedings” in the Company’s Form 10-Q forthe quarter ended June 30, 2006.

***Chapter 11 Proceedings***

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

As of September 30,2006, approximately 21.2 million of the shares of Mirant common stock to bedistributed under the Plan have not yet been distributed and have been reservedfor distribution with respect to claims that are disputed by the Mirant Debtorsand have not been resolved. A settlement entered into on May 30, 2006,among Pepco, Mirant, MC 2005, LLC f/k/a Mirant Corporation (“Old Mirant”), andvarious subsidiaries of Mirant, including subsidiaries of the Company, ifapproved by final order in the Chapter 11 proceedings, would result in thedistribution of up to 18 million of the reserved shares to Pepco, as describedbelow in *Pepco Litigation*. Under the terms of thePlan, to the extent other such unresolved claims are resolved now that theCompany has emerged from bankruptcy, the claimants will be paid from thereserved shares on the same basis as if they had been paid when the Plan becameeffective. That means that their allowed claims will receive the same pro ratadistributions of Mirant common stock, cash, or both common stock and cash aspreviously allowed claims in accordance with the terms of the Plan. To theextent the aggregate amount of the payouts determined to be due with respect tosuch disputed claims ultimately exceeds the amount of the funded claim reserve,Mirant would have to issue additional shares of common stock to address theshortfall, which would dilute existing Mirant shareholders, and Mirant andMirant Americas Generation would have to pay additional cash amounts asnecessary under the terms of the Plan to satisfy such pre-petition claims.

***Pepco Litigation***

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

Mirant assigned its rights and obligations under theBack-to-Back Agreement to Mirant Americas Energy Marketing. In the Chapter 11cases of the Mirant Debtors, Pepco asserted that an Assignment and AssumptionAgreement dated December 19, 2000, that includes as parties Pepco andvarious subsidiaries 

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of ours causes oursubsidiaries that are parties to the agreement to be jointly and severallyliable to Pepco for various obligations, including the obligations under theBack-to-Back Agreement. The Mirant Debtors have sought to reject the APSA, theBack-to-Back Agreement, and the Assignment and Assumption Agreement, and therejection motions have not been resolved. Under the Plan, the obligations ofthe Mirant Debtors under the APSA (including any other agreements executedpursuant to the terms of the APSA and found by a final court order to be partof the APSA), the Back-to-Back Agreement, and the Assignment and AssumptionAgreement are to be performed by Mirant Power Purchase, LLC (“Mirant PowerPurchase”), whose performance is guaranteed by Mirant. If any of the agreementsis successfully rejected, the obligations of Mirant Power Purchase and Mirant’sguarantee obligations terminate with respect to that agreement, and Pepco wouldbe entitled to a claim in the Chapter 11 proceedings for any 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 theCompany), and a trust established pursuant to the Plan to which ownership ofOld Mirant and Mirant Americas Energy Marketing was transferred (collectivelythe “Mirant Settling Parties”) entered into a Settlement Agreement and Release(the “Settlement Agreement”) with Pepco and various affiliates of Pepco(collectively the “Pepco Settling Parties”). Once it becomes effective, theSettlement Agreement will fully resolve the contract rejection motions thatremain pending in the bankruptcy proceedings, as well as other matterscurrently disputed between Pepco and Mirant and its subsidiaries. The PepcoSettling Parties and the Mirant Settling Parties will release each other fromall claims known as of May 30, 2006, including the fraudulent transferclaims brought by Old Mirant and several of its subsidiaries against Pepco in July 2005.The Settlement Agreement will become effective once it has been approved by theBankruptcy Court and that approval order has become a final order no longersubject to appeal. On August 9, 2006, the Bankruptcy Court entered anorder approving the Settlement Agreement, but certain holders of unsecuredclaims against Old Mirant in the bankruptcy proceedings have appealed thatorder, and it has not yet become a final order.

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

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

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under or with respect toany of the remainder of such agreements. If, however, Mirant elects to have theBack-to-Back Agreement assumed and assigned to Mirant Power Purchase under theconditions set out in the Settlement Agreement, then the Settlement Agreementprovides that nothing in its terms prejudices the argument currently being madeby Pepco in the contract rejection proceedings that the APSA, the Back-to-BackAgreement, and the Ancillary Agreements constitute a single non-severableagreement, the material breach of which would entitle Pepco to suspend orterminate its performance thereunder, or any defense of Mirant and its subsidiariesto such an argument by Pepco.

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

***California and Western Power Markets***

*FERC Show Cause ProceedingRelating to Trading Practices.**  *OnJune 25, 2003, the Federal Energy Regulatory Commission (the “FERC”)issued a show cause order (the “Trading Practices Order”) to more than 50parties, including Mirant Americas Energy Marketing and subsidiaries of MirantAmericas Generation, that a FERC staff report issued on March 26, 2003,identified as having potentially engaged in one or more trading strategies ofthe type employed by Enron Corporation and its affiliates (“Enron”), asdescribed 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 California Independent System Operator (“CAISO”) and California PowerExchange (“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 bankruptcy proceeding

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for$3.67 million in settlement of the allegations with respect to the sale ofancillary services. The FERC approved the Trading Settlement Agreement, asamended, on June 27, 2005, and the Bankruptcy Court approved it on August 24,2005. Certain parties filed motions for rehearing, which the FERC denied on October 11,2006.

