**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

**Forthe Quarterly Period Ended June 30, 2007**

**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  Incorporation or Organization) |   | (Commission File  Number) |   | (I.R.S. Employer  Identification No.) |

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. x Yes  o 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 largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

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

 

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

Indicate by check 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 acourt. x Yes  o No

All of our outstandingmembership interests are held by our parent, Mirant Americas Generation, LLC,so we have no membership interests held by nonaffiliates.

 

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**TABLEOF CONTENTS**
|              | ** ** | ** **                                                                                  | ** ** | **Page** |
|--------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
|         |       | Glossary  of Certain Defined Terms                                                          |       | i - iii  |
|         |       | Cautionary  Statement Regarding Forward-Looking Information                                 |       | 3        |
| ** **   | ** ** | **PART I—FINANCIAL INFORMATION**                                                  |       |     |
| Item 1. |       | Interim Financial  Statements (unaudited):                                                  |       |     |
|         |       | Condensed  Consolidated Statements of Operations                                            |       | 5        |
|         |       | Condensed  Consolidated Balance Sheets                                                      |       | 6        |
|         |       | Condensed  Consolidated Statements of Member’s Equity                                  |       | 7        |
|         |       | Condensed Consolidated  Statements of Cash Flows                                            |       | 8        |
|         |       | Notes to Condensed  Consolidated Financial Statements                                       |       | 9        |
| Item 2. |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |       | 41       |
| Item 3. |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 63       |
| Item 4. |       | Controls  and Procedures                                                                    |       | 63       |
| ** **   | ** ** | **PART II—OTHER  INFORMATION**                                                    |       |     |
| Item 1. |       | Legal Proceedings                                                                           |       | 65       |
| Item 1A.     |       | Risk Factors                                                                                |       | 65       |
| Item 6. |       | Exhibits                                                                                    |       | 65       |

 

2

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**Glossary of CertainDefined Terms**

**ACO**—AdministrativeCompliance Order.

**APB**—AccountingPrinciples Board.

**APB No. 22**—APBOpinion No. 22, *Disclosure of AccountingPolicies.*

**APSA**—AssetPurchase and Sale Agreement dated June 7, 2000, between the Company andPepco.

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

**BankruptcyCode**—United States Bankruptcy Code.

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

**BaseloadGenerating Units**—Units that satisfy minimum baseloadrequirements of the system and produce electricity at an essentially constantrate and run continuously.

**CAISO**—CaliforniaIndependent System Operator.

**Cal PX**—CaliforniaPower Exchange.

**CFTC**—CommodityFutures Trading Commission.

**Clean AirAct**—Federal Clean Air Act.

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

**CO**—Carbonmonoxide.

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

**CPUC**—CaliforniaPublic Utilities Commission.

**DOE**—Departmentof Energy.

**DOJ**—Departmentof Justice.

**DWR**—CaliforniaDepartment of Water Resources.

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

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

**EITF 02-3**—EITFIssue No. 02-3, *Issues Involved inAccounting for Derivative Contracts Held for Trading Purposes and ContractsInvolved in Energy Trading and Risk Management Activities.*

**EITF 06-3**—EITFIssue No. 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation).*

**EOB**—CaliforniaElectricity Oversight Board.

**EPA**—EnvironmentalProtection Agency.

**FASB**—FinancialAccounting Standards Board.

**FERC**—FederalEnergy Regulatory Commission.

**FIN**—FASBInterpretation.

**FIN 39**—FINNo. 39, *Offsetting of Amounts Returned to CertainContracts.*

i

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**FIN 48**—FIN No. 48,*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109.*

**FSP**—FASB Staff Position.

**FSP FIN 39-1**—FSP FIN No. 39-1,*Modification to FASB Interpretation No. 39(FIN 39).*

**FSP FIN 48-1**—FSP FIN No. 48-1,*Definition of Settlement in FASB Interpretation No. 48(FIN 48).*

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

**Gross Margin**—Operatingrevenue less cost of fuel, electricity and other products.

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

**Intermediate Generating Units**—Unitsthat meet system requirements that are greater than baseload and less thanpeaking.

**LIBOR**—London InterBank OfferedRate.

**MAAC**—Mid-Atlantic Area Council.

**Mirant**—Old Mirantprior to January 3, 2006, and New Mirant on or after January 3, 2006.

**Mirant Americas**—MirantAmericas, Inc.

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

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

**Mirant Bowline**—MirantBowline, LLC.

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

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

**Mirant Kendall**—MirantKendall, LLC.

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

**Mirant Lovett**—MirantLovett, LLC.

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

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

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

**Mirant NY-Gen**—MirantNY-Gen, LLC.

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

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

**Mirant Services**—MirantServices, LLC.

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

**Mirant West Georgia**—MirantWest Georgia, L.L.C.

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

**MW**—Megawatt.

**MWh**—Megawatt hour.

**NAAQS**—Nationalambient air quality standards.

ii

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**New Mirant**—MirantCorporation on or after January 3, 2006.

**NOL**—Net operatingloss.

**NOx**—Nitrogenoxides.

**NSR**—New sourcereview.

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

**NYSDEC**—New YorkState Department of Environmental Conservation.

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

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

**Panda**—Panda-Brandywine,LP.

**Peaking Generating Units**—Unitsused to meet demand requirements during the periods of greatest or peak load onthe system.

**Pepco**—PotomacElectric Power Company.

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

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

**Plan**—Plan of Reorganizationeffective on January 3, 2006, for Mirant and most of its subsidiaries thatwere debtors in the bankruptcy proceedings.

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

**PPA**—Power purchaseagreement.

**Reserve Margin**—Excesscapacity over peak demand.

**RMR**—Reliability-must-run.

**RTO**—Regionaltransmission organization.

**SEC**—U.S. Securitiesand Exchange Commission.

**Securities Act**—SecuritiesAct of 1933, as amended.

**SFAS**—Statement ofFinancial Accounting Standards.

**SFAS No. 5**—SFASNo. 5, *Accounting for Contingencies.*

**SFAS No. 109**—SFASNo. 109, *Accounting for Income Taxes.*

**SFAS No. 144**—SFASNo. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.*

**SFAS No. 155**—SFAS No. 155,*Accounting for Certain Hybrid Financial Instruments—anamendment of FASB Statements No. 133 and 140.*

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

**SFAS No. 159**—SFASNo. 159, *The Fair Value Option for Financial Assetsand Financial Liabilities—Including an amendment of FASB Statement No 115.*

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

**SO2**—Sulfur dioxide.

**Virginia DEQ**—VirginiaDepartment of Environmental Quality.

iii

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

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

Forward-looking statements are only predictions.Actual events or results may differ materially from any forward-lookingstatement as a result of various factors, which include:

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

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

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

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

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

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

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

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

·       changesin the rules used to calculate capacity and energy payments in the marketsin which we operate;

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

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

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

·       our ability to borrowadditional funds and access capital markets;

3

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·       strikes, union activity orlabor unrest;

·       weather and other naturalphenomena, including hurricanes and earthquakes;

·       the cost and availabilityof emissions allowances;

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

·       curtailment of operationsdue to transmission constraints;

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

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

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

·       the fact that our MirantLovett subsidiary remains in bankruptcy;

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

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

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

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

**Factors that CouldAffect Future Performance**

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

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

**Certain Terms**

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

4

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**MIRANT NORTHAMERICA, LLC AND SUBSIDIARIES**

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

| ** **                                                                                  | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                  | ** ** | **(in millions)**                          | ** ** |
| Operating  revenues—affiliate                                                          | ** ** | **$**                                           | **20**     |                                          | $          | 27 | ** ** | **$** | **53** |   | $ | 30 |   |
| Operating  revenues—nonaffiliate                                                       | ** ** | **490**                                         |       | 638                                           | ** ** | **802** |   | 1,597 |   |
| Total operating revenues                                                                    | ** ** | **510**                                         |       | 665                                           | ** ** | **855** |   | 1,627 |   |
| Cost of fuel,  electricity and other products—affiliate                                | ** ** | **11**                                          |       | 35                                            | ** ** | **47** |   | 51 |   |
| Cost of fuel,  electricity and other products—nonaffiliate                             | ** ** | **216**                                         |       | 263                                           | ** ** | **493** |   | 567 |   |
| Total cost of fuel, electricity and other products                                          | ** ** | **227**                                         |       | 298                                           | ** ** | **540** |   | 618 |   |
| **Gross  Margin**                                                                           | ** ** | **283**                                         |       | 367                                           | ** ** | **315** |   | 1,009 |   |
| **Operating Expenses:**                                                                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operations and  maintenance—affiliate                                                  | ** ** | **64**                                          |       | 69                                            | ** ** | **129** |   | 138 |   |
| Operations and  maintenance—nonaffiliate                                               | ** ** | **97**                                          |       | 96                                            | ** ** | **183** |   | 188 |   |
| Depreciation and  amortization                                                              | ** ** | **29**                                          |       | 31                                            | ** ** | **59** |   | 59 |   |
| Impairment losses                                                                           | ** ** | **175**                                         |       | —                                        | ** ** | **175** |   | — |   |
| Gain on sales of  assets, net                                                               | ** ** | **(17**                                         | **)**      | (6                                            | )          | **(19** | **)** | (6 | ) |
| Total operating expenses                                                                    | ** ** | **348**                                         |       | 190                                           | ** ** | **527** |   | 379 |   |
| **Operating  Income (Loss)**                                                                | ** ** | **(65**                                         | **)**      | 177                                           | ** ** | **(212** | **)** | 630 |   |
| **Other Expense (Income), net:**                                                            | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense—affiliate                                                            | ** ** | **1**                                           |       | —                                        | ** ** | **1** |   | — |   |
| Interest  expense—nonaffiliate                                                         | ** ** | **25**                                          |       | 31                                            | ** ** | **54** |   | 71 |   |
| Interest  income—affiliate                                                             | ** ** | **(1**                                          | **)**      | (2                                            | )          | **(3** | **)** | (3 | ) |
| Interest  income—nonaffiliate                                                          | ** ** | **(15**                                         | **)**      | (9                                            | )          | **(27** | **)** | (16 | ) |
| Gain on sales of  investments, net                                                          |       | —                                          |       | (2                                            | )          | — |   | (2 | ) |
| Other, net                                                                                  |       | —                                          |       | 1                                             |       | — |   | — |   |
| Total other expense, net                                                                    | ** ** | **10**                                          |       | 19                                            | ** ** | **25** |   | 50 |   |
| **Income  (Loss) From Continuing Operations Before Reorganization Items and Income  Taxes** | ** ** | **(75**                                         | **)**      | 158                                           | ** ** | **(237** | **)** | 580 |   |
| Reorganization  items, net                                                                  | ** ** | **(1**                                          | **)**      | (1                                            | )          | **(2** | **)** | (1 | ) |
| Provision for  income taxes                                                                 |       | —                                          |       | 2                                             |       | — |   | 2 |   |
| **Income  (Loss) From Continuing Operations**                                               | ** ** | **(74**                                         | **)**      | 157                                           | ** ** | **(235** | **)** | 579 |   |
| **Income  (Loss) From Discontinued Operations**                                             | ** ** | **4**                                           |       | (2                                            | )          | **(2** | **)** | (1 | ) |
| **Net Income (Loss)**                                                                       | ** ** | **$**                                           | **(70**    | **)**                                         | $          | 155 | ** ** | **$** | **(237** | **)** | $ | 578 |   |

 

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

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**MIRANT NORTHAMERICA, LLC AND SUBSIDIARIES**

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

| ** **                                                               | ** ** | **At**                 | ** ** | **At**                                                   | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                               | ** ** | **June 30,**      | ** ** | **December 31,**                                    | ** ** |
| ** **                                                               | ** ** | **2007**               | ** ** | **    2006    ** | ** ** |
| ** **                                                               | ** ** | **(Unaudited)**        | ** ** | ** **                                               | ** ** |
| ** **                                                               | ** ** | **(in millions)** | ** ** |
| **ASSETS**                                                               | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| **Current Assets:**                                                      | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| Cash and cash  equivalents                                               | ** ** |                   | **$**      | **1,096**                                                | ** ** |   |   | $ | 750 |   |   |
| Funds on deposit                                                         | ** ** |                   | **269**    | ** **                                               |       |   | 233 |   |   |
| Receivables:                                                             |       |                   | ** ** | ** **                                               |       |   |   |   |   |
| Affiliate                                                                | ** ** |                   | **16**     | ** **                                               |       |   | 16 |   |   |
| Nonaffiliate, less  allowance for uncollectibles of $2 for 2007 and 2006 | ** ** |                   | **259**    | ** **                                               |       |   | 371 |   |   |
| Notes receivable—affiliate                                          | ** ** |                   | **124**    | ** **                                               |       |   | 125 |   |   |
| Price risk  management assets—affiliate                             | ** ** |                   | **2**      | ** **                                               |       |   | 3 |   |   |
| Price risk  management assets—nonaffiliate                          | ** ** |                   | **289**    | ** **                                               |       |   | 728 |   |   |
| Prepaid rent and  other payments                                         | ** ** |                   | **111**    | ** **                                               |       |   | 131 |   |   |
| Inventories                                                              | ** ** |                   | **307**    | ** **                                               |       |   | 287 |   |   |
| Assets held for  sale                                                    | ** ** |                   | **—** | ** **                                               |       |   | 532 |   |   |
| Total current  assets                                                    | ** ** |                   | **2,473**  | ** **                                               |       |   | 3,176 |   |   |
| **Property,  Plant and Equipment, net**                                  | ** ** |                   | **2,148**  | ** **                                               |       |   | 2,176 |   |   |
| **Noncurrent Assets:**                                                   | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| Intangible assets,  net                                                  | ** ** |                   | **208**    | ** **                                               |       |   | 212 |   |   |
| Price risk  management assets—affiliate                             | ** ** |                   | **—** | ** **                                               |       |   | 1 |   |   |
| Price risk  management assets—nonaffiliate                          | ** ** |                   | **45**     | ** **                                               |       |   | 104 |   |   |
| Prepaid rent                                                             | ** ** |                   | **237**    | ** **                                               |       |   | 218 |   |   |
| Debt issuance  costs, net                                                | ** ** |                   | **44**     | ** **                                               |       |   | 48 |   |   |
| Other                                                                    | ** ** |                   | **9**      | ** **                                               |       |   | 17 |   |   |
| Total noncurrent  assets                                                 | ** ** |                   | **543**    | ** **                                               |       |   | 600 |   |   |
| **Total  assets**                                                        | ** ** |                   | **$**      | **5,164**                                                | ** ** |   |   | $ | 5,952 |   |   |
| **LIABILITIES AND EQUITY**                                               | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| **Current Liabilities:**                                                 | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| Notes  payable—affiliate                                            | ** ** |                   | **$**      | **19**                                                   | ** ** |   |   | $ | 27 |   |   |
| Current portion of  long-term debt                                       | ** ** |                   | **96**     | ** **                                               |       |   | 141 |   |   |
| Accounts payable  and accrued liabilities                                | ** ** |                   | **299**    | ** **                                               |       |   | 292 |   |   |
| Payable to  affiliate                                                    | ** ** |                   | **30**     | ** **                                               |       |   | 33 |   |   |
| Price risk  management liabilities—affiliate                        | ** ** |                   | **—** | ** **                                               |       |   | 13 |   |   |
| Price risk management  liabilities—nonaffiliate                     | ** ** |                   | **238**    | ** **                                               |       |   | 286 |   |   |
| Accrued property  taxes                                                  | ** ** |                   | **—** | ** **                                               |       |   | 75 |   |   |
| Other                                                                    | ** ** |                   | **2**      | ** **                                               |       |   | 41 |   |   |
| Total current  liabilities                                               | ** ** |                   | **684**    | ** **                                               |       |   | 908 |   |   |
| **Noncurrent Liabilities:**                                              | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| Long-term debt                                                           | ** ** |                   | **1,344**  | ** **                                               |       |   | 1,435 |   |   |
| Price risk  management liabilities—affiliate                        | ** ** |                   | **—** | ** **                                               |       |   | 4 |   |   |
| Price risk  management liabilities—nonaffiliate                     | ** ** |                   | **93**     | ** **                                               |       |   | 39 |   |   |
| Asset retirement  obligations                                            | ** ** |                   | **43**     | ** **                                               |       |   | 40 |   |   |
| Other                                                                    | ** ** |                   | **13**     | ** **                                               |       |   | 4 |   |   |
| Total noncurrent  liabilities                                            | ** ** |                   | **1,493**  | ** **                                               |       |   | 1,522 |   |   |
| **Liabilities  Subject to Compromise**                                   | ** ** |                   | **8**      | ** **                                               |       |   | 58 |   |   |
| **Commitments and Contingencies**                                        | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| **Equity:**                                                              | ** ** |                   | ** ** | ** **                                               |       |   | ** ** |   |   |
| Member’s interest                                                   | ** ** |                   | **3,201**  | ** **                                               |       |   | 3,685 |   |   |
| Preferred stock in  affiliate                                            | ** ** |                   | **(222**   | **)**                                                    |       |   | (221 | ) |   |
| Total equity                                                             | ** ** |                   | **2,979**  | ** **                                               |       |   | 3,464 |   |   |
| **Total  liabilities and equity**                                        | ** ** |                   | **$**      | **5,164**                                                | ** ** |   |   | $ | 5,952 |   |   |

 

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

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**MIRANT NORTHAMERICA, LLC AND SUBSIDIARIES**

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

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

**(in millions)**

| ** **                                                    | ** ** | **Member’s  Interest** | ** ** | **Preferred  Stock in  Affiliate** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|
| Balance,  December 31, 2006                              |       |                        | $          | 3,685                                   |       |   |   | $ | (221 | ) |   |
| Net loss                                                      |       |                        | (237       | )                                       |       |   | — |   |   |
| Amortization of discount on preferred stock in  affiliate     |       |                        | 6          |                                    |       |   | (6 | ) |   |
| Redemption of preferred stock in affiliate                    |       |                        | —     |                                    |       |   | 5 |   |   |
| Distribution to member                                        |       |                        | (346       | )                                       |       |   | — |   |   |
| Settlement of member’s obligations pursuant to the  Plan |       |                        | (15        | )                                       |       |   | — |   |   |
| Capital contribution pursuant to the Plan                     |       |                        | 17         |                                    |       |   | — |   |   |
| Adoption of FIN 48                                            |       |                        | 51         |                                    |       |   | — |   |   |
| Effect of the Supplemental Plan                               |       |                        | 40         |                                    |       |   | — |   |   |
| **Balance, June 30, 2007**                               | ** ** | ** **                  | **$**      | **3,201**                               |       | ** ** | ** ** | **$** | **(222** | **)** | ** ** |

 

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

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**MIRANT NORTHAMERICA, LLC AND SUBSIDIARIES**

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

| ** **                                                                                                                     | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                                                                     | ** ** | **(in millions)**                        | ** ** |
| **Cash Flows from Operating Activities:**                                                                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                              | ** ** | **$**                                         | **(237**   | **)** | $ | 578 |   |
| Loss from  discontinued operations                                                                                             | ** ** | **(2**                                        | **)**      | (1 | ) |
| Income (loss) from  continuing operations                                                                                      | ** ** | **(235**                                      | **)**      | 579 |   |
| Adjustments to reconcile net income (loss) from  continuing operations to net cash provided by (used in) operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                                                                 | ** ** | **63**                                        |       | 63 |   |
| Impairment losses                                                                                                              | ** ** | **175**                                       |       | — |   |
| Gain on sales of  assets and investments, net                                                                                  | ** ** | **(19**                                       | **)**      | (8 | ) |
| Price risk  management activities, net                                                                                         | ** ** | **489**                                       |       | (377 | ) |
| Changes in operating  assets and liabilities:                                                                                  |       |                                          |       |   |   |
| Affiliate accounts  receivable, net                                                                                            | ** ** | **(3**                                        | **)**      | 6 |   |
| Customer accounts  receivable, net                                                                                             | ** ** | **112**                                       |       | 249 |   |
| Funds on deposit                                                                                                               | ** ** | **(36**                                       | **)**      | 261 |   |
| Prepaid rent                                                                                                                   | ** ** | **(19**                                       | **)**      | (12 | ) |
| Inventories                                                                                                                    | ** ** | **(20**                                       | **)**      | (99 | ) |
| Other assets                                                                                                                   | ** ** | **20**                                        |       | 99 |   |
| Accounts payable  and accrued liabilities                                                                                      | ** ** | **14**                                        |       | (236 | ) |
| Payable to  affiliate                                                                                                          | ** ** | **(7**                                        | **)**      | (12 | ) |
| Property taxes  accrued                                                                                                        | ** ** | **(23**                                       | **)**      | 32 |   |
| Other liabilities                                                                                                              | ** ** | **(26**                                       | **)**      | 48 |   |
| Total adjustments                                                                                                              | ** ** | **720**                                       |       | 14 |   |
| Net cash provided  by operating activities of continuing operations                                                            | ** ** | **485**                                       |       | 593 |   |
| Net cash provided  by (used in) operating activities of discontinued operations                                                | ** ** | **(14**                                       | **)**      | 8 |   |
| Net cash provided  by operating activities                                                                                     | ** ** | **471**                                       |       | 601 |   |
| **Cash Flows from Investing Activities:**                                                                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                                                          | ** ** | **(176**                                      | **)**      | (60 | ) |
| Repayments  (issuance) of notes receivable from affiliate, net                                                                 |       | —                                        |       | 207 |   |
| Proceeds from the  sales of assets and investments, net                                                                        | ** ** | **26**                                        |       | 16 |   |
| Property insurance  proceeds                                                                                                   | ** ** | **3**                                         |       | — |   |
| Net cash provided  by (used in) investing activities of continuing operations                                                  | ** ** | **(147**                                      | **)**      | 163 |   |
| Net cash provided  by (used in) investing activities of discontinued operations                                                | ** ** | **509**                                       |       | (3 | ) |
| Net cash provided  by investing activities                                                                                     | ** ** | **362**                                       |       | 160 |   |
| **Cash Flows from Financing  Activities:**                                                                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Issuance  (repayment) of debt—affiliate, net                                                                              | ** ** | **7**                                         |       | (110 | ) |
| Proceeds from  issuance of long-term debt—nonaffiliate                                                                    |       | —                                        |       | 2,015 |   |
| Repayment of  long-term debt—nonaffiliate                                                                                 | ** ** | **(136**                                      | **)**      | (470 | ) |
| Settlement of debt  under the Plan                                                                                             |       | —                                        |       | (1,773 | ) |
| Debt issuance  costs                                                                                                           |       | —                                        |       | (51 | ) |
| Payment to  affiliate under the Plan                                                                                           |       | —                                        |       | (250 | ) |
| Distribution to  member                                                                                                        | ** ** | **(346**                                      | **)**      | (44 | ) |
| Settlement of  member’s obligations pursuant to the Plan                                                                  | ** ** | **(15**                                       | **)**      | — |   |
| Net cash used in  financing activities of continuing operations                                                                | ** ** | **(490**                                      | **)**      | (683 | ) |
| **Net  Increase in Cash and Cash Equivalents**                                                                                 | ** ** | **343**                                       |       | 78 |   |
| **Cash and  Cash Equivalents, beginning of period**                                                                            | ** ** | **750**                                       |       | 295 |   |
| **Plus:  Cash and Cash Equivalents in Assets Held for Sale, beginning of period**                                              | ** ** | **3**                                         |       | — |   |
| **Less:  Cash and Cash Equivalents in Assets Held for Sale, end of period**                                                    |       | —                                        |       | 3 |   |
| **Cash and  Cash Equivalents, end of period**                                                                                  | ** ** | **$**                                         | **1,096**  |   | $ | 370 |   |
| **Supplemental Cash Flow  Disclosures:**                                                                                       | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Cash paid for  interest, net of amounts capitalized                                                                            | ** ** | **$**                                         | **52**     |   | $ | 66 |   |
| **Financing Activity:**                                                                                                        | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Effect of the  Supplemental Plan—non-cash                                                                                 | ** ** | **$**                                         | **40**     |   | $ | — |   |
| Capital  contribution pursuant to the Plan—non-cash                                                                       | ** ** | **$**                                         | **17**     |   | $ | 1 |   |
| Redemption of  preferred stock in affiliate—non-cash                                                                      | ** ** | **$**                                         | **5**      |   | $ | — |   |

 

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

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

**A.**                Descriptionof Business

Mirant North America, a Delaware limited liabilitycompany, is a national independent power producer, a wholly-owned subsidiary ofMirant Americas Generation and an indirect wholly-owned subsidiary of Mirant.Mirant North America’s continuing operations consist of the ownership,long-term lease and operation of 10,301 MW of power generation facilitieslocated in markets in the Mid-Atlantic and Northeast regions of the UnitedStates and in California, and energy trading and marketing operations inAtlanta, Georgia.

