UNITED STATES
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, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO_____
COMMISSION FILE NUMBER: 001-16107
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, at December 16, 2002 was 403,910,772.
MIRANT CORPORATION AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Page
Number
------
DEFINITIONS 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 2
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Condensed Consolidated Statements of Income 4
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statement of Stockholders' Equity 7
Condensed Consolidated Statements of Cash Flows 8
Notes to the Condensed Consolidated Financial Statements 9
Independent Accountants' Review Report 50
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 51
Item 3. Quantitative and Qualitative Disclosures about Market Risk 80
Item 4. Controls and Procedures 83
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 85
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 85
Signatures
Certifications
i
DEFINITIONS
TERM MEANING
---- -------
APB Accounting Principles Board
AQC Allied Queensland Coalfields Pty Ltd.
Bewag Bewag AG
BP BP p.l.c.
CAISO California Independent System Operator
CEMIG Companhia Energetica de Minas Gerais
Cleco Cleco Midstream Resources, LLC
the Company Mirant Corporation and its subsidiaries
CPUC California Public Utilities Commission
DWR California Department of Water Resources
EITF Emerging Issues Task Force
Enron Enron Corporation and its affiliates
EPA U. S. Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fitch Fitch, Inc.
GAAP Generally accepted accounting principles
Hyder Hyder Limited
IPP Independent Power Producers
JPSCo Jamaica Public Service Company Limited
Kogan Creek MAP Australia (BVI) Limited
LIBOR London Interbank Offering Rate
Mirant Americas Mirant Americas, Inc.
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 Canada Energy Marketing Mirant Canada Energy Marketing, Ltd.
Mirant Mirant Corporation and its subsidiaries
Mirant Delta Mirant Delta, LLC
Mirant Mid-Atlantic Mirant Mid-Atlantic, LLC and its subsidiaries
Mirant New England Mirant New England, LLC
Mirant New York Mirant New York, Inc., Mirant New York
Investments, Inc., and subsidiaries
Mirant Potrero Mirant Potrero, LLC
Moody's Moody's Investors Service
MW Megawatts
Neenah Mirant Corporation's Neenah generating facility
NPC National Power Corporation
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
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
Shajiao C Guangdong Guanghope Power Company Limited
SIPD Shandong International Power Development
Company Limited
Southern Southern Company
S&P Standard & Poor's
State Line State Line Energy, L.L.C.
Vastar Vastar Resources Inc.
WPD Western Power Distribution group headed by
WPD 1953 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, Mirant's
future financial performance or projected business results. In some cases,
forward-looking statements by terminology may be identified by statements 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:
- legislative and regulatory initiatives regarding deregulation, regulation
or restructuring of the electric utility industry;
- the extent and timing of the entry of additional competition in the
markets of our subsidiaries and affiliates;
- our pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;
- political, legal and economic conditions and developments and state,
federal and other rate regulations in the United States and in foreign
countries in which our subsidiaries and affiliates operate;
- changes in or application of environmental and other laws and regulations
to which we and our subsidiaries and affiliates are subject;
- financial market conditions and the results of our financing or
refinancing efforts;
- changes in market conditions, including developments in energy and
commodity supply, volume and pricing and interest rates;
- weather and other natural phenomena;
- 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 and adverse results in
current or future litigation;
- the direct or indirect effects on our business, including the availability
of insurance, resulting from the terrorist actions on September 11, 2001
or any other terrorist actions or responses to such actions, including,
but not limited to, acts of war;
- the direct or indirect effects on our business resulting from the
financial difficulties of competitors of Mirant, including, but not
limited to, their effects on liquidity in the trading and power industry,
and their effects on the capital markets views of the energy or trading
industry and our ability to access the capital markets on the same
favorable terms as in the past;
- the direct or indirect effects on our business of a further lowering of
our credit rating (or actions we may take in response to changing credit
ratings criteria), including increased collateral requirements to execute
our business plan, demands for increased collateral by our current
counterparties, refusal by our current or potential counterparties to
enter into transactions with us and our inability to obtain credit or
capital in amounts or on terms favorable to us;
- the disposition of the pending litigation described in our Form 10-K/A
filed on March 11, 2002, our Form 10-Q filed on May 13, 2002, as amended
on November 7, 2002, our Form 10-Q filed on November 7, 2002, our Form 8-K
filed on June 27, 2002 and this Form 10-Q;
- the direct or indirect effects of the accounting issues discussed in Note
A in the notes to the unaudited condensed consolidated financial
statements included in this Form 10-Q and the additional issues arising
from the weaknesses identified by the internal control and procedures
review discussed in Item 4 of Part I of this Form 10-Q;
- the direct or indirect ramifications of the results of the reaudit of our
2000 and 2001 financial statements and the restatements that will be
required as a result of these reaudits including potential effects on our
financing arrangements and refinancing efforts;
- the direct or indirect effects of inquiries by the U.S. Securities &
Exchange Commission and the U.S. Department of Justice and the Commodities
Futures Trading Commission regarding, among other things, the accounting
issues described in the Company's July 30 and August 14, 2002 press
releases and energy trading issues;
2
- the direct or indirect effects on our business of our or our subsidiaries'
failure to timely file our or their Form 10-Q for the quarters ended June
30, 2002 and September 30, 2002; and
- other factors discussed in this Form 10-Q and in our reports filed from
time to time with the SEC (including our Form 10-K filed on March 11, 2002,
as amended by Form 10-K/A, filed on March 11, 2002, our Form 10-Q filed on
May 13, 2002, as amended by Form 10-Q/A, filed on November 7, 2002 and our
Form 10-Q filed on November 7, 2002).
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 expressly disclaim a duty to update
any of the forward-looking statements contained herein.
3
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
------- ------- ------- -------
(in millions, except per share data)
OPERATING REVENUES (NOTE A): $ 2,258 $ 2,484 $ 4,981 $ 7,049
------- ------- ------- -------
OPERATING EXPENSES (NOTE A):
Cost of fuel, electricity and other products, excluding
depreciation 1,473 1,611 3,027 4,593
------- ------- ------- -------
GROSS MARGIN 785 873 1,954 2,456
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Depreciation and amortization 82 98 236 275
Maintenance 31 30 92 98
Selling, general and administrative 172 178 479 653
Impairment loss (Note D) 204 3 204 96
Restructuring charges (Note H) 8 -- 598 --
Gain on sales of assets, net (Note H) (5) -- (33) --
Other 137 116 363 370
------- ------- ------- -------
Total other operating expenses 629 425 1,939 1,492
------- ------- ------- -------
OPERATING INCOME 156 448 15 964
------- ------- ------- -------
OTHER (EXPENSE) INCOME, NET:
Interest income 28 29 60 117
Interest expense (128) (141) (354) (423)
Gain/(loss) on sales of assets, net (Note H) (4) (1) 276 1
Equity in income of affiliates 25 38 145 164
Impairment loss on minority owned affiliates (Note D) (18) -- (335) --
Receivables recovery (Note A) -- -- 29 10
Other, net (4) 10 (1) 10
------- ------- ------- -------
Total other expense, net (101) (65) (180) (121)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST 55 383 (165) 843
PROVISION FOR INCOME TAXES 38 135 19 276
MINORITY INTEREST 20 18 54 48
------- ------- ------- -------
(LOSS) INCOME FROM CONTINUING OPERATIONS (3) 230 (238) 519
------- ------- ------- -------
INCOME FROM DISCONTINUED OPERATIONS, NET
OF TAX PROVISION OF $3 AND $2 FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001, AND $8 FOR BOTH THE NINE
MONTHS ENDED SEPTEMBER 30, 2002 AND 2001,
RESPECTIVELY 2 4 11 19
------- ------- ------- -------
NET (LOSS) INCOME $ (1) $ 234 $ (227) $ 538
======= ======= ======= =======
(LOSS) EARNINGS PER SHARE:
Basic $ -- $ 0.69 $ (0.56) $ 1.58
Diluted $ -- $ 0.67 $ (0.56) $ 1.55
The accompanying notes are an integral part of these condensed
consolidated statements.
4
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Note A)
(Restated)
AT SEPTEMBER 30, At December 31,
2002 2001
--------------- ---------------
(in millions)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 2,283 $ 856
Receivables:
Customer accounts, less provision for uncollectibles
of $153 and $159 for 2002 and 2001, respectively 1,852 1,954
Other, less provision for uncollectibles
of $34 and $32 for 2002 and 2001, respectively 204 773
Notes receivable 4 24
Energy marketing and risk management assets (Note G) 1,186 911
Derivative hedging instruments (Notes C and G) 145 253
Deferred income taxes 363 405
Inventories 326 362
Assets held for sale (Note J) 105 323
Other 305 377
-------- --------
Total current assets 6,773 6,238
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 5,127 4,241
Less accumulated provision for depreciation and depletion (469) (326)
-------- --------
4,658 3,915
Leasehold interest, net of accumulated amortization
of $356 and $297 for 2002 and 2001, respectively 1,697 1,751
Construction work in progress 1,044 1,921
Investment in suspended construction (Note H) 732 --
-------- --------
Total property, plant and equipment, net 8,131 7,587
-------- --------
NONCURRENT ASSETS:
Investments (Note H) 522 2,247
Notes and other receivables, less provision for uncollectibles
of $131 and $116 for 2002 and 2001, respectively 462 287
Energy marketing and risk management assets (Note G) 747 508
Goodwill, net of accumulated amortization
of $293 and $275 for 2002 and 2001, respectively (Notes A and B) 3,422 3,190
Other intangible assets, net of accumulated amortization
of $63 and $70 for 2002 and 2001, respectively (Notes A and B) 581 865
Derivative hedging instruments (Notes C and G) 110 95
Deferred income taxes 342 423
Other 285 247
-------- --------
Total noncurrent assets 6,471 7,862
-------- --------
TOTAL ASSETS $ 21,375 $ 21,687
======== ========
The accompanying notes are an integral part of these condensed
consolidated statements.
5
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Note A)
(Restated)
AT SEPTEMBER 30, At December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: 2002 2001
---------------- ---------------
(in millions, except share data)
CURRENT LIABILITIES:
Short-term debt $ 109 $ 55
Current portion of long-term debt (Note F):
Mirant Corporation term loan 1,125 --
Sual and Pagbilao project loans 163 1,201
Mirant Asia-Pacific 34 792
Mirant Holdings Beteiligungsgesellschaft (Note H) -- 566
Other 224 45
Accounts payable and accrued liabilities 2,381 2,580
Taxes accrued 56 150
Energy marketing and risk management liabilities (Note G) 1,140 862
Obligations under energy delivery and purchase commitments (Note I) 598 635
Derivative hedging instruments (Notes C and G) 91 232
Accrued restructuring charges 197 --
Liabilities related to assets held for sale (Note J) 12 37
Other 182 151
-------- --------
Total current liabilities 6,312 7,306
-------- --------
NONCURRENT LIABILITIES:
Notes payable (Note F) 5,066 3,751
Other long-term debt (Note F) 1,848 2,068
Energy marketing and risk management liabilities (Note G) 700 633
Deferred income taxes 113 72
Obligations under energy delivery and purchase commitments (Note I) 976 1,376
Derivative hedging instruments (Notes C and G) 96 47
Other 384 354
-------- --------
Total noncurrent liabilities 9,183 8,301
-------- --------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 304 281
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF A
SUBSIDIARY HOLDING SOLELY PARENT COMPANY DEBENTURES 345 345
COMMITMENTS AND CONTINGENT MATTERS (NOTES I AND L)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, per share 4 4
Authorized -- 2,000,000,000 shares
Issued -- September 402,585,030 shares;
-- December 31, 2001: 400,880,937 shares
Treasury -- September 30, 2002: 100,000 shares
-- December 31, 2001: 100,000 shares
Additional paid-in capital 4,901 4,886
Retained earnings 451 678
Accumulated other comprehensive loss (123) (112)
Treasury stock, at cost (2) (2)
-------- --------
Total stockholders' equity 5,231 5,454
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,375 $ 21,687
======== ========
The accompanying notes are an integral part of these condensed
consolidated statements.
6
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS STOCK LOSS
----- ------- -------- ---- ----- ----
(in millions)
BALANCE, DECEMBER 31, 2001, AS
PREVIOUSLY REPORTED $4 $4,886 $ 729 $ (119) $ (2)
Restatement adjustments (Note A) -- -- (51) 7 --
-- ------ ------ ------ ------
BALANCE, DECEMBER 31, 2001, AS
RESTATED 4 4,886 678 (112) (2)
Net loss -- -- (227) -- -- $ (227)
Other comprehensive loss (Note C) -- -- -- (11) -- (11)
------
Comprehensive loss $ (238)
======
Issuance of common stock -- 15 -- -- --
-- ------ ------ ------ ------
BALANCE, SEPTEMBER 30, 2002 $4 $4,901 $ 451 $ (123) $ (2)
== ====== ====== ====== ======
The accompanying notes are an integral part of these condensed
consolidated statements.
7
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
-------------------
2002 2001
---- ----
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (227) $ 538
------- -------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Equity in income of affiliates (145) (162)
Dividends received from equity investments 29 81
Depreciation and amortization 258 306
Amortization of obligations under energy delivery and purchase commitments:
Power purchase agreements (42) (19)
Transition power agreements (320) (322)
Other agreements (74) 38
Impairment loss 539 96
Energy marketing and risk management activities, net (169) 23
Restructuring charge, net of amounts paid 541 --
Deferred income taxes 101 92
Gain on sales of assets (309) (1)
Minority interest 38 48
Other, net 65 14
Changes in operating assets and liabilities, excluding effects
from acquisitions:
Receivables, net 609 1,946
Other current assets 106 (121)
Other assets (72) (32)
Accounts payable and accrued liabilities (200) (2,375)
Taxes accrued (52) 188
Other current liabilities 23 30
Other liabilities (16) 16
------- -------
Total adjustments 910 (154)
------- -------
Net cash provided by operating activities 683 384
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,111) (1,183)
Cash paid for acquisitions (94) (864)
Issuance of notes receivable (329) (116)
Repayments on notes receivable 142 511
Disposal of Southern Company affiliates and other companies -- (77)
Proceeds from the sale of assets 242 --
Proceeds from the sale of minority owned investments 1,987 --
Property insurance proceeds 7 13
Other (18) --
------- -------
Net cash provided by (used in) investing activities 826 (1,716)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,562 3,200
Repayment of long-term debt (2,765) (2,341)
Proceeds from issuance of common stock 15 28
Capital contributions from minority interests 17 31
Payment of dividends to minority interests (17) (2)
Purchase of treasury stock -- (2)
Issuance of short-term debt, net 52 607
Change in debt service reserve fund 47 138
------- -------
Net cash (used in) provided by financing activities (89) 1,659
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 7 18
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,427 345
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 856 1,049
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,283 $ 1,394
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized $ 294 $ 409
Refunds received for income taxes $ 276 $ 11
BUSINESS ACQUISITIONS:
Fair value of assets acquired $ 97 $ 1,530
Less cash paid 94 864
------- -------
Liabilities assumed $ 3 $ 666
======= =======
The accompanying notes are an integral part of these
condensed consolidated statements.
8
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING AND REPORTING POLICIES
GENERAL
Mirant Corporation (formerly Southern Energy, Inc.) was incorporated in
Delaware in 1993. Mirant Corporation and its subsidiaries (collectively,
"Mirant" or the "Company") are a global competitive energy company that delivers
value primarily by producing and selling electricity in the U.S., Philippines,
China and the Caribbean. Mirant's business includes independent power projects,
integrated utilities and energy marketing and risk management operations.
ADJUSTMENTS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS. Prior to filing its
second quarter 2002 Form 10-Q, the Company identified accounting errors in its
previously issued financial statements, primarily related to its risk management
and marketing operations. The Company restated its December 31, 2001 balance
sheet, reducing retained earnings for after tax charges totaling approximately
$51 million. The principal reasons and effects of the adjustments on the
accompanying 2001 balance sheet from amounts previously reported on the
Company's Form 10-K/A are summarized below (in millions):
INCREASE (DECREASE)
DECEMBER 31, 2001
RETAINED EARNINGS
-----------------
Receivables - Other (a) $(117)
Current deferred income tax assets (b) 47
Non-current deferred income tax liabilities (c) 25
Other, net (6)
-----
$ (51)
=====
a) reflects the correction of the overstatement of a natural gas asset and
the correction of accrued revenues at December 31, 2001.
b) reflects the income tax benefits related to the corrections discussed in
(a) above.
c) reflects the correction of $42 million of excess income tax provisions
recorded in Asia, offset by $17 million of additional income tax expenses
related to WPD.
The Company also reduced both energy marketing and risk management assets
and liabilities in its December 31, 2001 consolidated balance sheets from
amounts previously reported in its Form 10-K/A by $820 million to eliminate
intracompany transactions. These adjustments do not have any effect on the
Company's consolidated results of operations or cash flows.
The Company has engaged its independent auditors to reaudit the Company's
2000 and 2001 financial statements to address these and other accounting errors
that have been identified, which are expected to result in a restatement of its
statement of income for either or both of 2000 and 2001 and potentially for
interim periods in 2001 and 2002. In addition, the Company would have been
required to have its independent auditors reaudit the Company's 2000 and 2001
financial statements as a result of the Company's adoption of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and the change
in reporting energy trading activities required by EITF Issue 02-3, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities," both
of which require significant modifications to the Company's previously issued
financial statements.
The specific interim periods within previous years to which $70 million of
the charges (described in (a) and (b) above) relate have not been determined at
this time; accordingly, their effect has not been reflected in the accompanying
2001 interim condensed consolidated statements of income. The interim periods to
which the $70 million relates will be determined in connection with the reaudit.
Rather than correct the 2001 results of operations and cash flows to reflect a
portion of these accounting errors, the Company has
9
presented the comparative 2001 amounts as previously reported until the review
of accounting issues is resolved and the reaudit is completed. The Company
expects to correct the financial statements, as needed, for each reporting
period in 2000 or 2001. Until the reaudit is completed, the Company does not
believe it is appropriate to revise the historical results for the interim
periods. There may be significant changes in previously reported amounts of
operating revenues, operating income, equity in income of affiliates, provision
for income taxes, net income and operating cash flows.
In its first quarter 2002 Form 10-Q/A, the Company also restated its
previously reported results of operations for the first quarter of 2002 to a net
loss of $6 million from an originally reported net loss of $42 million. These
corrections have been reflected in the accompanying 2002 unaudited condensed
consolidated statements of income. The Company also restated its previously
reported first quarter 2002 statement of cash flows, increasing originally
reported cash provided from operations by $46 million to reflect cash receipts
and disbursements in the appropriate period, and increasing cash provided by
investing activities by $11 million.
A summary comparison of the previously reported on Form 10-Q and restated
on Form 10-Q/A first quarter 2002 unaudited condensed consolidated statements of
income follows (in millions):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002, AS MARCH 31, 2002,
PREVIOUSLY REPORTED AS RESTATED
------------------- -----------
Operating revenues $ 7,037 $ 6,908
Operating expenses 6,465 6,298
------- -------
Gross margin 572 610
Other (614) (616)
------- -------
Net loss $ (42) $ (6)
======= =======
BASIS OF ACCOUNTING. These unaudited condensed consolidated financial statements
should be read in conjunction with Mirant's audited 2000 and 2001 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, 2001. As previously discussed, the Company has engaged its
independent auditors to reaudit its 2000 and 2001 financial statements. As
discussed below, in the quarter ended September 30, 2002, the Company adopted
the June 2002 consensus reached by the EITF related to EITF Issue 02-3. This
effect of the consensus significantly reduces the amounts of revenues and costs
of sales in the accompanying financial statements, but has no impact on gross
margin or net income.
The results for interim periods are not necessarily indicative of the
results for the entire year. Specifically, Mirant has sold its investments in
Bewag and WPD, which contributed substantial earnings to the Company's
historical results of operations in the first and fourth fiscal quarters.
Management believes that the accompanying unaudited condensed consolidated
financial statements as of September 30, 2002 and 2001 and for the three and
nine months then ended reflect adjustments, consisting of normal recurring
items, necessary for a fair presentation of results for those interim periods
presented.
Certain prior-year amounts have been reclassified to conform with
current-year financial statement presentation.
REVENUE RECOGNITION. Mirant recognizes revenue from the sale of energy
commodities when it is earned and reasonably assured of collection. The
Company's wholesale electric generating operations record revenue when the
electric power is delivered to the customer pursuant to contractual commitments
that specify volume, price and delivery requirements. When the contractual sales
agreement includes formula pricing, Mirant recognizes revenues at the lower of
the amount of the formula pricing or the amount billable under the contract.
When a long-term electric power agreement conveys the right to use the
generating
10
capacity of Mirant's plant to the buyer of the electric power, that agreement is
evaluated to determine if it is a lease of the generation asset rather than a
sale of electric power.
When Mirant hedges the forward sale of electricity produced by its
generation assets, the settlement of that hedging derivative is netted against
the hedged revenue. When economical, the Company may choose to not operate its
plants and, alternatively, purchase electric power in the wholesale power
markets to physically meet its sales commitments. The resale of electric power
purchased is reflected as revenue and the cost of power purchased is reflected
as operating expense.
The Company, through its energy marketing and risk management operations
(see Note G), engages in risk management activities with counterparties. All
such transactions and related expenses are recorded on a trade-date basis.
Financial instruments and contractual commitments related to these activities,
which includes energy related contracts for storage and transportation, are
accounted for using the mark-to-market method of accounting. Under the
mark-to-market method of accounting, financial instruments and contractual
commitments are recorded at fair value in the accompanying unaudited condensed
consolidated balance sheets. 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 net gain or loss resulting from the change in the fair value of
these energy trading contracts and derivative instruments are reported as
operating revenues.
ACCOUNTING CHANGES. In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These
pronouncements significantly change the accounting for business combinations,
goodwill and 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 statement further
clarifies the criteria to recognize intangible assets separately from goodwill.
The provisions of SFAS No. 141 are effective for all business combinations
initiated after June 30, 2001 and for business combinations accounted for using
the purchase method for which the acquisition date was before July 1, 2001. 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
(Note H). SFAS No. 142 is effective for the Company's 2002 fiscal year or for
business combinations initiated after June 30, 2001. Mirant adopted these
statements on January 1, 2002.
Upon initial application of SFAS No. 141, Mirant reassessed the
classification of its intangible assets and determined that trading rights
resulting from business combinations did not meet the new criteria for
recognition apart from goodwill. Effective January 1, 2002, trading rights
related to business combinations were reclassified to goodwill as required by
the Statement. The reclassification increased goodwill by $194 million, net of
accumulated amortization of $18 million.
As a result of the adoption of SFAS No. 142, Mirant discontinued
amortization of goodwill effective January 1, 2002. During the first quarter of
2002, Mirant completed the transitional impairment test required by SFAS No. 142
and did not record any impairments of goodwill (Note H). Net income and earnings
per share (basic and diluted) for the three and nine months ended September 30,
2001 have been adjusted below to exclude amortization related to goodwill and
trading rights recognized in business combinations (in millions, except per
share data).
11
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
Earnings Per Share Earnings Per Share
------------------ ------------------
Net Income Basic Diluted Net Income Basic Diluted
---------- ----- ------- ---------- ----- -------
As reported $ 234 $ 0.69 $ 0.67 $ 538 $ 1.58 $ 1.55
Effect of goodwill and trading rights 17 0.05 0.05 55 0.16 0.15
amortization --------- --------- --------- --------- --------- ---------
As adjusted $ 251 $ 0.74 $ 0.72 $ 593 $ 1.74 $ 1.70
========= ========= ========= ========= ========= =========
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 has not yet determined
the financial statement impact of this statement.
In October 2001, the FASB issued SFAS No. 144 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 (Note H). Mirant adopted SFAS No.
144 on January 1, 2002. Prior to SFAS No. 144, the dispositions of State Line,
AQC and Neenah would not have been classified as discontinued operations.
Because SFAS No. 144 expanded the breadth of transactions subject to
discontinued operations classification, the dispositions of State Line, AQC and
Neenah are now required to be presented as a discontinued operations (Note J).
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize certain costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. Mirant will adopt SFAS No. 146 on January
1, 2003 and management has not determined the impact on its consolidated
financial statements.
In June 2002, the EITF reached consensus on certain issues related to EITF
Issue 02-3. The Task Force reached a consensus that gains and losses on energy
trading contracts (accounted for pursuant to SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, and EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities,") should be reported net in the statements of income.
In October 2002, the Task Force reached the following additional consensus
related to EITF Issue 02-3:
- EITF Issue 98-10 was rescinded. Accordingly, energy-related
contracts that are not accounted for pursuant to SFAS No. 133 such
as transportation contracts, storage contracts and tolling
agreements, should be accounted for as executory contracts using the
accrual method of accounting and not at fair value. Energy-related
contracts that do meet the definition of a derivative pursuant to
SFAS No. 133 should continue to be carried at fair value.
Additionally, the Task Force observed that accounting for
energy-related inventory at fair value by analogy to the consensus
in EITF Issue 98-10 was no longer appropriate and that such
inventory should be carried at the lower of cost or market in
accordance with Accounting Research Bulletin ("ARB") No. 43,
"Restatement and Revision of Accounting Research Bulletins," and not
at fair value.
- The consensus reached as part of the rescission of EITF Issue 98-10
above is required to be applied prospectively to energy trading
contracts entered into after October 25, 2002. Additionally, the
12
consensus should be applied to all energy trading contracts and
energy related inventory that existed on October 25, 2002 in periods
beginning after December 15, 2002. Changes to the accounting for
existing contracts as a result of the rescission of EITF Issue 98-10
will be reported as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, ("Accounting
Changes"). Changes in accounting for energy-related inventory will
also be reported as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20 unless information
to calculate the impact of the change is not available. In that
case, the carrying value of the energy-related inventory becomes the
cost basis of the inventory at the effective date.
- The Task Force also reached a consensus that its previous conclusion
on reporting gains and losses on derivatives in the statements of
income should be expanded to include all trading activities. That
is, gains and losses on any derivative contracts within the scope of
SFAS No. 133 that are held for trading purposes should be reported
net in the statements of income. The original (June 2002) consensus
on net reporting of gains and losses on energy trading contracts is
required for financial statements for periods ending after July 15,
2002.
- The Task Force agreed to rescind its previous consensus on EITF
Issue 02-3 that required additional disclosures for energy trading
contracts and activities and asked the FASB to reconsider the
disclosures required by SFAS No. 133.
The implementation of the EITF consensus with respect to netting revenues
and expenses on energy trading activities has been reflected in the accompanying
condensed consolidated statements of income/(loss) and has reduced revenues and
cost of fuel, electricity and other products for all periods presented. The
reclassification did not impact Mirant's gross margin or net income. The
following table reconciles gross revenues from generation and energy marketing
products and cost of fuel, electricity and other products to revenues from
generation and energy marketing products and cost of fuel, electricity and other
products reported after the effects of the adoption of EITF Issue 02-3 (in
millions).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
------- ------- ------- -------
Gross revenues from generation and energy
marketing products $ 8,893 $ 8,012 $21,684 $23,897
Costs from generation and energy marketing
products netted per EITF Issue 02-3 6,793 5,695 17,122 17,206
------- ------- ------- -------
Reported net revenues from generation and
energy marketing products $ 2,100 2,317 $ 4,562 $ 6,691
======= ===== ======= =======
Gross cost of fuel, electricity and other
products $ 8,266 $ 7,306 $20,149 $21,799
Cost of fuel, electricity and other products
netted per EITF Issue 02-3 6,793 5,695 17,122 17,206
------- ------- ------- -------
Reported net cost of fuel, electricity and
other products $ 1,473 $ 1,611 $ 3,027 $ 4,593
======= ======= ======= =======
The Company has not yet determined the impact of ceasing use of the fair
value (or mark-to-market) method of accounting for non-derivative energy trading
contracts and energy-related inventory held for trading purposes. The Company
currently has certain storage and transportation agreements accounted for under
the mark-to-market method of accounting under EITF Issue 98-10, which will be
required to be accounted for as executory contracts and not mark-to-market upon
adoption of EITF Issue 02-3. The Company does not have long-term tolling
agreements accounted for under the mark-to-market method of accounting under
EITF Issue 98-10.
CONCENTRATION OF REVENUES AND CREDIT RISK. For the three and nine months ended
September 30, 2002, revenues earned from a single customer did not exceed 10% of
Mirant's total operating revenues.
13
For the three and nine months ended September 30, 2001, gross operating revenues
earned from Enron, through energy marketing and risk management operations,
approximated 19% for both periods of Mirant's total gross operating revenues,
prior to netting of gains and losses under EITF Issue 02-03.
As of September 30, 2002, the CAISO owed Mirant approximately $238
million, which 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 energy marketing and risk management and derivative
hedging activities and netted against offsetting payables and posted collateral,
as appropriate.
RECEIVABLES RECOVERY. During the nine months ended September 30, 2002, Mirant
received $29 million as final payment related to receivables that were assumed
in conjunction with the Mirant Asia-Pacific Limited business acquisition. During
the nine months ended September 30, 2001 Mirant received $10 million related to
these receivables. At the time of the Mirant Asia-Pacific Limited business
acquisition, Mirant did not place value on the receivables due to the uncertain
credit standing of the party from whom the receivables were due.
CAPITALIZATION OF INTEREST COST. Mirant capitalizes interest on projects during
the advanced stages of development and the construction period, in accordance
with SFAS No. 34, "Capitalization of Interest Cost," as amended by SFAS No. 58,
"Capitalization of Interest Cost in Financial Statements That Include
Investments Accounted for by the Equity Method." The Company determines which
debt instruments represent a reasonable measure of the cost of financing
construction assets in terms of interest cost incurred that otherwise could have
been avoided. These debt instruments and associated interest cost are included
in the calculation of the weighted average interest rate used for determining
the capitalization rate. Upon commencement of commercial operations of the plant
or project, capitalized interest, as a component of the total cost of the plant,
is amortized over the estimated useful life of the plant or the life of the
cooperation period of the various energy conversion agreements ("ECAs"). For the
three and nine months ended September 30, 2002, the Company incurred $152
million and $445 million, respectively, in interest costs, of which $24 million
and $91 million, respectively, were capitalized and included in construction
work in process. For the three and nine months ended September 30, 2001, the
Company incurred $155 million and $457 million, respectively, in interest costs,
of which $14 million and $34 million were capitalized and included in
construction work in progress. The remaining interest was expensed during the
periods.
As part of Mirant's operational restructuring plan announced in March of
2002 (the "March 2002 Plan"), Mirant suspended construction on several projects
and no longer capitalizes interest on these projects. The construction cost
related to these projects is shown as "Investment in suspended construction" on
the unaudited condensed consolidated balance sheet.
INVESTMENT IN SUSPENDED CONSTRUCTION. Mirant reviews suspended construction
projects for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires long-lived
assets that are held and used to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset might
not be recoverable. If changes in circumstances or events suggest that an
impairment may exist, an impairment loss is recognized if the sum of the
estimated future undiscounted cash flows is less than the carrying value of the
assets. During the nine months ended September 30, 2002, Mirant postponed
construction on certain plants which it intends to resume construction on at a
later date. Upon a determination that the plants will not be completed, the
carrying value of the projects would be assessed for impairment.