***Environmental Matters***

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

The computer modeling analysis predicted that emissionsfrom the Potomac River plant have the potential to contribute to localized,modeled instances of exceedances of the NAAQS for SO2, NO2 and PM10 undercertain conditions. Based on those results, the Virginia DEQ issued a directiveto Mirant Potomac River on August 19, 2005, to undertake immediately suchaction as was necessary to ensure protection of human health and theenvironment and eliminate NAAQS violations. On August 24, 2005, powerproduction at all five units of the Potomac River generating facility wastemporarily halted in response to the directive from the Virginia DEQ. On August 25, 2005, the District of ColumbiaPublic Service Commission filed an emergency petition and complaint with theFERC and the Department of Energy (the “DOE”) to prevent the shutdown of thePotomac River facility. The matter remains pending before the FERC and the DOE.On September 21, 2005, Mirant Potomac River commenced partial operation ofone unit of the plant. On December 20, 2005, due to a determination by theDOE that an emergency situation existed with respect to the reliability of thesupply of electricity to central Washington, D.C. the DOE ordered MirantPotomac River to generate electricity at the Potomac River generating facility,as requested by Pennsylvania-New Jersey-Maryland Interconnection, LLC (“PJM”),during any period in which one or both of the transmission lines serving thecentral Washington, D.C. area are out of service due to a planned or unplannedoutage. In addition, the DOE ordered Mirant Potomac River, at all other times,for electric reliability purposes, to keep as many units in operation aspossible and to reduce the start-up time of units not in operation withoutcontributing to any NAAQS exceedances. The DOE required Mirant Potomac River tosubmit a plan, on or before December 30, 2005, that met theserequirements. The DOE advised that it would consider Mirant Potomac River’splan in consultation with the Environmental Protection Agency (the “EPA”). Theorder further provides that Mirant Potomac River and its customers should agreeto mutually satisfactory terms for any costs incurred by it under this order orjust and reasonable terms shall be established by a supplemental order. Certainparties filed for rehearing of the DOE order, and on February 17, 2006,the DOE issued an order granting rehearing solely for purposes of consideringfurther the rehearing requests. Mirant Potomac River submitted an operatingplan in accordance with the order. On January 4, 2006, the DOE issued aninterim response to Mirant Potomac River’s operating plan authorizing operationof the units of the Potomac River generating facility 

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on areduced basis, but making it possible to bring the entire plant into servicewithin approximately 28 hours when necessary for reliability purposes. The DOE’sorder expires after November 30, 2006, but Mirant Potomac River expects itwill be able to continue to operate these units after that expiration.

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

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

*SuitRegarding Chalk Point Emissions.*   By letter datedJune 15, 2006, four environmental advocacy organizations—EnvironmentalIntegrity Project, Chesapeake Climate Action Network, Patuxent Riverkeeper andEnvironment Maryland Research and Policy Center—notified Mirant and MirantMid-Atlantic that they intended to file suit alleging that Mirant Chalk Pointhad violated the opacity limits set by the permits for Chalk Point unit 3 andunit 4 during thousands of six minute time intervals between January 2002and March 2006. The letter indicated that the organizations intend to filesuit to enjoin the violations alleged, to obtain civil penalties for pastnoncompliance to the extent that liability for these violations was notdischarged by the bankruptcy of Mirant Chalk Point, and to recover attorneys’fees. On August 3, 2006, Mirant, Mirant Mid-Atlantic, and Mirant ChalkPoint filed a complaint in the Bankruptcy Court seeking an injunction barringthe four organizations from filing suit as threatened in the June 15,2006, notice on the grounds that the notice and any claim for civil penaltiesor other monetary relief for alleged violations occurring before January 3,2006, violated the discharge of claims and causes of action granted MirantChalk Point under the Plan. On August 14, 2006, the Bankruptcy Courtentered an order agreed to by the parties enjoining the four organizations fromseeking monetary damages for any alleged violations occurring on or before January 3,2006. As part of that order, the organizations agreed not to file a complaintinitiating litigation concerning the alleged violations until August 30,2006.

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

On August 30, 2006,the four environmental organizations filed suit in the United States DistrictCourt for the District of Maryland against Mirant, Mirant Mid-Atlantic, andMirant Chalk Point asserting that emissions from Chalk Point units 3 and 4 hadviolated opacity limits set under the Clean Air Act and state law on numerousoccasions since January 4, 2006. The plaintiffs seek an injunctionprohibiting further violations by Chalk Point units 3 and 4 of the Clean AirAct, civil penalties of up to $32,500 for each violation of the Clean Air Act,additional civil penalties for mitigation projects, and attorneys’ fees. On September 22,2006, the Mirant defendants filed a motion to dismiss, arguing that under theClean Air Act the MDE’s prosecution of the same alleged violations in theMaryland state court proceeding and their resolution through the Consent Decreebarred the plaintiffs’ suit.