In the third quarter of 2006, Mirant commenced auctionprocesses to sell six of its U.S. natural gas-fired plants, including theCompany’s Zeeland (903 MW) and Bosque (546 MW) natural gas-fired plantstotaling 1,449 MW. On May 1, 2007, the Company completed the sale of thesenatural gas-fired plants. In addition, on May 7, 2007, the Companycompleted the sale of Mirant NY-Gen (121 MW), an indirect wholly-ownedsubsidiary. See Note C for additional information regarding the accounting forthese assets as discontinued operations.

On April 9, 2007, Mirant announced that its Boardof Directors had decided to explore strategic alternatives to enhancestockholder value. In light of the status of the disposition program, the Boardof Directors will consider in the exploration process whether the interests ofstockholders would be best served by returning excess cash from the sale proceedsto stockholders, with Mirant continuing to operate its retained businesses or,alternatively, whether greater stockholder value would be achieved by enteringinto a transaction with another company, including a sale of Mirant in itsentirety. Mirant does not expect to consider making an acquisition as part ofthis exploration process.

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

**B.**               Accountingand Reporting Policies

***Basis of Presentation***

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

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Mirant North America and itswholly-owned subsidiaries and have been prepared from records maintainedby Mirant North America and its subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation.

In accordance with SFAS No. 144, the resultsof operations of the Company’s assets to be disposed of have been reclassifiedto discontinued operations, and the associated assets and liabilities have beenreclassified to assets and liabilities held for sale for all periods presented.In addition, the accompanying 

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unaudited condensedconsolidated statements of cash flows present the cash flows from discontinuedoperations in each of the three major categories (operating, investing andfinancing activities). The unaudited condensed consolidated statement of cashflows for the six months ended June 30, 2006, was revised to conform tothis presentation.

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

***Recently Adopted Accounting Standards***

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

On January 1, 2007, the Company adopted theprovisions of FIN 48 for all uncertain tax positions. Only tax positions thatmet the more-likely-than-not recognition threshold at the effective date wererecognized or will continue to be recognized. The total effect of adopting FIN48 was an increase in member’s interest of $51 million. See Note I foradditional information on FIN 48.

On May 2, 2007, the FASB issued FSP FIN 48-1,which amended FIN 48 to provide guidance on how an enterprise should determinewhether a tax position is effectively settled for the purpose of recognizingpreviously unrecognized tax benefits. In determining whether a tax position iseffectively settled, companies are required to make the assessment on aposition-by-position basis; however, a company could conclude that allpositions in a particular tax year are effectively settled. The Company’sinitial adoption of FIN 48 on January 1, 2007, was consistent with theprovisions of FSP FIN 48-1.

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

On June 28, 2006, theFASB ratified the EITF’s consensus reached on EITF 06-3, which relates tothe income statement presentation of taxes collected from customers andremitted to government authorities. The Task Force affirmed as a consensus onthis issue that the presentation of taxes on either a gross basis or a netbasis within the scope of EITF 06-3 is an accounting policy decision thatshould be disclosed pursuant to APB No. 22. A company should disclose theamount of those taxes that is recognized on a gross basis in interim and annualfinancial statements for each period for which an income statement is presentedif those amounts are significant. The Company adopted EITF 06-3 on January 1,2007. While the amounts are not material, the Company’s policy is to presentsuch taxes on a net basis in the consolidated statements of operations.

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

On September 15, 2006, the FASB issued SFAS No. 157,which establishes a framework for measuring fair value under GAAP and expandsdisclosure about fair value measurement. SFAS No. 157 requires companiesto disclose the fair value of their financial instruments according to a fairvalue hierarchy (i.e., levels 1, 2 and 3, as defined). Additionally,companies are required to provide enhanced disclosure regarding fair valuemeasurements in the level 3 category, including a reconciliation of the beginningand 

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ending balances separatelyfor each major category of assets and liabilities accounted for at fair value.SFAS No. 157 is effective at the beginning of the first fiscal year after November 15,2007. The Company will adopt SFAS No. 157 on January 1, 2008, and asof that date, evaluate the fair value of its assets and liabilities accordingto the hierarchy established by the FASB and present the required disclosures.It is also expected that the adoption of SFAS No. 157 will affect themeasurement of certain liabilities by incorporating the Company’s own creditstanding and the accounting for inception gains and losses currently beingdeferred under EITF 02-3. The net deferred inception gains and losses at June 30,2007, were not material. The Company has not yet determined the potentialeffect of SFAS No. 157 on its statements of operations, financial positionor cash flows.

On February 15, 2007, the FASB issued SFAS No. 159,which permits an entity to measure many financial instruments and certain otheritems at fair value by electing a fair value option. Once elected, the fairvalue option may be applied on an instrument by instrument basis, isirrevocable and is applied only to entire instruments. SFAS No. 159 alsorequires companies with trading and available-for-sale securities to report theunrealized gains and losses for which the fair value option has been electedwithin earnings for the period presented. SFAS No. 159 is effective at thebeginning of the first fiscal year after November 15, 2007. The Companywill adopt SFAS No. 159 on January 1, 2008. The Company does notexpect the adoption of SFAS No. 159 to have a material effect on itsstatements of operations, financial position or cash flows.

On April 30, 2007,the FASB issued FSP FIN 39-1, which amended FIN 39, to indicate that thefollowing fair value amounts could be offset against each other if certainconditions of FIN 39 are otherwise met: (a) those recognized forderivative instruments executed with the same counterparty under a masternetting arrangement and (b) those recognized for the right to reclaim cashcollateral (a receivable) or the obligation to return cash collateral (apayable) arising from the same master netting arrangement as the derivativeinstruments. In addition, a reporting entity is not precluded from offsettingthe derivative instruments if it determines that the amount recognized uponpayment or receipt of cash collateral is not a fair value amount. FSP FIN 39-1is effective at the beginning of the first fiscal year after November 15,2007. The Company will adopt FSP FIN 39-1 on January 1, 2008. TheCompany has not yet determined the potential effect of FSP FIN 39-1 onits statements of financial position.

**C.**               Dispositions

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

Assets and liabilities held for sale includediscontinued operations and other assets that the Company expects to dispose ofin the subsequent year. In the third quarter of 2006, Mirant commenced auctionprocesses to sell six of its U.S. natural gas-fired assets, including theCompany’s Zeeland and Bosque plants.

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

The Company completed the sale of Mirant NY-Gen toAlliance Energy Renewables, LLC on May 7, 2007, and recognized a gain of$8 million, which is recorded in discontinued operations.

At December 31, 2006, assets and liabilities heldfor sale consisted of the planned dispositions discussed above and theancillary equipment included in the sale to the LS Power Group.

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

| ** **                     | ** ** | **At December 31,  2006** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|
| Current Assets                 |       |                                | $          | 27 |   |   |
| Property, Plant  and Equipment |       |                                | 505        |   |   |
| Total Assets                   |       |                                | $          | 532 |   |   |
| Current Liabilities            |       |                                | $          | 14 |   |   |
| Noncurrent  Liabilities        |       |                                | 15         |   |   |
| Total Liabilities              |       |                                | $          | 29 |   |   |

 

***Discontinued Operations***

The Company has reclassified amounts for prior periodsin the financial statements to report separately, as discontinued operations,the revenues and expenses of components of the Company that have been disposedof or have met the required criteria for such classification at June 30,2007.

For the three and six months ended June 30, 2007,income from discontinued operations includes the Zeeland and Bosque U.S.natural gas-fired plants and Mirant NY-Gen through their respective datesof sale.

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

| ** **               | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating  revenues      |       |                                            | $          | 3                                             |       |   |   | $ | 16 |   |   |   | $ | 10 |   |   |   | $ | 30 |   |   |
| Operating  expenses, net |       |                                            | (3         | )                                             |       |   | 17 |   |   |   | 10 |   |   |   | 30 |   |   |
| Operating income  (loss) |       |                                            | 6          |                                          |       |   | (1 | ) |   |   | — |   |   |   | — |   |   |
| Other expense            |       |                                            | 2          |                                          |       |   | 1 |   |   |   | 2 |   |   |   | 1 |   |   |
| Net income (loss)        |       |                                            | $          | 4                                             |       |   |   | $ | (2 | ) |   |   | $ | (2 | ) |   |   | $ | (1 | ) |   |

 

**D.**              Impairmentson Assets Held and Used

In accordance with SFAS No. 144,an asset classified as held and used shall be tested for recoverabilitywhenever events or changes in circumstances indicate that the carrying amountof the asset may not be recoverable. An asset impairment charge must berecognized if the sum of the undiscounted expected future cash flows from along-lived asset is less than the carrying value of that asset. The amount ofany impairment charge is calculated as the excess of the carrying value of theasset over its fair value. Fair value is estimated based on the discountedfuture cash flows from that asset or determined by other valuation techniques.

*Background*

The Mirant Lovett generation facility in New York hasbeen in ongoing discussions with NYSDEC and the New York State Office of theAttorney General regarding environmental controls. Under the terms of a consentdecree dated June 11, 2003 (the “2003 Consent Decree”), Mirant Lovett wasrequired to install certain environmental controls on unit 5 of the Lovettfacility, convert unit 5 to operate exclusively on natural gas, or discontinueoperation of unit 5 by April 30, 2007. The 2003 Consent Decree alsorequired that certain environmental controls be installed on unit 4 by April 30,2008, or operation of unit 4 had to be discontinued.

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On September 19, 2006, Mirant Lovett soughtBankruptcy Court approval to discontinue operation of units 3 and 5 of theLovett generation facility if an alternative environmental compliance mechanismfor environmental controls agreeable to the State of New York was not approvedby April 30, 2007. On October 18, 2006, the Bankruptcy Court approvedthe Company’s request. On October 19, 2006, Mirant Lovett submittednotices of its intent to discontinue operations of units 3 and 5 of the Lovettfacility on April 30, 2007, to the New York Public Service Commission,NYISO, Orange and Rockland and several other affected transmission anddistribution utilities in New York.

On April 30, 2007 and May 7, 2007, MirantLovett entered into two tolling agreements with the New York State Office ofthe Attorney General and the NYSDEC to allow the operation of unit 5 tocontinue on coal until May 14, 2007, while the parties sought to reachagreement on an amendment to the 2003 Consent Decree. The second tollingagreement also required the temporary suspension of operation of unit 4. MirantLovett advised the New York Public Service Commission, the NYISO, Orange andRockland and other potentially affected transmission and distribution companiesin New York of the changes in expected operating status of units 4 and 5.

On May 10, 2007, Mirant Lovett entered into anamendment to the 2003 Consent Decree with the State of New York that switchedthe deadlines for shutting down units 4 and 5 so that the deadline forcompliance by unit 5 was extended until April 30, 2008, and thedeadline for unit 4 was shortened. Unit 4 discontinued operation as of May 7,2007. In addition, unit 3 discontinued operation because it is uneconomic forthe unit to continue to run. On May 8, 2007, Mirant New York, MirantLovett, Mirant Bowline and Hudson Valley Gas also entered into an agreement(the “Tax Assessments Agreement”) with the Town of Stony Point, the Town ofHaverstraw and the Village of Haverstraw to set the assessed values for theLovett and Bowline facilities and the pipeline owned by Hudson Valley Gas for2007 and 2008 for property tax purposes at the values established for 2006under a settlement agreement entered into by the Mirant entities and thosetaxing authorities in December 2006. The Bankruptcy Court approved theamendment to the 2003 Consent Decree and the Tax Assessments Agreement on May 10,2007. The amendment to the 2003 Consent Decree was approved by the UnitedStates District Court for the Southern District of New York on May 11,2007.

In its impairment analysisof the Lovett generation facility in prior periods, the Company assumedmultiple scenarios, including the operation of all units of the Lovett facilitybeyond April 2008. Entering into the amendment to the 2003 Consent Decreeand the Tax Assessments Agreement prompted management to test forrecoverability of the Lovett facility under SFAS No. 144 in the secondquarter of 2007.

*Assumptions andResults*

The Company’s assessment of Lovett under SFAS No. 144in the current period involved developing two scenarios for the future expectedoperation of the Lovett facility. The first scenario considered was theshutdown of unit 5 by April 30, 2008, in accordance with the amendment tothe 2003 Consent Decree. The Company also considered a second scenario thatassumed operation of unit 5, utilizing coal as the primary fuel source, through2012 to allow the Lovett facility to continue to contribute to the reliabilityof the electric system of the State of New York. Property taxes under bothscenarios were assumed at the assessed levels specified in the Tax AssessmentsAgreement for those periods. Additionally, both scenarios included an estimatedcost for demolition of the facility to reduce future property taxes, a valuefor the land on which the facility operates and the sale of previously grantedemission allowances for periods beyond the shutdown date. For purposes ofmeasuring an impairment loss, a long-lived asset or assets must be grouped atthe lowest level of independent identifiable cash flows. All of the units atMirant Lovett are viewed as one group. As required under SFAS No. 144, theassessment did not include the value of new generation capacity that couldpotentially be constructed at the current Lovett facility site.

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As a result of thisassessment, in the second quarter of 2007, the Company recorded an impairmentloss of $175 million to reduce the carrying value of the Lovett facility to itsestimated fair value. The carrying value of the Lovett facility prior to theimpairment was approximately $185 million. The remaining depreciable life forthe Lovett facility was also adjusted to April 30, 2008, based on the highlikelihood of a shutdown of unit 5 on that date.

**E.**               PriceRisk Management Assets and Liabilities

Thefair values of the Company’s price risk management assets and liabilities, netof credit reserves, at June 30, 2007 and December 31, 2006, are asfollows (in millions):

| ** **                        | ** ** | **At June 30, 2007** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **Assets**                          | ** ** | **Liabilities** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Current**                         | ** ** | **Noncurrent** | ** ** | **Current** | ** ** | **Noncurrent** | ** ** | **Net Fair Value** | ** ** |
| Electricity                       |       |                                | $          | 258 |   |   |   | $ | 35 |   |   |   | $ | (183 | ) |   |   | $ | (84 | ) |   |   | $ | 26 |   |   |
| Natural Gas                       |       |                                | 7          |   |   |   | — |   |   |   | (10 | ) |   |   | (1 | ) |   |   | (4 | ) |   |
| Oil                               |       |                                | 24         |   |   |   | 10 |   |   |   | (44 | ) |   |   | (8 | ) |   |   | (18 | ) |   |
| Coal                              |       |                                | 4          |   |   |   | — |   |   |   | (1 | ) |   |   | — |   |   |   | 3 |   |   |
| Other, including  credit reserves |       |                                | (2         | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (2 | ) |   |
| Total                             |       |                                | $          | 291 |   |   |   | $ | 45 |   |   |   | $ | (238 | ) |   |   | $ | (93 | ) |   |   | $ | 5 |   |   |

 

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

 

Thefollowing table represents the net price risk management assets and liabilitiesby tenor as of June 30, 2007 (in millions):

| 2007                      |   | $   | 73 |   |
|---------------------------|--------|-----|----|--------|
| 2008                      |   | (25 | )  |
| 2009                      |   | (24 | )  |
| 2010                      |   | (18 | )  |
| Thereafter                |   | (1  | )  |
| Net assets  (liabilities) |   | $   | 5  |   |

 

The volumetric weighted average maturity, or weightedaverage tenor, of the price risk management portfolio at June 30, 2007,was approximately 13 months. The net notional amount of the price riskmanagement assets and liabilities at June 30, 2007, was a net shortposition of approximately 33** **millionequivalent MWh.

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Thefollowing table provides a summary of the factors affecting the change in netfair value of the price risk management asset and liability accounts for thesix months ended June 30, 2007 (in millions):

| ** **                                             | ** ** | **Proprietary  Trading and  Fuel Oil  Management** | ** ** | **Asset  Management** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------|------------|-----------|------------|
| Net fair value of  portfolio at December 31, 2006 |       |                                                         | $          | 106                   |       |      |       | $ | 388 |   |   | $ | 494 |   |
| Changes in fair  value, net                            |       |                                                         | (22        | )                     |       |      | (124       | ) |   | (146 | ) |
| Contracts settled  during the period, net              |       |                                                         | (82        | )                     |       |      | (261       | ) |   | (343 | ) |
| Net fair value of  portfolio at June 30, 2007     |       |                                                         | $          | 2                     |       |      |       | $ | 3 |   |   | $ | 5 |   |

 

**F.**                Debt

Long-termdebt is as follows (in millions):

| ** **                                         | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** | ** **             | ** ** | **Secured/**  | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|------------------------|------------|---------------|------------|
| ** **                                         | ** ** | **2007**                  | ** ** | **2006**                      | ** ** | **Interest Rate** | ** ** | **Unsecured** | ** ** |
| **Long-term debt:**                                | ** ** |                      | ** ** | ** **                    |       |                   | ** ** | ** **    |       | ** ** | ** ** | ** ** | ** ** |
| Mirant  North America:                             |       |                      |       |                          |       |                   |       |          |       |   |   |   |   |
| Term loan, due 2007 to 2013                        |       |                      | $          | 558                           |       |                   |       | $             | 693        |   |   | LIBOR + 1.75 | % | Secured |   |
| Notes, due 2013.                                   |       |                      | 850        |                          |       |                   | 850        |          |       | 7.375 | % | Unsecured |   |
| Mirant Chalk Point capital lease, due 2007 to 2015 |       |                      | 32         |                          |       |                   | 33         |          |       | 8.19 | % | — |   |
| Total                                              |       |                      | 1,440      |                          |       |                   | 1,576      |          |       |   |   |   |   |
| Less: current  portion of long-term debt           |       |                      | (96        | )                             |       |                   | (141       | )             |       |   |   |   |   |
| Total long-term  debt, excluding current portion   |       |                      | $          | 1,344                         |       |                   |       | $             | 1,435      |   |   |   |   |   |   |

 

***Senior Secured Credit Facilities***

Mirant North America entered into senior securedcredit facilities in January 2006, which are comprised of an$800 million six-year senior secured revolving credit facility and a$700 million seven-year senior secured term loan. The full amount of thesenior secured revolving credit facility is available for cash draws or for theissuance of letters of credit. On January 3, 2006, Mirant North Americadrew $465 million under its senior secured revolving credit facility. Allamounts were repaid during the first quarter of 2006.******Thesenior secured term loan was fully drawn at closing and amortizes in quarterlyinstallments aggregating 0.25% of the original principal of the term loan perquarter for the first 27 quarters, with the remainder payable on the finalmaturity date in January 2013. At the closing, $200 million drawnunder the senior secured term loan was deposited into a cash collateral accountto support the issuance of up to $200 million of letters of credit. As ofJune 30, 2007, there were approximately $177 million of letters of creditoutstanding under the senior secured term loan and $86 million of letters ofcredit outstanding under the senior secured revolving credit facility. Thesenior secured credit facilities are obligations of Mirant North America andthe respective guarantors and are without recourse to any other Mirant NorthAmerica entities.

In addition to thequarterly installments, Mirant North America is required to prepay a portion ofthe outstanding senior secured term loan principal balance once a year. Theprepayment is based on an adjusted EBITDA calculation that determines excessfree cash flows, as defined in the loan agreement. On March 20, 2007, theCompany made a mandatory principal prepayment of approximately $131 million onthe term loan. Based on projections for 2007, the current estimate of themandatory principal prepayment of the term loan in March 2008 isapproximately $86 million. This amount has been reclassified from long-termdebt to current portion of long-term debt at June 30, 2007. The estimateof the principal prepayment 

15

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wasreduced in the second quarter of 2007 from $155 million at March 31, 2007,primarily due to changes in the estimated utilization of proceeds from the saleof the Zeeland and Bosque gas-fired plants for capital expenditures primarily atMirant Mid-Atlantic.

**G.**              FinancialStatements of Subsidiary in Bankruptcy

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

On January 31, 2007, Mirant New York enteredinto an agreement with Alliance Energy Renewables, LLC for the sale of MirantNY-Gen, which owns the Hillburn and Shoemaker gas turbine facilities and theSwinging Bridge, Rio and Mongaup hydroelectric generating facilities. The saleprice of $5 million was subject to adjustments for working capital andcertain dam remediation efforts that were ongoing at the Swinging Bridgefacility. The sale closed on May 7, 2007, and the Company recognized again of $8 million. Mirant NY-Gen emerged from bankruptcy under a plan ofreorganization that incorporated the sale and was approved by the BankruptcyCourt on April 27, 2007.

At June 30, 2007, Mirant Lovett remained inbankruptcy. On July 13, 2007, Mirant Lovett filed a plan of reorganizationwith the U.S. Bankruptcy Court in Texas. Mirant Lovett is expected to emergefrom bankruptcy in the fourth quarter of 2007. Mirant Americas is providingMirant Lovett with a debtor-in-possession credit facility for working capital.At June 30, 2007, there were no amounts outstanding under this facility.For further discussion see “Chapter 11 Proceedings” in Note L.

Unaudited condensed financial statements of MirantLovett, which remained in bankruptcy at June 30, 2007, are set forthbelow:

**Mirant Lovett Unaudited Condensed Statements of Operations Data**

| ** **                                          | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                                      | ** ** | **2006**                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(in millions)**                                        | ** ** |
| Operating  revenues                                 |       | $                                                             | 30         |                                                        | $          | 41 |   | $ | 78 |   | $ | 102 |   |
| Total cost of  fuel, electricity and other products |       | 17                                                            |       | 28                                                          |       | 39 |   | 68 |   |
| Operating  expenses(1)                              |       | 193                                                           |       | 25                                                          |       | 210 |   | 47 |   |
| Operating loss                                      |       | (180                                                          | )          | (12                                                         | )          | (171 | ) | (13 | ) |
| Other income, net                                   |       | (1                                                            | )          | —                                                      |       | — |   | — |   |
| Net loss                                            |       | $                                                             | (179       | )                                                           | $          | (12 | ) | $ | (171 | ) | $ | (13 | ) |

----

(1)          Includesan impairment loss of $175 million in the second quarter of 2007 to reduce thecarrying value of the Lovett facility to its estimated fair value.

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**Mirant Lovett Unaudited Condensed Balance Sheet Data**

| ** **                                  | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2007**                  | ** ** | **2006**                      | ** ** |
| ** **                                  | ** ** | **(in millions)**    | ** ** |
| Assets—affiliate                       |       |                      | $          | 44                            |       |   |   | $ | 63 |   |   |
| Assets—nonaffiliate                    |       |                      | 30         |                          |       |   | 24 |   |   |
| Property, plant  and equipment, net(1)      |       |                      | 9          |                          |       |   | 187 |   |   |
| Total assets                                |       |                      | $          | 83                            |       |   |   | $ | 274 |   |   |
| Liabilities not subject to compromise       |       |                      |       |                          |       |   |   |   |   |
| Liabilities—affiliate                  |       |                      | $          | 3                             |       |   |   | $ | 3 |   |   |
| Liabilities—nonaffiliate               |       |                      | 15         |                          |       |   | 36 |   |   |
| Liabilities subject to compromise           |       |                      |       |                          |       |   |   |   |   |
| Liabilities—affiliate                  |       |                      | 23         |                          |       |   | 22 |   |   |
| Liabilities—nonaffiliate               |       |                      | 2          |                          |       |   | 2 |   |   |
| Member’s equity                        |       |                      | 40         |                          |       |   | 211 |   |   |
| Total liabilities and  member’s equity |       |                      | $          | 83                            |       |   |   | $ | 274 |   |   |

----

(1)          Includesan impairment loss of $175 million in the second quarter of 2007 to reduce thecarrying value of the Lovett facility to its estimated fair value.