B. GOODWILL AND OTHER INTANGIBLE ASSETS
During the nine months ended September 30, 2002, goodwill was increased by
$58 million related to purchase accounting adjustments for JPSCo and reduced by
$23 million related to tax adjustments in the International Group and Mirant
Americas Energy Marketing. Management currently believes there is no impairment
of goodwill and is in the process of completing its annual planning process for
2003, from which
14
the carrying value of goodwill can be assessed. This plan should be completed in
early 2003. Mirant's announced asset sale program and the overall conditions
impacting the energy sector may materially impact the book value of goodwill in
future periods (Note H). As of September 30, 2002, the North America Group's
goodwill was $2.01 billion and the International Group's goodwill was $1.41
billion.
Substantially all of Mirant's other intangible assets are subject to
amortization and are being amortized on a straight-line basis over their
estimated useful lives, up to 40 years. There were no material acquisitions of
intangible assets during the third quarter of 2002. Effective January 1, 2002,
trading rights related to business combinations were reclassified to goodwill.
The reclassification decreased other intangible assets by $227 million, net of
accumulated amortization of $18 million. These provisions of SFAS No. 141 do not
apply to asset acquisitions, therefore trading rights resulting from asset
acquisitions continue to be recognized apart from goodwill. The trading rights
represent Mirant's ability to create additional cash flows by incorporating
Mirant's trading organization activities with generation assets. In a
deregulated marketing structure, trading rights are the ability to create value
beyond that of the tangible assets through developing markets. During the three
and nine months ended September 30, 2002, Mirant transferred $0 and $36 million,
net of accumulated amortization of $4 million, in development rights to
construction work in process. Development rights represent the ability to expand
capacity at certain acquired generation facilities. The existing infrastructure,
including storage facilities, transmission interconnections, and fuel delivery
systems, and contractual rights acquired by Mirant provide the opportunity to
expand or repower generation facilities. This ability to repower or expand is at
significant cost savings compared to greenfield construction. Intangible asset
amortization expense was approximately $6 million for the third quarter and $18
million for the nine months ended September 30, 2002. The components of other
intangible assets as of September 30, 2002 and December 31, 2001 were as follows
(in millions):
SEPTEMBER 30, 2002 DECEMBER 31, 2001 (AS RESTATED)
------------------ -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Trading rights $ 207 $ (28) $ 453 $ (45)
Development rights 252 (16) 292 (9)
Emissions allowances 131 (7) 131 (4)
Other intangibles 54 (12) 59 (12)
--------- --------- --------- ---------
Total other intangible assets $ 644 $ (63) $ 935 $ (70)
========= ========= ========= =========
Assuming no future acquisitions, dispositions or impairments of intangible
assets, amortization expense is estimated to be $25 million for the year ending
December 31, 2002 and for each of the following four years.
C. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) 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 (loss) for the three and
nine months ended September 30, 2002 and 2001 (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income $ (1) $ 234 $(227) $ 538
Other comprehensive loss (48) (61) (11) (11)
----- ----- ----- -----
Comprehensive (loss) income $ (49) $ 173 $(238) $ 527
===== ===== ===== =====
Components of accumulated other comprehensive loss consisted of the following
(in millions):
BALANCE, DECEMBER 31, 2001, AS RESTATED $ (112)
Other comprehensive income (loss) for the period:
Net change in fair value of derivative hedging instruments,
net of tax effect of $25 18
Reclassification to earnings, net of tax effect of $41 (Note G) (48)
Cumulative translation adjustment 32
Share of affiliates' OCI (13)
-------
Other comprehensive loss (11)
-------
BALANCE, SEPTEMBER 30, 2002 $ (123)
=======
15
The $123 million balance of accumulated other comprehensive loss as of
September 30, 2002 includes the impact of $43 million related to interest rate
hedges, $78 million related to interest rate swap breakage costs, $87 million of
foreign currency translation losses and $8 million representing Mirant's share
of accumulated other comprehensive loss of unconsolidated affiliates, offset
by $93 million of net gains on commodity price management hedges.
Mirant estimates that $25 million ($51 million of commodity hedging gains
and $26 million of interest rate hedging losses) of net derivative after-tax
gains included in OCI as of September 30, 2002 will be reclassified into
earnings or otherwise settled within the next twelve months as certain
transactions relating to commodity contracts, foreign denominated contracts and
interest payments are realized. Mirant is exposed to currency risks with its
investment in CEMIG in Brazil. These risks have not been hedged due to the high
cost and the uncertain effectiveness of implementing such a hedge. In December
2002, management committed to a plan to divest its investment in CEMIG. As a
result, currency translation losses of approximately $84 million included in OCI
will be recognized in the statement of income when evaluating the investment for
impairment in the fourth quarter of 2002.
D. WRITE-DOWN OF ASSETS
As part of its strategic restructuring, Mirant sold its 49% ownership
interest in WPD in September 2002. Mirant had recorded a write-down of
approximately $304 million, including $13 million of related income tax
benefits, during the second quarter of 2002 to reflect the difference between
the carrying value of its investment and its estimated fair value. In the third
quarter, Mirant recorded an additional write-down of approximately $8 million
offsetting the net income recognized from its equity investment in WPD for that
quarter prior to closing the sale. In the second quarter of 2001, Mirant wrote
off its remaining investment in EDELNOR of $88 million ($57 million after-tax).
In September 2002, Mirant recorded a write down of $61 million ($37 million
after-tax) reflecting the fair market value of Mirant Americas Production
Company. In November 2002, Mirant entered into an agreement to sell the assets
of Mirant Americas Production Company for $150 million and in December 2002, the
sale of these assets was completed. Mirant Americas Production Company is an oil
and gas exploration, development and production company reported in Mirant's
North America Group operations. The table below represents the components of
Mirant Americas Production Company's balance sheet accounts as of September 30,
2002 (in millions):
CURRENT ASSETS:
Risk management assets $ 2
PROPERTY, PLANT AND EQUIPMENT 149
-------
Total assets $ 151
=======
CURRENT LIABILITIES:
Risk management liabilities $ 1
-------
Total liabilities $ 1
=======
In the quarter ended September 30, 2002, the Company assessed for
impairment certain costs associated with two power islands related to its
proposed development project in Europe and one power island that the Company
originally intended to use as part of a development project in Korea. Based on
management's current estimate of recoverability of the costs of these power
islands and the related projects, an impairment loss of $153 million ($98
million after-tax) was recorded in the quarter ended September 30, 2002 (which
includes the $132 million impairment loss on turbines/power islands disclosed in
Note I). Approximately $6
16
million of project cost remains on the Company's condensed consolidated balance
sheet as of September 30, 2002, which reflects management's estimate of the fair
market value of these projects.
E. EARNINGS (LOSS) PER SHARE
Mirant calculates basic earnings (loss) per share by dividing the income
(loss) available to common stockholders by the weighted average number of common
shares outstanding. The following table shows the computation of basic earnings
(loss) per share for the three and nine months ended September 30, 2002 and 2001
(in millions, except per share data). Diluted earnings (loss) per share 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 for the three months ended September 30, 2001
and $11 million for the nine months ended September 30, 2001. Because of the net
loss for the three and nine months ended September 30, 2002, the anti-dilution
provisions of SFAS No. 128, "Earnings per Share," preclude stating diluted loss
per share above basic loss per share.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
-------- -------- -------- --------
(Loss) Income from continuing operations $ (3) $ 230 $ (238) $ 519
Discontinued operations 2 4 11 19
-------- -------- -------- --------
Net (loss) income $ (1) $ 234 $ (227) $ 538
======== ======== ======== ========
Basic
Weighted average shares outstanding 402.3 340.4 401.8 339.7
(Loss) earnings per share from:
Continuing operations $ (0.01) $ 0.68 $ (0.59) $ 1.53
Discontinued operations 0.01 0.01 0.03 0.05
-------- -------- -------- --------
Net (loss) income $ (0.00) $ 0.69 $ (0.56) $ 1.58
======== ======== ======== ========
Diluted
Weighted average shares outstanding 340.4 339.7
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 355.7 355.1
======== ========
Earnings per share from:
Continuing operations $ 0.66 $ 1.49
Discontinued operations 0.01 0.06
-------- --------
Net income $ 0.67 $ 1.55
======== ========
F. DEBT
The following table sets forth Mirant's short-term and long-term debt as
of September 30, 2002 and December 31, 2001 (in millions):
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
SHORT-TERM DEBT
Recourse short-term debt $ 44 $ 26
Non-recourse short-term debt 65 29
------ ------
Total short-term debt 109 55
------ ------
CURRENT PORTION OF LONG-TERM DEBT
Recourse current portion of
long-term debt 1,312 21
Non-recourse current portion
of long-term debt 234 2,583
------ ------
Total current portion of long-term debt 1,546 2,604
------ ------
NOTES PAYABLE
Recourse notes payable 895 895
Non-recourse notes payable 4,171 2,856
------ ------
Total notes payable 5,066 3,751
------ ------
OTHER LONG-TERM DEBT
Recourse other long-term debt 1,582 1,825
Non-recourse other long-term debt 266 243
------ ------
Total other long-term debt 1,848 2,068
------ ------
TOTAL DEBT $8,569 $8,478
====== ======
TOTAL RECOURSE DEBT $3,833 $2,767
TOTAL NON-RECOURSE DEBT 4,736 5,711
------ ------
TOTAL DEBT $8,569 $8,478
====== ======
17
CREDIT FACILITIES
At September 30, 2002, Mirant and its subsidiaries had revolving credit
facilities, included in the table above, with various lending institutions
totaling approximately $3.19 billion of commitments. At September 30, 2002,
commitment amounts utilized under such facilities (including drawn amounts and
letters of credit) totaled $3.09 billion and were comprised of the following:
commitments of $1.17 billion drawn or utilized under facilities expiring in 2003
and commitments of $1.92 billion drawn or utilized under the facilities expiring
in 2004 and beyond.
In July 2002, Mirant Corporation fully drew the commitments under its
$1.125 billion 364-Day Credit Facility, and elected to convert all advances
outstanding into a term loan maturing in July 2003. The outstanding balance was
reclassified to short-term debt. The Company is evaluating various potential
financing transactions to repay and/or refinance the Facility prior to its
maturity. As a result of present market conditions and other factors, including
the reaudit of its historical financial statements, Mirant cannot provide
assurance that it will be successful in entering into a new credit facility. If
Mirant is successful in entering into a new credit facility, it expects the
facility will likely be smaller and will have higher pricing and more
restrictive terms than the current facility.
Except for the credit facility of Mirant Canada Energy Marketing, an
indirect, wholly owned subsidiary of Mirant Corporation and the $1.125 billion
364-Day Credit Facility, which was converted into a term loan maturing in July
2003, borrowings under these facilities are recorded as long-term debt in the
accompanying unaudited condensed consolidated balance sheets. The credit
facilities generally require payment of commitment fees based on the unused
portion of the commitments. The schedule below summarizes the revolving credit
facilities held by Mirant Corporation and its subsidiaries as of September 30,
2002 (in millions).
UTILIZED AMOUNT LETTERS OF
FACILITY EXCLUDING LETTERS CREDIT AMOUNT
COMPANY AMOUNT OF CREDIT OUTSTANDING AVAILABLE
------- ------ --------- ----------- ---------
Mirant Corporation $ 2,700 $ 1,551(1) $ 1,048 $ 101
Mirant Americas Generation 300 300 -- --
Mirant Canada Energy Marketing 44 44 -- --
Mirant Americas Energy Capital 150 150 -- --
--------- ------- --------- ---------
Total $ 3,194 $ 2,045 $ 1,048 $ 101
========= ======= ========= =========
(1) Amount includes fully drawn commitments under Mirant's $1.125 billion
364-Day Credit Facility that was converted in July 2002 to a term loan
maturing in July 2003.
Each of Mirant's credit facilities contain various covenants including,
among other things, (i) limitations on (a) dividends, redemptions and
repurchases of capital stock, (b) the incurrence of indebtedness and liens and
(c) the sale of assets, and (ii) affirmative covenants to (a) provide annual
audited and quarterly unaudited financial statements prepared in accordance with
US and local GAAP and (b) comply with legal
18
requirements in the conduct of its business. In addition to other covenants and
terms, each of Mirant's credit facilities includes minimum debt service coverage
and a maximum leverage covenant. As of September 30, 2002, there were no events
of default under such credit facilities.
In connection with its review of the previously disclosed accounting
issues, the Company identified various errors affecting the Company's historical
financial statements. The Company believes that the errors it has identified do
not constitute a breach of a covenant or an event of default under its credit
facilities. If the Company were in default, or the type or amount of any
adjustments arising from the announced reaudit of the Company's historical
financial statements were to result in an event of default under its credit
facilities, the lenders would have the right to accelerate the Company's
obligations under its credit facilities. Any such acceleration would trigger
cross-acceleration provisions in a substantial portion of the Company's other
consolidated indebtedness. In such event, the Company would be required to seek
waivers or other relief from its lenders and, absent such relief, approximately
$4.5 billion of the Company's consolidated debt would be classified as
short-term debt and could be accelerated. Further, in the event that its lenders
accelerated such indebtedness, the Company can provide no assurances that it
would be able to refinance such indebtedness in the existing credit markets and
would likely have to seek bankruptcy court or other protection from its
creditors.
Mirant Canada Energy Marketing has extended its credit facility to June
30, 2003. The revolving credit facility of approximately $44 million
(denominated as 70 million Canadian dollars) had outstanding borrowings of $44
million, at an interest rate of 3.64% at September 30, 2002. The credit facility
is guaranteed by Mirant Corporation and is secured by a letter of credit in the
amount of $46 million and security interests in the real and personal property
of Mirant Canada Energy Marketing.
In February 2002, Mirant, Mirant Americas Energy Marketing, Perryville and
the lenders under its credit facility entered into the following transactions:
(i) an indirect, wholly owned subsidiary of Mirant Corporation made a
subordinated loan of $48 million to Perryville, (ii) Mirant Corporation agreed
to guarantee the obligations of Mirant Americas Energy Marketing under the
tolling agreement, (iii) Perryville (with the consent of its lenders) and Mirant
Americas Energy Marketing lowered the ratings threshold in the tolling agreement
with respect to Mirant Corporation, relating to the ratings below which Mirant
Americas Energy Marketing agreed to post a letter of credit or other credit
support, and (iv) the parties agreed to certain additional terms in support of
the syndication of the credit facility. In June 2002, Mirant completed the sale
of its 50% ownership interest in Perryville to Cleco, which holds the remaining
50% ownership interest in Perryville. Cleco assumed Mirant's $13 million future
equity commitment to Perryville and paid approximately $55 million in cash to
Mirant as repayment of its subordinated loan, invested capital to date and other
miscellaneous costs. In connection with the existing project financing, Mirant
agreed to make a $25 million subordinated loan to the project. In addition,
Mirant retains certain obligations as a project sponsor, some of which are
subject to indemnification by Cleco. Effective August 23, 2002, Mirant Americas
Energy Marketing and Perryville, with the consent of the project lenders,
restructured the tolling agreement between the parties to remove the requirement
to post a letter of credit or other credit support in the event of a downgrade
from S&P or Moody's. In connection with its operational restructuring, Mirant
Americas made a $100 million subordinated loan to Perryville, the proceeds of
which were used to repay the existing $25 million subordinated loan owed to a
Mirant subsidiary and to repay $75 million of senior debt of the project. In
addition, Mirant Americas guaranteed the obligations of Mirant Americas Energy
Marketing under the tolling agreement up to the amount of the subordinated loan.
The obligations of Mirant Americas Energy Marketing under the tolling agreement
continue to be guaranteed by Mirant Corporation.
As discussed below in Note I "Commitments and Contingent Matters - Turbine
Purchases and Other Construction-Related Commitments" Mirant negotiated
deferrals of the shipment dates of certain turbines under both equipment
procurement facilities as part of the March 2002 Plan, and additionally made
unreimbursed direct payments to vendors related to certain turbines/power
islands in the equipment procurement facilities. Consequently, Mirant has
included a $225 million liability for these turbines (equal to the costs
incurred to date in constructing these turbines) as of September 30, 2002, of
which $40 million
19
is reported as "Other long-term debt" and $185 million is reported in "Current
portion of long-term debt" on the accompanying unaudited condensed consolidated
balance sheet at September 30, 2002.
In the fourth quarter of 2002, Mirant has negotiated deferrals of the
shipment dates and made unreimbursed direct payments to vendors for certain
other turbines, and will be recognizing approximately $79 million additional
"Current portion of long-term debt" and approximately $31 million additional
"Other long-term debt" on its balance sheet as of December 31, 2002.
On January 23, 2002, Mirant Asia-Pacific, an indirect, wholly owned
subsidiary of Mirant Corporation, borrowed $192 million under a new credit
facility to repay, in part, its prior $792 million credit facility. The
repayment of the balance of the prior credit facility was funded by Mirant
Corporation. In March 2002, Mirant Asia-Pacific secured a second tranche of $62
million which has been used to repay part of the funding from Mirant
Corporation. The new credit facility contains various business and financial
covenants including, among other things, (i) limitations on dividends and
distributions, including a prohibition on dividends if Mirant ceases to be rated
investment grade by at least two of Fitch, S&P and Moody's, (ii) mandatory
prepayments upon the occurrence of certain events, including certain asset sales
and certain breaches of the Sual and the Pagbilao energy conversion agreements,
(iii) limitations on the ability to make investments and to sell assets, (iv)
limitations on transactions with affiliates of Mirant and (v) maintenance of
minimum debt service coverage ratios. As a result of the October 2002 downgrades
by Fitch and Moody's, Mirant Asia-Pacific is prohibited under the terms of its
credit facility from making distributions to Mirant Corporation. However, in
connection with the sale of the Shajiao C power project discussed in Note H, the
Company expects to repay the Mirant Asia-Pacific credit facility.
CONVERTIBLE SENIOR NOTES
In July 2002, Mirant Corporation completed the issuance of $370 million of
convertible senior notes. The net proceeds from the offering, after deducting
underwriting discounts and commissions payable by Mirant, were $361 million.
The notes mature on July 15, 2007 with an annual interest rate of 5.75%.
Holders of the notes may convert their notes into 131.9888 shares of Mirant
common stock for each $1,000 principal amount of the notes at any time prior to
July 15, 2007. This conversion rate is equivalent to the initial conversion
price of $7.58 per share based on the issue price of the notes. Mirant has the
right to redeem for cash, some or all of the notes at any time on or after July
20, 2005, upon not less than 30 nor more than 60 days' notice by mail to holders
of the notes, for a price equal to 100% of the principal amount of the notes to
be redeemed plus any accrued and unpaid interest to the redemption date.
G. FINANCIAL INSTRUMENTS
ENERGY MARKETING AND RISK MANAGEMENT ACTIVITIES
Mirant provides energy marketing and risk management services to its
customers in the North American markets. These services are provided through a
variety of exchange-traded and OTC energy and energy-related contracts, such as
forward contracts, futures contracts, option contracts and financial swap
agreements.
These contractual commitments are presented as energy marketing and risk
management assets and liabilities in the accompanying unaudited condensed
consolidated balance sheets and are accounted for using the mark-to-market
method of accounting in accordance with SFAS No. 133 and EITF Issue 98-10.
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. Attention is drawn to
"Accounting Changes" in Note A - Accounting and Reporting Policies, where the
EITF reached consensus on certain issues related to EITF Issue 02-3, under EITF
Issues 98-10 and 00-17, "Measuring the
20
Fair Value of Energy-Related Contracts in Applying Issue 98-10." EITF Issues
98-10 and 00-17 address various aspects of the accounting for contracts involved
in energy trading and risk management activities.
The Company, through its energy marketing and risk management operations,
engages in risk management activities with counterparties. All such transactions
and related expenses are recorded on a trade-date basis. Financial instruments
and contractual commitments related to 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 are recorded at
fair value in the accompanying unaudited condensed consolidated balance sheets.
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.
During the first quarter of 2002, Mirant substantially exited its European
trading and marketing business. The volumetric weighted average maturity, or
weighted average tenor of the North American portfolio, at September 30, 2002
was 2.9 years. The net notional amount, or net open position, of the energy
marketing and risk management assets and liabilities at September 30, 2002 was
approximately 3 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.
Certain financial instruments that Mirant uses to manage risk exposure to
energy prices for its North American generation portfolio do not meet the hedge
criteria under SFAS No. 133 and therefore, the fair values of these instruments
are included in energy marketing and risk management assets and liabilities in
the accompanying unaudited condensed consolidated balance sheets.
The fair values and average values of Mirant's energy marketing and risk
management assets and liabilities as of September 30, 2002, net of credit
reserves, are included in the following table (in millions). The average values
are based on a monthly average for 2002.
ENERGY MARKETING AND RISK ENERGY MARKETING AND RISK
MANAGEMENT ASSETS MANAGEMENT LIABILITIES
----------------- ----------------------
VALUE AT VALUE AT
AVERAGE SEPTEMBER 30, AVERAGE SEPTEMBER 30,
VALUE 2002 VALUE 2002
----- ---- ----- ----
Energy commodity instruments:
Electricity $ 479 $ 345 $ 388 $ 285
Natural gas 1,121 1,559 1,235 1,519
Crude oil 20 32 15 30
Other 51 (3) 32 6
--------- --------- --------- ---------
Total $ 1,671 $ 1,933 $ 1,670 $ 1,840
========= ========= ========= =========
In October 2001, the Company entered into a prepaid gas transaction with a
counterparty and a simultaneous natural gas swap with a third-party independent
to the prepaid gas transaction. The prepaid gas transaction resulted in the
receipt of payments in 2001 in exchange for financial settlements to be made
over a future three-year period. Approximately 10% of the contract notional
quantity will settle in 2002, 10% in 2003 and the remaining 80% will settle in
2004 based on fixed notional quantities of gas defined in the agreement at the
natural gas index prices on the date of each settlement. The natural gas swap
served to fix the price of the gas to be settled under the prepaid gas
agreement. At the date the transaction was consummated, the notional fixed
future natural gas settlements totaled approximately $250 million and the fair
value of such gas settlements was approximately $225 million.
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
21
minimize these risks using the most effective methods to eliminate or reduce the
impacts of these exposures and to provide a measure of stability to the
Company's cash flows in a time of volatile changes.
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. After-tax derivative net gains of $18
million and $48 million during the three and nine months ended September 30,
2002, respectively, were reclassified as follows (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
---- ----
Reclassified to operating income $ 48 $ 119
Reclassified to interest expense (9) (30)
Tax provision (21) (41)
----------- -----------
Net reclassification to earnings (Note C) $ 18 $ 48
=========== ===========
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 being hedged. Under SFAS No. 133, transactions
may meet the requirements for hedge treatment but may be less than 100%
effective. For example, a derivative instrument specifying one commodity
delivery location may be used to hedge a risk at a different commodity delivery
location. The price differential between the two locations is considered the
ineffective portion of the hedge. Any changes in the fair value of the
ineffective portion must be recorded currently in earnings. During the three and
nine months ended September 30, 2002, $1 million of pre-tax losses and $9
million of pre-tax losses, respectively, arising from hedge ineffectiveness were
recognized in other expense. In addition, a $4 million pre-tax loss in both the
three and nine months ended September 30, 2002 arising from hedge
ineffectiveness was recognized in "Cost of fuel, electricity and other products,
excluding depreciation." 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 its exposure to interest rates by 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. Swaps that fix the interest rate exposure of variable-rate
debt and qualify for hedge treatment are treated as cash flow hedges, where 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 over the life of the swaps. Gains and losses resulting from the
termination of qualifying cash flow hedges prior to their stated maturities are
recognized ratably over the original remaining life of the hedging instrument,
provided the underlying hedged transactions are still probable. Otherwise, the
gains and losses will be recorded currently in earnings. Swaps that hedge
underlying fixed-rate debt and qualify for hedge treatment are treated as fair
value hedges, where the changes in the fair value of gains and losses of the
swaps are recognized currently in interest expense together with the changes in
the fair value of the hedged debt. Mirant currently only utilizes cash flow
hedges.
Commodity Price Hedging
Mirant enters into commodity financial instruments and other contracts in
order to hedge its exposure to market prices for electricity expected to be
produced by its generation assets. These contracts are primarily physical
forward sales but may also include options and other financial instruments.
Mirant also uses commodity financial instruments and other contracts to hedge
its exposure to market prices for natural gas, coal and other fuels expected to
be utilized by its generation assets. These contracts primarily include futures,
options, and swaps. Where these contracts are derivatives and are designated as
cash flow hedges,
22
the gains and losses are deferred in OCI and are then recognized in earnings in
the same period as the settlement of the underlying physical transaction.
At September 30, 2002, Mirant had a net commodity derivative hedging asset
of approximately $142 million. The fair value of its commodity derivative
hedging 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, 2002, these contracts relate to periods through 2010. The
net notional amount, or net open position, of the derivative hedging instruments
at September 30, 2002 was 3 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.
Power sales agreements and other contracts that are used to mitigate
exposure to commodity prices but which either do not meet the definition of a
derivative or are excluded under certain exceptions under SFAS No. 133 are not
included in derivative hedging instruments in the accompanying unaudited
condensed consolidated balance sheets.
Foreign Currency Hedging
From time to time, 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 reflected in OCI,
net of tax, and net of the translation effects.
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. From time to time, Mirant utilizes
cross-currency swaps that not only offset the effect of exchange rate
fluctuations on the hedged principal amount of the foreign currency denominated
debt, but also fix the interest expense arising from that hedged debt. 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. When these hedging strategies qualify as cash flow hedges,
the 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.
Interest Rate and Currency Derivatives
The interest rates noted in the following table represent the range of
fixed interest rates that Mirant pays on the related interest rate swaps. On all
of these interest rate swaps, Mirant receives floating interest rate payments at
LIBOR. The currency derivatives mitigate Mirant's exposure arising from certain
foreign currency transactions, such as cross border sales.
YEAR OF MATURITY NUMBER OF NOTIONAL UNREALIZED
TYPE OR TERMINATION INTEREST RATES COUNTERPARTIES AMOUNT (LOSS) GAIN
---- -------------- -------------- -------------- ------ -----------
(IN MILLIONS)
Interest rate swaps 2003-2012 3.85%-7.12% 3 $549 $ (74)
Currency swaps 2003 -- 1 CAD$8 (1)
--------
$ (75)
=======
CAD - Denotes Canadian dollar
23
Canadian dollar contracts with a notional amount of CAD$266 million are
included in fair value of energy marketing and risk management liabilities
because hedge accounting criteria are not met. As of September 30, 2002, the
unrealized loss was $3 million.
The unrealized gain/loss for interest rate swaps is determined based on
the estimated amount that Mirant would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The unrealized
gain/loss for currency forwards is determined based on current foreign exchange
rates.
H. BUSINESS DEVELOPMENTS
MODIFICATION OF BUSINESS STRATEGY
As a result of the ongoing downward trend in market conditions, the
Company has modified its business strategy to focus on its North American,
Caribbean and Philippines operations. As part of this new focus, the Company
will continue to reduce the level of its trading and marketing activity,
particularly with respect to physical natural gas, as well as continue its asset
sales program. As a result of this contraction, the Company expects to record
additional restructuring charges upon completion of the next phase of the
restructuring plan.
Additionally, in 2002, the Company adopted SFAS No.'s 141, 142 and 144.
These new pronouncements, among other things, change the accounting model for
recognizing impairments of the carrying value of assets held for use and held
for sale, as well as the carrying value of goodwill and other intangible assets.
The Company's announced asset sale program, as well as overall conditions
affecting the Company and its sector, may materially impact the fair values of
its property plant and equipment, its construction work in progress, its
investment in suspended construction, its goodwill and its other intangible
assets. Management does not currently believe that this reduction in fair value
will result in an impairment of its goodwill. The Company will complete the
annual assessment of the carrying values of its goodwill in early 2003, after
completing its annual planning process for 2003. This process provides
management with the best information from which to analyze the goodwill for
impairment. Currently, Mirant does not believe that its "Investment in suspended
construction" is subject to an impairment loss under SFAS No. 144.
Asset Sales
In February 2002, Mirant completed the sale of its 44.8% interest in Bewag
for approximately $1.63 billion. Mirant received approximately $1.06 billion in
net proceeds after repayment of approximately $550 million in related debt. The
gain on the sale of Mirant's investment in Bewag was $290 million ($167 million
after-tax) and is included in "Other (expense) income, net -- Gain/(loss) on
sales of assets, net" on Mirant's accompanying unaudited condensed consolidated
statements of income. The net proceeds were used for general corporate purposes,
capital expenditures and repayment of certain drawn balances on revolving credit
facilities.
In May 2002, Mirant completed the sale of its 60% ownership interest in
the Kogan Creek power project, located near Chinchilla in southeast Queensland,
Australia, and associated coal deposits for approximately $29 million. The gain
on the sale of Mirant's investment in Kogan Creek was approximately $26 million
($17 million after-tax) and is included in "Gain on sales of assets, net" on
Mirant's accompanying unaudited condensed consolidated statements of income.
In May 2002, Mirant completed the sale of its 9.99% ownership interest in
SIPD, located in the Shandong Province, China, for approximately $120 million.
The loss on the sale of Mirant's investment in SIPD was approximately $10
million ($9 million after-tax) and is included in "Other (expense) income, net
-- Gain/(loss) on sales of assets, net" on Mirant's accompanying unaudited
condensed consolidated statements of income.
24
In June 2002, Mirant completed the sale of its State Line generating
facility for approximately $181 million plus an adjustment for working capital.
The asset was sold at approximately book value.
In June 2002, Mirant completed the sale of its 50% ownership interest in
Perryville to Cleco, which holds the remaining 50% ownership interest in
Perryville. Cleco assumed Mirant's $13 million future equity commitment to
Perryville and paid approximately $55 million in cash to Mirant as repayment of
its subordinated loan, invested capital to date and other miscellaneous costs.
The investment was sold at approximately book value based on the value of the
investment at the date of sale. At such time, in connection with the existing
project financing, Mirant agreed to make a $25 million subordinated loan to the
project. In addition, Mirant retains certain obligations as a project sponsor,
some of which are subject to indemnification by Cleco. The obligations retained
by Mirant and not subject to indemnity relate primarily to the existing 20-year
tolling agreement with Mirant Americas Energy Marketing as described in Note I.
Effective August 23, 2002, Mirant Americas Energy Marketing and Perryville, with
the consent of the project lenders, restructured the tolling agreement between
the parties to remove the requirement to post a letter of credit or other credit
support in the event of a downgrade from S&P or Moody's. In connection with the
restructuring, Mirant Americas made a $100 million subordinated loan to
Perryville, the proceeds of which were used to repay the existing $25 million
subordinated loan owed to a Mirant subsidiary and to repay $75 million of senior
debt of the project. In addition, Mirant Americas guaranteed the obligations of
Mirant Americas Energy Marketing under the tolling agreement up to the amount of
the subordinated loan. The obligations of Mirant Americas Energy Marketing under
the tolling agreement are guaranteed by Mirant Corporation.
In July 2002, Mirant announced that it had entered into an agreement to
sell its Neenah generating facility to Alliant Energy Resources, Inc. for
approximately $109 million. The sale of Mirant's investment in Neenah will
approximate book value. The sale is expected to close in the first quarter of
2003.
In August 2002, Mirant completed the sale of its wholly owned subsidiary
MAP Fuels Limited, which wholly owned AQC, in Queensland, Australia, for
approximately $21 million. The asset was sold at approximately book value. The
sale included both the Wilkie Creek Coal Mine and the Horse Creek coal deposits.
In September 2002, Mirant completed the sale of its 49% economic interest
in Western Power Distribution Holdings Limited and WPD Investment Holdings (both
identified jointly as WPD) for approximately $235 million. As a result of the
announced sale in the second quarter of 2002, Mirant recorded a write-down of
its investment in WPD by approximately $317 million ($304 million after-tax)
which is included in "Impairment loss on minority owned affiliates" on Mirant's
accompanying unaudited condensed consolidated statements of income. Upon
completion of the sale, in the third quarter of 2002, Mirant recorded a loss of
$4 million ($1 million after-tax) on the sale of this investment. The WPD assets
include the electricity distribution networks for Southwest England and South
Wales.
