**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

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

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

**Or**

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

**Forthe Transition Period from               to                    **

**Mirant 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**

----

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act.

| 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.

 

----

**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                                    |       |     | 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 |       |     | 40         |   |   |
| Item 3. |       | Quantitative and Qualitative Disclosures about Market  Risk                                  |       |     | 60         |   |   |
| Item 4. |       | Controls and Procedures                                                                      |       |     | 60         |   |   |
|         |       | **PART II—OTHER  INFORMATION**                                                     |       |     |       |   |   |
| Item 1. |       | Legal  Proceedings                                                                           |       |     | 61         |   |   |
| Item  1A.    |       | Risk  Factors                                                                                |       |     | 72         |   |   |
| Item 6. |       | Exhibits                                                                                     |       |     | 82         |   |   |

 

2

----

**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

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

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

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

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

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

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

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

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

·       our inability to accesseffectively the over-the-counter and exchange-based commodity markets orchanges in commodity market liquidity or other commodity market conditions,which may affect our ability to engage in asset management and proprietarytrading activities as expected;

·       ourability to borrow additional funds and access capital markets;

·       strikes,union activity or labor unrest;

·       weatherand other natural phenomena, including hurricanes and earthquakes;

·       thecost and availability of emissions allowances;

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

·       curtailmentof operations due to transmission constraints;

·       environmentalregulations that restrict our ability to operate our business;

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

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

3

----

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

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

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

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

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

·       thefact that our New York subsidiaries remain in bankruptcy;

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

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

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

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

·       thedisposition of the pending litigation described in this Form 10-Q.

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 ofFinancial Condition and Results of Operations and the accompanying Notes toMirant North America, LLC’s unaudited condensed consolidated and combinedfinancial statements, other factors that could affect the Company’s futureperformance (business, financial condition or results of operations and cashflows) are set forth 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

----

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

**JUNE 30, 2006, CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

**and**

**JUNE30, 2005, CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)**

| ** **                                                                                           | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                           | ** ** | **(in millions)**                          | ** ** |
| Operating  revenues—affiliate                                                                   | ** ** | **$**                                           | **27**     |                                          | $          | 25 | ** ** | **$** | **30** |   | $ | 60 |   |
| Operating  revenues—nonaffiliate                                                                | ** ** | **654**                                         |       | 643                                           | ** ** | **1,627** |   | 1,199 |   |
| Total operating revenues                                                                             | ** ** | **681**                                         |       | 668                                           | ** ** | **1,657** |   | 1,259 |   |
| Cost of fuel,  electricity and other products—affiliate                                         | ** ** | **35**                                          |       | 35                                            | ** ** | **51** |   | 65 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                                      | ** ** | **265**                                         |       | 402                                           | ** ** | **572** |   | 768 |   |
| Total cost of fuel, electricity and other products                                                   | ** ** | **300**                                         |       | 437                                           | ** ** | **623** |   | 833 |   |
| **Gross  Margin**                                                                                    | ** ** | **381**                                         |       | 231                                           | ** ** | **1,034** |   | 426 |   |
| **Operating Expenses:**                                                                              | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operations and  maintenance—affiliate, including restructuring charges of  $2 in 2005 | ** ** | **70**                                          |       | 73                                            | ** ** | **140** |   | 151 |   |
| Operations and  maintenance—nonaffiliate                                                        | ** ** | **83**                                          |       | 80                                            | ** ** | **156** |   | 141 |   |
| Depreciation and  amortization                                                                       | ** ** | **35**                                          |       | 32                                            | ** ** | **67** |   | 65 |   |
| Generation  facilities rent                                                                          | ** ** | **24**                                          |       | 26                                            | ** ** | **48** |   | 51 |   |
| Gain on sales of  assets, net                                                                        | ** ** | **(6**                                          | **)**      | **—**                                    | ** ** | **(6** | **)** | (1 | ) |
| Total operating expenses                                                                             | ** ** | **206**                                         |       | 211                                           | ** ** | **405** |   | 407 |   |
| **Operating  Income**                                                                                | ** ** | **175**                                         |       | 20                                            | ** ** | **629** |   | 19 |   |
| **Other Expense (Income), net:**                                                                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense—affiliate                                                                      | ** ** | **—**                                      |       | 3                                             |       | — |   | 6 |   |
| Interest expense—nonaffiliate                                                                   | ** ** | **31**                                          |       | 2                                             | ** ** | **71** |   | 3 |   |
| Interest income—affiliate                                                                       | ** ** | **(2**                                          | **)**      | —                                        | ** ** | **(3** | **)** | **—** | ** ** |
| Interest income—nonaffiliate                                                                    | ** ** | **(9**                                          | **)**      | —                                        | ** ** | **(16** | **)** | (1 | ) |
| Gain on sale of  investments                                                                         | ** ** | **(2**                                          | **)**      | —                                        | ** ** | **(2** | **)** | **—** | ** ** |
| Other, net                                                                                           | ** ** | **1**                                           |       | (1                                            | )          | — |   | (2 | ) |
| Total other expense, net                                                                             | ** ** | **19**                                          |       | 4                                             | ** ** | **50** |   | 6 |   |
| **Income  Before Reorganization Items and Income Taxes**                                             | ** ** | **156**                                         |       | 16                                            | ** ** | **579** |   | 13 |   |
| Reorganization  items, net                                                                           | ** ** | **(1**                                          | **)**      | (23                                           | )          | **(1** | **)** | 7 |   |
| Provision  (benefit) for income taxes                                                                | ** ** | **2**                                           |       | (1                                            | )          | **2** |   | 5 |   |
| **Net Income**                                                                                       | ** ** | **$**                                           | **155**    |                                          | $          | 40 | ** ** | **$** | **578** |   | $ | 1 |   |

 

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

5

----

**MIRANT NORTH AMERICA, LLC AND SUBSIDIARIES(Wholly-Owned Indirect Subsidiary of Mirant Corporation)CONDENSED CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                     | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| ** **                                                                                     | ** ** | **(Unaudited)**           | ** ** | ** **                    | ** ** |
| ** **                                                                                     | ** ** | **(in millions)**    | ** ** |
| **ASSETS**                                                                                     | ** ** |                      | ** ** | ** **                    |       |   | ** ** |   |   |
| **Current Assets:**                                                                            |       |                      |       |                          |       |   |   |   |   |
| Cash and cash  equivalents                                                                     | ** ** |                      | **$**      | **373**                       |       |   |   | $ | 295 |   |   |
| Funds on deposit                                                                               | ** ** |                      | **429**    |                          |       |   | 1,540 |   |   |
| Receivables:                                                                                   |       |                      |       |                          |       |   |   |   |   |
| Affiliate                                                                                      | ** ** |                      | **16**     |                          |       |   | 23 |   |   |
| Nonaffiliate, less  allowance for uncollectibles of $6 and $10 for 2006 and 2005, respectively | ** ** |                      | **329**    |                          |       |   | 583 |   |   |
| Notes  receivable—affiliate                                                               | ** ** |                      | **125**    |                          |       |   | 332 |   |   |
| Price risk  management assets—affiliate                                                   | ** ** |                      | **13**     |                          |       |   | — |   |   |
| Price risk  management assets—nonaffiliate                                                | ** ** |                      | **655**    |                          |       |   | 604 |   |   |
| Prepaid rent and  other payments                                                               | ** ** |                      | **118**    |                          |       |   | 147 |   |   |
| Inventories                                                                                    | ** ** |                      | **377**    |                          |       |   | 278 |   |   |
| Assets held for  sale                                                                          | ** ** |                      | **—** |                          |       |   | 7 |   |   |
| Investment in  securities available for sale                                                   | ** ** |                      | **44**     |                          |       |   | 30 |   |   |
| Total current  assets                                                                          | ** ** |                      | **2,479**  |                          |       |   | 3,839 |   |   |
| **Property,  Plant and Equipment, net**                                                        | ** ** |                      | **2,815**  |                          |       |   | 2,804 |   |   |
| **Noncurrent Assets:**                                                                         |       |                      |       |                          |       |   |   |   |   |
| Intangible assets,  net                                                                        | ** ** |                      | **216**    |                          |       |   | 221 |   |   |
| Price risk  management assets—affiliate                                                   | ** ** |                      | **3**      |                          |       |   | — |   |   |
| Price risk  management assets—nonaffiliate                                                | ** ** |                      | **116**    |                          |       |   | 105 |   |   |
| Prepaid rent                                                                                   | ** ** |                      | **220**    |                          |       |   | 208 |   |   |
| Funds on deposit                                                                               | ** ** |                      | **4**      |                          |       |   | 5 |   |   |
| Accounts  receivable, less allowance for uncollectibles of $3 for 2006 and 2005                | ** ** |                      | **5**      |                          |       |   | 2 |   |   |
| Debt issuance costs,  net                                                                      | ** ** |                      | **52**     |                          |       |   | 24 |   |   |
| Other                                                                                          | ** ** |                      | **9**      |                          |       |   | — |   |   |
| Total noncurrent  assets                                                                       | ** ** |                      | **625**    |                          |       |   | 565 |   |   |
| **Total  assets**                                                                              | ** ** |                      | **$**      | **5,919**                     |       |   |   | $ | 7,208 |   |   |
| **LIABILITIES AND EQUITY**                                                                     |       |                      |       |                          |       |   |   |   |   |
| **Current Liabilities:**                                                                       |       |                      |       |                          |       |   |   |   |   |
| Notes  payable—affiliate                                                                  | ** ** |                      | **$**      | **22**                        |       |   |   | $ | 132 |   |   |
| Current portion of  long-term debt                                                             | ** ** |                      | **74**     |                          |       |   | 3 |   |   |
| Claims payable and  estimated claims accrual                                                   | ** ** |                      | **71**     |                          |       |   | — |   |   |
| Accounts payable  and accrued liabilities                                                      | ** ** |                      | **279**    |                          |       |   | 480 |   |   |
| Payable to  affiliate                                                                          | ** ** |                      | **39**     |                          |       |   | 301 |   |   |
| Price risk  management liabilities—affiliate                                              | ** ** |                      | **3**      |                          |       |   | 5 |   |   |
| Price risk  management liabilities—nonaffiliate                                           | ** ** |                      | **494**    |                          |       |   | 791 |   |   |
| Accrued property  taxes                                                                        | ** ** |                      | **216**    |                          |       |   | 186 |   |   |
| Other                                                                                          | ** ** |                      | **8**      |                          |       |   | — |   |   |
| Total current  liabilities                                                                     | ** ** |                      | **1,206**  |                          |       |   | 1,898 |   |   |
| **Noncurrent Liabilities:**                                                                    |       |                      |       |                          |       |   |   |   |   |
| Long-term debt                                                                                 | ** ** |                      | **1,519**  |                          |       |   | 894 |   |   |
| Price risk  management liabilities—nonaffiliate                                           | ** ** |                      | **28**     |                          |       |   | 27 |   |   |
| Asset retirement  obligations                                                                  | ** ** |                      | **37**     |                          |       |   | 33 |   |   |
| Other                                                                                          | ** ** |                      | **1**      |                          |       |   | 5 |   |   |
| Total noncurrent  liabilities                                                                  | ** ** |                      | **1,585**  |                          |       |   | 959 |   |   |
| **Liabilities  Subject to Compromise**                                                         | ** ** |                      | **58**     |                          |       |   | 58 |   |   |
| **Commitments and Contingencies**                                                              |       |                      |       |                          |       |   |   |   |   |
| **Equity:**                                                                                    |       |                      |       |                          |       |   |   |   |   |
| Member’s interest                                                                         | ** ** |                      | **3,242**  |                          |       |   | 4,474 |   |   |
| Preferred stock in  affiliate                                                                  | ** ** |                      | **(214**   | **)**                         |       |   | (208 | ) |   |
| Accumulated other  comprehensive income                                                        | ** ** |                      | **42**     |                          |       |   | 27 |   |   |
| Total equity                                                                                   | ** ** |                      | **3,070**  |                          |       |   | 4,293 |   |   |
| **Total  liabilities and equity**                                                              | ** ** |                      | **$**      | **5,919**                     |       |   |   | $ | 7,208 |   |   |

 

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

6

----

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

**CONDENSEDCONSOLIDATED STATEMENTS OF MEMBER’S EQUITY ANDCOMPREHENSIVE INCOME (UNAUDITED)**

**(in millions)**

| ** **                                                    | ** ** | ** **        | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **        | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | ** **        | ** ** | **Preferred**     | ** ** | **Other**         | ** ** | ** **        | ** ** |
| ** **                                                    | ** ** | **Member’s** | ** ** | **Stock in** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                                                    | ** ** | **Interest**      | ** ** | **Affiliate**     | ** ** | **Income**        | ** ** | **Income**        | ** ** |
| Balance,  December 31, 2005                              |       |              | $          | 4,474             |       |              |       | $                 | (208       | ) |   |   | $ | 27 |   |   |   |   |   |   |
| Net Income                                                    | ** ** | ** **        | **578**    | ** **        | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **—** |   | ** ** | ** ** | **$** | **578** |   |   |
| Amortization of discount on preferred stock in  affiliate     | ** ** | ** **        | **6**      | ** **        | ** ** | ** **        | **(6**     | **)**             | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Settlement of member’s obligations pursuant to the  Plan | ** ** | ** **        | **(1,773** | **)**             |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Distribution to member                                        | ** ** | ** **        | **(44**    | **)**             | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Capital contribution pursuant to the Plan of  Reorganization  | ** ** | ** **        | **1**      | ** **        | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |
| Other comprehensive income                                    | ** ** | ** **        | **—** | ** **        | ** ** | ** **        | **—** | ** **        | ** ** | ** ** | **15** |   | ** ** | ** ** | **15** |   |   |
| Comprehensive Income                                          | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** |   | ** ** | ** ** | **$** | **593** |   |   |
| **Balance, June 30, 2006**                               | ** ** | ** **        | **$**      | **3,242**         | ** ** | ** **        | ** ** | **$**             | **(214**   | **)** | ** ** | ** ** | **$** | **42** |   | ** ** | ** ** | ** ** |   |   |

 

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

7

----

**MIRANTNORTH AMERICA, LLC AND SUBSIDIARIES**

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

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

| ** **                                                                                   | ** ** | **Six Months**          | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                   | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                   | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **(in millions)**       | ** ** |
| **Cash Flows from Operating Activities:**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net income                                                                                   | ** ** | **$**                        | **578**    |   | $ | 1 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                         |       |   |   |
| Depreciation and  amortization                                                               | ** ** | **71**                       |       | 65 |   |
| Price risk management  activities, net                                                       | ** ** | **(376**                     | **)**      | (67 | ) |
| Deferred income taxes                                                                        |       | —                       |       | 2 |   |
| Non-cash charges for  reorganization items                                                   |       | —                       |       | (17 | ) |
| Gain on sales of assets  and investments                                                     | ** ** | **(8**                       | **)**      | (1 | ) |
| Other, net                                                                                   | ** ** | **1**                        |       | 1 |   |
| Changes in operating assets and liabilities:                                                 |       |                         |       |   |   |
| Affiliate accounts  receivable, net                                                          | ** ** | **6**                        |       | (5 | ) |
| Customer accounts  receivable, net                                                           | ** ** | **343**                      |       | 91 |   |
| Prepaid rent                                                                                 | ** ** | **(12**                      | **)**      | (17 | ) |
| Inventories                                                                                  | ** ** | **(99**                      | **)**      | 20 |   |
| Other assets                                                                                 | ** ** | **270**                      |       | (29 | ) |
| Accounts payable and  accrued liabilities                                                    | ** ** | **(239**                     | **)**      | (110 | ) |
| Payable to affiliate                                                                         | ** ** | **(12**                      | **)**      | 8 |   |
| Property taxes accrued,  affiliate                                                           |       | —                       |       | (5 | ) |
| Property taxes accrued,  nonaffiliate                                                        | ** ** | **30**                       |       | 18 |   |
| Other liabilities                                                                            | ** ** | **48**                       |       | 5 |   |
| Total adjustments                                                                            | ** ** | **23**                       |       | (41 | ) |
| Net cash provided by (used  in) operating activities                                         | ** ** | **601**                      |       | (40 | ) |
| **Cash Flows from Investing Activities:**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                        | ** ** | **(63**                      | **)**      | (62 | ) |
| Repayments on  notes receivable from affiliate                                               | ** ** | **207**                      |       | 11 |   |
| Proceeds from the  sales of assets and investments, net                                      | ** ** | **16**                       |       | 4 |   |
| Net cash provided by  (used in) investing activities                                         | ** ** | **160**                      |       | (47 | ) |
| **Cash Flows from Financing Activities:**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Proceeds from  issuance of long-term debt                                                    | ** ** | **2,015**                    |       | 1 |   |
| Repayment of notes  payable—affiliate                                                   | ** ** | **(110**                     | **)**      | — |   |
| Repayment of  long-term debt—nonaffiliate                                               | ** ** | **(470**                     | **)**      | (1 | ) |
| Debt issuance cost                                                                           | ** ** | **(51**                      | **)**      | — |   |
| Payment to  affiliate under the plan                                                         | ** ** | **(250**                     | **)**      | — |   |
| Distribution to  member                                                                      | ** ** | **(44**                      | **)**      | — |   |
| Settlement of  member’s obligation pursuant to the Plan                                 | ** ** | **(1773**                    | **)**      | — |   |
| Net cash used in  financing activities                                                       | ** ** | **(683**                     | **)**      | — |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                    | ** ** | **78**                       |       | (87 | ) |
| **Cash and  Cash Equivalents, beginning of period**                                          | ** ** | **295**                      |       | 636 |   |
| **Cash and  Cash Equivalents, end of period**                                                | ** ** | **$**                        | **373**    |   | $ | 549 |   |
| **Supplemental Cash Flow Disclosures:**                                                      | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Cash paid for  interest, net of amounts capitalized                                          | ** ** | **$**                        | **66**     |   | $ | 9 |   |
| Cash paid for  claims and professional fees from bankruptcy                                  | ** ** | **$**                        | **—** |   | $ | 33 |   |
| **Financing Activity:**                                                                      | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Capital  contribution—non-cash                                                          | ** ** | **$**                        | **1**      |   | $ | — |   |

 

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

8

----

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

**A. Description ofBusiness**

***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 in thisreport “Mirant” refers to old Mirant prior to January 3, 2006, and to newMirant 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 12,035 megawatts (“MW”) of electric generation capacity in theUnited States. The Company operates 72 generating units at 21 plantsserving customers located near major metropolitan load centers in Maryland,California, New York, Massachusetts, Michigan, Virginia and Texas.