***City of Alexandria Zoning Action***

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

***New York Tax Proceedings***

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

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

Collectively, Mirant Bowline and Mirant Lovett havenot paid approximately $58 million assessed by local taxing authorities on theBowline and Lovett generating facilities for 2003, which fell due on September 30,2003, and January 30, 2004, approximately $53 million assessed by localtaxing authorities on the generating facilities for 2004 that fell due on September 30,2004, and January 30, 2005, approximately $59 million assessed by localtaxing authorities on the generating facilities for 2005 that fell due on September 30,2005, and January 30, 2006, and $40 million assessed by local taxingauthorities on the generating facilities for 2006 that fell due on September 30,2006, in order to preserve their respective rights to offset the overpaymentsof taxes made in earlier years against the sums payable on account of currenttaxes. The failure to pay the taxes due on September 30, 2003, January 30,2004, September 30, 2004, January 30, 2005, September 30, 2005, January 30,2006, and September 30, 2006, could subject Mirant Bowline and MirantLovett to additional penalties and interest.

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

On October 3, 2006, the County of Rockland, NewYork, filed a motion with the Bankruptcy Court asking it to compel MirantBowline and Mirant Lovett to pay the real property taxes owed for 2003 through2006 based upon the values of the Bowline and Lovett facilities for 2003determined by the New York state court. The County of Rockland asserts that theNew York state court’s determination of the value of those facilities for 2003should also fix their assessed values for the subsequent three years undersection 727 of New York Real Property Tax Law. The County asserts that theunpaid taxes total $111 million, with penalties and interest. On October 5,2006, Mirant, Mirant New York, Mirant Bowline and Mirant Lovett filed acomplaint with the Bankruptcy Court requesting that it determine the realproperty taxes owed by Mirant Bowline and Mirant Lovett for 2004 through 2006,that any refunds owed to Mirant Bowline and Mirant Lovett should be treated aspayments of or set off against the unpaid taxes, and that the penalties andinterest potentially owed on the unpaid taxes should be reduced or eliminated. 

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The Mirant plaintiffsargue that the pending appeals of the rulings entered by the New York statecourt and exceptions set out in section 727 of New York Real Property Tax Lawcause the rulings by the New York state court not to be determinative of thevalues of the plants for any year after 2003.

There have been no othermaterial developments in legal proceedings involving the Company or itssubsidiaries since those reported in the Company’s Form 10-Q for thequarter ended June 30, 2006.

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

The following are factorsthat could affect our future performance:

***Our revenues are unpredictable because many of ourfacilities operate without long-term power purchase agreements, and ourrevenues and results of operations depend on market and competitive forces thatare beyond our control.***

We sell capacity, energy and ancillary services frommany of our generating facilities into competitive power markets or on ashort-term fixed price basis through power sales agreements. We are notguaranteed recovery of our costs or any return on our capital investmentsthrough mandated rates. The market for wholesale electric energy and energyservices reflects various market conditions beyond our control, including thebalance of supply and demand, the marginal and long run costs incurred by ourcompetitors and the impact of market regulation. The price for which we cansell our output may fluctuate on a day-to-day basis. The markets in which wecompete remain subject to one or more forms of regulation that limit ourability to raise prices during periods of shortage to the degree that wouldoccur in a fully deregulated market, limiting our ability to recover costs andan adequate return on our investment.

Our revenues andresults of operations are influenced by factors that are beyond our control,including:

·       the failure of marketregulators to develop efficient mechanisms to compensate merchant generatorsfor the value of providing capacity needed to meet demand;

·       actions by regulators,independent system operators (“ISOs”), regional transmission organization (“RTOs”)and other bodies that may prevent capacity and energy prices from rising to thelevel sufficient for recovery of our costs, our investment and an adequatereturn on our investment;

·       the ability of wholesalepurchasers of power to make timely payment for energy or capacity, which may beadversely impacted by factors such as retail rate caps, refusal by regulatorsto allow utilities to fully recover their wholesale power costs and investmentsthrough rates, catastrophic losses, and losses from investments in unregulatedbusinesses;

·       the fact that increases inprevailing market prices for fuel oil, coal, natural gas and emissionsallowances may not be reflected in increased prices we receive for sales ofenergy;

·       increases in supplies dueto actions of our current competitors or new market entrants, including thedevelopment of new generating facilities that may be able to produceelectricity less expensively than our generating facilities, and improvementsin transmission that allow additional supply to reach our markets;

·       the competitive advantagesof certain competitors including continued operation of older power plants instrategic locations after recovery of historic capital costs from ratepayers;

·       existing or futureregulation of our markets by the FERC, ISOs and RTOs, including any pricelimitations and other mechanisms to address some of the price volatility orilliquidity in these markets or the physical stability of the system;

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·       regulatory policies ofstate agencies which affect the willingness of our customers to enter intolong-term contracts generally, and contracts for capacity in particular;

·       weather conditions thatdepress demand or increase the supply of hydro power; and

·       changes in the rate ofgrowth in electricity usage as a result of such factors as regional economicconditions and implementation of conservation programs.

In addition, unlike mostother commodities, electric energy can only be stored on a very limited basisand generally must be produced at the time of use. As a result, the wholesalepower markets are subject to substantial price fluctuations over relativelyshort periods of time and can be unpredictable.