In November 2002, Mirant entered into an agreement to sell the assets of
Mirant Americas Production Company for $150 million and in December 2002, the
sale of these assets was completed. Mirant Americas Production Company is an oil
and gas exploration, development and production company reported in Mirant's
North America Group operations.
On December 20, 2002, certain subsidiaries of Mirant entered into a share
sale agreement with China Resources Power Holdings Co. Ltd, to sell its indirect
33% interest in the 1,980 MW Shajiao C power project (Guangdong Province, China)
for $300 million. Mirant expects to record a gain on the sale. The transaction
is expected to close by the end of 2002. In connection with the sale, Mirant
expects to repay the approximately $254 million balance under the credit
facility for Mirant Asia-Pacific. Repayment of the credit facility will
eliminate the existing prohibition on distributions included therein.
Suspended Construction
The table below presents the suspended construction projects included in
"Investment in suspended construction" which is classified as property, plant
and equipment on Mirant's condensed consolidated balance sheet at September 30,
2002 (in millions):
Mirant Wyandotte, LLC $ 198
Mirant Bowline, LLC 200
Mint Farm Generation, LLC 162
Mirant Delta, LLC 170
Other 2
------
Total $ 732
======
25
Restructuring Charges
As a result of changing market conditions including constrained access to
capital markets attributable primarily to the Enron bankruptcy and Moody's
December 2001 downgrade of Mirant's credit rating, in March 2002, Mirant adopted
the March 2002 Plan to restructure its operations by exiting certain business
operations (including its European trading and marketing business), canceling
and suspending planned power plant developments, closing business development
offices and severing employees. During the three and nine months ended September
30, 2002, Mirant recorded pre-tax restructuring charges of $8 million and $598
million, respectively.
During the three and nine months ended September 30, 2002, Mirant recorded
the following components of the restructuring charges, respectively (in
millions):
NINE MONTHS
THREE MONTHS ENDED
ENDED SEPTEMBER SEPTEMBER 30,
30, 2002* 2002
--------- ----
Write-downs of work in progress and progress payments on
Equipment $ -- $285
Costs to cancel equipment orders and service agreements per
contract terms (6) 240
Severance of approximately 575 employees worldwide and other
employee termination-related charges 10 67
Costs incurred to suspend construction projects in progress 4 6
---- ----
Total $ 8 $598
==== ====
* Net of adjustments
Mirant anticipates that it will record additional restructuring charges
related to the March 2002 Plan by the end of the first quarter of 2003. These
costs are associated with additional employee severance and related costs to be
incurred in the near future. As of September 30, 2002, Mirant has terminated
approximately 525 employees as part of its restructuring. At September 30, 2002,
Mirant's restructuring accrual balance was approximately $197 million. During
the nine months ended September 30, 2002, Mirant adjusted the accrual as a
result of revisions to restructuring estimates (primarily relating to European
and domestic office closures and adjustments to equipment termination costs )
and made payments against the accrual as summarized in the following table (in
millions):
RECLASS TO
ADJUSTMENTS CURRENT
(P & L IMPACT) PORTION OF BALANCE AT
INITIAL -------------- CASH OTHER LONG-TERM SEPTEMBER
ACCRUAL INCREASES DECREASES PAYMENTS ADJUSTMENTS DEBT 30, 2002
------- --------- --------- -------- ----------- ---- --------
Costs to cancel equipment and
projects $ 256 $ -- $ (6) $ (37) $ 5 $ (31) $ 187
Costs to sever employees and
other employee-termination
related costs 24 18 (15) (14) (3) -- 10
-------- -------- -------- -------- -------- -------- --------
Total $ 280 $ 18 $ (21) $ (51) $ 2 $ (31) $ 197
======== ======== ======== ======== ======== ======== ========
As discussed above, continuing modifications of Mirant's business strategy
during 2002 are likely to result in restructuring charges beyond those
contemplated in the March 2002 Plan.
Commencement of Operation
In June 2002, the Ilijan facility located in the Philippines, in which
Mirant has a 20% ownership interest, commenced commercial operations.
26
In June 2002, the Ilijan facility located in the Philippines, in which
Mirant has a 20% ownership interest, commenced commercial operations.
In July 2002, Mirant commenced operation of the second phase at its
Zeeland, Michigan generating plant, operation at its Wrightsville, Arkansas
generating plant and operation of the first phase at its Sugar Creek generating
plant near Terre Haute, Indiana. Upon completion of the projects, $678 million
in costs were transferred from "Construction work in progress" to "Property,
plant and equipment."
In December 2002, the Company commenced operation of its expansion project
at its Kendall facility located in Cambridge, Massachusetts.
Pagbilao Put Options
The Pagbilao project ("MPagC") shareholder agreement grants minority
shareholders put option rights, such that they can require Mirant Asia-Pacific
Limited and/or its subsidiaries to purchase their interests in the project. The
put option can be exercised (i) between August 5, 2002 and August 5, 2008, the
sixth and twelfth anniversaries of the completion of the project construction
or, (ii) in the event of any change in control, a change in MPagC's charter
documents or the transfer of sponsor in violation of the sponsor completion
support agreement. The put option may be exercised on the earlier of the date of
such changes/events or August 5, 2008, the twelfth anniversary of the completion
of project construction. The price would be determined by a formula including
the discounted future annual net cash flow less the total liabilities
outstanding plus the current assets as of the date of the put notice. Discounted
future annual net cash flow is comprised of capacity and energy fees less
operating and maintenance costs less capital expenditures. If, at any time,
MPagC proposes to transfer shares to any proposed transferee (other than in a
public offering), MPagC shall afford each of the minority shareholders the
opportunity to participate proportionately in such stock transfer. Two of the
three Pagbilao project minority shareholders have served notice to exercise
their respective put options, collectively representing an 8.52% ownership
interest in the project. The current intent of Mirant is to fund the purchase of
these interests during the first quarter of 2003 with amounts available at
Mirant Asia-Pacific Limited and/or its subsidiaries.
I. COMMITMENTS AND CONTINGENT MATTERS
LITIGATION AND OTHER CONTINGENCIES
With respect to each of the following matters, the Company cannot
currently determine the outcome of the proceedings or the amounts of any
potential losses from such proceedings.
Western Power Markets Investigations: Several governmental entities have
launched investigations into the western power markets, including activities by
Mirant and several of its wholly owned subsidiaries. Those governmental entities
include the FERC, the U.S. Department of Justice, the CPUC, the California
Senate, the California State Auditor, California's Electricity Oversight Board,
the General Accounting Office of the U.S. Congress, the San Joaquin District
Attorney and the Attorney General's offices of Washington, Oregon and
California. These investigations, some of which are civil and some criminal,
have resulted in the issuance of civil investigative demands, subpoenas,
document requests, requests for admission, and interrogatories directed 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. Each of these civil investigative demands, subpoenas, document requests,
requests for admission, and interrogatories, as well as the plant visits, could
impose significant compliance costs on Mirant or its subsidiaries. Despite the
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.
Additionally, on February 13, 2002, the FERC directed its staff to
undertake a fact-finding investigation into whether any entity manipulated
short-term prices in electric energy or natural gas markets in the West or
otherwise exercised undue influence over wholesale prices in the West, for the
period January 1, 2000
27
forward. Information from this investigation could be used in any existing or
future complaints before the FERC relevant to the matters being investigated,
including the California refund proceeding described below in Western Power
Markets Price Mitigation and Refund Proceedings. On August 13, 2002, the FERC
Staff issued an initial report regarding its preliminary findings. The report
recommended that the FERC initiate separate proceedings to further investigate
specific instances of inappropriate conduct by several companies, none of which
are affiliated with Mirant. In addition, the report recommended that the natural
gas indices used for purposes of calculating potential refunds in the California
refund case be replaced with indices at a different location plus a
transportation component.
The initial report of the FERC Staff described its investigation of the
effect on spot electric prices in the West of trading strategies employed by
Enron subsidiaries and other entities but could not quantify the exact economic
impact. The FERC Staff will continue to investigate whether the questionable
trading strategies had an indirect effect on other products sold in the West,
such as long-term contracts. The staff report also recommended imposition of
certain limitations on entities with market-based rate authority designed to
prohibit trading strategies based on the submission of false information or the
omission of material information to the FERC, independent system operators, or
other market participants. The staff report is a preliminary report, and the
staff continues to investigate a variety of matters. The Company cannot predict
the impact of the initial staff report on any FERC action that might be taken in
this investigation docket or any other ongoing proceeding at the FERC.
Subsequent to the issuance of the FERC Staff's report, some companies that
sell natural gas at wholesale have announced that certain of their employees did
not correctly report transactional information to the trade press that publish
natural gas spot price data. Mirant cannot at this time predict what effect, if
any, such misreporting of information to the trade press will have upon the use
of spot price data published by the trade press in the ongoing proceeding before
FERC or upon other transactions to which Mirant is a party that utilize such
published spot price data as part of the price terms. The FERC Staff has
requested information from various market participants, including Mirant,
regarding the reporting of transactional information to the trade press.
In September 2002, the CPUC issued a report that purported to show that on
days in the fall of 2000 through the spring of 2001 during which the CAISO had
to declare a system emergency requiring interruption of interruptible load or
imposition of rolling blackouts, Mirant and the other four out of state
purchasers of generation in California had generating capacity that either was
not operated or was out of service due to an outage and that could have avoided
the problem if operated. The report identified two specific days on which Mirant
allegedly had capacity available that was not used or that was on outage and
that if operated could have avoided the system emergency. Mirant has publicly
responded to the report pointing out a number of material inaccuracies and
errors that it believes cause the CPUC's conclusions to be wrong with respect to
Mirant.
In November 2002, Mirant received a subpoena from the Department of
Justice acting through the United States Attorney's office for the Northern
District of California requesting information about its activities and those of
its subsidiaries for the period since January 1, 1998. The subpoena requests
information related to the California energy markets and other topics, including
the reporting of inaccurate information to the trade press that publish natural
gas or electricity spot price data. The subpoena was issued as part of a grand
jury investigation. Mirant intends to cooperate fully with the United States
Attorney's office in this investigation.
California Attorney General Litigation: On March 11, 2002, the California
Attorney General filed a civil suit against Mirant and several of its wholly
owned subsidiaries. The lawsuit alleges that between 1998 and 2001 the companies
effectively double-sold their capacity by selling both ancillary services and
energy from the same generating units, such that if called upon, the companies
would have been unable to perform their contingent obligations under the
ancillary services contracts. The California Attorney General claims that this
alleged behavior violated both the tariff of the CAISO and, more importantly,
the California Unfair Competition Act. The suit seeks both restitution and
penalties in unspecified amounts. Mirant removed this
28
suit from the state court in which it was originally filed to the United States
District Court for the Northern District of California. This suit has been
consolidated for joint administration with the California Attorney General suits
filed on April 9, 2002, and April 15, 2002. Mirant has filed a motion seeking
dismissal of the claims.
On March 20, 2002, the California Attorney General filed a complaint with
the FERC against certain power marketers and their affiliates, including Mirant
and several of its wholly owned subsidiaries, alleging that market-based sales
of energy made by such generators were in violation of the Federal Power Act
because such transactions were not appropriately filed with the FERC. The
complaint requests, among other things, refunds for any prior short-term sales
of energy that are found to not be just and reasonable along with interest on
any such refunded amounts. The FERC has dismissed the California Attorney
General's complaint and denied the California Attorney General's request for
rehearing. The California Attorney General has appealed that dismissal to the
United States Court of Appeals for the Ninth Circuit.
On April 9, 2002, the California Attorney General filed a second civil
suit against Mirant and several of its wholly owned subsidiaries. The lawsuit
alleges that the companies violated the California Unfair Competition Act by
failing to properly file their rates, prices, and charges with the Federal
Energy Regulatory Commission as required by the Federal Power Act, and by
charging unjust and unreasonable prices in violation of the Federal Power Act.
The complaint seeks unspecified penalties, costs and attorney fees. Mirant
removed this suit from the state court in which it was originally filed to the
United States District Court for the Northern District of California. This suit
has been consolidated for joint administration with the California Attorney
General suits filed on March 11, 2002 and April 15, 2002. Mirant has filed a
motion seeking dismissal of the claims.
On April 15, 2002, the California Attorney General filed a third civil
lawsuit against Mirant and several of its wholly owned subsidiaries in the
United States District Court for the Northern District of California. The
lawsuit alleges that Mirant's acquisition and possession of its Potrero and
Delta power plants has substantially lessened, and will continue to
substantially lessen, competition in violation of the Clayton Act and the
California Unfair Competition Act. The lawsuit seeks equitable remedies in the
form of divestiture of the plants and injunctive relief, as well as monetary
damages in unspecified amounts to include disgorgement of profits, restitution,
treble damages, statutory civil penalties and attorney fees. This suit has been
consolidated for joint administration with the California Attorney General suits
filed on March 11, 2002 and April 9, 2002. Mirant has filed a motion seeking
dismissal of the claims.
Defaults by SCE and Pacific Gas and Electric, and the Bankruptcies of Pacific
Gas and Electric and the PX: On January 16, 2001, SCE suspended indefinitely
certain payment obligations to the PX and to the CAISO. Pacific Gas and Electric
similarly suspended payments. The failure of SCE and Pacific Gas and Electric to
make these payments prevented the PX and CAISO from making payments to Mirant.
As of September 30, 2002, the total amount owed to Mirant by the CAISO and the
PX as a result of these defaults was $352 million. During 2000 and 2001, Mirant
took provisions in relation to these and other uncertainties arising from the
California power markets (discussed elsewhere in this Note) of $295 million
pre-tax.
On March 9, 2001, as a result of the nonpayments of SCE and Pacific Gas
and Electric, the PX ceased operation and filed for bankruptcy protection. The
PX's ability to repay its debt is directly dependent on the extent to which it
receives payment from Pacific Gas and Electric and SCE and on the outcome of its
litigation with the California State government.
On April 6, 2001, Pacific Gas and Electric filed a voluntary petition
under Chapter 11 of the Bankruptcy Code. It is not known at this time what
effect the bankruptcy filing will have on the ultimate recovery of amounts owed
to Mirant. Pacific Gas and Electric and the CPUC have each filed proposed plans
of reorganization for Pacific Gas and Electric, and each of these competing
proposed plans contemplates payment of one hundred percent of all approved
claims. Mirant does not expect any payment to be made to it
29
for power sold by it into the PX or CAISO markets and repurchased by Pacific Gas
and Electric until the FERC issues a final ruling in the Western Power Markets
Price Mitigation and Refund Proceedings.
On March 1, 2002, SCE paid approximately $870 million to the PX in
satisfaction of all claims of or through the PX and the CAISO through
approximately January 18, 2001. The PX is not expected to make any payment to
Mirant until the bankruptcy judge so orders, and the judge is not expected to
rule until after the FERC issues a final ruling in the refund proceeding. Mirant
cannot now determine the timing of such payment or the extent to which such
payment would satisfy its claims.
RMR 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. Under the RMR
agreements, Mirant recovers a portion of the annual fixed revenue requirement
(the "Annual Requirement") of the generation assets through fixed charges to the
CAISO, and Mirant depends on revenues from sales of the output of the units at
market prices to recover the remainder. The portion of the Annual Requirement
that can be recovered through fixed charges to the CAISO is subject to the
FERC's review and approval both as to the percentage and the amount of the
Annual Requirement to which the percentage is applied.
Mirant assumed the RMR agreements from Pacific Gas and Electric prior to
the outcome of a FERC proceeding initiated in October 1997 (the "Fixed Portion
Proceeding"). The Fixed Portion Proceeding will determine the percentage to be
paid to Mirant by the CAISO under the RMR agreements of a $159 million Annual
Requirement that was in effect through December 31, 2001, as well as any future
Annual Requirement in effect through the final disposition of the Fixed Portion
Proceeding. This $159 million Annual Requirement was negotiated as part of a
prior settlement of a FERC rate proceeding. In the Fixed Portion Proceeding,
Mirant contended 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 RMR
agreements) and the CAISO's actual calls, which would have resulted in the CAISO
paying approximately $120 million, or 75% of the settled Annual Requirement in
effect through December 31, 2001. Mirant currently collects 50% of the Annual
Requirement from the CAISO, which charges are subject to refund once the FERC
determines the percentage of the Annual Requirement that should be recovered by
Mirant from the CAISO. The decision in the Fixed Portion Proceeding will affect
the amount the CAISO will pay to Mirant for the period from June 1, 1999 through
the final disposition of the Fixed Portion Proceeding, including any appeals. On
June 7, 2000, the administrative law judge ("ALJ") in the Fixed Portion
Proceeding issued an initial decision providing for the CAISO to pay
approximately 3% of the Annual Requirement to Mirant. On July 7, 2000, Mirant
appealed the ALJ's decision and the matter is pending at the FERC.
In the Fall of 2001, Mirant filed with the FERC to increase the Annual
Requirement for the generating assets subject to the RMR agreements from the
$159 million amount that had been in effect to $199 million. That increase took
effect January 1, 2002, subject to refund of any amount that the FERC may
determine in a proceeding (the "Annual Requirement Proceeding") separate from
the Fixed Portion Proceeding to be in excess of just and reasonable rates. The
CAISO and Pacific Gas and Electric, which buys from the CAISO the electricity
sold to the CAISO by Mirant under the RMR agreements, have contested the
increase in the Annual Requirement at the FERC. On November 22, 2002, the
parties filed with the FERC for its approval a settlement agreement regarding
the increase in the Annual Requirement that would set the Annual Requirement
through 2004. If approved by the FERC, the settlement agreement will result in
refunds being made by Mirant of a portion of the Annual Requirement currently
being collected by Mirant for 2002. Mirant expects that the amount of such
refunds would not materially exceed the amounts currently being reserved by
Mirant with respect to the Annual Requirement issue. The percentage that
ultimately results from the Fixed Portion Proceeding, discussed above, will be
applied to the Annual Requirement for 2002 in the Annual Requirement Proceeding.
30
Mirant has also exercised its right under the RMR agreements to recover
100% of the Annual Requirement specific to the Potrero plant through fixed
charges to the CAISO beginning January 1, 2002. The Annual Requirement of the
Potrero plant constitutes $35 million of the total $199 million Annual
Requirement currently in effect for 2002, subject to refund as subsequently
determined in the Annual Requirement Proceeding. As part of their challenge to
the increase in the Annual Requirement in the Annual Requirement Proceeding,
discussed above, the CAISO and Pacific Gas and Electric have contested the
increase in the Annual Requirement for the Potrero plant. This issue is also
part of the settlement agreement that was filed on November 22, 2002 with the
FERC for its approval. By exercising this right under the RMR agreement, Mirant
has limited its potential refund liability resulting from the Fixed Portion
Proceeding related to the Potrero plant, if any, to the period June 1, 1999
through December 31, 2001.
On October 1, 2002, the CAISO notified Mirant that it was electing to
receive service under the RMR agreements during 2003 from Contra Costa Units
4-7, Pittsburg Units 5-7, and Potrero Units 3-6. On November 26, 2002, Mirant
exercised its right under the RMR agreements to recover 100% of the Annual
Requirement specific to all of its plants and units subject to RMR agreements,
except for the Pittsburg Unit 5, through fixed charges to the CAISO, beginning
January 1, 2003. The result of this election is that any refund amounts that
might be owed by Mirant upon resolution of the Fixed Portion Proceeding would be
limited to the period June 1, 1999 through December 31, 2002 for the units
subject to the RMR agreements other than Pittsburg Unit 5 and the Potrero plant,
as discussed above.
If Mirant is unsuccessful in its appeal of the ALJ's decision in the Fixed
Portion Proceeding, it will be required to refund certain amounts of the Annual
Requirement paid by the CAISO for the period from June 1, 1999. For the Potrero
plant the period for which such refunds would be owed would run through December
31, 2001, for Mirant's other California plants except Pittsburg Unit 5 the
refund period would run through December 31, 2002, and for Pittsburg Unit 5 the
refund period would run through the final disposition of the appeal. Mirant
estimates that the amount of such refunds, together with the refunds potentially
resulting from resolution of the Annual Requirement Proceeding described above,
as of September 30, 2002, would have been approximately $298 million. This
amount does not include interest that may be payable in the event of a refund.
If resolution of the Fixed Portion Proceeding and the Annual Requirement
Proceeding results in refunds of that magnitude, no effect on net income for the
periods under review would result as adequate reserves have been recorded.
Western Power Markets Price Mitigation and Refund Proceedings: On June 19, 2001,
the FERC issued an order that provides for price mitigation in all hours in
which power reserves fall below 7%. During these emergency 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. This price mitigation
includes all spot market sales in markets throughout the Western System
Coordinating Council. This price mitigation was implemented on June 20, 2001 and
was in effect until July 11, 2002, at which time the formula was replaced by a
hard cap of $91.87/MWh, which was in place until October 30, 2002. The FERC
requires 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.
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 or PX
from October 2, 2000 through June 20, 2001. Parties have appealed the FERC's
June 19, 2001 and July 25, 2001 orders to the United States Court of Appeals for
the Ninth Circuit, seeking review of various issues, including expanding the
potential refund date to include periods prior to October 2, 2000. Any such
expansion of the refund period could significantly increase Mirant's refund
exposure in this proceeding. In response to an order by the Ninth Circuit
allowing the California parties to include additional evidence in the record
regarding purported market manipulation, on September 6, 2002, the California
parties filed a motion for additional discovery in the refund case on the issue
of purported market manipulation. On November 20, 2002, the FERC issued an order
permitting additional discovery in this proceeding commencing on the date of the
order and continuing through
31
February 28, 2003. Following that period for additional discovery, the parties
to the proceeding will be allowed to introduce additional evidence for the
FERC's consideration in determining the refund issues.
In the July 25, 2001 order, 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 one
of Mirant's subsidiaries, for bilateral sales of electricity to the DWR at the
California/Oregon border, claiming that such sales took place in the Pacific
Northwest. The refunds sought from Mirant and of its subsidiaries totaled
approximately $90 million. A FERC ALJ 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. On May 13, 2002 and May 24, 2002, the City of Tacoma, Washington and
the City of Seattle, Washington, respectively, filed to reopen the evidentiary
record in this proceeding as a result of the contents of three internal Enron
Power Marketing, Inc. memoranda that had been obtained and publicly released by
the FERC as part of its continuing investigation. On December 19, 2002, the FERC
granted in part the motion to reopen the record, allowing parties the
opportunity to conduct additional discovery through February 28, 2003 on claims
of purported market manipulation. Upon the completion of that period for
additional discovery, parties can submit directly to the FERC any additional
evidence and proposed findings of fact that they wish the FERC to consider in
evaluating the ALJ's initial decision. The Company cannot predict the outcome of
these proceedings. 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 during the refund periods. In addition, its
subsidiaries would be owed amounts for purchases made on their behalf from other
sellers in the Pacific Northwest.
On August 13, 2002, the FERC in the California refund proceeding requested
comments from parties on whether the gas indices in the existing formula for
calculating refunds should be replaced with different gas indices (plus
transportation costs) as recommended by the FERC Staff in its report (as
described in Western Power Markets Investigations above). If the FERC adopts the
staff's recommended gas formula for purposes of calculating refunds, it would
increase Mirant's refund exposure in the California refund case.
On December 12, 2002, the ALJ in the California refund proceeding issued
an initial decision providing for a method to implement the FERC's mitigated
market clearing price methodology set forth in its July 25, 2001 order and a
preliminary determination of what refunds are owed under that methodology. In
addition, the ALJ determined the preliminary amounts currently owed to each
supplier in the proceeding. The ALJ determined that the initial amounts owed to
Mirant from the CAISO and the PX totaled approximately $292 million and that
Mirant owed the CAISO and the PX refunds totaling approximately $170 million.
The ALJ recommended that any refunds owed by a supplier to the CAISO and PX
should be offset against any outstanding amounts owed to that supplier by the
CAISO and PX. Under this approach, Mirant would be owed net amounts totaling
approximately $122 million from the CAISO and the PX. The ALJ stressed that the
monetary amounts are not final since they do not reflect the final mitigated
market clearing prices, interest that would be applied under the FERC's
regulations, offsets for emission costs or the effect of certain findings made
by the ALJ in the initial decision. Mirant believes that the amount identified
by the ALJ as being owed to Mirant by the PX fails to reflect an adjustment for
January 2001 that the ALJ concluded elsewhere in his initial decision should be
applied. If that adjustment is applied, the amount owed Mirant by the PX, and
the net amount owed Mirant by the CAISO and the PX after taking into account the
proposed refunds, would increase by approximately $36 million. The amount owed
to Mirant from either the CAISO or the PX or any refund that Mirant might be
determined to owe to the CAISO or the PX may also be affected materially by the
FERC's resolution of the issues described above related to which gas indices
should be used in calculating the mitigated market clearing prices, allegations
of market manipulation, and whether the refund period should include periods
prior to October 2, 2000. Mirant has until January 13, 2003 to appeal the ALJ's
initial decision to the FERC, at which time the FERC may accept, reject or
modify any and all parts of that decision.
On July 17, 2002, the FERC issued an order adopting new market design
rules ("Market Design 2002") applicable to the California wholesale power
markets as well as price caps and other requirements that are
32
applicable to all West-wide wholesale power markets. Key elements of the Market
Design 2002 that were supposed to be in place on October 1, 2002 included an
increase in the amount sellers of electricity at wholesale may bid to the CAISO
from $91.87/MWh to $250/MWh on bids into the California real-time energy and
ancillary services markets, and a FERC imposed maximum price of $250/MWh for all
spot market sales in the western markets. The FERC delayed implementation of the
increase in the price cap until October 30, 2002. Sellers are still required to
offer all available uncommitted capacity for sale in the region. The FERC also
put in place, effective October 31, 2002, procedures in the CAISO market that
will mitigate prices whenever a supplier bids greater than established
thresholds.
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 22, 2001, Mirant entered into a 19-month
agreement with the DWR to provide the State of California with approximately 500
MW of electricity during peak hours through December 31, 2002.
On February 25, 2002, the CPUC and the California Electricity Oversight
Board ("EOB") filed separate complaints at the FERC against certain sellers of
energy under long-term agreements with the California DWR, including the
contract entered into by Mirant with the DWR dated May 22, 2001, alleging that
the terms of these contracts are unjust and unreasonable and that the contracts
should be abrogated or the prices under the contracts should be reduced. In
particular, the EOB claims that the contracts should be voidable at the option
of the State of California. The complaints allege that the DWR was forced to
enter into these long-term contracts due to dysfunctions in the California
market and the alleged market power of the sellers.
Two lawsuits, the McClintock suit and the Millar suit, have also been
filed that seek relief for contracts between the California DWR and certain
marketers of electricity, including the May 22, 2001 contract between DWR and
Mirant, that allegedly contain unfair terms. The plaintiffs allege that the
terms of the contracts are unjust and unreasonable and that the DWR was forced
to enter into these long-term contracts due to dysfunctions in the California
market and alleged market power of the sellers. Plaintiffs seek, among other
things, a declaration that the contracts are void and unenforceable, enjoinment
of the enforcement and performance of those contracts and restitution for funds
allegedly obtained wrongfully under the contracts.
The Millar suit has been consolidated for purposes of pretrial proceedings
with the six rate payer suits described below in "California Rate Payer
Litigation." The McClintock suit has been stayed pending a resolution of a
separate action challenging the long term contracts that were entered into by
the DWR, which suit does not include Mirant or any of its subsidiaries as
parties.
California Rate Payer Litigation: A total of seventeen lawsuits have been filed
asserting claims under California law based on allegations that certain owners
of electric generation facilities in California and energy marketers, including
Mirant and several of its subsidiaries, engaged in various unlawful and
anti-competitive acts that served to manipulate wholesale power markets and
inflate wholesale electricity prices in California. One of the suits has been
voluntarily dismissed, and the other sixteen suits remain pending.
33
Six of those suits were filed between November 27, 2000 and May 2, 2001 in
various California Superior Courts. Three of these suits seek class action
status, while two of the suits are brought on behalf of all citizens of
California. 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.
One such suit names Mirant Corporation itself as a defendant.
These six suits (the "Six Coordinated Suits") were coordinated for
purposes of pretrial proceedings before the Superior Court for San Diego County.
In the Spring of 2002, two of the defendants filed crossclaims against other
market participants who were not parties to the actions. Some of those
crossclaim defendants then removed the Six Coordinated Suits to the United
States District Court for the Southern District of California. The plaintiffs
filed a motion seeking to have the actions remanded to the California state
court, and the defendants filed motions seeking to have the claims dismissed. On
December 13, 2002, the United States District Court for the Southern District of
California granted the plaintiffs' motion seeking to have the six cases remanded
to the California state court. That decision remanding the Six Coordinated Suits
to the California state courts has been appealed to the United States Court of
Appeals for the Ninth Circuit by the defendants that filed the crossclaims.
Those defendants have requested the district court to stay its remand decision
until the Ninth Circuit can act on their appeal, but the district court has not
yet ruled upon that request. If the district court's remand order is not stayed,
then the Six Coordinated Suits will be remanded to the Superior Court for San
Diego County and will go forward before that court while the appeal is pending.
Seven additional rate payer lawsuits were filed between April 23, 2002 and
May 24, 2002 alleging that certain owners of electric generation facilities in
California, as well as certain energy marketers, including Mirant and several of
its subsidiaries, engaged in various unlawful and fraudulent business acts that
served to manipulate wholesale markets and inflate wholesale electricity prices
in California. The suits are related to events in the California wholesale
electricity market occurring over the last three years. Each of the complaints
alleges violation of California's Unfair Competition Act. One complaint also
alleges violation of California's antitrust statute. Each of the plaintiffs
seeks class action status for their respective case. The actions seek, among
other things, restitution, compensatory and general damages, and to enjoin the
defendants from engaging in illegal conduct. These suits were initially filed in
California state courts by the plaintiffs and removed to United States district
courts. These seven cases have been consolidated for purposes of pretrial
proceedings with the Six Coordinated Suits described above. Whether these cases
will remain in the United States District Court for the Southern District of
California or be remanded to the California state courts in light of the
district court's decision on December 13, 2002 to remand the Six Coordinated
Suits cannot be determined at this time.
On June 3, 2002, a lawsuit, Hansen v. Dynegy Power Marketing, et al., was
filed in the Superior Court for the County of San Francisco against various
owners of electric generation facilities in California, including Mirant and
several of its subsidiaries, alleging substantially similar claims to the
ratepayer actions described above. The plaintiff sought class action status for
the lawsuit and purported to represent residential ratepayers located in various
public utility districts in the State of Washington. The complaint sought, among
other things, injunctive relief, disgorgement of profits, restitution and treble
damages. This action was dismissed by the plaintiff on July 11, 2002.
On July 15, 2002, an additional rate payer lawsuit, Public Utility
District No. 1 of Snohomish Co. v. Dynegy Power Marketing, et al., was filed in
the United States District Court for the Central District of California against
various owners of electric generation facilities in California, including Mirant
and its subsidiaries, by Public Utility District No. 1 of Snohomish County,
which is a municipal corporation in the state of Washington that provides
electric and water utility service. The plaintiff public utility district
34
alleges that defendants violated California's antitrust statute by conspiring to
raise wholesale power prices, injuring plaintiff through higher power purchase
costs. The plaintiff also alleges that defendants acted both unfairly and
unlawfully in violation of California's Unfair Competition Act through various
unlawful and anticompetitive acts, including the purportedly wrongful
acquisition of plants, engagement in "Enron-style" trading, and withholding
power from the market. The plaintiff seeks restitution, disgorgement of profits,
injunctive relief, treble damages, and attorney's fees. The federal judicial
panel on multidistrict litigation has ordered the Snohomish suit to be
transferred to the United States District Court for the Southern District of
California and consolidated for purposes of pretrial proceedings with the Six
Coordinated Suits. The defendants have filed motions seeking to have the claims
dismissed.