**Mirant Lovett Unaudited Condensed Statements of Cash Flows Data**

| ** **                                      | ** ** | **For the Six Months Ended  June 30,**                  | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **      2007      ** | ** ** | **      2006      ** | ** ** |
| ** **                                      | ** ** | **(in millions)**                                                           | ** ** |
| Net cash provided  by (used in):                |       |                                                                             |       |   |   |   |   |   |   |
| Operating activities                            |       |                                                                             | $          | (9 | ) |   |   | $ | 2 |   |   |
| Investing activities                            |       |                                                                             | 19         |   |   |   | (2 | ) |   |
| Net increase in  cash and cash equivalents      |       |                                                                             | 10         |   |   |   | — |   |   |
| Cash and cash equivalents,  beginning of period |       |                                                                             | —     |   |   |   | — |   |   |
| Cash and cash  equivalents, end of period       |       |                                                                             | $          | 10 |   |   |   | $ | — |   |   |

 

**H.**              RelatedParty Arrangements and Transactions

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

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

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

| ** **                                                  | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                      | ** ** | **2006**                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of fuel, electricity and other products—affiliate |       |                                                          | $          | 2                                                           |       |   |   | $ | 2 |   |   |   | $ | 4 |   |   |   | $ | 4 |   |   |
| Operations and maintenance expense—affiliate           |       |                                                          | 39         |                                                        |       |   | 39 |   |   |   | 77 |   |   |   | 76 |   |   |
| Total                                                       |       |                                                          | $          | 41                                                          |       |   |   | $ | 41 |   |   |   | $ | 81 |   |   |   | $ | 80 |   |   |

 

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

For the three and six months ended June 30, 2007and 2006, the Company provided energy marketing and fuel procurement servicesthrough Mirant Energy Trading to the following affiliates: Mirant Las Vegas,Mirant Sugar Creek, Shady Hills, Mirant West Georgia and Mirant Wichita Falls.For the three and six months ended June 30, 2007, the Company recorded areduction to operations and maintenance of approximately $0 and $1 million,respectively, compared to $2 million and $3 million, respectively, for the sameperiods in 2006, related to these agreements.

Mirant Wichita Falls was sold by Mirant in the secondquarter of 2006. On May 1, 2007, Mirant completed the sale of Mirant LasVegas, Mirant Sugar Creek, Shady Hills and Mirant West Georgia. Subsequent tothe sale of these affiliates, the Company no longer recognizes a reduction tooperations and maintenance associated with providing services to theseaffiliates.

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

***Administration Arrangements with Mirant Services***

Substantially all of Mirant’s corporate overhead costsare allocated to Mirant’s operating subsidiaries. For the three and six monthsended June 30, 2007, the Company incurred approximately $25 millionand $53 million, respectively, compared to $32 million and $65 million,respectively, for the same periods in 2006, in costs under these arrangements,which are included in operations and maintenance—affiliate in the accompanyingunaudited condensed consolidated statements of operations.

The Company’s allocationof Mirant’s overhead costs is expected to increase as a result of the recentdisposition of Mirant’s Philippine and Caribbean businesses and six U.S.natural gas-fired plants.

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

During the pendency of theChapter 11 proceedings, Mirant and certain of its subsidiaries participatedin an intercompany cash management program whereby cash balances at Mirant andthe participating subsidiaries were transferred to central concentrationaccounts to fund working capital and other needs. At June 30, 2007 andDecember 31, 2006, the Company had current notes receivable from MirantAmericas Generation of $124 million and $125 million, respectively, related tothe intercompany cash management program. For the three and six months endedJune 30, 2007, the Company earned $1 million and $3 million, respectively,compared to $2 million and $3 million, respectively, for the same periods in2006, of 

18

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interestincome related to the note receivable, which is recorded in interestincome—affiliate in the accompanying unaudited condensed consolidatedstatements of operations. At June 30, 2007 and December 31, 2006, theCompany had current notes payable to affiliate of $19 million and$27 million, respectively. For the three and six months endedJune 30, 2007, the Company incurred interest expense—affiliate of $1million compared to less than $1 million for the same periods in 2006.

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

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

***Mirant Letters of Credit***

Mirant posted pre-petition letters of credit and aguarantee on behalf of Mirant Mid-Atlantic to provide for the rent paymentreserve required in connection with Mirant Mid-Atlantic’s lease obligations inthe event that it was unable to pay its lease payment obligations. OnJanuary 3, 2006, as part of the settlement and the Company’s emergencefrom bankruptcy, Mirant North America posted a $75 million letter of credit forthe benefit of Mirant Mid-Atlantic to cover rent payment reserve obligations onMirant Mid-Atlantic’s leases. Upon the posting of the letter of credit, thetrustee returned $56 million of cash collateral to Mirant Mid-Atlantic.

Mirant posted a post-petition letter of credit in theamount of $5 million on behalf of Mirant Texas, LP (“Mirant Texas”) as ofDecember 31, 2004, related to a tolling agreement. This post-petitionletter of credit was set to expire in January 2006. Upon emergence frombankruptcy, Mirant North America replaced this post-petition letter of creditwith a letter of credit issued under its senior secured credit facilities. Theletter of credit expired in February 2007.

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

***Preferred Stock in Mirant Americas***

Mirant Americas issued mandatorily redeemableSeries A preferred shares to Mirant Mid-Atlantic for the purpose offunding future environmental capital expenditures. For the six months endedJune 30, 2007, the Company recorded $6 million in preferred stock inaffiliate and member’s interest in the unaudited condensed consolidated balancesheet related to the amortization of the discount on the preferred stock inMirant Americas.

The Series Apreferred shares issued by Mirant Americas are mandatorily redeemable by MirantAmericas at various dates. On June 30, 2007, Mirant Americas was requiredto redeem $5 million in preferred stock held by Mirant Mid-Atlantic, which wascompleted on July 2, 2007.

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

Mirant North America and Mirant Americas EnergyMarketing, (the “Primary DIP Lenders”) entered into an agreement (the “PrimaryNew York DIP Agreement”) to make secured debtor-in-possession financing in anamount of (i) $20 million, plus (ii) an amount equal to theamount of credit support provided on behalf of Mirant New York, Mirant Bowline,Mirant Lovett and Hudson Valley Gas (collectively, the “New York DIPBorrowers”), to the extent such amounts were collateralized with cash or cashequivalents by the New York DIP Borrowers. The New York DIP Borrowers hadposted $21 million cash collateral with Mirant Energy Trading (successor toMirant Americas Energy Marketing) in accordance with the March 31, 2007,collateral allocation performed in good faith by Mirant Energy Trading. Thiscash collateral amount was returned to the New York DIP Borrowers, and thePrimary New York DIP Agreements were terminated in conjunction with theEmerging New York Entities’ emergence from bankruptcy on April 16, 2007.

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

On April 18, 2007, anew DIP Agreement was established between Mirant Lovett and Mirant Americas tomake secured debtor-in-possession financing in an amount of $20 million. Thefinancing has a stated maturity of 180 days and bears interest at a rate ofLIBOR plus 4.25%. At June 30, 2007, there were no amounts outstandingunder this loan. In addition, Mirant Lovett is required to post cash collateralwith Mirant Energy Trading to collateralize Mirant Energy Trading forcollateral that Mirant Energy Trading has posted on Mirant Lovett’s behalf. AtJune 30, 2007, Mirant Lovett had posted approximately $6 million withMirant Energy Trading in accordance with the June 15, 2007, collateralallocation performed in good faith by Mirant Energy Trading.

**I.**                   IncomeTaxes

The Company is a limited liability company treated asa branch of Mirant Americas for income tax purposes. As a result, MirantAmericas and Mirant have direct liability for the majority of the federal andstate income taxes relating to the Company’s operations. ThroughDecember 31, 2005, the Company has allocated current and deferred incometaxes to each regarded corporate member entity of our consolidated group as ifeach regarded corporate entity member were a single taxpayer utilizing theasset and liability method to account for income taxes except with respect torecognizing certain current period tax benefits. Specifically, the Company didnot record current period tax benefits on each regarded corporate entity’sability to carry back its separate company current year net operating loss asrealization of such losses were dependent on reimbursements from Mirant, which wereat Mirant’s discretion under the tax sharing agreement.

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

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December 31, 2005. InMay 2007, Mirant New York, Inc. was converted to a limited liabilitycompany, resulting in the elimination of any existing deferred tax assets andliabilities related to Mirant New York.

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.

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

The amount and ultimate utilization of the Company’sremaining NOLs and pro forma NOLs will depend on several factors, including theCompany’s future financial performance and certain tax elections. Specifically,the Company’s utilization of NOLs and pro forma NOLs arising prior to itsemergence from bankruptcy will be affected by whether Mirant and the Company issubject to the default NOL treatment under Internal Revenue Code§382(l)(5) or the alternative tax treatment provided in §382(l)(6).

Previously, Mirant had determined that it was morelikely than not that it would elect treatment under §382(l)(5). As a result offurther tax planning, Mirant has determined that it is now more likely than notto elect treatment under §382(l)(6) and, accordingly, expects to make the§382(l)(6) election in its 2006 annual tax return to be filed no laterthan September 17, 2007. Absent making this election, Mirant’s and theCompany’s pre-emergence NOLs and pro forma NOLs would be subject to the defaulttreatment under §382(l)(5). As a result, the Company’s deferred income taxesand pro forma deferred income taxes, including its pre-emergence NOLs and proforma NOLs, are presented in accordance with the §382(l)(6) treatment.This change had no net effect on the consolidated balance sheets orconsolidated statements of operations. Similarly, this change had no net effecton the Company’s pro forma deferred taxes or pro forma income tax because theincrease in the pro forma deferred tax asset NOLs was equally offset by anincrease in the related pro forma deferred tax asset valuation allowance.

Under §382(l)(6), the Company estimates that it willbe subject to an annual limitation on the use of the pre-emergence NOLs and proforma NOLs, disregarding the effect of net unrealized built-in gains. The proforma NOLs under this election will not be subject to any previous adjustmentsfor interest accrued on debt settled with Mirant stock as required under§382(l)(5). The Company also anticipates that it will elect to reduce theincome tax basis of depreciable assets for any cancellation of debt income thatarises from making the §382(l)(6) election.

Under §382(l)(5) treatment, the Company wouldhave unlimited use of its pre-emergence NOLs and pro forma NOLs as long asthere is not a change of ownership (broadly defined as 50 percent change of“five percent” shareholders) within two years of its emergence from bankruptcy.The §382(l)(5) default treatment would require the Company to reduce itspre-emergence pro forma NOLs by $148 million due to interest accrued on debtsettled with Mirant stock for the three years prior to emergence. Mirant hasrequested guidance from the Internal Revenue Service concerning certain aspectsof the default tax treatment under §382(l)(5), but has not yet received suchguidance.

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If the Company was to beallocated income taxes attributable to its operations, pro forma income taxexpense attributable to income before tax would be $7 million and $10 million,for the three and six months ended June 30, 2007, respectively, compared to$2 million for the same periods in 2006. The pro forma balance of the Company’sdeferred income taxes would be zero as of June 30, 2007. The pro formaincrease in tax benefits that would have been recognized upon adoption of FIN48 is $86 million. The pro forma unrecognized tax benefit as a result ofadopting FIN 48 is an insignificant amount and would not materially affect theCompany’s pro forma effective tax rate if it were recognized.

**J.**                  SegmentReporting

The Company has four operating segments: Mid-Atlantic,Northeast, California and Other Operations. Other Operations includesproprietary trading and fuel oil management. In the following tables,eliminations are primarily related to intercompany sales of emissionsallowances and interest on intercompany notes receivable and notes payable.

**OperatingSegments**

| ** **                                                             | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                             | ** ** | **(in millions)** | ** ** |
| **Three Months Ended  June 30, 2007:**                            |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues—affiliate                                     |       |                   | $          | 272           |       |           |       | $                     | 168        |             |       |      | $          | 7 |   |   |   | $ | 78 |   |   |   | $ | (505 | ) |   | $ | 20 |   |
| Operating  revenues—nonaffiliate                                  |       |                   | 18         |          |       |           | 3          |                  |       |             | 33         |      |       |   | 436 |   |   |   | — |   |   | 490 |   |
| Total operating revenues                                               |       |                   | 290        |          |       |           | 171        |                  |       |             | 40         |      |       |   | 514 |   |   |   | (505 | ) |   | 510 |   |
| Cost of fuel,  electricity and other products—affiliate           |       |                   | 76         |          |       |           | 44         |                  |       |             | 9          |      |       |   | 387 |   |   |   | (505 | ) |   | 11 |   |
| Cost of fuel,  electricity and other products—nonaffiliate        |       |                   | 31         |          |       |           | 57         |                  |       |             | —     |      |       |   | 131 |   |   |   | (3 | ) |   | 216 |   |
| Total cost of fuel, electricity and other products                |       |                   | 107        |          |       |           | 101        |                  |       |             | 9          |      |       |   | 518 |   |   |   | (508 | ) |   | 227 |   |
| Gross Margin                                                           |       |                   | 183        |          |       |           | 70         |                  |       |             | 31         |      |       |   | (4 | ) |   |   | 3 |   |   | 283 |   |
| Operating Expenses:                                                    |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and maintenance—  affiliate                            |       |                   | 33         |          |       |           | 18         |                  |       |             | 9          |      |       |   | 4 |   |   |   | — |   |   | 64 |   |
| Operations and maintenance—nonaffiliate                           |       |                   | 58         |          |       |           | 31         |                  |       |             | 7          |      |       |   | 1 |   |   |   | — |   |   | 97 |   |
| Depreciation and amortization                                          |       |                   | 20         |          |       |           | 6          |                  |       |             | 4          |      |       |   | (1 | ) |   |   | — |   |   | 29 |   |
| Impairment losses                                                      |       |                   | —     |          |       |           | 175        |                  |       |             | —     |      |       |   | — |   |   |   | — |   |   | 175 |   |
| Gain on sales of assets, net                                           |       |                   | (1         | )             |       |           | (15        | )                     |       |             | (1         | )         |       |   | — |   |   |   | — |   |   | (17 | ) |
| Total operating  expenses                                              |       |                   | 110        |          |       |           | 215        |                  |       |             | 19         |      |       |   | 4 |   |   |   | — |   |   | 348 |   |
| Operating income  (loss)                                               |       |                   | 73         |          |       |           | (145       | )                     |       |             | 12         |      |       |   | (8 | ) |   |   | 3 |   |   | (65 | ) |
| Total other  expense (income), net                                     |       |                   | (2         | )             |       |           | (4         | )                     |       |             | (2         | )         |       |   | 18 |   |   |   | — |   |   | 10 |   |
| Income (loss)  from continuing operations before reorganization  items |       |                   | 75         |          |       |           | (141       | )                     |       |             | 14         |      |       |   | (26 | ) |   |   | 3 |   |   | (75 | ) |
| Reorganization  items, net                                             |       |                   | —     |          |       |           | (1         | )                     |       |             | —     |      |       |   | — |   |   |   | — |   |   | (1 | ) |
| Income (loss)  from continuing operations                              |       |                   | $          | 75            |       |           |       | $                     | (140       | )                |       |      | $          | 14 |   |   |   | $ | (26 | ) |   |   | $ | 3 |   |   | $ | (74 | ) |
| Total assets of  continuing operations at June 30, 2007      |       |                   | $          | 3,415         |       |           |       | $                     | 651        |             |       |      | $          | 196 |   |   |   | $ | 1,941 |   |   |   | $ | (1,039 | ) |   | $ | 5,164 |   |

 

22

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| ** **                                                                  | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                                  | ** ** | **(in millions)** | ** ** |
| **Six Months Ended June 30,  2007:**                                   |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating revenues—affiliate                                           |       |                   | $          | 502           |       |           |       | $                     | 316        |             |       |      | $          | 15 |   |   |   | $ | 425 |   |   |   | $ | (1,205 | ) |   | $ | 53 |   |
| Operating revenues—nonaffiliate                                        |       |                   | (155       | )             |       |           | 8          |                  |       |             | 70         |      |       |   | 879 |   |   |   | — |   |   | 802 |   |
| Total operating revenues                                                    |       |                   | 347        |          |       |           | 324        |                  |       |             | 85         |      |       |   | 1,304 |   |   |   | (1,205 | ) |   | 855 |   |
| Cost of fuel,  electricity and other products—affiliate                |       |                   | 171        |          |       |           | 70         |                  |       |             | 22         |      |       |   | 989 |   |   |   | (1,205 | ) |   | 47 |   |
| Cost of fuel,  electricity and other products—nonaffiliate             |       |                   | 66         |          |       |           | 143        |                  |       |             | —     |      |       |   | 293 |   |   |   | (9 | ) |   | 493 |   |
| Total cost of fuel,  electricity and other products                    |       |                   | 237        |          |       |           | 213        |                  |       |             | 22         |      |       |   | 1,282 |   |   |   | (1,214 | ) |   | 540 |   |
| Gross Margin                                                                |       |                   | 110        |          |       |           | 111        |                  |       |             | 63         |      |       |   | 22 |   |   |   | 9 |   |   | 315 |   |
| Operating Expenses:                                                         |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance—  affiliate                                |       |                   | 66         |          |       |           | 36         |                  |       |             | 18         |      |       |   | 9 |   |   |   | — |   |   | 129 |   |
| Operations and  maintenance— nonaffiliate                              |       |                   | 108        |          |       |           | 56         |                  |       |             | 18         |      |       |   | 1 |   |   |   | — |   |   | 183 |   |
| Depreciation and  amortization                                              |       |                   | 39         |          |       |           | 13         |                  |       |             | 7          |      |       |   | — |   |   |   | — |   |   | 59 |   |
| Impairment losses                                                           |       |                   | —     |          |       |           | 175        |                  |       |             | —     |      |       |   | — |   |   |   | — |   |   | 175 |   |
| Gain on sales of assets,  net                                               |       |                   | (2         | )             |       |           | (25        | )                     |       |             | (2         | )         |       |   | — |   |   |   | 10 |   |   | (19 | ) |
| Total operating expenses                                                    |       |                   | 211        |          |       |           | 255        |                  |       |             | 41         |      |       |   | 10 |   |   |   | 10 |   |   | 527 |   |
| Operating income (loss)                                                     |       |                   | (101       | )             |       |           | (144       | )                     |       |             | 22         |      |       |   | 12 |   |   |   | (1 | ) |   | (212 | ) |
| Total other expense  (income), net                                          |       |                   | (3         | )             |       |           | (6         | )                     |       |             | (5         | )         |       |   | 39 |   |   |   | — |   |   | 25 |   |
| Income (loss) from  continuing operations before reorganization  items |       |                   | (98        | )             |       |           | (138       | )                     |       |             | 27         |      |       |   | (27 | ) |   |   | (1 | ) |   | (237 | ) |
| Reorganization items,  net                                                  |       |                   | —     |          |       |           | (2         | )                     |       |             | —     |      |       |   | — |   |   |   | — |   |   | (2 | ) |
| Income (loss) from  continuing  operations                                  |       |                   | $          | (98           | )          |           |       | $                     | (136       | )                |       |      | $          | 27 |   |   |   | $ | (27 | ) |   |   | $ | (1 | ) |   | $ | (235 | ) |
| Total assets of  continuing operations at June 30, 2007           |       |                   | $          | 3,415         |       |           |       | $                     | 651        |             |       |      | $          | 196 |   |   |   | $ | 1,941 |   |   |   | $ | (1,039 | ) |   | $ | 5,164 |   |

 

 

23

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| ** **                                                                             | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                                             | ** ** | **(in millions)** | ** ** |
| **Three Months Ended  June 30, 2006:**                                            |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues-affiliate                                                          |       |                   | $          | 338           |       |           |       | $                     | 170        |             |       |      | $          | 10 |   |   |   | $ | 184 |   |   |   | $ | (675 | ) |   | $ | 27 |   |
| Operating revenues-nonaffiliate                                                        |       |                   | 28         |          |       |           | (1         | )                     |       |             | 28         |      |       |   | 583 |   |   |   | — |   |   | 638 |   |
| Total operating revenues                                                               |       |                   | 366        |          |       |           | 169        |                  |       |             | 38         |      |       |   | 767 |   |   |   | (675 | ) |   | 665 |   |
| Cost of fuel,  electricity and other products-affiliate                                |       |                   | 109        |          |       |           | 87         |                  |       |             | 10         |      |       |   | 504 |   |   |   | (675 | ) |   | 35 |   |
| Cost of fuel,  electricity and other products-nonaffiliate                             |       |                   | 19         |          |       |           | 26         |                  |       |             | —     |      |       |   | 235 |   |   |   | (17 | ) |   | 263 |   |
| Total cost of fuel, electricity and other products                                |       |                   | 128        |          |       |           | 113        |                  |       |             | 10         |      |       |   | 739 |   |   |   | (692 | ) |   | 298 |   |
| Gross Margin                                                                           |       |                   | 238        |          |       |           | 56         |                  |       |             | 28         |      |       |   | 28 |   |   |   | 17 |   |   | 367 |   |
| Operating  Expenses:                                                                   |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and   maintenance-affiliate                                                 |       |                   | 35         |          |       |           | 20         |                  |       |             | 9          |      |       |   | 5 |   |   |   | — |   |   | 69 |   |
| Operations and maintenance-nonaffiliate                                                |       |                   | 53         |          |       |           | 40         |                  |       |             | 4          |      |       |   | (1 | ) |   |   | — |   |   | 96 |   |
| Depreciation and amortization                                                          |       |                   | 18         |          |       |           | 6          |                  |       |             | 4          |      |       |   | 3 |   |   |   | — |   |   | 31 |   |
| Gain on sales of assets, net                                                           |       |                   | (5         | )             |       |           | (10        | )                     |       |             | —     |      |       |   | — |   |   |   | 9 |   |   | (6 | ) |
| Total operating expenses                                                               |       |                   | 101        |          |       |           | 56         |                  |       |             | 17         |      |       |   | 7 |   |   |   | 9 |   |   | 190 |   |
| Operating income                                                                       |       |                   | 137        |          |       |           | —     |                  |       |             | 11         |      |       |   | 21 |   |   |   | 8 |   |   | 177 |   |
| Total other expense (income), net                                                      |       |                   | (2         | )             |       |           | (2         | )                     |       |             | (1         | )         |       |   | 24 |   |   |   | — |   |   | 19 |   |
| Income (loss)  from continuing operations before reorganization items and income taxes |       |                   | 139        |          |       |           | 2          |                  |       |             | 12         |      |       |   | (3 | ) |   |   | 8 |   |   | 158 |   |
| Reorganization  items, net                                                             |       |                   | —     |          |       |           | (1         | )                     |       |             | —     |      |       |   | — |   |   |   | — |   |   | (1 | ) |
| Provision for  income taxes                                                            |       |                   | —     |          |       |           | —     |                  |       |             | —     |      |       |   | 2 |   |   |   | — |   |   | 2 |   |
| Income (loss)  from continuing operations                                              |       |                   | $          | 139           |       |           |       | $                     | 3          |             |       |      | $          | 12 |   |   |   | $ | (5 | ) |   |   | $ | 8 |   |   | $ | 157 |   |
| Total assets of  continuing operations at December 31, 2006                  |       |                   | $          | 3,404         |       |           |       | $                     | 1,184      |             |       |      | $          | 443 |   |   |   | $ | 1,976 |   |   |   | $ | (1,587 | ) |   | $ | 5,420 |   |

 

24

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| ** **                                                                             | ** ** | **Mid-Atlantic**       | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| ** **                                                                             | ** ** | **(in millions)** | ** ** |
| **Six  Months Ended June 30, 2006:**                                              |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues-affiliate                                                          |       |                   | $          | 890           |       |           |       | $                     | 440        |             |       |      | $          | 19 |   |   |   | $ | 117 |   |   |   | $ | (1,436 | ) |   | $ | 30 |   |
| Operating  revenues-nonaffiliate                                                       |       |                   | 55         |          |       |           | 1          |                  |       |             | 63         |      |       |   | 1,478 |   |   |   | — |   |   | 1,597 |   |
| Total operating revenues                                                               |       |                   | 945        |          |       |           | 441        |                  |       |             | 82         |      |       |   | 1,595 |   |   |   | (1,436 | ) |   | 1,627 |   |
| Cost of fuel,  electricity and other products-affiliate                                |       |                   | 221        |          |       |           | 170        |                  |       |             | 27         |      |       |   | 1,069 |   |   |   | (1,436 | ) |   | 51 |   |
| Cost of fuel,  electricity and other products-nonaffiliate                             |       |                   | 69         |          |       |           | 71         |                  |       |             | —     |      |       |   | 459 |   |   |   | (32 | ) |   | 567 |   |
| Total cost of fuel, electricity and other products                                |       |                   | 290        |          |       |           | 241        |                  |       |             | 27         |      |       |   | 1,528 |   |   |   | (1,468 | ) |   | 618 |   |
| Gross Margin                                                                           |       |                   | 655        |          |       |           | 200        |                  |       |             | 55         |      |       |   | 67 |   |   |   | 32 |   |   | 1,009 |   |
| Operating Expenses:                                                                    |       |                   |       |          |       |           |       |                  |       |             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Operations and   maintenance-affiliate                                                 |       |                   | 69         |          |       |           | 39         |                  |       |             | 19         |      |       |   | 11 |   |   |   | — |   |   | 138 |   |
| Operations and maintenance- nonaffiliate                                               |       |                   | 104        |          |       |           | 73         |                  |       |             | 11         |      |       |   | — |   |   |   | — |   |   | 188 |   |
| Depreciation and amortization                                                          |       |                   | 36         |          |       |           | 11         |                  |       |             | 7          |      |       |   | 5 |   |   |   | — |   |   | 59 |   |
| Gain on sales of assets, net                                                           |       |                   | (5         | )             |       |           | (43        | )                     |       |             | —     |      |       |   | — |   |   |   | 42 |   |   | (6 | ) |
| Total operating expenses                                                               |       |                   | 204        |          |       |           | 80         |                  |       |             | 37         |      |       |   | 16 |   |   |   | 42 |   |   | 379 |   |
| Operating income                                                                       |       |                   | 451        |          |       |           | 120        |                  |       |             | 18         |      |       |   | 51 |   |   |   | (10 | ) |   | 630 |   |
| Total other expense (income), net                                                      |       |                   | (3         | )             |       |           | 1          |                  |       |             | (1         | )         |       |   | 53 |   |   |   | — |   |   | 50 |   |
| Income (loss) from continuing operations before  reorganization items and income taxes |       |                   | 454        |          |       |           | 119        |                  |       |             | 19         |      |       |   | (2 | ) |   |   | (10 | ) |   | 580 |   |
| Reorganization items, net                                                              |       |                   | —     |          |       |           | (1         | )                     |       |             | —     |      |       |   | — |   |   |   | — |   |   | (1 | ) |
| Provision for income taxes                                                             |       |                   | —     |          |       |           | —     |                  |       |             | —     |      |       |   | 2 |   |   |   | — |   |   | 2 |   |
| Income (loss)  from continuing operations                                              |       |                   | $          | 454           |       |           |       | $                     | 120        |             |       |      | $          | 19 |   |   |   | $ | (4 | ) |   |   | $ | (10 | ) |   | $ | 579 |   |
| Total assets of  continuing operations at December 31, 2006                  |       |                   | $          | 3,404         |       |           |       | $                     | 1,184      |             |       |      | $          | 443 |   |   |   | $ | 1,976 |   |   |   | $ | (1,587 | ) |   | $ | 5,420 |   |

 

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

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

During the second quarter of 2007, the Emerging NewYork Entities emerged from bankruptcy and became subsidiary guarantors. Theunaudited condensed consolidated financial statements for prior periods havebeen revised to conform to the current period financial statement presentation.

