SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
MIRANT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 58-2056305
--------------------------------------------------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1155 Perimeter Center West, Suite 100, Atlanta, Georgia 30338
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(678) 579-5000
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
__________
The number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, at October 31, 2001, was 340,615,252.
Mirant Corporation and Subsidiaries
INDEX
For the Quarterly Period Ended September 30, 2001
Page
Number
DEFINITIONS 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 4
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Condensed Consolidated Statements of Income 5
Condensed Consolidated Balance Sheets 6
Condensed Consolidated Statements of Stockholders' Equity 8
Condensed Consolidated Statements of Cash Flows 9
Notes to the Condensed Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes in Securities and Use of Proceeds Inapplicable
Item 3. Defaults Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders Inapplicable
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 48
Signatures
i
DEFINITIONS
TERM MEANING
-------------------------------- --------------------------------------------
Bewag Bewag AG
BNDES Banco Nacional de Desenvolvimento
Economico e Social
BP Amoco BP Amoco, plc
CAISO California Independent System Operator
CEMIG Companhia Energetica de Minas Gerais
Clean Air Act Clean Air Act Amendments of 1990
the Company Mirant Corporation and its subsidiaries
CPUC California Public Utilities Commission
DWR California Department of Water Resources
EDELNOR Empresa Electrica del Norte Grande S.A.
EPA U. S. Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Hyder Hyder Limited
LIBOR London Interbank Offering Rate
Mirant Americas Energy Marketing Mirant Americas Energy Marketing, L. P.
Mirant Americas Energy Capital Mirant Americas Energy Capital, LP
Mirant Americas Generation Mirant Americas Generation, LLC
Mirant Asia-Pacific Mirant Asia-Pacific Ventures, Inc.
Mirant Mirant Corporation and its subsidiaries
Mirant California Mirant California, LLC
Mirant Delta Mirant Delta, LLC
Mirant Potrero Mirant Potrero, LLC
Mobile Energy Mobile Energy Services Company, L.L.C.
MW Megawatts
NYISO New York Independent System Operator
OCI Other comprehensive income
OTC Over-the-counter
Pacific Gas and Electric Pacific Gas and Electric Co.
PEPCO Potomac Electric Power Company
Perryville Perryville Energy Partners, LLC
PX California Power Exchange Corporation
RMR Reliability-Must-Run
SCE Southern California Edison
SEB Southern Electric Brasil Participacoes Ltda
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933
SE Finance SE Finance Capital Corporation
SFAS Statement of Financial Accounting Standards
SIPD Shandong International Power Development
Company Limited
Southern Southern Company
State Line State Line Energy, L.L.C.
SWALEC South Wales Electricity plc
Vastar Vastar Resources Inc.
WPD South Western Electricity plc trading as
Western Power Distribution
WPD Holdings WPD Holdings UK
WPDL WPD Limited
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The information presented in this quarterly report on Form 10-Q includes
forward-looking statements, in addition to historical information. These
statements involve known and unknown risks and relate to future events, our
future financial performance or projected business results. In some cases,
forward-looking statements may be identified by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "targets," "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-looking statement as a result of various
factors, which include:
o legislative and regulatory initiatives regarding deregulation, regulation
or restructuring of the electric utility industry;
o the extent and timing of the entry of additional competition in the markets
of our subsidiaries and affiliates;
o our pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;
o state, federal and other rate regulation in the United States and in
foreign countries in which our subsidiaries and affiliates operate;
o changes in or application of environmental and other laws and regulations
to which we and our subsidiaries and affiliates are subject;
o political, legal, market, (including, but not limited to, energy and
commodity supply and pricing developments) and economic conditions and
developments in the United States and in foreign countries in which our
subsidiaries and affiliates operate;
o financial market conditions and the results of our financing efforts;
o changes in commodity prices and interest rates;
o weather and other natural phenomena;
o performance of our projects undertaken and the success of our efforts to
invest in and develop new opportunities;
o developments in the California power markets, including, but not limited
to, governmental intervention, deterioration in the financial condition of
our counterparties, default on receivables due, adverse results in current
or future litigation and adverse changes in the tariffs of the California
Power Exchange Corporation or California Independent System Operator
Corporation;
o the direct or indirect effects on our business, including the availability
of insurance, resulting from the terrorist attacks on September 11, 2001 or
any other terrorist actions or responses to such actions;
o the direct and indirect effects on our business resulting from the
inability of significant energy market participants to perform on their
delivery or payment obligations to us, or to a third party; and
o other factors, discussed elsewhere herein and in other reports (including
our Form 10-K filed on March 21, 2001, as amended by Form 10-K/A, filed on
June 29, 2001, our Form 10-Q filed on May 10, 2001 and our Form 10-Q filed
on August 10, 2001, as amended by Form 10-Q/A filed on August 22, 2001)
described from time to time in our filings with the SEC.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We do not undertake a duty to update any
of the forward-looking statements.
2
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
----------- ----------- ------------- ----------
(in millions, except per (in millions, except per
share data) share data)
Operating Revenues: $8,185 $ 4,198 $24,295 $5,357
----------- ----------- ------------- ----------
Operating Expenses:
Cost of fuel, electricity and other products 7,303 3,569 21,811 3,965
Maintenance 32 36 103 104
Depreciation and amortization 100 89 284 244
Selling, general and administrative 209 209 748 323
Impairment loss (Note B) 3 5 96 19
Other 81 73 265 175
----------- ----------- ------------- ----------
Total operating expenses 7,728 3,981 23,307 4,830
----------- ----------- ------------- ----------
Operating Income 457 217 988 527
----------- ----------- ------------- ----------
Other Income (Expense), net:
Interest income 27 42 111 123
Interest expense (142) (162) (428) (461)
Equity in income of affiliates 38 69 164 132
Other, net 9 27 30 66
----------- ----------- ------------- ----------
Total other income (expense), net (68) (24) (123) (140)
----------- ----------- ------------- ----------
Income From Continuing Operations Before
Income Taxes and Minority Interest 389 193 865 387
Provision for Income Taxes 137 85 284 55
Minority Interest 18 17 48 60
----------- ----------- ------------- ----------
Income From Continuing Operations 234 91 533 272
----------- ----------- ------------- ----------
Income from Discontinued Operations,
net of tax benefit of $3 for 2001 and $6
and $15 for the three and nine months ended
September 30, 2000, respectively - 7 5 20
----------- ----------- ------------- ----------
Net Income $ 234 $ 98 $ 538 $ 292
=========== =========== ============= ==========
Earnings Per Share:
Basic:
From continuing operations $0.69 $0.33 $ 1.57 $1.00
From discontinued operations - 0.03 0.01 0.07
----------- ----------- ------------- -----------
Net income $0.69 $0.36 $ 1.58 $1.07
=========== =========== ============= ===========
Diluted (Pro forma for 2000):
From continuing operations $0.67 $0.27 $ 1.53 $0.79
From discontinued operations - 0.02 0.02 0.06
----------- ----------- ------------- ----------
Net income $0.67 $0.29 $ 1.55 $0.85
=========== =========== ============= ==========
The accompanying notes are an integral part of these condensed consolidated
statements.
3
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At September 30,
2001 At December 31,
ASSETS: (Unaudited) 2000
------------------ ---------------------
(in millions)
Current Assets:
Cash and cash equivalents $ 1,488 $ 1,280
Receivables:
Customer accounts, less provision for uncollectibles
of $152 and $72 for 2001 and 2000, respectively 1,508 3,399
Other, less provision for uncollectibles
of $31 and $22 for 2001 and 2000, respectively 573 629
Notes receivable 165 365
Assets from risk management activities (Note F) 1,200 2,678
Derivative hedging instruments (Notes A, C and F) 506 -
Deferred income taxes 373 275
Other 676 526
------------------ ---------------------
Total current assets 6,489 9,152
------------------ ---------------------
Property, Plant and Equipment:
Property, plant and equipment 4,691 3,648
Less accumulated provision for depreciation (421) (228)
------------------ ---------------------
4,270 3,420
Leasehold interest, net of accumulated amortization
of $277 and $216 for 2001 and 2000, respectively 1,788 1,843
Construction work in progress 1,229 418
------------------ ---------------------
Total property, plant and equipment, net 7,287 5,681
------------------ ---------------------
Noncurrent Assets:
Investments (Note G) 2,329 1,797
Notes and other receivables, less provision for uncollectibles
of $47 and $49 for 2001 and 2000, respectively 72 213
Notes receivable from related parties - 979
Assets from risk management activities (Note F) 1,130 1,230
Goodwill, net of accumulated amortization
of $254 and $184 for 2001 and 2000, respectively 3,269 3,292
Other intangible assets, net of accumulated amortization
of $57 and $34 for 2001 and 2000, respectively 674 738
Investment in leveraged leases - 596
Derivative hedging instruments (Notes A, C and F) 403 -
Deferred income taxes 466 334
Miscellaneous deferred charges 213 124
------------------ ---------------------
Total noncurrent assets 8,556 9,303
------------------ ---------------------
Total assets $ 22,332 $ 24,136
================== =====================
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At September 30,
2001 At December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: (Unaudited) 2000
------------------ ---------------------
(in millions)
Current Liabilities:
Short-term debt $ 2,115 $ 1,289
Current portion of long-term debt 984 201
Accounts payable 1,969 4,240
Taxes accrued 401 216
Liabilities from risk management activities (Note F) 1,228 2,899
Obligations under energy delivery commitments 571 790
Derivative hedging instruments (Notes A, C and F) 527 -
Other 151 140
------------------ ---------------------
Total current liabilities 7,946 9,775
------------------ ---------------------
Noncurrent Liabilities:
Subsidiary obligated mandatorily redeemable preferred securities - 950
Notes payable 4,469 5,206
Other long-term debt 1,227 390
Liabilities from risk management activities (Note F) 1,022 906
Deferred income taxes 106 53
Obligations under energy delivery commitments 1,517 1,514
Derivative hedging instruments (Notes A, C and F) 327 -
Miscellaneous deferred credits 326 307
------------------ ---------------------
Total noncurrent liabilities 8,994 9,326
------------------ ---------------------
Preferred Stock held by Southern Company - 242
Minority Interest in Subsidiary Companies 350 312
Company Obligated Mandatorily Redeemable Securities of a
Subsidiary Holding Solely Parent Company Debentures 345 345
Commitments and Contingent Matters (Notes I and K)
Stockholders' Equity:
Common stock, $.01 par value, per share 3 3
Authorized -- 2,000,000,000 shares
Issued -- September 30, 2001: 340,451,333 shares;
-- December 31, 2000: 338,701,000 shares
Treasury -- September 30, 2001: 100,000 shares
Additional paid-in capital 4,125 4,084
Retained earnings 699 166
Accumulated other comprehensive loss (128) (117)
Treasury stock, at cost (2) -
------------------ ---------------------
Total stockholders' equity 4,697 4,136
------------------ ---------------------
Total liabilities and stockholders' equity $ 22,332 $ 24,136
================== =====================
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
5
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury Comprehensive
Stock Capital Earnings Income (Loss) Stock Income (Loss)
------------- ------------- ------------- ---------------- ---------------- ----------------
(in millions)
Balance, December 31, 2000 $ 3 $ 4,084 $ 166 $ (117) $ -
Net income - - 538 - - $ 538
Other comprehensive loss - - - (11) - (11)
-----------------
Comprehensive income - - - - - $ 527
=================
Dividends and return of capital - - (5) - -
Issuance of common stock - 41 - - -
Common stock repurchased, at cost - - - - (2)
-----------------------------------------------------------------------
Balance, September 30, 2001 $ 3 $ 4,125 $ 699 $ (128) $ (2)
=======================================================================
The accompanying notes are an integral part of these condensed consolidated
statements.
6
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2001 2000
----------------- ----------------
(in millions)
Cash Flows from Operating Activities:
Net income $ 538 $ 292
----------------- ----------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in income of affiliates (162) (115)
Depreciation and amortization 306 254
Obligations under energy delivery commitments (217) -
Impairment loss (Note B) 96 19
Risk management activities, net 23 86
Deferred income taxes 92 137
Minority interest 48 60
Other, net 13 (87)
Changes in certain assets and liabilities, exluding effects from acquisitions:
Receivables, net 1,946 (534)
Other current assets (121) (39)
Accounts payable (2,406) 371
Taxes accrued 188 91
Other current liabilities 30 (67)
Other (71) -
----------------- ----------------
Total adjustments (235) 176
----------------- ----------------
Net cash provided by operating activities 303 468
----------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures (1,183) (365)
Cash paid for acquisitions (864) (292)
Proceeds received from the sale of investments 1 33
Issuance of notes receivable (116) (511)
Repayments on notes receivable 511 172
Disposal of Southern Company affiliates (77) -
Property insurance proceeds 13 -
Dividends received from equity investments 81 15
----------------- ----------------
Net cash used in investing activities (1,634) (948)
----------------- ----------------
Cash Flows from Financing Activities:
Payment of dividends to Southern Company - (503)
Proceeds from issuance of common stock 28 -
Proceeds from issuance of short-term debt, net 607 1,560
Proceeds from issuance of long-term debt 3,200 289
Repayment of long-term debt (2,341) (504)
Other 27 38
----------------- ----------------
Net cash provided by financing activities 1,521 880
----------------- ----------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 18 (13)
----------------- ----------------
Net Increase in Cash and Cash Equivalents 208 387
Cash and Cash Equivalents, beginning of period 1,280 323
----------------- ----------------
Cash and Cash Equivalents, end of period $ 1,488 $ 710
================= ================
Supplemental Cash Flow Disclosures:
Cash paid for interest, net of amounts capitalized $ 409 $ 559
Cash paid (refunds received) for income taxes $ 11 $ (109)
Business Acquisitions:
Fair value of assets acquired $ 1,530 $ 2,545
Less cash paid 864 292
----------------- ----------------
Liabilities assumed $ 666 $ 2,253
================= ================
The accompanying notes are an integral part of these condensed consolidated
statements.
7
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
Basis of Accounting
These unaudited condensed consolidated financial statements should be read
in conjunction with Mirant's audited 2000 consolidated financial statements and
the accompanying footnotes which are contained in the Company's annual report on
Form 10-K, as amended on Form 10-K/A, for the year ended December 31, 2000.
Management believes that the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring
items, necessary for a fair statement of results for the interim periods
presented. Certain prior-year amounts have been reclassified to conform with the
audited 2000 consolidated financial statement and current-year financial
statement presentation. Specifically generation and energy marketing revenue and
selling, general and administrative expenses for 2000 have been adjusted to
reflect the reclassification of provisions taken related to revenues from the
Company's California operations under RMR contracts. The results for interim
periods are not necessarily indicative of the results for the entire year.
Accounting Changes
Effective January 1, 2001, Mirant adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
statement requires that certain derivative instruments be recorded in the
balance sheet as either assets or liabilities measured at fair value, and that
changes in the fair value be recognized currently in earnings, unless specific
hedge accounting criteria are met. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized currently in earnings. If
the derivative is designated as a cash flow hedge, the changes in the fair value
of the derivative are recorded in OCI and the gains and losses related to these
derivatives are recognized in earnings in the same period as the settlement of
the underlying hedged transaction. If the derivative is designated as a net
investment hedge, the changes in the fair value of the derivative are also
recorded in OCI. Any ineffectiveness relating to these hedges is recognized
currently in earnings. The assets and liabilities related to derivative
instruments for which hedge accounting criteria is met are reflected as
derivative hedging instruments in the accompanying unaudited condensed
consolidated balance sheet at September 30, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes
that all business combinations will be accounted for using the purchase method.
Use of the pooling-of-interests method is no longer allowed. The provisions of
SFAS No. 141 are effective for all business combinations initiated after June
30, 2001 and all business combinations accounted for using the purchase method
for which the date of acquisition is July 1, 2001 or later. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and, generally, adopts a non-amortization and periodic
impairment-analysis approach to goodwill and indefinitely-lived intangibles.