On October 18, 2002, another rate payer lawsuit, Kurtz v. Duke Energy
Trading et al., was filed in the Superior Court for the County of Los Angeles.
The Kurtz suit alleges that certain owners of electric generation facilities in
California, as well as certain energy marketers, including Mirant and various of
its subsidiaries, engaged in various unlawful and fraudulent business acts that
served to manipulate wholesale markets and inflate wholesale electricity prices
in California since early 1998 in violation of California's Unfair Competition
Act. The Kurtz suit contains allegations of misconduct by the defendants,
including the Mirant entities, that are similar to the allegations made in the
previously filed rate payer suits, in the suits filed by the California Attorney
General on March 11, 2002, and April 15, 2002, and in the suits filed
challenging long-term agreements with the California DWR. The plaintiff seeks to
represent a class consisting of all persons and entities that purchased energy
that was sold into California by the defendants through sales to the CAISO, the
PX or the DWR. The action seeks, among other things, restitution, compensatory
and general damages, and to enjoin the defendants from engaging in illegal
conduct.
On November 20, 2002, a class action suit, Bustamante v. The McGraw-Hill
Companies, Inc., et al., was filed in the Superior Court for the County of Los
Angeles against certain publishers of index prices for natural gas, gas
distribution or marketing companies, owners of electric generation facilities in
California and energy marketers, including the Company and various of its
subsidiaries. The plaintiff in the Bustamante suit alleges that the defendants
violated California Penal Code sections 182 and 395 and California's Unfair
Competition Act by reporting false information about natural gas transactions to
the defendants that published index prices for natural gas causing the prices
paid by Californians for natural gas and for electricity to be artificially
inflated. The suit seeks, among other things, disgorgement of profits,
restitution, and compensatory and punitive damages.
Shareholder Litigation: Twenty lawsuits have been filed since May 29, 2002
against Mirant and four of its officers alleging, among other things, that
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by making material misrepresentations
and omissions to the investing public regarding Mirant's business operations and
future prospects during the period from January 19, 2001 through May 6, 2002.
The suits have each been filed in the United States District Court for the
Northern District of Georgia, with the exception of three suits filed in the
United States District Court for the Northern District of California. The
complaints seek unspecified damages, including compensatory damages and the
recovery of reasonable attorneys' fees and costs.
The seventeen suits filed in the United States District Court for the
Northern District of Georgia have been consolidated. In November 2002, the
plaintiffs in the consolidated suits filed an amended complaint that added
additional defendants and claims. The plaintiffs added as defendants Southern
Company, the directors of Mirant immediately prior to its initial public
offering of stock, and various firms that were underwriters for the initial
public offering by the Company. In addition to the claims set out in the
original complaint, the amended complaint asserts claims under Sections 11 and
15 of the Securities Act of 1933, alleging the registration statement and
prospectus for the initial public offering of Mirant's stock misrepresented and
omitted material facts. In the amended complaint, the plaintiffs expand their
claims under sections 10(b) and 20 of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder to include statements made to the investing
public regarding Mirant's business operations and future prospects during the
period from September 26, 2000 through September 5, 2002. The amended complaint
35
alleges, among other things, that Mirant's stock price was artificially inflated
because the Company failed to disclose in various filings, public statements,
and registration statements: (1) that Mirant allegedly reaped illegal profits in
California by manipulating energy prices through a variety of alleged improper
tactics; (2) that Mirant allegedly failed to take a timely charge to earnings
through a write off of its interest in Western Power Distribution; and (3) the
accounting errors and internal controls issues that were disclosed in July and
November of 2002.
Under a master separation agreement between Mirant and Southern Company,
Southern Company is entitled to be indemnified by Mirant for any losses arising
out of any acts or omissions by Mirant and its subsidiaries in the conduct of
the business of Mirant and its subsidiaries. The underwriting agreements between
Mirant and the various firms added as defendants that were underwriters for the
initial public offering by the Company also provide for Mirant to indemnify such
firms against any losses arising out of any acts or omissions by Mirant and its
subsidiaries.
In December 2002, two of the three suits pending in California were
transferred by the court to the United States District Court for the Northern
District of Georgia. Mirant expects those suits to be consolidated with the
seventeen consolidated suits already pending before that court. The Company has
not yet been served in the other suit filed in California.
Shareholder Derivative Litigation: Four purported shareholders' derivative suits
have been filed against Mirant, its directors and certain officers of the
Company.
These lawsuits allege that the directors breached their fiduciary duties
by allowing the Company to engage in alleged unlawful or improper practices in
the California energy market during 2000 and 2001. The Company practices
complained of in the purported derivative lawsuits largely mirror those
complained of in the shareholder litigation, the rate payer litigation and the
California attorney general lawsuits that have been previously disclosed by the
Company. One suit also alleges that the defendant officers engaged in insider
trading. The complaints seek unspecified damages on behalf of the Company,
including attorneys' fees, costs and expenses and punitive damages. Three of the
suits have been stayed until discovery begins in the seventeen consolidated
suits pending in the United States District Court for the Northern District of
Georgia described in Shareholder Litigation above.
Wallula Power Project: On June 20, 2002, Wallula Generation, LLC ("Wallula")
sent a letter to Mirant Americas Energy Marketing, a wholly-owned subsidiary of
Mirant, requesting a letter of credit in the amount of $166 million in
connection with a tolling arrangement pursuant to a Conversion Services
Agreement (the "Agreement") between Mirant Americas Energy Marketing and Wallula
for the planned Wallula Power Project to be constructed by Wallula in the State
of Washington by October 2004, which date could be extended pursuant to the
Agreement. Mirant Americas Energy Marketing disagreed with Wallula's
interpretation of the collateral and credit requirements of the Agreement. By
letter dated July 10, 2002, Wallula requested that Mirant arbitrate the issue of
whether Mirant was obligated to provide a letter of credit in the amount of $166
million. In September Mirant and Wallula entered into an agreement settling
their outstanding dispute. Under that settlement agreement, Mirant has paid
Wallula an amount that will not have a materially adverse impact on the Company.
In addition, the Agreement between Mirant Americas Energy Marketing and Wallula
has been terminated.
Enron Bankruptcy Proceedings: Since December 2, 2001, Enron and a number of its
subsidiaries have filed for bankruptcy. As of September 30, 2002, the total
amount owed to Mirant by Enron was approximately $82 million. Based on a reserve
for potential bad debts recorded in 2001, the Company does not expect the
outcome of the bankruptcy proceeding to have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
State Line: On July 28, 1998, an explosion occurred at the Company's 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
36
far, seven personal injury lawsuits have been filed against Mirant, five of
which were filed in Cook County, Illinois. Mirant has settled the claims of five
of these plaintiffs. The terms of the settlements involve cash payments to the
plaintiffs, with such payments being fully covered by insurance. The outcome of
these proceedings cannot now be determined and an estimated range of loss cannot
be made; however, the Company has significant insurance coverage for losses
occurring as a result of the explosion.
Edison Mission Energy Litigation: On March 8, 2002, two subsidiaries of Edison
International (collectively, "EME") filed a breach of contract action against
Mirant Corporation and two of its subsidiaries. In July 2001, Mirant and its
subsidiaries entered into a contract with EME to purchase its 50% ownership
interest in EcoElectrica Holdings Ltd. ("EcoElectrica"), a limited partnership
owning a 540 MW liquefied natural gas fired combined cycle cogeneration facility
in Puerto Rico together with various related facilities. EME alleges that Mirant
and its subsidiaries breached the purchase agreement by failing to complete the
purchase of EME's interest in EcoElectrica. The plaintiffs seek damages in
excess of $50 million, plus interest and attorney fees. At the same time Mirant
and its subsidiaries entered into the contract with EME, they entered into a
separate agreement with a subsidiary of Enron to purchase an additional 47.5%
ownership interest in EcoElectrica. That purchase also was not completed.
Environmental Information Requests: Along with several other electric generators
which own facilities in New York, in October 1999 Mirant New York received an
information request from the State of New York concerning the air quality
control implications of various repairs and maintenance activities at its Lovett
facility. Mirant New York responded fully to this request and provided all of
the information requested by the State. The State of New York issued notices of
violation to some of the utilities being investigated. The State issued a notice
of violation to the previous owner of Plant Lovett, Orange and Rockland
Utilities, alleging violations associated with the operation of Plant Lovett
prior to the acquisition of the plant by Mirant New York. To date, Mirant New
York has not received a notice of violation. Mirant New York disagrees with the
allegations of violations in the notice of violation issued to the previous
owner. The notice of violation does not specify corrective actions, which the
State of New York may require. If a violation is determined to have occurred at
Plant Lovett, Mirant New York may be responsible for the cost of purchasing and
installing emission control equipment, the cost of which may be material. Under
the sales agreement with Orange and Rockland Utilities for Plant Lovett, Orange
and Rockland Utilities is responsible for fines and penalties arising from any
violation associated with historical operations, but the state or federal
government could seek fines and penalties from Mirant New York, the cost of
which may be material. Mirant New York is engaged in discussions with the State
to explore a resolution of this matter.
In January 2001, the EPA, Region 3 issued a request for information to
Mirant concerning the air permitting implications of past repair and maintenance
activities at its Potomac River plant in Virginia and Chalk Point, Dickerson and
Morgantown plants in Maryland. The requested information concerns the period of
operations that predates Mirant's ownership of the plants. Mirant has responded
fully to this request. If a violation is determined to have occurred at any of
the plants, Mirant may be responsible for the cost of purchasing and installing
emission control equipment, the cost of which may be material. Under the sales
agreement with PEPCO for those plants, PEPCO is responsible for fines and
penalties arising from any violation associated with historical operations prior
to the Company's acquisition of the plants, but the state or federal government
could seek fines and penalties from Mirant, the cost of which may be material.
The Company cannot provide assurance that lawsuits or other administrative
actions against its power plants will not be filed or taken in the future. If an
action is filed against the Company or its power plants and it is judged to not
be in compliance, this could require substantial expenditures to bring the
Company's power plants into compliance and have a material adverse effect on its
financial condition, cash flows and results of operations.
SEC Informal Investigation and U.S. Department of Justice and CFTC Inquiries: In
August 2002, Mirant received a notice from the Division of Enforcement of the
Securities and Exchange Commission that it was conducting an investigation of
Mirant. The Division of Enforcement has asked for information and
37
documents relating to various topics such as accounting issues including the
issues announced on July 30, 2002 and August 14, 2002; energy trading matters
(including round trip trades); Mirant's accounting for transactions involving
special purpose entities; and information related to shareholder litigation.
Mirant intends to cooperate fully with the Securities and Exchange Commission.
In addition, the Company has been contacted by the U.S. Department of
Justice regarding the Company's disclosure of accounting issues and energy
trading matters. The Company has been asked to provide copies of the same
documents requested by the SEC in their informal inquiry, and it intends to
cooperate fully.
In August 2002, the Commodities Futures Trading Commission ("CFTC") asked
the Company for information about a small number of buy and sell transactions
occurring during 2001. The Company provided information regarding such trades to
the CFTC in mid August, none of which it considers to be wash trades. The CFTC
subsequently requested additional information, including information about all
trades conducted on the same day with the same counterparty that were
potentially offsetting during the period from January 1, 1999 through June 17,
2002.
Philippines IPP Review: Pursuant to the Electric Power Industry Reform Act of
2001, a governmental Inter-Agency Review Committee ("Committee") was established
to review all contracts with IPPs in the Philippines, including those of the
Company, to determine whether such contracts have provisions which are grossly
disadvantageous or onerous to the government of the Philippines. On July 5,
2002, it was reported that 29 of the 35 contracts reviewed had legal or
financial issues requiring further review or action. These included several of
Mirant's contracts. Mirant Philippines, the Power Sector Assets and Liabilities
Management Corporation ("PSALM"), the Department of Energy, and the Department
of Justice have entered into a letter agreement establishing a general framework
("Framework Agreement") for resolving all outstanding issues raised by the
Committee about Mirant's IPP contracts. The Department of Energy has announced
that the parties "have successfully resolved, through bilateral agreement,
between the Philippine Government and the firm, all outstanding issues" on
Mirant's IPP contracts. The key terms of the new agreements are: Pagbilao will
no longer nominate capacity beyond the plant's nominal capacity; Pagbilao will
agree to settle certain issues on interpretation of its ECA relating to
penalties resulting from forced outages and waive past claims relating thereto;
the ECAs for Navotas I and II will be terminated and Mirant will acquire rights
to the Navotas I and II plants in return for a net payment of approximately
US$12 million; Mirant will be free to sell Navotas and excess Pagbilao energy
output in the open market; and Sual and Pagbilao will waive their claims to be
reimbursed for local business taxes. The benefits to Mirant are confirmation
that the original contracts for Sual and Pagbilao remain intact and will be
reaffirmed; no resultant material net income impact; reduction in potential
penalty payments due to outages at Pagbilao; acquisition of ownership rights of
Navotas I and II plants; and facilitation of further energy sales from Sual,
Pagbilao and Navotas I and II. The Framework Agreement has numerous conditions
precedent and its implementation will require many other agreements involving
project companies, and in some cases other parties and government agencies. The
parties have agreed to complete the measures within 90 days from the date of the
Framework Agreement. Any issue with respect to Ilijan is outside the terms of
the Framework Agreement.
Panda-Brandywine, L.P. Power Purchase Agreement: On July 18, 2002, the Maryland
Court of Special Appeals ruled that a Power Purchase Agreement ("Panda PPA")
between Panda-Brandywine, L.P. ("Panda") and PEPCO had been improperly assigned
to Mirant and that PEPCO had improperly delegated its duties under the Panda PPA
to Mirant. The Panda PPA is a long term power purchase agreement that expires in
2021. At the time that Mirant purchased the Mid-Atlantic assets from PEPCO in
2000, Mirant and PEPCO entered into a contractual arrangement (the "Back-to-Back
Agreement") with respect to the Panda PPA under which (1) PEPCO agreed to resell
to Mirant all "capacity, energy, ancillary services and other benefits" to which
it is entitled from Panda under the Panda PPA; (2) Mirant agreed to pay PEPCO
each month all amounts due from PEPCO to Panda for the immediately preceding
month associated with such capacity, energy, ancillary services and other
benefits; and (3) PEPCO irrevocably and unconditionally appointed Mirant to deal
directly with Panda with respect to all matters arising under the Panda PPA.
Mirant
38
has also entered into an agreement with PEPCO that the Back-to-Back Agreement
would be terminated and an adjustment would be made to the price paid by Mirant
under the asset purchase and sale agreement if the Back-to-Back Agreement was
found to be void by a binding court order within the period ending in March
2005. The amount of the purchase price adjustment is to be set so as to
compensate PEPCO for the termination of the benefit to PEPCO of the back-to-back
arrangement while also holding Mirant economically indifferent from any such
court order. In December 2000, Mirant estimated that the charges to be paid by
PEPCO for electricity under the Panda PPA exceeded the then existing market
prices for electricity by $365 million on a net present value basis. In its July
18, 2002 decision, the Court of Special Appeals also ruled, however, that the
Maryland PSC has the authority to approve the transfer of rights, duties and
obligations under the Panda PPA to Mirant on public policy grounds despite the
assignment provision and remanded the case to the Maryland PSC. The Court of
Special Appeals denied a motion for reconsideration filed by Panda on September
23, 2002. In December 2002, the Maryland Court of Appeals, its highest court,
granted petitions filed by PEPCO and Panda seeking to appeal the decision made
by the Court of Special Appeals. Mirant does not believe that it will ultimately
be required to make the purchase price adjustment, but the ultimate outcome
cannot now be determined.
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. The Company recognizes estimated losses from contingencies
when information available indicates that a loss is probable and the amount of
the loss is reasonably estimable in accordance with SFAS No. 5, "Accounting for
Contingencies."
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 certain of its investments.
The material commitments are discussed in the following sections.
ENERGY MARKETING AND RISK MANAGEMENT
Mirant Corporation had approximately $947 million of trade credit support
commitments outstanding as of September 30, 2002, which included $638 million of
letters of credit, $5 million of net cash collateral held and $314 million of
parent guarantees.
Mirant Corporation has also guaranteed the performance of obligations
under a multi-year agreement entered into by Mirant Americas Energy Marketing
with Brazos Electric Power Cooperative ("Brazos"). Mirant Corporation's
guarantee was $60 million at September 30, 2002, a decrease of $5 million from
December 31, 2001. Mirant Corporation is subject to regulatory and commercial
risks under this energy requirements contract. Mirant Corporation believes, but
cannot guarantee, that it has adequately provided for the potential risks
related to this contract, which terminates at the end of 2003.
Mirant Corporation also has a guarantee of $64 million for the performance
of all obligations to Pan Alberta Gas, Ltd. issued in 2000 and outstanding at
September 30, 2002.
Vastar, a subsidiary of BP, and Mirant Corporation had issued certain
financial guarantees made in the ordinary course of business, on behalf of
Mirant Americas Energy Marketing's counterparties, to financial institutions and
other credit grantors. Mirant Corporation has agreed to indemnify BP against
losses under such guarantees in proportion to Vastar's former ownership
percentage of Mirant Americas Energy Marketing. At September 30, 2002, such
guarantees amounted to approximately $85 million.
39
Mirant Americas Energy Marketing has a 20-year tolling agreement with
Perryville under which Perryville will sell all the electricity generated by the
facility to Mirant Americas Energy Marketing. At September 30, 2002, the total
estimated notional commitment under this agreement was approximately $1.05
billion over the 20-year life of the contract. Effective August 23, 2002, Mirant
Americas Energy Marketing and Perryville, with the consent of the project
lenders, restructured the tolling agreement between the parties to remove the
requirement to post a letter of credit or other credit support in the event of a
downgrade from S&P or Moody's. In connection with the restructuring, Mirant
Americas made a $100 million subordinated loan to Perryville, the proceeds of
which were used to repay an existing $25 million subordinated loan owed to a
Mirant subsidiary and to repay $75 million of senior debt of the project. In
addition, Mirant Americas guaranteed the obligations of Mirant Americas Energy
Marketing under the tolling agreement up to the amount of the subordinated loan.
The remaining obligations of Mirant Americas Energy Marketing under the tolling
agreement are guaranteed by Mirant Corporation.
To the extent that Mirant Corporation does not maintain its current credit
ratings, it could be required to provide alternative collateral to certain risk
management and marketing counterparties based on the value of the Company's
portfolio at such time, in order to continue its current relationship with those
counterparties. Mirant could also be required to provide alternative collateral
related to committed pipeline capacity charges. Such collateral might be in the
form of cash and/or letters of credit. There is an additional risk that in the
event of a reduction of Mirant's credit rating that certain counterparties may,
without contractual justification, request additional collateral or terminate
their obligations to Mirant.
TURBINE PURCHASES AND OTHER CONSTRUCTION-RELATED COMMITMENTS
During the first quarter of 2002, Mirant committed itself to a
restructuring plan designed to reduce capital spending and operating expenses.
As a result, the Company recorded restructuring charges in the nine months ended
September 30, 2002 related to these changes. The reduced capital spending plan
results in material changes to Mirant's expected commitments under its turbine
purchase agreements and its off-balance sheet equipment procurement facilities.
Mirant has canceled and intends to cancel certain turbines under its purchase
agreements and its off-balance sheet equipment procurement facilities. The
commitments for turbines that Mirant has canceled and intends to cancel are
included in Mirant's restructuring charges (Note H), and Mirant plans to
formally terminate the orders for these turbines at various times within one
year of the restructuring commitment date. Until these termination orders are
issued Mirant continues to have the option to purchase the turbines.
As of September 30, 2002, Mirant had outstanding agreements to purchase 32
turbines (24 gas turbines and 8 steam turbines) of which 11 have been accrued
for termination under the March 2002 Plan (see table below). In addition,
Mirant's other construction-related commitments totaled approximately $622
million at September 30, 2002.
Mirant, through certain of its subsidiaries, has two off-balance sheet
equipment procurement facilities. These facilities are being used to fund
equipment progress payments due under purchase contracts that have been assigned
to the facilities, which are separate, independent third-party owners. For the
first facility, which is a $1.8 billion notional value facility (the "domestic
facility"), remaining contracts for 42 turbines (28 gas turbines and 14 steam
turbines) have been assigned to a third-party trust. For the second facility,
which at September 30, 2002 was a Euro 550 million (approximately $543 million)
notional value facility (the "Euro facility"), remaining contracts for four
engineered equipment packages ("power islands") have been assigned to a
third-party owner incorporated in the Netherlands. Of these 46 remaining
turbines/power islands, 35 have been accrued for termination under the March
2002 Plan.
40
PROCUREMENT
PURCHASE FACILITIES TOTAL
COMMITMENTS (TURBINES/POWER TURBINES/POWER
(TURBINE) ISLANDS) ISLANDS
--------- -------- -------
TURBINE COUNT
Total contracted turbines/power islands at
December 31, 2001 48 55 103
Turbines/power islands terminated during
the nine months ended September 30, 2002 (8) (9) (17)
Turbines/power islands placed in service
During the nine months ended September 30,
2002 (8) -- (8)
----- ----- -----
Total contracted turbines/power islands at
September 30, 2002 32 46 78
Turbines/power islands to be terminated
or sold in the future under March 2002 Plan (11) (35) (46)
----- ----- -----
Total remaining contracted turbines / power
Islands at September 30, 2002 (after
March 2002 Plan) 21 11 32
===== ===== =====
COMMITMENTS FOR REMAINING CONTRACTED
TURBINES / POWER ISLANDS AFTER MARCH 2002 PLAN
(IN MILLIONS)
Total commitments not reported on balance
sheet at September 30, 2002 $ 28 $ 377 $ 405
Total commitments reported on balance sheet at
September 30, 2002 $ -- $ 128 $ 128
Cost to terminate at September 30, 2002 $ 2 $ 210 $ 212
As part of the March 2002 Plan, Mirant negotiated deferrals of the
shipment dates of certain turbines under both equipment procurement facilities.
As a result, the revised shipment dates for certain turbines included in the
domestic facility extend beyond the permitted term of the facility. Thus, the
Company no longer has the option to enter into a lease arrangement for this
equipment, and it will be forced to exercise its purchase option. Therefore, the
equipment no longer qualifies for off-balance sheet treatment and Mirant is
treating the equipment as if it is the owner for financial reporting purposes.
Consequently, Mirant has included a $37 million liability for these turbines
(equal to the costs incurred to date in constructing these turbines) as of
September 30, 2002, of which $13 million was added to construction work in
progress and $24 million was reported as restructuring expense during the
quarter ended March 31, 2002 as part of the March 2002 Plan. Of the $37 million
liability, $13 million is reported as "Other long-term debt" and $24 million is
reported in "Current portion of long-term debt" on the accompanying unaudited
condensed consolidated balance sheet at September 30, 2002. Of the $24 million
in the "Current portion of long-term debt," $2 million was reclassified from
restructuring reserves (as it had previously been accrued for termination in the
March 2002 Plan).
During the quarter ended September 30, 2002, the Company made unreimbursed
direct payments to vendors related to certain turbines/power islands in the
equipment procurement facilities. Therefore, the equipment no longer qualifies
for off-balance sheet treatment and Mirant is treating the equipment as if it is
the owner for financial reporting purposes. Consequently, Mirant has recorded a
$188 million liability (equal to the costs incurred to date in constructing
these turbines/power islands) as of September 30, 2002, of which $29 million was
reclassified from the restructuring reserve (as it had previously been accrued
for termination in the March 2002 Plan), and the remaining $159 million was
added to construction work in progress. Of the $188 million liability, $27
million is reported in "Other long-term debt" and $161 million is reported in
"Current portion of long-term debt" on the accompanying unaudited condensed
consolidated balance sheet at September 30, 2002. The Company recorded a $132
million impairment charge related to certain of these turbines/power islands
during the three months ended September 30, 2002 (Note D).
Effectively, as of September 30, 2002, Mirant has now recognized in its
financial statements all of the remaining four power islands and related debt
obligations in the European equipment procurement facility.
The drawn amounts of all turbines/power islands (included those to be
terminated) under the equipment procurement facilities were equal to $508
million as of September 30, 2002 ($391 million in the domestic
41
facility and $117 million in the Euro facility), of which Mirant has guaranteed
89.9%. Mirant has recorded $225 million of this amount as a liability on its
balance sheet as described above.
Further, the modification of the Company's strategic direction subsequent
to March 2002 is likely to result in restructuring charges incremental to those
contemplated in the March 2002 Plan. See Note H.
In October 2002, Mirant terminated contracts for twelve turbines. Nine of
the turbines had previously been accrued for termination in the March 2002 Plan,
and the termination of the remaining three turbines resulted in additional
termination expense of approximately $34 million which was recorded during the
fourth quarter of 2002. Additionally, Mirant negotiated deferrals of the
shipment dates of certain other turbines under the domestic equipment
procurement facility that were part of the March 2002 Plan. As a result, the
revised shipment dates for certain turbines included in the facility extend
beyond the permitted term of the facility. Thus, the Company no longer has the
option to enter into a lease arrangement for this equipment, and it will be
forced to exercise its purchase option. Therefore, the equipment no longer
qualifies for off-balance sheet treatment and Mirant will be treating the
equipment as if it is the owner for financial reporting purposes. Consequently,
Mirant will reclassify approximately $79 million from its restructuring accrual
to "Current portion of long-term debt" for these turbines (equal to the costs
incurred to date in constructing these turbines) in the fourth quarter of 2002.
In November 2002, the Company made further unreimbursed direct payments to
vendors related to two turbines in the domestic equipment procurement facility.
Therefore, the equipment will no longer qualify for off-balance sheet treatment
and Mirant will be treating the equipment as if it is the owner for financial
reporting purposes. Consequently, Mirant will record approximately a $31 million
liability as "Other long-term debt" (equal to the costs incurred to date in
constructing these turbines) and $31 million will be added to "Construction work
in progress" in the fourth quarter of 2002.
LONG-TERM SERVICE AGREEMENTS
Mirant has entered into long-term service agreements for the maintenance
and repair by third parties of many of its combustion-turbine generating plants.
Generally, these agreements may be terminated at little or no cost prior to
shipment of the associated turbine. As of September 30, 2002, the maximum
termination amounts for long-term service agreements associated with completed
and shipped turbines were $642 million. As of September 30, 2002, the total
estimated commitments for long-term service agreements associated with turbines
already completed and shipped were approximately $805 million. These commitments
are payable over the course of each agreement's term. The terms range from ten
to twenty years. Estimates for future commitments for long-term service
agreements are based on the stated payment terms in the contracts at the time of
execution. These payments are subject to an annual inflationary adjustment.
As a result of the turbine cancellations as part of the March 2002 Plan,
the long-term service agreements associated with the canceled turbines will also
be canceled. However, as stated above, canceling the long-term service
agreements will result in little or no termination costs to Mirant. Mirant does
not intend to cancel long-term service agreements associated with turbines that
have already shipped. Consequently, the March 2002 Plan should not have an
impact on the long-term service agreement commitments disclosed above.
OBLIGATIONS UNDER ENERGY DELIVERY AND PURCHASE COMMITMENTS
Under the asset purchase and sale agreement for the PEPCO generating
assets, Mirant assumed and recorded net obligations of approximately $2.3
billion representing the estimated fair value (at the date of acquisition) of
out-of-market energy delivery and power purchase agreements, which consist of
five power purchase agreements ("PPAs") and two transition power agreements
("TPAs"). The estimated fair value of the contracts was derived using forward
prices obtained from brokers and other external sources in the
42
market place including brokers and trading platforms/exchanges such as the New
York Mercantile Exchange ("NYMEX") and estimated load information. The PPAs,
which are with parties unrelated to PEPCO, are for a total capacity of 735 MW
and expire over periods through 2021. The TPA agreements state that Mirant will
sell a quantity of megawatthours over the life of the contracts based on PEPCO's
load requirements. The TPA agreement related to load in Maryland expires in June
2004, while the TPA agreement related to load in the District of Columbia
expires in January 2005. The proportion of megawatthours supplied under the two
agreements are currently 64% and 36%, respectively. As actual megawatthours are
purchased or sold under these agreements, Mirant amortizes a ratable portion of
the obligation as an increase in revenues. For the three and nine months ended
September 30, 2002, the Company recorded as revenues, amortization of
approximately $120 million and $320 million, respectively, of the TPA
obligation. Approximately $8 million and $42 million, respectively, of
amortization of the PPA obligation was recorded as a reduction of the cost of
electricity purchased. As of September 30, 2002, the remaining obligations
recorded in the unaudited condensed consolidated balance sheet for the TPAs and
PPAs totaled $986 million and $492 million, respectively, of which $480 million
and $65 million, respectively, are classified as current. The remaining TPA
obligation will be amortized as an increase in revenue through January 2005. The
remaining PPA obligation will be amortized as a reduction of cost of energy
purchased through 2021. At September 30, 2002, the estimated commitments under
the PPA agreements were $1.58 billion based on the total remaining MW commitment
at contractual prices.
Other obligations of approximately $96 million related to other out of
market contracts are also included in the unaudited condensed consolidated
balance sheet.
FUEL COMMITMENTS
Mirant has a contract with BP whereby BP is obligated to deliver fixed
quantities of natural gas at identified delivery points. The negotiated purchase
price of delivered gas is generally equal to the monthly spot rate then
prevailing at each delivery point. In July 2002, Mirant and BP restructured
their contract. The contract term has been extended to December 31, 2009, unless
terminated sooner. Mirant has the ability to reduce the purchase obligation on
this contract annually. Based on current contract volumes, the estimated minimum
commitment for the term of this agreement based on current spot prices is $2.2
billion as of September 30, 2002. The contract is now subject to the North
American Master Netting Agreement between Mirant and BP, dated December 1, 2001
(the "Master Netting Agreement") and a new collateral annex to the Master
Netting Agreement. Together, the Master Netting Agreement and Collateral Annex
provide that the amounts due to BP under the contract will be netted against
payments due between Mirant and BP under various other gas and power contracts,
and that collateral will be posted by one party to the other based on the net
amount of exposure.
Mirant has fixed volumetric purchase commitments under fuel purchase and
transportation agreements totaling $509 million at September 30, 2002. These
agreements will continue to be in effect through 2012.
In addition, in April 2002, Mirant Mid-Atlantic entered into a long-term
fuel purchase agreement. The fuel supplier will convert coal feedstock received
at the Company's Morgantown facility into a synthetic fuel. Under the terms of
the agreement, Mirant Mid-Atlantic is required to purchase a minimum of 2.4
million tons of fuel per annum through December 2007. This minimum purchase
commitment became effective upon the commencement of operations of the synthetic
fuel plant in July 2002 at the Morgantown facility. The purchase price of the
fuel will vary with the delivered cost of the coal feedstock. Based on current
coal prices, it is expected that the annual purchase commitment will be
approximately $100 million.