Pursuant to the Plan of Reorganization (the “Plan”),that was approved in conjunction with Mirant’s emergence from bankruptcy, in December 2005Mirant contributed its interest in Mirant Potomac River, LLC (“Mirant PotomacRiver”) and Mirant Peaker, LLC (“Mirant Peaker”) to our wholly-owned subsidiaryMirant Mid-Atlantic, LLC (“Mirant Mid-Atlantic”) and its interest in MirantZeeland, LLC (“Mirant Zeeland”) and Mirant Americas Energy Marketing, LP (“MirantAmericas Energy Marketing”), Mirant Americas Development, Inc., MirantAmericas Production Company, Mirant Americas Energy Capital, LLC, MirantAmericas Energy Capital Assets, LLC, Mirant Americas Development Capital, LLC,Mirant Americas Retail Energy Marketing, LP, and Mirant Americas Gas Marketing,LLC (collectively, the “Trading Debtors”) to the Company. All of thecontributed subsidiaries were under the common control of Mirant and arecollectively referred to as the “Contributed Subsidiaries.” On January 31,2006, the trading and marketing business of the Trading Debtors was transferredto Mirant Energy Trading, LLC (“Mirant Energy Trading”), a wholly-ownedsubsidiary of Mirant North America. After these transfers took place, theTrading Debtors were transferred to a trust created under the Plan that is notaffiliated with the Company. On August 9, 2006, Mirant announced theplanned sales of our Zeeland (837 MW) and Bosque (532 MW) plants.

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Mirant North America and itssubsidiaries. The accompanying unaudited condensed combined financialstatements present the results of operations and cash flows of the Companybased on the assets, liabilities and operations of the predecessor MirantCorporation Contributed Subsidiaries and include the assets, liabilities andoperations of Mirant Americas Generation. The effects of the Plan are reflectedas of December 31, 2005. As a result, the Company’s condensed consolidatedbalance sheet as of December 31, 2005, does not include the assets andliabilities of Mirant Americas Generation.

9

----

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 unauditedcondensed consolidated and combined financial statements include the accountsof Mirant North America and its wholly-owned subsidiaries, the ContributedSubsidiaries and Mirant Americas Generation as discussed above and have beenprepared from records maintained by Mirant North America, its subsidiaries, theContributed Subsidiaries and Mirant Americas Generation. All significantintercompany accounts and transactions have been eliminated in preparing thecondensed consolidated and combined financial statements. Certain prior periodamounts have been reclassified to conform to the current year financialstatement presentation.

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

Mirant North America evaluates long-lived assets, suchas property, plant and equipment and purchased intangible assets subject toamortization, for impairment whenever events or changes in circumstancesindicate that the carrying amount of the asset may not be recoverable. Suchevaluations are performed in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144, *“Accounting for theImpairment or Disposal of Long-Lived Assets.”* Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to the estimated undiscounted future cash flows expected to begenerated by the asset. If the carrying amount of an asset exceeds itsestimated undiscounted future cash flows, an impairment charge is recognized asthe amount by which the carrying amount of the asset exceeds the discountedfuture cash flows of the asset. Assets to be disposed of are separatelypresented in the accompanying condensed consolidated balance sheets and arereported at the lower of the carrying amount or fair value less costs to sell,and are not depreciated. The assets and liabilities of a disposal groupclassified as held for sale are presented separately in the appropriate assetand liability sections of the accompanying condensed consolidated balancesheets.

On August 9, 2006,Mirant announced the planned sale of various gas fired assets. The Mirant NorthAmerica assets to be sold include the Zeeland (837 MW) and Bosque (532 MW)intermediate and peaking gas fired plants. The planned sales will result in thereclassification of the long-lived assets related to these plants as held forsale beginning in the third quarter of 2006. Initial estimates indicate thatfor each of these plants an impairment loss will need to be recorded in thethird quarter to reduce the carrying value of these plants to the fair valueless costs to sell. While the amount of the impairment loss has not yet beendetermined, the Company currently estimates the total impairment loss for thesetwo plants will range from $100 million to $200 million and will be reflectedas a loss from discontinued operations in the Company’s condensed consolidatedstatements of operations for the third quarter of 2006.

***Recently Adopted Accounting Standard***

In September 2005,the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues TaskForce (“EITF”) Issue 04-13, *“Accounting for Purchasesand Sales of Inventory with the Same*

10

----

*Counterparty”*(“EITF 04-13”), which requires companies to account forcertain purchases and sales of inventory with the same counterparty as a singletransaction. The Company adopted EITF 04-13 on April 1, 2006. Theadoption of EITF 04-13 did not have a material impact on the Company’sstatements of operations, financial position or cash flows during the quarter.

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

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

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

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

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

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 

11

----

the technical merits ofthe position. In evaluating whether a tax position has met themore-likely-than-not recognition threshold, the enterprise should presume thatthe position will be examined by the appropriate taxing authority having fullknowledge of all relevant information. The second step is to measure a taxposition that meets the more-likely-than-not threshold. The tax position ismeasured at the largest amount of benefit that is greater than 50% likely ofbeing realized upon ultimate settlement.

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

**B. BankruptcyRelated Disclosures**

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

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

In the six months ended June 30,2006, Mirant Corporation and Mirant Americas Generation contributed to theCompany a $71 million escrow account and the related $71 million bankruptcyclaim. These amounts are included in funds on deposit and claims payable,respectively, in the unaudited condensed consolidated balance sheet at June 30,2006.

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

Mirant North America’s NewYork subsidiaries remain in bankruptcy and include the following entities:Mirant Lovett, LLC (“Mirant Lovett”), Mirant Bowline, LLC (“Mirant Bowline”),Mirant NY-Gen, LLC (“Mirant NY-Gen”), Mirant New York, Inc. (“Mirant NewYork”) and Hudson Valley Gas Corporation. Unaudited condensed consolidatedfinancial statements of Mirant North America’s New York subsidiaries are setforth below.

**NewYork SubsidiariesUnaudited Condensed Consolidated Statements of Operations**

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

 

12

----

**New YorkSubsidiaries**

**UnauditedCondensed Consolidated Balance Sheets**

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

 

**New YorkSubsidiaries**

**UnauditedCondensed Consolidated Statements of Cash Flows**

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

 

***Liabilities Subject to Compromise***

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

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

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

 

13

----

***Reorganization Items, net***

Forthe three and six months ended June 30, 2006, reorganization items, netwere $1 million and relate to the New York subsidiaries. For the three and sixmonths ended June 30, 2006 and 2005, reorganization items, net representamounts that were recorded in the financial statements as a result of thebankruptcy proceedings. The following were the significant items within thiscategory (in millions):

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

 

**C. Related PartyArrangements 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 six months ended June 30,2006 and 2005 as follows (in millions):

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

 

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

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

***Administration Arrangements with Mirant Services***

Substantially all ofMirant’s corporate overhead costs are allocated to Mirant’s operatingsubsidiaries. For the three and six months ended June 30, 2006, theCompany incurred approximately $32 million and $65 million, respectively,compared to $30 million and $68 million, respectively, for the same periods in2005, in costs under these arrangements, which are included in operations andmaintenance—affiliate in the accompanying unaudited condensed consolidated andcombined statements of operations.

14

----

***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 June 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. At June 30, 2006, and December 31, 2005, theCompany had current notes payable to affiliate of $22 million and $132 million,respectively. For the three and six months ended June 30, 2006, theCompany incurred less than $1 million of interest expense under thisarrangement, compared to $3 million and $6 million, for the sameperiods in 2005, which are recorded in interest expense—affiliate in theaccompanying unaudited condensed consolidated and combined financialstatements.

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

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

***Mirant Guarantees***

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

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

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

***Preferred Stock in Mirant Americas***

For the six months ended June 30,2006, the Company recorded $6 million in Preferred Stock in affiliate andMember’s Interest in the unaudited condensed consolidated balance sheet relatedto the amortization of the discount on the preferred stock in Mirant Americas.

15

----

***Debtor in Possession Financing for New York Subsidiaries***

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

Contemporaneous with their entry into the Primary NewYork DIP Agreement, the New York DIP Borrowers also entered into an agreementfor secured financing with Mirant (the “Secondary New York DIP Agreement”). TheSecondary New York DIP Agreement permits Mirant to make 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 from Mirant Americasunder which Mirant Americas, subject to certain conditions, would lend up to$9.5 million to Mirant NY-Gen to provide funding for the repairs on theSwinging Bridge dam.

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

**D. Price RiskManagement Assets and Liabilities**

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

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

 

Of the $262 million net fair value asset at June 30,2006, a net price risk management asset of $96 million relates to the remainderof 2006, a net price risk management asset of $109 million relates to 2007 anda net price risk management asset of $57 million relates to periods thereafter.The volumetric weighted average maturity, or weighted average tenor, of theprice risk management portfolio at June 30, 2006, was approximately 14months. The net notional amount of the price risk management assets andliabilities at June 30, 2006, was a net short position of approximately 28** **million equivalent megawatt-hours (“MWh”).

16

----

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

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

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

 

**E. Assets Held forSale**

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

***Planned Asset Dispositions***

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

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

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

 

17

----

**F. Debt**

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

| **Long-term debt:**                            | ** ** | ** ** | ** ** | **At  June 30, 2006** | ** ** | **At  December 31, 2005** | ** ** | **Interest Rate** | ** ** | **Secured/  Unsecured** | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------------|------------|-------------------------|------------|
| Mirant North America:                               |       |       |       |                            |       |                                |       |                   |       |                    |       |   |   |
| Term loan, due 2006 to 2013(1)                 |       |       | $          | 696                             |       |                                |       | $                      | —     |                    |       | LIBOR  + 1.75% |   | Secured |   |
| Senior note, due 2013.                              |       |       | 850        |                            |       |                                | 850        |                   |       | 7.375%                  |       | Unsecured |   |
| Mirant Zeeland capital lease, due 2006 to 2012 |       |       | 12         |                            |       |                                | 11         |                   |       | 9.50%                   |       | — |   |
| Other :                                             |       |       |       |                            |       |                                |       |                   |       |                    |       |   |   |
| Mirant Peaker capital lease, due 2006 to 2015  |       |       | 35         |                            |       |                                | 36         |                   |       | 8.19%                   |       | — |   |
| Total                                               |       |       | 1,593      |                            |       |                                | 897        |                   |       |                    |       |   |   |
| Less: current  portion of long-term debt            |       |       | (74        | )                               |       |                                | (3         | )                      |       |                    |       |   |   |
| Total long-term  debt, excluding current portion    |       |       | $          | 1,519                           |       |                                |       | $                      | 894        |                    |       |   |   |   |   |

----

       (1) Under the senior secured term loan, $200 millionwas deposited into a cash collateral account to support issuance of up to $200 millionof letters of credit.

***Senior Secured Credit Facilities***

Mirant North America, entered into senior securedcredit facilities in January 2006, which are comprised of an $800 millionsix-year senior secured revolving credit facility and a $700 millionseven-year senior secured term loan. The full amount of the senior securedrevolving credit facility is available for cash draws or for the issuance ofletters of credit. On January 3, 2006, the Company drew $465 millionunder its senior secured revolving credit facility. All amounts were repaidduring the first quarter of 2006. The senior secured term loan was fully drawnat closing and amortizes in quarterly installments aggregating 0.25% of theoriginal principal of the term loan per quarter for the first 27 quarters,with the remainder payable on the final maturity date in January 2013. Atthe closing, $200 million drawn under the senior secured term loan wasdeposited into a cash collateral account to support the issuance of up to $200 millionof letters of credit. The senior secured credit facilities are obligations ofMirant North America and the respective guarantors and are not recourse to anyother Mirant North America entities.

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

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

Mirant North America 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 

18

----

adjustedearnings before interest, taxes, depreciation and amortization (“EBITDA”)calculation to determine excess free cash flows, as defined in the loanagreement. At June 30, 2006, the current estimate of the mandatoryprincipal prepayment of the term loan in April 2007 is approximately $63 million.This amount has been reclassified from long-term debt to current portion oflong-term debt as of June 30, 2006.

***Senior Notes***

In December 2005, the Company issued senior notes(the “Old Notes”) in an aggregate principal amount of $850 million thatbear interest at 7.375% and mature on December 31, 2013. The senior notes wereissued in a private placement and were not registered with the Securities andExchange Commission. Interest on the notes is payable on each June 30 and December 31,commencing June 30, 2006. The proceeds of the notes offering initiallywere placed in escrow pending the emergence of Mirant North America frombankruptcy. The proceeds were released from escrow in connection with MirantNorth America’s emergence from bankruptcy and the closing of the senior securedcredit facilities. The senior notes are obligations of Mirant North America andthe respective guarantors and are not recourse to any other Mirant NorthAmerica entities

In connection with theissuance of the Old Notes, Mirant North America entered into a registrationrights agreement under which it agreed to complete an exchange offer for theOld Notes. On June 29, 2006, Mirant North America completed itsregistration under the Securities Act of $850 million of 7.375% seniornotes due 2013 (the “New Notes”) and initiated an offer to exchange all of theoutstanding Old Notes for the New Notes (the “Exchange Offer”). The ExchangeOffer was completed on August 4, 2006, with $849.965 million of theoutstanding Old Notes being tendered for the New Notes. The terms of the NewNotes are identical in all material respects to the terms of the Old Notes,except that the New Notes are registered under the Securities Act and generallyare not subject to transfer restrictions or registration rights.

**G. Litigation andOther Contingencies**

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

***Chapter 11 Proceedings***

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

As of June 30, 2006, approximately 21.3 millionof the shares of Mirant common stock to be distributed under the Plan have notyet been distributed and have been reserved for distribution with respect toclaims that are disputed by the Mirant Debtors and have not been resolved. Asettlement 

19

----

entered into on May 30,2006, among Pepco, Mirant, MC 2005, LLC f/k/a Mirant Corporation (“Old Mirant”),and various 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, asdescribed below in *Pepco Litigation*.Under the terms of the Plan, to the extent other such unresolved claims areresolved now that the Company has emerged from bankruptcy, the claimants willbe paid from the reserved shares on the same basis as if they had been paidwhen the Plan became effective. That means that their allowed claims willreceive the same pro rata distributions of Mirant common stock, cash, or bothcommon stock and cash as previously allowed claims in accordance with the termsof the Plan. To the extent the aggregate amount of the payouts determined to bedue with respect to such disputed claims ultimately exceeds the amount of thefunded claim reserve, Mirant would have to issue additional shares of commonstock to address the shortfall, which would dilute existing Mirantshareholders, and Mirant and Mirant Americas Generation would have to payadditional cash amounts as necessary under the terms of the Plan to satisfysuch pre-petition claims.

The Company’s Lovett and Bowline generation facilitiesin New York are subject to disputes with local tax authorities regardingproperty tax assessments. In addition, Mirant Lovett is in discussions with theNew York State Department of Environmental Conservation (“NYSDEC”) and the NewYork State Office of the Attorney General regarding environmental controls. MirantLovett is also in discussions with the State of New York and other partiesregarding an agreement that would compensate Mirant Lovett for the contributionof the Lovett facility to the reliability of the New York electric powersystem. The facilities are forecasted to have negative operating cash flows attheir current property taxation levels. Until a resolution is reached onproperty taxes and environmental controls that would permit economicallyfeasible operation, the Company’s subsidiaries that own the facilities, MirantLovett and Mirant Bowline, will remain in Chapter 11. Until such issues areresolved and the companies emerge from bankruptcy, the Company will not haveaccess to the cash from operations generated from these subsidiaries.

The Company’s othersubsidiaries related to its New York business operations, Mirant New York,Hudson Valley Gas Corporation and Mirant NY-Gen also remain in bankruptcy.Mirant NY-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) Pepcoagreed to resell to Mirant all capacity, energy, ancillary services and otherbenefits to which it is entitled under those agreements and (2) Mirantagreed to pay Pepco each month all amounts due from Pepco to the sellers underthose agreements for the immediately preceding month associated with suchcapacity, energy, ancillary services and other benefits. The Panda PPAruns until 2021, and the Back-to-Back Agreement does not expire until allobligations have been performed under the Panda PPA. Under the Back-to-Back Agreement,Mirant is obligated to purchase power from Pepco at prices that typically arehigher than the market prices for power.

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

20

----

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 the BankruptcyCourt were to conclude that the Assignment and Assumption Agreement imposedliability 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, OldMirant, various subsidiaries of Mirant (including subsidiaries of the Company),and a trust established pursuant to the Plan to which ownership of Old Mirantand Mirant Americas Energy Marketing was transferred (collectively the “MirantSettling Parties”) entered into a Settlement Agreement and Release (the “SettlementAgreement”) with Pepco and various affiliates of Pepco (collectively the “PepcoSettling Parties”). Once it becomes effective, the Settlement Agreement willfully resolve the contract rejection motions that remain pending in thebankruptcy proceedings, as well as other matters currently disputed betweenPepco and Mirant and its subsidiaries. The Pepco Settling Parties and theMirant Settling Parties will release each other from all claims known as of May 30,2006, including the fraudulent transfer claims brought by Old Mirant andseveral of its subsidiaries against Pepco in July 2005. The SettlementAgreement will become effective once it has been approved by the BankruptcyCourt and that approval order has become a final order no longer subject toappeal. On August 9, 2006, the Bankruptcy Court entered an order approvingthe Settlement Agreement, but the period within which an appeal can be filedfrom that order has not expired, and the order has not yet become a finalorder.

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

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

21

----

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 itssubsidiaries 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,subject to certain adjustments. Upon the Settlement Agreement becomingeffective, Mirant will distribute up to 18 million shares of Mirant commonstock to Pepco to satisfy its claim and Pepco will liquidate those shares. Theshares are to be distributed to Pepco in two distributions, the first totaling13.5 million shares and the second to be determined by Mirant after theSettlement Agreement becomes effective so as to produce upon liquidation totalnet proceeds from both share distributions as near to $520 million aspossible, subject to the overall cap on the shares to be distributed of 18 millionshares. If the net proceeds received by Pepco from the liquidation of theshares are less than $520 million, Mirant will pay Pepco cash equal to thedifference. If the closing price of Mirant’s stock is less than $16.00 on fourbusiness days in a 20 consecutive business day period prior to any distributionof shares to Pepco on its claim, then Mirant can elect to have the Back-to-BackAgreement assumed and assigned to Mirant Power Purchase rather than rejectingit. If Mirant exercises this right to have the Back-to-Back Agreement assumed,then the $520 million is reduced to $70 million and Mirant PowerPurchase would continue to perform the Back-to-Back Agreement through itsexpiration in 2021 with Mirant guaranteeing its performance. The Settlement Agreementallocates the $70 million to various claims asserted by Pepco that do notarise from the rejection of the Back-to-Back Agreement, including claimsasserted under the Local Area Support Agreement between Pepco and MirantPotomac River that are discussed below in *Pepco Assertion of Breachof Local Area Support Agreement*.

***California and Western Power Markets***

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

 

22

----

*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 Ninth Circuitremanded to the FERC for further proceedings the FERC’s denial of relief forsales of electricity made in the CAISO and Cal PX markets prior toOctober 2, 2000, at rates found to be unjust and directed the FERC toaddress the parties’ request for a market-wide remedy for tariff violationsthat may have occurred prior to October 2, 2000. In addition, the NinthCircuit found that the FERC had not adequately supported its decision toexclude from the FERC Refund Proceedings (i) sales made in the CAISO andCal PX that had 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 the CaliforniaElectricity Oversight Board (the “EOB”) filed to recover certain refunds fromparties, including Mirant Americas Energy Marketing, for bilateral sales ofelectricity to the DWR at the California/Oregon border, claiming that suchsales took place in the Pacific Northwest. In an order issued June 25,2003, the FERC ruled that no refunds were owed and terminated the proceeding.On November 10, 2003, the FERC denied requests for rehearing filed byvarious parties. Various parties have appealed the FERC’s decision to the NinthCircuit.