25

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The following sets forthunaudited condensed consolidating financial statements of the guarantor andnon-guarantor subsidiaries:

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)**

**ThreeMonths Ended June 30, 2007**

**(inmillions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                           |       |       | $          | —     |       |          |       | $             | 30         |             |       |             | $          | 181 |   |   |   | $ | 495 |   |   |   | $ | (196 | ) |   |   | $ | 510 |   |   |
| Cost of fuel,  electricity and other products |       |       | (4         | )          |       |          | 17         |          |       |             | 93         |             |       |   | 317 |   |   |   | (196 | ) |   |   | 227 |   |   |
| Gross Margin                                  |       |       | 4          |       |       |          | 13         |          |       |             | 88         |             |       |   | 178 |   |   |   | — |   |   |   | 283 |   |   |
| Operating Expenses:                           |       |       |       |       |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | —     |       |       |          | 16         |          |       |             | 51         |             |       |   | 94 |   |   |   | — |   |   |   | 161 |   |   |
| Depreciation and  amortization                |       |       | —     |       |       |          | 2          |          |       |             | 7          |             |       |   | 20 |   |   |   | — |   |   |   | 29 |   |   |
| Impairment loss                               |       |       | —     |       |       |          | 175        |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 175 |   |   |
| Gain on sales of  assets, net                 |       |       | —     |       |       |          | —     |          |       |             | (16        | )                |       |   | (1 | ) |   |   | — |   |   |   | (17 | ) |   |
| Total operating  expenses                     |       |       | —     |       |       |          | 193        |          |       |             | 42         |             |       |   | 113 |   |   |   | — |   |   |   | 348 |   |   |
| Operating Income  (Loss)                      |       |       | 4          |       |       |          | (180       | )             |       |             | 46         |             |       |   | 65 |   |   |   | — |   |   |   | (65 | ) |   |
| Other Expense  (Income), net                  |       |       | 26         |       |       |          | (1         | )             |       |             | (6         | )                |       |   | (5 | ) |   |   | (4 | ) |   |   | 10 |   |   |
| Reorganization  items, net                    |       |       | —     |       |       |          | —     |          |       |             | (1         | )                |       |   | — |   |   |   | — |   |   |   | (1 | ) |   |
| Income (loss)  from continuing operations     |       |       | (22        | )          |       |          | (179       | )             |       |             | 53         |             |       |   | 70 |   |   |   | 4 |   |   |   | (74 | ) |   |
| Income (loss)  from discontinued operations   |       |       | 3          |       |       |          | —     |          |       |             | 4          |             |       |   | (3 | ) |   |   | — |   |   |   | 4 |   |   |
| Net Income (Loss)                             |       |       | $          | (19        | )          |          |       | $             | (179       | )                |       |             | $          | 57 |   |   |   | $ | 67 |   |   |   | $ | 4 |   |   |   | $ | (70 | ) |   |

 

26

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**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)**

**ThreeMonths Ended June 30, 2006**

**(inmillions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                           |       |       | $          | —     |       |          |       | $             | 41         |             |       |             | $          | 166 |   |   |   | $ | 713 |   |   |   | $ | (255 | ) |   |   | $ | 665 |   |   |
| Cost of fuel,  electricity and other products |       |       | (17        | )          |       |          | 28         |          |       |             | 96         |             |       |   | 446 |   |   |   | (255 | ) |   |   | 298 |   |   |
| Gross Margin                                  |       |       | 17         |       |       |          | 13         |          |       |             | 70         |             |       |   | 267 |   |   |   | — |   |   |   | 367 |   |   |
| Operating Expenses:                           |       |       |       |       |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | —     |       |       |          | 23         |          |       |             | 51         |             |       |   | 91 |   |   |   | — |   |   |   | 165 |   |   |
| Depreciation and  amortization                |       |       | —     |       |       |          | 3          |          |       |             | 6          |             |       |   | 22 |   |   |   | — |   |   |   | 31 |   |   |
| Loss (gain) on  sales of assets               |       |       | 9          |       |       |          | (1         | )             |       |             | (9         | )                |       |   | (5 | ) |   |   | — |   |   |   | (6 | ) |   |
| Total operating  expenses                     |       |       | 9          |       |       |          | 25         |          |       |             | 48         |             |       |   | 108 |   |   |   | — |   |   |   | 190 |   |   |
| Operating Income  (Loss)                      |       |       | 8          |       |       |          | (12        | )             |       |             | 22         |             |       |   | 159 |   |   |   | — |   |   |   | 177 |   |   |
| Other Expense  (Income), net                  |       |       | 32         |       |       |          | —     |          |       |             | (2         | )                |       |   | (8 | ) |   |   | (3 | ) |   |   | 19 |   |   |
| Reorganization  items, net                    |       |       | —     |       |       |          | —     |          |       |             | (1         | )                |       |   | — |   |   |   | — |   |   |   | (1 | ) |   |
| Provision for  income tax                     |       |       | 2          |       |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 2 |   |   |
| Income (loss)  from continuing operations     |       |       | (26        | )          |       |          | (12        | )             |       |             | 25         |             |       |   | 167 |   |   |   | 3 |   |   |   | 157 |   |   |
| Income (loss)  from discontinued operations   |       |       | —     |       |       |          | —     |          |       |             | 3          |             |       |   | (5 | ) |   |   | — |   |   |   | (2 | ) |   |
| Net Income (Loss)                             |       |       | $          | (26        | )          |          |       | $             | (12        | )                |       |             | $          | 28 |   |   |   | $ | 162 |   |   |   | $ | 3 |   |   |   | $ | 155 |   |   |

 

27

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**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)**

**SixMonths Ended June 30, 2007**

**(inmillions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                           |       |       | $          | —     |       |          |       | $             | 78         |             |       |             | $          | 331 |   |   |   | $ | 973 |   |   |   | $ | (527 | ) |   |   | $ | 855 |   |   |
| Cost of fuel,  electricity and other products |       |       | (9         | )          |       |          | 39         |          |       |             | 196        |             |       |   | 841 |   |   |   | (527 | ) |   |   | 540 |   |   |
| Gross Margin                                  |       |       | 9          |       |       |          | 39         |          |       |             | 135        |             |       |   | 132 |   |   |   | — |   |   |   | 315 |   |   |
| Operating Expenses:                           |       |       |       |       |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | 1          |       |       |          | 30         |          |       |             | 101        |             |       |   | 180 |   |   |   | — |   |   |   | 312 |   |   |
| Depreciation and  amortization                |       |       | —     |       |       |          | 5          |          |       |             | 14         |             |       |   | 40 |   |   |   | — |   |   |   | 59 |   |   |
| Impairment loss                               |       |       | —     |       |       |          | 175        |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 175 |   |   |
| Loss (gain) on  sales of assets, net          |       |       | 10         |       |       |          | —     |          |       |             | (27        | )                |       |   | (2 | ) |   |   | — |   |   |   | (19 | ) |   |
| Total operating  expenses                     |       |       | 11         |       |       |          | 210        |          |       |             | 88         |             |       |   | 218 |   |   |   | — |   |   |   | 527 |   |   |
| Operating Income  (Loss)                      |       |       | (2         | )          |       |          | (171       | )             |       |             | 47         |             |       |   | (86 | ) |   |   | — |   |   |   | (212 | ) |   |
| Other Expense  (Income), net                  |       |       | 61         |       |       |          | —     |          |       |             | (12        | )                |       |   | (15 | ) |   |   | (9 | ) |   |   | 25 |   |   |
| Reorganization  items, net                    |       |       | —     |       |       |          | —     |          |       |             | (2         | )                |       |   | — |   |   |   | — |   |   |   | (2 | ) |   |
| Income (loss)  from continuing operations     |       |       | (63        | )          |       |          | (171       | )             |       |             | 61         |             |       |   | (71 | ) |   |   | 9 |   |   |   | (235 | ) |   |
| Income (loss)  from discontinued operations   |       |       | 2          |       |       |          | —     |          |       |             | —     |             |       |   | (4 | ) |   |   | — |   |   |   | (2 | ) |   |
| Net Income (Loss)                             |       |       | $          | (61        | )          |          |       | $             | (171       | )                |       |             | $          | 61 |   |   |   | $ | (75 | ) |   |   | $ | 9 |   |   |   | $ | (237 | ) |   |

 

28

----

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)**

**SixMonths Ended June 30, 2006**

**(inmillions)**

| ** **                                    | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                           |       |       | $          | —     |       |          |       | $             | 102        |             |       |             | $          | 421 |   |   |   | $ | 1,643 |   |   |   | $ | (539 | ) |   |   | $ | 1,627 |   |   |
| Cost of fuel,  electricity and other products |       |       | (32        | )          |       |          | 68         |          |       |             | 201        |             |       |   | 920 |   |   |   | (539 | ) |   |   | 618 |   |   |
| Gross Margin                                  |       |       | 32         |       |       |          | 34         |          |       |             | 220        |             |       |   | 723 |   |   |   | — |   |   |   | 1,009 |   |   |
| Operating Expenses:                           |       |       |       |       |       |          |       |          |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operations and  maintenance                   |       |       | —     |       |       |          | 42         |          |       |             | 104        |             |       |   | 180 |   |   |   | — |   |   |   | 326 |   |   |
| Depreciation and  amortization                |       |       | —     |       |       |          | 6          |          |       |             | 11         |             |       |   | 42 |   |   |   | — |   |   |   | 59 |   |   |
| Loss (gain) on  sales of assets               |       |       | 42         |       |       |          | (1         | )             |       |             | (42        | )                |       |   | (5 | ) |   |   | — |   |   |   | (6 | ) |   |
| Total operating  expenses                     |       |       | 42         |       |       |          | 47         |          |       |             | 73         |             |       |   | 217 |   |   |   | — |   |   |   | 379 |   |   |
| Operating Income  (Loss)                      |       |       | (10        | )          |       |          | (13        | )             |       |             | 147        |             |       |   | 506 |   |   |   | — |   |   |   | 630 |   |   |
| Other Expense  (Income), net                  |       |       | 66         |       |       |          | —     |          |       |             | —     |             |       |   | (13 | ) |   |   | (3 | ) |   |   | 50 |   |   |
| Reorganization  items, net                    |       |       | —     |       |       |          | —     |          |       |             | (1         | )                |       |   | — |   |   |   | — |   |   |   | (1 | ) |   |
| Provision for  income tax                     |       |       | 2          |       |       |          | —     |          |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 2 |   |   |
| Income (loss)  from continuing operations     |       |       | (78        | )          |       |          | (13        | )             |       |             | 148        |             |       |   | 519 |   |   |   | 3 |   |   |   | 579 |   |   |
| Income (loss) from  discontinued  operations  |       |       | —     |       |       |          | —     |          |       |             | 2          |             |       |   | (3 | ) |   |   | — |   |   |   | (1 | ) |   |
| Net Income (Loss)                             |       |       | $          | (78        | )          |          |       | $             | (13        | )                |       |             | $          | 150 |   |   |   | $ | 516 |   |   |   | $ | 3 |   |   |   | $ | 578 |   |   |

 

29

----

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING BALANCE SHEETS (UNAUDITED) At June 30, 2007**

**(inmillions)**

| ** **                                          | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                          | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Current Assets:**                                 | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash equivalents                           |       | $          | 596        |       |       | $             | 10         | ** **    |       |             | $          | —           | ** ** |   |   | $ | 490 | ** ** |   |   | $ | — |   |   |   | $ | 1,096 | ** ** |   |
| Funds on deposit                                    |       | 201        |       |       | —     | ** **    |       |          | 3          | ** **       |       |             | 65         | ** ** |   |   | — |   |   |   | 269 | ** ** |   |
| Receivables—affiliate                          |       | 2          |       |       | 13         | ** **    |       |          | 41         | ** **       |       |             | 26         | ** ** |   |   | (66 | ) |   |   | 16 | ** ** |   |
| Receivables—nonaffiliate                       |       | —     |       |       | —     | ** **    |       |          | 11         | ** **       |       |             | 248        | ** ** |   |   | — |   |   |   | 259 | ** ** |   |
| Notes receivable—affiliate                     |       | 7          |       |       | 31         | ** **    |       |          | 100        | ** **       |       |             | —     | ** ** |   |   | (14 | ) |   |   | 124 | ** ** |   |
| Price risk management assets—affiliate         |       | —     |       |       | —     | ** **    |       |          | 25         | ** **       |       |             | 2          | ** ** |   |   | (25 | ) |   |   | 2 | ** ** |   |
| Price risk management assets—nonaffiliate      |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 289        | ** ** |   |   | — |   |   |   | 289 | ** ** |   |
| Prepaid rent and other payments                     |       | —     |       |       | 2          | ** **    |       |          | 9          | ** **       |       |             | 100        | ** ** |   |   | — |   |   |   | 111 | ** ** |   |
| Inventories                                         |       | (8         | )          |       | 11         | ** **    |       |          | 31         | ** **       |       |             | 273        | ** ** |   |   | — |   |   |   | 307 | ** ** |   |
| Total current assets                                |       | 798        |       |       | 67         | ** **    |       |          | 220        | ** **       |       |             | 1,493      | ** ** |   |   | (105 | ) |   |   | 2,473 | ** ** |   |
| **Property, Plant and Equipment, net**              |       | —     |       |       | 9          | ** **    |       |          | 482        | ** **       |       |             | 1,639      | ** ** |   |   | 18 |   |   |   | 2,148 | ** ** |   |
| **Noncurrent Assets:**                              | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Goodwill, net                                       |       | (799       | )          |       | —     | ** **    |       |          | —     | ** **       |       |             | 799        | ** ** |   |   | — |   |   |   | — | ** ** |   |
| Intangible assets, net                              |       | —     |       |       | —     | ** **    |       |          | 55         | ** **       |       |             | 153        | ** ** |   |   | — |   |   |   | 208 | ** ** |   |
| Price risk management assets—nonaffiliate      |       | —     |       |       | —     | ** **    |       |          | 6          | ** **       |       |             | 45         | ** ** |   |   | (6 | ) |   |   | 45 | ** ** |   |
| Prepaid rent                                        |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 237        | ** ** |   |   | — |   |   |   | 237 | ** ** |   |
| Debt issuance costs, net                            |       | 44         |       |       | —     | ** **    |       |          | —     | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 44 | ** ** |   |
| Other                                               |       | 4,398      |       |       | 7          | ** **    |       |          | 220        | ** **       |       |             | 1          | ** ** |   |   | (4,617 | ) |   |   | 9 | ** ** |   |
| Total noncurrent assets                             |       | 3,643      |       |       | 7          | ** **    |       |          | 281        | ** **       |       |             | 1,235      | ** ** |   |   | (4,623 | ) |   |   | 543 | ** ** |   |
| **Total Assets**                                    |       | $          | 4,441      |       |       | $             | 83         | ** **    |       |             | $          | 983              | ** ** |   |   | $ | 4,367 | ** ** |   |   | $ | (4,710 | ) |   |   | $ | 5,164 | ** ** |   |
| **LIABILITIES AND EQUITY**                          | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Current Liabilities:**                            | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Notes payable—affiliate                        |       | $          | 13         |       |       | $             | —     | ** **    |       |             | $          | 20               | ** ** |   |   | $ | — | ** ** |   |   | $ | (14 | ) |   |   | $ | 19 | ** ** |   |
| Current portion of long-term debt                   |       | 93         |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 3          | ** ** |   |   | — |   |   |   | 96 | ** ** |   |
| Accounts payable and accrued liabilities            |       | 34         |       |       | 6          | ** **    |       |          | 19         | ** **       |       |             | 240        | ** ** |   |   | — |   |   |   | 299 | ** ** |   |
| Payable to affiliate                                |       | 6          |       |       | 3          | ** **    |       |          | 13         | ** **       |       |             | 57         | ** ** |   |   | (49 | ) |   |   | 30 | ** ** |   |
| Price risk management liabilities—affiliate    |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 25         | ** ** |   |   | (25 | ) |   |   | — | ** ** |   |
| Price risk management liabilities—nonaffiliate |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 238        | ** ** |   |   | — |   |   |   | 238 | ** ** |   |
| Other                                               |       | —     |       |       | —     | ** **    |       |          | 2          | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 2 | ** ** |   |
| Total current liabilities                           |       | 146        |       |       | 9          | ** **    |       |          | 54         | ** **       |       |             | 563        | ** ** |   |   | (88 | ) |   |   | 684 | ** ** |   |
| **Noncurrent  Liabilities:**                        | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Long-term debt                                      |       | 1,315      |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 29         | ** ** |   |   | — |   |   |   | 1,344 | ** ** |   |
| Price risk management liabilities—affiliate    |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 6          | ** ** |   |   | (6 | ) |   |   | — | ** ** |   |
| Price risk management liabilities—nonaffiliate |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 93         | ** ** |   |   | — |   |   |   | 93 | ** ** |   |
| Asset retirement obligations                        |       | —     |       |       | 9          | ** **    |       |          | 21         | ** **       |       |             | 13         | ** ** |   |   | — |   |   |   | 43 | ** ** |   |
| Other                                               |       | 1          |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 12         | ** ** |   |   | — |   |   |   | 13 | ** ** |   |
| Total noncurrent liabilities                        |       | 1,316      |       |       | 9          | ** **    |       |          | 21         | ** **       |       |             | 153        | ** ** |   |   | (6 | ) |   |   | 1,493 | ** ** |   |
| **Liabilities Subject to Compromise**               |       | —     |       |       | 25         | ** **    |       |          | —     | ** **       |       |             | —     | ** ** |   |   | (17 | ) |   |   | 8 | ** ** |   |
| **Commitments  and Contingencies**                  | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Equity**                                          |       | 2,979      |       |       | 40         | ** **    |       |          | 908        | ** **       |       |             | 3,651      | ** ** |   |   | (4,599 | ) |   |   | 2,979 | ** ** |   |
| **Total  Liabilities and Equity**                   |       | $          | 4,441      |       |       | $             | 83         | ** **    |       |             | $          | 983              | ** ** |   |   | $ | 4,367 | ** ** |   |   | $ | (4,710 | ) |   |   | $ | 5,164 | ** ** |   |

 

30

----

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING BALANCE SHEETS At December 31, 2006**