In July 2002, in conjunction with the commencement of Mirant
Mid-Atlantic's minimum synthetic fuel purchase commitments, Mirant Americas
Energy Marketing arranged for the synthetic fuel supplier to contract with the
coal supplier to purchase coal directly from the supplier. Mirant Americas
Energy Marketing's minimum coal purchase commitments are reduced to the extent
that the synthetic fuel supplier purchases coal under this arrangement. Since
the inception of this arrangement, the synthetic fuel supplier
43
has purchased 100% of Mirant Americas Energy Marketing's minimum coal purchase
commitment thereby reducing the amount of coal purchased by Mirant Americas
Energy Marketing under the contracts, which are included in the fixed volumetric
purchase commitment of $509 million noted above.
MIRANT NEW ENGLAND GUARANTEE
Mirant New England is required to sell electricity at fixed prices to
Cambridge and Commonwealth in order for them to meet their supply requirements
to certain retail customers. In April 2002, Mirant Corporation issued a
guarantee in the amount of $188 million for any obligations Mirant New England
may incur under its Wholesale Transition Service Agreement with Cambridge
Electric Light Company and Commonwealth Electric Company. Both the guarantee and
the agreement expire in February 2005.
OPERATING LEASES
On December 19, 2000, in conjunction with the purchase of the PEPCO
assets, the Company, through Mirant Mid-Atlantic, entered into multiple
sale-leaseback transactions totaling $1.5 billion relating to the Dickerson and
the Morgantown baseload units and associated property. The terms of each lease
vary between 28.5 and 33.75 years. Mirant Mid-Atlantic is accounting for these
leases as operating leases. The Company's expenses associated with the
commitments under the Dickerson and Morgantown operating leases totaled
approximately $24 million for both the three months ended September 30, 2002 and
2001 and $74 million for both the nine months ended September 30, 2002 and 2001.
As of September 30, 2002, the total notional minimum lease payments for the
remaining life of the leases was approximately $2.8 billion. The lease
agreements contain covenants that restrict the Mirant Mid-Atlantic's ability to,
among other things, make dividend distributions, incur indebtedness, or sublease
the facilities.
Mirant Mid-Atlantic has an option to renew the lease for a period that
would cover up to 75% of the economic useful life of the facility, as measured
near the end of the lease term. However, the extended term of the lease will
always be less than 75% of the revised economic useful life of the facility.
Upon an event of default by the Company, the lessors are entitled to a
termination value payment as defined in the agreements which, in general,
decreases over time. At September 30, 2002, the termination value was
approximately $1.4 billion. Upon expiration of the original lease term, the
termination value will be $300 million.
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $33 million and $31 million during the three months ended
September 30, 2002 and 2001, respectively, and approximately $96 million and $94
million during the nine months ended September 30, 2002 and 2001, respectively.
As of September 30, 2002, estimated minimum rental commitments for
non-cancelable operating leases were $3.4 billion.
J. DISCONTINUED OPERATIONS
In August 2002, Mirant completed the sale of its wholly owned subsidiary
MAP Fuels Limited, which wholly owned AQC, in Queensland, Australia, for
approximately $21 million. The asset was sold at approximately book value. In
July 2002, Mirant announced that it had entered into an agreement to sell Neenah
for approximately $109 million. The proceeds from the sale of Mirant's
investment in Neenah are expected to approximate book value. The sale is
expected to close in the first quarter of 2003. In February 2002, Mirant
announced that it had entered into an agreement to sell its State Line
generating facility for $181 million plus an adjustment for working capital. The
sale was completed in June 2002. State Line was previously reported in Mirant's
North America Group operations. In addition, income from discontinued operations
for the three months ended March 31, 2001 includes SE Finance, which was
contributed to Southern on March 5, 2001 as part of Mirant's spin-off from
Southern.
44
The results of these discontinued operations for the three and nine months
ended September 30, 2002 and 2001 were as follows (in millions):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER,
2002 2001 2002 2001
---- ---- ---- ----
Revenue ...................... $ 9 $ 23 $ 53 $ 67
Leveraged lease income ....... -- -- -- 10
Expense ...................... 4 17 34 51
Equity in (loss) of affiliates -- -- -- (3)
---- ---- ---- ----
Income before income taxes ... 5 6 19 23
---- ---- ---- ----
Income taxes ................. 3 2 8 4
---- ---- ---- ----
Net income ................... $ 2 $ 4 $ 11 $ 19
==== ==== ==== ====
The table below presents the components of the balance sheet accounts
classified as current assets and liabilities held for sale as of September 30,
2002 and December 31, 2001 (in millions):
SEPTEMBER 30, AT DECEMBER 31,
CURRENT ASSETS: 2002 2001
---- ----
Cash and cash equivalents .................... $-- $ 4
Accounts receivable .......................... 2 10
Inventory .................................... -- 5
Property, plant and equipment ................ 100 283
Intangibles .................................. -- 14
Other assets ................................. 3 7
Total current assets held for sale ........ $105 $323
==== ====
CURRENT LIABILITIES:
Taxes and other payables ..................... $ 7 $ 15
Deferred taxes ............................... 5 18
Other current liabilities .................... -- 4
---- ----
Total current liabilities related to assets
held for sale .......................... $ 12 $ 37
==== ====
45
K. SEGMENT REPORTING
With the sale of the Company's investment in Bewag and its restructuring, Mirant
has changed its principal business segments from Americas, Asia-Pacific and
Europe to North America and International. North America includes Mirant's
United States, Canadian and Caribbean operations, and International includes
Mirant's Asia-Pacific, European and Brazilian operations. The other reportable
business segment is Corporate.
FINANCIAL DATA BY SEGMENT
For the Three Months Ended September 30, 2002 and 2001
(In Millions)
Corporate and
North America International Eliminations Consolidated
------------------ -------------- ------------ ------------------
2002 2001 2002 2001 2002 2001 2002 2001
Operating Revenues:
Generation and energy marketing $ 1,968 $ 2,195 $ 132 $ 122 $ -- $ -- $ 2,100 $ 2,317
Distribution & integrated utility revenues 128 154 -- -- -- -- 128 154
Other 29 12 1 1 -- -- 30 13
------- ------- ----- ----- ---- ---- ------- -------
Total operating revenues 2,125 2,361 133 123 -- -- 2,258 2,484
Operating Expenses:
Cost of fuel, electricity and other products 1,470 1,612 3 (1) -- -- 1,473 1,611
------- ------- ----- ----- ---- ---- ------- -------
Gross Margin 655 749 130 124 -- -- 785 873
Other Operating Expenses:
Depreciation and amortization 58 63 20 34 4 1 82 98
Maintenance 23 23 8 7 -- -- 31 30
Selling, general, and administrative 112 124 38 23 22 31 172 178
Impairment loss 106 3 98 -- -- -- 204 3
Restructuring charges 6 -- 7 -- (5) -- 8 --
Gain on sales of assets, net (2) -- (3) -- -- -- (5) --
Other 130 109 6 3 1 4 137 116
------- ------- ----- ----- ---- ---- ------- -------
Total other operating expenses 433 322 174 67 22 36 629 425
------- ------- ----- ----- ---- ---- ------- -------
Operating Income (Loss) 222 427 (44) 57 (22) (36) 156 448
Other Income (Expense):
Interest expense, net (32) (37) (22) (35) (46) (40) (100) (112)
Equity in income of affiliates 5 8 20 30 -- -- 25 38
Impairment loss on minority owned affiliates -- -- (18) -- -- -- (18) --
Gain/(loss) on sales of assets, net -- (1) (4) -- -- -- (4) (1)
Other (3) 3 (1) 10 -- (3) (4) 10
Income (Loss) From Continuing Operations
------- ------- ----- ----- ---- ---- ------- -------
Before Income Taxes and Minority Interest 192 400 (69) 62 (68) (79) 55 383
Provision (Benefit) for income taxes 64 170 (5) (3) (21) (32) 38 135
Minority interest 6 4 9 8 5 6 20 18
------- ------- ----- ----- ---- ---- ------- -------
Income (Loss) From Continuing Operations 122 226 (73) 57 (52) (53) (3) 230
Income From Discontinued Operations,
Net of Tax Benefit 1 3 1 1 -- -- 2 4
------- ------- ----- ----- ---- ---- ------- -------
Net Income (Loss) $ 123 $ 229 $ (72) $ 58 $(52) $(53) $ (1) $ 234
======= ======= ===== ===== ==== ==== ======= =======
46
FINANCIAL DATA BY SEGMENT
For the Nine Months Ended September 30, 2002 and 2001
(In Millions)
Corporate and
North America International Eliminations Consolidated
------------------ -------------- -------------- ------------------
2002 2001 2002 2001 2002 2001 2002 2001
Operating Revenues:
Generation and energy marketing $ 4,168 $ 6,365 $ 394 $ 326 $-- $-- $ 4,562 $ 6,691
Distribution & integrated utility revenues 362 334 -- -- -- -- 362 334
Other 54 22 3 2 -- -- 57 24
------- ------- ----- ----- ----- ----- ------- -------
Total operating revenues 4,584 6,721 397 328 -- -- 4,981 7,049
Operating Expenses:
Cost of fuel, electricity and other products 3,016 4,588 11 5 -- -- 3,027 4,593
------- ------- ----- ----- ----- ----- ------- -------
Gross Margin 1,568 2,133 386 323 -- -- 1,954 2,456
Other Operating Expenses:
Depreciation and amortization 161 173 66 99 9 3 236 275
Maintenance 74 80 18 18 -- -- 92 98
Selling, general, and administrative 324 474 96 80 59 99 479 653
Impairment loss 106 96 98 -- -- -- 204 96
Restructuring charges 500 -- 79 -- 19 -- 598 --
Gain on sales of assets, net (1) -- (32) -- -- -- (33) --
Other 336 347 14 10 13 13 363 370
------- ------- ----- ----- ----- ----- ------- -------
Total other operating expenses 1,500 1,170 339 207 100 115 1,939 1,492
------- ------- ----- ----- ----- ----- ------- -------
Operating (Loss) Income 68 963 47 116 (100) (115) 15 964
Other Income (Expense):
Interest expense, net (98) (115) (73) (93) (123) (98) (294) (306)
Equity in income of affiliates 17 23 128 141 -- -- 145 164
Gain/(loss) on sales of assets, net (1) -- 277 1 -- -- 276 1
Impairment loss on minority owned affiliates -- -- (335) -- -- -- (335) --
Other 8 (1) 23 21 (3) -- 28 20
(Loss) Income From Continuing Operations
------- ------- ----- ----- ----- ----- ------- -------
Before Income Taxes and Minority Interest (6) 870 67 186 (226) (213) (165) 843
(Benefit) Provision for income taxes (13) 367 114 (33) (82) (58) 19 276
Minority interest 12 8 26 24 16 16 54 48
------- ------- ----- ----- ----- ----- ------- -------
(Loss) Income From Continuing Operations (5) 495 (73) 195 (160) (171) (238) 519
Income From Discontinued Operations,
Net of Tax Benefit 9 11 2 3 -- 5 11 19
------- ------- ----- ----- ----- ----- ------- -------
Net (Loss) Income $ 4 $ 506 $ (71) $ 198 $(160) $(166) $ (227) $ 538
======= ======= ===== ===== ===== ===== ======= =======
47
SELECTED BALANCE SHEET INFORMATION BY SEGMENT
At September 30, 2002
(In Millions)
Corporate and
North America International Eliminations Total
------------- ------------- ------------ -----
Current assets $ 5,735 $ 909 $ 129 $ 6,773
Property, plant & equipment,
including leasehold interest 6,307 1,712 112 8,131
Total assets 16,632 4,541 202 21,375
Total debt 3,831 1,445 3,293 8,569
Common equity 5,736 2,426 (2,931) 5,231
48
L. SUBSEQUENT EVENT
TDC Energy Litigation
On December 12, 2002, TDC Energy LLC filed a complaint against Mirant and
several of its subsidiaries in the United States Bankruptcy Court for the
Eastern District of Louisiana. On December 1, 2000, Mirant Americas Energy
Capital agreed to loan TDC Energy up to $75 million to develop oil and gas
leasehold properties located off the coast of Texas and Louisiana. As security
for the loan, Mirant Americas Energy Capital obtained a security interest in
virtually all of TDC Energy's assets, including its leasehold interests, its
contract rights, and the revenues generated from its production of oil and gas.
All revenue generated by TDC Energy was required to be paid into a bank account
controlled by Mirant Americas Energy Capital. On March 19, 2002, Mirant Americas
Energy Capital declared TDC Energy in default under the loan agreement. TDC
Energy filed a Chapter 11 bankruptcy petition on August 19, 2002. At the time of
the Chapter 11 filing, Mirant Americas Energy Capital had advanced TDC Energy
approximately $62 million. The December 2002 complaint alleges that Mirant
Americas Energy Capital, in contravention of the loan agreement, systematically
refused to release funds to TDC Energy from the Mirant Americas Energy Capital
bank account. Further, the complaint alleges that Mirant Americas Energy
Capital's failure to release the funds forced TDC Energy to (i) abandon
profitable drilling projects; (ii) lay off employees; and (iii) file bankruptcy.
The complaint alleges breach of contract, tort claims, and breach of fiduciary
duty of a former Mirant Americas Energy Capital officer that served on TDC
Energy's board. TDC Energy seeks damages in excess of $73 million. The Mirant
parties will timely respond to the complaint. The Company cannot predict the
outcome of this proceeding.
On December 20, 2002, certain subsidiaries of Mirant entered into a share
sale agreement with China Resources Power Holdings Co. Ltd, to sell Mirant's
indirect 33% interest in the 1,980 MW Shajiao C power project (Guangdong
Province, China) for $300 million. Mirant expects to record a gain on the sale.
The transaction is expected to close by the end of 2002. In connection with the
sale, Mirant expects to repay the approximately $254 million balance under the
credit facility for Mirant Asia-Pacific. Repayment of the credit facility will
eliminate the existing prohibition on distributions included therein.
49
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Mirant Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of Mirant
Corporation and subsidiaries as of September 30, 2002, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 2002, and the related statements of stockholders' equity and
cash flows for the nine-month period ended September 30, 2002. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
The consolidated financial statements of the Company as of and for the year
ended December 31, 2001, were not audited by us and, accordingly, we do not
express an opinion or any form of assurance on the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2001.
Additionally, the condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 2001, and the related
statement of cash flows for the nine-month period ended September 30, 2001, were
not reviewed or audited by us and, accordingly, we do not express an opinion or
any form of assurance on them.
/s/ KPMG LLP
Atlanta, Georgia
December 20, 2002
50
ITEM 2.
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
We are a global competitive energy company that delivers value primarily
by producing and selling electricity in the U.S., Philippines, China and the
Caribbean. In the U.S., we optimize the value of our extensive power plant asset
base by buying and selling power and natural gas and other fuels utilizing our
risk management and marketing expertise. In the Philippines and China, we have
long-term contracts to sell the majority of the power produced from our power
plants and in the Caribbean we also own fully integrated electric utilities with
generation, transmission and distribution capabilities. As of November 30, 2002,
we owned or controlled more than 22,100 MW of electric generating capacity
around the world and expect to bring online approximately 1,200 MW by December
2003. In North America, we also control access to approximately 3.8 billion
cubic feet per day of natural gas production, more than 3.6 billion cubic feet
per day of natural gas transportation and approximately 49 billion cubic feet of
natural gas storage as of September 30, 2002.
With the sale of our investments in Bewag, WPD and our restructuring, we
changed our principal business segments from Americas, Asia-Pacific and Europe
to North America and International. For the first three quarters of 2002, North
America includes our United States, Canadian and Caribbean operations and
International includes our Asia-Pacific, European and Brazilian operations. The
other reportable business segment is Corporate. In the fourth quarter of 2002,
we launched an additional phase of our restructuring plan. As a result of this
restructuring, our Caribbean operations will be reported in our International
Group rather than our North American Group beginning in the fourth quarter of
2002.
As a result of the ongoing downward trend in market conditions, we have
modified our business strategy to focus on our North American, Philippines and
Caribbean operations. As part of this new focus, we will continue to reduce the
level of our trading and marketing activity, particularly with respect to
physical natural gas, as well as continue our asset sales program. As a result
of this contraction, we expect to record additional restructuring charges. Our
current portfolio of power plants and electric utilities gives us a net
ownership and leasehold interest of over 18,600 MW of electric generating
capacity around the world, and control of over 3,500 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. We use our risk management capabilities to optimize the value of
our U.S. asset portfolio and offer risk management services to gas producers.
CHANGES IN SENIOR MANAGEMENT
On December 4, 2002, Mirant announced that Harvey Wagner would be joining
the Company as its Executive Vice President and Chief Financial Officer
beginning January 1, 2003. Mr. Wagner will be replacing Mirant's current Chief
Financial Officer, Raymond Hill.
51
ACCOUNTING ERRORS AND REAUDIT OF HISTORICAL FINANCIAL STATEMENTS
As disclosed in a press release dated July 30, 2002, the Company
identified several accounting issues related to its risk management and
marketing operations. Subsequent to its July 30, 2002 press release, the Company
determined that there is no $100 million overstatement of an account payable and
reconciled the potential $68 million overstatement of an accounts receivable
asset referenced in the July 30 press release. The resolution of the $68 million
item did, however, indicate that earnings for the first quarter of 2002 were
understated by $16 million, and previously reported second quarter 2002 earnings
were overstated by $16 million.
The Company also determined the cumulative impact of the previously
disclosed $85 million overstatement of a natural gas asset and recorded
after-tax charges totaling $42 million in its December 31, 2001 retained
earnings balance. The specific interim periods within previous years to which
the $42 million relates have not been determined at this time; accordingly, the
December 31, 2001 retained earnings balance in the accompanying condensed
consolidated balance sheets has been adjusted but not the accompanying 2001
condensed consolidated statements of income. The interim periods to which the
$42 million relates will be determined in connection with the reaudit described
below.
As a result of the identification of the initial accounting issues
described in the July 30, 2002 press release, the Company retained the law firm
of King & Spalding with the support of a nationally recognized accounting firm
to conduct an independent review and to report to the Company's Audit Committee.
King & Spalding has concluded that there was no fraudulent conduct on the part
of any Mirant employee or officer related to the identified accounting issues.
In the course of resolving the previously announced accounting issues
discussed above, and the concurrent review of Mirant's interim financial
statements, errors affecting Mirant's historical financial statements were
identified. A summary of these adjustments is as follows (in millions):
INCREASE (DECREASE) IN NET INCOME
---------------------------------
2001 AND FIRST QUARTER
PRIOR PERIODS 2002
------------- ----
Corrections of Prior Years' Income
- U.S. income taxes on Asian income (a)........... $42
- Natural gas asset (b)........................... (42)
- Other........................................... (15)
Corrections of Items Impacting 2002 and Prior Year(s)
- Accrued power revenues (c) ..................... (29) $8
- WPD income taxes (d)............................ (17)
- Other........................................... 10 6
Corrections of Items Impacting 2002 Interim Results
- Gas accrual (e)................................. 16
- Accrued gas revenues (f)........................ 12
- Other........................................... (6)
---- ---
TOTAL CORRECTIONS..................................... ($51) $36
==== ===
(a) excess U.S. income tax on Asia income of $10 million in each of 1999 and
2000, and $22 million in 2001
(b) the cumulative impact of the previously disclosed overstatement of a
natural gas asset
(c) $48 million of overstated physical power sales were accrued through
December 31, 2001; $13 million of expenses and $11 million of revenues
were originally recorded in the first and second quarters of 2002,
respectively, related to this item.
(d) $17 million of deferred tax expenses related to the Company's investment
in WPD were originally recorded in the second quarter of 2002. These
expenses relate to 1999, 2000 and 2001.
(e) earnings for the first quarter of 2002 were understated by $16 million,
and earnings for the second quarter of 2002 were overstated by $16
million.
(f) correction of accrued gas revenues that decreased first quarter net loss
by $12 million and increased second quarter net loss by $8 million
52
A summary of the adjustments to the previously filed first quarter 2002
unaudited condensed consolidated statement of income follows (in millions):
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------
AS PREVIOUSLY FILED AS RESTATED
------------------- -----------
Operating revenues.............. $7,037 $6,908
Operating expenses.............. 6,465 6,298
------ ------
Gross margin.................... 572 610
Other........................... (614) (616)
------ ------
Net (loss) ...................... $(42) $(6)
====== ======
Prior to filing its second quarter 2002 Form 10-Q, the Company also
resolved its announced balance sheet reclassifications that reduce both energy
risk management and marketing assets and liabilities in the Company's December
31, 2000 and 2001 consolidated balance sheets by $1.53 billion and $820 million,
respectively. These reclassifications relate primarily to intra-company
eliminations and do not have any effect on the Company's results of operations,
revenues, expenses, net income, liquidity or cash flow.
The Company's independent auditors assessed the Company's internal
controls of its North American energy marketing and risk management operations
as part of the interim review for the second quarter. The independent auditors
provided the Company with detailed process improvement recommendations to
address internal control deficiencies in existence at June 30, 2002. The
independent auditors have advised the Audit Committee that these internal
control deficiencies constitute reportable conditions and, collectively, a
material weakness as defined in Statement on Auditing Standards No. 60. The
Company has assigned the highest priority to the short-term and long-term
correction of these internal control deficiencies. Management has discussed its
proposed actions with the Audit Committee and has begun implementation of
certain items and developed a timeline for implementation of all items (See Item
4 of Part I of this Form 10-Q). The Company has implemented corrective actions
to mitigate the risk that these deficiencies could lead to material
misstatements in the Company's current financial statements. In addition, the
Company has performed additional procedures to enable the completion of the
independent auditors' review of the Company's interim financial statements
despite the presence of the control weaknesses as noted above.
In October 2002, the Company engaged KPMG to reaudit the Company's 2000
and 2001 financial statements for two primary reasons: (i) to address accounting
errors identified during reviews of the Company's previously disclosed
accounting issues; and (ii) to enable its independent auditors to provide an
opinion on Mirant's 2000 and 2001 financial statements which will be required to
be revised upon adoption of EITF Issue 02-3 and SFAS No. 144. The Company
expects the reaudit to result in a restatement of its statement of income for
either or both of 2000 and 2001 and potentially for interim periods in 2001 and
2002.
53
RESULTS OF OPERATIONS
Results of operations for the three and nine months ended September 30,
2002 include revenue which result in higher margins than are currently available
based on forward curves. For example, the prices realized under our power sales
agreement with California DWR which expires in December 2002, were significantly
above market prices during 2002. Our inability to enter into contracts with
similar margins is expected to adversely impact our future operating results.
Our earnings currently benefit also from the fact that we entered into
power sales agreements (the Transition Power Agreements, or "TPAs") with PEPCO
upon our acquisition of their assets in December 2000. These agreements require
us to sell power to PEPCO at a rate below prices available in the market at the
time we entered into the agreements with PEPCO. The first of these agreements
expires in June 2004, and the second expires in January 2005. In purchase
accounting we record the value of this out-of-market obligation at the date of
closing in December 2000, and amortize it as an increase in revenue over the
period the obligation is satisfied. Our margins have been increased by $120
million and $103 million in the three months ended September 30, 2002 and 2001,
respectively, and by $320 million and $322 million in the nine months ended
September 30, 2002 and 2001, respectively, as a result of the amortization of
these obligations. At September 30, 2002, approximately $1.105 billion of
obligation remains, all of which will increase our revenues in the fourth
quarter of 2002 through the first quarter of 2005, as our obligations to PEPCO
are met.
The value of the out-of-market obligation is not adjusted for subsequent
changes in market prices. As a result, the amount of amortization recognized as
revenue will differ from the amount required to satisfy the obligation based on
market prices at the time the obligations are satisfied. The actual amortization
exceeded the amount required to satisfy the obligation based on market price by
$125 million and $95 million, respectively, in the three months ended September
30, 2002 and 2001 and $371 million and $149 million, respectively, in the nine
months ended September 30, 2002 and 2001.
Our earnings also currently benefit from the fact that we assumed certain
power purchase agreements ("PPAs") from PEPCO upon our acquisition of their
assets. These agreements require us to purchase power from third parties at
rates that were above prices available at the time we assumed PEPCO's
obligations under these agreements. These agreements expire through 2021. In
purchase accounting, we recorded the value of this out-of-market obligation at
the date of closing in December 2000, and amortize it as a reduction of the cost
of electricity purchased over the remaining term of the PPAs. Our margins have
been increased by $8 million and $5 million in the three months ended September
30, 2002 and 2001, respectively, and by $42 million and $19 million in the nine
months ended September 30, 2002 and 2001, respectively, as a result of the
amortization of these obligations. As is the case with the TPAs, the value of
these obligations is not adjusted for subsequent changes in market prices. As a
result, the amount of amortization recognized as a reduction of the cost of
electricity purchased will differ from the amount required to satisfy the
obligation based on market prices at the time the obligations are satisfied. The
amount required to satisfy the obligation based on market price exceeded the
actual amortization by $29 million and $26 million, respectively, in the three
months ended September 30, 2002 and 2001, and $86 million and $69 million,
respectively, in the nine months ended September 30, 2002 and 2001.
We have seen lower trading volumes in forward markets for both gas and
electricity. Trading volumes are expected to further decline as a result of a
number of our competitors exiting the trading business and as a result of our
plan to reduce significantly the size of our physical natural gas operations.
54
THIRD QUARTER 2002 vs. THIRD QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
Third Quarter Year-to-Date
--------------------------- ---------------------------
(in millions)
Operating revenues $(226) (9%) $(2,068) (29%)
Cost of fuel, electricity and other products (138) (9%) (1,566) (34%)
Gross margin (88) (10%) (502) (20%)
Other operating expenses
Depreciation and amortization (16) (16%) (39) (14%)
Selling, general and administrative (6) (3%) (174) (27%)
Impairment loss 201 NM 108 112%
Restructuring charges 8 NM 598 NM
Gain on sale of assets, net 5 NM 33 NM
Other 21 18% (7) (2%)
Other income/expense
Interest income (1) (3%) (57) (49%)
Interest expense (13) (9%) (69) (16%)
Gain/(loss) on sale of assets, net (3) NM 275 NM
Equity in income of affiliates (13) (34%) (19) (12%)
Impairment loss on minority owned affiliates 18 NM 335 NM
Receivables recovery -- -- 19 190%
Other, net (14) (140)% (11) (110%)
Provision for income
Taxes (97) (72%) (257) (93%)
Minority interest 2 11% 6 13%
Note: NM indicates "not meaningful."
Operating revenues. Our operating revenues for the three and nine months
ended September 30, 2002 were $2,258 million and $4,981 million, respectively, a
decrease of $226 million and $2,068 million over the same periods in 2001. The
following factors were responsible for the decrease in operating revenues:
- Revenues from generation and energy marketing products for the three and
nine months ended September 30, 2002, were $2,100 million and $4,562
million, a decrease of $217 million or 9% and $2,129 million, or 32% from
the same periods in 2001. These decreases resulted primarily from
decreased prices, decreased price volatility and reduced liquidity in our
trading of natural gas and power, and reduced generation in the U.S. due
to reduced demand. These decreases were offset somewhat by higher sales
volumes due in part to the net capacity additions to our U.S. generating
capacity since the comparable periods of 2001. In North America, the
average price for power and natural gas both decreased more than 50% while
sales volumes increased by more than 40% and 70%, respectively. In
addition, our power production decreased by approximately 10%. The
decrease for the third quarter 2002 is also due to exiting our European
energy marketing operations. The year-to-date decrease was partially
offset by higher revenues from our European energy marketing operations
due to higher physical volumes in the German market in the first quarter
of 2002.
- Distribution and integrated utility revenues for the three and nine months
ended September 30, 2002, were $128 million and $362 million,
respectively, a decrease of $26 million for the three months ended
September 30, 2002 and an increase of $28 million for the nine months
ended September 30, 2002. The decrease for the three months ended
September 30, 2002 was primarily due to the reduction of approximately $24
million in revenue as a result of the sale of our Chilean operations in
December 2001.
55
The year to date increase was primarily attributable to approximately $97
million of additional revenue from our Jamaican investment, which was
acquired in March 2001, offset somewhat by the reduction of approximately
$70 million in revenue as a result of the sale of our Chilean operations
in December 2001.
- Other revenues for the three and nine months ended September 30, 2002,
were $30 million and $57 million, respectively, an increase of $17 million
and $33 million from the same periods in 2001. Approximately 47% and 76%
of these increases for the three and nine months ended September 30, 2002
was primarily attributable to revenues related to the gas and oil
operations we acquired from Castex in August 2001. Approximately 41% and
21% of these increases for the three and nine months ended September 30,
2002 were attributable to increased revenue related to an operations and
maintenance contract related to assets we operate but do not own.
Cost of fuel, electricity and other products. Cost of fuel, electricity
and other products for the three and nine months ended September 30, 2002, was
$1,473 million and $3,027 million, respectively, a decrease of 9% and 34% from
the same periods in 2001. These decreases of $138 million and $1,566 million
were primarily attributable to decreased prices and decreased price volatility
for natural gas and power and reduced generation in the U.S. These decreases
were offset somewhat by higher purchases due in part to net capacity additions
to our U.S. generating capacity since the comparable periods of 2001. In North
America, the average price for power and natural gas decreased more than 50%
while sales volumes increased by more than 40% and 70%, respectively. In
addition, our power production decreased by approximately 10%. The decrease for
the third quarter is also due to exiting our European energy marketing
operations. The year to date decrease was partially offset by higher costs from
our European energy marketing operations due to higher physical volumes in the
German market in the first quarter of 2002 and by the operating expenses during
the nine months ended September 30, 2002 from our Jamaican investment (which was
acquired in March 2001).
Gross margin. Gross margin for the three and nine months ended September
30, 2002, was $785 million and $1,954 million, respectively, a 10% and 20%
decrease the same periods in 2001. As discussed above, the decreases were
attributable to lower prices for electricity as well as lower production from
our existing assets in the U.S. compared to the same periods in 2001. These
decreases were offset somewhat by incremental net capacity additions to our U.S.
generating capacity since the comparable periods of 2001, as well as
improvements in the performance of a requirements contract in Texas. In
addition, we reduced our obligation associated with this Texas requirements
contract in the September 2002 quarter by $23 million, based on our expectations
of remaining losses to be incurred during the remaining fifteen-month term of
the contract.
Other operating expenses. Other operating expenses for the three and nine
months ended September 30, 2002, were $629 million and $1,939 million,
respectively, an increase of 48% for the three months ended September 30, 2002
and an increase of 30% for the nine months ended September 30, 2002 over the
same periods in 2001. The following factors were responsible for the changes in
operating expenses:
- Depreciation and amortization expense for the three and nine months ended
September 30, 2002, was $82 million and $236 million, respectively, a
decrease of 16% and 14% from the same periods in 2001. The decreases of
$16 million and $39 million resulted from no longer amortizing goodwill
and trading rights recognized in business combinations of approximately
$17 million and $55 million for the three and nine months ended September
30, 2002, respectively. These decreases were partially offset by
additional depreciation from assets we acquired throughout 2001, and from
the commencement of operations at our plants throughout 2001 and 2002.
- Selling, general and administrative expense for the three and nine months
ended September 30, 2002, was $172 million and $479 million, respectively,
a 3% and 27% decrease from the same periods in 2001. These decreases
resulted from higher stock related compensation in the second quarter of
2001 and less costs in 2002 due to exiting the European trading and
marketing operations in early 2002, offset somewhat by expenses from new
acquisitions and assets coming on line. In addition, the year-to-date
decrease resulted
56
from provisions for potential losses taken in the first quarter of 2001
related to uncertainties in the California power markets.