On September 9, 2004, the Ninth Circuit reversedthe FERC’s dismissal of a complaint filed in 2002 by the California AttorneyGeneral that sought refunds for transactions conducted in markets administeredby the CAISO and the Cal PX outside the Refund Period set by the FERC and fortransactions between the DWR and various owners of generation and powermarketers, including Mirant Americas Energy Marketing and subsidiaries of theCompany. The Ninth Circuit remanded the proceeding to the FERC for it todetermine what remedies, including potential refunds, are appropriate whereentities, including Mirant Americas Energy Marketing, purportedly did notcomply with certain filing requirements for transactions conducted under market-basedrate tariffs. Mirant Americas Energy Marketing and other parties have filed apetition for rehearing with the Ninth Circuit that remains pending.

On January 14, 2005,**Mirantand certain of its subsidiaries, including the Company, entered into a Settlementand Release of Claims Agreement (the “California Settlement”) with PG&E,Southern California Edison Company (“SCE”), San Diego Gas and Electric Company,the CPUC, the DWR, the EOB and the Attorney General of the State of California(collectively, the “California Parties”) and with the Office of MarketOversight and Investigations of the FERC. The California Settlement settled anumber of disputed lawsuits and regulatory proceedings that were pursuedoriginally in state and federal 

23

----

courts and before theFERC. 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 the CaliforniaAttorney General. Under the California Settlement, the California Parties andthose other market participants who have opted into the settlement havereleased the Mirant Settling Parties from any liability for refunds related tosales 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 related totransactions under those contracts.

*FERCShow Cause Proceeding Relating to Trading Practices.**  *On June 25, 2003, the FERC issued a show causeorder (the “Trading Practices Order”) to more than 50 parties, including MirantAmericas Energy Marketing and subsidiaries of the Company, that a FERC staffreport issued on March 26, 2003, identified as having potentially engagedin one or more trading strategies of the type employed by Enron Corporation andits affiliates (“Enron”), as described in Enron memos released by the FERC inMay 2002. The Trading Practices Order identified certain specific tradingpractices that the FERC indicated could constitute gaming or anomalous marketbehavior in violation of the CAISO and Cal PX tariffs. The Trading PracticesOrder requires the CAISO to identify transactions between January 1, 2000,and June 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 ofimproper trading conduct with respect to the selling of ancillary servicesduring 2000 should be resolved in the show cause proceeding. OnDecember 19, 2003, the Mirant entities filed with the FERC for approval ofan amendment to the Trading Settlement Agreement reached with the FERC TrialStaff with respect to 

24

----

the sale of ancillaryservices. Under that amendment, the FERC would have an allowed unsecured claimin Mirant Americas Energy Marketing’s bankruptcy proceeding for $3.67 millionin settlement of the allegations with respect to the sale of ancillaryservices. The FERC approved the Trading Settlement Agreement, as amended, onJune 27, 2005, and the Bankruptcy Court approved it on August 24,2005. Certain parties have filed motions for rehearing with the FERC, whichmotions remain pending.

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

*MirantAmericas Energy Marketing 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.*   In November 2002,Mirant received a subpoena from the Department of Justice (the “DOJ”), actingthrough the United States Attorney’s office for the Northern District ofCalifornia, requesting information about its activities and those of itssubsidiaries for the period since January 1, 1998. The subpoena requestedinformation related to the California energy markets and other topics,including the reporting of inaccurate information to the trade press thatpublish natural gas or electricity spot price data. The subpoena was issued aspart of a grand jury investigation. The DOJ’s investigation of the reporting ofinaccurate natural gas price information is continuing, and Mirant has helddiscussions with the DOJ regarding the disposition of this matter. The DOJ’sinvestigation is based upon the same circumstances that were the subject of aninvestigation by the Commodity Futures Trading Commission (“CFTC”) that wassettled in December 2004. As described in Mirant’s Annual Report on Form 10 Kfor the year ended December 31, 2004, in *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) from January 2000 throughDecember 2001, certain Mirant Americas Energy Marketing natural gas traders (a)knowingly reported inaccurate price, volume, and/or counterparty information regardingnatural gas cash transactions to publishers of natural gas indices and (b)inaccurately reported to index publishers transactions observed in the marketas Mirant Americas Energy Marketing transactions and (2) from January toOctober 2000, certain Mirant Americas Energy Marketing west region tradersknowingly delivered the false reports in an attempt to manipulate the price ofnatural gas. Under the settlement, the CFTC received a subordinated allowed,unsecured claim against Mirant Americas Energy Marketing of $12.5 million inthe Chapter 11 proceedings. On June 19, 2006, two former employees of Mirantpled guilty to charges of conspiracy to manipulate the price of natural gas ininterstate commerce during the period from July 1, 2000, until 

25

----

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’s current assessment is that the amountof any such fine would not be material. Mirant has cooperated fully with theDOJ and intends to continue to do so. At this time, the Company’s view is thatany action 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 air permitting and air emissions control implicationsunder the EPA’s new source review (“NSR”) regulations promulgated under the FederalClean Air Act (the “Clean Air Act”) of past repair and maintenance activitiesat the Potomac River plant in Virginia and the Chalk Point, Dickerson andMorgantown plants in Maryland. The requested information concerns the period ofoperations that predates the Company subsidiaries’ ownership and lease of thoseplants. Mirant has responded fully to this request. Under the APSA, Pepco isresponsible for fines and penalties arising from any violation associated withhistorical operations prior to the Company subsidiaries’ acquisition or leaseof the plants. If a violation is determined to have occurred at any of theplants, the Company subsidiary owning or leasing the plant may be responsiblefor the cost of purchasing and installing emissions control equipment, the costof which may be material. If such violation is determined to have occurredafter the Company’s subsidiaries acquired or leased the plants or, if occurringprior to the acquisition or lease, is determined to constitute a continuingviolation, the Company subsidiary owning or leasing the plant at issue wouldalso be subject to fines and penalties by the state or federal government forthe period subsequent to its acquisition or lease of the plant, the cost ofwhich may be material.

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

26

----

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

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MarylandDepartment of the Environment (the “MDE”), the DOJ and the EPA entered into,and filed for approval with the United States District Court for the EasternDistrict of Virginia, a proposed consent decree (the “Original Consent Decree”)that, if approved, would resolve Mirant Potomac River’s potential liability formatters addressed in the NOVs previously issued by the Virginia DEQ and theEPA. The Original Consent Decree requires Mirant Potomac River and MirantMid-Atlantic to (1) install pollution control equipment at the PotomacRiver plant and at the Morgantown plant leased by Mirant Mid-Atlantic inMaryland, (2) comply with declining system-wide ozone season NOx emissionscaps from 2004 through 2010, (3) comply with system-wide annual NOxemissions caps starting in 2004, (4) meet seasonal system averageemissions rate targets in 2008 and (5) pay civil penalties and performsupplemental environmental projects in and around the Potomac River plantexpected to achieve additional environmental benefits. Except for theinstallation of the controls planned for the Potomac River units and theinstallation of selective catalytic reduction (“SCR”) or equivalent technologyat Mirant Mid-Atlantic’s Morgantown Units 1 and 2 in 2007 and 2008, theOriginal Consent Decree does not obligate the Company’s subsidiaries to installspecifically designated technology, but rather to reduce emissions sufficientlyto meet the various NOx caps. Moreover, as to the required installations ofSCRs at Morgantown, Mirant Mid-Atlantic may choose not to install thetechnology by the applicable deadlines and leave the units off eitherpermanently or until such time as the SCRs are installed. The Original ConsentDecree is subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree has not yet beenapproved and the parties have filed an amended proposed consent decree.

The owners/lessors under thelease-financing transactions covering the Morgantown and Dickerson plants (the “Owners/Lessors”)objected to the Original Consent Decree in the Bankruptcy Court and filed amotion to intervene in the district court action. As part of a resolution of disputedmatters in the Chapter 11 proceedings, the Owners/Lessors agreed not toobject to the Original Consent Decree, subject to certain terms set forth inthe Plan and the order entered by the Bankruptcy Court on December 9,2005, approving the Plan.

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

27

----

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 Court mustapprove the Amended Consent Decree for it to become effective. The BankruptcyCourt approved the Amended Consent Decree on June 1, 2006. 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) provide theEPA, Virginia DEQ and the MDE with the written agreement of the new owner oroperator of the affected plant or plants to be bound by the obligations of theAmended Consent Decree and (ii) where the affected plant is the Morgantownplant, offer to any and all prospective owners and/or operators of theMorgantown plant to pay for completion of engineering, construction andinstallation of the SCRs required by the Amended Consent Decree. If the new owneror operator of the affected plant or plants does not agree to be bound by theobligations 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 be mixed rapidly toward the groundresulting in higher ground level concentrations of emissions. If the modelinganalysis indicates that emissions from the facility may cause exceedances ofthe NAAQS for SO2, NO2, CO or PM10, or exceedances of mercury compared toVirginia Standards of Performance for Toxic Pollutants, the consent orderrequires Mirant Potomac River to submit to the Virginia DEQ a plan and scheduleto eliminate and prevent such exceedances on a timely basis. Upon approval bythe Virginia DEQ of the plan and schedule, the approved plan and schedule is tobe incorporated by reference into the consent order. The results of thecomputer modeling analysis showed that emissions from the Potomac River planthave the potential to contribute to localized, modeled instances of exceedancesof the NAAQS for SO2, NO2 and PM10 under certain conditions.

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

28

----

ServiceCommission filed an emergency petition and complaint with the FERC and theDepartment of Energy (the “DOE”) to prevent the shutdown of the Potomac Riverfacility. The matter remains pending before the FERC and the DOE. On September 21,2005, Mirant Potomac River commenced partial operation of one unit of theplant. On December 20, 2005, due to a determination by the DOE that anemergency situation existed with respect to a shortage of electric energy, theDOE ordered Mirant Potomac River to generate electricity at the Potomac Rivergenerating facility, as requested by Pennsylvania-New Jersey-Maryland Interconnection,LLC (“PJM”), during any period in which one or both of the transmission linesserving the central Washington, D.C. area are out of service due to a plannedor unplanned outage. In addition, the DOE ordered Mirant Potomac River, at allother times, for electric reliability purposes, to keep as many units inoperation as possible and to reduce the start-up time of units not in operationwithout contributing to any NAAQS exceedances. The DOE required Mirant PotomacRiver to submit 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 EPA. The order further provides that MirantPotomac River and its customers should agree to mutually satisfactory terms forany costs incurred by it under this order or just and reasonable terms shall beestablished by a supplemental order. Certain parties filed for rehearing of theDOE order, and on February 17, 2006, the DOE issued an order grantingrehearing solely for purposes of considering the rehearing requests further.Mirant Potomac River submitted an operating plan in accordance with the order.On January 4, 2006, the DOE issued an interim response to Mirant PotomacRiver’s operating plan authorizing operation of the units of the Potomac Rivergenerating facility on a reduced basis, but making it possible to bring theentire plant into service within approximately 28 hours when necessary forreliability purposes. The DOE’s order expires after September 30, 2006,but Mirant Potomac River expects it will be able to continue to operate theseunits after that expiration. In a letter received December 30, 2005, theEPA invited Mirant Potomac River and the Virginia DEQ to work with the EPA toensure that Mirant Potomac River’s operating plan submitted to the DOEadequately 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 an EPAinvestigation to determine the Clean Air Act compliance status of the PotomacRiver generating facility. On January 9, 2006, the FERC issued an orderdirecting 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 Riverfacility, which scenarios and limits take into account whether one or both ofthe 230kV transmission lines serving Washington, D.C. are out of service; (ii) requiresthe operation of trona injection units to help reduce SO2 emissions; and (iii) requiresMirant Potomac River to undertake a model evaluation study to predict ambientair quality impacts from the facility’s operations. In accordance with thespecified operating scenarios, the ACO permits the facility to operate using adaily predictive modeling protocol. This protocol allows the facility toschedule operations based on whether computer modeling predicts a NAAQSexceedance, based on weather and certain operating parameters. Additionalprecautions such as an alarm system and the installation of a total of sixambient SO2 monitors in various sites near the facility by July 31, 2006,will signal potential exceedances of the NAAQS. Mirant Potomac River reportsdata, including modeled and actual readings, to the EPA and the Virginia DEQ.On June 2, 2006, the DOE 

29

----

issued a letter modifyingits January 6, 2006, order to direct Mirant Potomac River to comply withthe ACO in order to ensure adequate electric reliability to the District ofColumbia On July 27, 2006, Mirant Potomac River sent a letter to the EPAto request an extension of ten business days to install the sixth ambient SO2monitor. Mirant Potomac River is operating the Potomac River facility inaccordance with the ACO and, depending on weather conditions, has been able tooperate all five units of the facility under the ACO.

*City of AlexandriaNuisance Suit.**  *On October 7,2005, the City of Alexandria filed a suit against Mirant Potomac River andMirant Mid-Atlantic in the Circuit Court for the City of Alexandria. The suitasserts nuisance claims, alleging that the Potomac River plant’s emissions ofcoal dust, flyash, NOx, SO2, particulate matter, hydrogen chloride, hydrogenfluoride, mercury and oil pose a health risk to the surrounding community andharm property owned by the City. The City seeks injunctive relief, damages andattorneys’ fees. On February 17, 2006, the City amended its complaint toadd additional allegations in support of its nuisance claims relating to noiseand lighting, interruption of traffic flow by trains delivering coal to thePotomac River plant, particulate matter from the transport and storage of coaland flyash, and potential coal leachate into the soil and groundwater from thecoal pile.

*Notice of Intent to SueRegarding Chalk Point Emissions.**  *Mirantand Mirant Mid-Atlantic have received a letter dated June 15, 2006, fromfour environmental advocacy organizations providing notice that they intendedto file suit alleging that Mirant Chalk Point had violated the opacity limitsimposed by the permits for Chalk Point Unit 3 and Unit 4 during thousands ofsix minute time intervals between January 2002 and March 2006. Theletter indicates that the organizations intend to file suit to enjoin theviolations alleged, to obtain civil penalties for past noncompliance to theextent that liability for these violations was not discharged by the bankruptcyof Mirant Chalk Point, and to recover attorneys’ fees. On August 3, 2006,Mirant, Mirant Mid-Atlantic, and Mirant Chalk Point filed a complaint in theBankruptcy Court seeking an injunction barring the four organizations fromfiling suit as threatened in the June 15, 2006, notice on the grounds thatthe notice and any claim for civil penalties or other monetary relief foralleged violations occurring before January 3, 2006, violated thedischarge of claims and causes of action granted Mirant Chalk Point under thePlan.

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

***City of Alexandria Zoning Action***

On December 18, 2004, the City Council for 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 

30

----

would likely imposevarious conditions and stipulations as to the permitted use of the plant andseek to limit the period for which it could continue to operate.

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

On January 18, 2005,Mirant Potomac River and Mirant Mid-Atlantic filed a complaint against the Cityof Alexandria and the City Council in the Circuit Court for the City ofAlexandria. The complaint sought to overturn the actions taken by the CityCouncil on December 18, 2004, changing the zoning status of Mirant PotomacRiver’s generating plant and approving revocation of the 1989 SUPs, on thegrounds 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 issuedan oral 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, thecourt entered judgment in favor of Mirant Potomac River and Mirant Mid-Atlanticdeclaring the change in the zoning status of Mirant Potomac River’s generatingplant adopted December 18, 2004, to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. The City of Alexandria has filed noticeseeking to appeal this judgment.

***Pepco Assertion ofBreach of Local Area Support Agreement***

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

31

----

If it is approved by a final order of the BankruptcyCourt, the Settlement Agreement entered into on May 30, 2006, by theMirant Settling Parties and the Pepco Settling Parties, will resolve all claimsasserted by Pepco against Mirant Potomac River arising out of the suspension ofoperations of the Potomac River plant in August 2005. On August 9,2006, the Bankruptcy Court entered an order approving the Settlement Agreement,but the period within which an appeal can be filed from that order has notexpired, and the order has not yet become a final order. Under the SettlementAgreement, Pepco would release all claims it has asserted against MirantPotomac River related to the shutdown of the plant in return for the claimPepco receives in the Mirant bankruptcy proceeding.

***New York Tax Proceedings***

The Company’s subsidiaries that own the Bowline andLovett generating plants in New York are the petitioners in various proceedings(“Tax Certiorari Proceedings”) initially brought in the New York state courtschallenging the assessed value of those generating plants determined by theirrespective local taxing authorities. Mirant Bowline has challenged the assessedvalue of the Bowline generating facility and the resulting local taxassessments paid for tax years 1995 through 2005. Mirant Bowline succeeded torights held by Orange & Rockland Utilities, Inc. (“Orange &Rockland”) for the tax years prior to its acquisition of the Bowline Plant in1999 under its agreement with Orange & Rockland for the purchase ofthat plant. Mirant Lovett has initiated proceedings challenging the assessedvalue of the Lovett facility for each of the years 2000 through 2005. If theTax Certiorari Proceedings result in a reduction of the assessed value of thegenerating facility at issue in each proceeding, the New York Debtor owning thefacility would be entitled to a refund with interest of any excess taxes paidfor those tax years.

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

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

32

----

***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 asinkhole at its Swinging Bridge dam, located in Sullivan County, New York. Inresponse, Mirant NY-Gen filled this sinkhole, inspected the dam’s penstock andslopes for damage, drew down the lake level, and cleaned the diversion tunnel.Mirant NY-Gen’s analysis indicates that the most probable cause of the sinkholewas erosion of soil comprising the dam through a hole in the penstock. The damis currently stabilized, and Mirant NY-Gen is performing additional remediationrepairs. Mirant NY-Gen currently expects to incur additional costs to repairthe dam that could be material and to recover insurance proceeds for a portionof these repair costs. As a result of the sinkhole, Mirant NY-Gen was requiredto perform and provide to the FERC a flood study relating to the SwingingBridge, Rio and Mongaup reservoirs to determine the maximum capacity of thereservoirs and the downstream consequences of a rain event resulting in a “greaterthan the maximum capacity” event. The flood study found that under the veryextreme weather conditions assumed for the study (which included rainfall overa short period in amounts well in excess of the highest rainfall amountsrecorded for such a period historically), the water flowing into the reservoirscould cause the level of the reservoirs to exceed the height of the dams atMirant NY-Gen’s hydro facilities, leading to downstream flooding. By letterdated June 14, 2006, the FERC authorized Mirant NY-Gen to proceed with itsremediation plan for the sinkhole. The FERC has also concurred with the resultsof Mirant NY-Gen’s flood study for its New York Swinging Bridge, Rio andMongaup generation facilities, which study concluded that no additionalremediation is required. The Bankruptcy Court authorized Mirant NY-Gen toproceed with implementation of the remediation plan on June 29, 2006. Thecurrent estimated cost to remediate the dam at Swinging Bridge is approximately$20 million of which approximately $12 million had been incurred through June 30,2006. The Bankruptcy Court has approved a debtor-in-possession loan to MirantNY-Gen from Mirant Americas under which Mirant Americas, subject to certainconditions, would lend up to $9.5 million to Mirant NY-Gen to provide fundingfor the repairs on the Swinging Bridge dam.