**(inmillions)**

| ** **                                           | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                           | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Current Assets:**                                  | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                           |       | $          | 231        |       |       | $             | —     | ** **    |       |             | $          | 98               | ** ** |   |   | $ | 421 | ** ** |   |   | $ | — |   |   |   | $ | 750 | ** ** |   |
| Funds on deposit                                     |       | 201        |       |       | —     | ** **    |       |          | 3          | ** **       |       |             | 29         | ** ** |   |   | — |   |   |   | 233 | ** ** |   |
| Receivables—affiliate                           |       | —     |       |       | 13         | ** **    |       |          | 54         | ** **       |       |             | 33         | ** ** |   |   | (84 | ) |   |   | 16 | ** ** |   |
| Receivables—nonaffiliate                        |       | —     |       |       | —     | ** **    |       |          | 71         | ** **       |       |             | 300        | ** ** |   |   | — |   |   |   | 371 | ** ** |   |
| Notes  receivable—affiliate                     |       | 22         |       |       | 50         | ** **    |       |          | 502        | ** **       |       |             | 357        | ** ** |   |   | (806 | ) |   |   | 125 | ** ** |   |
| Price risk  management assets—affiliate         |       | —     |       |       | —     | ** **    |       |          | 56         | ** **       |       |             | 4          | ** ** |   |   | (57 | ) |   |   | 3 | ** ** |   |
| Price risk  management assets—nonaffiliate      |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 728        | ** ** |   |   | — |   |   |   | 728 | ** ** |   |
| Prepaid rent and  other payments                     |       | —     |       |       | 5          | ** **    |       |          | 11         | ** **       |       |             | 115        | ** ** |   |   | — |   |   |   | 131 | ** ** |   |
| Inventories                                          |       | (7         | )          |       | 13         | ** **    |       |          | 30         | ** **       |       |             | 251        | ** ** |   |   | — |   |   |   | 287 | ** ** |   |
| Assets held for  sale                                |       | (8         | )          |       | —     | ** **    |       |          | 535        | ** **       |       |             | 5          | ** ** |   |   | — |   |   |   | 532 | ** ** |   |
| Total current  assets                                |       | 439        |       |       | 81         | ** **    |       |          | 1,360      | ** **       |       |             | 2,243      | ** ** |   |   | (947 | ) |   |   | 3,176 | ** ** |   |
| **Property,  Plant and Equipment, net**              |       | —     |       |       | 187        | ** **    |       |          | 483        | ** **       |       |             | 1,498      | ** ** |   |   | 8 |   |   |   | 2,176 | ** ** |   |
| **Noncurrent Assets:**                               | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Goodwill, net                                        |       | (799       | )          |       | —     | ** **    |       |          | —     | ** **       |       |             | 799        | ** ** |   |   | — |   |   |   | — | ** ** |   |
| Intangible assets,  net                              |       | —     |       |       | —     | ** **    |       |          | 56         | ** **       |       |             | 156        | ** ** |   |   | — |   |   |   | 212 | ** ** |   |
| Price risk  management assets—affiliate         |       | —     |       |       | —     | ** **    |       |          | 6          | ** **       |       |             | 1          | ** ** |   |   | (6 | ) |   |   | 1 | ** ** |   |
| Price risk  management assets—nonaffiliate      |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 104        | ** ** |   |   | — |   |   |   | 104 | ** ** |   |
| Prepaid rent                                         |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 218        | ** ** |   |   | — |   |   |   | 218 | ** ** |   |
| Debt issuance costs,  net                            |       | 48         |       |       | —     | ** **    |       |          | —     | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 48 | ** ** |   |
| Other                                                |       | 6,178      |       |       | 6          | ** **    |       |          | 525        | ** **       |       |             | —     | ** ** |   |   | (6,692 | ) |   |   | 17 | ** ** |   |
| Total noncurrent  assets                             |       | 5,427      |       |       | 6          | ** **    |       |          | 587        | ** **       |       |             | 1,278      | ** ** |   |   | (6,698 | ) |   |   | 600 | ** ** |   |
| **Total  Assets**                                    |       | $          | 5,866      |       |       | $             | 274        | ** **    |       |             | $          | 2,430            | ** ** |   |   | $ | 5,019 | ** ** |   |   | $ | (7,637 | ) |   |   | $ | 5,952 | ** ** |   |
| **LIABILITIES AND EQUITY**                           | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Current Liabilities:**                             | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Notes  payable—affiliate                        |       | $          | 767        |       |       | $             | —     | ** **    |       |             | $          | 60               | ** ** |   |   | $ | 7 | ** ** |   |   | $ | (807 | ) |   |   | $ | 27 | ** ** |   |
| Current portion of  long-term debt                   |       | 138        |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 3          | ** ** |   |   | — |   |   |   | 141 | ** ** |   |
| Accounts payable  and accrued liabilities            |       | 33         |       |       | 10         | ** **    |       |          | 16         | ** **       |       |             | 233        | ** ** |   |   | — |   |   |   | 292 | ** ** |   |
| Payable to  affiliate                                |       | 9          |       |       | 3          | ** **    |       |          | 17         | ** **       |       |             | 67         | ** ** |   |   | (63 | ) |   |   | 33 | ** ** |   |
| Price risk  management liabilities—affiliate    |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 70         | ** ** |   |   | (57 | ) |   |   | 13 | ** ** |   |
| Price risk  management liabilities—nonaffiliate |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 286        | ** ** |   |   | — |   |   |   | 286 | ** ** |   |
| Accrued property  taxes                              |       | 51         |       |       | 20         | ** **    |       |          | 4          | ** **       |       |             | —     | ** ** |   |   | — |   |   |   | 75 | ** ** |   |
| Other                                                |       | —     |       |       | —     | ** **    |       |          | 28         | ** **       |       |             | 13         | ** ** |   |   | — |   |   |   | 41 | ** ** |   |
| Total current  liabilities                           |       | 998        |       |       | 33         | ** **    |       |          | 125        | ** **       |       |             | 679        | ** ** |   |   | (927 | ) |   |   | 908 | ** ** |   |
| **Noncurrent Liabilities:**                          | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Long-term debt                                       |       | 1,404      |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 31         | ** ** |   |   | — |   |   |   | 1,435 | ** ** |   |
| Price risk  management liabilities—affiliate    |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 10         | ** ** |   |   | (6 | ) |   |   | 4 | ** ** |   |
| Price risk  management liabilities—nonaffiliate |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 39         | ** ** |   |   | — |   |   |   | 39 | ** ** |   |
| Asset retirement  obligations                        |       | —     |       |       | 6          | ** **    |       |          | 22         | ** **       |       |             | 12         | ** ** |   |   | — |   |   |   | 40 | ** ** |   |
| Other                                                |       | —     |       |       | —     | ** **    |       |          | —     | ** **       |       |             | 22         | ** ** |   |   | (18 | ) |   |   | 4 | ** ** |   |
| Total noncurrent  liabilities                        |       | 1,404      |       |       | 6          | ** **    |       |          | 22         | ** **       |       |             | 114        | ** ** |   |   | (24 | ) |   |   | 1,522 | ** ** |   |
| **Liabilities  Subject to Compromise**               |       | —     |       |       | 24         | ** **    |       |          | 51         | ** **       |       |             | 4          | ** ** |   |   | (21 | ) |   |   | 58 | ** ** |   |
| **Commitments and Contingencies**                    |       |       |       |       |       | ** **    |       |          |       | ** **       |       |             |       | ** ** |   |   |   |   |   |   |   | ** ** |   |
| **Equity**                                           |       | 3,464      |       |       | 211        | ** **    |       |          | 2,232      | ** **       |       |             | 4,222      | ** ** |   |   | (6,665 | ) |   |   | 3,464 | ** ** |   |
| **Total  Liabilities and Equity**                    |       | $          | 5,866      |       |       | $             | 274        | ** **    |       |             | $          | 2,430            | ** ** |   |   | $ | 5,019 | ** ** |   |   | $ | (7,637 | ) |   |   | $ | 5,952 | ** ** |   |

 

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**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)**

**SixMonths Ended June 30, 2007**

**(inmillions)**

| ** **                                                                    | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash Flows provided by (used in):**                | ** ** | ** ** | ** ** |       | ** ** | ** **    |       |          | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Operating  activities                                                         |       | $          | 155        |       |       | $             | (9         | )             |       |             | $          | 154              |       |   |   | $ | 395 |   |   |   | $ | (224 | ) |   |   | $ | 471 |   |   |
| Investing  activities                                                         |       | 490        |       |       | 19         |          |       |          | (213       | )                |       |             | (157       | ) |   |   | 223 |   |   |   | 362 |   |   |
| Financing  activities                                                         |       | (280       | )          |       | —     |          |       |          | (39        | )                |       |             | (172       | ) |   |   | 1 |   |   |   | (490 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                         |       | 365        |       |       | 10         |          |       |          | (98        | )                |       |             | 66         |   |   |   | — |   |   |   | 343 |   |   |
| Cash and cash  equivalents, beginning of period                          |       | 231        |       |       | —     |          |       |          | 98         |             |       |             | 421        |   |   |   | — |   |   |   | 750 |   |   |
| Plus: Cash and  Cash Equivalents in Assets Held for Sale, beginning of period |       | —     |       |       | —     |          |       |          | —     |             |       |             | 3          |   |   |   | — |   |   |   | 3 |   |   |
| Cash and cash  equivalents, end of period                                     |       | $          | 596        |       |       | $             | 10         |          |       |             | $          | —           |       |   |   | $ | 490 |   |   |   | $ | — |   |   |   | $ | 1,096 |   |   |

 

**MIRANTNORTH AMERICAGUARANTOR/NON-GUARANTOR**

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)**

**SixMonths Ended June 30, 2006**

**(inmillions)**

| ** **                                                              | ** ** | ** ** | ** ** | **Mirant** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                                              | ** ** | **Parent** | ** ** | **Lovett** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash Flows provided by (used in):**          | ** ** |       | ** ** | ** ** |       |          | ** ** | ** **    |       |             | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Operating  activities                                                   |       |       | $          | 161        |       |          |       | $             | 2          |             |       |             | $          | 127 |   |   |   | $ | 731 |   |   |   | $ | (420 | ) |   |   | $ | 601 |   |   |
| Investing  activities                                                   |       |       | (18        | )          |       |          | (2         | )             |       |             | (142       | )                |       |   | (359 | ) |   |   | 681 |   |   |   | 160 |   |   |
| Financing  activities                                                   |       |       | (5         | )          |       |          | —     |          |       |             | 81         |             |       |   | (498 | ) |   |   | (261 | ) |   |   | (683 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                   |       |       | 138        |       |       |          | —     |          |       |             | 66         |             |       |   | (126 | ) |   |   | — |   |   |   | 78 |   |   |
| Cash and cash  equivalents, beginning of period                         |       |       | —     |       |       |          | —     |          |       |             | 3          |             |       |   | 292 |   |   |   | — |   |   |   | 295 |   |   |
| Less: Cash and  Cash Equivalents in Assets Held for Sale, end of period |       |       | —     |       |       |          | —     |          |       |             | —     |             |       |   | 3 |   |   |   | — |   |   |   | 3 |   |   |
| Cash and cash  equivalents, end of period                               |       |       | $          | 138        |       |          |       | $             | —     |             |       |             | $          | 69 |   |   |   | $ | 163 |   |   |   | $ | — |   |   |   | $ | 370 |   |   |

 

**L.**                Litigationand Other Contingencies

The Company is involved ina number of significant legal proceedings. In certain cases plaintiffs seek torecover large and sometimes unspecified damages, and some matters may beunresolved for several years. The Company cannot currently determine theoutcome of the proceedings described below or the ultimate amount of potentiallosses and therefore has not made any provision for such matters unless 

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specificallynoted below. Pursuant to SFAS No. 5, management provides for estimatedlosses to the extent information becomes available indicating that losses areprobable and that the amounts are reasonably estimable. Additional losses couldhave a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

***Chapter 11Proceedings***

On July 14, 2003, and various dates thereafter,Mirant Corporation and certain of its subsidiaries (collectively, the “MirantDebtors”), including the Company and its subsidiaries, filed voluntary petitionsfor relief under Chapter 11 of the Bankruptcy Code in the BankruptcyCourt. Mirant, the Company and most of the Mirant Debtors emerged frombankruptcy on January 3, 2006, when the Plan became effective. As of June 30,2007, approximately 21 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 disputed by the Mirant Debtors thathave not been resolved. Under the terms of the Plan, to the extent unresolvedclaims are resolved now that the Company has emerged from bankruptcy, theclaimants will receive the same pro rata distributions of Mirant common stock,cash, or both common stock and cash as previously allowed claims.

A settlement entered into on May 30, 2006, amongPepco, Mirant, Old Mirant and various subsidiaries of Mirant, includingsubsidiaries of the Company, that became effective August 10, 2007, willresult in the distribution of up to 18 million of the reserved shares to Pepco,as described below in *Pepco Litigation*.Once that distribution to Pepco has been made, Mirant will make a supplementaldistribution under the Plan to holders of allowed Mirant Debtor Class 3—UnsecuredClaims (other than Allowed Subordinated Note Claims as defined in the Plan) ofall but 1,023,000 shares of the shares that then remain reserved with respectto Mirant Debtor Class 3-Unsecured Claims.

To the extent the aggregate amount of the payoutsdetermined to be due with respect to disputed claims ultimately exceeds theamount 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 only Mirant Debtorremaining in bankruptcy is Mirant Lovett. On July 13, 2007, Mirant Lovettfiled the Chapter 11 Plan of Reorganization of Mirant Lovett (the “MirantLovett Plan”) with the Bankruptcy Court for its approval. If confirmed by theBankruptcy Court, the proposed Mirant Lovett Plan will provide unsecuredcreditors of Mirant Lovett with the same treatment afforded holders ofunsecured claims against Mirant Americas Generation and its subsidiaries underthe Plan. Such unsecured creditors of Mirant Lovett will receive their*pro rata* share of the pool of assetscreated under the Plan for the benefit of the unsecured creditors of MirantAmericas Generation and its subsidiaries. Until Mirant Lovett emerges frombankruptcy, the Company will not have access to the cash from operationsgenerated by Mirant Lovett.

***Pepco Litigation***

In 2000, Mirant purchased power generating facilitiesand other assets from Pepco, including certain PPAs between Pepco and thirdparties. Under the terms of the APSA, Mirantand Pepco entered into the Back-to-Back Agreement with respect to certain PPAs,including Pepco’s long-term PPA with Panda, under which (1) Pepco agreedto resell to Mirant all capacity, energy, ancillary services and other benefitsto which it is entitled under those agreements and (2) Mirant agreed topay Pepco each month all amounts due from Pepco to the sellers under thoseagreements for the immediately preceding month associated with such capacity,energy, ancillary services and other benefits. The Panda PPA is the onlysignificant one of those PPAs still in effect. It runs until 2021, and theBack-to-Back Agreement does not expire until all 

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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 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 included as parties Pepco andvarious of the Company’s subsidiaries, caused the Company’s subsidiaries thatwere parties to the agreement to be jointly and severally liable to Pepco forvarious obligations, including the obligations under the Back-to-BackAgreement. The Mirant Debtors sought to reject the APSA, the Back-to-BackAgreement, and the Assignment and Assumption Agreement. Under the Plan, theobligations of the Mirant Debtors under the APSA (including any otheragreements executed pursuant to the terms of the APSA and found by a finalcourt order to be part of the APSA), the Back-to-Back Agreement, and theAssignment and Assumption Agreement have been performed since January 3,2006, by Mirant Power Purchase, whose performance was guaranteed by Mirant,pending resolution of the rejection motions.

On May 30, 2006, Mirant and various of itssubsidiaries, including subsidiaries of the Company (collectively the “MirantSettling Parties”) entered into a Settlement Agreement and Release (the “SettlementAgreement”) with Pepco and various affiliates of Pepco (collectively the “PepcoSettling Parties”). To become effective, the Settlement Agreement had to beapproved by the Bankruptcy Court and that approval order had to become a finalorder. On August 9, 2006, the Bankruptcy Court entered an order approvingthe Settlement Agreement, and on December 26, 2006, the United StatesDistrict Court for the Northern District of Texas affirmed that order. Certainholders of unsecured claims against Old Mirant in the bankruptcy proceedingsappealed that ruling to the Fifth Circuit. On August 9, 2007, the FifthCircuit entered an order dismissing the appeal at the request of the parties,and the Settlement Agreement became effective August 10, 2007.

The Settlement Agreement fully resolves the contractrejection motions that had remained pending in the bankruptcy proceedings, aswell as other matters disputed between Pepco and Mirant and its subsidiaries.The Pepco Settling Parties and the Mirant Settling Parties have released eachother from all claims known as of May 30, 2006, including fraudulenttransfer claims brought by Old Mirant against Pepco in July 2005. Underthe Settlement Agreement, Mirant Power Purchase will perform any remainingobligations under the APSA, and Mirant will guaranty its performance. TheBack-to-Back Agreement has been rejected and terminated effective as of May 31,2006, and the Assignment and Assumption Agreement has also been rejected.

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 has assumedthe agreement and Mirant has guaranteed that subsidiary’s performance. MirantPower Purchase’s obligations under the APSA do not include any obligationsrelated to the Ancillary Agreements. The Settlement Agreement provides that afuture breach of the APSA or any Ancillary Agreement by a party to suchagreement will not entitle the non-defaulting party to terminate, suspendperformance under, or exercise any other right or remedy under or with respectto any of the remainder of such agreements.

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. Mirantwill distribute up to 18 million shares of Mirant common stock to Pepco tosatisfy its claim and Pepco will liquidate those shares. Mirant is to set thenumber of shares to be distributed to Pepco so as to produce upon liquidationtotal net proceeds as near to $520 million as possible, subject to the overallcap on the shares to be distributed of 18 million 

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shares.If the net proceeds received by Pepco from the liquidation of the shares areless than $520 million, Mirant will pay Pepco cash equal to the difference.

***California and Western Power Markets***

*FERCRefund Proceedings Arising Out of California Energy Crisis.*   Highprices experienced in California and western wholesale electricity markets in2000 and 2001 caused various purchasers of electricity in those markets toinitiate proceedings seeking refunds. Several of those proceedings remainpending either before the FERC or on appeal to the United States Court ofAppeals for the Ninth Circuit (the “Ninth Circuit”). The proceedings thatremain pending include proceedings (1) ordered by FERC on July 25,2001, (the “FERC Refund Proceedings”) to determine the amount of any refundsand amounts owed for sales made by market participants, including MirantAmericas Energy Marketing, to the CAISO or the Cal PX from October 2,2000, through June 20, 2001 (the “Refund Period”), (2) ordered byFERC to determine whether there had been unjust and unreasonable charges forspot market bilateral sales in the Pacific Northwest from December 25,2000, through June 20, 2001, and in which the FERC’s determination that norelief was warranted is on appeal to the Ninth Circuit, and (3) arisingfrom a complaint filed in 2002 by the California Attorney General that soughtrefunds for transactions conducted in markets administered by the CAISO and theCal PX outside the Refund Period set by the FERC and for transactions betweenthe DWR and various owners of generation and power marketers, including MirantAmericas Energy Marketing and subsidiaries of the Company. Various parties haveappealed FERC orders related to these proceedings to the Ninth Circuit seekingreview of a number of issues, including changing the Refund Period to includeperiods prior to October 2, 2000, and expanding the sales of electricitysubject to potential refund to include bilateral sales made to the DWR andother parties.

On January 14, 2005,**Mirantand certain of its subsidiaries, including the Company (the “Mirant SettlingParties”), entered into a Settlement and Release of Claims Agreement (the “CaliforniaSettlement”) with PG&E, SCE, San Diego Gas and Electric Company, the CPUC,the DWR, the EOB and the Attorney General of the State of California(collectively, the “California Parties”). The California Settlement wasapproved by the FERC on April 13, 2005, and became effective April 15,2005, upon its approval by the Bankruptcy Court. The California Settlementresulted in the release of most of Mirant Americas Energy Marketing’s potentialliability (1) in the FERC Refund Proceedings for sales made in the CAISOor the Cal PX markets, (2) in the proceeding also initiated by the FERC inJuly 2001 to determine whether there had been unjust and unreasonablecharges for spot market bilateral sales in the Pacific Northwest from December 25,2000, through June 20, 2001, and (3) in any proceedings at the FERCresulting from the complaint filed in 2002 by the California Attorney General.Under the California Settlement, the California Parties and those other marketparticipants who have opted into the settlement have released the MirantSettling Parties, including Mirant Americas Energy Marketing, from anyliability for refunds related to sales of electricity and natural gas in thewestern markets from January 1, 1998, through July 14, 2003. Also,the California Parties have assumed the obligation of Mirant Americas EnergyMarketing to pay any refunds determined by the FERC to be owed by MirantAmericas Energy Marketing to other parties that do not opt into the settlementfor transactions in the CAISO and Cal PX markets during the Refund Period, withthe liability of the California Parties for such refund obligation limited tothe amount of certain receivables assigned by Mirant Americas Energy Marketingto the California Parties under the California Settlement. The settlement didnot relieve Mirant Americas Energy Marketing of liability for any refunds thatthe FERC determines it to owe (1) to participants in the Cal PX and CAISOmarkets that are not California Parties (or that did not elect to opt into thesettlement) for periods outside the Refund Period and (2) to participantsin bilateral transactions with Mirant Americas Energy Marketing that are notCalifornia Parties (or that did not elect to opt into the settlement).

Resolution of the refund proceedings that remainpending before the FERC or that currently are on appeal to the Ninth Circuitcould ultimately result in the FERC concluding that the prices received by 

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Mirant Americas EnergyMarketing in some transactions occurring in 2000 and 2001 should be reduced.The Company’s view is that the bulk of any obligations of Mirant AmericasEnergy Marketing to make refunds as a result of sales completed prior to July 14,2003, in the CAISO or Cal PX markets or in bilateral transactions either havebeen addressed by the California Settlement or have been resolved as part ofMirant Americas Energy Marketing’s bankruptcy proceedings. To the extent thatMirant Americas Energy Marketing’s potential refund liability arises fromcontracts that were transferred to Mirant Energy Trading as part of thetransfer of the trading and marketing business under the Plan, Mirant EnergyTrading may have exposure to any refund liability related to transactions underthose 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. The TradingPractices Order identified certain specific trading practices that the FERCindicated could constitute gaming or anomalous market behavior in violation ofthe CAISO and Cal PX tariffs, and required sellers previously involved intransactions of those types to demonstrate why such transactions were notviolations of the CAISO and Cal PX tariffs. On September 30, 2003,and December 19, 2003, the Mirant entities filed with the FERC forapproval of a settlement agreement (the “Trading Settlement Agreement”) enteredinto between certain Mirant entities and the FERC Trial Staff and an amendmentto that agreement, under which Mirant Americas Energy Marketing would pay$332,411 and the FERC would have an allowed unsecured claim in Mirant AmericasEnergy Marketing’s bankruptcy proceeding for $3.67 million to settle theshow cause proceeding. The FERC approved the Trading Settlement Agreement, asamended, on June 27, 2005, and the Bankruptcy Court approved it on August 24,2005. Certain parties filed motions for rehearing with the FERC, which itdenied on October 11, 2006. A party to the proceeding has appealed theFERC’s June 27, 2005, order to the Ninth Circuit.

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

*Mirant Americas EnergyMarketing Contract Dispute with Southern California Water.**  *On December 21, 2001, Southern California WaterCo. filed a complaint at the FERC seeking reformation of the purchase price ofenergy under a long-term contract it had entered with Mirant Americas EnergyMarketing, claiming that the prices under that contract were unjust andunreasonable because, when it entered the contract, western power markets weredysfunctional and non-competitive markets. The contract was for the purchase of15 MWs during the period April 1, 2001, through December 31, 2006. OnJune 25, 2003, the FERC dismissed this proceeding. Southern CaliforniaWater appealed that dismissal to the United States Court of Appeals for theNinth Circuit, which on December 19, 2006, reversed the dismissal of thecomplaint and remanded the proceeding to the FERC. Upon the transfer of theassets of the trading and marketing business to Mirant Energy Trading under thePlan, Mirant Energy Trading assumed Mirant Americas Energy Marketing’s contractobligations to Southern California Water Company, including any potentialrefund obligations.

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

*Department of JusticeInquiries.**  *In November 2002,Mirant received a subpoena from the DOJ, acting through the United StatesAttorney’s office for the Northern District of California, requestinginformation about its activities and those of its subsidiaries for the periodsince January 1, 1998. The subpoena requested information related to theCalifornia energy markets and other topics, including the reporting ofinaccurate information to trade publications that publish natural gas orelectricity spot price data. The subpoena was issued as part of a grand juryinvestigation. The DOJ’s investigation was based upon the same circumstancesthat were the subject of an investigation by the CFTC that was settled in December 2004,**a**s described****in Mirant’sAnnual Report on Form 10-K for the year ended December 31,2004, in*Legal Proceedings—Other Governmental Proceedings—CFTCInquiry*. On June 19, 2006, two former employees of Mirant pledguilty to charges of conspiracy to manipulate the price of natural gas ininterstate commerce during the period from July 1, 2000, until November 1,2000, while they were west region traders for Mirant Americas Energy Marketing.On July 11, 2007, Mirant and Mirant Energy Trading entered into a deferredprosecution agreement with the DOJ to resolve this matter. Pursuant to theagreement, Mirant paid $11 million, which amount was previously accrued. Absenta breach, the agreement will expire in fifteen months and no further actionwill be taken by the DOJ.

***Environmental Matters***

*EPAInformation Request.**  *InJanuary 2001, the EPA issued a request for information to Mirantconcerning the implications under the EPA’s NSR regulations promulgated underthe Clean Air Act of past repair and maintenance activities at the PotomacRiver plant in Virginia and the Chalk Point, Dickerson and Morgantown plants inMaryland. The requested information concerns the period of operations thatpredates the Company subsidiaries’ ownership and lease of those plants. Mirantresponded fully to this request. Under the APSA, Pepco is responsible for finesand penalties arising from any violation associated with operations prior tothe acquisition or lease of the plants by subsidiaries of the Company. 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. The Company’s subsidiaries owning or leasing the Chalk Point,Dickerson and Morgantown plants in Maryland will be installing a variety ofemissions control equipment on those plants to comply with the Maryland HealthyAir Act, but that equipment may not include all of the emissions controlequipment that could be required if a violation of the EPA’s NSR regulations isdetermined to have occurred at one or more of those plants. If such a violationis determined to have occurred after the Company’s subsidiaries acquired orleased the plants or, if occurring prior to the acquisition or lease, isdetermined to constitute a continuing violation, the Company’s subsidiaryowning or leasing the plant at issue could also be subject to fines andpenalties by the state or federal government for the period after itsacquisition or lease of the plant, the cost of which may be material, althoughapplicable bankruptcy law may bar such liability for periods prior to January 3,2006, when the Plan became effective for the Company and its subsidiaries thatown or lease these plants.

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

Computer modeling predicted that emissions from thePotomac River plant had the potential to contribute to localized, modeledinstances of exceedances of the NAAQS for SO2, NOx and PM10 under 

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certain conditions. Basedon those results, the Virginia DEQ issued a directive to Mirant Potomac Riveron August 19, 2005, to undertake immediately such action as was necessaryto ensure protection of human health and the environment and eliminate NAAQSexceedances. On August 24, 2005, Mirant Potomac River temporarily haltedpower production at all five units of the Potomac River generating facility inresponse to the directive from the Virginia DEQ. On August 25, 2005, the District of Columbia Public ServiceCommission filed an emergency petition and complaint with the DOE to preventthe shutdown of the Potomac River facility. On December 20, 2005, due to adetermination by the DOE that an emergency situation existed with respect tothe reliability of the supply of electricity to central Washington, D.C., theDOE ordered Mirant Potomac River to generate electricity at the Potomac Rivergenerating facility, as requested by PJM, during any period in which certaintransmission lines serving the central Washington, D.C. area were out ofservice 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. On January 4,2006, the DOE issued an order authorizing operation of the units of the PotomacRiver generating facility on a reduced basis, but making it possible to bringthe entire plant into service within approximately 28 hours when necessary forreliability purposes.