- Impairment loss for the three and nine months ended September 30, 2002 was
$204 million, as compared to $3 million and $96 million for the same
periods in 2001. During the third quarter of 2002, we recorded an
impairment loss of approximately $143 million related to our development
projects in Norway and Korea. We also recorded a write down of $61 million
reflecting the fair market value of Mirant Americas Production Company. In
the second quarter of 2001, we wrote-off $88 million of our investment in
our Chilean subsidiary, EDELNOR.
- Restructuring charges for the three and nine months ended September 30,
2002, were $8 million and $598 million, respectively. The components of
the restructuring charges for the three and nine months ended September
30, 2002, respectively, include:
- $0 and $285 million related to write-downs of work in progress and
progress payments on equipment;
- $(6) million and $240 million related to costs to cancel equipment
orders and service agreements per contract terms;
- $10 million and $67 million related to the severance of
approximately 575 employees worldwide and other employee termination
-related charges; and
- $4 million and $6 million related to costs incurred to suspend
construction projects in progress.
- Gain on sale of assets for the nine months ended September 30, 2002 was
$33 million. This resulted primarily from the gain on the sale of our
investment in Kogan Creek in the second quarter of 2002.
- Other expense for the three and nine months ended September 30, 2002 was
$137 million and $363 million, respectively, a 18% and 2% increase from
the same periods in 2001. These increases for the three and nine months
ended September 30, 2002 were attributable to expenses from U.S.
generating assets coming on line in 2002.
Total other (expense) income, net. Other expense for the three and nine
months ended September 30, 2002 was $(101) million $(180) million, respectively,
an increase of 55% and 49% from the same periods in 2001. The increase in other
expense for the three and nine months ended September 30, 2002 was primarily due
to the following:
- Interest income for the three and nine months ended September 30, 2002,
was $28 million and $60 million, respectively, compared to $29 million and
$117 million for the same periods in 2001. The year to date decrease of
$57 million was primarily due to lower interest revenue from our loan
receivables related to Shajiao C and the Hyder acquisition, lower overall
investment balances and lower interest rates earned on those balances. In
addition, we had interest income in the first quarter of 2001 of
approximately $12 million related to the Capital Funding subsidiary
transferred to Southern in March 2001.
- Interest expense for the three and nine months ended September 30, 2002,
was $128 million and $354 million, respectively, a decrease of 9% and 16%
from the same periods in 2001. The decrease was due to higher capitalized
interest during 2002. Capitalized interest for the three and nine months
ended September 30, 2002 was $24 million and $91 million, respectively,
compared to $14 million and $34 million for the same periods in 2001. The
increase in capitalized interest resulted from higher levels of
construction in progress in 2002. In addition, we had interest expense in
the first quarter of 2001 of approximately $12 million related to the
Capital Funding subsidiary transferred to Southern in March 2001.
- Gain/(loss) on sale of assets for the three and nine months ended
September 30, 2002, was $(4) million and $276 million, respectively. The
year-to-date amount resulted primarily from the gain on the sale of our
investment in Bewag in February 2002 of $290 million. In addition, we
recognized a net loss of approximately $9 million on the sale of our
investments in SIPD and Perryville in the second quarter of 2002.
57
- Equity in income of affiliates for the three and nine months ended
September 30, 2002 and 2001 was $25 million and $145 million,
respectively, compared to $38 million and $164 million for the same
periods in 2001. These decreases were primarily due to the reduction of
earnings from Bewag, SIPD and WPD resulting from our sale of those assets
in 2002, offset by higher current year earnings from our Shajiao C venture
due to forced outages in 2001 and earnings due to the commencement of
operations at the Ilijan facility.
- Impairment loss on minority owned affiliates for the three and nine months
ended September 30, 2002 was $18 million and $335 million, respectively.
During the three months ended September 30, 2002, we recorded a write-down
of approximately $10 million for our Norway investment and an adjustment
of approximately $8 million for our investment in WPD. We recorded a
write-down of approximately $317 million during the second quarter of 2002
for our investment in WPD.
- Receivables of $29 million were recovered by us during the first quarter
of 2002 as final payment related to receivables that were assumed in
conjunction with the Mirant Asia-Pacific Limited business acquisition.
During the first quarter of 2001, we received $10 million related to these
receivables. At the time of the purchase, we did not place value on the
receivables due to the uncertain credit standing of the party from whom
the receivables were due.
Provision for income taxes. The provision for income taxes for the three
and nine months ended September 30, 2002 was $38 million and $19 million, a 72%
and 93% decrease from the same periods in 2001. Approximately 29% of the
decrease in the provision for the quarter is due to a reduction in pre tax
income from operations and a decrease of 66% is due to impairment charges. These
decreases are offset by an additional provision recorded in the quarter related
to Mirant's limited ability to fully utilize its future foreign tax credits and
due to a provision for taxes on earnings from Mirant's China venture which are
no longer considered permanently reinvested. Approximately 40% of the year to
date decrease is due to a reduction in pre tax income from operations primarily
from our Americas group. In addition a 105% decrease is due to the tax benefit
related to restructuring and impairment charges taken in 2002. These decreases
were offset by a 45% increase in taxes related to the gain on sale of our
investment in Bewag in February 2002 and SIPD in May 2002, and local country
taxes on a portion of Mirant's Philippine operations which became taxable in
that country in July 2002. In 2001, the Company also recorded additional
provisions related to our consolidated tax position in the first quarter of
2001.
Minority interest. Minority interest for the three and nine months ended
September 30, 2002 was $20 million and $54 million, an 11% and 13% increase from
the same periods in 2001. These increases were primarily attributable to higher
income from Jamaica, Shajiao C and our Philippine operations offset somewhat by
a reduction of income after the sale of our investment in our Chilean
subsidiary, EDELNOR in December 2001.
EARNINGS
Our consolidated net loss for the three and nine months ended September
30, 2002, was $1 million ($0 per diluted share) and $227 million ($.56 per
diluted share), respectively, compared to net income of $234 million ($0.67 per
diluted share) and $538 million ($1.55 per diluted share) for the corresponding
periods of 2001. The decreases in net income of $235 million and $765 million
from the same periods in 2001 are attributable to our business segments as
follows:
NORTH AMERICA
Net income for the North America Group was $123 million for the three
months ended September 30, 2002 and $4 million for the nine months ended
September 30, 2002. This represents a decrease of $106 million, or 46%, and $502
million, or 99%, from the same periods in 2001. The decrease for the quarter and
year was
58
attributable to the write-down of approximately $64 million related to of our
investment in Mirant Americas Production Company, and certain turbines to
reflect their fair market value. The decrease was also due to lower spark
spreads and falling prices for power from our California operations offset by
higher margins from our operations in Texas and the provision release of
approximately $14 million related to our contract with Brazos. In addition, the
decrease for the year is attributable to a net restructuring charge of $303
million and the offset by the write-off of $57 million of our investment in our
Chilean subsidiary, EDELNOR, in the second quarter of 2001 and by the
elimination of goodwill amortization in 2002. In addition, 2001 net income
includes a $147 million ($245 million pre-tax) provision for the uncertainties
in the California power market recorded in the first quarter of 2001. The total
amount of provisions made in relation to these uncertainties was $177 million
($295 million pre-tax). As of September 30, 2002, the total amount owed to us by
the CAISO and the PX was $352 million.
INTERNATIONAL
Net loss for the International Group totaled $72 million for the three
months ended September 30, 2002 and $71 million for the nine months ended
September 30, 2002, a decrease of $130 million, or 224%, and $269 million, or
136%, respectively, from the same periods in 2001. The decrease for the quarter
was attributable to the write-down of approximately $71 million related to our
development projects in Norway and Korea. In addition, we had additional tax
expense due to the expiration of the local tax holiday related to our Pagbilao
operations in June 2002 and the change in our tax deferral policy, commencing
the third quarter of 2002, related to our Shajiao C investment. This decrease
was also attributable to lower income from operations of Bewag and SIPD due to
our sale of those assets in 2002, offset partially by higher income from our
Brazilian investment due to the tariff settlement in the first quarter of 2002.
In addition, the decrease for the year is attributable to the write-down of our
investment in WPD of approximately $304 million in the second quarter of 2002
and net restructuring charges of $5 million and $51 million for the three and
nine months ended September 30, 2002, These decreases were offset somewhat by
the after-tax gain of $8 million from the sale of our interests in SIPD and
Kogan Creek in the second quarter of 2002, the after-tax gain of $167 million
from the sale of our interest in Bewag in the first quarter of 2002 and by the
elimination of goodwill amortization.
CORPORATE
After-tax corporate expenses produced a net loss from continuing
operations of $52 million and $160 million for the three and nine months ended
September 30, 2002; a decrease of $1 million, or 2%, for the third quarter and
$6 million, or 4%, for the nine months ended September 30, 2002. The decreased
costs for the quarter resulted primarily from a reduction of the restructuring
charges of $4 million and lower compensation expense offset by increased
interest expense in 2002 on corporate borrowings used to fund working capital
and construction. In addition, the year-to-date decrease resulted primarily from
restructuring charges of $12 million and additional tax provisions related to
our consolidated tax position in 2001.
59
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have obtained cash from operations, borrowings under
credit facilities and issuance of senior notes, proceeds from equity issuances,
capital contributions from Southern and proceeds from non-recourse project
financing. These funds have been used to finance operations, service debt
obligations, fund the acquisition, development and construction of generating
facilities and distribution businesses, finance other capital expenditures and
meet other cash and liquidity needs. In addition, the Company has used cash and
letters of credit to meet the collateral requirements for its trading and
marketing activities. Over the next several years, we will be required to repay
bank credit facilities and other financial obligations which are significant.
Because of the general deteriorating conditions in our industry and because our
credit ratings have been lowered, we do not expect to be able to refinance these
obligations in the same amounts or on terms as favorable as our existing
borrowings. We expect that we will meet our liquidity needs through a
combination of re-financing transactions, use of our existing cash balances and
asset sales. In addition, planned contractions in the level of our trading and
marketing activity are expected to reduce the need for collateral posted through
letters of credit and cash. However, in the event we were unable to refinance a
substantial portion of our indebtedness, we could be required to seek bankruptcy
court or other protection from creditors. Because our operations are conducted
primarily by our subsidiaries, our cash flow is dependent in part upon cash
dividends and distributions and other transfers from our subsidiaries.
The projects that we have developed typically required substantial capital
investment. Some of the projects and assets in which we have an interest have
been financed primarily with non-recourse debt that is repaid from the cash
flows of such project assets. Some of this debt is secured by interests in the
physical assets, major project contracts and agreements, cash accounts and, in
some cases, the ownership interest in that project subsidiary. These financing
structures are designed so that Mirant Corporation is not contractually
obligated to repay the debt of the subsidiary, that is, the debt is
"non-recourse" to Mirant Corporation and to its other subsidiaries not involved
in the project or asset. However, we have agreed to undertake limited financial
support for some of our subsidiaries in the form of limited obligations and
contingent liabilities such as guarantees of specific obligations. To the extent
we become liable under these guarantees or other agreements in respect of a
particular project or asset, we may choose to use distributions we receive from
other subsidiaries, subject to limitations in the various subsidiary credit
agreements or corporate borrowing capacity to satisfy these obligations to the
extent available.
As of December 17, 2002, Mirant had not repurchased any debt securities
pursuant to its previously announced authorization to do so.
Operating Activities
Net cash provided by operating activities per our unaudited condensed
consolidated statements of cash flows totaled $683 million for the nine months
ended September 30, 2002, as compared to $384 million for the same period in
2001. This increase was due to the following items:
- We made payments in the first quarter of 2001 to fuel suppliers and others
of approximately $140 million, which were accrued in 2000 and related to
amounts owed to us and not collected from the CAISO and California PX.
- We received $203 million of net cash collateral during the nine months
ended September 30, 2002, compared to a net payment of cash collateral of
$201 million during the same period in 2001. The receipts in 2002 were due
primarily to a reduction in our energy marketing credit exposure as a
result of lower prices in 2002 and expanding the use of master netting
agreements.
60
- We realized lower gross margins and a lower portion of our gross margin in
cash during the nine months ended September 30, 2002 compared to the same
period in 2001. This was attributable to higher prices and margins in 2001
as well as a shorter tenor in our energy marketing and risk management net
positions in 2001.
- We received $276 million of income tax refunds in 2002 compared to $11
million in 2001.
Excluding the effects of working capital reflected as "Changes in certain
assets and liabilities, excluding effects from acquisitions" in our unaudited
condensed consolidated statements of cash flows, our operating cash flows for
the nine months ended September 30, 2002 decreased by $447 million compared to
the same period in 2001. This decrease was primarily attributable to the
significant amount of cash realized in 2001 compared to 2002 due to higher
prices and margins in 2001 in addition to reduced cash flows due to asset
dispositions during 2002, and the payment of severance and other related
restructuring charges. The primary contributors to our operating cash flows
before these working capital exclusions are our Asia and North American
operations.
For the nine months ended September 30, 2002 and 2001, net income included
the release of approximately $219 million and $206 million, respectively, in
after-tax provisions recorded in connection with the PEPCO acquisition. Our
after-tax funding obligation for the energy delivery and purchase agreements
associated with this acquisition was $47 million for the nine months ended
September 30, 2002, as compared to $158 million for the same period in 2001. The
total after-tax assumed obligation recorded in purchase accounting was $1.4
billion, which was our estimate of actual after-tax cash payments we expected to
make over the term of the contracts as a result of assuming the out-of-market
contracts from PEPCO, based on future price and volume estimates at the time of
our acquisition.
Investing Activities
Net cash provided by investing activities totaled $826 million for the nine
months ended September 30, 2002, as compared to net cash used in investing
activities of $1,716 million for the same period in 2001. For the nine months
ended September 30, 2002, we received proceeds from the sale of our interest in
Bewag of approximately $1.63 billion, $235 million for the sale of our interest
in WPD, $181 million for State Line, $120 million for SIPD, $50 million for the
Kogan Creek and Map Fuels Ltd investments in Australia and $13 million in
proceeds from the sale of other miscellaneous assets and property. These inflows
were offset by capital expenditures of approximately $1,111 million which
includes turbine cancellation payments of $24 million, investments totaling $94
million in the Curacao project, the Coyote Springs project and the purchase of
the Toledo project in Asia. Notes were issued by us in the amount of $329
million during 2002. These loans were made in connection with our Energy Capital
business and include the subordinated loan to Perryville. The 2001 investing
activities included capital expenditures in North America, acquisition of an
additional 18.8% interest in Bewag and the acquisition of our Jamaican
subsidiary in March 2001. Cash flows from investing activities also include the
repayment of notes receivable in the form of shareholder's loans to Shajiao C in
the amount of $12 million in 2002 and $146 million in 2001. Of these amounts, we
are entitled to approximately $12 million and $121 million respectively, after
repayments to minority shareholders.
Financing Activities
Net cash used for financing activities totaled $89 million for the nine
months ended September 30, 2002, as compared to net cash provided by financing
activities of $1,659 million for the same period in 2001. The decrease is
primarily attributable to net borrowings in 2001 to finance acquisitions and
construction activities compared to net repayments of long-term debt in 2002,
much of which was completed using the proceeds received from the sale of our
interest in Bewag and other asset sales. In addition, in July 2002, Mirant fully
drew the commitments under its $1.125 billion 364-day Credit Facility and
elected to convert all outstanding advances into a term loan maturing in 2003.
Mirant and Mirant Americas Generation drew down most of their available
revolving credit commitments, and cash balances increased significantly as a
result.
61
Our cash from operations, asset sales, existing credit facilities and cash
position, along with existing credit facilities at our subsidiaries, is expected
to provide sufficient liquidity for working capital and capital expenditures
over the next 12 months. In addition, we expect our proceeds from operations
will be sufficient to fund our interest costs on an ongoing basis.
Our liquidity could be impacted by changing prices resulting from abnormal
weather, excess capacity, the ability to complete asset sales, changes in credit
ratings and other factors. In addition, a significant part of Mirant
Corporation's investments are in subsidiaries financed with project or
subsidiary level indebtedness to be repaid solely from the respective
subsidiary's cash flows. Subsidiaries financed in this manner are often
restricted by their respective project credit documents in their ability to pay
dividends and management fees periodically to Mirant Corporation. These
limitations usually require that debt service payments be current, debt service
coverage and leverage 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 subsidiary and its assets. As discussed below, Mirant
Mid-Atlantic's reclassification of the out of market portions of its Energy and
Capacity Sales Agreement will reduce its fixed charge coverage ratios. Depending
on the then-current market conditions, Mirant Mid-Atlantic could be prevented
from paying dividends until such time as market conditions improve.
Credit Ratings
The following table presents as of December 18, 2002 the credit ratings on
Mirant and its subsidiaries from the three major rating agencies. The outlooks
for all credit ratings are negative.
S&P MOODY'S FITCH
--- ------- -----
Mirant Corporation...................... BB B1 BB
Mirant Americas Generation............... BB Ba3 BB
Mirant Mid-Atlantic...................... BB Ba3 BB+
Mirant Americas Energy Marketing......... BB Ba3 Not rated
Mirant Trust I........................... B B3 B+
On June 24, 2002, Fitch lowered its rating on Mirant's senior notes and
convertible senior notes to BBB- from BBB, and on October 15, 2002, Fitch
further lowered its rating on Mirant's senior notes and convertible senior notes
to BB from BBB-. Fitch's new ratings on Mirant securities each include a
negative outlook. Fitch also lowered its rating on the following of the
Company's subsidiaries or subsidiary issues: Mirant Trust I, Mirant Americas
Generation and Mirant Mid-Atlantic.
On October 10, 2002, Moody's lowered its rating on Mirant's senior
unsecured debt to B1 from Ba1. Moody's new rating on Mirant debt includes a
negative outlook. Moody's also lowered its rating on the following of the
Company's subsidiaries or subsidiary issues: Mirant Americas Energy Marketing,
Mirant Trust I, Mirant Americas Generation and Mirant Mid-Atlantic.
On October 21, 2002, S&P lowered its rating on Mirant's senior unsecured
debt to BB from BBB-. S&P's new rating on Mirant debt includes a negative
outlook. S&P also lowered its rating on the following of the Company's
subsidiaries or subsidiary issues: Mirant Americas Energy Marketing, Mirant
Trust I, Mirant Americas Generation and Mirant Mid-Atlantic.
As a result of Moody's, Fitch and S&P lowering their ratings in October
2002 on our senior unsecured debt, as of November 30, 2002, we have had to post
approximately $244 million of new collateral in the form of cash and letters of
credit and have agreed to post approximately $7 million of additional collateral
in December 2002. As a result of the recent downgrades by Fitch and
Moody's, Mirant Asia-Pacific is prohibited under the terms of its credit
facility from making distributions to Mirant Corporation; provided, however,
that the Company expects to repay the Mirant Asia-Pacific credit facility in
connection with the sale of the Shajiao C power project.
62
While the foregoing indicates the ratings from these agencies, we note
that these ratings are not a recommendation to buy, sell or hold our securities,
that the ratings may be subject to revision or withdrawal at any time by the
assigning rating organization and that each rating should be evaluated
independently of any other rating. There can be no assurance that a rating will
remain in effect for any given period of time or that a rating will not be
lowered or withdrawn entirely by a rating agency if, in its judgement,
circumstances so warrant. Further, we note that each of the rating agencies
continues to monitor Mirant's credit profile, with increased scrutiny arising
from the reported financial difficulties of other market participants, the
uncertainty and turmoil in the financial markets generally and in the energy
sector specifically and our pending reaudit. In addition, we note the risk
factors related to a downgrade in our credit ratings as disclosed in our Form
10-K filed in March 2002.
Asset Sales
In February 2002, we completed the sale of our 44.8% interest in Bewag for
approximately $1.63 billion. We received approximately $1.06 billion in net
proceeds after repayment of approximately $550 million in related debt. The gain
on the sale of our investment in Bewag was $290 million ($167 million after-tax)
and is included in "Other (expense) income, net--Gain/(loss) on sales of assets,
net" on Mirant's accompanying unaudited condensed consolidated statements of
income. The net proceeds were used for general corporate purposes, capital
expenditures and repayment of certain drawn balances on revolving credit
facilities.
In May 2002, we completed the sale of our 60% ownership interest in the
Kogan Creek power project, located near Chinchilla in southeast Queensland,
Australia, and associated coal deposits for approximately $29 million. The gain
on the sale of our investment in Kogan Creek was approximately $26 million ($17
million after-tax) and is included in "Gain on sales of assets, net" on Mirant's
accompanying unaudited condensed consolidated statements of income.
In May 2002, we completed the sale of our 9.99% ownership interest in
SIPD, located in the Shandong Province, China, for approximately $120 million.
The loss on the sale of our investment in SIPD was approximately $10 million ($9
million after-tax) and is included in "Other (expense) income, net--Gain/(loss)
on sales of assets, net" on Mirant's accompanying unaudited condensed
consolidated statements of income.
In June 2002, we completed the sale of our State Line generating facility
for approximately $181 million plus an adjustment for working capital. The asset
was sold at approximately book value.
In June 2002, we completed the sale of our 50% ownership interest in
Perryville to Cleco, which holds the remaining 50% ownership interest in
Perryville. In connection with such sale, Cleco assumed our $13 million future
equity commitment to Perryville and paid approximately $55 million in cash to us
as repayment of the subordinated loan, invested capital to date and other
miscellaneous costs. Our investment was sold at approximately book value based
on the value of the investment at the date of sale. At such time, in connection
with the existing project financing, we agreed to make a $25 million
subordinated loan to the project. Effective August 23, 2002, Mirant Americas
Energy Marketing and Perryville, with the consent of the project lenders,
restructured the tolling agreement between the parties to remove the requirement
to post a letter of credit or other credit support in the event of a downgrade
from S&P or Moody's. In connection with the restructuring, Mirant Americas made
a $100 million subordinated loan to Perryville, the proceeds of which were used
to repay the existing $25 million subordinated loan owed to a Mirant subsidiary
and to repay $75 million of senior debt of the project. In addition, we retain
certain obligations as a project sponsor, some of which are subject to
indemnification by Cleco. The obligations retained by us and not subject to
indemnity relate primarily to the existing 20-year tolling agreement between
Mirant Americas Energy Marketing and Perryville as described in "--Contractual
Obligations and Commitments -- Energy Marketing and Risk Management." The
obligations of Mirant Americas Energy Marketing under the tolling agreement are
guaranteed by Mirant Corporation.
63
In July 2002, we announced that we had entered into an agreement to sell
our Neenah generating facility to Alliant Energy Resources, Inc. for
approximately $109 million. The sale of Mirant's investment in Neenah will
approximate book value. The sale is expected to close in the first quarter of
2003.
In August 2002, we completed the sale of our wholly owned subsidiary, MAP
Fuels Limited, which wholly owned Allied Queensland Coalfields Pty Ltd., in
Queensland, Australia, for approximately $21 million. The asset was sold at
approximately book value. The sale included both the Wilkie Creek Coal Mine and
the Horse Creek coal deposits.
In September 2002, we completed the sale of our 49% economic interest in
Western Power Distribution Holdings Limited and WPD Investment Holdings (both
identified jointly as WPD) for approximately $235 million. As a result of the
announced sale, in the second quarter of 2002, we wrote-down our investment in
WPD by approximately $317 million ($304 million after-tax) which is included in
"Impairment loss on minority owned affiliates" on our accompanying unaudited
condensed consolidated statements of income. Upon completion of the sale, in the
third quarter of 2002, we recorded a loss of $4 million ($1 million after-tax)
on the sale of this investment. The WPD assets include the electricity
distribution networks for Southwest England and South Wales.
In November 2002, Mirant entered an agreement to sell the assets of Mirant
Americas Production Company for $150 million. In December 2002, the sale of
these assets was completed. Mirant Americas Production Company is an oil and gas
exploration, development and production company reported in Mirant's North
America Group operations.
On December 20, 2002, certain subsidiaries of the Company entered into a
share sale agreement with China Resources Power Holdings Co. Ltd, to sell the
Company's indirect 33% interest in the 1,980 MW Shajiao C power project
(Guangdong Province, China) for $300 million. The Company expects to record a
gain on the sale. The transaction is expected to close by the end of 2002. In
connection with the sale, Mirant expects to repay the approximately $254 million
balance under the credit facility for Mirant Asia-Pacific. Repayment of the
credit facility will eliminate the existing prohibition on distributions
included therein.
Available Liquidity
The following table contains our available liquidity as of September 30, 2002
and December 31, 2001 (in millions):
LIQUIDITY
------------------------------------
AS OF SEPTEMBER AS OF DECEMBER 31,
30, 2002 2001
-------- ----
Cash at Mirant Corporation.......... $1,678 $ 406
Cash at other subsidiaries.......... 731 430
Availability of credit facilities:
Mirant Corporation................ 101 867
Mirant Americas Generation........ -- 227
Mirant Canada Energy Marketing... 18
Cash at subsidiaries not available
for Immediate payment to parent (1). (547) (294)
----- ----
Total .............................. $1,963 $1,654
====== ======
(1) Represents estimated cash at the subsidiary level that is required
for operating, working capital or investment purposes at the
respective subsidiary or that the distribution to the Company is
restricted by the subsidiaries' debt agreements and that is not
available for immediate payment to Mirant Corporation.
Mirant Mid-Atlantic has an Energy and Capacity Sales Agreement ("ECSA"),
which is a fixed rate power purchase agreement with Mirant Americas Energy
Marketing. Under the terms of the ECSA, Mirant Mid-Atlantic supplies all of its
facilities' capacity and energy to Mirant Americas Energy Marketing. As a result
of the reclassification of the out of market portions of the ECSA, Mirant
Mid-Atlantic's fixed charge coverage ratios will be reduced for purposes of
calculating whether a dividend may be paid to Mirant's wholly owned subsidiary,
Mirant Americas Generation. If Mirant Mid-Atlantic were unable to pay dividends,
this would reduce the amount available for Mirant Americas Generation to
dividend to Mirant until such time as market conditions improve. In such event,
Mirant Americas Energy Marketing would potentially elect not to renew the ECSA
for 2004.
64
Debt
The following table sets forth our short-term and long-term debt as of
September 30, 2002 and December 31, 2001 (in millions):
RECOURSE/ STATED
SEPTEMBER DECEMBER NON- INTEREST MAXIMUM
30, 2002 31, 2001 RECOURSE RATE***** MATURITY BALANCE *
--------- -------- ------------ --------- --------- -----------
(in millions) (in millions)
SHORT-TERM DEBT
Mirant Canada Energy Marketing (has a
Mirant Corp. guarantee) .................. $ 44 $ 26 Recourse 3.64% Jun-03 $ 44
------- -------
Total recourse short-term debt ......... 44 26
Jamaica Public Service Company ............. 5 5 Non-recourse 10.85% Nov-02
Jamaica Public Service Company ............. 7 7 Non-recourse 10.00% Jul-03
Jamaica Public Service Company ............. 6 -- Non-recourse 6.50% Jun-03
Jamaica Public Service Company ............. 5 5 Non-recourse 9.75% Mar-03
Jamaica Public Service Company ............. 30 -- Non-recourse 9.00% Apr-03
Jamaica Public Service Company ............. 5 5 Non-recourse 10.00% Dec-02
Mirant Asia-Pacific Ltd - Mirant
Asia-Pacific Singapore Pte Ltd. .......... 7 7 Non-recourse 5.00% On demand
------- -------
Total non-recourse short-term debt ....... 65 29
------- -------
Total short-term debt ...................... 109 55
======= =======
CURRENT PORTION OF LONG-TERM DEBT
Mirant Corporation CSFB 364-day
Revolving Credit Facility ................ 1,125 -- Recourse L+1.05% Jul-03 1,125
European Power Island Procurement B.V ...... 105 -- Recourse 5.88% Dec-03
Mirant Americas Development Capital ........ 61 -- Recourse 3.35% Apr-04
Mirant Americas, Inc. - deferred
acquisition price ........................ 21 21 Recourse 0.00% Oct-02
------- -------
Total recourse current portion of
long-term debt ......................... 1,312 21
Mirant Asia-Pacific ........................ 34 792 Non-recourse L+3.75% Jan-07**
Mirant Holdings Beteiligungsgesellschaft
term loan ................................ -- 566 Non-recourse 5.14% Jun-02
Mirant Pagbilao project loan ............... 4 23 Non-recourse 10.25% Jan-07
Mirant Pagbilao project loan ............... 3 9 Non-recourse 9.75% Jan-03
Mirant Pagbilao project loan ............... 6 34 Non-recourse 10.25% Jan-07
Mirant Pagbilao project loan ............... 1 4 Non-recourse 9.50% Jan-04
Mirant Pagbilao project loan ............... 22 122 Non-recourse 7.46% Jan-07
Mirant Pagbilao project loan ............... 15 81 Non-recourse L+2.15% Jan-07
Mirant Pagbilao project loan ............... 18 101 Non-recourse 7.16% Jan-07
Mirant Sual project loan ................... 4 19 Non-recourse 9.70% Jul-06
Mirant Sual project loan ................... 33 352 Non-recourse 5.95% Jan-12
Mirant Sual project loan ................... 4 37 Non-recourse 8.26% Jan-12
Mirant Sual project loan ................... 10 105 Non-recourse 5.95% Jan-12
Mirant Sual project loan ................... 3 30 Non-recourse 8.78% Jan-12
Mirant Sual project loan ................... 10 102 Non-recourse 7.35% Jan-12
Mirant Sual project loan ................... 2 28 Non-recourse 10.56% Jan-12
Mirant Sual project loan ................... 2 37 Non-recourse 9.40% Jan-12
Mirant Sual project loan ................... 26 117 Non-recourse L+2.50% Jan-06
Mirant Asia-Pacific Ltd - Shajiao C ........ 1 -- Non-recourse 0.00% Jan. 05
European Power Island Procurement B.V ...... 12 -- Non-recourse 5.88% Dec-03
Mirant Americas Development Capital ........ 7 -- Non-recourse 3.35% Apr-04
West Georgia Generating Company ............ 5 5 Non-recourse 3.45% Dec-02
Capital Leases - Jamaica ................... 9 9 Non-recourse 12.51% Aug-16
Jamaica Public Service Company ............. -- 8 Non-recourse 4.50% Feb-03
Mirant Grand Bahamas ....................... 1 1 Non-recourse L+1.25% Oct-02
Grand Bahama Power Company ................. 1 1 Non-recourse L+1.00% Apr-03
Grand Bahama Power Company ................. 1 -- Non-recourse L+1.25% Feb-03
------- -------
Total non-recourse current portion of
long-term debt ......................... 234 2,583
------- -------
Total current portion of long-term debt .... 1,546 2,604
======= =======
65
NOTES PAYABLE
Mirant Corporation senior notes ............ 200 200 Recourse 7.40% Jul-04
Mirant Corporation senior notes ............ 500 500 Recourse 7.90% Jul-09
Mirant Americas Energy Capital (has a
Mirant Corporation guarantee) ............ 150 150 Recourse 3.94% Sep-04 150
Mirant Americas, Inc. - deferred
acquisition price ........................ 22 22 Recourse 0.00% Oct-03
Mirant Americas, Inc. - deferred
acquisition price ........................ 23 23 Recourse 0.00% Oct-04
------- -------
Total recourse notes payable ............. 895 895
Mirant Asia-Pacific ........................ 220 -- Non-recourse L+3.75% Jan-07**
Mirant Americas Generation - senior notes .. 500 500 Non-recourse 7.625 May-06
Mirant Americas Generation - senior notes .. 850 850 Non-recourse 8.300 May-11
Mirant Americas Generation - senior notes .. 400 400 Non-recourse 9.125 May-31
Mirant Americas Generation - senior notes .. 300 300 Non-recourse 7.20% Oct-08
Mirant Americas Generation - senior notes .. 450 450 Non-recourse 8.50% Oct-21
Mirant Americas Generation - credit facility 50 -- Non-recourse L+1.25% Oct-04 50
Mirant Americas Generation - credit facility 250 73 Non-recourse L+1.25% Oct-04 250
West Georgia Generating Company ............ 140 140 Non-recourse 3.45% Dec-03***
Mirant Grand Bahamas ....................... 9 9 Non-recourse L+1.25% Apr-06
Mirant Grand Bahamas ....................... 6 6 Non-recourse L+1.25% Aug-04
Grand Bahama Power Company ................. 17 18 Non-recourse L+1.25% Apr-05
Grand Bahama Power Company ................. 12 13 Non-recourse L+1.00% Feb-07
Mirant Trinidad notes ...................... 73 73 Non-recourse 10.20% Jan-06
Mirant Pagbilao project loan ............... 14 -- Non-recourse 10.25% Jan-07
Mirant Pagbilao project loan ............... -- -- Non-recourse 9.75% Jan-03
Mirant Pagbilao project loan ............... 22 -- Non-recourse 10.25% Jan-07
Mirant Pagbilao project loan ............... 1 -- Non-recourse 9.50% Jan-04
Mirant Pagbilao project loan ............... 78 -- Non-recourse 7.46% Jan-07
Mirant Pagbilao project loan ............... 51 -- Non-recourse L+2.15% Jan-07
Mirant Pagbilao project loan ............... 65 -- Non-recourse 7.16% Jan-07
Mirant Sual project loan ................... 11 -- Non-recourse 9.70% Jul-06
Mirant Sual project loan ................... 285 -- Non-recourse 5.95% Jan-12
Mirant Sual project loan ................... 30 -- Non-recourse 8.26% Jan-12
Mirant Sual project loan ................... 85 -- Non-recourse 5.95% Jan-12
Mirant Sual project loan ................... 24 -- Non-recourse 8.78% Jan-12
Mirant Sual project loan ................... 82 -- Non-recourse 7.35% Jan-12
Mirant Sual project loan ................... 25 -- Non-recourse 10.56% Jan-12
Mirant Sual project loan ................... 33 -- Non-recourse 9.40% Jan-12
Mirant Sual project loan ................... 65 -- Non-recourse L+2.5% Jan-06
Mirant Asia-Pacific Ltd - Shajiao C ........ 26 27 Non-recourse 0.00% Jan-05
Unamortized debt premium/ discounts on notes (3) (3) Non-recourse
------- -------
Total non-recourse notes payable ......... 4,171 2,856
------- -------
Total notes payable ........................ 5,066 3,751
======= =======
OTHER LONG-TERM DEBT
Mirant Corporation convertible senior
debentures ............................... 750 750 Recourse 2.50% Dec-21*** *
Mirant Corporation convertible senior
notes .................................... 370 -- Recourse 5.75% Jul-07
Mirant Corporation CSFB 364-day
Revolving Credit Facility ................ -- 1,075 Recourse L+1.05% Jul-03 1,125
Mirant Corporation CSFB 4-year Revolving
Credit Facility .......................... 25 -- Recourse L+1.00% Jul-05 1,125
Mirant Corporation Citibank C Credit
Facility ................................. 401 -- Recourse L+0.975% Apr-04 450
Mirant Americas Development Capital ........ 36 -- Recourse 3.35% Apr-04
------- -------
Total recourse other long-term debt ...... 1,582 1,825
Jamaica Public Service Company ............. 80 80 Non-recourse 11.90% Aug-06
Jamaica Public Service Company ............. 51 45 Non-recourse 10.75% Sep-06
66
Jamaica Public Service Company ............. 1 -- Non-recourse 10.00% Feb-05
Jamaica Public Service Company ............. 2 -- Non-recourse 4.50% Dec-30
Mirant Curacao Investments - deferred
acquisition price ........................ 9 -- Non-recourse 0.00% Apr-05
Mirant Americas Development Capital ........ 4 -- Non-recourse 3.35% Apr-04
Capital Leases - Americas / Zeeland ........ 10 10 Non-recourse 12.51% Dec-12
Capital Leases - Jamaica ................... 109 108 Non-recourse 12.51% 2016
------- -------
Total non-recourse other long-term debt .. 266 243
------- -------
Total other long-term debt ................. 1,848 2,068
======= =======
Total debt ................................. $ 8,569 $ 8,478
======= =======
TOTAL RECOURSE DEBT .......................... 3,833 2,767
TOTAL NON-RECOURSE DEBT ...................... 4,736 5,711
------- -------
TOTAL DEBT ................................... $ 8,569 $ 8,478
======= =======
* Maximum Balance is provided for revolving credit facilities. This number
reflects the total amounts available under each facility for bank draws and
letters of credit.