*CaliforniaSettlement.**  *TheCalifornia Settlement described above in *Californiaand Western Power Markets—FERC Refund Proceedings*included aprovision that either (1) the partially constructed Contra Costa 8project, which is a planned 530 MW combined cycle generating facility, andrelated equipment (collectively, the “CC8 Assets”) will be transferred toPG&E or (2) PG&E will receive additional alternative considerationof $70 million (the “CC8 Alternative Consideration”). To fund the CC8Alternative Consideration, PG&E received an allowed, unsecured claim in thebankruptcy proceedings against Mirant Delta, LLC (Mirant Delta”) that receiveda distribution of cash and Mirant common stock with a value of approximately$70 million. PG&E was required to liquidate the common stock received aspart of that distribution and place the net resulting amount plus any cashreceived into an escrow 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. In the period that the CC8 Assets aretransferred to PG&E and the $70 million escrow account is paid to MirantDelta, the Company expects to recognize a gain for the amount by which the escrowaccount exceeds the carrying amount of the CC8 Assets. The transfer is expectedto be completed before the end of 2006. The estimated amount of that gain isapproximately $24 million and will be included in other income in the Company’sconsolidated statements of operations.

33

----

**H.**              Income Taxes

The Company is a limitedliability company treated as a branch of Mirant Americas for income taxpurposes. As a result, Mirant Americas and Mirant have direct liability for themajority of the federal and state income taxes relating to the Company’soperations. Through December 31, 2005, the Company has allocated currentand deferred income taxes to each regarded corporate member entity of ourconsolidated group as if each regarded corporate entity member were a single taxpayerutilizing the asset and liability method to account for income taxes exceptwith respect to recognizing certain current period tax benefits. Specifically,the Company 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 sharingagreement.

Several significant changes to the Company’s taxposture occurred as a result of the Plan including the conversion of certain ofthe Company’s regarded corporate entities to limited liability companiescoupled with the liquidation and/or merger of these regarded corporate entitiesinto other disregarded corporate entities for income tax purposes, and certainpartnerships owned by the regarded corporate entities were also liquidated andnow form part of these disregarded entities for income tax purposes. The resulteliminates the Company’s recording of tax expense and benefit beginning January 1,2006, with respect to the liquidated regarded corporate entities. Furthermore,with respect to those liquidated regarded 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 were to beallocated income taxes attributable to its operations, pro forma income taxexpense attributable to income before tax is $2 million for the three and sixmonths ending June 30, 2006, respectively, compared to $1 million and $2million for the same periods in 2005. The pro forma balance of the Company’sdeferred income taxes is zero as of June 30, 2006.

**I.      Condensed Consolidating and Combining Financial 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 of 7.375%senior notes, which mature on December 31, 2013. Upon Mirant’s and theCompany’s emergence from bankruptcy, Mirant North America Escrow was mergedwith and into Mirant North America with Mirant North America as the survivingentity. See Note F 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.

34

----

The following sets forthcondensed consolidating and combining financial statements of the guarantor andnon-guarantor subsidiaries:

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)Three Months Ended June 30, 2006(in millions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non**       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating revenues                            |       |       | $          | —            |       |          |       | $             | 71         |             |       |             | $          | 152 |   |   |   | $ | 717 |   |   |   | $ | (259 | ) |   |   | $ | 681 |   |   |
| Cost of fuel,  electricity and other products |       |       | (8         | )                 |       |          | 41         |          |       |             | 75         |             |       |   | 451 |   |   |   | (259 | ) |   |   | 300 |   |   |
| Gross margin                                  |       |       | 8          |              |       |          | 30         |          |       |             | 77         |             |       |   | 266 |   |   |   | — |   |   |   | 381 |   |   |
| Operating expenses:                           |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | —     |              |       |          | 48         |          |       |             | 40         |             |       |   | 65 |   |   |   | — |   |   |   | 153 |   |   |
| Depreciation and  amortization                |       |       | —     |              |       |          | 5          |          |       |             | 8          |             |       |   | 22 |   |   |   | — |   |   |   | 35 |   |   |
| Generation facilities  rent                   |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 24 |   |   |   | — |   |   |   | 24 |   |   |
| Gain on sales of assets,  net                 |       |       | —     |              |       |          | —     |          |       |             | (1         | )                |       |   | (5 | ) |   |   | — |   |   |   | (6 | ) |   |
| Total operating expenses                      |       |       | —     |              |       |          | 53         |          |       |             | 47         |             |       |   | 106 |   |   |   | — |   |   |   | 206 |   |   |
| Operating Income (Loss)                       |       |       | 8          |              |       |          | (23        | )             |       |             | 30         |             |       |   | 160 |   |   |   | — |   |   |   | 175 |   |   |
| Other Expense (Income),  net                  |       |       | (149       | )                 |       |          | —     |          |       |             | (3         | )                |       |   | (8 | ) |   |   | 179 |   |   |   | 19 |   |   |
| Reorganization items,  net                    |       |       | —     |              |       |          | (1         | )             |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | (1 | ) |   |
| Provision for income tax                      |       |       | 2          |              |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 2 |   |   |
| Net Income (Loss)                             |       |       | $          | 155               |       |          |       | $             | (22        | )                |       |             | $          | 33 |   |   |   | $ | 168 |   |   |   | $ | (179 | ) |   |   | $ | 155 |   |   |

 

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

| ** **                                    | ** ** | ** **        | ** ** | ** **    | ** ** | ** **    | ** ** | **Mirant**       | ** ** | ** **   | ** ** |
|-----------------------------------------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|--------------|------------|
| ** **                                    | ** ** | ** **        | ** ** | ** **    | ** ** | ** **    | ** ** | **Americas**     | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | ** **        | ** ** | ** **    | ** ** | ** **    | ** ** | **Generation**   | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non**       | ** ** | **and**          | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Combined** | ** ** |
| Operating  revenues                           |       |              | $          | 85            |       |          |       | $                | 160        |         |       |   | $ | 765 |   |   |   | $ | (342 | ) |   |   | $ | 668 |   |   |
| Cost of fuel,  electricity and other products |       |              | 70         |          |       |          | 93         |             |       |         | 617        |   |   |   | (343 | ) |   |   | 437 |   |   |
| Gross margin                                  |       |              | 15         |          |       |          | 67         |             |       |         | 148        |   |   |   | 1 |   |   |   | 231 |   |   |
| Operating  expenses:                          |       |              |       |          |       |          |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |              | 42         |          |       |          | 43         |             |       |         | 68         |   |   |   | — |   |   |   | 153 |   |   |
| Depreciation and  amortization                |       |              | 6          |          |       |          | 8          |             |       |         | 19         |   |   |   | (1 | ) |   |   | 32 |   |   |
| Generation  facilities rent                   |       |              | —     |          |       |          | —     |             |       |         | 26         |   |   |   | — |   |   |   | 26 |   |   |
| Total operating  expenses                     |       |              | 48         |          |       |          | 51         |             |       |         | 113        |   |   |   | (1 | ) |   |   | 211 |   |   |
| Operating Income  (Loss)                      |       |              | (33        | )             |       |          | 16         |             |       |         | 35         |   |   |   | 2 |   |   |   | 20 |   |   |
| Other Expense  (Income), net                  |       |              | 1          |          |       |          | 3          |             |       |         | 2          |   |   |   | (2 | ) |   |   | 4 |   |   |
| Reorganization  items, net                    |       |              | (1         | )             |       |          | (171       | )                |       |         | 129        |   |   |   | 20 |   |   |   | (23 | ) |   |
| Benefit for  income taxes                     |       |              | —     |          |       |          | (1         | )                |       |         | —     |   |   |   | — |   |   |   | (1 | ) |   |
| Net Income (Loss)                             |       |              | $          | (33           | )          |          |       | $                | 185        |         |       |   | $ | (96 | ) |   |   | $ | (16 | ) |   |   | $ | 40 |   |   |

 

35

----

**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSED CONSOLIDATINGSTATEMENTS OF OPERATIONS (UNAUDITED)Six Months Ended June 30, 2006(in millions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant  New** | ** ** | ** **    | ** ** | **Non**       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **York**        | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating revenues                            |       | $          | —     |            | $          | 189           |       |          | $          | 364              |       |             |       | $ | 1,653 |   |   |   | $ | (549 | ) |   |   | $ | 1,657 |   |   |
| Cost of fuel,  electricity and other products |       | 10         |       | 84              |       |          | 147        |          |       |             | 931        |             |       |   | (549 | ) |   |   | 623 |   |   |
| Gross margin                                  |       | (10        | )          | 105             |       |          | 217        |          |       |             | 722        |             |       |   | — |   |   |   | 1,034 |   |   |
| Operating expenses:                           |       |       |       |            |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       | —     |       | 86              |       |          | 80         |          |       |             | 130        |             |       |   | — |   |   |   | 296 |   |   |
| Depreciation and  amortization                |       | —     |       | 9               |       |          | 16         |          |       |             | 42         |             |       |   | — |   |   |   | 67 |   |   |
| Generation  facilities rent                   |       | —     |       | —          |       |          | —     |          |       |             | 48         |             |       |   | — |   |   |   | 48 |   |   |
| Gain on sales of  assets, net                 |       | —     |       | —          |       |          | (1         | )             |       |             | (5         | )                |       |   | — |   |   |   | (6 | ) |   |
| Total operating expenses                      |       | —     |       | 95              |       |          | 95         |          |       |             | 215        |             |       |   | — |   |   |   | 405 |   |   |
| Operating Income  (Loss)                      |       | (10        | )          | 10              |       |          | 122        |          |       |             | 507        |             |       |   | — |   |   |   | 629 |   |   |
| Other Expense  (Income), net                  |       | (590       | )          | 2               |       |          | (2         | )             |       |             | (13        | )                |       |   | 653 |   |   |   | 50 |   |   |
| Reorganization  items, net                    |       | —     |       | (2              | )          |          | —     |          |       |             | —     |             |       |   | 1 |   |   |   | (1 | ) |   |
| Provision for  income tax                     |       | 2          |       | —          |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | 2 |   |   |
| Net Income (Loss)                             |       | $          | 578        |            | $          | 10            |       |          | $          | 124              |       |             |       | $ | 520 |   |   |   | $ | (654 | ) |   |   | $ | 578 |   |   |

 

**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSED COMBININGSTATEMENTS OF OPERATIONS (UNAUDITED)Six Months Ended June 30, 2005(in millions)**

| ** **                                    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | **Mirant**       | ** ** | ** **   | ** ** |
|-----------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|--------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | **Americas**     | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **Mirant** | ** ** | ** **    | ** ** | ** **    | ** ** | **Generation**   | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **New**    | ** ** | ** **    | ** ** | **Non**       | ** ** | **and**          | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **York**   | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Combined** | ** ** |
| Operating  revenues                           |       |       | $          | 150           |       |          |       | $                | 350        |         |       |   | $ | 1,535 |   |   |   | $ | (776 | ) |   |   | $ | 1,259 |   |   |
| Cost of fuel,  electricity and other products |       |       | 119        |          |       |          | 197        |             |       |         | 1,297      |   |   |   | (780 | ) |   |   | 833 |   |   |
| Gross margin                                  |       |       | 31         |          |       |          | 153        |             |       |         | 238        |   |   |   | 4 |   |   |   | 426 |   |   |
| Operating expenses:                           |       |       |       |          |       |          |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | 76         |          |       |          | 84         |             |       |         | 133        |   |   |   | (1 | ) |   |   | 292 |   |   |
| Depreciation and  amortization                |       |       | 11         |          |       |          | 16         |             |       |         | 38         |   |   |   | — |   |   |   | 65 |   |   |
| Generation  facilities rent                   |       |       | —     |          |       |          | —     |             |       |         | 51         |   |   |   | — |   |   |   | 51 |   |   |
| Gain on sales of  assets, net                 |       |       | (1         | )             |       |          | —     |             |       |         | —     |   |   |   | — |   |   |   | (1 | ) |   |
| Total operating  expenses                     |       |       | 86         |          |       |          | 100        |             |       |         | 222        |   |   |   | (1 | ) |   |   | 407 |   |   |
| Operating Income  (Loss)                      |       |       | (55        | )             |       |          | 53         |             |       |         | 16         |   |   |   | 5 |   |   |   | 19 |   |   |
| Other Expense  (Income), net                  |       |       | 1          |          |       |          | 3          |             |       |         | 4          |   |   |   | (2 | ) |   |   | 6 |   |   |
| Reorganization  items, net                    |       |       | (1         | )             |       |          | (169       | )                |       |         | 142        |   |   |   | 35 |   |   |   | 7 |   |   |
| Provision for  income taxes                   |       |       | 1          |          |       |          | 4          |             |       |         | —     |   |   |   | — |   |   |   | 5 |   |   |
| Net Income (Loss)                             |       |       | $          | (56           | )          |          |       | $                | 215        |         |       |   | $ | (130 | ) |   |   | $ | (28 | ) |   |   | $ | 1 |   |   |

 

36

----

**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSED CONSOLIDATINGBALANCE SHEETS (UNAUDITED)At June 30, 2006(in millions)**

| ** **                                  | ** ** | ** ** | ** ** | **Mirant**        | ** ** | ** **    | ** ** | **Non**       | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | **Parent** | ** ** | **New York** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                  | ** ** |       | ** ** |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Assets:**                         |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                   |       |       | $          | 138               |       |          |       | $             | 72         |             |       |             | $          | — |   |   |   | $ | 163 |   |   |   | $ | — |   |   |   | $ | 373 |   |   |
| Funds on deposit                            |       |       | 200        |              |       |          | —     |          |       |             | 74         |             |       |   | 155 |   |   |   | — |   |   |   | 429 |   |   |
| Receivables—affiliate                  |       |       | —     |              |       |          | 53         |          |       |             | 41         |             |       |   | 29 |   |   |   | (107 | ) |   |   | 16 |   |   |
| Receivables—nonaffiliate               |       |       | 1          |              |       |          | 4          |          |       |             | 6          |             |       |   | 325 |   |   |   | (7 | ) |   |   | 329 |   |   |
| Notes receivable—affiliate             |       |       | 20         |              |       |          | 32         |          |       |             | 332        |             |       |   | 332 |   |   |   | (591 | ) |   |   | 125 |   |   |
| Price risk management assets                |       |       | —     |              |       |          | 1          |          |       |             | 23         |             |       |   | 670 |   |   |   | (26 | ) |   |   | 668 |   |   |
| Prepaid rent and other payments             |       |       | —     |              |       |          | 1          |          |       |             | 16         |             |       |   | 101 |   |   |   | — |   |   |   | 118 |   |   |
| Inventories                                 |       |       | (13        | )                 |       |          | 21         |          |       |             | 26         |             |       |   | 343 |   |   |   | — |   |   |   | 377 |   |   |
| Investment in securities available for sale |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 44 |   |   |   | — |   |   |   | 44 |   |   |
| Total current assets                        |       |       | 346        |              |       |          | 184        |          |       |             | 518        |             |       |   | 2,162 |   |   |   | (731 | ) |   |   | 2,479 |   |   |
| **Property, Plant and Equipment, net**      |       |       | —     |              |       |          | 494        |          |       |             | 871        |             |       |   | 1,447 |   |   |   | 3 |   |   |   | 2,815 |   |   |
| **Noncurrent Assets:**                      |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in subsidiaries                 |       |       | 5,647      |              |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | (5,647 | ) |   |   | — |   |   |
| Goodwill, net                               |       |       | (799       | )                 |       |          | —     |          |       |             | —     |             |       |   | 799 |   |   |   | — |   |   |   | — |   |   |
| Intangible assets, net                      |       |       | —     |              |       |          | —     |          |       |             | 57         |             |       |   | 159 |   |   |   | — |   |   |   | 216 |   |   |
| Price risk management assets                |       |       | —     |              |       |          | 3          |          |       |             | 9          |             |       |   | 119 |   |   |   | (12 | ) |   |   | 119 |   |   |
| Prepaid rent                                |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 220 |   |   |   | — |   |   |   | 220 |   |   |
| Funds on deposit                            |       |       | —     |              |       |          | 4          |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 4 |   |   |
| Accounts receivable—affiliate          |       |       | —     |              |       |          | 17         |          |       |             | —     |             |       |   | — |   |   |   | (17 | ) |   |   | — |   |   |
| Accounts receivable—nonaffiliate       |       |       | —     |              |       |          | 4          |          |       |             | 1          |             |       |   | — |   |   |   | — |   |   |   | 5 |   |   |
| Debt issuance costs, net                    |       |       | 52         |              |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 52 |   |   |
| Other                                       |       |       | —     |              |       |          | 1          |          |       |             | 7          |             |       |   | 1 |   |   |   | — |   |   |   | 9 |   |   |
| Total noncurrent assets                     |       |       | 4,900      |              |       |          | 29         |          |       |             | 74         |             |       |   | 1,298 |   |   |   | (5,676 | ) |   |   | 625 |   |   |
| **Total Assets**                            |       |       | $          | 5,246             |       |          |       | $             | 707        |             |       |             | $          | 1,463 |   |   |   | $ | 4,907 |   |   |   | $ | (6,404 | ) |   |   | $ | 5,919 |   |   |
| **LIABILITIES AND EQUITY**                  |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current Liabilities:**                    |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable—affiliate                |       |       | $          | 572               |       |          |       | $             | 17         |             |       |             | $          | 24 |   |   |   | $ | — |   |   |   | $ | (591 | ) |   |   | $ | 22 |   |   |
| Current portion of long-term debt           |       |       | 71         |              |       |          | —     |          |       |             | —     |             |       |   | 3 |   |   |   | — |   |   |   | 74 |   |   |
| Claims payable and estimated claims accrual |       |       | —     |              |       |          | —     |          |       |             | 71         |             |       |   | — |   |   |   | — |   |   |   | 71 |   |   |
| Accounts payable and accrued liabilities    |       |       | 8          |              |       |          | 31         |          |       |             | 26         |             |       |   | 346 |   |   |   | (93 | ) |   |   | 318 |   |   |
| Price risk management liabilities           |       |       | —     |              |       |          | —     |          |       |             | 1          |             |       |   | 521 |   |   |   | (25 | ) |   |   | 497 |   |   |
| Accrued property taxes                      |       |       | 49         |              |       |          | 166        |          |       |             | 1          |             |       |   | — |   |   |   | — |   |   |   | 216 |   |   |
| Other                                       |       |       | —     |              |       |          | 1          |          |       |             | 6          |             |       |   | — |   |   |   | 1 |   |   |   | 8 |   |   |
| Total current liabilities                   |       |       | 700        |              |       |          | 215        |          |       |             | 129        |             |       |   | 870 |   |   |   | (708 | ) |   |   | 1,206 |   |   |
| **Noncurrent Liabilities:**                 |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                              |       |       | 1,476      |              |       |          | —     |          |       |             | 12         |             |       |   | 32 |   |   |   | (1 | ) |   |   | 1,519 |   |   |
| Price risk management liabilities           |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 39 |   |   |   | (11 | ) |   |   | 28 |   |   |
| Asset retirement obligations                |       |       | —     |              |       |          | 8          |          |       |             | 20         |             |       |   | 9 |   |   |   | — |   |   |   | 37 |   |   |
| Long-term payable—affiliate            |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 17 |   |   |   | (17 | ) |   |   | — |   |   |
| Other                                       |       |       | —     |              |       |          | 2          |          |       |             | 1          |             |       |   | — |   |   |   | (2 | ) |   |   | 1 |   |   |
| Total noncurrent liabilities                |       |       | 1,476      |              |       |          | 10         |          |       |             | 33         |             |       |   | 97 |   |   |   | (31 | ) |   |   | 1,585 |   |   |
| **Liabilities Subject to Compromise**       |       |       | —     |              |       |          | 79         |          |       |             | —     |             |       |   | — |   |   |   | (21 | ) |   |   | 58 |   |   |
| **Commitments and Contingencies**           |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Equity**                                  |       |       | 3,070      |              |       |          | 403        |          |       |             | 1,301      |             |       |   | 3,940 |   |   |   | (5,644 | ) |   |   | 3,070 |   |   |
| **Total  Liabilities and Equity**           |       |       | $          | 5,246             |       |          |       | $             | 707        |             |       |             | $          | 1,463 |   |   |   | $ | 4,907 |   |   |   | $ | (6,404 | ) |   |   | $ | 5,919 |   |   |