In a letter received December 30,2005, the EPA asserted that Mirant Potomac River did not immediately undertakeaction as directed by the Virginia DEQ’s August 19, 2005, letter andtherefore failed to comply with the requirements of the Virginia State ImplementationPlan. On June 1, 2006, Mirant Potomac River and the EPA executed anACO by Consent to resolve the EPA’s allegations and to assure an acceptablelevel of reliability to the District of Columbia. The ACO (i) specifiedcertain operating scenarios and SO2 emissions limits for the Potomac Riverfacility, which scenarios and limits took into account whether certain 230kVtransmission lines serving Washington, D.C. were out of service; (ii) requiredthe operation of trona injection units to reduce SO2 emissions; and (iii) requiredMirant Potomac River to undertake a model evaluation study to predict ambientair quality effects from the facility’s operations. On June 2, 2006, theDOE issued a letter modifying its January 6, 2006, order to direct MirantPotomac River to comply with the ACO in order to ensure adequate electricreliability to the District of Columbia. The ACO expired on June 1, 2007,and the DOE’s order expired on July 1, 2007.

On May 23, 2007, the Virginia State Air PollutionControl Board directed the Director of the Virginia DEQ to issue a stateoperating permit (the “Permit”) for the Potomac River plant that would restrictthe plant’s operations by imposing stringent limits on its SO2 emissions, whichlimits Mirant Potomac River views as unreasonably low and arbitrary. TheVirginia DEQ issued the Permit as directed on June 1, 2007. The effects ofthe Permit were effectively stayed until the DOE order expired on July 1,2007. In June 2007, Mirant Potomac River filed a petition for appeal inthe Circuit Court of the City of Richmond, Virginia seeking to set aside theVirginia State Air Pollution Control Board’s directive of May 23, 2007,and the Permit issued by the Virginia DEQ on June 1, 2007. The VirginiaState Air Pollution Control Board stated that the Permit is intended to besupplanted by a more comprehensive permit that it expects to issue in the fallof 2007.

*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 Yorkcited various existing outstanding matters between the State and the Company’ssubsidiaries owning generating facilities in New York related to compliancewith environmental laws and regulations. The State of New York and the NYSDECexecuted a stipulated order with the Company’s New York subsidiaries and theother Mirant Debtors to stay resolution of this administrative claim. That stipulatedorder was approved by the Bankruptcy Court on February 23, 2006. Althoughthis administrative claim 

38

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remains stayed, the bulkof the existing outstanding matters upon which the claim was based have beenseparately resolved with the NYSDEC.

*Riverkeeper Suit AgainstMirant Lovett.**  *On March 11,2005, Riverkeeper, Inc. filed suit against Mirant Lovett in the UnitedStates District Court for the Southern District of New York under the CleanWater Act. The suit alleges that Mirant Lovett failed to implement a marinelife exclusion system at its Lovett generating plant and to perform monitoringfor the exclusion of certain aquatic organisms from the plant’s cooling waterintake structures in violation of Mirant Lovett’s water discharge permit issuedby the State of New York. The plaintiff requested the court to enjoin MirantLovett from continuing to operate the Lovett generating plant in a manner thatallegedly violates the Clean Water Act, to impose civil penalties of $32,500per day of violation, and to award the plaintiff attorneys’ fees. Mirant Lovett’sview is that it has complied with the terms of its water discharge permit, asamended by a Consent Order entered June 29, 2004. On April 20, 2005,the district court approved a stipulation agreed to by the plaintiff and MirantLovett that stays the suit until 60 days after entry of an order by theBankruptcy Court confirming a plan of reorganization for Mirant Lovett becomesfinal and non-appealable.

***City of Alexandria Zoning Action***

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

On January 18, 2005,Mirant Potomac River and Mirant Mid-Atlantic filed a complaint against the Cityof Alexandria and the City Council in the Circuit Court for the City ofAlexandria seeking to overturn the actions taken by the City Council on December 18,2004, on the grounds that those actions violated federal, state and city laws.On February 24, 2006, the court entered judgment in favor of MirantPotomac River and Mirant Mid-Atlantic declaring the change in the zoning statusof Mirant Potomac River’s generating plant to be invalid and vacating the CityCouncil’s revocation of the 1989 SUPs. On April 20, 2007, the VirginiaSupreme Court affirmed the rulings by the trial court. On June 22, 2007,the Virginia Supreme Court denied a petition for rehearing filed by the City.

***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 itconsidered 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 contended that Mirant Potomac River’sactions entitle Pepco to recover as damages the cost of constructing additionaltransmission facilities. Pepco, on January 24, 2006, filed a notice ofadministrative claims in the bankruptcy proceedings asserting that MirantPotomac River’s shutdown of the Potomac 

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River plant caused MirantPotomac River to be liable for the cost of such transmission facilities, whichcost it estimated to be in excess of $70 million. Mirant Potomac River disputesPepco’s interpretation of the agreement.

The Settlement Agreemententered into on May 30, 2006, by the Mirant Settling Parties and the PepcoSettling Parties that became effective August 10, 2007, resolved allclaims asserted by Pepco against Mirant Potomac River arising out of thesuspension of operations of the Potomac River plant in August 2005. Underthe Settlement Agreement, Pepco released all claims it has asserted againstMirant Potomac River related to the shutdown of the plant in return for theclaim Pepco received in the Mirant bankruptcy proceeding.

***Other Legal Matters***

The Company is involved in various other claims andlegal actions arising in the ordinary course of business. In the opinion ofmanagement, the ultimate disposition of these matters will not have a materialadverse effect on the Company’s financial position, results of operations orcash flows.

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

The following discussionshould be read in conjunction with our accompanying unaudited condensedconsolidated financial statements and the notes thereto, which are includedelsewhere in this report.

***Overview***

Our continuing operations generate revenues primarilythrough the production of electricity. Those operations consist of theownership, long-term lease and operation of 10,301 MW of power generationfacilities located in markets in the Mid-Atlantic and Northeast regions of theUnited States and in California, and energy trading and marketing operations inAtlanta, Georgia.

We are a direct wholly-owned subsidiary of MirantAmericas Generation and an indirect wholly-owned subsidiary of Mirant. OnMay 1, 2007, Mirant completed the sale of six U.S. natural gas-firedintermediate and peaking plants, including our Zeeland and Bosque facilities toBroadway Generating Company, LLC, a member of the LS Power Group. The netproceeds to the Company from the sale, after paying transaction costs were $524million. In addition, on May 7, 2007, we completed the sale of MirantNY-Gen to Alliance Energy Renewables, LLC and recognized a gain of $8 million. 

On April 9, 2007, Mirant announced that its Boardof Directors had decided to explore strategic alternatives to enhancestockholder value. In light of the status of the disposition program, the Boardof Directors will consider in the exploration process whether the interests of stockholderswould be best served by returning excess cash from the sale proceeds tostockholders, with Mirant continuing to operate its retained businesses or,alternatively, whether greater stockholder value would be achieved by enteringinto a transaction with another company, including a sale of Mirant in itsentirety. Mirant does not expect to consider making an acquisition as part ofthis exploration process.

Our Mid-Atlantic operations contributed 53% of our $413million of realized gross margin for the three months ended June 30, 2007, and 58%of our $804 million of realized gross margin for the six months ended June 30,2007. Our power plants located in the Mid-Atlantic region that sell power intothe PJM market participate in the reliability pricing model (“RPM”)forward capacity market, which is designed to provide prices for capacity thatare intended to ensure that adequate resources are in place to meet the region’sdemand requirements. The PJM RPM held its first annual capacity auction inApril 2007, for delivery of capacity from June 1, 2007 toMay 31, 2008. In that auction, the resource clearing price in theSouthwestern MAAC (the zone in which our plants are located) for delivery ofcapacity from June 1, 2007 to May 31, 2008, was set at $188.54 perMW-day. The PJM RPM held its second annual capacity auction in July 2007, fordelivery of capacity from June 1, 2008 to May 31, 2009. In the secondauction the resource clearing price in the Southwestern MAAC for delivery ofcapacity from June 1, 2008 to May 31, 2009, was set at $210.11 perMW-day. The auction for delivery of capacity from June 1, 2009 toMay 31, 2010, will be held in October 2007. An additional auction will beheld in January 2008 for the June 1, 2010 to May 31, 2011, period.Thereafter, annual auctions will be conducted to procure capacity three yearsprior to each delivery period beginning in May 2008 for delivery of capacityfrom June 1, 2011 to May 31, 2012.

On July 30, 2007, MirantMid-Atlantic and Mirant Chalk Point, both indirect subsidiaries of Mirant NorthAmerica, entered into an agreement with Stone & Webster, Inc. forengineering, procurement and construction services relating to the installationof air quality control systems at the Morgantown, Dickerson and Chalk Pointgenerating stations. The target cost for installation of the scrubbers underthe agreement is approximately $1.1 billion. These services are part of totalcapital expenditures of approximately $1.6 billion through 2009 that weanticipate to comply with the requirements for SO2 and NOx emissions under theMaryland Healthy Air Act.

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**Results ofOperations**

Thefollowing discussion of our performance is organized by reportable segment,which is consistent with the way we manage our business.

*Consolidated FinancialPerformance*

We reported a net loss of $70 million and $237million for the three and six months ended June 30, 2007, respectively,compared to net income of $155 million and $578 million for the same periods in2006. 

Income (loss) fromcontinuing operations was a loss of $74 million and $235 million for the threeand six months ended June 30, 2007, respectively, compared to income of $157million and $579 million for the comparable periods in 2006. Significantfactors contributing to the decrease for the 2007 periods as compared to the2006 periods were:

·       Forthe three and six months ended June 30, 2007, as compared to the same periodsin 2006, a decrease in unrealized gross margin reduced net income by $225million and $866 million, respectively. Unrealized gross margin reflects thenet unrealized portion of our derivative contracts related to our asset hedgingactivities. We engage in asset hedging activities to reduce our exposure tocommodity price fluctuations and to achieve more predictable realized grossmargins. However, these hedges create volatility in our net income asunrealized gains and losses.

·       Realizedgross margin increased $141 million and $172 million in the three and sixmonths ended June 30, 2007, as compared to the same periods in 2006, primarilydue to higher energy prices, higher generation volumes, higher capacityrevenues and the settlement of favorable fuel oil management positions.

·       Inthe second quarter of 2007, we recorded an impairment loss of $175 million toreduce the carrying value of the Lovett facility to its estimated fair value.See Note D to the unaudited condensed consolidated financial statements foradditional information related to this impairment. 

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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/** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                                                                                       | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)**                                | ** ** | **2007**      | ** ** | **2006** | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                                           |       | $                                               | 413        |          | $          | 272                                           |       |          | $          | 141 |   |   | $ | 804 |   | $ | 632 |   |   | $ | 172 |   |   |
| Unrealized gross  margin                                                                         |       | (130                                            | )          | 95            |       |                                          | (225       | )             |       | (489 | ) | 377 |   |   | (866 | ) |   |
| Total gross  margin                                                                              |       | 283                                             |       | 367           |       |                                          | (84        | )             |       | 315 |   | 1,009 |   |   | (694 | ) |   |
| Operating expenses:                                                                              |       |                                            |       |          |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Operations and  maintenance                                                                      |       |                                            |       |          |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                                                                                        |       | 64                                              |       | 69            |       |                                          | (5         | )             |       | 129 |   | 138 |   |   | (9 | ) |   |
| Nonaffiliate                                                                                     |       | 97                                              |       | 96            |       |                                          | 1          |          |       | 183 |   | 188 |   |   | (5 | ) |   |
| Depreciation and  amortization                                                                   |       | 29                                              |       | 31            |       |                                          | (2         | )             |       | 59 |   | 59 |   |   | — |   |   |
| Impairment losses                                                                                |       | 175                                             |       | —        |       |                                          | 175        |          |       | 175 |   | — |   |   | 175 |   |   |
| Gain on sales of  assets, net                                                                    |       | (17                                             | )          | (6            | )          |                                          | (11        | )             |       | (19 | ) | (6 | ) |   | (13 | ) |   |
| Total operating  expenses                                                                        |       | 348                                             |       | 190           |       |                                          | 158        |          |       | 527 |   | 379 |   |   | 148 |   |   |
| Operating income  (loss)                                                                         |       | (65                                             | )          | 177           |       |                                          | (242       | )             |       | (212 | ) | 630 |   |   | (842 | ) |   |
| Other expense (income),  net                                                                     |       |                                            |       |          |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Affiliate                                                                                        |       | —                                          |       | (2            | )          |                                          | 2          |          |       | (2 | ) | (3 | ) |   | 1 |   |   |
| Nonaffiliate                                                                                     |       | 10                                              |       | 21            |       |                                          | (11        | )             |       | 27 |   | 53 |   |   | (26 | ) |   |
| Income (loss)  from continuing operations before reorganization items, net and income taxes |       | (75                                             | )          | 158           |       |                                          | (233       | )             |       | (237 | ) | 580 |   |   | (817 | ) |   |
| Reorganization  items, net                                                                       |       | (1                                              | )          | (1            | )          |                                          | —     |          |       | (2 | ) | (1 | ) |   | (1 | ) |   |
| Provision for  income taxes                                                                      |       | —                                          |       | 2             |       |                                          | (2         | )             |       | — |   | 2 |   |   | (2 | ) |   |
| Income (loss)  from continuing operations                                                        |       | (74                                             | )          | 157           |       |                                          | (231       | )             |       | (235 | ) | 579 |   |   | (814 | ) |   |
| Income (loss)  from discontinued operations                                                      |       | 4                                               |       | (2            | )          |                                          | 6          |          |       | (2 | ) | (1 | ) |   | (1 | ) |   |
| Net Income (loss)                                                                                |       | $                                               | (70        | )             | $          | 155                                           |       |          | (225       | ) |   | $ | (237 | ) | $ | 578 |   |   | $ | (815 | ) |   |

 

In the tables below, the Mid-Atlanticregion includes our Chalk Point, Morgantown, Dickerson and Potomac Riverfacilities. The Northeast region includes our Bowline, Canal, Lovett, Kendall,Martha’s Vineyard and Wyman facilities. The California region includes ourPittsburg, Contra Costa and Potrero facilities. Other Operations includesproprietary trading and fuel oil management activities.

*OperatingStatistics*

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

| ** **   | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|--------------|------------|-------------------------------------------------|------------|---------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **   | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)**                                | ** ** | **2007**      | ** ** | **2006** | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       |                                            | 31         | %             |       |                                          | 28         | %             |       |   | 3 | % |   |   | 34 | % |   |   | 32 | % |   |   | 2 | % |   |
| Northeast    |       |                                            | 19         | %             |       |                                          | 16         | %             |       |   | 3 | % |   |   | 24 | % |   |   | 14 | % |   |   | 10 | % |   |
| California   |       |                                            | 2          | %             |       |                                          | 6          | %             |       |   | (4 | )% |   |   | 2 | % |   |   | 5 | % |   |   | (3 | )% |   |
| Total        |       |                                            | 21         | %             |       |                                          | 20         | %             |       |   | 1 | % |   |   | 24 | % |   |   | 21 | % |   |   | 3 | % |   |

 

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

| ** **   | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|--------------|------------|-------------------------------------------------|------------|---------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **   | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)**                                | ** ** | **2007**      | ** ** | **2006** | ** ** | **(Decrease)** | ** ** |
| Mid-Atlantic |       | 3,561                                           |       | 3,236         |       |                                          | 325        |          |       | 7,795 |   | 7,319 |   |   | 476 |   |   |
| Northeast    |       | 1,108                                           |       | 958           |       |                                          | 150        |          |       | 2,768 |   | 1,702 |   |   | 1,066 |   |   |
| California   |       | 102                                             |       | 286           |       |                                          | (184       | )             |       | 247 |   | 529 |   |   | (282 | ) |   |
| Total        |       | 4,771                                           |       | 4,480         |       |                                          | 291        |          |       | 10,810 |   | 9,550 |   |   | 1,260 |   |   |

 

***Three Months Ended June 30, 2007 versus Three MonthsEnded June 30, 2006***

*Gross Margin*

Thefollowing table details realized and unrealized gross margin by operatingregion (in millions):

| ** **       | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------|------------|-----------------------------------------------------|------------|
| ** **       | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **       | ** ** | **Realized**                                        | ** ** | **Unrealized** | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic     |       |                                                | $          | 217 |   |   |   | $ | (34 | ) |   | $ | 183 |   |   | $ | 139 |   |   |   | $ | 99 |   |   | $ | 238 |   |
| Northeast        |       |                                                | 53         |   |   |   | 17 |   |   | 70 |   |   | 57 |   |   |   | (1 | ) |   | 56 |   |
| California       |       |                                                | 31         |   |   |   | — |   |   | 31 |   |   | 28 |   |   |   | — |   |   | 28 |   |
| Other Operations |       |                                                | 109        |   |   |   | (113 | ) |   | (4 | ) |   | 31 |   |   |   | (3 | ) |   | 28 |   |
| Eliminations     |       |                                                | 3          |   |   |   | — |   |   | 3 |   |   | 17 |   |   |   | — |   |   | 17 |   |
| Total            |       |                                                | $          | 413 |   |   |   | $ | (130 | ) |   | $ | 283 |   |   | $ | 272 |   |   |   | $ | 95 |   |   | $ | 367 |   |

 

Grossmargin for the three months ended June 30, 2007 and 2006, is further detailedas follows (in millions):

| ** **                                      | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Mid-Atlantic**                                              | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy                                          |       |                                                          | $          | 144 |   |   |   | $ | 25 |   |   |   | $ | 1 |   |   |   | $ | 109 |   |   |   | $ | 3 |   |   | $ | 282 |   |
| Contracted and  capacity                        |       |                                                          | 27         |   |   |   | 21 |   |   |   | 30 |   |   |   | — |   |   |   | — |   |   | 78 |   |
| Incremental  realized value of hedges |       |                                                          | 46         |   |   |   | 7 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 53 |   |
| Unrealized gross  margin                        |       |                                                          | (34        | ) |   |   | 17 |   |   |   | — |   |   |   | (113 | ) |   |   | — |   |   | (130 | ) |
| Total                                           |       |                                                          | $          | 183 |   |   |   | $ | 70 |   |   |   | $ | 31 |   |   |   | $ | (4 | ) |   |   | $ | 3 |   |   | $ | 283 |   |

 

| ** **                                 | ** ** | **Three Months Ended June 30, 2006** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Mid-Atlantic**                                              | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy                                     |       |                                                          | $          | 77 |   |   |   | $ | 34 |   |   |   | $ | 3 |   |   |   | $ | 31 |   |   |   | $ | 17 |   |   | $ | 162 |   |
| Contracted and  capacity                   |       |                                                          | 9          |   |   |   | 11 |   |   |   | 26 |   |   |   | — |   |   |   | — |   |   | 46 |   |
| Incremental  realized value of hedges |       |                                                          | 53         |   |   |   | 12 |   |   |   | (1 | ) |   |   | — |   |   |   | — |   |   | 64 |   |
| Unrealized gross  margin                   |       |                                                          | 99         |   |   |   | (1 | ) |   |   | — |   |   |   | (3 | ) |   |   | — |   |   | 95 |   |
| Total                                      |       |                                                          | $          | 238 |   |   |   | $ | 56 |   |   |   | $ | 28 |   |   |   | $ | 28 |   |   |   | $ | 17 |   |   | $ | 367 |   |

 

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

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Contracted and capacity represents gross marginreceived through RMR contracts and other installed capacity arrangements andancillary services.

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

Unrealized gross margin represents the net unrealizedgain or loss of our derivative contracts.

Our gross margin for the threemonths ended June 30, 2007, was $283 million as compared to $367 million forthe same period in 2006. The decrease in gross margin, which includes netunrealized gains and losses from our hedging activities is principally due tothe following: 

A decrease of $225million in unrealized gross margin was primarily due to the following:

·       unrealized losses of $130 million in the secondquarter of 2007 comprised of $171 million related to the settlement ofpower and fuel contracts during the period for which net unrealized gains hadbeen recorded in prior periods, partially offset by a $41 million increase invalue associated with forwardpower contracts for future periods as a result of decreases in forward powerprices during the second quarter; and 

·       unrealizedgains of $95 million in the second quarter of 2006, primarily due to decliningpower prices in that period.

Realizedgross margin increased $141 million primarily as a result of higherenergy prices, higher generation volumes, higher capacity revenues and thesettlement of favorable fuel oil management positions.

***Mid-Atlantic***

OurMid-Atlantic segment, which accounts for approximately half of our generatingcapacity, includes four generation facilities with total generation capacity of5,256 MW. The following tables summarize our Mid-Atlantic segment (inmillions):

| ** **                                                                           | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase**/ | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                                                                           | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                               |       | $                                               | 217        |          | $          | 139 |   |   | $ | 78 |   |   |
| Unrealized gross  margin                                                             |       | (34                                             | )          | 99            |       |   | (133 | ) |   |
| Total gross  margin                                                                  |       | 183                                             |       | 238           |       |   | (55 | ) |   |
| Operating expenses:                                                                  |       |                                            |       |          |       |   |   |   |   |
| Operations and maintenance                                                           |       | 91                                              |       | 88            |       |   | 3 |   |   |
| Depreciation and amortization                                                        |       | 20                                              |       | 18            |       |   | 2 |   |   |
| Gain on sales of assets, net                                                         |       | (1                                              | )          | (5            | )          |   | 4 |   |   |
| Total operating  expenses                                                            |       | 110                                             |       | 101           |       |   | 9 |   |   |
| Operating income                                                                     |       | 73                                              |       | 137           |       |   | (64 | ) |   |
| Total other  income, net                                                             |       | (2                                              | )          | (2            | )          |   | — |   |   |
| Income from continuing operations  before reorganization items and income taxes |       | $                                               | 75         |          | $          | 139 |   |   | $ | (64 | ) |   |

 

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*Gross Margin*

| ** **                            | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                               | 144        |          | $          | 77 |   |   | $ | 67 |   |   |
| Contracted and  capacity              |       | 27                                              |       | 9             |       |   | 18 |   |   |
| Incremental  realized value of hedges |       | 46                                              |       | 53            |       |   | (7 | ) |   |
| Total realized  gross margin          |       | 217                                             |       | 139           |       |   | 78 |   |   |
| Unrealized gross  margin              |       | (34                                             | )          | 99            |       |   | (133 | ) |   |
| Total gross margin                    |       | $                                               | 183        |          | $          | 238 |   |   | $ | (55 | ) |   |

 

The increase of $78million in realized gross margin was primarily due to the following:

·       anincrease of $67 million in energy, primarily due to an increase of 15% inaverage power prices, an increase of 10% in generation volumes due to higherprices and a decrease in emissions costs; and

·       anincrease of $18 million in contracted and capacity primarily due to thePJM RPM, which became effective in June 2007. This amount was net of $7million to reflect our lower availability that was to a significant extentrelated to the extension in June 2007 of a planned spring outage at unit 1of our Morgantown generation facility.

The decrease of$133 million in unrealized gross margin was primarily because of the following:

·       unrealizedlosses of $34 million in 2007 due to $88 million related to the settlementof power and fuel contracts during the period for which net unrealized gainshad been recorded in prior periods, partially offset by a $54 million increasein value associated with forwardpower and fuel contracts for future periods as a result of decreases in forwardpower prices in the second quarter of 2007; and

·       unrealized gains of $99million in 2006 due to $76 million related to an increase in value associatedwith forward power and fuel contracts for future periods due to decreases inpower prices and $23 million due to the settlement of contracts during theperiod for which unrealized losses had been recorded in prior periods.