***Changes in commodity prices may negatively impact ourfinancial results by increasing the cost of producing power or lowering theprice at which we are able to sell our power, and we may be unsuccessful atmanaging this risk.***

Our generation business is subject to changes in powerprices and fuel costs, which may impact our financial results and financialposition by increasing the cost of producing power and decreasing the amountswe receive from the sale of power. In addition, actual power prices and fuelcosts may differ from our expectations.

Mirant Energy Trading engages in asset hedgingactivities related to sales of electricity and purchases of fuel. The incomeand losses from these activities are recorded as generation revenues and fuelcosts. Mirant Energy Trading may use forward contracts and derivative financialinstruments to manage market risk and exposure to volatility in electricity,coal, natural gas, emissions and oil prices. We cannot provide assurance thatthese strategies will be successful in managing our price risks, or that they willnot result in net losses to us as a result of future volatility in electricityand fuel markets.

Many factors influence commodity prices, includingweather, market liquidity, transmission and transportation inefficiencies,availability of competitively priced alternative energy sources, demand forenergy commodities, natural gas, crude oil and coal production, naturaldisasters, wars, embargoes and other catastrophic events, and federal and stateenvironmental regulation and legislation.

Additionally, we expect tohave an open position in the market, within our established guidelines,resulting from the management of our portfolio. To the extent open positionsexist, fluctuating commodity prices can impact financial results and financialposition, either favorably or unfavorably. Furthermore, the risk managementprocedures we have in place may not always be followed or may not always workas planned. As a result of these and other factors, we cannot predict theimpact that risk management decisions may have on our business, operatingresults or financial position. Although management devotes a considerableamount of attention to these issues, their outcome is uncertain.

***We are exposed to the risk of fuel and fueltransportation cost increases and volatility and interruption in fuel supplybecause our facilities generally do not have long-term agreements for naturalgas, coal and oil fuel supply.***

Although we attempt topurchase fuel based on our known fuel requirements, we still face the risks ofsupply interruptions and fuel price volatility. Our cost of fuel may notreflect changes in energy and fuel prices in part because we must pre-purchaseinventories of coal and oil for reliability and dispatch requirements, and thusthe price of fuel may have been determined at an earlier date than the price ofenergy generated from it. The price we can obtain from the sale of energy maynot rise at the same rate, or may not rise at all, to match a rise in fuelcosts. This may have a material adverse effect on our financial performance.The volatility of fuel prices could adversely affect our financial results andoperations.

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***Some of our generation facilities depend on only oneor a few customers or suppliers. These parties, as well as other parties withwhom we have contracts, may fail to perform their obligations, or may terminatetheir existing agreements, which may result in a default on project debt or aloss in revenues and may require us to institute legal proceedings to enforcethe relevant agreements.***

Several of our power production facilities depend on asingle customer or a few customers to purchase most or all of the facility’soutput or on a single supplier or a few suppliers to provide fuel, water andother services required for the operation of the facility. The sale andprocurement agreements for these facilities may also provide support for anyproject debt used to finance the related facilities. The failure of anysupplier or customer to fulfill its contractual obligations to the facilitycould have a material adverse effect on such facility’s financial results. Thefinancial performance of these facilities is dependent on the continuedperformance by customers and suppliers of their obligations under theirlong-term agreements.

Revenue received by oursubsidiaries may be reduced upon the expiration or termination of existingpower sales agreements. Some of the electricity we generate from our existingportfolio is sold under long-term power sales agreements that expire at varioustimes. When the terms of each of these power sales agreements expire, it ispossible that the price paid to us for the generation of electricity may bereduced significantly, which would substantially reduce our revenue.

***Operation of our generation facilities involves risksthat may have a material adverse impact on our cash flows and results ofoperations.***

The operation ofour generation facilities involves various operating risks, including, but notlimited to:

·       the output and efficiencylevels at which those generation facilities perform;

·       interruptions in fuelsupply;

·       disruptions in the deliveryof electricity;

·       adverse zoning;

·       breakdowns or equipmentfailures (whether due to age or otherwise);

·       restrictions on emissions;

·       violations of our permitrequirements or changes in the terms of or revocation of permits;

·       releases of pollutants andhazardous substances to air, soil, surface water or groundwater;

·       shortages of equipment orspare parts;

·       labor disputes;

·       operator errors;

·       curtailment of operationsdue to transmission constraints;

·       failures in the electricitytransmission system which may cause large energy blackouts;

·       implementation of unproventechnologies in connection with environmental improvements; and

·       catastrophic events such asfires, explosions, floods, earthquakes, hurricanes or other similaroccurrences.

A decrease in, or theelimination of, the revenues generated by our facilities or an increase in thecosts of operating such facilities could materially impact our cash flows andresults of operations, including cash flows available to us to makepayments on our debt or our other obligations.