** Facility was refinanced in January and March 2002.
***After the initial maturity in December 2003, all cash generated by the
project is used to repay indebtedness until final maturity in 2009.
**** The holders may require us to purchase all or a portion of their debentures
on June 15, 2004, June 15, 2006, June 15, 2011 and June 15, 2016 at a price
equal to 100% of the principal amount of the debentures to be purchased plus
accrued and unpaid interest to such purchase date.
*****The stated interest rate excludes the impact of Mirant's hedging program
where certain variable interest rates are swapped to a fixed rate.
CREDIT FACILITIES
We have revolving credit facilities with various lending institutions
totaling approximately $3.19 billion of commitments. At September 30, 2002,
commitments utilized under such facilities (including drawn amounts and letters
of credit) totaled $3.09 billion and are comprised of the following: commitments
of $1.17 billion drawn or utilized under facilities expiring in 2003 and
commitments of $1.92 billion drawn or utilized under the facilities expiring in
2004 and beyond.
In July 2002, Mirant Corporation fully drew the commitments under its
$1.125 billion 364-Day Credit Facility and elected to convert all revolving
credit advances outstanding into a term loan maturing in July 2003. In order to
mitigate concerns about a negative working capital balance, the Company is
evaluating various potential financing transactions to repay and/or refinance
the Facility prior to its maturity. As a result of present market conditions and
other factors, including the reaudit of its historical financial statements,
Mirant cannot provide assurance that it will be successful in entering into a
new credit facility. If Mirant is successful in entering into a new credit
facility, it expects the facility will likely be smaller and will have higher
pricing and more restrictive terms than the current facility.
In July 2002, Mirant Corporation and Mirant Americas Generation drew down
most of their available revolving credit commitments. The schedule below
summarizes the outstanding borrowings and letters of credit issued under the
credit facilities held by Mirant Corporation and its subsidiaries as of November
30, 2002 (in millions).
DRAWN AMOUNT
EXCLUDING LETTERS LETTERS OF CREDIT
COMPANY OF CREDIT OUTSTANDING
------- ----------------- -----------------
Mirant Corporation ..................... $1,551(1) $1,116
Mirant Americas Generation ............. 300 --
Mirant Canada Energy Marketing ......... 32 --
Mirant Americas Energy Capital ......... 150 --
(1) Amount includes fully drawn commitments under Mirant's $1.125 billion
364-Day Credit Facility that was converted in July 2002 to a term loan maturing
in July 2003.
67
Except for the credit facility of Mirant Canada Energy Marketing, an
indirect wholly owned subsidiary of Mirant Corporation and the $1.125 billion
364-Day Credit Facility, which was converted into a term loan maturing in July
2003, borrowings under these revolving facilities are recorded as long-term debt
in the unaudited condensed consolidated balance sheet as of September 30, 2002.
The credit facilities generally require payment of commitment fees based on the
unused portion of the commitments. The schedule below summarizes amounts
available on these facilities held by Mirant Corporation and the specified
subsidiaries as of December 31, 2001 and September 30, 2002 (in millions).
AMOUNT AVAILABLE
----------------------------
FACILITY SEPTEMBER 30, DECEMBER 31,
COMPANY AMOUNT 2002 2001
------- -------- ------------- ------------
Mirant Corporation * .............. $2,700 $ 101 $ 867
Mirant Americas Generation ........ 300 -- 227
Mirant Canada Energy Marketing .... 44 -- 18
Mirant Americas Energy Capital .... 150 -- --
------ ------ ------
Total .......................... $3,194 $ 101 $1,112
====== ====== ======
* At September 30, 2002, there was $2,599 million of utilized commitments which
included $1,048 million of letters of credit outstanding.
Each of Mirant's credit facilities contains various covenants including,
among other things, (i) limitations on (a) dividends, redemptions and
repurchases of capital stock, (b) the incurrence of indebtedness and liens and
(c) the sale of assets, and (ii) affirmative covenants to (a) provide annual
audited and quarterly unaudited financial statements prepared in accordance with
US and local GAAP and (b) comply with legal requirements in the conduct of its
business. In addition to other covenants and terms, each of Mirant's credit
facilities includes minimum debt service coverage and a maximum leverage
covenant. As of September 30, 2002, there were no events of default under such
credit facilities.
In connection with its review of the previously disclosed accounting
issues, the Company identified various errors affecting the Company's historical
financial statements. The Company believes that the errors it has identified do
not constitute a breach of a covenant or an event of default under its credit
facilities. If the Company were in default, or the type or amount of any
adjustments arising from the announced reaudit of the Company's historical
financial statements were to result in an event of default under its credit
facilities, the lenders would have the right to accelerate the Company's
obligations under its credit facilities. Any such acceleration would trigger
cross-acceleration provisions in a substantial portion of the Company's other
consolidated indebtedness. In such event, the Company would be required to seek
waivers or other relief from its lenders and, absent such relief, approximately
$4.5 billion of the Company's consolidated debt would be classified as
short-term debt and could be accelerated. Further, in the event that its lenders
accelerated such indebtedness, the Company can provide no assurances that it
would be able to refinance such indebtedness in the existing credit markets and
would likely have to seek bankruptcy court or other protection from its
creditors.
Mirant Canada Energy Marketing has extended its credit facility to June
30, 2003. The revolving credit facility of approximately $44 million
(denominated as 70 million Canadian dollars) had outstanding borrowings of $44
million, at an interest rate of 3.64% at September 30, 2002. The credit facility
is guaranteed by Mirant Corporation and is secured by a letter of credit in the
amount of $46 million and security interests in the real and personal property
of Mirant Canada Energy Marketing.
In February 2002, Mirant, Mirant Americas Energy Marketing, Perryville and
the lenders under its credit facility entered into the following transactions:
(i) an indirect, wholly owned subsidiary of Mirant Corporation made a
subordinated loan of $48 million to Perryville, (ii) Mirant Corporation agreed
to guarantee the obligations of Mirant Americas Energy Marketing under the
tolling agreement, (iii) Perryville (with the consent of its lenders) and Mirant
Americas Energy Marketing lowered the ratings threshold in the tolling agreement
with respect to Mirant, related to the ratings below which Mirant Americas
Energy Marketing has agreed to
68
post a letter of credit or other credit support, and (iv) the parties agreed to
certain additional terms in support of the syndication of the credit facility.
In June 2002, Mirant completed the sale of its 50% ownership interest in
Perryville to Cleco, which holds the remaining 50% ownership interest in
Perryville. Cleco assumed Mirant's $13 million future equity commitment to
Perryville and paid approximately $55 million in cash to Mirant as repayment of
its subordinated loan, invested capital to date and other miscellaneous costs.
At such time, Mirant agreed to make a $25 million subordinated loan to the
project. Effective August 23, 2002, Mirant Americas Energy Marketing and
Perryville, with the consent of the project lenders, restructured the tolling
agreement between the parties to remove the requirement to post a letter of
credit or other credit support in the event of a downgrade from S&P or Moody's.
In connection with its operational restructuring, Mirant Americas made a $100
million subordinated loan to Perryville, the proceeds of which were used to
repay the existing $25 million subordinated loan owed to a Mirant subsidiary and
to repay $75 million of senior debt of the project. In addition, Mirant retains
certain obligations as a project sponsor, some of which are subject to
indemnification by Cleco. The obligations retained by Mirant which are not
subject to indemnity relate primarily to the existing 20-year tolling agreement
with Mirant Americas Energy Marketing as described in "--Contractual
Obligations and Commitments - Energy Marketing and Risk Management."
In March 2002, Mirant Americas Energy Capital transferred the borrowing
base assets under its credit facility to a special purpose entity and granted
security interests in such assets. The special purpose entity is consolidated
with Mirant.
As discussed below in "Contractual Obligations and Commitments - Turbine
Purchases and Other Construction-Related Commitments" Mirant negotiated
deferrals of the shipment dates of certain turbines under both equipment
procurement facilities as part of the March 2002 Plan, and additionally made
unreimbursed direct payments to vendors related to certain turbines/power
islands in the equipment procurement facilities. Consequently, Mirant has
included a $225 million liability for these turbines (equal to the costs
incurred to date in constructing these turbines) as of September 30, 2002, of
which $40 million is reported as "Other long-term debt" and $185 million is
reported in "Current portion of long-term debt" on the accompanying unaudited
condensed consolidated balance sheet at September 30, 2002.
In the fourth quarter of 2002, Mirant has negotiated deferrals of the
shipment dates and made unreimbursed direct payments to vendors for certain
other turbines, and will be recognizing approximately $79 million additional
"Current portion of long-term debt" and approximately $31 million additional
"Other long-term debt" on its balance sheet as of December 31, 2002.
On January 23, 2002, Mirant Asia-Pacific, an indirect, wholly owned
subsidiary of Mirant Corporation, borrowed $192 million under a new credit
facility to repay, in part, its prior $792 million credit facility. The
repayment of the balance of the prior credit facility was funded by Mirant
Corporation. In March 2002, Mirant Asia-Pacific secured a second tranche of $62
million which has been used to repay part of the funding from Mirant
Corporation. The new credit facility contains various business and financial
covenants including, among other things, (i) limitations on dividends and
distributions, including a prohibition on dividends if Mirant ceases to be rated
investment grade by at least two of Fitch, S&P and Moody's, (ii) mandatory
prepayments upon the occurrence of certain events, including certain asset sales
and certain breaches of the Sual and the Pagbilao energy conversion agreements,
(iii) limitations on the ability to make investments and to sell assets, (iv)
limitations on transactions with affiliates of Mirant and (v) maintenance of
minimum debt service coverage ratios. As a result of the recent downgrades by
Fitch and Moody's, Mirant Asia-Pacific is prohibited under the terms of its
credit facility from making distributions to Mirant Corporation. However, the
Company expects to repay the Mirant Asia-Pacific credit facility in connection
with the sale of the Shajiao power project as further discussed
in "Asset Sales."
In December 2002, Mirant and its lenders for the Sual and Pagbilao loan
agreements amended the insurance provisions requirements required by the loan
agreements. The amendments state that, in the event Sual and Pagbilao do not
obtain the levels of insurance specified in the loan agreements, Sual and
Pagbilao will not be held in breach of the agreements provided they obtain all
of the insurance coverage that is reasonably available and commercially feasible
in the insurance market for similarly situated facilities, as certified by the
lenders'
69
insurance advisor. To avoid breaching the agreements, the coverage obtained must
further be in amounts above threshold levels defined in the amendments. The
insurance coverage obtained for the November 1, 2002 renewal satisfies the
amended terms of the loan agreements. As a result, Mirant has reclassified the
Sual and Pagbilao credit facilities from current portion of long-term debt to
long-term notes payable on its condensed consolidated balance sheet.
CONVERTIBLE SENIOR NOTES
In July 2002, Mirant Corporation completed the issuance of $370 million of
convertible senior notes. The net proceeds from the offering, after deducting
underwriting discounts and commissions payable by Mirant, were $361 million.
The notes mature on July 15, 2007 with an annual interest rate of 5.75%.
Holders of the notes may convert their notes into 131.9888 shares of Mirant
common stock for each $1,000 principal amount of the notes at any time prior to
July 15, 2007. This conversion rate is equivalent to the initial conversion
price of $7.58 per share based on the issue price of the notes. The initial
conversion rate may be subject to adjustment. Mirant has the right to redeem for
cash, some or all of the notes at any time on or after July 20, 2005, upon not
less than 30 nor more than 60 days' notice by mail to holders of the notes, for
a price equal to 100% of the principal amount of the notes to be redeemed plus
any accrued and unpaid interest to the redemption date.
COMMENCEMENT OF OPERATIONS
In June 2002, the Ilijan facility located in the Philippines, in which
Mirant has a 20% ownership interest, commenced commercial operations.
In July 2002, we commenced operation of the second phase at our Zeeland,
Michigan generating plant, operation at our Wrightsville, Arkansas generating
plant and operation of the first phase at our Sugar Creek generating plant near
Terre Haute, Indiana. Upon completion of the projects, $678 million of costs
were transferred from "Construction work in progress" to "Property, plant and
equipment."
In October 2002, JPSCo, in which we have an 80% ownership interest,
commenced operation of a new unit at its Bogue generating plant in Montego Bay,
Jamaica. Upon completion of the project, approximately $70 million in costs were
transferred from "Construction work in progress" to "Property, plant and
equipment."
In December 2002, we commenced operation of our expansion project at our
Kendall facility located in Cambridge, Massachusetts.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Energy Marketing and Risk Management
We provide energy marketing and risk management services to our customers
in the North American markets. These services are provided through a variety of
exchange-traded and OTC energy and energy-related contracts, such as forward
contracts, futures contracts, option contracts and financial swap agreements.
These contractual commitments are presented as energy marketing and risk
management assets and liabilities in the accompanying unaudited condensed
consolidated balance sheets and are accounted for using the mark-to-market
method of accounting in accordance with SFAS No. 133 and EITF Issue 98-10.
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. Attention is drawn to
"Accounting Changes" in Note A - Accounting and Reporting Policies, where the
EITF reached
70
consensus on certain issues related to EITF Issue 02-3, under EITF Issues 98-10
and 00-17, "Measuring the Fair Value of Energy-Related Contracts in Applying
Issue 98-10." EITF Issues 98-10 and 00-17 address various aspects of the
accounting for contracts involved in energy trading and risk management
activities.
The Company, through its energy marketing and risk management operations,
engages in risk management activities with counterparties. All such transactions
and related expenses are recorded on a trade-date basis. Financial instruments
and contractual commitments related to 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 are recorded at
fair value in the accompanying unaudited condensed consolidated balance sheets.
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.
During the first quarter of 2002, we substantially exited our European
trading and marketing business. The volumetric weighted average maturity, or
weighted average tenor of the North American portfolio, at September 30, 2002
was 2.9 years. The net notional amount, or net open position, of the energy
marketing and risk management assets and liabilities at September 30, 2002 was
approximately 3 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.
Certain financial instruments that we use to manage risk exposure to
energy prices do not meet the hedge criteria under SFAS No. 133. The fair values
of these instruments are recorded in energy marketing and risk management assets
and liabilities on our accompanying unaudited condensed consolidated balance
sheets.
The following table provides a summary of the factors impacting the change
in net fair value of the energy marketing and risk management asset and
liability accounts during the nine months ended September 30, 2002 (in
millions).
Net fair value of portfolio at December 31, 2001...................... $ (76)
Gains (losses) recognized in the period, net ......................... 405
Contracts settled during the period, net.............................. (278)
Change in fair value as a result of a change in valuation technique(1) --
Other changes in fair value, net(2)................................... (25)
Deferred option premiums, net......................................... 67
-----
Net fair value of portfolio at September 30, 2002..................... $ 93
=====
(1) Mirant's modeling methodology has been consistently applied through the
third quarter of 2002.
(2) Consists primarily of purchase accounting and other adjustments to energy
marketing and risk management assets (liabilities).
The fair values and average values of our energy marketing and risk
management assets and liabilities, net of credit reserves, as of September 30,
2002 are included in the following table (in millions). The average values are
based on a monthly average for 2002.
NET ENERGY MARKETING
ENERGY MARKETING AND RISK ENERGY MARKETING AND RISK AND RISK MANAGEMENT
MANAGEMENT ASSETS MANAGEMENT LIABILITIES ASSETS (LIABILITIES)
------------------------- ------------------------- --------------------
VALUE AT VALUE AT
AVERAGE SEPTEMBER 30, AVERAGE SEPTEMBER 30, NET VALUE AT
VALUE 2002 VALUE 2002 SEPTEMBER 30, 2002
------- ------------- ------- ------------- ------------------
Energy commodity
Instruments:
Electricity .... $ 479 $ 345 $ 388 $ 285 $ 60
Natural gas .... 1,121 1,559 1,235 1,519 40
Crude oil ...... 20 32 15 30 2
Other .......... 51 (3) 32 6 (9)
------- -------- ------- -------- --------
Total ........ $ 1,671 $ 1,933 $ 1,670 $ 1,840 93
======= ======== ======= ======== ========
71
The following table represents the net energy and risk management assets
and liabilities by tenor, complexity and liquidity. As of September 30, 2002,
approximately 85% of the net value, excluding the prepaid gas transaction
discussed below, was calculated using low complexity models with high price
discovery. These include forwards, swaps and options at actively traded
locations. Also, as of September 30, 2002, approximately 80% of the net value,
excluding the prepaid gas transaction discussed below, was expected to be
realized by the end of 2003. Examples of medium and high complexity models
include natural gas storage and transportation renewal options, respectively.
FAIR VALUE OF ENERGY MARKETING AND RISK MANAGEMENT
ASSETS AND LIABILITIES AS OF SEPTEMBER 30, 2002
(IN MILLIONS)
------------------------------------------------------------------------------------
LOW COMPLEXITY MODELS MEDIUM COMPLEXITY MODELS HIGH COMPLEXITY MODELS
PRICE DISCOVERY PRICE DISCOVERY PRICE DISCOVERY
---------------------- ------------------------ ----------------------
HIGH MEDIUM LOW HIGH MEDIUM LOW HIGH MEDIUM LOW TOTAL
---- ------ ----- ---- ------ ----- ---- ------ ----- -----
2002 .......... $ 60 $ (1) $ 1 $ 3 $ 1 $ -- $ -- $ -- $ -- $ 64
2003 .......... 156 14 4 6 1 -- -- -- -- 181
2004 .......... -- 4 1 4 -- -- -- -- -- 9
2005 .......... 14 (5) (2) 3 1 -- -- -- -- 11
2006 .......... 37 (12) (4) -- 3 1 -- -- -- 25
Thereafter .... 4 4 (20) -- 7 32 -- -- 1 28
---- ---- ---- ---- ----- ----- ---- ----- ----- -----
Net assets
excluding
prepaid gas
transaction ... $271 $ 4 $ (20) $ 16 $ 13 $ 33 $ -- $ -- $ 1 $ 318
Adjustment for
prepaid gas
transaction(1) $(225)
=====
Net assets ... $ 93
=====
MODEL COMPLEXITY:
- LOW - Transactions involving exchange, or exchange look-a-like products
with no operational or other constraints.
- MEDIUM - Transactions involving some operational constraints, but where
these constraints are not the primary drivers of value/risk.
- HIGH - Transactions involving much more complex operational and/or
contractual constraints, incorporating factors such as temperature, and
where these items can be the primary drivers of value/risk.
LEVEL OF PRICE DISCOVERY:
- HIGH - Large, liquid markets with multiple daily third-party and/or
exchange settled price quotes available.
- MEDIUM - Less liquid markets with periodic external price quotes
available, or price levels which are validated, on a daily basis,
indirectly as temporal and/or locational spreads off of "High" price
discovery data.
- LOW - Illiquid markets with little or no external price quotes, or where
the underlying transactions constitute a large portion of the totality of
the transactions in the market.
(1) In October 2001, the Company entered into a prepaid gas transaction with a
counterparty and a simultaneous natural gas swap with a third-party
independent to the prepaid gas transaction. The prepaid gas transaction
resulted in the receipt of payments in 2001 in exchange for financial
settlements to be made over a future three-year period. Approximately 10%
of the contract notional quantity will settle in 2002, 10% in 2003 and the
remaining 80% will settle in 2004 based on fixed notional quantities of
gas defined in the agreement at natural gas index prices on the date of
each settlement. The natural gas swap served to fix the price of the gas
to be settled under the prepaid gas agreement. At the date the transaction
was consummated, the notional fixed future natural gas settlements totaled
approximately $250 million and the fair value of such gas settlements was
approximately $225 million. Since this transaction results in fixed
payments through 2004 and no market price risk to the Company, its impact
has been disclosed separately above.
The process of model development, independent testing and verification of
model robustness, system implementation and security, and version control are
all covered by the oversight activities of our Model Oversight Committee which
is chaired by the Assistant Global Risk Control Officer. Documentation covering
this process, including independent testing of model results by the Risk Control
organization, is maintained for audit and oversight purposes.
72
Mirant Corporation had approximately $947 million trade credit support
commitments outstanding as of September 30, 2002, which included $638 million of
letters of credit, $5 million of net cash collateral held and $314 million of
parent guarantees.
Mirant Corporation has also guaranteed the performance of obligations
under a multi-year agreement entered into by Mirant Americas Energy Marketing
with Brazos. Under the agreement, effective January 1999, Mirant Corporation
provides all the electricity required to meet the needs of the distribution
cooperatives served by Brazos. Mirant Corporation is entitled to the output of
Brazos' generation facilities and its rights to electricity under power purchase
agreements Brazos has entered into with third parties. Mirant Corporation's
guarantee was $60 million at September 30, 2002, a decrease of $5 million from
December 31, 2001. Mirant Corporation is subject to regulatory and commercial
risks under this energy requirements contract. Mirant Corporation believes that
it has adequately provided for the potential risks related to this contract,
which terminates at the end of 2003; however, no assurance can be given that
additional losses will not occur.
Mirant Corporation also has a guarantee of $64 million for the performance
of all obligations to Pan Alberta Gas of $64 million issued in 2000 and
outstanding at September 30, 2002.
Vastar, a subsidiary of BP, and Mirant Corporation had issued financial
guarantees made in the ordinary course of business, on behalf of Mirant Americas
Energy Marketing's counterparties, to financial institutions and other credit
grantors. Mirant Corporation has agreed to indemnify BP against losses under
such guarantees in proportion to Vastar's former ownership percentage of Mirant
Americas Energy Marketing. At September 30, 2002, such guarantees amounted to
approximately $85 million.
Mirant Americas Energy Marketing has a 20-year tolling agreement with
Perryville in which Perryville will sell all the electricity generated by the
facility to Mirant Americas Energy Marketing. At September 30, 2002, the total
estimated notional commitment under this agreement was approximately $1.05
billion over the 20-year life of the contract. Effective August 23, 2002, Mirant
Americas Energy Marketing and Perryville, with the consent of the project
lenders, restructured the tolling agreement between the parties to remove the
requirement to post a letter of credit or other credit support in the event of a
downgrade from S&P or Moody's. In connection with the restructuring, Mirant
Americas made a $100 million subordinated loan to Perryville, the proceeds of
which were used to repay an existing $25 million subordinated loan owed to a
Mirant subsidiary and to repay $75 million of senior debt of the project. In
addition, Mirant Americas guaranteed the obligations of Mirant Americas Energy
Marketing under the tolling agreement up to the amount of the subordinated loan.
The obligations of Mirant Americas Energy Marketing under the tolling agreement
are guaranteed by Mirant Corporation.
To the extent that Mirant Corporation does not maintain its current credit
ratings, it could be required to provide alternative collateral to certain risk
management and energy marketing counterparties based on the value of our
portfolio at such time, in order to continue our current relationship with them.
Mirant could also be required to provide alternative collateral related to
committed pipeline capacity charges. Such collateral could be in the form of
cash and/or letters of credit. There is an additional risk that in the event of
a further reduction of Mirant's credit rating, certain counterparties may,
without contractual justification, request additional collateral or terminate
their obligations to Mirant. As of December 18, 2002, the Company has a credit
rating of B1 (non-investment grade), with a negative outlook by Moody's, BB
(non-investment grade) with a negative outlook by S&P and BB (non-investment
grade) with a negative outlook by Fitch. While the foregoing indicates the
ratings from the various agencies, we note that these ratings are not a
recommendation to buy, sell or hold the Company's securities and that each
rating should be evaluated independently of any other rating. There can be no
assurance that a rating will remain in effect for any given period of time or
that a rating will not be lowered or withdrawn entirely by a rating agency if,
in its judgment, circumstances so warrant. Further, the Company notes that,
given the reported financial difficulties of other market participants, the
uncertainty and turmoil in the financial markets generally and in the energy
sector specifically and the Company's pending accounting review, each of the
credit rating agencies continues to monitor its credit
73
position closely. The Company notes the risk factors related to a downgrade in
the Company's credit ratings as disclosed in its Annual Report on Form 10-K for
the year ended December 31, 2001, which was filed in March 2002.
Turbine Purchases and Other Construction-Related Commitments
During the first quarter of 2002, Mirant committed itself to a
restructuring plan designed to reduce capital spending and operating expenses.
As a result, the Company recorded restructuring charges in the nine months ended
September 30, 2002 related to these changes. The reduced capital spending plan
results in material changes to Mirant's expected commitments under its turbine
purchase agreements and its off-balance sheet equipment procurement facilities.
Mirant has canceled and intends to cancel certain turbines under its purchase
agreements and its off-balance sheet equipment procurement facilities. The
commitments for turbines that Mirant has canceled and intends to cancel are
included in Mirant's restructuring charges, and Mirant plans to formally
terminate the orders for these turbines at various times within one year of the
restructuring commitment date. Until these termination orders are issued Mirant
continues to have the option to purchase the turbines.
As of September 30, 2002, Mirant had outstanding agreements to purchase 32
turbines (24 gas turbines and 8 steam turbines) of which 11 have been accrued
for termination under the March 2002 Plan (see table below). In addition,
Mirant's other construction-related commitments totaled approximately $622
million at September 30, 2002.
Mirant, through certain of its subsidiaries, has two off-balance sheet
equipment procurement facilities. These facilities are being used to fund
equipment progress payments due under purchase contracts that have been assigned
to the facilities, which are separate, independent third-party owners. For the
first facility, which is a $1.8 billion notional value facility (the "domestic
facility"), remaining contracts for 42 turbines (28 gas turbines and 14 steam
turbines) have been assigned to a third-party trust. For the second facility,
which at September 30, 2002 was a Euro 550 million (approximately $543 million)
notional value facility (the "Euro facility"), remaining contracts for four
engineered equipment packages ("power islands") have been assigned to a
third-party owner incorporated in the Netherlands. Of these 46 remaining
turbines/power islands, 35 have been accrued for termination under the March
2002 Plan.
PROCUREMENT
PURCHASE FACILITIES TOTAL
COMMITMENTS (TURBINES/ TURBINES/
TURBINE COUNT (TURBINE) POWER ISLANDS) POWER ISLANDS
----------- -------------- -------------
Total contracted turbines/power islands at
December 31, 2001 .......................... 48 55 103
Turbines/power islands terminated during
the nine months ended September 30, 2002 ... (8) (9) (17)
Turbines/power islands placed in service
during the nine months ended September 30,
2002 ....................................... (8) -- (8)
------ ------ ------
Total contracted turbines/power islands at
September 30, 2002 ....................... 32 46 78
Turbines/power islands to be terminated
or sold in the future under March 2002 ..... (11) (35) (46)
------ ------ ------
Total remaining contracted turbines/power
Plan islands at September 30, 2002 (after
March 2002 Plan) ......................... 21 11 32
====== ====== ======
COMMITMENTS FOR REMAINING CONTRACTED TURBINES/
POWER ISLANDS AFTER MARCH 2002 PLAN
(IN MILLIONS)
Total commitments not reported on balance .... $ 28 $ 377 $ 405
sheet at September 30, 2002
Total commitments reported on balance sheet at
September 30, 2002 ......................... $ -- $ 128 $ 128
Cost to terminate at September 30, 2002 ...... $ 2 $ 210 $ 212
74
As part of the March 2002 Plan, Mirant negotiated deferrals of the
shipment dates of certain turbines under both equipment procurement facilities.