SFAS No. 142 is effective for the Company's 2002 fiscal year or for business
combinations initiated after July 1, 2001. Mirant is currently assessing the
financial statement impact of both pronouncements but has not yet determined
their final impact.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of SFAS No. 143
are effective for the Company's 2003 fiscal year. Mirant is currently assessing
the financial statement impact of this pronouncement.
8
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and APB Opinion No. 30 "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 amends
accounting and reporting standards for the disposal of segments of a business
and addresses various issues related to the accounting for impairments or
disposals of long-lived assets. The provisions of SFAS No. 144 are effective for
the Company's 2002 fiscal year. Mirant is currently assessing the financial
statement impact of this pronouncement.
Concentration of Revenues and Credit Risk
Revenues earned from Enron Corporation through energy marketing and risk
management operations approximated 19% of Mirant's total revenues for both the
three and nine months ended September 30, 2001 as compared to 10% and 8% for the
same periods in 2000. Mirant's credit exposure to this counterparty is
significant less than revenues due to the offset of purchases and other netting
activities. As of September 30, 2001, only one counterparty, the California
Department of Water Resources, represented more than 10% of Mirant's total
credit exposure. The Company's total credit exposure is computed as total
accounts and notes receivable, adjusted for risk management and derivative
hedging activities, netting where appropriate.
B. Write-off of Assets
Mirant, through its subsidiaries, has an 82.3% ownership interest in
EDELNOR, a partially integrated electric utility engaged in the generation,
transmission and marketing of electric power in the interconnected power grid in
northern Chile. In December 1998, Mirant announced its intention to pursue the
sale of its interest in EDELNOR. Mirant is currently in discussions with
interested parties with respect to a sale transaction. Based on Mirant's
expectations as to the possible outcome of these negotiations, in the second
quarter of 2001 the Company wrote off its remaining investment in EDELNOR of $88
million ($57 million after tax).
C. Comprehensive Income
Comprehensive income includes unrealized gains and losses on certain
derivatives that qualify as cash flow hedges and hedges of net investments, as
well as the translation effects of foreign net investments. The following table
sets forth the comprehensive income for the three and nine months ended
September 30, 2001 and 2000 (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 234 $ 98 $ 538 $ 292
Other comprehensive income
(loss) (61) 4 (11) (15)
-------- --------- --------- ---------
Comprehensive income $ 173 $102 $ 527 $ 277
======== ========= ========= =========
9
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accumulated other comprehensive loss consisted of the following, net of tax (in
millions):
Balance, December 31, 2000 $ (117)
Other comprehensive income (loss) for the period:
Transitional adjustment from adoption of SFAS No. 133 (310)
Change in fair value of derivative instruments 289
Reclassification to earnings (14)
Cumulative translation adjustment 12
Share of affiliates' OCI 12
------
Other comprehensive loss (11)
------
Balance, September 30, 2001 $ (128)
======
Mirant estimates that $13 million of net derivative after-tax gains
included in OCI as of September 30, 2001 will be reclassified into earnings or
otherwise settled within the next twelve months as certain forecasted
transactions relating to commodity contracts, foreign denominated contracts and
interest payments are realized.
D. Earnings Per Share
Mirant calculates basic earnings per share by dividing the income available
to common stockholders by the weighted average number of common shares
outstanding. The following table shows the computation of basic earnings per
share for the three and nine months ended September 30, 2001 and 2000 (in
millions, except per share data) after giving effect to the stock split that
occurred prior to the offering of common stock during 2000. Diluted earnings per
share for 2001 gives effect to stock options, as well as the assumed conversion
of convertible trust preferred securities and related after-tax interest expense
addback to net income of approximately $4 million and $11 million for the three
and nine months ended September 30, 2001. Mirant had no potentially dilutive
securities outstanding during the first nine months of 2000.
Pro forma earnings per share for the three and nine months ended September
30, 2000 shown below gives effect to the Company's public offering of shares as
though it had occurred for all periods, as well as to the conversion of Mirant's
standard value creation plan ("VCP") units, the grant of new stock options and
issuance of convertible trust preferred securities as though potentially
dilutive for all periods. Net income has been increased by approximately $5
million and $6 million to take into account the standard stock appreciation
right ("SAR") conversion for the three and nine months ended September 30, 2000.
10
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Income from continuing operations $ 234 $ 91 $ 533 $ 272
Discontinued operations 0 7 5 20
------- -------- --------- --------
Net income $ 234 $ 98 $ 538 $ 292
======= ======== ========= ========
Basic
-----
Weighted average shares outstanding 340.4 272.0 339.7 272.0
Earnings per share from:
Continuing operations $ 0.69 $ 0.33 $ 1.57 $ 1.00
Discontinued operations 0.00 0.03 0.01 0.07
-------- ---------- -------- ----------
Net income $ 0.69 $ 0.36 $ 1.58 $ 1.07
======== ========= ======== ==========
Diluted
-------
Weighted average shares outstanding 340.4 272.0 339.7 272.0
Shares due to assumed exercise of stock
options and equivalents 2.8 - 2.9 -
Shares due to assumed conversion of trust
preferred securities 12.5 - 12.5 -
-------- ---------- ---------- ----------
Adjusted shares 355.7 272.0 355.1 272.0
======== ========== ========== ==========
Earnings per share from:
Continuing operations $ 0.67 $ 0.33 $ 1.53 $ 1.00
Discontinued operations 0.00 0.03 0.02 0.07
-------- ---------- ---------- ----------
Net income $ 0.67 $ 0.36 $ 1.55 $ 1.07
======= ========== ========== ==========
11
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Nine Months Ended
Ended September September 30,
30, 2000 2000
-------------- -------------------
Pro Forma Basic
---------------
Weighted average shares outstanding 338.7 338.7
Earnings per share from:
Continuing operations $ 0.27 $ 0.80
Discontinued operations 0.02 0.06
------- ---------
Net income $ 0.29 $ 0.86
======= =========
Pro Forma Diluted
-----------------
Weighted average shares outstanding 338.7 338.7
Shares due to assumed conversion of stock
options and equivalents 1.2 1.2
Shares due to assumed conversion of trust
preferred securities 12.7 12.7
------- ---------
Adjusted shares 352.6 352.6
======= =========
Earnings per share from:
Continuing operations $ 0.27 $ 0.79
Discontinued operations 0.02 0.06
------- ---------
Net income $ 0.29 0.85
======= =========
E. Debt
On July 17, 2001, Mirant closed $2,250 million of new corporate revolving
credit facilities, comprised of a $1,125 million 364-day revolving credit
facility and a $1,125 million 4-year revolving credit facility. Funds from the
new revolving credit facilities were used to replace existing credit facilities.
As of September 30, 2001, Mirant had borrowed $625 million under the July
$1,125 million 364-day credit facility and $400 million under the July 2001
$1,125 million 4-year facility. Mirant also issued letters of credit totaling
$287 million and $216 million under the April 1999 $450 million credit facility
and the $1,125 million 4-year facility, respectively.
In August 2001, Mirant Americas Generation, an indirect wholly owned
subsidiary of the Company, exercised its right to extend the maturity of its
$695 million acquisition facility and its $150 million working capital facility
and converted the drawn balances of $750 million into a term loan with maturity
in September 2002. Under this facility, Mirant Americas Generation may elect to
rollover the borrowings at a base rate or at the LIBOR plus an applicable margin
based on its credit rating on the date of the rollover. The outstanding
borrowings under the term loan were $750 million at an interest rate of 4.68% at
September 30, 2001.
F. Financial Instruments
Risk Management Activities
Mirant provides risk management services associated with the energy
industry to its customers in the North American and European markets. These
services are provided through a variety of exchange-traded energy contracts,
forward contracts, futures contracts, option contracts and financial swap
agreements.
12
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
These contractual commitments are presented as assets and liabilities from
risk management activities in the accompanying unaudited condensed consolidated
balance sheets and are accounted for using the mark-to-market method of
accounting. Accordingly, they are reflected at fair value in the accompanying
unaudited condensed consolidated balance sheets. The net changes in their market
values are recognized in income in the period of change.
The marketing operations engage in risk management activities. All such
transactions and related expenses are recorded on a trade-date basis. Financial
instruments and contractual commitments utilized in connection with these
activities are accounted for using the mark-to-market method of accounting.
Under the mark-to-market method of accounting, financial instruments and
contractual commitments, including derivatives used for these purposes, are
recorded at fair value. The determination of fair value considers various
factors, including closing exchange or over-the-counter market price quotations,
time value and volatility factors underlying options and contractual
commitments.
The volumetric weighted average maturities at September 30, 2001, were 2.7
years and 3.8 years for the North American portfolio and European portfolio,
respectively. The net notional amount of the risk management assets and
liabilities at September 30, 2001, was approximately 7 million equivalent
megawatt-hours. The notional amount is indicative only of the volume of activity
and not of the amount exchanged by the parties to the financial instruments.
Consequently, these amounts are not a measure of market risk.
In addition, certain financial instruments that Mirant uses to manage risk
exposure to energy prices do not meet the hedge criteria under SFAS No. 133.
Therefore, the fair values of these instruments are included in assets and
liabilities from risk management activities. The fair values of Mirant's assets
and liabilities from risk management activities recorded in the unaudited
condensed consolidated balance sheet as of September 30, 2001 are included in
the following table (in millions):
Risk Management
---------------
Assets Liabilities
------ ------------
Energy commodity instruments:
Electricity $ 784 $ 683
Natural gas 1,444 1,457
Crude oil 45 47
Other 57 63
----------- ------------
Total $ 2,330 $ 2,250
=========== ============
Derivative Hedging Instruments
Mirant uses derivative instruments to manage exposures arising from changes
in interest rates, commodity prices and foreign currency exchange rates.
Mirant's objectives for holding derivatives are to minimize the risks using the
most effective methods to eliminate or reduce the impacts of these exposures.
Derivative gains and losses arising from cash flow hedges that are included
in OCI are reclassified into earnings in the same period as the settlement of
the underlying transaction. During the three months ended September 30, 2001,
$229 million of pre-tax derivative gains was reclassified to operating income
and $8 million of pre-tax derivative losses was reclassified to interest
expense. During the nine months ended September 30, 2001, $29 million of pre-tax
derivative gains was reclassified to operating income, $14 million of pre-tax
derivative losses was reclassified to interest expense, and $9 million of
pre-tax derivative gains was reclassified to other income, net. The derivative
gains and losses reclassified to earnings were partly offset by realized gains
and losses arising from the settlement of the underlying physical transactions
13
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
being hedged. During the nine months ended September 30, 2001, $1 million of
pre-tax losses arising from hedge ineffectiveness was recognized in operating
income. The maximum term over which Mirant is hedging exposures to the
variability of cash flows is through 2012.
Interest Rate Hedging
Mirant's policy is to manage interest expense using a combination of fixed-
and variable-rate debt. To manage this mix in a cost-efficient manner, Mirant
enters into interest rate swaps in which it agrees to exchange, at specified
intervals, the difference between fixed- and variable-interest amounts
calculated by reference to agreed-upon notional principal amounts. These swaps
are designated to hedge underlying debt obligations. For qualifying hedges, the
changes in the fair value of gains and losses of the swaps are deferred in OCI,
net of tax, and the interest rate differential is reclassified from OCI to
interest expense as an adjustment over the life of the swaps. Gains and losses
resulting from the termination of qualifying hedges prior to their stated
maturities are recognized ratably over the remaining life of the hedged
instrument.
Commodity Price Management
Mirant enters into commodity financial instruments in order to hedge market
risk and exposure to electricity and to natural gas, coal and other fuels
utilized by its generation assets. These financial instruments primarily include
forwards, futures and swaps. Where these derivatives are designated as cash flow
hedges, the gains and losses are recognized in earnings in the same period as
the settlement of the underlying physical transaction. Where these derivatives
are not designated as cash flow hedges because they do not meet the hedge
criteria under SFAS No. 133, the gains and losses resulting from the net change
in market value are recognized in earnings in the period of change.
At September 30, 2001, Mirant had a net derivative hedging asset of
approximately $161 million related to these financial instruments. The fair
value of its non-trading commodity financial instruments is determined using
various factors, including closing exchange or over-the-counter market price
quotations, time value and volatility factors underlying options and contractual
commitments.
At September 30, 2001, Mirant had contracts that related to periods through
2010. The net notional amount of the derivative hedging instruments at September
30, 2001 was 5 million equivalent megawatt-hours. The notional amount is
indicative only of the volume of activity and not of the amount exchanged by the
parties to the financial instruments. Consequently, this amount is not a measure
of market risk.
Foreign Currency Hedging
Mirant uses cross-currency swaps and currency forwards to hedge its net
investments in certain foreign subsidiaries. Gains or losses on these
derivatives designated as hedges of net investments are offset against the
translation effects reflected in OCI, net of tax.
Mirant also utilizes currency forwards intended to offset the effect of
exchange rate fluctuations on forecasted transactions arising from contracts
denominated in a foreign currency. In addition, Mirant also utilizes
cross-currency swaps that offset the effect of exchange rate fluctuations on
foreign currency denominated debt and fixes the interest rate exposure. Certain
other assets are exposed to foreign currency risk. Mirant designates currency
forwards as hedging instruments used to hedge the impact of the variability in
exchange rates on accounts receivable denominated in certain foreign currencies.
All of these hedging
14
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
strategies qualify as cash flow hedges, where gains and losses on the
derivatives are deferred in OCI, net of tax, until the forecasted transaction
affects earnings. The reclassification is then made from OCI to earnings to the
same revenue or expense category as the hedged transaction.
G. Investments in Affiliates
The following table sets forth certain summarized income statement
information of Mirant's investments in 50% or less-owned investments accounted
for under the equity method for the three and nine months ended September 30,
2001 and 2000. The figures below represent 100% of the results of the underlying
entities in which Mirant owns a portion. These figures are not comparable to the
Company's equity income from affiliates due to purchase accounting and other
adjustments.
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(in millions)
Revenues $ 2,342 $ 1,595 $ 4,609 $ 4,678
Operating income 440 421 1,063 642
Net income from continuing operations 115 196 516 127
H. Business Developments
In July 2001, Mirant began commercial operation of a 150-MW natural
gas-fired simple-cycle unit at its Monroe, Louisiana power plant site. This is
the first phase of the project. The second phase, expected to begin commercial
operation in June 2002, includes a 540-MW combined-cycle unit. The project was
financed by a group of banks under a $300 million project financing which closed
on June 7, 2001. The project is jointly owned on a 50/50 basis and is accounted
for using the equity method.
On July 31, 2001, Mirant announced plans to build a 286-MW natural
gas-fired, combined-cycle facility located in the Mint Farm Industrial Park in
Longview, Washington. Mirant anticipates the facility will come on-line by
summer 2003.
In July 2001, Mirant entered into an agreement to acquire a 97.5% ownership
interest in EcoElectrica Holdings Ltd. ("EcoElectrica"), a 540-MW, liquefied
natural gas ("LNG")-fired, combined-cycle cogeneration facility, a desalination
facility and a LNG facility located in Penuelas, Puerto Rico. The purchase price
is approximately $586 million, plus the assumption of liabilities of
approximately $700 million and is subject to applicable regulatory approvals.
The acquisition is expected to close before the end of 2001. The facility began
commercial operations in March 2000. The Puerto Rico Electric Power Authority
("PREPA") purchases power from EcoElectrica pursuant to a long-term power
purchase agreement that extends through March 2022. Under this agreement, PREPA
is obligated to purchase up to 507 MW of energy and capacity from EcoElectrica.