 

37

----

**MIRANT NORTH AMERICA**

**CONDENSED CONSOLIDATINGBALANCE 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         |          |       |             | 49         |             |       |   | 33 |   |   |   | (88 | ) |   |   | 23 |   |   |
| Receivables—nonaffiliate               |       |       | —     |              |       |          | 8          |          |       |             | 9          |             |       |   | 567 |   |   |   | (1 | ) |   |   | 583 |   |   |
| Notes receivable—affiliate             |       |       | 1          |              |       |          | 106        |          |       |             | 225        |             |       |   | — |   |   |   | — |   |   |   | 332 |   |   |
| Price risk management assets                |       |       | 8          |              |       |          | —     |          |       |             | 1          |             |       |   | 625 |   |   |   | (30 | ) |   |   | 604 |   |   |
| Prepaid rent and other payments             |       |       | —     |              |       |          | 2          |          |       |             | 17         |             |       |   | 128 |   |   |   | — |   |   |   | 147 |   |   |
| Inventories                                 |       |       | (2         | )                 |       |          | 19         |          |       |             | 24         |             |       |   | 237 |   |   |   | — |   |   |   | 278 |   |   |
| Assets held for sale                        |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 7 |   |   |   | — |   |   |   | 7 |   |   |
| Investment in securities available for sale |       |       | —     |              |       |          | —     |          |       |             | —     |             |       |   | 30 |   |   |   | — |   |   |   | 30 |   |   |
| Total current assets                        |       |       | 864        |              |       |          | 162        |          |       |             | 331        |             |       |   | 2,601 |   |   |   | (119 | ) |   |   | 3,839 |   |   |
| **Property, Plant and Equipment, net**      |       |       | —     |              |       |          | 502        |          |       |             | 882        |             |       |   | 1,420 |   |   |   | — |   |   |   | 2,804 |   |   |
| **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 |   |   |
| Accounts receivable—affiliate          |       |       | —     |              |       |          | 17         |          |       |             | —     |             |       |   | — |   |   |   | (17 | ) |   |   | — |   |   |
| Accounts receivable—nonaffiliate       |       |       | —     |              |       |          | —     |          |       |             | 1          |             |       |   | 1 |   |   |   | — |   |   |   | 2 |   |   |
| Debt issuance costs, net                    |       |       | 22         |              |       |          | —     |          |       |             | 2          |             |       |   | — |   |   |   | — |   |   |   | 24 |   |   |
| Total noncurrent assets                     |       |       | 4,610      |              |       |          | 22         |          |       |             | 60         |             |       |   | 1,276 |   |   |   | (5,403 | ) |   |   | 565 |   |   |
| **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    |       |       | 277        |              |       |          | 37         |          |       |             | 39         |             |       |   | 495 |   |   |   | (67 | ) |   |   | 781 |   |   |
| Price risk management liabilities           |       |       | —     |              |       |          | 19         |          |       |             | 3          |             |       |   | 804 |   |   |   | (30 | ) |   |   | 796 |   |   |
| Accrued property taxes                      |       |       | 48         |              |       |          | 136        |          |       |             | 2          |             |       |   | — |   |   |   | — |   |   |   | 186 |   |   |
| Total current liabilities                   |       |       | 331        |              |       |          | 204        |          |       |             | 79         |             |       |   | 1,381 |   |   |   | (97 | ) |   |   | 1,898 |   |   |
| **Noncurrent  Liabilities:**                |       |       |       |              |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                              |       |       | 850        |              |       |          | —     |          |       |             | 11         |             |       |   | 33 |   |   |   | — |   |   |   | 894 |   |   |
| 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          |          |       |             | 31         |             |       |   | 99 |   |   |   | (30 | ) |   |   | 959 |   |   |
| **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 |   |   |

 

38

----

**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS (UNAUDITED)Six Months Ended June 30, 2006(in millions)**

| ** **                                                     | ** ** | ** ** | ** ** | **Mirant  New** | ** ** | ** ** | ** ** | **Non-**      | ** ** | ** **    | ** ** | ** **       | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|
| **Cash Flows Provided By (Used In):** | ** ** | ** ** | ** ** | **Parent**      | ** ** | **York**   | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  Activities                                          |       |       | $          | 161             |       |       |       | $             | (7         | )             |       |             | $          | 127 |   |   |   | $ | 740 |   |   |   | $ | (420 | ) |   |   | $ | 601 |   |   |
| Investing  Activities                                          |       |       | (18        | )               |       |       | 73         |          |       |          | (117       | )                |       |   | (369 | ) |   |   | 591 |   |   |   | 160 |   |   |
| Financing  Activities                                          |       |       | (5         | )               |       |       | 5          |          |       |          | (12        | )                |       |   | (500 | ) |   |   | (171 | ) |   |   | (683 | ) |   |
| Net increase  (decrease) in cash and cash equivalents          |       |       | 138        |            |       |       | 71         |          |       |          | (2         | )                |       |   | (129 | ) |   |   | — |   |   |   | 78 |   |   |
| Cash and cash  equivalents, beginning of period                |       |       | —     |            |       |       | 1          |          |       |          | 2          |             |       |   | 292 |   |   |   | — |   |   |   | 295 |   |   |
| Cash and cash  equivalents, end of period                      |       |       | $          | 138             |       |       |       | $             | 72         |          |       |             | $          | — |   |   |   | $ | 163 |   |   |   | $ | — |   |   |   | $ | 373 |   |   |
|                                                                |            |            |            |                 |            |            |            |               |            |               |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**MIRANT NORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSED COMBININGSTATEMENTS OF CASH FLOWS (UNAUDITED)Six Months Ended June 30, 2005(in millions)**

| ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** | **Mirant**      | ** ** | ** **       | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** | **Americas**    | ** ** | ** **       | ** ** |
| ** **                                                     | ** ** | **Mirant** | ** ** | ** ** | ** ** | ** **    | ** ** | **Generations** | ** ** | ** **       | ** ** |
| ** **                                                     | ** ** | **New**    | ** ** | ** ** | ** ** | **Non**       | ** ** | **and**         | ** ** | ** **       | ** ** |
| **Cash Flows Provided By (Used In):** | ** ** | ** ** | ** ** | **York**   | ** ** | **Guarantor** | ** ** | **Guarantor**   | ** ** | **Eliminations** | ** ** | **Combined** | ** ** |
| Operating  Activities                                          |       |       | $          | —     |       |          |       | $               | 54         |             |       |   | $ | (61 | ) |   |   | $ | (33 | ) |   |   | $ | (40 | ) |   |
| Investing  Activities                                          |       |       | (3         | )          |       |          | (66        | )               |       |             | (41        | ) |   |   | 63 |   |   |   | (47 | ) |   |
| Financing  Activities                                          |       |       | 3          |       |       |          | 12         |            |       |             | (1         | ) |   |   | (14 | ) |   |   | — |   |   |
| Net increase  (decrease) in cash and cash equivalents          |       |       | —     |       |       |          | —     |            |       |             | (103       | ) |   |   | 16 |   |   |   | (87 | ) |   |
| Cash and cash equivalents, beginning of period                 |       |       | —     |       |       |          | 2          |            |       |             | 466        |   |   |   | 168 |   |   |   | 636 |   |   |
| Cash and cash  equivalents, end of period                      |       |       | $          | —     |       |          |       | $               | 2          |             |       |   | $ | 363 |   |   |   | $ | 184 |   |   |   | $ | 549 |   |   |
|                                                                |            |            |            |            |            |               |            |                 |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

39

----

**Item 2.**                        *Management’s Discussion and Analysis of Results of Operations andFinancial Condition*

The following discussionshould be read in conjunction with the Company’s accompanying unauditedcondensed consolidated and combined financial statements and the notes thereto,which are included elsewhere in this report.

***Overview***

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

On July 11, 2006, Mirantannounced the commencement of auction processes to sell its Philippines andCaribbean businesses and a modified “Dutch Auction” tender offer to repurchaseMirant common stock. On August 9, 2006, Mirant announced theplanned sale of various gas fired assets. The assets to be sold include ourZeeland (837 MW) and Bosque (532 MW) intermediate and peaking gas fired plants.These sales are expected to close by mid-2007.

In the tender offer, Mirant isoffering to repurchase up to 43 million shares of Mirant common stock for anaggregate purchase price of up to $1.25 billion. Mirant’s shareholders can,subject to certain conditions, sell all or a portion of their shares of Mirantcommon stock to Mirant at a price not less than $25.75 and not more than $29.00per share. Mirant intends to pay for the shares tendered in the offer andrelated expenses with approximately $300 million of cash on hand at MirantCorporation and approximately $950 million of distributions from subsidiaries,including approximately $175 million and $740 million to be distributed from usand Mirant Asia-Pacific Limited and its subsidiaries, respectively, as well asapproximately $35 million from other subsidiaries. The tender offer will expireon August 21, 2006.

Our gross margin for the sixmonths ended June 30, 2006, was $1.034 billion. This amount included$376 million of unrealized gains from hedging activities primarily due tothe decline in forward power prices from December 31, 2005 levels. Theprimary factors impacting the realized gross margin and cash flows of ouroperations are the prices for power, coal, oil and natural gas, which aredriven largely by supply and demand. Demandfor power varies regionally and seasonally due to, among other things, weatherand general economic conditions.

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

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

Cash flows from operationsfor the six months ended June 30, 2006, was a net provision of $601million, which included $658 million of realized gross margin and a decrease of$464 million in the amount of cash collateral posted to support energy tradingand marketing activities.

40

----

**Results ofOperations**

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

| ** **                            | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2006**                                        | ** ** | **2005**      | ** ** | **(Decrease)**                                | ** ** | **2006**      | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Gross margin                          |       |                                            |       |          |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                             |       | $                                               | (8         | )             | $          | (10                                           | )          |          | $          | 2 |   |   | $ | (21 | ) | $ | (5 | ) |   | $ | (16 | ) |   |
| Nonaffiliate                          |       | 389                                             |       | 241           |       |                                          | 148        |          |       | 1,055 |   | 431 |   |   | 624 |   |   |
| Total gross  margin                   |       | 381                                             |       | 231           |       |                                          | 150        |          |       | 1,034 |   | 426 |   |   | 608 |   |   |
| Operating expenses:                   |       |                                            |       |          |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Operations and  maintenance           |       |                                            |       |          |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                             |       | 70                                              |       | 73            |       |                                          | (3         | )             |       | 140 |   | 151 |   |   | (11 | ) |   |
| Nonaffiliate                          |       | 83                                              |       | 80            |       |                                          | 3          |          |       | 156 |   | 141 |   |   | 15 |   |   |
| Depreciation and  amortization        |       | 35                                              |       | 32            |       |                                          | 3          |          |       | 67 |   | 65 |   |   | 2 |   |   |
| Generation  facilities rent           |       | 24                                              |       | 26            |       |                                          | (2         | )             |       | 48 |   | 51 |   |   | (3 | ) |   |
| Gain on sales of  assets, net         |       | (6                                              | )          | —        |       |                                          | (6         | )             |       | (6 | ) | (1 | ) |   | (5 | ) |   |
| Total operating  expenses             |       | 206                                             |       | 211           |       |                                          | (5         | )             |       | 405 |   | 407 |   |   | (2 | ) |   |
| Operating income                      |       | 175                                             |       | 20            |       |                                          | 155        |          |       | 629 |   | 19 |   |   | 610 |   |   |
| Other expense (income),  net          |       |                                            |       |          |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                             |       | (2                                              | )          | 3             |       |                                          | (5         | )             |       | (3 | ) | 6 |   |   | (9 | ) |   |
| Nonaffiliate                          |       | 21                                              |       | 1             |       |                                          | 20         |          |       | 53 |   | — |   |   | 53 |   |   |
| Reorganization  items, net            |       | (1                                              | )          | (23           | )          |                                          | 22         |          |       | (1 | ) | 7 |   |   | (8 | ) |   |
| Provision  (benefit) for income taxes |       | 2                                               |       | (1            | )          |                                          | 3          |          |       | 2 |   | 5 |   |   | (3 | ) |   |
| Net Income                            |       | $                                               | 155        |          | $          | 40                                            |       |          | $          | 115 |   |   | $ | 578 |   | $ | 1 |   |   | $ | 577 |   |   |

 

In the tables below, theMid-Atlantic region includes our Chalk Point, Morgantown, Dickerson and PotomacRiver facilities. The Northeast region includes our Lovett, Bowline,Grahamsville, Hillburn, Mongaup, Rio, Shoemaker, Swinging Bridge, Canal,Kendall, Martha’s Vineyard and Wyman facilities. The West and Mid-Continentregion includes our Contra Costa, Pittsburg, Potrero, Bosque and Zeelandfacilities. Energy Trading includes proprietary trading and Eliminationsinclude the elimination of intercompany transactions between Mirant NorthAmerica subsidiaries.

*OperatingStatistics*

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

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

 

41

----

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

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

 

*Gross Margin*

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

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

 

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

 

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

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

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

 

42

----

 

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

 

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

----

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

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

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

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

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

·       adecrease of $29 million in energy primarily related to higher emissionsallowances expense, principally to reflect inventory at the lower of itshistorical cost or current market value and a reduction in power prices;

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

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

Northeast operations grossmargin increased by $17 million primarily due to an increase of $13 millionin energy, which includes an $8 million increase in intercompany sales ofsurplus emissions allowances to our Mid-Atlantic operations.

West and Mid-Continentoperations gross margin increased by $9 million primarily due to an increase of$5 million in incremental realized hedges primarily related to the expirationof unfavorable load deals in 2005.

Energy Trading grossmargin increased $46 million primarily due to an increase in energy of $36 millionin realized margin in our proprietary trading. Contracted and capacity included$20 million in realized margin on the Back-to-Back Agreement in 2005. In2006, the Back-to-Back Agreement was transferred to Mirant Power Purchase, LLC(“Mirant Power Purchase”).

43

----

Eliminations gross marginincreased by $8 million due primarily to an increase of $6 million related tothe elimination of intercompany emissions allowances transactions.

*Operating Expenses*

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

*Other Expense, net*

Our other expense, netincreased by $15 million for the three months ended June 30, 2006,compared to the same period in 2005 primarily due to interest expense on ourdebt.

*ReorganizationItems, net*

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

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

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

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

 

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

 

44

----

 

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

----

(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 realized valueof hedges reflects the actual margin upon the settlement of our power and fuelhedging contracts.

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

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

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

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

·       anincrease of $315 million related to unrealized gains from hedgingactivities of $325 million for the six months ended June 30, 2006, ascompared to $10 million for the same period in 2005 due to the settlement ofcontracts for which unrealized losses had previously been recognized and due tothe increased value associated with forward power contracts for future periodsas a result of decreases in forward power prices in the period.

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

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

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

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

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

45

----

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

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

*Operating Expenses*

Our operating expensesdecreased by $2 million for the six months ended June 30, 2006, comparedto the same period in 2005 primarily due to an increase in operation andmaintenance of $4 million that was offset by a decrease of $5 million gain onsales of assets, net. The sale of the Mirant Service Center closed on June 30,2006 and the Company recognized a gain of approximately $6 million.

*Other Expense, net*

Our other expense, netincreased by $44 million for the six months ended June 30, 2006, comparedto the same period in 2005 primarily due to interest expense on the debt offsetby increased interest income due to higher cash balances and lower collateralrequirements.

*ReorganizationItems, net*

The net favorable effectof reorganization items, decreased by $8 million due to our emergence from Chapter11.

**Financial Condition**

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

On December 23, 2005,the Company issued $850 million of 7.375% senior unsecured notes due 2013 (the “OldNotes”). These notes were issued in a private placement and were not registeredwith the Securities and Exchange Commission. The funds from this issuanceinitially were placed in escrow and were released from escrow on January 3,2006. On August 4, 2006, Mirant North America completed an exchange offerfor the Old Notes, whereby $849.965 million of senior notes registered underthe Securities Act (the “New Notes”) were exchanged for an equal amount of theOld Notes. The terms of the New Notes are identical in all material respects tothe Old Notes, except that the New Notes are registered under the SecuritiesAct and generally are not subject to transfer restrictions or registrationrights. On January 3, 2006, Mirant North America also entered into an $800million senior secured revolving credit facility and a $700 million seniorsecured term loan. At the closing, $200 million drawn under the senior securedterm loan was deposited into a cash collateral account to support the issuanceof up to $200 million of letters of credit.