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***The accounting for our asset hedging and proprietarytrading activities may increase the volatility of our quarterly and annualfinancial results.***

Weengage in asset management activities in order to economically hedge ourexposure to market risk with respect to (1) electricity sales from ourgeneration facilities, (2) fuel utilized by those facilities and (3) emissionsallowances. We generally attempt to balance our fixed-price physical andfinancial purchases and sales commitments in terms of contract volumes and thetiming of performance and delivery obligations through the use of financial andphysical derivative contracts. We also use derivative contracts with respect toour limited proprietary trading activities, through which we attempt to achieveincremental returns by transacting where we have specific market expertise.Some of the derivatives from our asset hedging and proprietary tradingactivities are recorded on our balance sheet at fair value pursuant toStatement of Financial Accounting Standards Board (“SFAS”) No. 133, “*Accounting for Derivative Instruments and Hedging Activities*”(“SFAS No. 133”). None of our derivatives recorded at fair market valueare designated as hedges under SFAS No. 133 and changes in their fairvalue are therefore recognized currently in earnings as unrealized gains orlosses. As a result, our financial results—including gross margin, operatingincome and balance sheet ratios—will, at times, be volatile and subject tofluctuations in value primarily due to changes in electricity and fuel prices.For example, for the nine months ended September 30, 2006, we wererequired to mark-to-market contracts resulting in a $593 million gain ascompared to the nine months ended September 30, 2005, when we wererequired to mark-to-market contracts resulting in a $407 million loss.

***Our results aresubject to quarterly and seasonal fluctuations.***

Our operatingresults have fluctuated in the past and may continue to do so in the future asa result of a number of factors, including:

·       seasonal variations indemand and corresponding energy and fuel prices; and

·       variationsin levels of production.

***We compete to sellenergy and capacity in the wholesale power markets against some competitorsthat enjoy competitive advantages, including the ability to recover fixed coststhrough rate base mechanisms and a lower cost of capital.***

Regulated utilities in thewholesale markets generally enjoy a lower cost of capital than we do and oftenare able to recover fixed costs through regulated retail rates including, inmany cases, the costs of generation, allowing them to build, buy and upgradegeneration facilities without relying exclusively on market clearing prices torecover their investments. The competitive advantages of such participantscould adversely impact our ability to compete effectively and could have anadverse impact on the revenues generated by our facilities.

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***Our business andactivities are subject to extensive environmental requirements and could beadversely affected by such requirements, including future changes to them.***

Our business is subject to extensive environmentalregulation by federal, state and local authorities, which, among other things,restricts the discharge of pollutants into the air, water and soil, and alsogoverns the use of water from adjacent waterways. Such laws and regulationsfrequently require us to obtain operating permits and remain in continuouscompliance with the conditions established by those operating permits. Tocomply with these legal requirements and the terms of our operating permits, wemust spend significant sums on environmental monitoring, pollution controlequipment and emissions allowances. If we were to fail to comply with theserequirements, we could be subject to civil or criminal liability and theimposition of liens or fines. In addition, we may be required to shut downfacilities if we are unable to comply with the requirements, such as withcarbon dioxide (“CO2”) regulations for which there currently is not a technicalcompliance solution, or if we determine the expenditures required to comply areuneconomic. For example, we currently intend to retire our Lovett generationfacility in New York, in part because of substantial environmental capitalexpenditure requirements, starting with units 3 and 5 in 2007 and unit 4in 2008. We are pursuing alternatives that would make it economically feasiblefor this generation facility to remain in operation, but there can be noassurances that we will be successful.

In addition, environmental laws, particularly withrespect to air emissions, wastewater discharge and cooling water intakestructures, are generally becoming more stringent, which may require us to makeexpensive facility upgrades or restrict our operations to meet more stringentstandards. With the trend toward stricter standards, greater regulation, andmore extensive permitting requirements, we expect our environmentalexpenditures to be substantial in the future. Although we have budgeted forsignificant expenditures to comply with these requirements, actual expendituresmay be greater than budgeted amounts. We may have underestimated the cost ofthe environmental work we are planning or the air emissions allowances weanticipate buying. In addition, new environmental laws may be enacted, new orrevised regulations under those laws may be issued, the interpretation of suchlaws and regulations by regulatory authorities may change, or additionalinformation concerning the way in which such requirements apply to us may beidentified. For example, in April 2006, Maryland’s governor signed intolaw the Healthy Air Act, which requires more significant reductions in emissionsof NOx, SO2 and mercury than therecently finalized CAIR and CAMR. This legislation affects our Chalk Point,Dickerson and Morgantown facilities and we are currently assessing our optionsfor compliance and their impacts. We anticipate that the capital expendituresto achieve compliance will be approximately $1.3 billion to $1.5 billionin 2006 through 2009.

From time to time we may not be able to obtainnecessary environmental regulatory approvals. Such approvals could be delayedor subject to onerous conditions. If there is a delay in obtaining anyenvironmental regulatory approvals or if onerous conditions are imposed, theoperation of our generation facilities or the sale of electricity to thirdparties could be prevented or become subject to additional costs. Such delaysor onerous conditions could have a material adverse effect on our financialperformance and condition.