In addition, Mirant acquired the rights to a twenty-year tolling services
agreement for the unloading, storing, redelivery and vaporization of LNG, as
well as access to excess capacity in the facility's LNG terminal, storage tank
and vaporizers. EcoElectrica has also entered into a LNG purchase agreement,
which extends until 2019 and which provides for the purchase of an annual
contract quantity equal to nine gamma standard cargoes.
15
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In August 2001, Mirant took effective control of a 640-MW natural gas-fired
power plant in Thomaston, Georgia. The plant is comprised of four combustion
turbines and has been operational since June 2000. Mirant finalized this
acquisition in October 2001. Mirant will continue to provide power from the
plant to customers under a variety of power purchase agreements.
In August 2001, Mirant announced plans to develop a 1,200-MW natural
gas-fired power plant in Gastonia, North Carolina. Construction of the power
facility is scheduled to begin early in 2002 with commercial operation scheduled
for summer 2004.
In August 2001, Mirant acquired a 75% working interest in 18 natural gas
and oil producing fields as well as 206,000 acres of mineral rights in southern
Louisiana from Castex Energy, Inc. ("Castex") and a number of its affiliates for
approximately $162 million. Castex, a privately held Houston-based oil and gas
producer, will retain an interest in the properties and will continue to operate
them.
In September 2001, Mirant recorded a $58 million ($35 million after-tax)
loss on an energy requirements contract primarily resulting from new market
regulatory requirements. Mirant believes that it has adequately provided for
estimated future losses under this contract, which terminates at the end of
2003; however, Mirant is subject to subsequent regulatory and commercial risks
under this contract and no assurance can be given that additional losses will
not occur.
In September 2001, Mirant announced that the partnership discussions related
to the possible combination of Bewag, VEAG, Laubag and HEW, the so-called Neue
Kraft, were terminated. Mirant continues to own approximately 45% of the
integrated utility, Bewag, which serves the city of Berlin.
I. Commitments and Contingent Matters
Litigation and Other Contingencies
Western United States Power Markets:
Reliability-Must-Run Agreements: Mirant's subsidiaries acquired generation
assets from Pacific Gas and Electric in April 1999, subject to RMR agreements.
These agreements allow the CAISO, under certain conditions, to require certain
of Mirant's subsidiaries to run the acquired generation assets in order to
support the reliability of the California electric transmission system. Mirant
assumed these agreements from Pacific Gas and Electric prior to the outcome of a
FERC proceeding initiated in October 1997 that will determine the percentage of
a $158.8 million annual fixed revenue requirement to be paid to Mirant by the
CAISO under the RMR agreements. This revenue requirement was negotiated as part
of a prior settlement of a FERC rate proceeding. Mirant contends that the amount
paid by the CAISO should reflect an allocation based on the CAISO's right to
call on the units (as defined by the reliability-must-run agreements) and the
CAISO's actual calls. This approach would result in annual payments by the CAISO
of approximately $120 million, or 75% of the settled fixed revenue requirement.
The decision in this case will affect the amount the CAISO will pay to Mirant
for the period from June 1, 1999 through December 31, 2001. On June 7, 2000, the
ALJ presiding over the proceeding issued an initial decision in which
responsibility for payment of approximately 3% of the revenue requirement was
allocated to the CAISO. On July 7, 2000, Mirant appealed the ALJ's decision to
the FERC.
16
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
If Mirant is unsuccessful in its appeal of the ALJ's decision, it will be
required to refund certain amounts of the revenue requirement paid by the CAISO
for the period from June 1, 1999 until the final disposition of the appeal. The
amount of this refund as of September 30, 2001 would have been approximately
$198 million; however, there would have been no effect on net income for the
periods under review as adequate reserves have been recorded. This amount does
not include interest that may be payable in the event of a refund. If Mirant is
unsuccessful in its appeal, Mirant plans to pursue other options available under
the reliability-must-run agreements to mitigate the impact of the ALJ's decision
upon its future operations. The outcome of this appeal is uncertain, and Mirant
cannot provide assurance that it will be successful.
In 2001, the CAISO failed to pay a total of approximately $19.6 million to
Mirant's subsidiaries under the reliability-must-run agreements assumed by
Mirant from Pacific Gas and Electric. Mirant has submitted notices of default to
the CAISO. Payments have been received for amounts that became due following
Pacific Gas and Electric's April 6, 2001 petition for bankruptcy.
Defaults by SCE and Pacific Gas and Electric and Bankruptcy of Pacific Gas and
Electric: On January 16 and 17, 2001, SCE and Pacific Gas and Electric's credit
and debt ratings were lowered by Moody's and S&P to "non-investment grade"
status. On January 16, 2001, SCE indicated that it would suspend indefinitely
certain obligations including a $215 million payment due to the PX and a $151
million payment due to a qualifying facility. On April 6, 2001, Pacific Gas and
Electric filed a voluntary petition under Chapter 11 of the Bankruptcy Code in
the U.S. Bankruptcy Court for the Northern District of California in San
Francisco. It is not known at this time what effect the bankruptcy will have on
the ultimate recovery of amounts owed by Pacific Gas and Electric.
DWR Power Purchases: On January 17, 2001, the Governor of California issued an
emergency proclamation giving the DWR authority to enter into arrangements to
purchase power in order to mitigate the effects of electrical shortages in the
state. The DWR began purchasing power under that authority the next day. On
February 1, 2001, the Governor of California signed Assembly Bill No. 1X
authorizing the DWR to purchase power in the wholesale markets to supply retail
consumers in California on a long-term basis. The Bill became effective
immediately upon its execution by the Governor. The Bill did not, however,
address the payment of amounts owed for power previously supplied to the CAISO
or PX for purchase by SCE and Pacific Gas and Electric. The CAISO and PX have
not paid the full amounts owed to Mirant's subsidiaries for power delivered to
the CAISO and PX in prior months and are expected to pay less than the full
amount owed on further obligations coming due in the future for power provided
to the CAISO for sales that were not arranged by the DWR. The ability of the DWR
to make future payments is subject to the DWR having a continued source of
funding, whether from legislative or other emergency appropriations, from a bond
issuance or from amounts collected from SCE and Pacific Gas and Electric for
deliveries to their customers.
On May 10, 2001, Governor Davis signed Bill SB31x into law. This
legislation permits the DWR to issue up to approximately $13 billion in revenue
bonds to finance the purchase of electrical energy. The Bill became effective on
August 8, 2001. On May 24, 2001, Mirant entered into a 19-month agreement with
the DWR to provide the State of California with approximately 500 MW of
electricity. The contract runs from June 1, 2001 to December 31, 2002.
California Price Mitigation and Refund Proceeding: The FERC has issued proxy
market price orders for the months of January, February, March, April and May
2001. The potential refund exposure for Mirant for January, February, March and
May was approximately $3 million. The proxy market price for April was not
applicable to any sales made. These refunds are being addressed in the
California Refund Proceeding
17
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
currently pending before the FERC ALJ. Mirant cannot give any assurances that
the FERC will accept the justification and decline to order refunds of some or
all of these amounts.
In March 2001, the FERC staff issued its recommendation regarding a new
market mitigation plan which included continued price mitigation during Stage 3
emergencies. On April 6, 2001, the CAISO filed a proposed market stabilization
plan at the FERC. On April 26, 2001, the FERC issued an order adopting a market
monitoring and price mitigation plan by its staff. The April 26 order provides
for price mitigation in all hours in which power reserves fall below 7.5
percent, a level that corresponds to the CAISO's Stage 1 emergency. In these
hours, the FERC will use a formula based on the marginal costs of the
highest-cost generator called on to run to determine the overall market-clearing
price. In the event that a generator sells power at prices higher than the
formula price set by the FERC, the generator is required to submit data to the
FERC within seven days to justify the higher price. The April 26 order also
provides for: (a) increased coordination and control of generation plan outages
by the CAISO, (b) all in-state generation, including generation owned by sellers
not subject to the FERC's jurisdiction, to offer all available power for sale in
real time, (c) load-serving public utilities to establish by June 1, 2001 demand
response mechanisms identifying the price at which load would be curtailed, (d)
the FERC to continue to monitor closely behavior of market participants,
including bidding behavior and plant outages, (e) interested parties to file
comments on whether the CAISO should be required to institute, on a prospective
basis, a surcharge on power sales to cover payments due to generators by the
California utilities, and (f) the FERC to institute an investigation under
Section 206 of the Federal Power Act into the rates, terms and conditions of
certain short-term wholesale power sales in the western markets outside of
California. This mitigation program became effective on May 29, 2001, and will
terminate after one year. In addition, the order identified certain prohibited
bidding practices by entities having market rate authority (which would include
certain of Mirant's subsidiaries) and has stated that it would impose sanctions
on entities that engage in the prohibited practices.
On June 19, 2001, the FERC issued an order on rehearing of the April 26
order. The June 19 order affirmed many of the key provisions of the April 26
order, but also broadened the scope of that order to include all spot market
sales in markets throughout the Western System Coordinating Council ("WSCC").
The price mitigation plan to be implemented pursuant to the June 19 order became
effective June 20, 2001, and will extend until September 30, 2002. Under the
June 19 order, the FERC retained the use of a single market clearing price for
sales in the CAISO's spot markets in reserve deficiency hours (i.e., when
reserves are below 7% in California), as well as the requirement that all public
and non-public utilities which own or control non-hydroelectric generation in
California must offer power in the CAISO's spot markets, to the extent the
output is not scheduled for delivery in the hour. However, the FERC revised the
method for calculating the market clearing price, specifying that: (a)
generation unit owners must submit bids during reserve deficiencies that are no
higher than the seller's marginal gas costs plus variable operating and
maintenance costs set at $6 per MWh; (b) generation unit owners may not reflect
start-up fuel and emissions costs in the energy price, but must invoice the
CAISO separately for these costs, which the CAISO will recover through a
new-imposed system-wide charge; (c) the ability to cost-justify a higher price
is available only to generation owners; marketers may not bid above the market
clearing price; and (d) the CAISO must add 10% to the market clearing price paid
to generators for all prospective sales in its markets to reflect credit
uncertainty. The additional 10% will not be reflected in the market price for
the rest of the WSCC. For the months of June and July 2001, the FERC denied the
requests of generators to charge a higher price than the mitigated price based
on claimed justifications for such higher prices. Mirant cannot predict how the
FERC will rule on any future requests/justifications for prices higher than the
mitigated price during future months.
18
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The June 19 order also extended the FERC's price mitigation regime to the
rest of the WSCC and to non-reserve deficiency hours. For spot market sales
outside the CAISO single price auction (i.e., bilateral sales in California and
sales in the balance of the WSCC), the June 19 order provides that sellers will
receive the price they negotiate, up to the CAISO spot market price, and that
all public and non-public utilities in the remainder of the WSCC must offer in a
spot market of their choosing any non-hydroelectric resource whether owned or
under contract to the extent the output is not scheduled for delivery in the
hour. In all non-reserve deficiency hours (i.e., when reserve levels in the
CAISO exceed 7%), the June 19 order provides that the market clearing price
within California and throughout the WSCC will be set at 85% of the highest
CAISO hourly market clearing price established during the most recent reserve
deficiency period. This price will remain in place until reserves fall below 7%
and a new price is set.
In addition, the June 19 order called for a settlement conference to
address any and all issues concerning the California markets, including payment
for past due amounts, refunds related to past periods and creditworthiness. In
accordance with the June 19 order, the FERC's Chief Administrative Law Judge
convened a 15-day settlement conference on June 25. Parties in the San Diego Gas
& Electric Co. complaint proceeding, the State of California and other
interested parties participated in the settlement conference. The parties were
unable to reach a settlement on the issues at the conference. On July 12, 2001,
the Chief Judge issued a recommendation to the FERC, which included a proposed
methodology for the FERC to adopt and issue refunds for sales into the CAISO and
PX markets. The recommendation also included a hearing procedure to determine
the appropriate amount of refunds for each jurisdictional seller. On July 25,
2001, the FERC issued an order requiring hearings to determine the amount of any
refunds and amounts owed for sales made to the CAISO/PX from October 1, 2000
through June 20, 2001. Hearings are scheduled to be held in December 2001 and
February 2002.
In the July 25 order issued in the California refund proceeding, the FERC
also ordered that a preliminary evidentiary proceeding be held to develop a
factual record on whether there have been unjust and unreasonable charges for
spot market bilateral sales in the Pacific Northwest from December 25, 2000
through June 20, 2001. In the proceeding, the DWR filed to recover certain
refunds from parties, including a Mirant subsidiary, for bilateral sales of
electricity to the DWR at the California/Oregon border, claiming that such sales
took place in the Pacific Northwest. A FERC ALJ recently concluded a preliminary
evidentiary hearing related to possible refunds for power sales in the Pacific
Northwest. In a preliminary ruling issued September 24, 2001, the ALJ indicated
that she would order no refunds because the complainants had failed to prove any
exercise of market power or that any prices were unjust or unreasonable. The
FERC may accept or reject this preliminary ruling and the FERC's decision may
itself be appealed. At this time, Mirant cannot predict the outcome of this
proceeding. If the Company were required to refund such amounts, its
subsidiaries would be required to refund amounts previously received pursuant to
sales made on their behalf. In addition, Mirant's subsidiaries would be owed
amounts for purchases made on their behalf from other sellers in the Pacific
Northwest.
Western Power Markets Investigations: The CPUC, the California Senate, the San
Joaquin District Attorney and the Attorney General's offices of Washington,
Oregon and California have each launched civil and criminal investigations into
the California energy markets that have resulted in the issuance of subpoenas to
several of Mirant's entities. In addition, the CPUC has had personnel onsite on
a periodic basis at Mirant's California generating facilities since December
2000. The California Attorney General issued its subpoena to Mirant in February
2001 under the following caption: "In the Matter of the Investigation of
Possibly Unlawful, Unfair, or Anti-Competitive Behavior Affecting Electricity
Prices in California." Each of these subpoenas, as well as the plant visits,
could impose significant compliance costs on Mirant or its subsidiaries. Also on
April 18, 2001, the Attorney General filed suit against the Company in the San
19
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Francisco Superior Court seeking to compel it to produce documents in the
investigation. With respect to both the CPUC and the California Attorney
General's office, there is ongoing litigation between Mirant and these agencies
regarding the scope of the subpoenas and the confidentiality of the Company's
documents. Despite various measures taken to protect the confidentiality of
sensitive information provided to these agencies, there remains a risk of
governmental disclosure of the confidential, proprietary and trade secret
information obtained by these agencies throughout this process.
While Mirant will vigorously defend against any claims of potential civil
liability or criminal wrongdoing asserted against the Company or its
subsidiaries, the results of such investigations cannot now be determined.
California Rate Payer Litigation: Six lawsuits have been filed and consolidated
in the superior courts of California alleging that certain owners of electric
generation facilities in California and energy marketers, including Mirant,
Mirant Americas Energy Marketing, Mirant Delta, Mirant Potrero, and Southern,
engaged in various unlawful and anti-competitive acts that served to manipulate
wholesale power markets and inflate wholesale electricity prices in California.
Four of the suits seek class action status. One lawsuit alleges that, as a
result of the defendants' conduct, customers paid approximately $4 billion more
for electricity than they otherwise would have and seeks an award of treble
damages, as well as other injunctive and equitable relief. One lawsuit also
names certain of Mirant's officers individually as defendants and alleges that
the state had to spend more than $6 billion purchasing electricity and that if
an injunction is not issued, the state will be required to spend more than $150
million per day purchasing electricity. The other suits likewise seek treble
damages and equitable relief. While two of the suits name Southern as a
defendant, it appears that the allegations, as they may relate to Southern and
its subsidiaries, are directed to activities of Mirant's subsidiaries. One such
suit names Mirant Corporation itself as a defendant. Southern has notified
Mirant of its claim for indemnification for costs associated with these actions
under the terms of the Master Separation Agreement that governs Mirant's
separation from Southern, and Mirant has undertaken the defense of all of the
claims.