***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 

46

----

several basis to the NewYork DIP Borrowers. On January 31, 2006, all the assets of Mirant AmericasEnergy Marketing were transferred to Mirant Energy Trading, with Mirant EnergyTrading to succeed to all rights and assume all obligations of Mirant AmericasEnergy Marketing under the Primary New York DIP Agreement. The financing underthe Primary New York DIP Agreement can be utilized through borrowings by theNew York DIP Borrowers, the issuance of letters of credit for the account ofany of the New York DIP Borrowers or in support of commercial transactionsentered into by Mirant Energy Trading for the benefit of the New York DIPBorrowers, the posting of cash in respect of obligations incurred for thebenefit of any of the New York DIP Borrowers, including the making ofprepayments for fuel and other commodities for the benefit of any of the NewYork DIP Borrowers. Under the Primary New York DIP Agreement, the amount whichrepresents the excess on the effective date of the Plan of (x) creditsupport posted for the benefit of the New York DIP Borrowers by the lenders inrespect of transactions entered into on their behalf over (y) the amountof cash collateral posted by the New York DIP Borrowers to the lenders isdeemed to be a loan made to the New York DIP Borrowers on such date. The NewYork DIP Borrowers have posted $18.3 million cash collateral with Mirant EnergyTrading in accordance with the June 30, 2006, collateral allocationperformed in good faith by Mirant Energy Trading. To the extent that therequired level of credit support provided to the New York DIP Borrowers isreduced, the amount of such reduction is required to be returned to the NewYork DIP Borrowers. The financing under the Primary New York DIP Agreement hasa stated maturity of 180 days, subject to renewal or extension, and is availableuntil the earlier of (x) the expiration of such period or (y) withrespect to each of the New York DIP Borrowers, the effective date of aconfirmed Plan of Reorganization (the “Plan”) for such New York DIP Borrower inits Chapter 11 case. The loan was extended for an additional 180 days in July 2006.Subject to the authorization of the United States Bankruptcy Court for theNorthern District of Texas (the “Bankruptcy Court”), the obligations of the NewYork DIP Borrowers under the Primary New York DIP Agreement, pursuant to Section 364(c) ofthe Chapter 11 of Title 11 of the UnitedStates Bankruptcy Code (as amended, the “Bankruptcy Code”), (i) constitutesa claim having priority over any or all administrative expenses of the kindspecified in sections 503(b) or 507(b) of Bankruptcy Code, (ii) issecured by a lien on property of the estates of the New York DIP Borrowers thatis not otherwise subject to a lien and (iii) is 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.

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 terms of theSecondary New York DIP Agreement are substantially similar to the terms of thePrimary New York DIP Agreement. However, (i) the rights of the Primary DIPLenders to payment out of cash collateral posted by the New York DIP Borrowerspursuant to the Primary New York DIP Agreement as may be repaid shall at alltimes rank senior to the rights of Mirant under the Secondary New York DIPAgreement and (ii) certain claims and liens granted under the Primary NewYork DIP Agreement in respect of cash collateral posted by the New York DIPBorrowers shall at all times be senior to similar claims and liens grantedunder the Secondary New York DIP Agreement. The loan was extended for anadditional 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 tocertain conditions, would lend 

47

----

up to $9.5 million to Mirant NY-Gen to provide fundingfor the repairs on the Swinging Bridge dam. The loan was extended for anadditional 180 days in July 2006.

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

On August 9, 2006,Mirant announced the planned sale of various gas fired assets. The assets to besold include our Zeeland (837 MW) and Bosque (532 MW) intermediate and peakinggas fired plants. Proceeds from the sales of the Zeeland and Bosque units willbe utilized pursuant to the covenants contained in the Mirant North Americadebt instruments.

**Cash Flows**

*Operating Activities.  *Ourcash provided by operating activities is impacted by seasonality, changes inenergy prices and fluctuations in our working capital requirements. Cashprovided by operating activities increased $641 million for the six monthsended June 30, 2006, compared to the same period in 2005. Net cashprovided by operating activities for the six months ended June 30, 2006,was $601 million and included the following:

*Sources of Cash*

·       realizedgross margin of $658 million; and

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

*Uses of Cash*

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

·       interestpayments of $66 million; and

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

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

*Sources of Cash*

·       realizedgross margin of $359 million; and

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

*Uses of Cash*

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

·       interestpayments of $9 million;

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

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

48

----

*Investing Activities.**  *Net cash provided by investing activities was $160million for the six months ended June 30, 2006, compared to the use of $47million for the same period in 2005. This difference was primarily due to thefollowing:

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

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

·       in2006, we received $207 million from the repayment of notes receivable fromaffiliate compared to $11 million for the same period in 2005.

*CapitalExpenditures.**  *Weexpect to incur capital expenditures of approximately $300 million in 2006.Approximately $200 million of our 2006 capital expenditures are forenvironmental compliance. See *“Environmental Regulation”*for additional discussion of expected environmental capital expenditures.

*Financing Activities.**  *Net cash used in financing activities was $683million for the six months ended June 30, 2006, compared to $0 for thesame period in 2005. This difference was primarily due to the following:

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

·       in 2006, we repaid debt of$470 million, which included the $465 million drawn on our senior securedrevolving credit facility. We also made a payment of $250 million to MirantAmericas, Inc. (“Mirant Americas”) under the Plan and repaid $110 millionof the notes payable-affiliate compared to $1 million for the same period in2005. Pursuant to the Plan we made distributions in respect of claims againstthe Mirant Americas Generation debtors of $44 million and paid $1.773 billionto settle obligations of Mirant Americas Generation pursuant to the Plan.

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

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

| ** **                                                                                                                     | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Cash and Cash  Equivalents:                                                                                                    |       |                    |       |                        |       |   |   |   |   |
| Mirant Mid-Atlantic                                                                                                            |       |                    | $          | 72                          |       |   |   | $ | 276 |   |   |
| Mirant North America                                                                                                           |       |                    | 301        |                        |       |   | 19 |   |   |
| Total cash and  cash equivalents                                                                                               |       |                    | 373        |                        |       |   | 295 |   |   |
| Less: Cash  required for operating, working capital or other purposes or restricted by  the subsidiaries’ debt agreements |       |                    | 81         |                        |       |   | 1 |   |   |
| Total available  cash and cash equivalents                                                                                     |       |                    | 292        |                        |       |   | 294 |   |   |
| Available under  credit facilities                                                                                             |       |                    | 818        |                        |       |   | — |   |   |
| Available under  the DIP Facility                                                                                              |       |                    | —     |                        |       |   | 249 |   |   |
| Total cash, cash  equivalents and credit facilities availability                                                               |       |                    | $          | 1,110                       |       |   |   | $ | 543 |   |   |

 

49

----

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

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

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

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

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

----

(1)          The amount includesapproximately $130 million deposited with J.P. Morgan Futures, Inc. asclearing broker as of June 30, 2006.

On July 13, 2006,Moody’s Investors Service reduced Mirant’s credit rating to “B2.” Our debtratings were also lowered. Standard and Poor’s announced that they also mightreduce Mirant’s credit rating and our debt ratings.

**Other Developments**

***Locational Installed Capacity Proposal***

Our New England plantsparticipate in a market administered by the Independent System Operator-NewEngland (“ISO-NE”). Mirant Energy Trading, LLC (“Mirant Energy Trading”) is amember of the New England Power Pool (“NEPOOL”), which is a voluntaryassociation of electric utilities and other market participants in Connecticut,Maine, Massachusetts, New Hampshire, Rhode Island and Vermont and whichfunctions as an advisory organization to ISO-NE. The Federal Energy RegulatoryCommission (“FERC”) approved ISO-NE as the Regional Transmission Organization (“RTO”)for the New England region effective on February 1, 2005, making ISO-NEresponsible for market rule filings at the FERC. In addition, ISO-NE isresponsible for the operation of transmission systems and administration and 

50

----

settlementof the wholesale electric energy, capacity and ancillary services markets.ISO-NE utilizes a locational marginal pricing model, with a price mitigationmethod similar to the New York Independent System Operators (“NYISO”) AutomatedMitigation Procedure, although it is implemented via manual processes ratherthan the automated process employed in New York. In 2004, the FERC approved alocational installed capacity market for ISO-NE (the ‘‘LICAP proposal’’) basedon the demand curve concept used by the NYISO to be implemented in January 2006.Demand curves are administrative mechanisms used to establish electricitygeneration capacity prices. A hearing on the demand curve parameters was heldin February and March 2005, and an initial decision issued by thepresiding administrative law judge ruled in favor of many of the suppliers’issues in the hearing. A subsequent FERC order issued on October 21, 2005,pushed back the LICAP implementation date to no sooner than October 1,2006, and put in place procedures to pursue a settlement on alternatives to theLICAP mechanism. Any such alternatives were to be submitted to the FERC by January 31,2006. On January 31, 2006, a FERC settlement judge reported that anagreement in principle had been reached among the majority of the parties inthe LICAP proceeding and requested an extension of the January 31, 2006deadline so that a final settlement could be filed with the FERC by March 6,2006. On March 6, 2006, a comprehensive settlement proposal was filed withthe FERC on behalf of numerous parties to the LICAP proceeding. The settlementwould replace the LICAP proposal with a Forward Capacity Market (“FCM”) underwhich annual capacity auctions would be conducted for supply three years inadvance of delivery. In addition, the settlement provides for a four yeartransition period under which capacity suppliers receive a set price for theircapacity commencing on December 1, 2006, and continuing with priceescalators through May 31, 2010. The settlement will go into effect uponapproval, without modification, by the FERC. On June 16, 2006, theCommission issued a decision accepting the proposed FCM settlement withoutmodification. The FCM will result in increased opportunities for our NewEngland generators to receive more revenues for their capacity commencing in December 2006.

***Reliability Pricing Model***

Our Mid-Atlantic facilities sell power into themarkets operated by Pennsylvania-New Jersey-Maryland Interconnection, LLC(“PJM”), which the FERC approved to operate as an independent system operator(“ISO”) in 1997 and as an RTO in 2002. We have access to the PJM transmissionsystem pursuant to PJM’s Open Access Transmission Tariff. PJM operates the PJMInterchange Energy Market, which is the region’s spot market for wholesaleelectricity, provides ancillary services for its transmission customers,performs transmission planning for the region and dispatches generatorsaccordingly. PJM administers day-ahead and real-time marginal cost clearingprice markets and calculates electricity prices based on a locational marginalpricing model. A locational marginal pricing model determines a price forenergy at each node in a particular zone taking into account the limitations ontransmission of electricity and losses involved in transmitting energy into thezone, resulting in a higher zonal price when cheaper power cannot be importedfrom another zone. Generation owners in PJM are subject to mitigation, whichlimits the prices that they may receive under certain specified conditions.

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

51

----

On August 31, 2005,PJM filed its Reliability Pricing Model (‘‘RPM’’) with the FERC to replace itscurrent capacity market rules. The RPM proposal would provide for a four-yearforward capacity auction using a demand curve and locational deliverability zonesfor capacity phased in over a several year period beginning on June 1,2006. On November 5, 2005, PJM proposed to delay the effective date of theRPM until June 1, 2007. On April 20, 2006, FERC issued an ordergenerally finding aspects of PJM’s RPM filing to be just and reasonable, butFERC also established further procedures including a paper hearing and stafftechnical conference to resolve the remaining issues and encouraged the partiesto seek a negotiated resolution. Settlement talks under the supervision of aFERC-appointed settlement judge began on June 5, 2006. On August 3,2006, the Settlement Judge issued a report stating that most of the activeparties to the case have reached a confidential agreement in principle, andwill work to develop a more detailed settlement agreement to be filed bySeptember 27, 2006. It is impossible to predict whether a final settlementagreement will be filed with the FERC by September 27, 2006. It islikewise impossible to predict the outcome of litigation, and whether RPM or asimilar proposal would be adopted by FERC should settlement efforts fail. If asettlement agreement is filed and approved by FERC without conditions ormodifications, or if FERC approves RPM in a form not materially different fromwhat was filed, increased opportunities for our power plants located in theMid-Atlantic region to receive more revenues for their capacity will result.

***Environmental Regulation***

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

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

This legislation affectsour Chalk Point, Dickerson and Morgantown facilities and we are currentlyassessing our options for compliance and their financial impacts. We may needto request additional time to comply, which is provided for in the legislation.Because the law limits our ability to use emissions allowances to comply, wewill be required to increase substantially our capital expenditures in order toremediate our units. We anticipate that the capital expenditures required toachieve compliance will be approximately $1.3 billion to $1.5 billion in 2006 through2009.

***SO2 Emissions Reductions***

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

52

----

***Clean Air MercuryRule***

The Environmental Protection Agency (the “EPA”) promulgatedthe CAMR on March 15, 2005, which utilizes a market-based cap and tradeapproach under Section 111 of the Federal Clean Air Act (the “Clean AirAct”). It requires emissions reductions in two phases, with the first phasegoing into effect in 2010 and the more stringent cap going into effect in 2018.In October 2005, the EPA issued a notice of proposed rulemaking toreconsider certain aspects of the CAMR. On May 31, 2006, the EPA tookfinal action on petitions to reconsider two actions regarding the air pollutantmercury. The EPA was asked to regulate electric steam generating units under Section 112of the Clean Air Act, which would have required each coal unit to apply controltechnology to reduce emissions from mercury and the cap-and-trade of mercuryemissions would not have been allowed. Instead, the EPA determined thatregulation under Section 112 of the Clean Air Act was not appropriate.This means the allowance trading program for mercury will stay intact. ForMirant, and the Company, we will receive an allocation of mercury emissionsallowances associated with our coal units nationwide and unless there are staterestrictions, under the federal program, Mirant and the Company will be allowedto use and trade those allowances. The EPA also made minor technical changes tothe CAMR including a recalculation of mercury allocations for the State ofAlaska, which resulted in a slight recalculation of allowances for each state.

***Virginia MercuryRule***

On April 19, 2006,the Governor of Virginia signed into law HB 1055, an air emissions control lawimplementing generally the federal rules, CAIR and CAMR. However, the state lawlimits Mirant Potomac River generating station’s ability to fully utilize CAMRallowances to meet compliance obligations.

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

***Faulkner AshStorage Zoning Matter***

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

53

----

***California Generation Facilities***

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

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

**Critical AccountingPolicies and Estimates**

The accounting estimates described below areconsidered critical to obtaining an understanding of our unaudited condensedconsolidated and combined financial statements because their applicationrequires significant estimates and judgments by management in preparing ourunaudited condensed consolidated and combined financial statements. Management’sestimates and judgments are inherently uncertain and may differ significantlyfrom actual results achieved. Management considers an accounting estimate to becritical if the following conditions apply:

·       theestimate requires significant assumptions; and

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

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

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

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

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

The accrual model has historically been used toaccount for our generation revenue from the sale of energy and integratedutilities and also to account for distribution revenue from the sale anddistribution of energy. We recognize revenue when earned and collection isprobable as a result of electric power delivered to customers pursuant tocontractual commitments that specify volume, price and delivery requirements.Sales of energy are based on economic dispatch, or they may be ‘as-ordered’ byan ISO, based on member participation agreements, but without an underlyingcontractual commitment. ISO revenues and revenues for sales of energy based oneconomic-dispatch are recorded on the basis of 

54

----

megawatt hours (“MWh”)delivered, at the relevant day-ahead or real-time prices. The Company alsorecognizes affiliate and nonaffiliate revenue when ancillary services have beenperformed and collection of such revenue is probable.

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

Pursuant to Statementof Financial Accounting Standards (“SFAS”) No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*” (“SFAS No. 133”),derivative contracts are reflected in our financial statements at fair value,with changes in fair value recognized currently in earnings unless they qualifyfor a scope exception. Management considers fair value techniques, valuationadjustments related to credit and liquidity and judgments related to theprobability of completing forecasted transactions to be critical 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 are also impacted by our assumptions as to interest rate,counterparty credit risk and liquidity risk. The nominal value of the contractsis discounted using a forward interest rate curve based on the LIBOR. Inaddition, the fair value of our derivative contracts is reduced to reflect theestimated risk of default of counterparties on their contractual obligations tous.

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

55

----

***Long-Lived Assets***

**Estimated UsefulLives**

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

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

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

**Asset RetirementObligations**

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

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

56

----

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

**Asset Impairments**

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

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

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

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

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

57

----

**Income Taxes**

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

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

Several significantchanges to our tax posture occurred as a result of the Plan of Reorganization.Implementation of the Plan included the conversion of certain of our regardedcorporate entities to limited liability companies coupled with the liquidationand/or merger of these regarded corporate entities into other disregardedcorporate entities for income tax purposes. As a result, certain subsidiariespreviously treated as regarded corporate entities for income tax purposes haveeither been liquidated or converted into disregarded entities for income taxpurposes pursuant to the Plan. Additionally, certain partnerships owned by theregarded corporate entities were also liquidated, and now form part of thesedisregarded entities for income tax purposes. The result of the above Planeffects was to eliminate our recording of tax expense and benefit prospectivelywith respect to the liquidated regarded corporate entities. Furthermore, withrespect to those liquidated regarded corporate entities, all previouslyexisting deferred tax assets and liabilities were eliminated as of December 31,2005. Certain of our other subsidiaries continue to exist as regarded corporateentities for income tax purposes, including Mirant New York, Inc., HudsonValley Gas Corporation, Mirant Kendall, LLC and Mirant Special Procurement, Inc.

Additionally, we havecontingent liabilities related to tax uncertainties arising in the ordinarycourse of business. We periodically assess our contingent liabilities inconnection with these uncertainties based on the latest information available.For those uncertainties where it is probable that a loss has occurred and theloss or range of loss can be reasonably estimated, a liability is recognized inthe financial statements. The recognition of contingent losses for taxuncertainties requires management to make significant assumptions about theexpected outcomes of certain tax contingencies. See Note A to our consolidatedfinancial statements for further information on FIN No. 48, “*Accounting for Uncertainty in Income Taxes: an Interpretation of FASBStatement No. 109*” (“FIN 48”).

In December 2005,pursuant to the Plan, Mirant rejected and thereby eliminated the tax sharingagreement with its direct and indirect wholly owned regarded corporateentities. As a result, Mirant’s 

58

----

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 with Mirantor Mirant Americas were resolved pursuant to a global settlement under the Planwhereby intercompany receivables and payables received no distribution, withthe exception of income tax payables and receivables related to Mirant New York, Inc.which continues to remain in bankruptcy at June 30, 2006.

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

***Loss Contingencies***

*Nature of EstimatesRequired.**  *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, environmentalmatters, tax matters and others.

*Key Assumptions andApproach 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 G 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.

59

----

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

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

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

**Inherent Limitations in Control Systems**

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

**Effectiveness of Disclosure Controls and Procedures**

As required by ExchangeAct Rule 13a-15(b), our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, conducted an assessment of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined by Rules 13a-15(e) and 15d-15(e) underthe Exchange Act), as of June 30, 2006. Based upon this assessment, ourmanagement concluded that, as of June 30, 2006, the design and operationof these disclosure controls and procedures were effective.

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

60

----

PART II

**Item 1.****   *Legal Proceedings***

***Chapter 11Proceedings***

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

As of June 30, 2006,approximately 21.3 million of the shares of Mirant common stock to bedistributed under the Plan have not yet been distributed and have been reservedfor distribution with respect to claims that are disputed by the Mirant Debtorsand have not been resolved. A settlement entered into on May 30, 2006,among Pepco, Mirant, MC 2005, LLC f/k/a Mirant Corporation (“Old Mirant”), and varioussubsidiaries of Mirant, including subsidiaries of the Company, if approved byfinal order in the Chapter 11 proceedings, would result in the distribution ofup to 18 million of the reserved shares to Pepco, as described below in PepcoLitigation. Under the terms of the Plan, to the extent other such unresolvedclaims are resolved now that the Company has emerged from bankruptcy, theclaimants will be paid from the reserved shares on the same basis as if theyhad been paid when the Plan became effective. That means that their allowedclaims will receive the same pro rata distributions of Mirant common stock,cash, or both common stock and cash as previously allowed claims in accordancewith the terms of the Plan. To the extent the aggregate amount of the payoutsdetermined to be due with respect to such disputed claims ultimately exceedsthe amount of the funded claim reserve, Mirant would have to issue additionalshares of common stock to address the shortfall, which would dilute existingMirant shareholders, and Mirant and Mirant Americas Generation would have topay additional cash amounts as necessary under the terms of the Plan to satisfysuch pre-petition claims.