46

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***Northeast***

OurNortheast segment is comprised of our assets located in New York and NewEngland with total generation capacity of 2,698 MW. The following tablessummarize the operations of our Northeast segment (in millions):

| ** **                                                                             | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                                                                             | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                                 |       | $                                               | 53         |          | $          | 57 |   |   | $ | (4 | ) |   |
| Unrealized gross  margin                                                               |       | 17                                              |       | (1            | )          |   | 18 |   |   |
| Total gross  margin                                                                    |       | 70                                              |       | 56            |       |   | 14 |   |   |
| Operating expenses:                                                                    |       |                                            |       |          |       |   |   |   |   |
| Operations and maintenance                                                             |       | 49                                              |       | 60            |       |   | (11 | ) |   |
| Depreciation and amortization                                                          |       | 6                                               |       | 6             |       |   | — |   |   |
| Impairment losses                                                                      |       | 175                                             |       | —        |       |   | 175 |   |   |
| Gain on sales of assets, net                                                           |       | (15                                             | )          | (10           | )          |   | (5 | ) |   |
| Total operating  expenses                                                              |       | 215                                             |       | 56            |       |   | 159 |   |   |
| Operating income  (loss)                                                               |       | (145                                            | )          | —        |       |   | (145 | ) |   |
| Total other  income, net                                                               |       | (4                                              | )          | (2            | )          |   | (2 | ) |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       | $                                               | (141       | )             | $          | 2 |   |   | $ | (143 | ) |   |

* *

*Gross Margin*

| ** **                            | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       |                                            | $          | 25            |       |   |   | $ | 34 |   |   |   | $ | (9 | ) |   |
| Contracted and capacity               |       |                                            | 21         |          |       |   | 11 |   |   |   | 10 |   |   |
| Incremental  realized value of hedges |       |                                            | 7          |          |       |   | 12 |   |   |   | (5 | ) |   |
| Total realized  gross margin          |       |                                            | 53         |          |       |   | 57 |   |   |   | (4 | ) |   |
| Unrealized gross  margin              |       |                                            | 17         |          |       |   | (1 | ) |   |   | 18 |   |   |
| Total gross margin                    |       |                                            | $          | 70            |       |   |   | $ | 56 |   |   |   | $ | 14 |   |   |

 

The decrease of $4million in realized gross margin was primarily due to the following:

·       anincrease of $10 million in contracted and capacity primarily due to theimplementation of a forward capacity market (“FCM”) under which annual capacityauctions are to be conducted for supply three years in advance of delivery. See“Item 1. Regulatory Environment” in our Annual Report on Form 10-Kfor the year ended December 31, 2006, for further information on theimplementation of FCM; and

·       adecrease of $9 million in energy as a result of higher prices for fuel oil,partially offset by a 15% increase in generation volumes.

The increase of $18million in unrealized gross margin was primarily due to the following:

·       unrealized gains of$17 million in 2007 were primarily due to $22 million from an increase invalue associated with forwardpower contracts for future periods as a result of decreases in forward powerprices in the second quarter of 2007, partially offset by a decrease of $5million due to the settlement of power and fuel contracts during the period forwhich net unrealized gains had been recorded in prior periods.

47

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*Operating Expenses*

Operating expensesincreased $159 million, primarily due to the $175 million impairment of ourLovett facility in the second quarter of 2007. See Note D to the unauditedcondensed consolidated financial statements for additional information relatedto this impairment. The impairment was partially offset by an $11 milliondecrease in operations and maintenance expense, of which $9 million was due toa decrease in property taxes.

***California***

OurCalifornia segment consists of the Pittsburg, Contra Costa and Potrerofacilities with total generation capacity of 2,347 MW. The following tablessummarize our California segment (in millions):

| ** **                                                                      | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                                                                      | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                          |       |                                            | $          | 31            |       |   |   | $ | 28 |   |   |   | $ | 3 |   |   |
| Unrealized gross  margin                                                        |       |                                            | —     |          |       |   | — |   |   |   | — |   |   |
| Total gross  margin                                                             |       |                                            | 31         |          |       |   | 28 |   |   |   | 3 |   |   |
| Operating expenses:                                                             |       |                                            |       |          |       |   |   |   |   |   |   |   |   |
| Operations and maintenance                                                      |       |                                            | 16         |          |       |   | 13 |   |   |   | 3 |   |   |
| Depreciation and amortization                                                   |       |                                            | 4          |          |       |   | 4 |   |   |   | — |   |   |
| Gain on sales of assets, net                                                    |       |                                            | (1         | )             |       |   | — |   |   |   | (1 | ) |   |
| Total operating  expenses                                                       |       |                                            | 19         |          |       |   | 17 |   |   |   | 2 |   |   |
| Operating income                                                                |       |                                            | 12         |          |       |   | 11 |   |   |   | 1 |   |   |
| Total other  income, net                                                        |       |                                            | (2         | )             |       |   | (1 | ) |   |   | (1 | ) |   |
| Income from continuing operations  before reorganization items and income taxes |       |                                            | $          | 14            |       |   |   | $ | 12 |   |   |   | $ | 2 |   |   |

*** ***

*Gross Margin*

| ** **                            | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       |                                            | $          | 1             |       |   |   | $ | 3 |   |   |   | $ | (2 | ) |   |
| Contracted and  capacity              |       |                                            | 30         |          |       |   | 26 |   |   |   | 4 |   |   |
| Incremental realized  value of hedges |       |                                            | —     |          |       |   | (1 | ) |   |   | 1 |   |   |
| Total realized  gross margin          |       |                                            | 31         |          |       |   | 28 |   |   |   | 3 |   |   |
| Unrealized gross  margin              |       |                                            | —     |          |       |   | — |   |   |   | — |   |   |
| Total gross margin                    |       |                                            | $          | 31            |       |   |   | $ | 28 |   |   |   | $ | 3 |   |   |

 

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

48

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***Other Operations***

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

| ** **                                                                    | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                                                                    | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                        |       | $                                               | 109        |          |       | $ | 31 |   |   |   | $ | 78 |   |   |
| Unrealized gross  margin                                                      |       | (113                                            | )          |          | (3         | ) |   |   | (110 | ) |   |
| Total gross  margin                                                           |       | (4                                              | )          |          | 28         |   |   |   | (32 | ) |   |
| Operating  expenses:                                                          |       |                                            |       |          |       |   |   |   |   |   |   |
| Operations and maintenance                                                    |       | 5                                               |       |          | 4          |   |   |   | 1 |   |   |
| Depreciation and amortization                                                 |       | (1                                              | )          |          | 3          |   |   |   | (4 | ) |   |
| Total operating  expenses                                                     |       | 4                                               |       |          | 7          |   |   |   | (3 | ) |   |
| Operating income  (loss)                                                      |       | (8                                              | )          |          | 21         |   |   |   | (29 | ) |   |
| Total other  expense, net                                                     |       | 18                                              |       |          | 24         |   |   |   | (6 | ) |   |
| Loss from continuing  operations before reorganization items and income taxes |       | $                                               | (26        | )             |       | $ | (3 | ) |   |   | $ | (23 | ) |   |

 

*Gross Margin*

| ** **                   | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|---------------|------------|
| ** **                   | ** ** | **2007**                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                       |       | $                                               | 109        |          |       | $ | 31 |   |   |   | $ | 78 |   |   |
| Total realized  gross margin |       | 109                                             |       |          | 31         |   |   |   | 78 |   |   |
| Unrealized gross  margin     |       | (113                                            | )          |          | (3         | ) |   |   | (110 | ) |   |
| Total gross margin           |       | $                                               | (4         | )             |       | $ | 28 |   |   |   | $ | (32 | ) |   |

 

The increase of $78 million in realized gross marginwas due to an increase in energy primarily related to fuel oil managementpositions that were settled in the current period.

The decrease of$110 million in unrealized gross margin was primarily due to the following:

·       unrealizedlosses on proprietary trading and fuel oil management activities of $113million in 2007, which included unrealized losses of $78 million related to thesettlement of power and fuel contracts during the period for which unrealizedgains had been recorded in prior periods and decreases in forward value ofpower and fuel contracts for future periods of $35 million; and

·       unrealized losses onproprietary trading and fuel oil management activities of $3 million in 2006,which included unrealized losses of $7 million from the settlement of power andfuel contracts during the period for which unrealized gains had been recordedin prior periods, partially offset by an increase in the forward value of powerand fuel contracts for future periods of $4 million.

*Other expense, net*

Our other expense, netdecreased by $6 million for the three months ended June 30, 2007, comparedto the same period in 2006, primarily due to an increase of $5 million ininterest income, which was principally the result of an increase in cash due tothe receipt of proceeds from the sale of our Zeeland and Bosque plants.

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*DiscontinuedOperations*

For the three months endedJune 30, 2007, income from discontinued operations was $4 million comparedto a loss of $2 million for the same period in 2006, from Mirant Zeeland,Mirant Texas and Mirant NY-Gen. The increase of $6 million is primarily due tothe gain of $8 million on the sale of Mirant NY-Gen.

***Six Months Ended June 30, 2007 versus Six MonthsEnded June 30, 2006***

Thefollowing table details realized and unrealized gross margin by operatingregion (in millions):

| ** **       | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------|------------|---------------------------------------------------|------------|
| ** **       | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **       | ** ** | **Realized**                                      | ** ** | **Unrealized** | ** ** | **Total** | ** ** | **Realized** | ** ** | **Unrealized** | ** ** | **Total** | ** ** |
| Mid-Atlantic     |       |                                              | $          | 463 |   |   |   | $ | (353 | ) |   | $ | 110 |   |   | $ | 330 |   |   |   | $ | 325 |   |   | $ | 655 |   |
| Northeast        |       |                                              | 143        |   |   |   | (32 | ) |   | 111 |   |   | 167 |   |   |   | 33 |   |   | 200 |   |
| California       |       |                                              | 63         |   |   |   | — |   |   | 63 |   |   | 54 |   |   |   | 1 |   |   | 55 |   |
| Other Operations |       |                                              | 126        |   |   |   | (104 | ) |   | 22 |   |   | 49 |   |   |   | 18 |   |   | 67 |   |
| Eliminations     |       |                                              | 9          |   |   |   | — |   |   | 9 |   |   | 32 |   |   |   | — |   |   | 32 |   |
| Total            |       |                                              | $          | 804 |   |   |   | $ | (489 | ) |   | $ | 315 |   |   | $ | 632 |   |   |   | $ | 377 |   |   | $ | 1,009 |   |

 

Grossmargin for the six months ended June 30, 2007 and 2006, is furtherdetailed as follows (in millions):

| ** **                             | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Mid-Atlantic**                                            | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy                                 |       |                                                        | $          | 309 |   |   |   | $ | 55 |   |   |   | $ | 2 |   |   |   | $ | 126 |   |   |   | $ | 9 |   |   | $ | 501 |   |
| Contracted and  capacity               |       |                                                        | 38         |   |   |   | 45 |   |   |   | 61 |   |   |   | — |   |   |   | — |   |   | 144 |   |
| Incremental  realized  value of hedges |       |                                                        | 116        |   |   |   | 43 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 159 |   |
| Unrealized gross  margin               |       |                                                        | (353       | ) |   |   | (32 | ) |   |   | — |   |   |   | (104 | ) |   |   | — |   |   | (489 | ) |
| Total                                  |       |                                                        | $          | 110 |   |   |   | $ | 111 |   |   |   | $ | 63 |   |   |   | $ | 22 |   |   |   | $ | 9 |   |   | $ | 315 |   |

 

| ** **                              | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                              | ** ** | **Mid-Atlantic**                                            | ** ** | **Northeast** | ** ** | **California** | ** ** | **Other  Operations** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Energy                                  |       |                                                        | $          | 218 |   |   |   | $ | 60 |   |   |   | $ | 3 |   |   |   | $ | 49 |   |   |   | $ | 32 |   |   | $ | 362 |   |
| Contracted and  capacity                |       |                                                        | 19         |   |   |   | 16 |   |   |   | 52 |   |   |   | — |   |   |   | — |   |   | 87 |   |
| Incremental  realized   value of hedges |       |                                                        | 93         |   |   |   | 91 |   |   |   | (1 | ) |   |   | — |   |   |   | — |   |   | 183 |   |
| Unrealized gross  margin                |       |                                                        | 325        |   |   |   | 33 |   |   |   | 1 |   |   |   | 18 |   |   |   | — |   |   | 377 |   |
| Total                                   |       |                                                        | $          | 655 |   |   |   | $ | 200 |   |   |   | $ | 55 |   |   |   | $ | 67 |   |   |   | $ | 32 |   |   | $ | 1,009 |   |

 

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

Contracted and capacity represents gross marginreceived through RMR contracts and other installed capacity arrangements andancillary services.

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

50

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Unrealized gross margin represents the unrealized gainor loss of our derivative contracts.

Our gross margin for the sixmonths ended June 30, 2007, was $315 million as compared to $1.009 billionfor the same period in 2006. The decrease in gross margin, which includes netunrealized gains and losses from our hedging activities is principally due tothe following:

A decrease of $866 million in unrealized gross margin was primarily dueto the following:

·       unrealized losses of $489 million in the firstsix months of 2007 due to $343 million related to the settlement ofpower and fuel contracts during the period for which net unrealized gains hadbeen recorded in prior periods and $146 million due to a decrease in valueassociated with forwardpower contracts for future periods as a result of increases in forward powerprices in 2007;

·       unrealized gains of $377 million in the first sixmonths of 2006 due to $306 million related to an increase in valueassociated with forwardpower contracts for future periods as a result of decreases in forward powerprices in 2006 and $71 million due to the settlement of power and fuelcontracts during the period for which net unrealized losses had been recordedin prior periods; and

An increase of $172million in realized gross margin primarilydue to higher energy prices, higher generation volumes, higher capacityrevenues, and the settlement of favorable fuel oil management positions.

***Mid-Atlantic***

OurMid-Atlantic segment, which accounts for approximately half of our generatingcapacity, includes four generation facilities with total generation capacity of5,256 MW. The following tables summarize our Mid-Atlantic segment (inmillions):

| ** **                                                                                  | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase**/ | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                                                                                  | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                                      |       | $                                             | 463        |          | $          | 330 |   |   | $ | 133 |   |   |
| Unrealized gross  margin                                                                    |       | (353                                          | )          | 325           |       |   | (678 | ) |   |
| Total gross  margin                                                                         |       | 110                                           |       | 655           |       |   | (545 | ) |   |
| Operating expenses:                                                                         |       |                                          |       |          |       |   |   |   |   |
| Operations and maintenance                                                                  |       | 174                                           |       | 173           |       |   | 1 |   |   |
| Depreciation and amortization                                                               |       | 39                                            |       | 36            |       |   | 3 |   |   |
| Gain on sales of assets, net                                                                |       | (2                                            | )          | (5            | )          |   | 3 |   |   |
| Total operating  expenses                                                                   |       | 211                                           |       | 204           |       |   | 7 |   |   |
| Operating income  (loss)                                                                    |       | (101                                          | )          | 451           |       |   | (552 | ) |   |
| Total other  income, net                                                                    |       | (3                                            | )          | (3            | )          |   | — |   |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       | $                                             | (98        | )             | $          | 454 |   |   | $ | (552 | ) |   |

 

51

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***Gross Margin***

| ** **                            | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                             | 309        |          | $          | 218 |   |   | $ | 91 |   |   |
| Contracted and  capacity              |       | 38                                            |       | 19            |       |   | 19 |   |   |
| Incremental  realized value of hedges |       | 116                                           |       | 93            |       |   | 23 |   |   |
| Total realized  gross margin          |       | 463                                           |       | 330           |       |   | 133 |   |   |
| Unrealized gross  margin              |       | (353                                          | )          | 325           |       |   | (678 | ) |   |
| Total gross margin                    |       | $                                             | 110        |          | $          | 655 |   |   | $ | (545 | ) |   |

 

The increase of$133 million in realized gross margin was primarily due to the following:

·       anincrease of $91 million in energy primarily due to a 9% increase in averagepower prices, a 6% increase in generation volumes and a decrease in emissionscosts;

·       anincrease of $23 million in incremental realized value of hedges of ourgeneration output primarily due to an increase in the amount by which thesettlement value of power contracts exceeded market prices; and

·       anincrease of $19 million in contracted and capacity primarily due to the PJMRPM, which became effective in June 2007. This amount was net of $7million to reflect our lower availability that was to a significant extentrelated to the extension in June 2007 of a planned spring outage at unit 1of our Morgantown generation facility.

The decrease of$678 million in unrealized gross margin was primarily due to the following:

·       unrealizedlosses of $353 million in 2007 due to $143 million related to a decrease invalue associated with forwardpower and fuel contracts for future periods as a result of increases in forwardpower prices in 2007 and $210 million due to the settlement of power and fuelcontracts during the period for which net unrealized gains had been recorded inprior periods; and

·       unrealized gains of $325million in 2006 due to $251 million related to an increase in value associatedwith forward power and fuel contracts for future periods due to decreases inpower prices and $74 million due to the settlement of contracts during theperiod for which unrealized losses had been recorded in prior periods.

52

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***Northeast***

OurNortheast segment is comprised of our assets located in New York and NewEngland with total generation capacity of 2,698 MW. The following tablessummarize the operations of our Northeast segment (in millions):

| ** **                                                                             | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                                                                             | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                                 |       | $                                             | 143        |          | $          | 167 |   |   | $ | (24 | ) |   |
| Unrealized gross  margin                                                               |       | (32                                           | )          | 33            |       |   | (65 | ) |   |
| Total gross  margin                                                                    |       | 111                                           |       | 200           |       |   | (89 | ) |   |
| Operating  expenses:                                                                   |       |                                          |       |          |       |   |   |   |   |
| Operations and maintenance                                                             |       | 92                                            |       | 112           |       |   | (20 | ) |   |
| Depreciation and amortization                                                          |       | 13                                            |       | 11            |       |   | 2 |   |   |
| Impairment losses                                                                      |       | 175                                           |       | —        |       |   | 175 |   |   |
| Gain on sales of assets, net                                                           |       | (25                                           | )          | (43           | )          |   | 18 |   |   |
| Total operating  expenses                                                              |       | 255                                           |       | 80            |       |   | 175 |   |   |
| Operating income  (loss)                                                               |       | (144                                          | )          | 120           |       |   | (264 | ) |   |
| Total other  expense (income), net                                                     |       | (6                                            | )          | 1             |       |   | (7 | ) |   |
| Income (loss) from  continuing operations before reorganization items and income taxes |       | $                                             | (138       | )             | $          | 119 |   |   | $ | (257 | ) |   |

 

***Gross Margin***

| ** **                            | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       | $                                             | 55         |          | $          | 60 |   |   | $ | (5 | ) |   |
| Contracted and  capacity              |       | 45                                            |       | 16            |       |   | 29 |   |   |
| Incremental  realized value of hedges |       | 43                                            |       | 91            |       |   | (48 | ) |   |
| Total realized  gross margin          |       | 143                                           |       | 167           |       |   | (24 | ) |   |
| Unrealized gross  margin              |       | (32                                           | )          | 33            |       |   | (65 | ) |   |
| Total gross margin                    |       | $                                             | 111        |          | $          | 200 |   |   | $ | (89 | ) |   |

 

The decrease of $24million in realized gross margin was primarily due to the following:

·       adecrease of $48 million in incremental realized value of hedges of ourgeneration output, primarily due to a decrease in the amount by which thesettlement value of power contracts exceeded market prices; partially offset by

·       anincrease of $29 million in contracted and capacity primarily due to theimplementation of FCM. See “Item 1. Regulatory Environment” in our AnnualReport on Form 10-K for the year ended December 31, 2006, forfurther information on the implementation of FCM.

The decrease of $65million in unrealized gross margin was primarily due to the following:

·       unrealizedlosses of $32 million in 2007 due to $51 million related to the settlement ofpower and fuel contracts during the period for which unrealized gains had beenrecorded in prior periods, partially offset by $19 million due to an increasein value of forward power and fuel contracts for future periods primarily as aresult of decreases in forward power prices in the second quarter of 2007; and

53

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·       unrealized gains of $33million in 2006 due to $28 million related to an increase in value associatedwith forward power contracts for future periods due to decreases in powerprices and $5 million due to the settlement of contracts during the period forwhich unrealized losses had been recorded in prior periods.

*Operating Expenses*

Operating expensesincreased $175 million primarily as a result of an impairment loss of $175million on our Lovett facility in the second quarter of 2007. See Note D to theunaudited condensed consolidated financial statements for additionalinformation related to this impairment. Gains on sales of assets decreased $18million due to lower sales of emissions allowances to affiliates. These gainsare eliminated in the consolidated statement of operations. These increases inoperating expenses were partially offset by a $20 million decrease inoperations and maintenance expense, of which $17 million was due to a decreasein property taxes.

***California***

OurCalifornia segment consists of the Pittsburg, Contra Costa and Potrero facilitieswith total generation capacity of 2,347 MW. The following tables summarize ourCalifornia segment (in millions):

| ** **                                                                           | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                                                                           | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                               |       |                                          | $          | 63            |       |   |   | $ | 54 |   |   |   | $ | 9 |   |   |
| Unrealized gross  margin                                                             |       |                                          | —     |          |       |   | 1 |   |   |   | (1 | ) |   |
| Total gross  margin                                                                  |       |                                          | 63         |          |       |   | 55 |   |   |   | 8 |   |   |
| Operating  expenses:                                                                 |       |                                          |       |          |       |   |   |   |   |   |   |   |   |
| Operations and maintenance                                                           |       |                                          | 36         |          |       |   | 30 |   |   |   | 6 |   |   |
| Depreciation and amortization                                                        |       |                                          | 7          |          |       |   | 7 |   |   |   | — |   |   |
| Gain on sales of assets. net                                                         |       |                                          | (2         | )             |       |   | — |   |   |   | (2 | ) |   |
| Total operating expenses                                                             |       |                                          | 41         |          |       |   | 37 |   |   |   | 4 |   |   |
| Operating income                                                                     |       |                                          | 22         |          |       |   | 18 |   |   |   | 4 |   |   |
| Total other  income, net                                                             |       |                                          | (5         | )             |       |   | (1 | ) |   |   | (4 | ) |   |
| Income from continuing  operations before reorganization items and income taxes |       |                                          | $          | 27            |       |   |   | $ | 19 |   |   |   | $ | 8 |   |   |

 

***Gross Margin***

| ** **                            | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                            | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                                |       |                                          | $          | 2             |       |   |   | $ | 3 |   |   |   | $ | (1 | ) |   |
| Contracted and  capacity              |       |                                          | 61         |          |       |   | 52 |   |   |   | 9 |   |   |
| Incremental  realized value of hedges |       |                                          | —     |          |       |   | (1 | ) |   |   | 1 |   |   |
| Total realized  gross margin          |       |                                          | 63         |          |       |   | 54 |   |   |   | 9 |   |   |
| Unrealized gross  margin              |       |                                          | —     |          |       |   | 1 |   |   |   | (1 | ) |   |
| Total gross margin                    |       |                                          | $          | 63            |       |   |   | $ | 55 |   |   |   | $ | 8 |   |   |

 

The $9 million increase inour contracted and capacity gross margin was primarily due to the commencementof a new tolling agreement in the first quarter of 2007 at our Contra Costa andPittsburg facilities. See “Item 1. Business Segments” in our Annual Report onForm 10-K for the year ended December 31, 2006, for additionalinformation regarding the tolling agreement.

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***Other Operations***

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

| ** **                                                                    | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                                                                    | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Realized gross  margin                                                        |       | $                                             | 126        |          |       | $ | 49 |   |   |   | $ | 77 |   |   |
| Unrealized gross  margin                                                      |       | (104                                          | )          |          | 18         |   |   |   | (122 | ) |   |
| Total gross  margin                                                           |       | 22                                            |       |          | 67         |   |   |   | (45 | ) |   |
| Operating  expenses:                                                          |       |                                          |       |          |       |   |   |   |   |   |   |
| Operations and maintenance                                                    |       | 10                                            |       |          | 11         |   |   |   | (1 | ) |   |
| Depreciation and amortization                                                 |       | —                                        |       |          | 5          |   |   |   | (5 | ) |   |
| Total operating  expenses                                                     |       | 10                                            |       |          | 16         |   |   |   | (6 | ) |   |
| Operating income                                                              |       | 12                                            |       |          | 51         |   |   |   | (39 | ) |   |
| Total other expense,  net                                                     |       | 39                                            |       |          | 53         |   |   |   | (14 | ) |   |
| Loss from continuing  operations before reorganization items and income taxes |       | $                                             | (27        | )             |       | $ | (2 | ) |   |   | $ | (25 | ) |   |

 

*Gross Margin*

| ** **                   | ** ** | **Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|---------------|------------|
| ** **                   | ** ** | **2007**                                      | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| Energy                       |       | $                                             | 126        |          |       | $ | 49 |   |   |   | $ | 77 |   |   |
| Total realized  gross margin |       | 126                                           |       |          | 49         |   |   |   | 77 |   |   |
| Unrealized gross  margin     |       | (104                                          | )          |          | 18         |   |   |   | (122 | ) |   |
| Total gross margin           |       | $                                             | 22         |          |       | $ | 67 |   |   |   | $ | (45 | ) |   |

 

The increase of $77 million in energy related to ourproprietary trading and fuel oil management activities as favorable positionsentered into prior to 2007 were settled in the current period.