In September 2001, the defendants in the California rate payer litigation
served upon the plaintiffs in each case a Joint Demurrer, a Joint Motion to
Strike and a Joint Motion to Stay. The Joint Demurrer asserts that the
defendants should be granted judgment as a matter of law on the claims asserted
by the plaintiffs. The Joint Motion to Strike asserts that if the court does not
conclude that plaintiffs' claims are barred entirely, then all claims seeking
monetary recovery should be stricken based on the filed rate doctrine. The Joint
Motion to Stay asserts that any claims not dismissed in response to the Joint
Demurrer or stricken in response to the Motion to Strike should be stayed until
the FERC has entered a final order in the ongoing proceedings before it related
to the investigations of the California wholesale markets. These pleadings have
been served on the plaintiffs in each of the six cases but will not be filed
with the court until a determination is made regarding whether the actions
should be coordinated and, if so, before which court. The plaintiffs seek to
have the cases coordinated before a court in San Francisco, while the defendants
have asked for the cases to be coordinated before a court in San Diego. The
California Judicial Council has sent the coordination motions to the presiding
judge for the Superior Court for the County of San Diego, who has assigned a
judge to hear the coordination petitions. The judge will decide whether the
cases should be coordinated and, if so, will recommend to the California
Judicial Council which court should hear the coordinated actions. The Company
cannot predict the outcome of these cases.
CAISO Claim before the FERC: The CAISO asserted in a March 22, 2001 filing at
the FERC that sellers in the California wholesale electricity market have, as a
group, charged amounts in the period from May 2000 through February 2001 that
exceeded just and reasonable charges by an amount in excess of $6 billion. The
CAISO also asserted that during that period generators in California bid prices
into the CAISO real time
20
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
markets that exceeded just and reasonable amounts by approximately $505 million
in the aggregate, of which a single generator (subsequently identified in a news
report as Mirant Corporation) was alleged by the CAISO to have overcharged by
approximately $97 million. These claims are being addressed in the FERC
California Refund proceeding scheduled for December 2001 and February 2002.
On June 7, 2001, the CAISO filed a motion with the FERC to revoke the
market-based rate authority issued by the FERC to several of Mirant's
subsidiaries engaged in the California market. The CAISO also requested that the
FERC order refunds for sales dating back to May 1, 2000, and that the FERC
investigate whether Mirant exercised market power prior to May 1, 2000. If this
motion were to be fully approved, it would subject the applicable subsidiaries
to cost-based rates under the FERC's jurisdiction. While Mirant does not believe
that the CAISO will gain full approval of its motion, Mirant cannot currently
predict what action the FERC will take, if any or what impact the CAISO's motion
will have on its operations. Mirant cannot predict the outcome of these
proceedings at this time.
Consumers Union Complaint: On June 15, 2001, the Consumers Union of U.S., Inc.
filed a petition at the FERC requesting immediate action to protect consumers
against unjust and unreasonable charges for electricity in the western United
States, including (1) immediate suspension of market-based rate authority for
all sellers subject to the FERC's jurisdiction, (2) the requirement of seller to
make cost of service filings with the FERC, (3) the determination of just and
reasonable rates for sellers based on their cost of service and (4) the ordering
of refunds for any unjust or unreasonable rates and charges. On July 16, 2001,
several of Mirant's subsidiaries filed a response to the petition, arguing that
the petition should be dismissed. Mirant cannot determine at this time what
action, if any, the FERC will take with respect to this complaint.
Environmental Suit and Notice of Intent to File Suit: On June 19, 2001, a Clean
Air Act citizen suit was filed in the United States District Court for the
Northern District of California by Bayview Hunters Point Community Advocates,
Communities for a Better Environment and Our Children's Earth Foundation,
against Mirant and the Bay Area Air Quality Management District, alleging
violations of federal permitting requirements resulting from Mirant's Potrero
peaking units exceeding permit limits on total annual hours of operation. The
lawsuit also alleges that the District's agreement with Mirant implementing
Executive Orders of the Governor of California and allowing operation of the
Potrero peaking units beyond their permitted operating hours (under limited
conditions specified in the agreement) violates the California Environmental
Quality Act ("CEQA"). Also on June 19, 2001, the City and County of San
Francisco filed a similar suit in the same court against Mirant only, and
excluding the CEQA allegations. EPA Region 9 has issued an Administrative Order
on Consent in recognition of Mirant's agreement with the District and specifying
a compliance schedule. The suits seek an injunction preventing operation of the
units, federal civil penalties of up to $27,500 per day per violation, state
civil penalties of $2,500 for each act of unfair competition, disgorgement of
any profits obtained through unfair business practices and invalidation of the
agreement between Mirant and the District.
On June 19, 2001, Bayview Hunters Point Community Advocates, Communities
for a Better Environment and Our Children's Earth Foundation, collectively, and
the City and County of San Francisco, each delivered to Mirant a Notice of
Intent to File Suit Under the Clean Air Act. These notices state that on 60 days
from June 19, the parties will file Clean Air Act citizen suits against Mirant
alleging violations of the California State Implementation Plan, the Title V
operating permit for the Potrero facility, and federal permitting requirements
for modified facilities. These violations are alleged to result from operation
of the Potrero peaking units beyond their permit limits on total annual hours of
operation. The parties state that they seek injunctive relief, penalties and
costs of litigation if the matters are not resolved within the 60-day period. On
June 26, 2001, Mirant filed with the FERC an Emergency Request for clarification
seeking
21
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
confirmation by the FERC that the Potrero jets are exempt from the FERC's
"must run" requirements, once they exceed their permitted operating limits.
Pacific Gas and Electric Bankruptcy: On April 6, 2001, Pacific Gas and Electric
filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the U.S.
Bankruptcy Court for the Northern District of California in San Francisco. It is
not known at this time what effect the bankruptcy filing will have on the
ultimate recovery of amounts owed to Mirant by Pacific Gas and Electric. On
September 20, 2001, Pacific Gas and Electric filed a proposed plan of
reorganization. Under the terms of the proposed plan, unsecured creditors such
as Mirant would receive 60% of the amounts owed upon approval of the plan. The
remaining 40% would be paid in negotiable debt with terms from 10 to 30 years.
CARE Complaint: On April 16, 2001, Californians for Renewable Energy, Inc.
("CARE") filed a complaint at the FERC against Mirant and three other suppliers
alleging that those suppliers withheld power to contrive an energy shortage and
to test their market power in violation of the Federal Power Act, federal and
state anti-trust laws, Title VI of the Civil Rights Act of 1964 and the North
American Free Trade Agreement. The complaint seeks refunds of overcharges and
unspecified damages. Mirant cannot predict at this time the outcome of this
proceeding.
PX Bankruptcy: On March 9, 2001, the PX filed for bankruptcy. Mirant Americas
Energy Marketing has been named to the participants' committee. The PX's ability
to repay its debt is directly dependent on the extent that it receives payments
from Pacific Gas and Electric and SCE, and on the outcome of its litigation with
the California state government. At this point, it is uncertain what effect the
PX's bankruptcy will have on the receivables owed to the Company.
As of September 30, 2001, the total amount owed to Mirant by the CAISO and
the PX was $373 million. The total amount of provisions made during 2000 and
2001 in relation to uncertainties in the California power market was $295
million pre-tax.
NYISO Automatic Mitigation Plan:
On June 28, 2001, the FERC issued an order accepting the Automatic
Mitigation Procedure as proposed by the NYISO effective immediately and expiring
on October 31, 2001. The Automatic Mitigation Procedure compares bids in the
day-ahead energy market that exceed $150 MWh to "reference bids" reflecting
historical bids over the previous 90 days or a shorter time period. If bids
exceed the reference bids by more than a stated margin, the bid is automatically
mitigated down to the reference bid level. The actual price received in the
day-ahead market is determined by the highest daily bid accepted among all
suppliers. As the unmitigated clearing price information is not made available,
the nature and extent of the possible impact on the Company is not currently
known.
Mobile Energy:
Mobile Energy is the owner of a facility that generates electricity,
produces steam and in the past processed black liquor as part of a pulp and
paper complex in Mobile, Alabama. On January 14, 1999, Mobile Energy and Mobile
Energy Services Holdings, Inc., which guaranteed debt obligations of Mobile
Energy, filed voluntary petitions in the United States Bankruptcy Court for the
Southern District of Alabama, seeking protection under Chapter 11 of the United
States Bankruptcy Code. Southern has guaranteed certain potential environmental
and certain other obligations of Mobile Energy that represent a maximum
contingent liability of $19 million as of September 30, 2001. A major portion of
the maximum
22
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
contingent liability escalates at the rate equal to the producer price index. As
part of its separation from Southern, Mirant has agreed to indemnify Southern
for any obligations incurred under such guarantees.
State Line:
On July 28, 1998, an explosion occurred at the State Line plant causing a
fire and substantial damage to the plant. The precise cause of the explosion and
fire has not been determined. Thus far, seven personal injury lawsuits have been
filed against Mirant, five of which were filed in Cook County, Illinois. Mirant
filed a motion to dismiss these five cases in 1998 for lack of "in personam"
jurisdiction and subsequently filed appeals regarding the denial of these
motions. The outcome of these proceedings cannot now be determined and an
estimated range of loss cannot be made.
CEMIG:
In September 1999, the State of Minas Gerais, Brazil, filed a lawsuit in a
state court seeking temporary relief against exercising voting rights of SEB, of
which Mirant holds a 25% indirect economic interest, under the shareholders'
agreement, between the State and SEB regarding SEB's interest in CEMIG, as well
as a permanent rescission of the agreement. In March 2000, a state court in
Minas Gerais ruled that the shareholders agreement was invalid. In September
2001, the Company's appeal of that ruling to the state appellate court was
denied. Mirant believes that this is a temporary situation and expects that the
shareholders agreement will be fully restored. Failure to prevail in this matter
has limited Mirant's influence on the daily operations of CEMIG. However, SEB
continues to have 33% of the voting shares of CEMIG and holds 4 of 11 seats on
CEMIG's Board of Directors. The significant rights SEB would lose relate to
supermajority rights and the right to participate in the daily operations of
CEMIG. SEB obtained financing from BNDES for approximately 50% of the total
purchase price of the CEMIG shares which is secured by a pledge of its shares in
CEMIG. The temporary suspension of the shareholders agreement has adversely
impacted SEB's influence over the performance of CEMIG and the remuneration of
the shareholders.
In addition to the matters discussed above, Mirant is party to legal
proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on the Company's consolidated results of operations, cash flows or
financial position.
Commitments and Capital Expenditures
Mirant has made firm commitments to buy materials and services in
connection with its ongoing operations and planned expansion and has made
financial guarantees relative to some of its investments. The material
commitments are as follows:
Turbine Purchases and Other Construction-Related Commitments
Mirant has entered into agreements to purchase 49 turbines to support
ongoing and planned construction efforts. Mirant also has options to purchase an
additional 32 turbines. Minimum termination amounts under all purchase contracts
were $8 million at September 30, 2001. At September 30, 2001, total amounts to
be paid under the agreements if all turbines are purchased as planned are
estimated to be $680 million. At September 30, 2001, other construction-related
commitments totaled $923 million.
In addition to these commitments, Mirant has assigned to separate
third-party owners purchase contracts for 46 turbines and purchase contracts for
nine engineered equipment packages ("power
23
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
islands"). As part of these assignments, Mirant has entered into agency
agreements with the respective third-party owners whereby Mirant is required to
manage procurement of all of this equipment. Under the agency agreements, Mirant
maintains purchase options for each individual turbine and power island. In
addition to the purchase options under the agreements, Mirant also maintains
options to lease the turbines and the power islands. If upon the end of the
respective terms of the agreements Mirant has failed to exercise either its
purchase options or lease options for each turbine and power island, Mirant may
participate in the re-marketing of this equipment. In the event that the
equipment is remarketed, Mirant has guaranteed the recovery of approximately
89.9 percent of certain equipment procurement costs borne by third parties, of
which approximately $263 million was incurred as of September 30, 2001.
Additionally, if Mirant had elected to exercise its purchase options with
respect to all of the turbines and power islands and to terminate the
procurement contracts at September 30, 2001, minimum termination amounts due to
the third party owners under the turbine and power island procurement contracts
would have been $283 million.
In June 2001, Mirant entered into an air permit guarantee and a waste water
discharge permit guarantee in connection with a loan agreement between
Perryville and a financial institution. Under these guarantee agreements, the
Company guaranteed the debt payments under the loan agreement if Perryville does
not obtain or achieve necessary air and waste water discharge permit compliance.
The Company has a 50% ownership interest in Perryville that is accounted for
using the equity method. Perryville began to commercially operate a
150-megawatt, natural gas-fired, simple-cycle unit in Louisiana in July 2001 and
is constructing a 540-megawatt natural gas-fired combined-cycle unit that is
expected to be completed in 2002. At September 30, 2001, the outstanding balance
under the loan agreement was approximately $136 million. Mirant has entered into
a separate agreement with Cleco Midstream Resources, LLC ("Cleco"), who holds
the remaining 50% ownership interest in Perryville, under which Mirant is
compensated for providing the loan agreement guarantees on behalf of Cleco.
Long-Term Service Agreements
The Company has entered into long-term service agreements for the
maintenance and repair by third parties of many of its combustion-turbine or
combined-cycle generating plants. These agreements may be terminated in the
event a planned construction project is cancelled. At September 30, 2001, the
total estimated commitment for completed and in-process construction projects
was $496 million, and the total estimated commitment if all turbines are
purchased as planned is approximately $2,240 million.
Long-Term Purchase Power Agreement
In April 2001, the Company entered into a long-term power purchase
agreement with Perryville, which expires in December 2022, under which it will
receive all the generation output of the Perryville facility for a monthly
reservation charge. The total estimated minimum commitment under this agreement
over the life of the agreement is approximately $924 million.
Operating Leases
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $31 million and $94 million during the three and nine months ended
September 30, 2001 as compared to $4 million and $11 million for the same
periods in 2000. As of September 30, 2001, estimated minimum rental commitments
for non-cancelable operating leases were approximately $3,249 million.
24
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Segment Reporting
The Company's principal business segments primarily relate to the geographic
areas in which the Company conducts business: the Americas Group, the
Asia-Pacific Group and the Europe Group. The other reportable business segment
is Corporate.