The Company’s Lovett andBowline generation facilities in New York are subject to disputes with localtax authorities regarding property tax assessments. 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. Mirant Lovett is also in discussions with theState of New York and other parties regarding an agreement that wouldcompensate Mirant Lovett for the contribution of the Lovett facility to thereliability of the New York electric power system. The facilities areforecasted to have negative operating cash flows at their current propertytaxation levels. Until a resolution is reached on property taxes andenvironmental controls that would permit economically feasible operation, theCompany’s subsidiaries that own the facilities, Mirant Lovett and MirantBowline, will remain in Chapter 11. Until such issues are resolved and thecompanies emerge from bankruptcy, the Company will not have access to the cashfrom operations generated from these subsidiaries.

The Company’s othersubsidiaries related to its New York business operations, Mirant New York,Hudson Valley Gas Corporation and Mirant NY-Gen also remain in bankruptcy.Mirant NY-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.

61

----

***Pepco Litigation***

In 2000, Mirant purchasedpower generating facilities and other assets from Pepco, including certainpower purchase agreements (“PPAs”) between Pepco and third parties. Under theterms of the Asset Purchase and Sale Agreement (“APSA”), Mirant and Pepcoentered into a contractual agreement (the “Back-to-Back Agreement”) withrespect to certain PPAs, including Pepco’s long-term PPA with Panda-BrandywineL.P. (“Panda”), under which (1) Pepco agreed to resell to Mirant allcapacity, energy, ancillary services and other benefits to which it is entitledunder those agreements and (2) Mirant agreed to pay Pepco each month allamounts due from Pepco to the sellers under those agreements for theimmediately preceding month associated with such capacity, energy, ancillaryservices and other benefits. The Panda PPA runs until 2021, and theBack-to-Back Agreement does not expire until all obligations have beenperformed under the Panda PPA. Under the Back-to-Back Agreement, Mirant isobligated to purchase power from Pepco at prices that typically are higher thanthe market prices for power.

Mirant assigned its rightsand obligations under the Back-to-Back Agreement to Mirant Americas EnergyMarketing. In the Chapter 11 cases of the Mirant Debtors, Pepco asserted thatan Assignment and Assumption Agreement dated December 19, 2000, thatincludes as parties Pepco and various subsidiaries 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 the Company), and a trust established pursuant tothe Plan to which ownership of Old Mirant and Mirant Americas Energy Marketingwas transferred (collectively the “Mirant Settling Parties”) entered into aSettlement Agreement and Release (the “Settlement Agreement”) with Pepco andvarious affiliates of Pepco (collectively the “Pepco Settling Parties”). Onceit becomes effective, the Settlement Agreement will fully resolve the contractrejection motions that remain pending in the bankruptcy proceedings, as well asother matters currently disputed between Pepco and Mirant and its subsidiaries.The Pepco Settling Parties and the Mirant Settling Parties will release eachother from all claims known as of May 30, 2006, including the 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 longer subjectto appeal. On August 9, 2006, the Bankruptcy Court entered an orderapproving the Settlement Agreement, but the period within which an appeal canbe filed from that order has not yet expired, and the order has not yet becomea final order.

Under the SettlementAgreement, Mirant Power Purchase will perform any remaining obligations underthe APSA, and Mirant will guaranty its performance. The Back-to-Back Agreementwill be rejected and terminated effective as of May 31, 2006, unlessMirant exercises an option given to it under the Settlement Agreement to havethe Back-to-Back Agreement assumed under certain conditions as 

62

----

describedbelow. If an appeal is filed from the Bankruptcy Court’s August 9, 2006,order approving the Settlement Agreement, the parties will continue to performtheir obligations under the Back-to-Back Agreement until the appeal is resolvedand the approval order has become a final order. Unless the Back-to-BackAgreement is assumed, Pepco will refund to Mirant Power Purchase all paymentsreceived under the Back-to-Back Agreement for energy, capacity or otherservices delivered after May 31, 2006, through the date the SettlementAgreement becomes effective.

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

The Settlement Agreementgrants Pepco a claim against Old Mirant in Old Mirant’s bankruptcy proceedingsthat will result in Pepco receiving common stock of Mirant and cash having avalue, after liquidation of the stock by Pepco, equal to $520 million, subjectto certain adjustments. Upon the Settlement Agreement becoming effective,Mirant will distribute up to 18 million shares of Mirant common stock to Pepcoto satisfy its claim and Pepco will liquidate those shares. The shares 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”) that are discussed below in *Pepco Assertion of Breachof Local Area Support Agreement.*

***California andWestern Power Markets***

*California Rate PayerLitigation.**  *Certainof our subsidiaries have been subject to litigation related to their activitiesin California and the western power markets and the high prices for wholesaleelectricity experienced in the western markets during 2000 and 2001. Variouslawsuits were filed in 2000 through 2003 that asserted claims under Californialaw based on allegations that certain owners of electricity generationfacilities in California and energy marketers, including the Company, MirantAmericas Energy Marketing and our subsidiaries owning generating facilities inCalifornia, engaged in various unlawful and 

63

----

anti-competitiveacts that served to manipulate wholesale power markets and inflate wholesaleelectricity prices in California. All of these suits had been dismissed byfinal orders except for six such suits that were filed between November 27,2000, and May 2, 2001, in various California Superior Courts andconsolidated before the Superior Court for the County of San Diego for pretrialpurposes. Although the plaintiffs dismissed Mirant from those suits, they hadnot filed to dismiss certain of the Company’s subsidiaries that were alsodefendants. On October 3, 2005, the California state court dismissed thosesix consolidated suits on the grounds that the plaintiffs’ claims were barredby federal preemption as a result of the Federal Power Act. On December 5,2005, the plaintiffs filed an appeal of the dismissal. On April 14, 2006,the California Court of Appeal dismissed the appeal as to the remaining Mirantdefendants pursuant to a stipulation and remanded the suits to the superiorcourt. On May 9, 2006, the California state court dismissed the suits withrespect to the remaining Mirant defendants.

***U.S. GovernmentInquiries***

*Department of JusticeInquiries.**  *In November 2002,Mirant received a subpoena from the Department of Justice (the “DOJ”), actingthrough the United States Attorney’s office for the Northern District ofCalifornia, requesting information about its activities and those of itssubsidiaries for the period since January 1, 1998. The subpoena requestedinformation related to the California energy markets and other topics,including the reporting of inaccurate information to the trade press thatpublish natural gas or electricity spot price data. The subpoena was issued aspart of a grand jury investigation. The DOJ’s investigation of the reporting ofinaccurate natural gas price information is continuing, and Mirant has helddiscussions with the DOJ regarding the disposition of this matter. The DOJ’sinvestigation is based upon the same circumstances that were the subject of aninvestigation by the Commodity Futures Trading Commission (“CFTC”) that wassettled in December 2004. As described in Mirant’s Annual Report on Form 10-Kfor the year ended December 31, 2004, in Legal Proceedings - OtherGovernmental Proceedings - CFTC Inquiry, Mirant and Mirant Americas EnergyMarketing pursuant to the settlement consented to the entry of an order by theCFTC in which it made findings, which are neither admitted nor denied by Mirantand Mirant Americas Energy Marketing, that (1) from January 2000through December 2001, certain Mirant Americas Energy Marketing naturalgas traders (a) knowingly reported inaccurate price, volume, and/orcounterparty information regarding natural gas cash transactions to publishersof natural gas indices and (b) inaccurately reported to index publisherstransactions observed in the market as Mirant Americas Energy Marketingtransactions and (2) from January to October 2000, certainMirant Americas Energy Marketing west region traders knowingly delivered thefalse reports in an attempt to manipulate the price of natural gas. Under thesettlement, the CFTC received a subordinated allowed, unsecured claim againstMirant Americas Energy Marketing of $12.5 million in the Chapter 11proceedings. On June 19, 2006, two former employees of Mirant pled guiltyto charges 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 and intendsto continue to do so. At this time, the Company’s view is that any action takenby the DOJ against Mirant or its subsidiaries related to the reporting ofnatural gas price information would not involve the Company or its subsidiariesexcept to the extent that any disposition of this matter results in ongoingundertakings by Mirant Energy Trading as the recipient of the assets of MirantAmericas Energy Marketing under the Plan.

***Environmental Matters***

*EPAInformation Request.**  *InJanuary 2001, the Environmental Protection Agency (the “EPA”) issued arequest for information to Mirant concerning the air permitting and airemissions control implications under the EPA’s new source review (“NSR”)regulations promulgated under the Federal 

64

----

Clean Air Act (the “CleanAir Act”) of past repair and maintenance activities at the Potomac River plantin Virginia and the Chalk Point, Dickerson and Morgantown plants in Maryland.The requested 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 historical operationsprior to the Company subsidiaries’ acquisition or lease of the plants. If aviolation is determined to have occurred at any of the plants, the Companysubsidiary owning or leasing the plant may be responsible for the cost ofpurchasing and installing emissions control equipment, the cost of which may bematerial. If such violation is determined to have occurred after the Company’ssubsidiaries acquired or leased the plants or, if occurring prior to theacquisition or lease, is determined to constitute a continuing violation, theCompany subsidiary owning or leasing the plant at issue would also be subjectto fines and penalties by the state or federal government for the periodsubsequent to its acquisition or lease of the plant, the cost of which may bematerial.

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

On September 27, 2004,Mirant Potomac River, Mirant Mid-Atlantic, the Virginia DEQ, the MDE, the DOJand the EPA entered into, and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia, a proposed consent decree(the “Original Consent Decree”) that, if approved, would resolve Mirant PotomacRiver’s potential liability for matters addressed in the NOVs previously issuedby the Virginia DEQ and the EPA. The Original Consent Decree requires MirantPotomac River and Mirant Mid-Atlantic to (1) install pollution controlequipment at the Potomac River plant and at the Morgantown plant leased byMirant Mid-Atlantic in Maryland, (2) comply with declining system-wide ozoneseason NOx emissions caps from 2004 through 2010, (3) comply with system-wideannual NOx emissions caps starting in 2004, (4) meet seasonal system averageemissions rate targets in 2008 and (5) pay civil penalties and performsupplemental environmental projects in and around the Potomac River plantexpected to achieve additional environmental benefits. Except for theinstallation of the controls planned for the Potomac River units and theinstallation of selective catalytic reduction (“SCR”) or equivalent technologyat Mirant Mid-Atlantic’s Morgantown Units 1 and 2 in 2007 and 2008, theOriginal Consent Decree does not obligate the Company’s subsidiaries to installspecifically designated technology, but rather to reduce emissions sufficientlyto meet the various NOx caps. Moreover, as to the required installations ofSCRs at Morgantown, Mirant Mid-Atlantic may choose not to install thetechnology by the applicable deadlines and leave the units off eitherpermanently or until such time as the SCRs are installed. The Original ConsentDecree is subject to the approval of the district court and the BankruptcyCourt. As described below, the Original Consent Decree has not yet beenapproved and the parties have filed an amended proposed consent decree.

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

65

----

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

In early May 2006, theparties to the Original Consent Decree and Mirant Chalk Point, LLC (“MirantChalk Point”) entered into and filed for approval with the United StatesDistrict Court for the Eastern District of Virginia an amended consent decree(the “Amended Consent Decree”) that, if approved, will resolve Mirant PotomacRiver’s potential liability for matters addressed in the NOVs previously issuedby the Virginia DEQ and the EPA. The district court and the Bankruptcy Courtmust approve the Amended Consent Decree for it to become effective. TheBankruptcy Court approved the Amended Consent Decree on June 1, 2006. TheAmended Consent Decree includes the requirements that were to be imposed underthe terms of the Original Consent Decree as described above. It also definesthe rights and remedies of the parties in the event of a rejection inbankruptcy or other termination of any of the long-term leases under whichMirant Mid-Atlantic leases the coal units at the Dickerson and Morgantownplants. The Amended Consent Decree provides that if Mirant Mid-Atlantic rejectsor otherwise 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) provide theEPA, Virginia DEQ and the MDE with the written agreement of the new owner oroperator of the affected plant or plants to be bound by the obligations of theAmended Consent Decree and (ii) where the affected plant is the Morgantownplant, offer to any and all prospective owners and/or operators of theMorgantown 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 be mixed rapidly toward the groundresulting in higher ground level concentrations of emissions. If the modelinganalysis indicates that emissions from the facility may cause exceedances ofthe NAAQS for SO2, NO2, CO or PM10, or exceedances of mercury compared toVirginia Standards of Performance for Toxic Pollutants, the consent 

66

----

order requires MirantPotomac River to submit to the Virginia DEQ a plan and schedule to eliminateand prevent such exceedances on a timely basis. Upon approval by the VirginiaDEQ of the plan and schedule, the approved plan and schedule is to beincorporated by reference into the consent order. The results of the computermodeling analysis showed that emissions from the Potomac River plant have thepotential to contribute to localized, modeled instances of exceedances of theNAAQS for SO2, NO2 and PM10 under certain conditions.

On August 24, 2005, power production at all fiveunits of the Potomac River generating facility was temporarily halted inresponse to a directive from the Virginia DEQ. The decision to temporarily shutdown the facility arose from findings of a study commissioned under the orderby consent referred to above. The Virginia DEQ’s directive was based on resultsfrom the study’s computer modeling showing that air emissions from the facilityhave the potential to contribute to localized, modeled exceedances of thehealth-based NAAQS under certain conditions. On August 25, 2005, the District of Columbia Public ServiceCommission filed an emergency petition and complaint with the FERC and theDepartment of Energy (the “DOE”) to prevent the shutdown of the Potomac Riverfacility. The matter remains pending before the FERC and the DOE. On September 21,2005, Mirant Potomac River commenced partial operation of one unit of theplant. On December 20, 2005, due to a determination by the DOE that anemergency situation existed with respect to a shortage of electric energy, theDOE ordered Mirant Potomac River to generate electricity at the Potomac Rivergenerating facility, as requested by PJM, during any period in which one orboth of the transmission lines serving the central Washington D.C. area are outof service due to a planned or unplanned outage. In addition, the DOE orderedMirant Potomac River, at all other times, for electric reliability purposes, tokeep as many units in operation as possible and to reduce the start-up time ofunits not in operation without contributing to any NAAQS exceedances. The DOErequired Mirant Potomac River to submit a plan, on or before December 30,2005, that met these requirements. The DOE advised that it would considerMirant Potomac River’s plan in consultation with the EPA. The order furtherprovides that Mirant Potomac River and its customers should agree to mutuallysatisfactory terms for any costs incurred by it under this order or just andreasonable terms shall be established by a supplemental order. Certain partiesfiled for rehearing of the DOE order, and on February 17, 2006, the DOEissued an order granting rehearing solely for purposes of considering therehearing requests further. Mirant Potomac River submitted an operating plan inaccordance with the order. On January 4, 2006, the DOE issued an interimresponse to Mirant Potomac River’s operating plan authorizing operation of theunits of the Potomac River generating facility on a reduced basis, but makingit possible to bring the entire plant into service within approximately 28hours when necessary for reliability purposes. The DOE’s order expires after September 30,2006, but Mirant Potomac River expects it will be able to continue to operatethese units after that expiration. In a letter received December 30, 2005,the EPA invited Mirant Potomac River and the Virginia DEQ to work with the EPAto ensure that Mirant Potomac River’s operating plan submitted to the DOEadequately 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 

67

----

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

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

*MorgantownEmissions Observation NOV.*   On June 30,2006, the MDE issued an NOV to Mirant Mid-Atlantic indicating that it hadfailed to comply with the air permit for the Morgantown facility by operatingthe combustion turbines at the facility for more than 168 hours withoutperforming an EPA Reference Method 9 observation of stack emissions for an 18-minuteperiod. The NOV did not seek a specificpenalty amount but noted that the violation identified could subject MirantMid-Atlantic to a civil penalty of up to $25,000 per day.

*MorgantownSO2 Exceedances.**  *MirantMid-Atlantic has received an NOV dated March 8, 2006, asserting that onthree days in June 2005 and January 2006, the Morgantown facilityexceeded SO2 emission limitations specified in its air permit. The NOVindicates that on two of those days the SO2 emission limitation was exceeded bytwo different units of the Morgantown facility each day. The NOV did not seek aspecific penalty amount but noted that the violations identified could subjectMirant Mid-Atlantic to a civil penalty of up to $25,000 per day.

*MorgantownParticulate Emissions. *OnMarch 3, 2006, Mirant Mid-Atlantic received a notice sent on behalf of theMaryland Department of the Environment alleging that violations of particulatematter emissions limits applicable to Unit 1 at the Morgantown plant occurredon nineteen days in June and July 2005. The notice advises that thepotential civil penalty is up to $25,000 per day for each day that Unit 1exceeded the applicable particulate matter limit. The letter further advisesthat the MDE has asked the Maryland Attorney General to file a civil suit underMaryland law based upon the alleged violations.

68

----

*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.

*NewYork State Administrative Claim.**  *OnJanuary 24, 2006, the State of New York and the NYSDEC filed a notice of administrativeclaims in the Mirant Debtors’ Chapter 11 proceedings asserting a claim seekingto require the Mirant Debtors to provide funding to the Company’s subsidiariesowning generating facilities in New York to satisfy certain specifiedenvironmental compliance obligations. The State of New York alleges that duringthe pendency of the Chapter 11 proceedings the Mirant Debtors that have emergedfrom bankruptcy made decisions on behalf of the Company’s subsidiaries owninggenerating facilities in New York and did not appropriately maintain thecorporate separateness between themselves and those subsidiaries. The Companydisputes those allegations. The State of New York cites various existingoutstanding matters between the State and the Company’s subsidiaries owninggenerating facilities in New York related to compliance with environmental lawsand regulations, most of which are not material. The most significantcompliance obligation identified by the State of New York in its notice ofadministrative claim relates to a consent decree entered into on June 11,2003 (the “2003 Consent Decree”), by Mirant New York and Mirant Lovett with theState of New York to resolve issues related to NSR requirements under the CleanAir Act related to the Lovett plant. Under the 2003 Consent Decree, MirantLovett is required to make an election to install certain environmentalcontrols on units 4 and 5 of the Lovett facility or shut down those units by2007 to 2008. The State of New York notes in its notice of administrative claimthat the cost of implementing such environmental controls could exceed $200million. The State of New York and the NYSDEC have executed a stipulated orderwith the Company, its New York subsidiaries and the other Mirant Debtors tostay resolution of this administrative claim. That stipulated order wasapproved by the Bankruptcy Court on February 23, 2006.

*RiverkeeperSuit Against Mirant 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.