The decrease of$122 million in unrealized gross margin was primarily due to the following:

·       unrealizedlosses on proprietary trading and fuel oil management activities of $104million in 2007, which included $82 million related to the settlement of powerand fuel contracts during the period for which unrealized gains had beenrecorded in prior periods and decreases in forward value of power and fuelcontracts for future periods of $22 million; and

·       unrealized gains onproprietary trading and fuel oil management activities of $18 million in 2006,which included an increase in the forward value of power and fuel contracts forfuture periods of $28 million, partially offset by unrealized losses of $10million due to the settlement of power and fuel contracts during the period forwhich unrealized gains had been recorded in prior periods.

*Other expense, net*

Our other expense, netdecreased by $14 million for the six months ended June 30, 2007, comparedto the same period in 2006 primarily due to lower interest expense on our debtof $5 million and an increase of $10 million in interest income, which wasprincipally the result of an increase in cash due to the receipt of proceedsfrom the sale of our Zeeland and Bosque plants.

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*DiscontinuedOperations*

For the six months endedJune 30, 2007 and 2006, loss from discontinued operations was $2 millionand $1 million, respectively, and included Mirant Zeeland, Mirant Texas andMirant NY-Gen. See Note C to our unaudited condensed consolidated financialstatements for additional information related to dispositions and discontinuedoperations.

**Financial Condition**

**Liquidity andCapital Resources**

***Overview***

Our liquidity and capitalrequirements are primarily a function of our debt maturities and debt servicerequirements, capital expenditures, collateral requirements, fuel procurementand power sale contract obligations, legal settlements and working capitalneeds. Net cash flow provided by operating activities for the six months endedJune 30, 2007, totaled $471 million compared to $601 million for the sameperiod in 2006.

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

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

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

On April 18, 2007, a new DIP Agreement wasestablished between Mirant Lovett and Mirant Americas to make secureddebtor-in-possession financing in an amount of $20 million. The financing has astated maturity of 180 days and bears interest at a rate of LIBOR plus 4.25%.At June 30, 2007, there were no amounts outstanding under this loan. Inaddition, Mirant Lovett is required to post cash collateral with Mirant EnergyTrading to collateralize Mirant Energy Trading for collateral that MirantEnergy Trading has posted on Mirant Lovett’s behalf. At June 30, 2007,Mirant Lovett had posted approximately $6 million with Mirant Energy Trading inaccordance with the June 15, 2007 collateral allocation performed in goodfaith by Mirant Energy Trading.

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***Cash Flows***

*ContinuingOperations*

*Operating Activities.**  *Ourcash provided by operating activities is affected by seasonality, changes inenergy prices and fluctuations in our working capital requirements. Cashprovided by operating activities from continuing operations decreased$108 million for the six months ended June 30, 2007, compared to thesame period in 2006, primarily due to the following:

·       anincrease in realized gross margin of $172 million in 2007, compared to thesame period in 2006. See *Results of Operations*foradditional discussion of our performance in 2007 compared to the same period in2006;

·       anincrease of $79 million primarily related to changes in our fuel oil andemissions inventory. Our inventory levels increased significantly in 2006 as aresult of purchases of emissions allowances, higher fuel oil prices and lowergeneration volumes in that period;

·       anincrease due to the receipt in 2007 of a net refund of $48 million relatedto the New York property tax settlement which is included in customer accountsreceivable, net in the unaudited condensed consolidated statements of cashflows;

·       adecrease of $356 million due to changes in posted collateral levels whichare included in funds on deposit in the unaudited condensed consolidated statementsof cash flows. For the six months ended June 30, 2007, we posted anadditional $36 million of cash collateral to support energy marketingactivities. The change in collateral for the six months ended June 30,2006, provided a source of cash of $320 million due to a decrease in cashcollateral to support energy marketing activities of $464 million and areduction of $56 million in cash collateral posted in connection with theMirant Mid-Atlantic lease upon posting $75 million of letters of credit.This was partially offset by a use of cash due to the deposit of$200 million into a cash collateral account to support the issuance ofletters of credit; and

·       adecrease of $80 million primarily due to the return in 2007 ofdeposits previously posted by our counterparties which is included in accountspayable and accrued liabilities in the unaudited condensed consolidatedstatements of cash flows.

*Investing Activities.*   Net cash usedin investing activities from continuing operations was $147 million for the sixmonths ended June 30, 2007, compared to net cash provided by investingactivities of $163 million in 2006. This difference was primarily due tothe following:

·       anincrease of $116 million in capital expenditures primarily due to anincrease in our environmental capital expenditures for our Mid-Atlanticgeneration facilities;

·       adecrease of $207 million in repayments (issuance) of notes receivable from affiliate,net;

·       anincrease of $10 million in proceeds from the sales of assets and investmentsprimarily as a result of proceeds of $22 million received in 2007 for the saleof Bowline assets compared to $12 million in proceeds received in 2006 for thesale of the Mirant Service Center; and

·       anincrease of $3 million in proceeds from property insurance in 2007.

*Financing Activities.**  *Net cash usedin financing activities from continuing operations was $490 million for the sixmonths ended June 30, 2007, compared to $683 million for the same periodin 2006. This difference of $193 million was primarily due to the following:

·       adecrease in proceeds from the issuance of long-term debt of$2.015 billion. Proceeds from the issuance of long-term debt in 2006 included$850 million from the Mirant North America debt 

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offering that was releasedfrom escrow on January 3, 2006, $700 million from the Mirant NorthAmerica senior secured loan and $465 million drawn on the Mirant NorthAmerica senior secured revolving credit facility;

·       adecrease in the repayments of long-term debt of approximately $2.107 billion.In 2007, we paid $135 million on the Mirant North America senior secured termloan. In 2006 we repaid $465 million on the Mirant North America seniorsecured revolving credit facility and $1.773 billion to settle obligationsof Mirant Americas Generation under the Plan;

·       apayment of $250 million in 2006 to Mirant Americas under the Plan;

·       adistribution of $346 million in 2007, to our member as compared to $44million for the same period in 2006;

·       adecrease of $15 million due to the settlement of members’ obligations relatedto the New York Entities’ emergence under the Plan;

·       anincrease of $117 million due to the issuance (repayment) of affiliate debt. In2007, we had issuance of $7 million and in 2006 we had repayments of $110million; and

·       a decrease in debt issuancecosts of approximately $51 million. In 2006, we paid $51 million in debtissuance costs associated with Mirant North America’s debt offering, seniorsecured loan and secured revolving credit facility.

*DiscontinuedOperations*

*OperatingActivities.  *Cash used in operating activitiesfrom discontinued operations was $14 million for the six months endedJune 30, 2007, compared to cash provided by operating activities of $8million for the same period in 2006. This difference was due primarily to adecrease of $15 million in realized gross margin as a result of the expirationof a tolling agreement at the end of 2006, and a reduction in operations in2007 from the sale of assets.

*Investing Activities.*   Net cashprovided by investing activities from discontinued operations was$509 million for the six months ended June 30, 2007, compared to netcash used in investing activities of $3 million in 2006. The increase incash was primarily due to proceeds from the sale of the Zeeland and Bosqueplants in the second quarter of 2007.

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

AtJune 30, 2007, we had total cash, cash equivalents, and credit facilityavailability of approximately $1.8 billion. The table below sets forth totalcash, cash equivalents and availability of credit facilities of Mirant NorthAmerica and its subsidiaries (in millions):

| ** **                                                                                                         | ** ** | **At  June 30,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Cash and Cash Equivalents:                                                                                         |       |                        |       |                            |       |   |   |   |   |
| Mirant North America                                                                                               |       |                        | $          | 903                             |       |   |   | $ | 675 |   |   |
| Mirant Mid-Atlantic                                                                                                |       |                        | 193        |                            |       |   | 75 |   |   |
| Total cash and cash  equivalents                                                                                   |       |                        | 1,096      |                            |       |   | 750 |   |   |
| Less: Cash restricted  due to bankruptcy of New York entities and reserved for working capital and  other purposes |       |                        | 11         |                            |       |   | 99 |   |   |
| Total available cash and  cash equivalents                                                                         |       |                        | 1,085      |                            |       |   | 651 |   |   |
| Available under credit  facilities                                                                                 |       |                        | 737        |                            |       |   | 796 |   |   |
| Total cash, cash  equivalents and credit facilities availability                                                   |       |                        | $          | 1,822                           |       |   |   | $ | 1,447 |   |   |
| Cash and cash equivalents of discontinued operations                                                               |       |                        | $          | —                          |       |   |   | $ | 3 |   |   |

 

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Our ability and theability of our subsidiary Mirant Mid-Atlantic to pay dividends is restrictedunder the terms of our debt agreements and leverage lease documentation,respectively. At June 30, 2007, we had distributed to Mirant AmericasGeneration all available cash that was permitted to be distributed under theterms of our debt agreements, leaving us and our subsidiaries withapproximately $1.096 billion. Approximately $193 million of such amount washeld by Mirant Mid-Atlantic which, as of June 30, 2007, met the ratiotests under the leveraged lease documents for distribution to us. After takinginto account our financial results for the six months ended June 30, 2007,we expect to be able to distribute approximately $111 million inAugust 2007.

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

In order to sell power and purchase fuel in theforward markets and perform other energy trading and marketing activities, weare often required to provide trade credit support to our counterparties ormake deposits with brokers. In addition, we are often required to provide cashcollateral or letters of credit for access to the transmission grid, toparticipate in power pools, to fund debt service reserves and for otheroperating activities. Trade credit support includes cash collateral, letters ofcredit and financial guarantees. In the event that we default, the counterpartycan draw on a letter of credit or apply cash collateral held to satisfy theexisting amounts outstanding under an open contract. At June 30, 2007, ouroutstanding issued letters of credit totaled $263 million.

Thefollowing table summarizes cash collateral posted with counterparties andbrokers and letters of credit issued as of June 30, 2007 andDecember 31, 2006 (in millions):

| ** **                                                | ** ** | **At  June 30,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Cash collateral  posted—energy trading and marketing |       |                        | $          | 63                              |       |   |   | $ | 27 |   |   |
| Cash collateral  posted—other operating activities   |       |                        | 11         |                            |       |   | 11 |   |   |
| Letters of  credit—energy trading and marketing      |       |                        | 117        |                            |       |   | 100 |   |   |
| Letters of  credit—debt service and rent reserves    |       |                        | 98         |                            |       |   | 84 |   |   |
| Letters of  credit—other operating activities        |       |                        | 48         |                            |       |   | 15 |   |   |
|                                                      |       |                        | 337        |                            |       |   | 237 |   |   |
| Discontinued operations:                                  |       |                        |       |                            |       |   |   |   |   |
| Assets held for  sale—letters of credit              |       |                        | —     |                            |       |   | 5 |   |   |
| Total                                                     |       |                        | $          | 337                             |       |   |   | $ | 242 |   |   |

 

**Critical AccountingEstimates**

The sections below containmaterial updates to our summary of critical accounting estimates included underItem 7, Management’s Discussion and Analysis of Results of Operations andFinancial Condition, in our Annual Report on Form 10-K for the yearended December 31, 2006.

***Long-Lived Asset Impairments***

*Natureof Estimates Required.**  *We evaluate our long-lived assets,including goodwill and intangible assets for impairment in accordance withapplicable accounting guidance. The amount of an impairment charge iscalculated as the excess of the asset’s carrying value over its fair value,which generally represents the discounted expected future cash flowsattributable to the asset or in the case of assets we expect to sell, at fairvalue less costs to sell.

SFAS No. 144 requires management to recognize animpairment charge if the sum of the undiscounted expected future cash flowsfrom a long-lived asset or definite-lived intangible is less than the carryingvalue of that asset. We evaluate our long-lived assets (property, plant andequipment) and 

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definite-lived intangiblesfor impairment whenever indicators of impairment exist or when we commit tosell the asset. These evaluations of long-lived assets and definite-livedintangibles may result from significant decreases in the market price of anasset, a significant adverse change in the extent or manner in which an assetis being used or in its physical condition, a significant adverse change inlegal factors or in the business climate that could affect the value of anasset, as well as other economic or operations analyses. If the carrying amountis not recoverable, an impairment charge is recorded.

*Key Assumptions andApproach Used.**  *The fair value of an asset is the amount at which theasset could be bought or sold in a current transaction between willing parties,that is, other than in a forced or liquidation sale. Quoted market prices inactive markets are the best evidence of fair value and are used as the basisfor the measurement, when available. In the absence of quoted prices foridentical or similar assets, fair value is estimated using various internal andexternal valuation methods. These methods include discounted cash flow analysesand reviewing available information on comparable transactions. Thedetermination of fair value requires management to apply judgment in estimatingfuture energy prices, environmental and maintenance expenditures and other cashflows. Our estimates of the fair value of the assets include significantassumptions about the timing of future cash flows, remaining useful lives andselecting a discount rate that reflects the risk inherent in future cash flows.

*ContinuingOperations*

In our impairment analysis of the Lovett generationfacility in prior periods, we had assumed multiple scenarios, including theoperation of all units of the Lovett facility beyond April 2008. Theamended 2003 Consent Decree and the Tax Assessments Agreement prompted us totest for recoverability of the Lovett facility under SFAS No. 144 in thesecond quarter of 2007. See Note L—Litigation and Other Contingencies foradditional information on the 2003 Consent Decree.

During the current period,our estimate of cash flows related to our impairment analysis of our Lovettgeneration facility involved considering scenarios for the future expectedoperation of the Lovett facility. The most likely scenario considered was theshut down of unit 5 by April 30, 2008, according to the amended 2003Consent Decree. We also considered a scenario that assumes operations,utilizing coal as the primary fuel source, through 2012 to allow the Lovettfacility to continue to contribute to the reliability of the electric system ofthe State of New York. Property taxes under both scenarios were at the assessedlevels specified in the Tax Assessments Agreement for those periods. We alsoassumed in both scenarios an estimated cost for demolition of the facility toreduce future property taxes, a value for the land on which the facilityoperates and the sale of previously granted emission allowances. For purposesof measuring an impairment loss, a long-lived asset or assets must be groupedat the lowest level of independent identifiable cash flows. All of the units atMirant Lovett are viewed as one group. As required under SFAS No. 144, theassessment did not include the value of new generation capacity that couldpotentially be constructed at the current Lovett facility site. As a result ofthe analysis, we recorded an impairment of long-lived assets of $175 million inthe unaudited condensed consolidated statements of operations to reduce thecarrying value of the Lovett facility to its estimated fair value. See Note D—*Impairments on Assets Held and Used* in the notes to theunaudited condensed consolidated financial statements where further discussed.

*DiscontinuedOperations*

On August 9, 2006, Mirant announced the plannedsale of certain of its intermediate and peaking natural gas-fired plants whichincluded our Zeeland and Bosque plants. The planned sales resulted in thereclassification of the long-lived assets related to these plants as held forsale.

On January 15, 2007, we entered into a definitivepurchase and sale agreement with Broadway Generating Company, LLC, (formerly LSPower Acquisition Co. I) a member of the LS Power Group., for 

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the sale of our Zeelandand Bosque natural gas-fired plants and ancillary equipment for a purchaseprice of $512 million, which includes estimated working capital at the closing.The purchase and sale agreement assigned a value to the Mirant North Americaplants as a whole, as well as the Mirant Americas plants as a whole. Theupdated fair values, along with changes to the working capital calculation inthe draft purchase and sale agreement provided to the bidders, resulted in anet impairment loss of $8 million in 2006. We recorded an additional impairmentof $1 million in the first quarter of 2007. The sale was completed onMay 1, 2007. The net proceeds to the Company from the sale, aftertransaction costs, were $524 million.

On January 31, 2007,Mirant New York entered into an agreement with Alliance Energy Renewables, LLCfor the sale of Mirant NY-Gen, which owns the Hillburn and Shoemaker gasturbine facilities and the Swinging Bridge, Rio and Mongaup hydroelectricgenerating facilities. The sale closed on May 7, 2007, and the Companyrecognized a gain of $8 million.

*Effect if DifferentAssumptions Used*

The estimates andassumptions used to determine whether an impairment exists are subject to ahigh degree of uncertainty. For our continuing operations, the estimated fairvalue of the Lovett facility would change if different estimates andassumptions are used in our applied valuation techniques, including estimatedcash flows, discount rates and remaining useful lives. The cash flow estimatesinclude uncertainty around the future price of fuel and electricity, the costof demolishing the Lovett facility and the salvage value of the land. If actualresults are not consistent with the assumptions used in estimating future cashflows and asset fair values, we may be exposed to additional losses that couldbe material to our results of operations. See Note D in the notes to theunaudited condensed consolidated financial statements for additionalinformation on the Lovett impairment recorded during the second quarter of 2007.

***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 taxable income during futureperiods for which temporary differences are expected to be deductible. Inmaking 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.

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Several significant changes to our tax postureoccurred as a result of the Plan. Implementation of the Plan included theconversion of certain of our regarded corporate entities to limited liabilitycompanies coupled with the liquidation and/or merger of these regardedcorporate entities into other disregarded corporate entities for income taxpurposes. As a result, certain subsidiaries previously treated as regardedcorporate entities for income tax purposes have either been liquidated orconverted into disregarded entities for income tax purposes pursuant to thePlan. Additionally, certain partnerships owned by the regarded corporateentities were also liquidated, and now form part of these disregarded entitiesfor income tax purposes. The result of the above Plan effects was to eliminateour recording of tax expense and benefit prospectively with respect to theliquidated regarded corporate entities. Furthermore, with respect to thoseliquidated regarded corporate entities, all previously existing deferred taxassets and liabilities were eliminated as of December 31, 2005. InMay 2007, Mirant New York, Inc. converted to a limited liabilitycompany, resulting in the elimination of any existing deferred tax assets andliabilities related to Mirant New York. Certain of our other subsidiariescontinue to exist as regarded corporate entities for income tax purposes,including Hudson Valley Gas, Mirant Kendall and Mirant SpecialProcurement, Inc.

Additionally, we have not recognized any tax benefitsrelating to tax uncertainties arising in the ordinary course of business thatare less than or subject to the measurement threshold of themore-likely-than-not standard prescribed under FIN 48. These unrecognized taxbenefits may be either a tax liability or an adjustment to the Company’s NOLsbased on the specific facts of each tax uncertainty. We periodically assess ourtax uncertainties based on the latest information available. The amount of theunrecognized tax benefit requires management to make significant assumptionsabout the expected outcomes of certain tax positions included in the Company’sfiled or yet to be filed tax returns. See Note I to our unauditedcondensed consolidated financial statements for information about our adoptionof FIN 48.

When it emerged from bankruptcy, Mirant terminated thetax sharing agreement with its direct and indirect wholly owned regardedcorporate entities. As a result, Mirant’s direct and indirect wholly ownedregarded corporate entities are no longer responsible for reimbursing Mirantfor their intercompany tax obligations attributable to their operations.Accordingly, our income tax receivables and payables with Mirant or MirantAmericas were resolved pursuant to a global settlement under the Plan wherebyintercompany receivables and payables received no distribution. Income taxpayables and receivables related to Mirant New York which emerged frombankruptcy on April 16, 2007, were also resolved pursuant to theSupplemental Plan.

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

The amount and ultimate utilization of our remainingNOLs and pro forma NOLs will depend on several factors, including our futurefinancial performance and certain tax elections. Specifically, our utilizationof NOLs and pro forma NOLs arising prior to our emergence from bankruptcy willbe affected by whether Mirant and us are subject to the defaultNOL treatment under Internal Revenue Code § 382(l)(5) or thealternative tax treatment provided in § 382(l)(6).

Previously, Mirant had determined that it was morelikely than not that it would elect treatment under §382(l)(5). As a result offurther tax planning, Mirant has determined that it is now more likely than notthat it will elect treatment under §382(l)(6) and, accordingly, expects tomake the §382(l)(6) election in its 2006 annual tax return to be filed nolater than September 17, 2007. Absent making this election, Mirant’s andour pre-emergence NOLs and pro forma NOLs would be subject to the defaulttreatment under §382(l)(5). As a result, our deferred income taxes and proforma deferred income taxes, including our pre-emergence NOLs and pro formaNOLs, are presented in accordance with the §382(l)(6) treatment. This 

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change had no net effecton the consolidated balance sheets or consolidated statements of operations.Similarly, this change had no net effect on our pro forma deferred taxes or proforma income tax because the increase in the pro forma deferred tax asset NOLswas equally offset by an increase in the related pro forma deferred tax assetvaluation allowance.

Under §382(l)(6), we will be subject to an annuallimitation on the use of the pre-emergence NOLs and pro forma NOLs, disregardingthe effect of net unrealized built-in gains. The pro forma NOLs under thiselection will not be subject to any previous adjustments for interest accruedon debt settled with stock as required under §382(l)(5). We also anticipatethat we will elect to reduce the income tax basis of depreciable assets for anycancellation of debt income that arises from making the§382(l)(6) election.

Under §382(l)(5) treatment, we would haveunlimited use of our pre-emergence NOLs and pro forma NOLs, as long as there isnot a change of ownership (broadly defined as 50 percent change of “fivepercent” shareholders) within two years of our emergence from bankruptcy. The§ 382(l)(5) default treatment would require us to reduce ourpre-emergence pro forma NOLs by $148 million due to interest accrued on debtsettled with Mirant stock for the three years prior to emergence. Mirant hasrequested guidance from the Internal Revenue Service concerning certain aspectsof the default tax treatment under §382(l)(5), but have not yet received suchguidance.

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

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

In connection with our powergenerating business, we are exposed to energy commodity price riskassociated with the acquisition of fuel needed to generate electricity, as wellas the electricity produced and sold. A portion of our fuel requirements ispurchased in the spot market and a portion of the electricity we produce alsois sold in the spot market. In addition, the open positions in our proprietarytrading and fuel management portfolios expose us to risks associated with thechanges in energy commodity prices. As a result, our financial performancevaries depending on changes in the prices of energy and energy-relatedcommodities. See “Critical Accounting Policies and Estimates” in our AnnualReport on Form 10-K for the year ended December 31, 2006, for adiscussion of the accounting treatment for our energy trading and marketingactivities and see Note E to our unaudited condensed consolidated financialstatements for detail of our price risk management assets and liabilities.

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

**Item 4.**                        Controlsand Procedures

**InherentLimitations in Control Systems**

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. 

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Additionally,controls can be circumvented by the individual acts of some persons, by collusionof two or more people, or by management override of the control. The design ofany system of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Over time, controls may become inadequate because of changes in conditions, orthe degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected. As a result,our management, including the Chief Executive Officer and Chief FinancialOfficer, does not expect that our disclosure controls and procedures, or ourinternal control over financial reporting, will prevent all error and allfraud.

**Effectiveness ofDisclosure Controls and Procedures**

As required by Exchange Act Rule 13a-15(b),our management, including our Chief Executive Officer and our Chief FinancialOfficer, conducted an assessment of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined byRules 13a-15(e) and 15d-15(e) under the ExchangeAct), as of June 30, 2007. Based upon this assessment, our managementconcluded that, as of June 30, 2007, the design and operation of thesedisclosure controls and procedures were effective.

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

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**PART II**

**Item 1.**     *LegalProceedings**—*SeeNote L—*Litigation and Other Contingencies* tothe accompanying unaudited condensed consolidated financial statements fordiscussion of the material legal proceedings to which we are a party.

**Item1A.**                *Risk Factors*

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

**Item 6.**                        Exhibits

**Exhibits.**
| Exhibit  Number | ** ** | ** **                                                                                                                                                                                                                                                    | ** ** | **Exhibit Name** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 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*           |       | Engineering,  Procurement and Construction Agreement dated as of July 30, 2007, by and  between Mirant Mid-Atlantic, LLC, Mirant Chalk Point, LLC and Stone and  Webster, Inc. (designated on form 8-K filed August 3, 2007,  as exhibit 10.1) |
| 31.1            |       | Certification of  Chief Executive Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).                                                                          |
| 31.2            |       | Certification of  Chief Financial Officer Pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).                                                                          |
| 32.1            |       | Certification of  the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)).                                                                |
| 32.2            |       | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(b)).                                                                |

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*                    Asteriskindicates exhibits incorporated by reference.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on this 13th day of August, 2007.
|          | MIRANT NORTH AMERICA,  LLC |
|----------|----------------------------|
|     | By:                   | /s/ THOMAS E. LEGRO |
|     |                       | Thomas E. Legro |
| * * | * *                   | *Senior Vice President and Controller  (Principal Accounting Officer)* |

 

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