Financial Data by Segment
For the Three Months Ended September 30, 2001 and 2000
Corporate and
Americas Europe Asia-Pacific Eliminations Consolidated
----------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
(in millions)
Operating Revenues:
Generation and energy marketing $7,695 $3,953 $ 201 $ - $ 127 $123 $ - $ - $8,023 $4,076
Distribution & integrated utility
revenues 154 43 - 71 - - - - 154 114
Other 3 - - - 5 4 - 4 8 8
--------- ------- --------- ------- --------- ------ -------- ------- ------- ---------
Total operating revenues 7,852 3,996 201 71 132 127 - 4 8,185 4,198
--------- ------- --------- ------- --------- ------ -------- ------- ------- ---------
Operating Expenses:
Cost of fuel, electricity and
other products 7,098 3,562 204 7 1 - - - 7,303 3,569
Depreciation and amortization 65 38 1 17 33 32 1 2 100 89
Other operating expenses 254 213 7 28 29 30 35 52 325 323
--------- ------- --------- ------- --------- ------ -------- ------- ------- ---------
Total operating expenses 7,417 3,813 212 52 63 62 36 54 7,728 3,981
--------- ------- --------- ------- --------- ------ -------- ------- ------- ---------
Operating Income (Loss) 435 183 (11) 19 69 65 (36) (50) 457 217
Other Income (Expense):
Interest expense, net (40) (28) (9) (25) (26) (27) (40) (40) (115) (120)
Equity in income of affiliates 1 23 24 28 13 18 - - 38 69
Other 2 14 1 6 9 (4) (3) 11 9 27
Income (Loss) From Continuing Operations
--------- ------- --------- ------- --------- ------ -------- ------- ------- ---------
Before Income Taxes and Minority Interest 398 192 5 28 65 52 (79) (79) 389 193
Provision (benefit) for income taxes 172 75 (7) 6 4 9 (32) (5) 137 85
Minority interest 4 4 - 3 8 10 6 - 18 17
--------- ------- --------- ------- --------- ------ -------- ------- ------- ---------
Income (Loss) From Continuing Operations 222 113 12 19 53 33 (53) (74) 234 91
Income From Discontinued Operations,
Net of Tax Benefit - - - - - - - 7 - 7
--------- ------- --------- ------- --------- ------ -------- ------- ------- ---------
Net Income (Loss) $ 222 $ 113 $ 12 $ 19 $ 53 $ 33 $(53) $(67) $ 234 $ 98
========= ======= ========= ======= ========= ====== ======== ======= ======= =========
25
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial Data by Segment
For the Nine Months Ended September 30, 2001 and 2000
Corporate and
Americas Europe Asia-Pacific Eliminations Consolidated
----------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
(in millions)
Operating Revenues:
Generation and energy marketing $ 23,353 $4,582 $ 211 $ (2) $ 376 $369 $ - $ - $23,940 $4,949
Distribution & integrated utility
revenues 334 126 - 263 - - - - 334 389
Other 5 - - - 16 10 - 9 21 19
---------- ------- ------- -------- ------ --------- -------- ------- ---------- -------
Total operating revenues 23,692 4,708 211 261 392 379 - 9 24,295 5,357
---------- ------- ------- -------- ------ --------- -------- ------- ---------- -------
Operating Expenses:
Cost of fuel, electricity and
other products 21,545 3,942 261 23 5 - - - 21,811 3,965
Depreciation and amortization 182 87 1 58 98 97 3 2 284 244
Other operating expenses 981 381 29 99 90 60 112 81 1,212 621
---------- ------- ------- -------- ------ --------- -------- ------- ---------- -------
Total operating expenses 22,708 4,410 291 180 193 157 115 83 23,307 4,830
---------- ------- ------- -------- ------ --------- -------- ------- ---------- -------
Operating Income (Loss) 984 298 (80) 81 199 222 (115) (74) 988 527
Other Income (Expense):
Interest expense, net (126) (97) (18) (79) (75) (79) (98) (83) (317) (338)
Equity in income of affiliates 12 27 116 56 36 49 - - 164 132
Other 8 22 2 14 20 15 - 15 30 66
Income (Loss) From Continuing Operations
---------- ------- ------- -------- ------ --------- -------- ------- ---------- -------
Before Income Taxes and Minority Interest 878 250 20 72 180 207 (213) (142) 865 387
Provision (benefit) for income taxes 375 104 (40) (16) 7 (1) (58) (32) 284 55
Minority interest 8 5 - 26 24 28 16 1 48 60
---------- ------- ------- -------- ------ --------- -------- ------- ---------- -------
Income (Loss) From Continuing Operations 495 141 60 62 149 180 (171) (111) 533 272
Income From Discontinued Operations,
Net of Tax Benefit - - - - - - 5 20 5 20
---------- ------- ------- -------- ------ --------- -------- ------- ---------- -------
Net Income (Loss) $ 495 $ 141 $ 60 $ 62 $ 149 $180 $(166) $(91) $ 538 $ 292
========== ======= ======= ======== ====== ========= ======== ======= ========== =======
26
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Selected Balance Sheet Information by Segment
At September 30, 2001
Corporate and
Americas Europe Asia-Pacific Eliminations Total
--------- --------- --------------- ------------------ -------------
(in millions)
Current assets $5,883 $ 143 $ 905 $ (442) $ 6,489
Property, plant & equipment,
including leasehold interest 5,256 2 1,808 221 7,287
Total assets 16,268 2,044 4,599 (579) 22,332
Total debt 4,039 618 2,047 2,091 8,795
Common equity 3,811 1,198 1,860 (2,172) 4,697
27
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Subsequent Events
On October 2, 2001, the CPUC refused to approve a rate agreement with the
DWR. The Treasurer of California has indicated that this rate agreement is
closely related to the issuance of approximately $13 billion in revenue bonds to
finance the purchase of electric energy. Mirant bears the risk of nonpayment by
the CAISO, the PX and the DWR for power purchased by the CAISO, the PX or the
DWR.
On October 2, 2001, the California Governor rescinded the executive order
calling for a third special session of the state legislature. The purpose of the
third special session was to consider legislation to restore SCE to solvency. In
view of the announced settlement between the California Public Utilities
Commission and SCE, California's Governor declared the third special session
unnecessary.
On October 2, 2001, the CPUC and SCE announced a settlement of SCE's filed
rate doctrine lawsuit, which is pending in federal district court in Los
Angeles. The terms of the proposed settlement provide that SCE will fully repay
what the settlement agreement calls "Procurement Related Liabilities" by the end
of 2003. Although the proposed settlement agreement purports to provide for the
payment of all Procurement Related Liabilities, which includes $920 million owed
to the PX and the CAISO (a portion of which is owed to Mirant), there is no
specific information about when any particular creditor or class of creditors
can expect repayment. Further, SCE has agreed to work with the CPUC and the
California Attorney General in pursuing litigation against energy sellers and to
meet and confer with the CPUC as to all significant strategic and tactical
decisions in existing or future litigation, including administrative
proceedings. Effective March 1, 2002, CPUC approval is required of any
settlement of existing or future litigation, and, if the CPUC rejects a proposed
settlement, SCE is required to continue with such litigation.
The impact of the proposed settlement agreement on Mirant remains
uncertain, but could include delayed payment, extended litigation, or
discriminatory treatment in the repayment process. Mirant is currently analyzing
the proposed settlement agreement and its analysis may indicate that other
available remedies are preferable to this settlement proposal. Such remedies may
include participation in an effort to file an involuntary bankruptcy petition
against SCE. On October 5, 2001, the U.S. District Court for the Central
District of California approved the proposed settlement agreement. The District
Court's judgement was temporarily stayed on October 30, 2001 by the 9th Circuit
Court of Appeals for a 14-day period while a motion is addressed by the District
Court.
On October 3, 2001, the Illinois Supreme Court denied Mirant's appeal
regarding the proper jurisdiction of the lawsuits related to State Line. Mirant
is considering whether to appeal this issue to the United States Supreme Court.
In October 2001, Mirant Americas Generation issued $750 million in senior
unsecured notes under Rule 144A of the Securities Act. The notes issued included
$300 million of 7.2% senior notes due 2008 and $450 million of 8.5% senior notes
due 2021. The net proceeds from these notes as well as operating cash flow were
used to repay the a $750 million term loan, which was subsequently terminated,
and to pay breakage costs on interest rate swaps entered into in 2000 in
anticipation of this debt offering. Interest on the notes is payable
semiannually beginning April 1, 2002. Mirant Americas Generation may redeem the
notes, in whole or in part, at any time at a redemption price equal to 100% of
the principal amount plus accrued interest, plus a make-whole premium, as
defined in the note agreements. Furthermore, Mirant Americas Generation is
obligated to consummate an exchange offer under an effective registration
statement or cause re-sale of the notes to be registered under the Securities
Act within 270 days of the issuance of these notes or the annual interest rate
will increase by 0.5% per annum.
28
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In October 2001, Mirant entered into an agreement to acquire the majority
of the gas marketing business of TransCanada PipeLines Limited. The transaction
would include the purchase of the majority of TransCanada's natural gas trading
and marketing business and the related natural gas transportation and storage
contracts. TransCanada also agreed to sell to Mirant the "netback pool," which
markets the aggregated supply from 550 Canadian natural gas producers. The
transaction would add approximately 5.1 billion cubic feet a day to Mirant's
natural gas physical marketing volumes, assuming year 2000 marketing and trading
volume numbers remain consistent. Mirant expects to close the transaction in the
fourth quarter of this year, subject to, among other things, regulatory,
producer and customer approvals.
On October 15, 2001, Mobile Energy filed a new amended plan of
reorganization that outlines alternative ways by which the Mobile Energy
bondholders would acquire ownership of Mobile Energy. Under either proposed
approach, Southern Company's interest would be terminated. Approval of that
proposed plan of reorganization would result in a termination of Southern's
direct and indirect ownership interests in both entities, but would not affect
Southern's continuing guarantee obligations that are described previously. The
amended plan has no effect on the Company's indemnity obligations to Southern.
The final outcome of this matter cannot now be determined.
On October 24, 2001, CARE filed a complaint with the FERC against the
Independent Energy Producers Association ("IEPA"), which includes Mirant, and
other parties, claiming that they had violated various California and federal
laws to unlawfully manipulate the California wholesale energy market. CARE
requests that the FERC (1) order refunds of approximately $2 billion from
sellers of electricity in the California market, (2) void any long-term energy
contracts with such sellers and DWR/CERS, and (3) revoke any licenses,
certificates or permits for any siting, construction or operation of power
plants in California. Mirant is in the process of responding to this complaint.
In October 2001, Mirant acquired a 480-MW natural gas-fired plant in New
Port Richey, Florida (north of Tampa). The Florida plant, comprised of three
combustion turbines, is scheduled to begin commercial operation in March 2002.
Mirant will continue to provide power from the plant to customers under a
variety of power purchase agreements.
In October 2001, Mirant announced that it had signed a letter of intent to
acquire a 50% interest in the 280-MW Coyote Springs 2 power project from Avista
Corporation. The plant, currently under construction near Boardman, Oregon, is
scheduled to begin operations in mid-2002. Pending regulatory approvals, the
sale is expected to close during the fourth quarter 2001.
In October 2001, Mirant agreed to a consent decree with all plaintiffs
resolving all issues related to the environmental suit and notice of intent to
file suit in connection with Mirant's Potrero peaking units. The agreed-upon
settlements are subject to final approvals and notices by various governmental
agencies.
In October 2001, Mirant Americas Development Capital, LLC ("Mirant Americas
Development Capital") closed a $1,800 million synthetic lease equipment revolver
facility. Tranch one of the facility is $700 million. The second tranch of
$1,100 million requires cash collateralization in order to be drawn. The
obligations of Mirant Americas Development Capital under the facility are 89.9 %
guaranteed by Mirant. This facility will be used to fund equipment progress
payments due under purchase contracts which have been assigned to a third party
trust. Mirant Americas Development Capital acts as the trust's agent and is
obligated as such to perform the obligations under the contracts. Currently,
there are contracts for 46 turbines assigned to the trust. In addition, this
facility will be used to fund future equipment purchases.
29
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In October 2001, the Company filed an appeal of the state court's decision
concerning CEMIG in Brazilian Federal Court. The final outcome of this matter
cannot now be determined.
The worldwide commercial insurance industry has steadily contracted since
mid-year 2000 making insurance coverage less available and more expensive. The
September 11, 2001, attacks on the World Trade Center and Pentagon have
exacerbated the markets' condition. Mirant's deductibles for property insurance
will increase from an average of $750,000 per occurrence to $5 million per
occurrence, and business interruption deductibles will increase from an average
of 45 days per occurrence to 60 days per occurrence. While the threshold is not
yet final, Mirant's maximum exposure for catastrophic events has increased from
$10 million to a minimum of $20 million. The limits available for such insurance
have also been reduced, except in the cases of terrorism and sabotage, still
exceed several hundred million dollars per occurrence. This change took effect
at the November 1, 2001 renewal date.
The availability of terrorism and sabotage insurance is also significantly
reduced due to the September 11 attacks. In response, Mirant has a new program
for physical damage and business interruption arising from terrorism or sabotage
events. The program provides for worldwide coverage limited to $100 million with
deductibles of $5 million for physical damage and 60 days for business
interruption.
Mirant indirectly holds a 91.9% interest in the 1,218-MW coal-fired Sual
plant and an 87.2% interest in the 735-MW coal-fired Pagbilao plant, each in the
Philippines. The Sual and Pagbilao plants are financed with non-recourse project
debt. As of October 31, 2001, the aggregate principal amounts outstanding under
the Sual and Pagbilao credit facilities were approximately $827 million and $369
million, respectively. Under the respective credit agreements, the project
companies are required to provide certain specified levels and types of
insurance coverage. Although Mirant has secured such types and levels of
insurance for the Sual and Pagbilao facilities as it believes are normal for
prudent operators of similar facilities, the Company has been unable to secure
certain types and levels of insurance required by the respective credit
agreements as a result of changes in the insurance markets, including changes
attributable to the terrorist attacks on September 11, 2001, and. As of November
1, 2001, Sual and Pagbilao were in default under these credit agreements. Each
of the lenders under the Sual and Pagbilao facilities have executed temporary
waivers of default, the effectiveness of which are subject to specific
conditions. Mirant is working with the respective lender groups to satisfy the
conditions to the effectiveness of the temporary waivers. At this time, Mirant
does not anticipate that the Sual and Pagbilao lenders will accelerate the
respective loans as a result of such defaults. However, Mirant can give no
assurance that the lenders will continue to cooperate with its requests for
waivers, provide permanent waivers or additional temporary waivers or refrain
from accelerating the loans. In the event of acceleration, Mirant intends and is
currently able to refinance the Sual and Pagbilao credit facilities using
currently available long-term borrowing capacity, however, if conditions change
it can give no assurance to such effect. If Mirant does not repay or refinance
such loans upon an acceleration, the loss of the cash flow and assets of Sual
and Pagbilao would have a material adverse effect on the Company. Further, if
Mirant was to refinance such loans, it can give no assurances that such
refinancing would not result in substantial costs and be on less favorable terms
than it currently has in place. Further, during the terms of such defaults, the
respective Sual and Pagbilao project entities are prohibited under the financing
documentation from making distributions and, thus, amounts that would otherwise
be available for distribution will not be available to Mirant or the
intermediate holding companies to repay indebtedness or fund investment
activities. Mirant does not consider the defaults under the Sual and Pagbilao
credit facilities, or the inability to secure the insurance coverage required
thereunder, a breach of the terms of their respective energy conversion
agreements with National Power Corporation of the Philippines.
30
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition, on November 5, 2001, as a result of the above defaults under
the Sual and Pagbilao credit agreements, Mirant Asia-Pacific, a subsidiary of
Mirant and an indirect parent company of Sual and Pagbilao, gave notice of a
cross-default to the lenders under its credit facility. As of October 31, 2001,
the aggregate principal amount outstanding under the Mirant Asia-Pacific credit
facility was approximately $792 million. Although no assurances can be given
that, the Mirant Asia-Pacific lenders will refrain from declaring a default or
accelerating the loan, Mirant does not anticipate at this time that such lenders
will declare a default and accelerate the loan. In addition, although Mirant
believes that, in the event of an acceleration, it would be able to refinance
the Mirant Asia-Pacific loan, it can give no assurances to such effect. If
Mirant does not repay or refinance such loan upon acceleration, the loss of the
cash flow and assets of Mirant Asia-Pacific would have a material adverse effect
on Mirant. Further, the Mirant Asia-Pacific loan matures in January 2002 and, as
a result of the existence of the cross-defaults, Mirant Asia-Pacific may be
unable to refinance such loan on acceptable terms. In such event, Mirant may
repay the Mirant Asia-Pacific loan with amounts borrowed by Mirant under
existing Mirant credit facilities, using Mirant borrowing capacity that could be
used to fund other investment activities. Further, in the event that the Mirant
Asia-Pacific lenders declare a default under the credit facility, Mirant
Asia-Pacific would be prohibited under the financing documentation from making
distributions and, thus, amounts that would otherwise be available for
distribution would not be available to Mirant to repay indebtedness or fund
investment activities.