As a result, the revised shipment dates for certain turbines included in the
domestic facility extend beyond the permitted term of the facility. Thus, the
Company no longer has the option to enter into a lease arrangement for this
equipment, and it will be forced to exercise its purchase option. Therefore, the
equipment no longer qualifies for off-balance sheet treatment and Mirant is
treating the equipment as if it is the owner for financial reporting purposes.
Consequently, Mirant has included a $37 million liability for these turbines
(equal to the costs incurred to date in constructing these turbines) as of
September 30, 2002, of which $13 million was added to construction work in
progress and $24 million was reported as restructuring expense during the
quarter ended March 31, 2002 as part of the March 2002 Plan. Of the $37 million
liability, $13 million is reported as "Other long-term debt" and $24 million is
reported in "Current portion of long-term debt" on the accompanying unaudited
condensed consolidated balance sheet at September 30, 2002. Of the $24 million
in the "Current portion of long-term debt," $2 million was reclassified from
restructuring reserves (as it had previously been accrued for termination in the
March 2002 Plan).
During the quarter ended September 30, 2002, the Company made unreimbursed
direct payments to vendors related to certain turbines/power islands in the
equipment procurement facilities. Therefore, the equipment no longer qualifies
for off-balance sheet treatment and Mirant is treating the equipment as if it is
the owner for financial reporting purposes. Consequently, Mirant has recorded a
$188 million liability (equal to the costs incurred to date in constructing
these turbines/power islands) as of September 30, 2002, of which $29 million was
reclassified from the restructuring reserve (as it had previously been accrued
for termination in the March 2002 Plan), and the remaining $159 million was
added to construction work in progress. Of the $188 million liability, $27
million is reported in "Other long-term debt" and $161 million is reported in
"Current portion of long-term debt" on the accompanying unaudited condensed
consolidated balance sheet at September 30, 2002. The Company recorded a $132
million impairment charge related to certain of these turbines/power islands
during the three months ended September 30, 2002.
Effectively, as of September 30, 2002, Mirant has now recognized in its
financial statements all of the remaining four power islands and related debt
obligations in the European equipment procurement facility.
The drawn amounts of all turbines/power islands (included those to be
terminated) under the equipment procurement facilities were equal to $508
million as of September 30, 2002 ($391 million in the domestic facility and $117
million in the Euro facility), of which Mirant has guaranteed 89.9%. Mirant has
recorded $225 million of this amount as a liability on its balance sheet as
described above.
Further, the modification of the Company's strategic direction subsequent
to March 2002 is likely to result in restructuring charges incremental to those
contemplated in the March 2002 Plan.
In October 2002, Mirant terminated contracts for twelve turbines. Nine of
the turbines had previously been accrued for termination in the March 2002 Plan,
and the termination of the remaining three turbines resulted in additional
termination expense of approximately $34 million which was recorded during the
fourth quarter of 2002. Additionally, Mirant negotiated deferrals of the
shipment dates of certain other turbines under the domestic equipment
procurement facility that were part of the March 2002 Plan. As a result, the
revised shipment dates for certain turbines included in the facility extend
beyond the permitted term of the facility. Thus, the Company no longer has the
option to enter into a lease arrangement for this equipment, and it will be
forced to exercise its purchase option. Therefore, the equipment no longer
qualifies for off-balance sheet treatment and Mirant will be treating the
equipment as if it is the owner for financial reporting purposes. Consequently,
Mirant will reclassify approximately $79 million from its restructuring
provision to "Current portion of long-term debt" for these turbines (equal to
the costs incurred to date in constructing these turbines) in the fourth quarter
of 2002.
In November 2002, the Company made further direct unreimbursed payments to
vendors related to two turbines in the domestic equipment procurement facility.
Therefore, the equipment will no longer qualify for
75
off-balance sheet treatment and Mirant will be treating the equipment as if it
is the owner for financial reporting purposes. Consequently, Mirant will record
approximately a $31 million liability as "Other long-term debt" (equal to the
costs incurred to date in constructing these turbines) and $31 million will be
added to "Construction work in progress" in the fourth quarter of 2002.
Long-Term Service Agreements
We have entered into long-term service agreements for the maintenance and
repair by third parties of many of our combustion-turbine generating plants.
Generally these agreements may be terminated at little or no cost prior to the
shipment of the associated turbine. As of September 30, 2002, the maximum
termination amounts for long-term service agreements associated with completed
and shipped turbines were $642 million. As of September 30, 2002, the total
estimated commitments for long-term service agreements associated with turbines
already completed and shipped were approximately $805 million. These commitments
are payable over the course of each agreement's term. The terms range from ten
to twenty years. Estimates for future commitments for long-term service
agreements are based on the stated payment terms in the contracts at the time of
execution. These payments are subject to an annual inflationary adjustment.
As a result of the turbine cancellations as part of the March 2002 Plan,
the long-term service agreements associated with the canceled turbines will also
be cancelled. However, as stated above, canceling the long term service
agreements will result in little or no termination costs to us. We do not intend
to cancel long-term service agreements associated with turbines that have
already shipped. Consequently, the March 2002 Plan should not have an impact on
the long-term service agreement commitments disclosed above.
Obligations Under Energy Delivery and Purchase Commitments
Under the asset purchase and sale agreement for the PEPCO generating
assets, Mirant assumed and recorded net obligations of approximately $2.3
billion representing the estimated fair value (at the date of acquisition) of
out-of-market energy delivery and power purchase agreements, which consist of
five power purchase agreements ("PPAs") and two transition power agreements
("TPAs"). The estimated fair value of the contracts was derived using forward
prices obtained from brokers and other external sources in the market place
including brokers and trading platforms/exchanges such as the New York
Mercantile Exchange ("NYMEX") and estimated load information. The PPAs, which
are with parties unrelated to PEPCO, are for a total capacity of 735 MW and
expire over periods through 2021. The TPA agreements state that Mirant will sell
a quantity of megawatthours over the life of the contracts based on PEPCO's load
requirements. The TPA agreement related to load in Maryland expires in June
2004, while the TPA agreement related to load in the District of Columbia
expires in January 2005. The proportion of megawatthours supplied under the two
agreements are currently 64% and 36%, respectively. As actual megawatthours are
purchased or sold under these agreements, Mirant amortizes a ratable portion of
the obligation as an increase in revenues. For the three and nine months ended
September 30, 2002, the Company recorded as revenues, amortization of
approximately $120 million and $320 million, respectively, of the TPA
obligation. Approximately $8 million and $42 million, respectively, of
amortization of the PPA obligation was recorded as a reduction of the cost of
electricity purchased. As of September 30, 2002, the remaining obligations
recorded in the unaudited condensed consolidated balance sheet for the TPAs and
PPAs totaled $986 million and $492 million, respectively, of which $480 million
and $65 million, respectively, are classified as current. The remaining TPA
obligation will be amortized as an increase in revenue through January 2005. The
remaining PPA obligation will be amortized as a reduction of cost of energy
purchased through 2021. At September 30, 2002, the estimated commitments under
the PPA agreements were $1.58 billion based on the total remaining MW commitment
at contractual prices.
Other obligations of approximately $96 million related to other out of
market contracts are also included in the unaudited condensed consolidated
balance sheet.
76
Fuel Commitments
Mirant has a contract with BP whereby BP is obligated to deliver fixed
quantities of natural gas at identified delivery points. The negotiated purchase
price of delivered gas is generally equal to the monthly spot rate then
prevailing at each delivery point. Because this contract is based on the monthly
spot price at the time of delivery, Mirant has the ability to sell the gas at
the same spot price, thereby offsetting the full amount of its commitment
related to this contract. In July 2002, Mirant and BP restructured this
contract. The contract term has been extended to December 31, 2009, unless
terminated sooner. Mirant has the ability to reduce the purchase obligation on
this contract annually. Based on current contract volumes, the estimated minimum
commitment for the term of this agreement based on current spot prices is $2.2
billion as of September 30, 2002. The contract is now subject to the North
American Master Netting Agreement between Mirant and BP, dated December 1, 2001
(the "Master Netting Agreement") and a new collateral annex to the Master
Netting Agreement. Together, the Master Netting Agreement and Collateral Annex
provide that the amounts due to BP under the contract will be netted against
payments due between Mirant and BP under various other gas and power contracts,
and that collateral will be posted by one party to the other based on the net
amount of exposure.
We have fixed volumetric purchase commitments under fuel purchase and
transportation agreements totaling $509 million at September 30, 2002. These
agreements will continue to be in effect through 2012.
In addition, in April 2002, Mirant Mid-Atlantic entered into a long-term
fuel purchase agreement. The fuel supplier will convert coal feedstock received
at the Company's Morgantown facility into a synthetic fuel. Under the terms of
the agreement, Mirant Mid-Atlantic is required to purchase a minimum of 2.4
million tons of fuel per annum through December 2007. Minimum purchase
commitments became effective upon the commencement of the synthetic fuel plant
operation at the Morgantown facility in July 2002. The purchase price of the
fuel will vary with the delivered cost of the coal feedstock. Based on current
coal prices it is expected that the annual purchase commitment will be
approximately $100 million.
In July 2002, in conjunction with the commencement of Mirant
Mid-Atlantic's minimum synthetic fuel purchase commitments, Mirant Americas
Energy Marketing arranged for the synthetic fuel supplier to contract with the
coal supplier to purchase coal directly from the supplier. Mirant Americas
Energy Marketing's minimum coal purchase commitments are reduced to the extent
that the synthetic fuel supplier purchases coal under this arrangement. Since
the inception of this arrangement, the synthetic fuel supplier has purchased
100% of Mirant Americas Energy Marketing's minimum coal purchase commitment
thereby reducing the amount of coal purchased by Mirant Americas Energy
Marketing under the contracts, which are included in the fixed volumetric
purchase commitment of $509 million noted above.
Operating Leases
On December 19, 2000, in conjunction with the purchase of the PEPCO
assets, the Company, through Mirant Mid-Atlantic, entered into multiple
sale-leaseback transactions totaling $1.5 billion relating to the Dickerson and
the Morgantown baseload units and associated property. The terms of each lease
vary between 28.5 and 33.75 years. Mirant Mid-Atlantic is accounting for these
leases as operating leases. The Company's expenses associated with the
commitments under the Dickerson and Morgantown operating leases totaled
approximately $24 million for both the three months ended September 30, 2002 and
2001 and $74 million for both the nine months ended September 30, 2002 and 2001.
As of September 30, 2002, the total notional minimum lease payments for the
remaining life of the leases was approximately $2.8 billion. The lease
agreements contain covenants that restrict the Mirant Mid-Atlantic's ability to,
among other things, make dividend distributions, incur indebtedness, or sublease
the facilities.
Mirant Mid-Atlantic has an option to renew the lease for a period that
would cover up to 75% of the economic useful life of the facility, as measured
near the end of the lease term. However, the extended term of the lease will
always be less than 75% of the revised economic useful life of the facility.
77
Upon an event of default by the Company, the lessors are entitled to a
termination value payment as defined in the agreements. At September 30, 2002,
the termination value was approximately $1.4 billion, which, in general,
declines over time. Upon expiration of the original lease term, the termination
value will be $300 million.
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $33 million and $31 million during the three months ended
September 30, 2002 and 2001, respectively, and approximately $96 million and $94
million during the nine months ended September 30, 2002 and 2001, respectively.
As of September 30, 2002, estimated minimum rental commitments for
non-cancelable operating leases were $3.4 billion.
Mirant New England Guarantee
Mirant New England is required to sell electricity at fixed prices to
Cambridge and Commonwealth in order for them to meet their supply requirements
to certain retail customers. In April 2002, Mirant Corporation issued a
guarantee in the amount of $188 million for any obligations Mirant New England
may incur under its Wholesale Transition Service Agreement with Cambridge
Electric Light Company and Commonwealth Electric Company. Both the guarantee and
the agreement expire in February 2005.
SHAJIAO C TARIFF REDUCTION MATTER
On November 6, 2002, Mirant received a circular entitled, "Notice
Regarding the On-grid Tariff of Shajiao C Power Station" issued by the Guangdong
Provincial Price Bureau ("Pricing Bureau") to Guangdian ("Off-Taker") and
Shajiao C dated October 18, 2002 (Ref: Yue Jia (2002) No. 323) (the "Notice").
The tariff of Shajiao C, which had applied for the period January 1, 2002
to June 30, 2002, was RMB 450.11/MWH. Under the Notice, the tariff is adjusted
to RMB 346.8/MWH (exclusive of VAT) effective July 1, 2002. The Notice further
states that "According to the relevant regulation stated in the "State
Development Planning Commission Issued New Regulation for On-Grid Tariff
Control" and the principle of on-grid tariff adjustment as agreed by the
Provincial Government, Shajiao C on-grid tariff would be adjusted through
reducing the operation fee and Chinese shareholder profits on condition that the
profit return level of the foreign investor is guaranteed to remain unchanged."
On December 5, 2002, Mirant received a letter from the Pricing Bureau
which provides additional information as to the mechanism by which Mirant's
return is intended to be preserved, including a number of measures which will
reduce the returns to our joint-venture partner. This letter goes some way to
clarify the situation and Mirant intends to work with its partners in order to
finalize the resulting adjustments to the project economics and any effect this
has on Mirant. Notwithstanding this, due to the remaining ambiguity surrounding
the mechanism by which Mirant's return is to be preserved, Mirant is unable at
this time to quantify the impact that the actions described in the Notice will
have on its investment. The Off-Taker has indicated that it intends to pay
Shajiao C the tariff specified in the Notice rather than the contractual tariff
going forward, and this will reduce cash flow to Shajiao C and in turn may
impact Mirant's profit returns.
On December 20, 2002, certain subsidiaries of the Company entered into a
share sale agreement with China Resources Power Holdings Co. Ltd, to sell the
Company's indirect 33% interest in the 1,980 MW Shajiao C power project
(Guangdong Province, China) for $300 million. The Company expects to record a
gain on the sale. The transaction is expected to close by the end of 2002. In
connection with the sale, the Company expects to repay the approximately $254
million balance under the credit facility for Mirant Asia-Pacific. Repayment of
the credit facility will eliminate the existing prohibition on distributions
included therein.
LITIGATION AND OTHER CONTINGENCIES
Reference is made to Notes I and L to the financial statements filed as
part of this Form 10-Q relating to the following litigation matters and other
contingencies:
Litigation:
- Western Power Markets Investigations
- California Attorney General Litigation
- Defaults by SCE and Pacific Gas and Electric and the Bankruptcies of
Pacific Gas and Electric and the PX
78
- RMR Agreements
- Western Power Markets Price Mitigation and Refund Proceedings
- DWR Power Purchases
- California Rate Payer Litigation
- Shareholder Derivative Litigation
- Shareholder Litigation
- SEC Informal Investigation and U.S. Department of Justice and CFTC
Inquiries
- Enron Bankruptcy Proceedings
- State Line
- Edison Mission Energy Litigation
- Panda Brandywine, L.P. Power Purchase Agreement
- Environmental Information Requests
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.
CRITICAL ACCOUNTING ESTIMATES
The accounting policies described in the Company's Form 10-K and below are
viewed by management as "critical" because their correct application requires
the use of material estimates and because they have a material impact on its
financial results and position. To aid in the Company's application of these
critical accounting policies, management invests substantial human and financial
capital in the development and maintenance of models and other forecasting tools
and operates a robust environment of internal controls surrounding these areas
in particular. These tools, in part, facilitate the measurement of less liquid
financial instruments accounted for at fair value and ensure that such
measurements are applied consistently across periods. In addition, separate
tools enable management to forecast the Company's global income tax position to
ensure that tax charges are appropriate in each period.
Additionally, in 2002, the Company adopted SFAS Nos. 141, 142 and 144.
These new pronouncements, among other things, change the accounting model for
recognizing impairments of the carrying value of assets held for use and held
for sale, as well as the book value of goodwill and other intangible assets. The
Company's announced asset sale program, as well as overall conditions affecting
the Company and its sector, may materially impact the fair values of its
property plant and equipment, its construction work in progress, its investment
in suspended construction, its goodwill and its other intangible assets.
Although management does not currently believe that this reduction in fair value
will result in an impairment of its goodwill, the Company will complete the
annual assessment of the carrying values of its goodwill after completing its
annual financial planning process for 2003. This process provides management
with the best information from which to analyze the goodwill for impairment. If
the testing of goodwill results in impairment, the impairment charge will be
recorded in the fourth quarter of 2002. Currently, Mirant does not believe that
its "Investment in suspended construction" is subject to an impairment loss
under SFAS No. 144.
As discussed above, Mirant adopted SFAS No. 142 effective January 1, 2002.
SFAS No. 142 requires a two-step impairment analysis process. The first step of
the test compares the estimated fair value of a reporting unit to its net book
value to determine if there is potential goodwill impairment. If no impairment
is indicated in step one, the test is complete. If the net book value of the
reporting unit exceeds the fair value in step one, the second step of the
impairment test is required. Step two measures the amount of the impairment
charge by comparing the estimated fair value of the reporting unit goodwill to
its book value. The excess of the book value of goodwill to its estimated fair
value is recognized as an impairment charge. Management currently believes there
is no impairment of goodwill; however, Mirant's announced asset sale program and
the overall conditions impacting the energy sector may materially impact the
book value of goodwill. This assessment may result in impairments at one or more
subsidiaries that do not result in impairments in Mirant's consolidated
financial statements.
79
AUDIT COMMITTEE APPROVAL OF AUDIT AND NON-AUDIT SERVICES
Mirant's Audit Committee has approved all audit and audit related services
performed by its independent auditor, KPMG. In addition, the Audit Committee has
delegated to its Chair the ability to pre-approve other non-audit services by
KPMG, and the Audit Committee Chair has pre-approved certain tax work. The fees
for such non-audit work for 2002 are not currently expected to exceed $1.4
million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our energy marketing and risk management activities, we enter
into a variety of contractual commitments, such as forward purchase and sale
agreements, futures, swaps, and option contracts. These contracts generally
require future settlement and are either executed on an exchange or marketed as
OTC instruments. Contractual commitments have widely varying terms and have
tenors that range from a few days to a number of years, depending on the
instrument.
Our accounting and financial statement presentation of contractual
commitments depends on both the type and purpose of the contractual commitment
held or issued. We record all contractual commitments used for energy marketing
purposes, including those used to hedge marketing 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 operating 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, tenor, composition and diversification of positions held and
the absolute and relative levels of commodity prices, interest rates, as well as
market volatility of the commodity prices 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. 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 committee reviews and monitors compliance with risk management
policies that limit the amount of total net exposure during the stated periods.
Our Global Risk Control Officer is a member of the risk oversight committee,
which also includes senior commercial, legal and finance management personnel as
members, thereby ensuring that information is communicated to our senior
management and audit committee as needed.
Market risk is a function not only of the behavior of the prices and the
structure of the markets for the commodities in which we operate, but it also
depends on the nature and complexity of the energy marketing and risk management
transactions that we enter. Therefore, a risk exists that our models do not
fully capture the essential details of the contractual arrangements. In order to
ensure that the model risk is properly controlled through a process of
systematic model development, deployment and control, we created and utilize a
Model Risk Oversight Committee, as described earlier in the Contractual
Obligations and Commitments section. The Model Risk Oversight Committee sets the
guidelines for the model development, testing, implementation process and
responsibilities. The Risk Control organization and the Mid-Office have the
joint responsibility for ensuring proper oversight and reporting of the values
and risks of transactions employing different models of value and risk. 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
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tenor to evaluate our VaR exposure. A 95% confidence interval means there is a
5% probability that the actual loss will be greater than the estimated loss
under the VaR. Therefore, we expect that the loss in our portfolio value will
not exceed our VaR for 95% of the time. A holding period is the time period it
would take to liquidate our portfolio. Our VaR measurement takes into account
the relative liquidity of different commodity positions across different time
horizons and locations through the use of different holding periods. For very
liquid commodity positions, such as natural gas for delivery within one year, we
use a five-day holding period, whereas for a less liquid commodity position,
such as physical coal, we employ a three-month holding period. As a result, the
VaR that we measure, monitor and report on a daily basis is larger than what
would be obtained using a one-day holding period for all positions, commodities
and commitments. We also incorporate seasonally updated correlations between
commodity prices in arriving at the portfolio VaR.
For the nine months ended September 30, 2002, the average VaR, using
various holding periods and a 95% confidence interval, was $27 million and the
VaR as of September 30, 2002, was $40.1 million, compared to $49.3 million and
$30.8 million for the same periods in 2001. In order to enable comparison on a
common base with our peers in the sector, we also report the portfolio VaR
levels using a one-day holding period for all positions and commitments in our
portfolio. Based on a 95% confidence interval and employing a one-day holding
period for all positions, our portfolio VaR was $13.3 million at September 30,
2002 and the average over the nine months ended September 30, 2002 was $11.4
million, compared to $11.5 million and $16.5 million for the same periods in
2001. During the nine months ended September 30, 2002, the actual daily loss on
a fair value basis exceeded the corresponding one-day VaR calculation three
times, which falls within our 95% confidence interval. During the second quarter
of 2002, we implemented a new trading system to administer our natural gas
transactions. As a result, the natural gas component of our total VaR
calculation was held constant for a period of approximately 45 days. We believe
this was a reasonable estimate of our average VaR calculations for 2002 and we
would not have had additional instances of exceeding our VaR limits if the
natural gas portion of the total VaR calculation would not have been held flat.
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. In stress testing, we stress both the price and volatility curves
for the entire portfolio in 10% increments to determine the effects on the fair
value.
The fair values of our energy marketing and risk management assets
recorded in the unaudited condensed consolidated balance sheet at September 30,
2002, were comprised primarily of approximately 18% electricity and 81% natural
gas. The fair values of our energy marketing and risk management liabilities
recorded in the unaudited condensed consolidated balance sheet at September 30,
2002, were comprised primarily of approximately 15% electricity and 83% natural
gas. Because of the expected contraction in our natural gas trading and
marketing activities, the percentage of natural gas positions would be expected
to decline.
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, energy companies and financial institutions. To examine and manage
credit risk, we look at credit risk from our stance as being exposed to
potential default by our counterparties. 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 by us, if any,
was 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 use 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. We try to manage the portfolio of our positions such that the average
credit quality of our portfolio falls inside an authorized range. We use
published ratings of counterparties to guide us in the process of setting credit
levels, risk limits and contractual arrangements including master netting
agreements. Where external ratings are not available, we conduct internal
assessments of counterparties. The average credit quality is monitored on a
regular basis and reported
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to the risk oversight committee on a periodic basis together with steps
initiated to bring credit exposures into line within the authorized range. The
weighted average credit rating of the counterparties, based on outstanding
balances and management's internal assessment, included in the net fair value of
our energy marketing and risk management assets was between BBB and BBB+ at
September 30, 2002.
We also monitor the concentration of credit risk from various positions,
including contractual commitments. Credit concentration risk exists when groups
of counterparties have similar business characteristics, and/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 concentration risk on both
an individual basis and a group counterparty basis.
In addition to continuously monitoring our credit exposure to our
counterparties, we also take appropriate steps to limit the exposures, initiate
actions to lower credit exposure and take credit reserves as appropriate. The
process of establishing and monitoring credit reserves is based on a standard
methodology of employing default probabilities to the current and potential
exposures by both settled and open contracts.
As of September 30, 2002, the CAISO owed Mirant approximately $238
million, which 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 energy marketing and risk management and derivative
hedging activities and netted against offsetting payables and posted collateral,
as appropriate. Our overall exposure to credit risk may be impacted, either
positively or negatively, because our counterparties may be similarly affected
by changes in economic, regulatory or other conditions.
Interest Rate Risk
Mirant's policy is to manage its exposure to interest rates by 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. Swaps that fix the interest rate exposure of variable-rate
debt and qualify for hedge treatment are treated as cash flow hedges, where 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 over the life of the swaps. Gains and losses resulting from the
termination of qualifying cash flow hedges prior to their stated maturities are
recognized ratably over the original remaining life of the hedging instrument,
provided the underlying hedged transactions are still probable. Otherwise, the
gains and losses will be recorded currently in earnings. Swaps that hedge
underlying fixed-rate debt and qualify for hedge treatment are treated as fair
value hedges, where the changes in the fair value of gains and losses of the
swaps are recognized currently in interest expense together with the changes in
the fair value of the hedged debt. Mirant currently only utilizes cash flow
hedges.
Foreign Currency Hedging
From time to time, 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 reflected in OCI,
net of tax, and net of the translation effects.
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. From time to time, Mirant utilizes
cross-currency swaps that not only offset the effect of exchange rate
fluctuations on the hedged principal amount of the foreign currency denominated
debt, but also fix the interest expense arising from that hedged debt. 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. When these hedging strategies qualify as cash flow hedges,
the gains and losses on the derivatives are deferred in OCI, net
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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.
Interest Rate and Currency Derivatives
The interest rates noted in the following table represent the range of
fixed interest rates that Mirant pays on the related interest rate swaps. On all
of these interest rate swaps, Mirant receives floating interest rate payments at
LIBOR. The currency derivatives mitigate Mirant's exposure arising from certain
foreign currency transactions, such as cross border sales.
YEAR OF MATURITY NUMBER OF NOTIONAL UNREALIZED
TYPE OR TERMINATION INTEREST RATES COUNTERPARTIES AMOUNT (LOSS) GAIN
---- -------------- -------------- -------------- ------ -----------
(IN MILLIONS)
Interest rate swaps.... 2003-2012 3.85%-7.12% 3 $549 $(74)
Currency swaps ........ 2003 -- 1 CAD$8 (1)
----
$(75)
====
CAD - Denotes Canadian dollar
Canadian dollar contracts with a notional amount of CAD$266 million are
included in fair value of energy marketing and risk management liabilities
because hedge accounting criteria are not met. As of September 30, 2002, the
unrealized loss was $3 million.
The unrealized gain/loss for interest rate swaps is determined based on
the estimated amount that Mirant would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The unrealized
gain/loss for currency forwards is determined based on current foreign exchange
rates.
ITEM 4. CONTROLS AND PROCEDURES
Effective April 1, 2002, the Company implemented a new Information
Technology system ("ENDUR") for its gas trading and marketing activities in
North America. Because of ENDUR's improved capabilities over the legacy systems,
management views the implementation of ENDUR as a significant change in internal
controls. In addition, the Company recently modified its power trading and
marketing IT system to improve reporting of realized and unrealized income
associated with power transactions.
The Company's independent auditors assessed the Company's internal
controls of its North American energy marketing and risk management operations
as part of the interim review for the second quarter. The Company received
detailed process improvement recommendations during October 2002 from its
independent auditors which address internal control deficiencies in existence at
June 30, 2002, the most significant of which relate to the Company's systems and
processes and include:
(i) Inadequate actualization analysis, documentation and internal
communication;
(ii) Inadequate reconciliation of the risk report and general
ledger;
(iii) Inadequate systems integration and data reconciliation; and
(iv) Untimely balance sheet discrepancy resolution.
The Company's independent auditors advised the Audit Committee that these
internal control deficiencies constitute reportable conditions and,
collectively, a material weakness as defined in Statement on Auditing Standards
No. 60 ("SAS No. 60"). The Company has assigned the highest priority to the
short-term and long-
83
term correction of these internal control deficiencies and has made significant
progress. Management has discussed its proposed actions with the Audit Committee
and its independent auditors. The Company has implemented corrective actions to
mitigate the risk that these deficiencies could lead to material misstatements
in the Company's current financial statements. In addition, the Company has
performed additional procedures to enable the completion of the independent
auditors' review of the Company's interim financial statements, despite the
presence of control weaknesses as noted above.
The following corrective actions have been implemented:
(i) Additional management oversight and detailed reviews;
(ii) Reports submitted monthly and summarized quarterly for the CFO
and CEO certifying that the balance sheet reconciliations have
been completed, the accounts appropriately adjusted and any
discrepancies listed; and
(iii) Involvement of the Company's internal audit personnel to
monitor certain critical monthly and quarterly closing
processes.
The following corrective actions are in the process of being implemented:
(i) Additional training and replacement of certain individuals;
(ii) Use of outside resources to supplement Company employees in
evaluating and implementing the internal control
recommendations;
(iii) Evaluation of accounting organization structure to align roles
and responsibilities with process and control changes; and
(iv) Re-evaluation of the role and resources devoted to internal
auditing to assure compliance with accounting requirements.
Longer-term corrective actions will include:
(i) Implementation of the ENDUR system for power transactions in
the second quarter of 2003;
(ii) Evaluation in the third quarter of 2003 of the feasibility of
automated interfaces between the Company's various systems,
including risk management, scheduling and general ledger;
(iii) Process mapping and evaluation in the first quarter of 2003 to
assure timely review and reconciliation between risk
management systems and the Company's accounting systems;
(iv) Re-evaluation in the first quarter of 2003 of the Chief Risk
Officer's duties to assure adequate controls; and
(v) Re-evaluation in the first quarter of 2003 of the Company's
Risk Oversight Committee's role and focus to include monthly
reporting and tracking of progress on the completion of all
controls enhancements and to ensure controls are appropriate
for the ongoing size and level of activities in the business.
Separately, the Company expects that the anticipated significant reduction
in its physical gas volumes and longer-term, structured transactions will have
an additional mitigating effect on the impact of the identified controls
weaknesses.
84
Within the 90-day period immediately preceding the filing of this report,
an evaluation was carried out under the supervision and with the participation
of the Company's management, including its Chief Executive Officer and its Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective, except as discussed above. Further, the
Chief Executive Officer and Chief Financial Officer reviewed in detail the
corrective and mitigating actions being taken regarding the deficiencies noted
in the Mirant Internal Control Assessment performed by the Company's independent
auditors. No significant changes were made to the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of this evaluation, except for the implementation of the corrective
actions noted above. The Company continues to evaluate the effectiveness of its
overall controls and procedures and will take such further actions as dictated
by such continuing reviews.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussions concerning the following legal matters are hereby
incorporated by reference to Notes I and L to the consolidated financial
statements that are a part of this quarterly report:
- Western Power Markets Mitigation and Refund Proceedings
- California Attorney General Litigation
- California Rate Payer Litigation
- Shareholder Litigation
- Environmental Information Requests
- Shareholder Derivative Litigation
- SEC Informal Investigation, U.S. Department of Justice and CFTC Inquiries
With respect to each of the preceding matters, we cannot currently
determine the outcome of the proceedings or the amounts of any potential losses
from such proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
15 KPMG Awareness Letter to Mirant Corporation
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, we filed a Current Report on Form
8-K dated July 3, 2002. Item 7 was reported and no financial statements were
filed.
During the quarter ended September 30, 2002, we filed a Current Report on Form
8-K dated July 8, 2002. Item 5 was reported and no financial statements were
filed.
During the quarter ended September 30, 2002, we filed a Current Report on Form
8-K dated August 14, 2002. Item 5 was reported and no financial statements were
filed.
85
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/ Raymond D. Hill
-------------------
Raymond D. Hill
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: December 20, 2002
CERTIFICATIONS
I, Marce Fuller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mirant Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 20, 2002 /s/ S. Marce Fuller
----------------------------------
S. Marce Fuller
President, Chief Executive Officer
(Principal Executive Officer)
I, Raymond Hill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mirant Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 20, 2002 /s/ Raymond D. Hill
---------------------------------
Raymond D. Hill
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)