Certain environmentallaws, including the Federal Comprehensive Environmental Response, Compensationand Liability Act of 1980 (“CERCLA”) and comparable state laws, impose strictand, in many circumstances, joint and several liability for costs ofcontamination in soil, groundwater and elsewhere. Some of our facilities haveareas with known soil and/or groundwater contamination. Releases of hazardoussubstances at our generation facilities, or at locations where we dispose of(or in the past disposed of) hazardous substances and other waste, couldrequire us to spend significant sums to remediate contamination, regardless ofwhether we caused such contamination. The discovery of significantcontamination at our generation facilities, at disposal sites we currentlyutilize or have formerly utilized, or at other locations for which we may beliable, or the failure or inability of parties contractually 

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responsibleto us for contamination to respond when claims or obligations regarding suchcontamination arise, could have a material adverse effect on our financialperformance and condition.

***The expected decommissioning and/or site remediationobligations of certain of our generation facilities may negatively impact ourcash flows.***

We expect that certain ofour generation facilities and related properties will become subject todecommissioning and/or site remediation obligations that may require materialexpenditures. The exact amount and timing of such expenditures, if any, is notpresently known. Furthermore, laws and regulations may change to imposematerial additional decommissioning and remediation obligations on us in thefuture. If we are required to make material expenditures to decommission orremediate one or more of our facilities, such obligations will impact our cashflows and may adversely impact our ability to make payments on our obligations.

***Our level of indebtedness could adversely affect ourability to raise additional capital to fund our operations, limit our abilityto react to changes in the economy or our industry and prevent us from meetingour obligations.***

As of September 30,2006, our total indebtedness wasapproximately $1.6 billion. In addition, the present value of lease paymentsunder the Mirant Mid-Atlantic leveraged leases is approximately $1 billion(assuming a 10% discount rate) and the termination value of the MirantMid-Atlantic leveraged leases is $1.4 billion. Our substantial degree ofleverage could have important consequences, including the following: (1) itmay limit our ability to obtain additional debt or equity financing for workingcapital, capital expenditures, debt service requirements, acquisitions andgeneral corporate or other purposes; (2) a substantial portion of our cashflows from operations must be dedicated to the payment of principal andinterest on our indebtedness and will not be available for other purposes,including our operations, capital expenditures and future businessopportunities; (3) our debt service requirements could make it moredifficult for us to satisfy our other financial obligations; (4) borrowingsunder our senior secured credit facility are at a variable rate of interest,exposing us to the risk of increased interest rates; (5) it may limit ourability to adjust to changing market conditions and place us at a competitivedisadvantage compared with our competitors that have less debt; and (6) wemay be more vulnerable in a downturn in general economic conditions or in ourbusiness and we may be unable to carry out capital expenditures that areimportant to our long-term growth or necessary to comply with environmentalregulations.

***We are a holdingcompany and may not have access to sufficient cash to meet our obligations.***

Our operations may notgenerate sufficient cash to enable us to make principal and interest paymentson our indebtedness. In addition, payments to us by our subsidiaries will becontingent upon our subsidiaries’ earnings. Our subsidiaries are permittedunder the terms of our indebtedness to incur additional indebtedness that mayrestrict payments from those subsidiaries to us. We cannot assure you thatagreements governing current and future indebtedness of our subsidiaries willpermit those subsidiaries to provide us with sufficient cash to fund ourobligations.

We have no operationsother than the operations of the subsidiaries that we own, including MirantMid-Atlantic. We have no source of revenue to pay interest or principal on ourdebt other than money received from distributions. Our subsidiaries areseparate and distinct legal entities, and, except for our existing and futuresubsidiaries that are and will be guarantors of our obligations including theguarantors of our senior secured credit facility and senior notes, they have noobligation, contingent or otherwise, to pay our obligations or to make anyfunds available to pay those obligations, whether by dividend, distribution,loan or other payment.

Our obligations orindebtedness are effectively subordinated to the obligations or indebtedness ofany of our subsidiaries, except to the extent that our obligations orindebtedness are assumed or guaranteed by a subsidiary. A significant portionof our cash from operations is generated by Mirant Mid-Atlantic, which 

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is not asubsidiary guarantor under our senior secured credit facility or senior notes.Under the Mirant Mid-Atlantic leveraged leases, Mirant Mid-Atlantic is subjectto a covenant that does not permit them to make distributions to us unless (1) certainfixed charge coverage ratio and projected fixed charge coverage ratio tests aremet and (2) at the time of and after giving effect to such distribution,no significant lease default or lease event of default has occurred and iscontinuing.

***We may be unable togenerate sufficient liquidity to service our debt and to post required amountsof cash collateral necessary to effectively hedge market risks.***

Our ability to pay principal and interest on our debtdepends on our future operating performance. If our cash flows and capitalresources are insufficient to allow us to make scheduled payments on our debt,we may have to reduce or delay capital expenditures, sell assets, seekadditional capital, restructure or refinance. There can be no assurance thatthe terms of our debt will allow these alternative measures, that the financialmarkets will be available to us on acceptable terms or that such measures wouldsatisfy our scheduled debt service obligations.