31
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2001 vs. THIRD QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
OVERVIEW
We are a global competitive energy company with leading energy marketing
and risk management expertise. We have extensive operations in North America,
Europe and Asia. With an integrated business model, we develop, construct, own
and operate power plants, and buy and sell wholesale electricity, gas and other
energy-related commodity products. We own or control more than 22,300 MW of
electric generating capacity around the world, with approximately 9,400 MW under
development. We consider a project under development when we have contracted to
purchase machinery for the project; we own or control the project site and are
in the permitting process. These projects may or may not have received all of
the necessary permits and approvals to begin construction. We cannot provide
assurance that these projects or pending acquisitions will be completed. In
North America, we also control access to approximately 2.6 billion cubic feet
per day of natural gas production, more than 2.2 billion cubic feet per day of
natural gas transportation and approximately 42 billion cubic feet of natural
gas storage.
Through our business development offices in the United States, Canada, The
Netherlands, Hong Kong, Singapore, Brazil, Italy, Switzerland, Germany, mainland
China, The Philippines and others, we monitor U.S. and international economies
and energy markets to identify and capitalize on business opportunities. Through
construction and acquisition, we have built a portfolio of power plants,
electric distribution companies and electric utilities, giving us a net
ownership and leasehold interest of over 19,900 MW of electric generating
capacity around the world, and control of over 2,400 MW of additional generating
capacity through management contracts. Our business also includes managing risks
associated with market price fluctuations of energy and energy-linked
commodities for us and our customers. We use our risk management capabilities to
optimize the value of our generating and gas assets and offer risk management
services to others. We also own electric utilities with generation transmission
and distribution capabilities and electricity distribution companies.
The Power and Gas Markets
In the United States during 2000, the Energy Information Administration
estimates that the power industry had an end-user market of over $228 billion of
electricity sales produced by an aggregate base power generation capacity of
approximately 793,000 MW (North American Electric Reliability Council ("NERC")
2001 Summer Assessment). The NERC anticipates that near-term electricity demand
will grow by 60,500 MW in the period from 2000-2004 (Reliability Assessment
2000-2009: The Reliability of Bulk Electric Systems in North America).
Historically, the power generation industry has been characterized by
electric utility monopolies selling to a franchised customer base. In response
to increasing customer demand for access to low-cost electricity and enhanced
services, new regulatory initiatives have been and are continuing to be adopted
to increase competition in the power industry. As a result of the recent energy
crisis in California, some states have either discontinued or delayed
implementation of initiatives involving retail deregulation. In deregulating
markets, industry trends and regulatory initiatives are transforming existing
franchise customer markets, which are characterized by vertically integrated,
price-regulated utilities, into markets in which generators compete with each
other for their principal customers (wholesale power suppliers and major
end-users) on the basis of price, service quality and other factors.
32
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the late 1980s and early 1990s deregulation of the natural gas
markets created a robust competitive wholesale gas market. Gas demand is
expected to grow from 23 trillion cubic feet per year in 2000 to a 30 trillion
cubic feet per year by 2010. The majority of this growth is being driven by the
electric generation market. The competitive electric generation market favors
low-cost generation technologies such as natural gas-fired combustion turbines
or combined-cycle plants to serve growing electricity demand and to replace
older, less-efficient units. Additionally, natural gas continues to be the most
cost-effective fuel source that meets increasingly stringent clean air
requirements. Currently, 16% of US power generation is fueled by natural gas.
Cambridge Energy Research Associates estimates that 90% of proposed power
generation development over the next four years in North America is expected to
use natural gas as its primary energy source. While the likelihood that all of
the proposed additions will actually enter commercial service as scheduled is
low, it does appear likely that natural gas demand driven by power generation
will be significant. Consequently, the natural gas and power commodity markets
are converging rapidly. The converging power and gas markets could create
significant arbitrage opportunities for us as a top-five marketer of natural gas
and power and an owner and controller of significant gas and power assets.
We view our gas and power marketing and risk management and power generation
businesses as an integrated unit. As the natural gas and power markets continue
to deregulate, unbundle and converge, we believe that our marketing experience,
risk management capabilities and products and control of selected assets in both
commodities potentially afford us a wide range of value creation opportunities
which could benefit both us and our customers. The ongoing restructuring of the
power industry should continue to transform traditional vertically integrated,
price-regulated markets into more competitive, more volatile markets. This
transformation requires that generators and their principal customers manage the
risks associated with producing and delivering energy commodities. As such, this
transformation of the energy markets could have the effect of creating
opportunities for us to market energy commodities and provide services to manage
these risks. We believe the move towards competitive marketplaces will increase
in the U.S. and abroad, potentially providing additional opportunities for us to
grow our risk management business.
Outside of the United States, we expect many governments in developed
economies to privatize their utilities, having realized that their energy assets
can be sold to raise capital without impairing system reliability. We expect
these countries to develop regulatory structures to encourage competition in the
electricity sector. In developing countries, the demand for electricity is
expected to grow rapidly. In order to satisfy this anticipated increase in
demand, some developing countries have adopted government programs designed to
encourage private investment in power plants. We believe that these market
trends will continue to create opportunities to acquire and develop power
generation plants outside the United States.
Strategy
Our strategy is to expand our business through ownership, leasing or control
of additional natural gas and electricity assets and to continue our rapid
growth by capitalizing on opportunities in markets where our unique combination
of strengths in physical asset management, electricity generation, management of
gas assets and energy marketing and risk management services allows us to be
positioned as a leading provider of energy products and services. We are
implementing our strategy through the development of new power plants
(greenfield projects), the expansion of existing power plants (brownfield
projects), acquisitions of power and gas assets competitively positioned in our
targeted markets, contractual arrangements for the control of generation
capacity and gas management facilities, the expansion of our marketing and risk
management activities and the implementation of information technology and
e-commerce applications. We continually review acquisition opportunities and are
currently in discussions with a number of parties in
33
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
regard to potential acquisitions, including potential acquisitions in the U.S.
that may be deemed material to our business. Our willingness to pursue these
opportunities may be dependent on many factors, including, but not limited to,
the market price of our common stock. To secure wholesale supply agreements or
to provide additional opportunities for growth, profitability or revenue
stability, we may enter into agreements to acquire, control or manage
distribution and supply businesses or other energy aggregators in selected
markets. We expect to fund our growth strategy in both the long and short-term
through a combination of cash flows from operations as well as debt financings
and equity offerings that are currently under evaluation.
While we believe that our experience and expertise in assessing and managing
market and credit risk will allow us to remain competitive during volatile or
otherwise adverse market circumstances, we may suffer from some competitive
disadvantages which impede our ability to implement this strategy.
Competition
As a global competitive energy company, we face intense competition in all
phases of the business in which we compete, both in the United States and in
international markets. We encounter competition from companies of all sizes,
having varying levels of experience, financial and human resources and differing
strategies. In the power generation markets, we compete in the development and
operation of energy-producing projects, and our competitors in this business
include various utilities, industrial companies and independent power producers
(including affiliates of utilities). In our energy marketing and risk management
operations, we compete with international, national and regional full service
energy providers, merchants, producers and pipelines in our ability to aggregate
competitively priced supplies from a variety of sources and locations and to
utilize efficient transmission or transportation.
The following summarizes our competitive position in several of our key
markets:
o North America: We were ranked the fifth and sixth-largest competitive
power company in July 2001 and July 2000, respectively, according to the
Platts "Global Power Report." In addition, for the second quarter of
2001, our marketing and risk management operations were ranked by Power
Markets Weekly as the seventh-largest North American power marketer and
by Gas Daily as the third-largest North American gas marketer.
o Europe: In the European market, in general, we were ranked among the 10
largest private power companies based on total dollars invested in
private power assets according to Cambridge Energy Research Associates.
In addition, according to 1999 data, Bewag was the sixth-largest
electricity producer in Germany based on total electricity sales
(approximately 13 TWh). These rankings are based on a report by VDEW, a
German electricity association.
o Asia-Pacific: As of July 2001, we ranked sixth in the Asia-Pacific
market among the twenty largest private power companies and we were the
second-largest U.S. developer, as measured by MW's of equity ownership,
according to Cambridge Energy Research Associates. Specifically, we have
an approximate 20% share of the total installed capacity in the
Philippines, and we are the largest private producer of electricity in
that country. In general, our coal-fired plants in the Philippines are
among the lowest operating cost plants in their market and have exceeded
their contractual availability requirements. In addition, we also hold
interests in power plants located in the Guangdong and Shandong
provinces of China.
34
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the transition of the energy industry to competitive markets, it is
difficult for us to assess our position versus the position of existing power
providers and new entrants, due to the fact that each company may employ widely
differing strategies in their fuel supply and power sales contracts with regard
to pricing, terms and conditions. Further difficulties in making competitive
assessments of our company arise from the fact that many states and countries
are considering or implementing different types of regulatory and privatization
initiatives that are aimed at increasing competition in the power industry.
Increased competition that has resulted from some of these initiatives has
already contributed to a reduction in electricity prices and put pressure on
electric utilities to lower their costs, including the cost of purchased
electricity. Additionally, our business is rapidly becoming more competitive due
to technological advances in power generation, e-commerce enabling new ways of
conducting business, the increased role of full service providers and increased
efficiency of energy markets.
In general, however, we believe that our experience and expertise in
assessing and managing market and credit risk will allow us to remain
competitive during volatile or otherwise adverse market circumstances.
RESULTS OF OPERATIONS
In August of 2000 we acquired the remaining 40% of Mirant Americas Energy
Marketing, which is now consolidated in our financial statements and in December
of 2000 we deconsolidated WPD. Due to these events some items in our financial
statements have been significantly affected and therefore affect period to
period comparisons.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
-------------------------------------------
Third Quarter Year-To-Date
------------------------ ------------------
(in millions)
Operating revenues.................................... $3,987 95% $18,938 354%
Operating expenses
Cost of fuel, electricity and other products....... 3,734 105% 17,846 450%
Maintenance........................................ (4) (11%) (1) (1%)
Depreciation and amortization...................... 11 12% 40 16%
Selling, general and administrative................ 0 0% 425 132%
Impairment loss.................................... (2) (40%) 77 405%
Other operating.................................... 8 11% 90 51%
Other income/expense
Interest expense, net.............................. (5) (4%) (21) (6)%
Equity in income of affiliates..................... (31) (45%) 32 24%
Other, net......................................... (18) (67%) (36) (55)%
Provision for income taxes............................ 52 61% 229 416%
Minority interest..................................... 1 6% (12) (20)%
35
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating revenues. Our operating revenues for the three and nine months
ended September 30, 2001 were $8,185 million and $24,295 million, respectively,
an increase of $3,987 million and $18,938 million over the same periods in 2000.
The following factors were responsible for the increase in operating revenues:
o Revenues from generation and energy marketing products for the three and
nine months ended September 30, 2001, were $8,023 million and $23,940
million, respectively, compared to $4,076 million and $4,949 million for
the same periods in 2000. These increases of $3,947 million and $18,991
million resulted primarily from our acquisition in August of 2000 of the
remaining 40% interest of Mirant Americas Energy Marketing, which is now
consolidated in our financial statements. The increases in revenues were
also attributable to the contribution of the plants we acquired in Maryland
and Virginia in December of 2000, increased prices of and market demand for
natural gas and power in the western U.S. and the commencement of
operations at our Wisconsin plant in May 2000, at our Michigan plant in
June 2001 and for the first and second phases of our Texas plant in June
2000 and 2001, respectively. In addition, the 2000 amounts also reflect
provisions taken related to revenues from our California operations under
RMR contracts.
o Distribution and integrated utility revenues for the three and nine months
ended September 30, 2001, were $154 million and $334 million, respectively,
compared to $114 million and $389 million for the same periods in 2000.
These variances were attributable to our acquisition of an 80% interest in
the Jamaican Public Service Company Limited in March 2001 and were offset
by the deconsolidation of WPD effective December 1, 2000.
Operating expenses. Operating expenses for the three and nine months ended
September 30, 2001, were $7,728 million and $23,307 million, respectively, an
increase of $3,747 million and $18,477 million over the same periods in 2000.
The following factors were responsible for the increase in operating expenses:
o Cost of fuel, electricity and other products for the three and nine months
ended September 30, 2001, was $7,303 million and $21,811 million,
respectively, compared to $3,569 million and $3,965 million for the same
periods in 2000. These increases of $3,734 million and $17,846 million
resulted primarily from our acquisition in August 2000 of the remaining 40%
of Mirant Americas Energy Marketing, which is now consolidated in our
financial statements. These increases were also attributable to additional
costs from the plants we acquired in Maryland and Virginia in December of
2000, our acquisition of 80% of the Jamaican Public Service Company Limited
in March of 2001, increased prices of and market demand for natural gas and
power in the western U.S. and the commencement of operations at our
Wisconsin plant in May 2000, at our Michigan plant in June 2001 and at our
Texas plant for the first and second phase in June 2000 and 2001,
respectively.
o Maintenance expense and depreciation and amortization expenses for the
three and nine months ended September 30, 2001, were $132 million and $387
million, respectively, compared to $125 million and $348 million for the
same periods in 2000. This increase of $7 million for the quarter resulted
primarily from the plants and businesses we acquired in the Americas. This
was offset somewhat by the deconsolidation of WPD effective December 1,
2000. The year-to-date increase of $39 million resulted primarily from the
plants we acquired in Maryland and Virginia in December of 2000, our
acquisition of 80% of the Jamaican Public Service Company Limited in March
of 2001 and the commencement of operations at our Wisconsin plant in May
2000, at our Michigan plant in June 2001 and at our Texas plant for the
first and second phase in June 2000 and 2001, respectively. These increases
were offset somewhat by the deconsolidation of WPD effective December 1,
2000.
36
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
o Selling, general and administrative expense for the three and nine months
ended September 30, 2001, was $209 million and $748 million, respectively,
compared to $209 million and $323 million for the same periods in 2000. The
quarterly amounts and the majority of the year-to-date increases of $425
million resulted from expenses associated with the operations of the plants
we acquired in Maryland and Virginia in December of 2000, our acquisition
of 80% of the Jamaican Public Service Company Limited in March of 2001 and
our acquisition in August 2000 of the remaining 40% of Mirant Americas
Energy Marketing, which is now consolidated in our financial statements.
These increases were partially offset by the deconsolidation of WPD
effective December 1, 2000 and costs related to our transition to a
publicly traded company recorded in the third quarter of 2000. The
year-to-date increases were also attributable to provisions taken in
relation to uncertainties in the California power market and a reduction of
bad debt expense in the first quarter of 2000 related to the Shajiao C
venture.
o Impairment loss for the nine months ended September 30, 2001 was $96
million, compared to $19 million for the same period in 2000. The loss is
primarily attributable to the $88 million write-off of our investment in
our Chilean subsidiary, EDELNOR ,taken in the second quarter of 2001.
o Other operating expense for the three and nine months ended September 30,
2001, was $81 million and $265 million, respectively, compared to $73
million and $175 million for the same periods in 2000. The majority of
these increases of $8 million and $90 million resulted from expenses
related to the plants we acquired in Maryland and Virginia in December of
2000, our acquisition of 80% of the Jamaican Public Service Company Limited
in March of 2001 and increased property taxes. These increases were offset
partially by the deconsolidation of WPD effective December 1, 2000.