*MirantLovett Coal Ash Management Facility.*   On July 8,2004, the New York State Department of Environmental Conservation (“NYSDEC”)issued an NOV for improper closure of the coal ash management facility (“CAMF”)at the Lovett plant. On June 1, 2006, the NYSDEC and Mirant Lovett, LLC (“MirantLovett”) entered into an Order on Consent that will resolve the NOV. The Orderon Consent requires the approval of the Bankruptcy Court in order to becomeeffective. It provides for payment by Mirant Lovett of a penalty of $20,000,with $5,000 to be paid within thirty days of obtaining the Bankruptcy Court’sapproval of the Order on Consent, and the remaining $15,000 to be suspended 

69

----

provided Mirant Lovettcompletes certain remedial actions specified in the Order on Consent. TheBankruptcy Court approved the Order on Consent on July 12, 2006.

*MirantBowline Oil Storage NOV.*   On January 4, 2006, the NYSDEC issued an NOVasserting various violations of regulations relating to a major oil storagefacility, secondary containment, compliance report, underground storage tanksand a small oil storage facility at the Bowline plant. The NOV identifiedissues with labeling, maintenance and monitoring procedures and leak detection.The NOV did not seek a specific penalty amount but noted that the violationsidentified could each subject Mirant Bowline to a civil penalty of up to$37,500 per day. On July 20, 2006, the NYSDEC and Mirant Bowline executeda Consent Order resolving the NOV that requires Mirant Bowline to pay a civilpenalty of $20,000 within sixty days of approval of the Bankruptcy Court. TheBankruptcy Court approved the Consent Order on August 1, 2006.

*Mirant Bowline Oil Spill.**  *In November 2001, Mirant Bowline removed twounderground oil storage tanks that had been used to collect oil recovered fromthe oil/water separators that are used for pretreatment of wastewater from theBowline generating facility. Contaminated soil was found during the removal ofone of the tanks and was removed from the site. Mirant Bowline is unable toconfirm from documents at the facility whether the spill was reported to theNYSDEC and to the Rockland County, New York authorities. Consequently, MirantBowline reported a potential non-reported spill to the NYSDEC on February 23,2006.

***City of Alexandria Zoning Action***

*On December 18, 2004, the CityCouncil for the City of Alexandria, Virginia (the “City Council”) adoptedcertain zoning ordinance amendments recommended by the City Planning Commissionthat resulted in the zoning status of Mirant Potomac River’s generating plantbeing changed from “noncomplying use” to “nonconforming use subject toabatement.” Under the nonconforming use status, unless Mirant Potomac Riverapplies for and is granted a special use permit for the plant during theseven-year abatement period, the operation of the plant must be terminatedwithin a seven-year period, and no alterations that directly prolong the lifeof the plant will be permitted during the seven-year period. If Mirant PotomacRiver were to apply for and receive a special use permit for the plant, theCity Council would likely impose various conditions and stipulations as to thepermitted use of the plant and seek to limit the period for which it couldcontinue to operate.*

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

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

70

----

MirantPotomac River’s due process rights. Mirant Potomac River and MirantMid-Atlantic requested the court to enjoin the City of Alexandria and the CityCouncil from taking any enforcement action against Mirant Potomac River or fromrequiring it to obtain a special use permit for the continued operation of itsgenerating plant. On January 18, 2006, the court issued an oral rulingfollowing a trial that the City of Alexandria acted unreasonably andarbitrarily in changing the zoning status of Mirant Potomac River’s generatingplant and in revoking the 1989 SUPs. On February 24, 2006, the court enteredjudgment in favor of Mirant Potomac River and Mirant Mid-Atlantic declaring thechange in the zoning status of Mirant Potomac River’s generating plant adoptedDecember 18, 2004, to be invalid and vacating the City Council’s revocation ofthe 1989 SUPs. The City of Alexandria has filed notice seeking to appeal thisjudgment.

***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 asserting that Mirant Potomac River’s shutdown of thePotomac River plant causes Mirant Potomac River to be liable for the cost ofsuch transmission facilities, which cost it estimates to be in excess of $70million. Mirant Potomac River disputes Pepco’s interpretation of the agreement.The outcome of this matter cannot be determined at this time.

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

***New York Tax Proceedings***

The Company’s subsidiaries that own the Bowline andLovett generating plants in New York are the petitioners in various proceedings(“Tax Certiorari Proceedings”) initially brought in the New York state courtschallenging the assessed value of those generating plants determined by theirrespective local taxing authorities. Mirant Bowline has challenged the assessedvalue of the Bowline generating facility and the resulting local taxassessments paid for tax years 1995 through 2005. Mirant Bowline succeeded torights held by Orange & Rockland Utilities, Inc. (“Orange &Rockland”) for the tax years prior to its acquisition of the Bowline Plant in1999 under its agreement with Orange & Rockland for the purchase ofthat plant. Mirant Lovett has initiated proceedings challenging the assessedvalue of the Lovett facility for each of the years 2000 through 2005. If theTax Certiorari Proceedings result in a reduction of the assessed value of the 

71

----

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

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

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

**Item1A.****   *Risk Factors***

The following are factorsthat could affect our future performance:

***Our revenues areunpredictable because many of our facilities operate without long-term powerpurchase agreements, and our revenues and results of operations depend onmarket and competitive forces that are 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 not guaranteedrecovery of our costs or any return on our capital investments through mandatedrates. The market for wholesale electric energy and energy services reflectsvarious market conditions beyond our control, including the balance of supplyand demand, the marginal and long run costs incurred by our competitors and theimpact of market regulation. The price for which we can sell our output mayfluctuate on a day-to-day basis. The markets in which we compete remain subjectto one or more forms of regulation that limit our ability to raise pricesduring periods of shortage to the degree that would occur in a fullyderegulated market, limiting our ability to recover costs and an adequatereturn on our investment.

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

·       thefailure of market regulators to develop efficient mechanisms to compensatemerchant generators for the value of providing capacity needed to meet demand;

72

----

·       actionsby regulators, ISOs, RTOs and other bodies that may prevent capacity and energyprices from rising to the level sufficient for recovery of our costs, ourinvestment and an adequate return on our investment;

·       theability of wholesale purchasers of power to make timely payment for energy orcapacity, which may be adversely impacted by factors such as retail rate caps,refusal by regulators to allow utilities to fully recover their wholesale powercosts and investments through rates, catastrophic losses, and losses frominvestments in unregulated businesses;

·       thefact that increases in prevailing market prices for fuel oil, coal, natural gasand emissions allowances may not be reflected in increased prices we receivefor sales of energy;

·       increasesin supplies due to actions of our current competitors or new market entrants,including the development of new generating facilities that may be able toproduce electricity less expensively than our generating facilities, andimprovements in transmission that allow additional supply to reach our markets;

·       thecompetitive advantages of certain competitors including continued operation ofolder power plants in strategic locations after recovery of historic capitalcosts from ratepayers;

·       existingor future regulation of our markets by the FERC, ISOs and RTOs, including anyprice limitations and other mechanisms to address some of the price volatilityor illiquidity in these markets or the physical stability of the system;

·       regulatorypolicies of state agencies which affect the willingness of our customers toenter into long-term contracts generally, and contracts for capacity inparticular;

·       weatherconditions that depress demand or increase the supply of hydro power; and

·       changesin the rate of growth in electricity usage as a result of such factors asregional economic conditions 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 incommodity prices may negatively impact our financial results by increasing thecost of producing power or lowering the price at which we are able to sell ourpower, and we may be unsuccessful at managing 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 theywill not 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.

73

----

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 tothe risk of fuel and fuel transportation cost increases and volatility andinterruption in fuel supply because our facilities generally do not havelong-term agreements for natural gas, 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.

***Some of ourgeneration facilities depend on only one or a few customers or suppliers. Theseparties, as well as other parties with whom we have contracts, may fail toperform their obligations, or may terminate their existing agreements, whichmay result in a default on project debt or a loss in revenues and may requireus to institute legal proceedings to enforce the 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 ourgeneration facilities involves risks that may have a material adverse impact onour cash flows and results of operations.***

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

·       theoutput and efficiency levels at which those generation facilities perform;

·       interruptionsin fuel supply;

·       disruptionsin the delivery of electricity;

·       adversezoning;

·       breakdownsor equipment failures (whether due to age or otherwise);

·       restrictionson emissions;

74

----

·       violationsof our permit requirements or changes in the terms of or revocation of permits;

·       releasesof pollutants and hazardous substances to air, soil, surface water orgroundwater;

·       shortagesof equipment or spare parts;

·       labordisputes;

·       operatorerrors;

·       curtailmentof operations due to transmission constraints;

·       failuresin the electricity transmission system which may cause large energy blackouts;

·       implementationof unproven technologies in connection with environmental improvements; and

·       catastrophicevents such as fires, explosions, floods, earthquakes, hurricanes or othersimilar occurrences.

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 make payments onour debt or our other obligations.

***The accounting forour asset hedging and proprietary trading activities may increase thevolatility of our quarterly and annual financial results.***

We engage in asset managementactivities in order to economically hedge our exposure to market risk withrespect to (1) electricity sales from our generation facilities, (2) fuelutilized by those facilities and (3) emissions allowances. We generallyattempt to balance our fixed-price physical and financial purchases and salescommitments in terms of contract volumes and the timing of performance anddelivery obligations through the use of financial and physical derivativecontracts. We also use derivative contracts with respect to our limitedproprietary trading activities, through which we attempt to achieve incrementalreturns by transacting where we have specific market expertise. Some of thederivatives from our asset hedging and proprietary trading activities arerecorded on our balance sheet at fair value pursuant to Statement of FinancialAccounting Standards Board (“SFAS”) No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*” (“SFAS No. 133”).None of our derivatives recorded at fair market value are designated as hedgesunder SFAS No. 133 and changes in their fair value are thereforerecognized currently in earnings as unrealized gains or losses. As a result,our financial results—including gross margin, operating income and balancesheet ratios—will, at times, be volatile and subject to fluctuations in valueprimarily due to changes in electricity and fuel prices. For example, for thesix months ended June 30, 2006, we were required to mark-to-marketcontracts resulting in a $376 million gain as compared to the six monthsended June 30, 2005, when we were required to mark-to-market contractsresulting in a $67 million gain.

***Our results are subject to quarterly and seasonalfluctuations.***

Our operating results have fluctuated in the past andmay continue to do so in the future as a result of a number of factors,including:

·       seasonalvariations in demand and corresponding energy and fuel prices; and

·       variations in levels ofproduction.

75

----

***We compete to sell energy and capacity in thewholesale power markets against some competitors that enjoy competitiveadvantages, including the ability to recover fixed costs through rate basemechanisms 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.

***Our business and activities are subject to extensiveenvironmental requirements and could be adversely affected by suchrequirements, 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 Unit 5 in 2007 and Units 3 and 4 in2008. We are pursuing alternatives that would make it economically feasible forthis generation facility to remain in operation, but there can be no assurancesthat 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 of theenvironmental 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 inemissions of NOx, SO2 and mercurythan the recently finalized CAIR and CAMR. This legislation affects our ChalkPoint, Dickerson and Morgantown facilities and we are currently assessing ouroptions for compliance and their impacts. We anticipate that the capitalexpenditures to achieve compliance will be approximately $1.3 billion to $1.5billion in 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.

76

----

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 responsible to usfor 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 June 30,2006, our total indebtedness was approximately$1.6 billion. In addition, the present value of lease payments under the MirantMid-Atlantic leveraged leases is approximately $1 billion (assuming a 10%discount rate) and the termination value of the Mirant Mid-Atlantic leveragedleases is $1.4 billion. Our substantial degree of leverage could have importantconsequences, including the following: (1) it may limit our ability toobtain additional debt or equity financing for working capital, capitalexpenditures, debt service requirements, acquisitions and general corporate orother purposes; (2) a substantial portion of our cash flows fromoperations must be dedicated to the payment of principal and interest on ourindebtedness and will not be available for other purposes, including our operations,capital expenditures and future business opportunities; (3) our debtservice requirements could make it more difficult for us to satisfy our other financialobligations; (4) borrowings under our senior secured credit facility is ata variable rate of interest, exposing us to the risk of increased interestrates; (5) it may limit our ability to adjust to changing marketconditions and place us at a competitive disadvantage compared with ourcompetitors that have less debt; and (6) we may be more vulnerable in adownturn in general economic conditions or in our business and we may be unableto carry out capital expenditures that are important to our long-term growth ornecessary to comply with environmental regulations.

***We are a holding company and may not have access tosufficient cash to meet our obligations.***

Our operations may not generate sufficient cash toenable us to make principal and interest payments on our indebtedness. Inaddition, payments to us by our subsidiaries will be contingent upon oursubsidiaries’ earnings. Our subsidiaries are permitted under the terms of ourindebtedness to incur additional indebtedness that may restrict payments fromthose subsidiaries to us. We cannot assure you that agreements governingcurrent and future indebtedness of our subsidiaries will permit thosesubsidiaries to provide us with sufficient cash to fund our obligations.

77

----

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, 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, and theyhave no obligation, contingent or otherwise, to pay our obligations or to makeany funds available to pay those obligations, whether by dividend,distribution, loan or other payment.

Our obligations areeffectively subordinated to the obligations or indebtedness of any of oursubsidiaries, except to the extent that such obligations or indebtedness isassumed or guaranteed by a subsidiary. A significant portion of our cash fromoperations is generated by Mirant Mid-Atlantic, which is not a subsidiaryguarantor our senior secured credit facility or senior notes. Under the MirantMid-Atlantic leveraged leases, Mirant Mid-Atlantic is subject to a covenantthat does not permit them to make distributions to us unless (1) certain fixedcharge coverage ratio and projected fixed charge coverage ratio tests are metand (2) at the time of and after giving effect to such distribution, nosignificant lease default or lease event of default has occurred and iscontinuing.

***We may be unable to generate sufficient liquidity toservice our debt and to post required amounts of cash collateral necessary toeffectively 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 June 30,2006, we had approximately $162 million of posted cash collateral and $182million of 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 andfactors, including market conditions. We have limited notice of any changes tothe margin rates. Consequently, we are exposed to changes in the per unitmargin rates 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.

78

----

***Our business is subject to complex governmentregulations. Changes in these regulations, or their 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 the 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 mitigated. In addition to direct regulation by theFERC, most of our assets are subject to rules and terms of participationimposed and administered by various RTOs and ISOs. Although these entities arethemselves ultimately regulated by the FERC, they can impose rules,restrictions and terms of service that are quasi-regulatory in nature and canhave a material adverse impact on our business. For example, ISOs and RTOs mayimpose bidding and scheduling rules, both to curb the potential exercise ofmarket power and to ensure market functions. Such actions may materially impactour ability to sell and the price we receive for our energy 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 forsupply of electricity, at both the wholesale and retail level. In addition, anyfuture legislation favoring large, vertically integrated utilities and aconcentration of ownership of such utilities could impact our ability tocompete successfully, and our business and results of operations could suffer.We cannot provide assurance that the introductions of new laws, or other futureregulatory developments, will not have a material adverse impact on our business,operations or financial condition.

***Changes in technology may significantly impact ourgeneration business by making our generation 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.

79

----

***Terrorist attacks, future war or risk of war mayadversely impact our results of operations, our ability to raise capital or ourfuture 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 be materiallyadversely impacted. In addition, such an attack could impact our ability toservice our indebtedness, our ability to raise capital and our future growthopportunities.

***Our operations are subject to hazards customary to thepower generation industry. We may not have adequate insurance to cover all ofthese 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 insurance coverage.Power generation involves hazardous activities, including acquiring,transporting and unloading fuel, operating large pieces of rotating equipmentand delivering electricity to transmission and distribution systems. Inaddition to natural risks, such as earthquake, flood, lightning, hurricane andwind, hazards, such as fire, explosion, collapse and machinery failure, areinherent risks in our operations. These hazards can cause significant personalinjury or loss of life, severe damage to and destruction of property, plant andequipment, contamination of, or damage to, the environment and suspension ofoperations. The occurrence of any one of these events may result in our beingnamed as a defendant in lawsuits asserting claims for substantial damages,environmental cleanup costs, personal injury and fines and/or penalties. Wemaintain an amount of insurance protection that we consider adequate, but wecannot assure that our insurance will be sufficient or effective under allcircumstances and against all hazards or liabilities to which we may besubject. A successful claim for which we are not fully insured could hurt ourfinancial results and materially harm our financial condition.

***The subsidiaries that own our generation facilities inNew York, including our Lovett and Bowline facilities, have not emerged fromChapter 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. We are also indiscussions with the NYISO and utilities regarding an agreement that wouldcompensate Mirant Lovett for its contribution to the reliability of the NewYork electric power system. The facilities are forecasted to have negativeoperating cash flows at their current tax valuations. Until a settlement isreached on property taxes, environmental controls and reliability that wouldpermit economically feasible operation, our subsidiaries that own thefacilities, Mirant Lovett and Mirant Bowline, LLC (“Mirant Bowline”), willremain in Chapter 11. The Lovett and Bowline facilities are currently innegotiations on all of 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 FERC has also concurred withthe results of Mirant NY-Gen’s flood study for its New York Swinging Bridge,Rio and Mongaup generating facilities, which study concluded that no additionalremediation is required. The Bankruptcy Court authorized Mirant NY-Gen toproceed with 

80

----

implementationof the remediation plan on June 29, 2006. The current estimated costs toremediate the dam at Swinging Bridge is approximately $20 million of which $12million has been incurred through June 30, 2006. Under thedebtor-in-possession loan, Mirant Americas, subject to certain conditions,would lend up to $9.5 million to Mirant NY-Gen to provide funding for therepairs at the Swinging Bridge dam.

***We may be subject to claims that were not dischargedin the bankruptcy cases, which could have a material adverse effect on ourresults 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 and certain debts arisingafterwards. With few exceptions, all claims that arose prior to our bankruptcyfiling and before confirmation of the Plan are (1) subject to compromiseand/or treatment under the Plan or (2) discharged, in accordance with theBankruptcy Code and terms of the Plan. Circumstances in which claims and otherobligations that arose prior to our bankruptcy filing were not dischargedprimarily relate to certain actions by governmental units under police powerauthority, where we have agreed to preserve a claimant’s claims, as well as,potentially, instances where a claimant had inadequate notice of the bankruptcyfiling. The ultimate resolution of such claims and other obligations may have amaterial adverse effect on our results of operations and profitability.

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

Although we emerged from bankruptcy upon consummationof the Plan, we cannot assure you that having been subject to bankruptcyprotection will not adversely affect our operations going forward, includingour ability to negotiate favorable terms from suppliers, hedging counterpartiesand others and to attract and retain customers. The failure to obtain suchfavorable terms and retain customers could adversely affect our financial performance.

81

----

***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)                                                                                                                                 |       |
| 10.1*               |       | Settlement  Agreement and Release dated as of May 30, 2006 by and among the Mirant  Settling Parties and the Pepco Settling Parties (Designated on Mirant  Corporation Form 8-K filed May 30, 2006 as Exhibit 10.1) |       |
| 31.1           |       | Certification of  Chief Executive Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).                                                    |       |
| 31.2           |       | Certification of  Chief Financial Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).                                                    |       |
| 32.1           |       | Certification of  the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)).                                          |       |
| 32.2           |       | Certification of  the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)).                                          |       |

 

----

                 * Asterisk indicates exhibits incorporated byreference.

82

----

**SIGNATURES**

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

 

83

----