We seek to manage the risks associated with thevolatility in the price at which we sell power produced by our generationfacilities and in the prices of fuel, emissions allowances and other inputsrequired to produce such power by entering into hedging transactions. Theseasset hedging activities generally require us to post a significant amount ofcollateral either in the form of cash or letters of credit. As of September 30,2006, we had approximately $100 million of posted cash collateral and $185 millionof letters of credit outstanding primarily to support our asset hedgingactivities and debt service reserve requirements. While we seek to structuretransactions in a way that reduces our potential liquidity needs forcollateral, we may be unable to execute our hedging strategy successfully if weare unable to post the amount of collateral required to enter into and supporthedging contracts.

In our efforts to hedge commodity price risk, we arean active participant in energy exchange and clearing markets. These marketsrequire a per contract initial margin to be posted, regardless of the creditquality of the participant. The initial margins are determined by the exchangesthrough the use of proprietary models that rely on a variety of inputs and factors,including market conditions. We have limited notice of any changes to themargin rates. Consequently, we are exposed to changes in the per unit marginrates required by the exchanges and could be required to post additionalcollateral on short notice.

If our facilitiesexperience unplanned outages, we may be required to procure replacement powerin the open market to satisfy contractual commitments. Without adequateliquidity to post margin and collateral requirements, we may be exposed tosignificant losses and may miss significant opportunities, and we may haveincreased exposure to the volatility of spot markets.

***Our business issubject to complex government regulations. Changes in these regulations, ortheir administration, bylegislatures, state and federal regulatory agencies, or other bodies may affectthe costs of operating our facilities or our ability to operate our facilities.Such cost impacts, in turn, may negatively impact our financial condition andresults of operations.***

Generally, we are subject to regulation by the FERCregarding the terms and conditions of wholesale service and rates, as well asby state agencies regarding physical aspects of the generation facilities. Themajority of our generation is sold at market prices under market-based rateauthority granted by the FERC. If certain conditions are not met, the FERC hasthe authority to withhold or rescind market-based rate authority and requiresales to be made based on cost-of-service rates. A loss of our market-basedrate authority could have a materially negative impact on our generationbusiness.

Even where market-based rate authority has beengranted, the FERC may impose various forms of market mitigation measures,including price caps and operating restrictions, where it determines thatpotential market power might exist and that the public interest requires suchpotential market power to be 

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mitigated. In addition todirect regulation by the FERC, most of our assets are subject to rules andterms of participation imposed and administered by various RTOs and ISOs.Although these entities are themselves ultimately regulated by the FERC, theycan impose rules, restrictions and terms of service that are quasi-regulatoryin nature and can have a material adverse impact on our business. For example,ISOs and RTOs may impose bidding and scheduling rules, both to curb thepotential exercise of market power and to ensure market functions. Such actionsmay materially impact our ability to sell and the price we receive for ourenergy and capacity.

Certain of our assets are located in the ElectricReliability Council of Texas (“ERCOT”) market. Such assets are not generallysubject to regulation by the FERC, but are subject to similar types ofregulation by the Public Utility Commission of Texas (“PUCT”).

To conduct our business, we must obtain licenses,permits and approvals for our facilities. These licenses, permits and approvalscan be in addition to any required environmental permits. No assurance can beprovided that we will be able to obtain and comply with all necessary licenses,permits and approvals for these facilities. If we cannot comply with allapplicable regulations, our business, results of operations and financialcondition could be adversely affected.

We cannot predict whetherthe federal or state legislatures will adopt legislation relating to therestructuring of the energy industry. There are proposals in many jurisdictionsboth to advance and to roll back the movement toward competitive markets forthe supply of electricity, at both the wholesale and retail levels. Inaddition, any future legislation favoring large, vertically integratedutilities and a concentration of ownership of such utilities could impact ourability to compete successfully, and our business and results of operationscould suffer. We cannot provide assurance that the introductions of new laws,or other future regulatory developments, will not have a material adverseimpact on our business, operations or financial condition.

***Changes intechnology may significantly impact our generation business by making ourgeneration facilities less competitive.***

A basic premise of ourgeneration business is that generating power at central facilities achieveseconomies of scale and produces electricity at a low price. There are othertechnologies that can produce electricity, most notably fuel cells,microturbines, windmills and photovoltaic solar cells. It is possible thatadvances in technology will reduce the cost of alternative methods ofelectricity production to levels that are equal to or below that of mostcentral station electric production, which could have a material impact on ourresults of operations.

***Terrorist attacks,future war or risk of war may adversely impact our results of operations, ourability to raise capital or our future growth.***

As power generators, weface heightened risk of an act of terrorism, either a direct act against one ofour generation facilities or an inability to operate as a result of systemicdamage resulting from an act against the transmission and distributioninfrastructure that we use to transport our power. If such an attack were tooccur, our business, financial condition and results of operations could bematerially adversely impacted. In addition, such an attack could impact ourability to service our indebtedness, our ability to raise capital and ourfuture growth opportunities.