Total other income (expense). Other expense for the three and nine months
ended September 30, 2001, was $68 million and $123 million, respectively,
compared to other expense of $24 million and $140 million from the same periods
in 2000. The increase of $44 million and decrease of $17 million were primarily
due to:
o Interest expense, net for the three and nine months ended September 30,
2001, was $115 million and $317 million, respectively, compared to $120
million and $338 million for the same periods in 2000. These decreases of
$5 million and $21 million were primarily due to the deconsolidation of WPD
effective December 1, 2000. This was offset by interest expense in 2001
related to additional debt financings to fund acquisitions and working
capital, increased expense resulting from the acquisition of the remaining
40% of Mirant Americas Energy Marketing in August 2000, which is now
consolidated in our financial statements and greater use of lines of credit
to support growth in the energy marketing business.
o Equity in income of affiliates for the three and nine months ended
September 30, 2001, was $38 million and $164 million, respectively, a
decrease of $31 million and an increase of $32 million from the same
periods in 2000. The decrease for the quarter was primarily due to lower
earnings from Bewag, due in part to increased fuel cost in the current
quarter. In addition, Bewag's third quarter income for 2000 was higher due
to the impact of a German income tax rate reduction. In the Americas we had
income from Mirant Americas Energy Marketing prior to its consolidation
resulting from our acquisition of the remaining 40% in August 2000. In Asia
we had lower earnings from our Shajiao C venture due to a forced outage.
This was offset by income from WPD after the deconsolidation effective
December 1, 2000 which includes income from SWALEC after our acquisition of
Hyder. The year-to-date increases were primarily due to income from WPD
after the deconsolidation effective December 1, 2000 and income from SWALEC
after our acquisition of Hyder. This was somewhat offset by the
consolidation of
37
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Mirant Americas Energy Marketing in August of 2000 after acquiring the
remaining 40% and by lower earnings from our Shajiao C venture.
o Other income for the three and nine months ended September 30, 2001, was $9
million and $30 million, respectively, compared to $27 million and $66
million from the same periods in 2000. These decreases were primarily the
result of gains recognized from the sale of miscellaneous assets in 2000.
Provision for income taxes. The provision for income taxes for the three
and nine months ended September 30, 2001, was $137 million and $284 million,
respectively, an increase of $52 million and $229 million for the same periods
in 2000. These increases are primarily due to the substantial increase in income
generated by the Americas Group. This was offset somewhat by the recording of a
U.S. income tax expense in the third quarter of 2000 related to our investment
in Bewag. In addition, the year-to-date increase also includes additional taxes
related to a change in our cash repatriation strategy for our Asian operations
and additional provisions related to our consolidated tax position taken in the
first quarter of 2001.
Minority interest. Minority interest for the three and nine months ended
September 30, 2001, was $18 million and $48 million, respectively, an increase
of $1 million and a decrease of $12 million for the same periods in 2000. The
year-to-date variance was primarily due to the deconsolidation of WPD effective
December 1, 2000, offset by the accrued dividends on the trust preferred
securities in 2001 and income from our acquisition of 80% of the Jamaican Public
Service Company Limited in March of 2001.
Earnings
Our consolidated income from continuing operations for the three and nine
months ended September 30, 2001, was $234 million ($.67 per diluted share) and
$533 million, respectively. Adjusting for the final write-off of our Chilean
investment ($57 million net of tax), taken in the second quarter of 2001, and
costs of $28 million related to our transition to a publicly traded company
recorded in the third quarter of 2000, our income from operations for the three
and nine months ended September 30, 2001, was $234 million and $590 million
($0.67 and $1.69 per diluted share, respectively) compared to $119 million and
$300 million ($0.35 and $1.00 per diluted share, respectively) for the
corresponding periods of 2000. This excludes the net income from our
discontinued operations (SE Finance) of $7 million for the three months ended
September 30, 2000, and $5 million and $20 million for the nine months ended
September 30, 2001 and 2000, respectively. The increases in income from
operations of $115 million, or 97%, and $290 million, or 97%, from the same
periods in 2000 are attributable to our business segments as follows:
Americas
Income from continuing operations for the Americas Group totaled $222
million and $552 million for the three and nine months ended September 30, 2001
(excluding the write-off of our investment in EDELNOR taken in the second
quarter of 2001). This represents an increase of $109 million and $411 million
from the same periods in 2000 and is primarily attributable to the contribution
of the plants we acquired in Maryland and Virginia in December of 2000, our
acquisition of 80% of the Jamaican Public Service Company Limited in March of
2001 and the commencement of operations at our Wisconsin plant in May 2000, our
plant in Michigan in June 2001 and the first and second phases of our Texas
plant in June 2000 and 2001, respectively. This increase was partially offset by
a $35 million loss during the three months ended September 30, 2001, on an
energy requirements contract primarily resulting from new market regulatory
requirements. We believe that we have adequately provided for estimated future
losses under this contract, which terminates at the end of 2003; however, we are
subject to subsequent regulatory and commercial risks under this contract and no
assurance can be given that additional losses will not occur. The year-to-date
increase was also attributable to increased price volatility and market demand
for natural gas and power in
38
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
the U.S. and natural gas in Canada. This increase was partially offset by
$147 million ($245 million pre-tax) which was provided in relation to the
uncertainties in the California power market in the first quarter of 2001. The
total amount of provisions made during 2000 and 2001 in relation to these
uncertainties was $177 million ($295 million pre-tax). As of September 30, 2001,
the total amount owed to us by the CAISO and the PX was $373 million.
Europe
Income from continuing operations from the Europe Group totaled $12 million
and $60 million for the three and nine months ended September 30, 2001, a
decrease of $7 million and $2 million from the same periods in 2000. The
decrease for the quarter was primarily attributable to lower earnings from Bewag
due to increased fuel cost in the current quarter, net losses from the energy
marketing operations and increased business development expenses. This decrease
was offset by earnings from WPD which includes the results from the SWALEC
electricity distribution business purchased as part of the Hyder acquisition in
the fourth quarter of 2000. The year-to-date decrease is primarily due to net
losses from the energy marketing operations offset by earnings from WPD which
includes the results from the SWALEC electricity distribution business.
Asia-Pacific
Income from continuing operations from the Asia-Pacific Group totaled $53
million and $149 million for the three and nine months ended September 30, 2001,
an increase of $20 million and a decrease of $31 million from the same periods
in 2000. The increase for the quarter was primarily due to the final settlement
of a commercial dispute with an outside advisor and additional income due to the
commencement of the energy supply business partially offset by lower income from
our Shajiao C venture due to a forced outage. The year-to-date decrease in net
income includes an increase in accrued income taxes in 2001 resulting from a
change in our cash repatriation strategy for our Asian operations, lower
earnings from our Shajiao C venture due to a forced outage and a reduction of
bad debt expense in 2000 related to the Shajiao C venture. These amounts were
partially offset by additional income due to the commencement of the energy
supply business, and higher income from SIPD.
Corporate
After-tax corporate expenses produced a net loss from continuing operations
of $53 million and $171 million for the three and nine months ended September
30, 2001. Excluding the costs of $28 million related to our transition to a
publicly traded company recorded in the third quarter of 2000, our net loss from
operations for the three and nine months ended September 30, 2000 was $46
million and $83 million, respectively, an increase of $7 million and $88 million
from the same periods in 2000. The increased costs for the quarter resulted
primarily from the accrued dividends on the trust preferred securities. The
year-to-date increase reflects the accrued dividends on the trust preferred
securities, increased advertising, additional tax provisions related to our
consolidated tax position and increased interest expense on corporate borrowings
used to fund acquisitions and working capital and various other Corporate
expenses.
During the third quarter, we entered into a derivative contract to reduce
the cash and earnings volatility associated with the majority of its
stock-related compensation programs. In accordance with SFAS 133, the derivative
is accounted for under fair value accounting in our financial statements.
39
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Cash provided by operating activities totaled approximately $303 million
for the nine months ended September 30, 2001 as compared to approximately $468
million for the same period last year. This decrease and the difference between
net income and cash from operations is primarily due to the payment of operating
costs related to amounts owed from the CAISO and California PX and obligations
under energy delivery contracts and power purchase agreements with PEPCO. In
addition, the cash flows of WPD are now reflected as cash flows from investing
activities as we receive dividends from this affiliate. In the prior year, the
cash flows of WPD were reflected in cash flows from operating activities as we
were consolidating them prior to December 2000.
Cash used in investing activities totaled $1,634 million for the nine
months ended September 30, 2001, as compared to $948 million for the same period
in 2000. The increase is primarily attributable to additional capital
expenditures in North America, the acquisition of an additional 18.8% interest
in Bewag in June 2001, our Jamaican investment in March 2001 and our southern
Louisiana investment in August 2001. The increase was somewhat offset by the
issuance of notes in 2000 to finance the Hyder acquisition.
Cash provided by financing activities totaled approximately $1,521 million
for the nine months ended September 30, 2001, as compared to $880 million for
the same period in 2000. The increase is primarily attributable to payments of
$503 million of dividends to Southern in 2000. We primarily used cash flows
provided by financing activities to finance investments in our subsidiaries.
We expect our cash and financing needs over the next several years to be
met through a combination of cash flows from operations, debt and equity
financings and potential asset sales. We have a significant part of our
investments in subsidiaries financed under arrangements requiring extensions of
credit to be repaid solely from each of our subsidiaries' cash flows.
Subsidiaries financed in this manner are often restricted in their ability to
pay dividends and management fees periodically to us by their respective project
credit documents. These limitations usually require that debt service payments
be current, debt service coverage ratios be met and there be no default or event
of default under the relevant credit documents. There are also additional
limitations that are adapted to the particular characteristics of each project
affiliate.
On July 17, 2001, we closed $2,250 million of new corporate revolving
credit facilities, comprised of a $1,125 million 364-day revolving credit
facility and a $1,125 million 4-year revolving credit facility. Funds from the
new revolving credit facilities were used to replace existing credit facilities.
On July 20, 2001, we repaid a $62 million term loan facility. On July 23, 2001,
we repaid the balance of $427 million and cancelled the commitment on our $450
million credit facility. Letters of credit totaling $96 million were transferred
to the new 4-year credit facility and our $100 million letter of credit facility
was cancelled.
As of September 30, 2001, sources of liquidity included the April 1999 $450
million credit facility C, the July 2001 $1,125 million 364-day credit facility
and the July 2001 $1,125 million 4-year facility. We have the option to extend
the outstanding amounts on the $1,125 million 364-day credit facility at
maturity for up to an additional year. Our existing facilities and cash
position, along with existing credit facilities at our subsidiaries and
additional planned financings to fund construction costs and working capital,
are expected to provide sufficient liquidity for new investments, working
capital and capital expenditures,
40
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
including letters of credit, over the next 12 months. As of September 30, 2001,
we had borrowed $625 million under the July $1,125 million 364-day credit
facility and $400 million under the July 2001 $1,125 million 4-year facility. We
also issued letters of credit totaling $287 million and $216 million under the
April 1999 $450 million credit facility and the $1,125 million 4-year facility,
respectively.
In August 2001, Mirant Americas Generation exercised its right to extend the
maturity of its $695 million acquisition facility and its $150 million working
capital facility and converted the drawn balances of $750 million into a term
loan with maturity in September 2002. Under this facility, Mirant Americas
Generation may elect to rollover the borrowings at a base rate or at the LIBOR
plus an applicable margin based on its credit rating on the date of the
rollover. The outstanding borrowings under the term loan were $750 million at an
interest rate of 4.68% at September 30, 2001.
As of September 30, 2001, Mirant Americas Generation had separate $250
million and $50 million revolving credit facilities. The commitments under the
$250 million and $50 million revolving credit facilities, with an annual
commitment fee of 17.5 basis points per annum, remain available through October
2004. Under the revolving credit facilities, Mirant Americas Generation may
elect to borrow at a base rate or at the LIBOR plus an applicable margin based
on its credit rating on the date of borrowing. Interest is payable on the
maturity of the chosen interest period. No amounts were outstanding on the $250
million and $50 million revolving credit facilities at September 30, 2001.
On September 17, 2001, our Board of Directors approved the repurchase of up
to 10 million shares of our common stock. The authorization was effective
immediately and continued for a period of 30 days. Pursuant to the
authorization, 100,000 shares of our common stock were purchased for
approximately $2 million in the open market, in privately negotiated
transactions and/or in block transactions.
On October 9, 2001, Mirant Americas Generation issued $750 million in senior
unsecured notes under Rule 144A of the Securities Act. The notes issued included
$300 million of 7.2% senior notes due 2008 and $450 million of 8.5% senior notes
due 2021. The net proceeds from these notes as well as operating cash flow were
used to repay the $750 million term loan, which was subsequently terminated, and
to pay breakage costs on interest rate swaps entered into in 2000 in
anticipation of this debt offering. Interest on the notes is payable
semiannually beginning April 1, 2002. Mirant Americas Generation may redeem the
notes, in whole or in part, at any time at a redemption price equal to 100% of
the principal amount plus accrued interest, plus a make-whole premium, as
defined in the note agreements. Furthermore, Mirant Americas Generation is
obligated to consummate an exchange offer under an effective registration
statement or cause re-sale of the notes to be registered under the Securities
Act within 270 days of the issuance of these notes or the annual interest rate
will increase by 0.5% per annum.
We indirectly hold a 91.9% interest in the 1,218-MW coal-fired Sual plant
and an 87.2% Interest in the 735-MW coal-fired Pagbilao plant, each in the
Philippines. The Sual and Pagbilao plants are financed with non-recourse project
debt. As of October 31, 2001, the aggregate principal amounts outstanding under
the Sual and Pagbilao credit facilities were approximately $827 million and $369
million, respectively. Under the respective credit agreements, the project
companies are required to provide certain specified levels and types of
insurance coverage. Although we have secured such types and levels of insurance
for the Sual and Pagbilao facilities as we believe are normal for prudent
operators of similar facilities, we have been unable to secure certain types and
levels of insurance required by the respective credit agreements as a result of
changes in the insurance markets, including changes attributable to the
terrorist attacks on September 11, 2001. As of November 1, 2001, Sual and
Pagbilao were in default under these credit agreements. Each of the lenders
under the Sual and Pagbilao facilities have executed temporary waivers of
default, the effectiveness of which are subject to specific conditions. We are
working with the respective lender groups to satisfy the conditions to the
41
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
effectiveness of the temporary waivers. At this time, we do not anticipate that
the Sual and Pagbilao lenders will accelerate the respective loans as a result
of such defaults. However, we can give no assurance that the lenders will
continue to cooperate with our requests for waivers or provide permanent
waivers, additional temporary waivers or refrain from accelerating the loans. In
the event of acceleration, we intend and are currently able to refinance the
Sual and Pagbilao credit facilities using currently available long-term
borrowing capacity, however, if conditions change we can give no assurance to
such effect. If we do not repay or refinance such loans upon an acceleration,
the loss of the cash flow and assets of Sual and Pagbilao would have a material
adverse effect on us. Further, if we were to refinance such loans, we can give
no assurances that such refinancing would not result in substantial costs and be
on less favorable terms than we currently have in place. Further, during the
terms of such defaults, the respective Sual and Pagbilao project entities are
prohibited under the financing documentation from making distributions and,
thus, amounts that would otherwise be available for distribution will not be
available to us or the intermediate holding companies to repay indebtedness or
fund investment activities. We do not consider the defaults under the Sual and
Pagbilao credit facilities, or the inability to secure the insurance coverage
required thereunder, a breach of the terms of their respective energy conversion
agreements with National Power Corporation of the Philippines.
In addition, on November 5, 2001, as a result of the above defaults under
the Sual and Pagbilao credit agreements, Mirant Asia-Pacific, a subsidiary of
ours and an indirect parent company of Sual and Pagbilao, gave notice of a
cross-default to the lenders under its credit facility. As of October 31, 2001,
the aggregate principal amount outstanding under the Mirant Asia-Pacific credit
facility was approximately $792 million. Although no assurances can be given
that the Mirant Asia-Pacific lenders will refrain from declaring a default or
accelerating the loan, we do not anticipate at this time that such lenders will
declare a default and accelerate the loan. In addition, although we believe
that, in the event of an acceleration, we would be able to refinance the Mirant
Asia-Pacific loan, we can give no assurances to such effect. If we do not repay
or refinance such loans upon acceleration, the loss of the cash flow and assets
of Mirant Asia-Pacific would have a material adverse effect on us. Further, the
Mirant Asia-Pacific loan matures in January 2002 and, as a result of the
existence of the cross-defaults, Mirant Asia-Pacific may be unable to refinance
such loan on acceptable terms. In such event, we may repay the Mirant
Asia-Pacific loan with amounts borrowed by us under existing Mirant credit
facilities, using our borrowing capacity that could be used to fund other
investment activities. Further, in the event that the Mirant Asia-Pacific
lenders declare a default under the credit facility, Mirant Asia-Pacific would
be prohibited under the financing documentation from making distributions and,
thus, amounts that would otherwise be available for distribution would not be
available to us to repay indebtedness or fund investment activities.
42
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The market price of our common stock at September 30, 2001 was $21.90 per
share and the book value was $13.80 per share based on the 340,351,333 million
shares outstanding at September 30, 2001, representing a market-to-book ratio of
159%.
Litigation and Other Contingencies
Reference is made to Note I to the financial statements filed as part of
this quarterly report on Form 10-Q relating to the following litigation matters
and other contingencies:
Litigation:
o Reliability-Must-Run Agreements
o Defaults by SCE and Pacific Gas and Electric and Bankruptcy of Pacific
Gas and Electric
o DWR Power Purchases
o California Price Mitigation and Refund Proceeding
o Western Power Market Investigations
o California Rate Payer Litigation
o CAISO Claim before the FERC
o Consumers Union Complaint
o Environmental Suit and Notice of Intent to File Suit
o Pacific Gas and Electricity Bankruptcy
o CARE Complaint
o PX Bankruptcy
o NYISO Automatic Mitigation Plan
o Mobile Energy
o State Line
o CEMIG
Other Contingencies:
o Turbine Purchases and Other Construction-Related Commitments
o Long-Term Service Agreements
o Long-Term Purchase Power Agreement
o Operating Leases
Additionally, for recent events occurring after September 30, 2001
reference is made to Note K to the financial statements filed as part of this
quarterly report on Form 10-Q.
In addition to the proceedings described above, we experience routine
litigation from time to time in the normal course of our business, which is not
expected to have a material adverse effect on our consolidated financial
condition, cash flows or results of operations.
43
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our energy marketing activities, our energy marketing and risk
management subsidiaries enter into a variety of contractual commitments, such as
swaps, swap options, cap and floor agreements, futures contracts, forward
purchase and sale agreements and option contracts. These contracts generally
require future settlement and are either executed on an exchange or traded as
OTC instruments. Contractual commitments have widely varying terms and have
durations that range from a few days to a number of years, depending on the
instrument.
The way in which we account for and present contractual commitments in our
financial statements depends on both the type and purpose of the contractual
commitment held or issued. As discussed in the summary of accounting policies,
we record all contractual commitments used for trading purposes, including those
used to hedge trading positions, at fair value. Consequently, changes in the
amounts recorded in our unaudited condensed consolidated balance sheets
resulting from movements in fair value are included in trading revenues in the
period in which they occur. Contractual commitments expose us to both market
risk and credit risk.
Market Risk
Market Risk is the potential loss that we may incur as a result of changes
in the fair value of a particular instrument or commodity. All financial and
commodities-related instruments, including derivatives, are subject to market
risk. Our exposure to market risk is determined by a number of factors,
including the size, duration, composition, and diversification of positions held
and the absolute and relative levels of interest rates, as well as market
volatility and liquidity. For instruments such as options, the time period
during which the option may be exercised and the relationship between the
current market price of the underlying instrument and the option's contractual
strike or exercise price also affects the level of market risk. The most
significant factor influencing the overall level of market risk to which we are
exposed is our use of various risk management techniques. We manage market risk
by actively monitoring compliance with stated risk management policies as well
as monitoring the effectiveness of our hedging policies and strategies through
our risk oversight committees. Our risk oversight committees review and monitor
compliance with risk management policies that limit the amount of total net
exposure during the stated periods. These policies, including related risk
limits, are approved by the Group Boards of Directors and are regularly assessed
by management to ensure their appropriateness given our objectives. Our
corporate risk control officer is a member of the Group risk oversight
committees to ensure that information is communicated to our senior management
and audit committee as needed.
We employ a systematic approach to the evaluation and management of the
risks associated with our energy marketing and risk management-related
contracts, including Value-at-Risk ("VaR"). VaR is defined as the maximum loss
that is not expected to be exceeded with a given degree of confidence and over a
specified holding period. We use a 95% confidence interval and holding periods
that vary by commodity and tenor, to evaluate our VaR exposure. Based on a 95%
confidence interval and employing a one-day holding period for all positions,
our portfolio of positions had a VaR of $11 million at September 30, 2001.
During the nine months ending September 30, 2001, the actual daily change in
fair value exceeded the corresponding daily VaR calculation twice, which falls
within our 95% confidence interval. In addition to VaR, we utilize additional
risk control mechanisms such as commodity position limits and stress testing of
the total portfolio and its components.
The determination of net notional amounts does not consider any of the
market risk factors discussed above. Net notional amounts are indicative only of
the volume of activity and are not a measure of market risk. Market risk is also
influenced by the relationship among the various off-balance sheet categories,
as
44
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
well as by the relationship between off-balance sheet items and items recorded
in our condensed consolidated balance sheets. For all of these reasons, the
interpretation of net notional amounts as a measure of market risk could be
misleading.
The fair values of our assets from risk management activities recorded in
the unaudited condensed consolidated balance sheets at September 30, 2001, were
comprised primarily of approximately 34% electricity and 62% natural gas. The
fair values of the liabilities from risk management activities recorded in the
unaudited condensed consolidated balance sheets at September 30, 2001, were
comprised primarily of approximately 30% electricity and 65% natural gas.
Credit Risk
In conducting our energy marketing and risk management activities, we
regularly transact business with a broad range of entities and a wide variety of
end users, trading companies, and financial institutions. Credit risk is
measured by the loss we would record if our counterparties failed to perform
pursuant to the terms of their contractual obligations and the value of
collateral held, if any, were not adequate to cover such losses. We have
established controls to determine and monitor the creditworthiness of
counterparties, as well as the quality of pledged collateral, and uses master
netting agreements whenever possible to mitigate our exposure to counterparty
credit risk. Master netting agreements enable us to net certain assets and
liabilities by counterparty. We also net across product lines and against cash
collateral, provided such provisions are established in the master netting and
cash collateral agreements. Additionally, we may require counterparties to
pledge additional collateral when deemed necessary.
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. We
monitor credit risk on both an individual basis and a group counterparty basis.
45
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The following information updates previously reported litigation. A
background for these updates can be found in Notes I and K to the financial
statements herein or our Form 10-K filed March 21, 2001, as amended by Form
10-K/A, filed on June 29, 2001 or our quarterly reports on Form 10-Q filed May
10, 2001 and August 10, 2001, as amended by Form 10-Q/A, filed on August 22,
2001.
CEMIG. In September 2001, our appeal to the state appellate court in the
suit against the State of Minas Gerais, Brazil, concerning our interest in CEMIG
was denied. On October 31, 2001, we filed an appeal of the state court's
decision in Brazilian Federal Court.
State Line. On October 3, 2001, the Illinois Supreme Court denied our
appeal regarding the proper jurisdiction of the lawsuits. We are considering
whether to appeal this issue to the United States Supreme Court.
California Rate Payer Litigation. On September 21, 2001, the defendants in
the California rate payer litigation served upon the plaintiffs in each case a
Joint Demurrer, a Joint Motion to Strike and a Joint Motion to Stay. The Joint
Demurrer asserts that the defendants should be granted judgment as a matter of
law on the claims asserted by the plaintiffs. The Joint Motion to Strike asserts
that if the court does not conclude that plaintiffs' claims are barred entirely,
then all claims seeking monetary recovery should be stricken based on the filed
rate doctrine. The Joint Motion to Stay asserts that any claims not dismissed in
response to the Joint Demurrer or stricken in response to the Motion to Strike
should be stayed until the FERC has entered a final order in the ongoing
proceedings before it related to the investigations of the California wholesale
markets. These pleadings have been served on the plaintiffs in each of the six
cases but will not be filed with the court until a determination is made
regarding whether the actions should be coordinated and, if so, before which
court. The plaintiffs seek to have the cases coordinated before a court in San
Francisco, while the defendants have asked for the cases to be coordinated
before a court in San Diego. The California Judicial Council has sent the
coordination motions to the presiding judge for the Superior Court for the
County of San Diego, who has assigned a judge to hear the coordination
petitions. The judge will decide whether the cases should be coordinated and, if
so, will recommend to the California Judicial Council which court should hear
the coordinated actions. We cannot predict the outcome of these cases.
CARE Complaints. On October 24, 2001, CARE filed a complaint with the FERC
against the Independent Energy Producers Association ("IEPA"), which includes
us, and other parties, claiming that they had violated various California and
federal laws to unlawfully manipulate the California wholesale energy market.
CARE requests that the FERC (1) order refunds of approximately $2 billion from
sellers of electricity in the California market, (2) void any long-term energy
contracts with such sellers and DWR/CERS, and (3) revoke any licenses,
certificates or permits for any siting, construction or operation of power
plants in California. We are in the process of responding to this complaint.
FERC Developments Relating to the Western U.S. Power Markets
CAISO and PX Price Caps. On July 12, 2001, the Chief Judge issued a
recommendation to the FERC, which included a proposed methodology for the FERC
to adopt and issue refunds for sales into the CAISO and PX markets. The
recommendation also included a hearing procedure to determine the appropriate
amount of refunds for each jurisdictional seller. On July 25, 2001, the FERC
issued an order requiring hearings to determine the amount of any refunds and
amounts owed for sales made to the CAISO/PX from October 1, 2000 through June
20, 2001. Hearings are scheduled to be held in December 2001 and February 2002.
In the July 25 order issued in the California refund proceeding, the FERC
also ordered that a preliminary evidentiary proceeding be held to develop a
factual record on whether there have been unjust and unreasonable charges for
46
spot market bilateral sales in the Pacific Northwest from December 25, 2000
through June 20, 2001. In the proceeding, the DWR filed to recover certain
refunds from parties, including a Mirant subsidiary, for bilateral sales of
electricity to the DWR at the California/Oregon border, claiming that such sales
took place in the Pacific Northwest. A FERC ALJ recently concluded a preliminary
evidentiary hearing related to possible refunds for power sales in the Pacific
Northwest. In a preliminary ruling issued September 24, 2001, the ALJ indicated
that she would order no refunds because the complainants had failed to prove any
exercise of market power or that any prices were unjust or unreasonable. The
FERC may accept or reject this preliminary ruling and the FERC's decision may
itself be appealed. At this time, we cannot predict the outcome of this
proceeding. If we are required to refund such amounts, our subsidiaries would be
required to refund amounts previously received pursuant to sales made on their
behalf. In addition, our subsidiaries would be owed amounts for purchases made
on their behalf from other sellers in the Pacific Northwest.
Consumers Union Complaint. On July 16, 2001, several of our subsidiaries
filed a response to the petition, arguing that the petition should be dismissed.
We cannot determine at this time what action, if any, the FERC will take with
respect to this complaint.
Environmental Suit and Notice of Intent to File Suit. In October 2001, we
agreed to a consent decree with all plaintiffs resolving all issues related to
the environmental suit and notice of intent to file suit in connection with
Mirant's Potrero peaking units. The agreed-upon settlements are subject to final
approvals and notices by various governmental agencies.
Pacific Gas and Electric Bankruptcy. On September 20, 2001, Pacific Gas and
Electric filed a proposed plan of reorganization. Under the terms of the
proposed plan, unsecured creditors such as we would receive 60% of the amounts
owed upon approval of the plan. The remaining 40% would be paid in negotiable
debt with terms from 10 to 30 years.
DWR Purchases. On October 2, 2001, the CPUC refused to approve a rate
agreement with the DWR. The Treasurer of California has indicated that this rate
agreement is closely related to the issuance of approximately $13 billion in
revenue bonds to finance the purchase of electric energy. We bear the risk of
nonpayment by the CAISO, the PX and the DWR for power purchased by the CAISO,
the PX or the DWR.
Defaults by SCE and Pacific Gas and Electric and Bankruptcy of Pacific Gas
and Electric. On October 2, 2001, the California Governor rescinded the
executive order calling for a third special session of the state legislature.
The purpose of the third special session was to consider legislation to restore
SCE to solvency. In view of the announced settlement between the California
Public Utilities Commission and SCE, California's Governor declared the third
special session unnecessary.
On October 2, 2001, the CPUC and SCE announced a settlement of SCE's filed
rate doctrine lawsuit, which is pending in federal district court in Los
Angeles. The terms of the proposed settlement provide that SCE will fully repay
what the settlement agreement calls "Procurement Related Liabilities" by the end
of 2005. Although the proposed settlement agreement purports to provide for the
payment of all Procurement Related Liabilities, which includes $920 million owed
to the PX and the CAISO (a portion of which is owed to us), there is no specific
information about when any particular creditor or class of creditors can expect
repayment. Further, SCE has agreed to work with the CPUC and the California
Attorney General in pursuing litigation against energy sellers and to meet and
confer with the CPUC as to all significant strategic and tactical decisions in
existing or future litigation, including administrative proceedings. Effective
March 1, 2002, CPUC approval is required of any settlement of existing or future
litigation, and, if the CPUC rejects a proposed settlement, SCE is required to
continue with such litigation.
The impact of the proposed settlement agreement on us remains uncertain but
could include delayed payment, extended litigation, or discriminatory treatment
in the repayment process. We are currently analyzing the proposed settlement
agreement and our analysis may indicate that other available remedies are
preferable to this settlement proposal. Such remedies may include participation
in an effort to file an involuntary bankruptcy petition against SCE. On October
47
5, 2001, the U.S. District Court for the Central District of California approved
the proposed settlement agreement. The District Court's judgement was
temporarily stayed on October 30, 2001 by the 9th Circuit Court of Appeals for a
14-day period while a motion is addressed by the District Court.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
10.25 Amendment to Change in Control Agreement with S. Marce Fuller
10.26 Amendment to Change in Control Agreement with Raymond D. Hill
10.27 Amendment to Change in Control Agreement with Richard J. Pershing
10.28 Change in Control Agreement with Douglas L. Miller
10.33 Change in Control Agreement with Vance N. Booker
10.34 Change in Control Agreement with James Ward
10.35 Amended and Restated Change in Control Agreement with Frederick D.
Kuester
10.36 Amended and Restated Change in Control Agreement with Barney Rush
10.37 Stock Purchase Agreement between Edison Mission Energy, EME del
Caribe, Mirant Corporation, Mirant EcoElectrica Investments I,
Ltd. and Mirant EcoElectrica Finance, Ltd. EcoElectrica, L.P.
Penuelas, Puerto Rico, dated July 25, 2001. (Portions of this
exhibit containing confidential information have been omitted
pursuant to a request for confidential treatment submitted
under Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. An unredacted version of this exhibit has been filed
separately with the Commission.)
10.38 Stock Purchase Agreement between Enron Asset Holdings, LLC,
Mirant EcoElectrica Investments I, Ltd., Mirant EcoElectrica
Finance, Ltd. and Mirant Corporation, dated July 25, 2001.
(Confidential treatment has been requested for portions of this
exhibit that contain confidential commercial and financial
information pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. Unredacted versions of this
exhibit have been filed separately with the Commission.)
(b) Reports on Form 8-K.
--------------------
During the quarter ended September 30, 2001, we filed a Current Report on
Form 8-K dated September 17, 2001. Item 5 was reported and no financial
statements were filed.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MIRANT CORPORATION
By /s/ James A. Ward
------------------------------------------------
James A. Ward
Senior Vice President, Finance
And Accounting
(Principal Accounting Officer)
Date: November 9, 2001