***Our operations aresubject to hazards customary to the power generation industry. We may not haveadequate insurance to cover all of these hazards.***

Our operations are subjectto many hazards associated with the power generation industry, which may exposeus to significant liabilities for which we may not have adequate insurancecoverage. Power generation involves hazardous activities, including acquiring,transporting and unloading fuel, operating 

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largepieces of rotating equipment and delivering electricity to transmission anddistribution systems. In addition to natural risks, such as earthquake, flood,lightning, hurricane and wind, hazards such as fire, explosion, collapse andmachinery failure are inherent risks in our operations. These hazards can causesignificant personal injury or loss of life, severe damage to and destructionof property, plant and equipment, contamination of, or damage to, theenvironment and suspension of operations. The occurrence of any one of theseevents may result in our being named as a defendant in lawsuits assertingclaims for substantial damages, environmental cleanup costs, personal injuryand fines and/or penalties. We maintain an amount of insurance protection thatwe consider adequate, but we cannot assure that our insurance will besufficient or effective under all circumstances and against all hazards orliabilities to which we may be subject. A successful claim for which we are notfully insured could hurt our financial results and materially harm ourfinancial condition.

***The subsidiariesthat own our generation facilities in New York, including our Lovett andBowline facilities, have not emerged from Chapter 11.***

Our Lovett and Bowline generation facilities in NewYork are subject to disputes with local tax authorities regarding property taxassessments and with the New York State Department of EnvironmentalConservation (the “NYSDEC”) regarding environmental controls. Until asettlement is reached on property taxes and environmental controls that wouldpermit economically feasible operation, our subsidiaries that own thefacilities, Mirant Lovett and Mirant Bowline, LLC (“Mirant Bowline”), willremain in Chapter 11. Mirant Lovett and Mirant Bowline are currently innegotiations on these issues. Although negotiations are continuing, resolutionsmay not be reached in the near future or not at all. Until resolutions arereached and the companies emerge from bankruptcy, we will not have access tothe cash from operations generated from these subsidiaries.

Mirant NY-Gen, whichincludes hydroelectric facilities at Swinging Bridge, Rio and Mongaup, andsmall combustion turbine facilities at Hillburn and Shoemaker, is insolvent.Its expenses are being funded under a debtor-in-possession facility made byMirant Americas, Inc. (“Mirant Americas”), with the approval of, and underthe supervision of, the Bankruptcy Court. The FERC authorized Mirant NY-Gen toproceed with its remediation plan for the sinkhole discovered in May 2005in the dam at the Swinging Bridge facility. The Bankruptcy Court authorizedMirant NY-Gen to proceed with implementation of the remediation plan on June 29,2006. The current estimated costs to remediate the dam at Swinging Bridge isapproximately $23 million of which $17 million has been incurred through September 30,2006. Under the debtor-in-possession loan, Mirant Americas, subject to certainconditions, would lend up to $9.5 million to Mirant NY-Gen to provide fundingfor the repairs at the Swinging Bridge dam.

***We may be subjectto claims that were not discharged in the bankruptcy cases, which could have amaterial adverse effect on our results of operations and profitability.***

The nature of our businessfrequently subjects us to litigation. Substantially all of the material claimsagainst us that arose prior to the date of the bankruptcy filing were resolvedduring our Chapter 11 proceedings. In addition, the Bankruptcy Code providesthat the confirmation of a plan of reorganization discharges a debtor fromsubstantially all debts arising prior to confirmation. With a few exceptions,all claims that arose prior to our bankruptcy filing and before confirmation ofthe Plan are (1) subject to compromise and/or treatment under the Plan or (2) discharged,in accordance with the Bankruptcy Code and terms of the Plan. Circumstances inwhich claims and other obligations that arose prior to our bankruptcy filingwere not discharged primarily relate to certain actions by governmental unitsunder police power authority, where we have agreed to preserve a claimant’sclaims, as well as, potentially, instances where a claimant had inadequatenotice of the bankruptcy filing. The ultimate resolution of such claims and otherobligations may have a material adverse effect on our results of operations andprofitability.

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***We cannot be certain that the bankruptcy proceedingwill not adversely affect our operations going forward.***

Although we emerged frombankruptcy upon consummation of the Plan, we cannot assure you that having beensubject to bankruptcy protection will not adversely affect our operations goingforward, including our ability to negotiate favorable terms from suppliers,hedging counterparties and others and to attract and retain customers. Thefailure to obtain such favorable terms and retain customers could adverselyaffect our financial performance.

***Item 6.***                          Exhibits

**(a)***        **Exhibits.*

| Exhibit  Number | ** ** | ** **                                                                                                                                                                                     | ** ** | **Exhibit Name** |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 2.1*            |       | Amended and  Restated Joint Chapter 11 Plan of Reorganization for Registrant and its  Affiliated Debtors (Designated on Form 8-K filed December 15,  2005, as Exhibit 2.1)      |
| 3.1*            |       | Certificate of  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)                                                                                        |
| 31.1            |       | Certification of  Chief Executive Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).           |
| 31.2            |       | Certification of  Chief Financial Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).           |
| 32.1            |       | Certification of  the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)). |
| 32.2            |       | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)). |

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*                    Asteriskindicates exhibits incorporated by reference.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on this 13th day of November, 2006.

|          | MIRANT  NORTH AMERICA, LLC |
|----------|----------------------------|
|     | By:                        | /s/  THOMAS LEGRO |
|     |                       | Thomas Legro |
| * * | * *                   | *Senior  Vice President and Controller (Principal Accounting Officer)* |

 

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