================================================================================
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 March 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
MIRANT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 58-2056305
--------------------------------- ----------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1155 Perimeter Center West, Suite 100, Atlanta, Georgia 30338
--------------------------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
(678) 579-5000
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
__________
The number of shares outstanding of the Registrant's Common Stock, par
value $0.01 per share, at May 6, 2002 was 401,976,330.
Mirant Corporation and Subsidiaries
INDEX
For the Quarterly Period Ended March 31, 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 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Stockholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 50
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 51
Signatures
i
DEFINITIONS
TERM MEANING
------------------------------------- -----------------------------------------
APB Accounting Principles Board
Bewag Bewag AG
BP p.l.c. BP
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.
Hyder Hyder Limited
LIBOR London Interbank Offering Rate
Mirant Americas Energy Marketing Mirant Americas Energy Marketing, L. P.
Mirant Americas Energy Capital Mirant Americas Energy Capital, LP
Mirant Americas Generation Mirant Americas Generation, LLC
Mirant Asia-Pacific Mirant Asia-Pacific Ventures, Inc.
Mirant 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
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
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
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.
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The information presented in this 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:
o legislative and regulatory initiatives regarding deregulation, regulation
or restructuring of the electric utility industry;
o the extent and timing of the entry of additional competition in the markets
of our subsidiaries and affiliates;
o our pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;
o state, federal and other rate regulations in the United States and in
foreign countries in which our subsidiaries and affiliates operate;
o changes in or application of environmental and other laws and regulations
to which we and our subsidiaries and affiliates are subject;
o political, legal and economic conditions and developments in the United
States and in foreign countries in which our subsidiaries and affiliates
operate;
o financial market conditions and the results of our financing efforts;
o changes in market conditions, including developments in energy and
commodity supply, volume and pricing and interest rates;
o weather and other natural phenomena;
o performance of our projects undertaken and the success of our efforts to
invest in and develop new opportunities;
o developments in the California power markets, including, but not limited
to, governmental intervention, deterioration in the financial condition of
our counterparties, default on receivables due and adverse results in
current or future litigation;
o 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;
o the direct or indirect effects on our business resulting from the financial
difficulties of Enron, or other competitors of Mirant, including, but not
limited to, their effects on liquidity in the trading and power industry,
and its 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;
o the direct or indirect effects on our business of a 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; and
o other factors discussed in this Form 10-Q and in other reports (including
our Form 10-K filed on March 11, 2002, as amended by Form 10-K/A, filed on
March 11, 2002) filed from time to time with the SEC.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We expressly disclaim a duty to update
any of the forward-looking statements contained herein.
2
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months
Ended March 31,
2002 2001
------------- --------------
(in millions, except
per share data)
Operating Revenues $ 7,037 $ 8,168
------------- --------------
Operating Expenses:
Cost of fuel, electricity and other products 6,465 7,381
------------- --------------
Gross Margin 572 787
------------- --------------
Other Operating Expenses:
Depreciation and amortization 79 85
Maintenance 32 27
Selling, general and administrative 155 296
Impairment loss - 4
Restructuring charge (Note G) 562 -
Other 107 99
------------- --------------
Total other operating expenses 935 511
------------- --------------
Operating (Loss) Income (363) 276
------------- --------------
Other Income (Expense), net:
Interest income 17 52
Interest expense (120) (143)
Gain on sales of assets, net (Note G) 291 -
Equity in income of affiliates 79 79
Receivables recovery (Note A) 29 10
Other, net (23) (3)
------------- --------------
Total other income (expense), net 273 (5)
------------- --------------
(Loss) Income From Continuing Operations
Before Income Taxes and Minority Interest (90) 271
(Benefit) Provision for Income Taxes (61) 88
Minority Interest 15 14
------------- --------------
(Loss) Income From Continuing Operations (44) 169
------------- --------------
Income from Discontinued Operations, net
of tax provision of $2 and $1
in 2002 and 2001, respectively 2 11
------------- --------------
Net (Loss) Income $ (42) $ 180
============= ==============
Earnings Per Share:
Basic $ (0.10) $ 0.53
Diluted: $ (0.10) $ 0.52
The accompanying notes are an integral part of these condensed consolidated
statements.
3
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At March 31,
2002 At December 31,
ASSETS: (Unaudited) 2001
------------------ ----------------------
(in millions)
Current Assets:
Cash and cash equivalents $ 906 $ 836
Receivables:
Customer accounts, less provision for uncollectibles
of $153 and $159 for 2002 and 2001, respectively 1,934 2,131
Other, less provision for uncollectibles
of $21 and $32 for 2002 and 2001, respectively 583 858
Notes receivable 64 24
Energy marketing and risk management assets (Note F) 916 1,458
Derivative hedging instruments (Notes C and F) 281 348
Deferred income taxes 374 364
Inventories 343 358
Assets held for sale (Note I) 191 193
Other 297 380
------------------ ----------------------
Total current assets 5,889 6,950
------------------ ----------------------
Property, Plant and Equipment:
Property, plant and equipment 4,468 4,328
Less accumulated provision for depreciation and depletion (358) (329)
------------------ ----------------------
4,110 3,999
Leasehold interests, net of accumulated amortization
of $317 and $297 for 2002 and 2001, respectively 1,731 1,751
Construction work in progress 1,977 1,922
------------------ ----------------------
Total property, plant and equipment, net 7,818 7,672
------------------ ----------------------
Noncurrent Assets:
Investments (Note G) 1,078 2,244
Notes and other receivables, less provision for uncollectibles
of $99 and $116 for 2002 and 2001, respectively 351 287
Energy marketing and risk management assets (Note F) 608 709
Goodwill, net of accumulated amortization
of $295 and $277 for 2002 and 2001, respectively (Notes A and B) 3,481 3,245
Other intangible assets, net of accumulated amortization
of $47 and $63 for 2002 and 2001, respectively (Notes A and B) 597 860
Derivative hedging instruments (Notes C and F) 210 136
Deferred income taxes 335 402
Other 226 249
------------------ ----------------------
Total noncurrent assets 6,886 8,132
------------------ ----------------------
Total assets $ 20,593 $ 22,754
================== ======================
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At March 31,
2002 At December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: (Unaudited) 2001
------------------ ----------------------
(in millions, except share data)
Current Liabilities:
Short-term debt $ 53 $ 55
Current portion of long-term debt (Note E):
Sual and Pagbilao project loans 1,118 1,201
Mirant Asia-Pacific 14 792
Mirant Holdings Beteiligungsgesellschaft (Note G) - 566
Other 38 45
Accounts payable and accrued liabilities 2,463 2,722
Taxes accrued 61 153
Energy marketing and risk management liabilities (Note F) 940 1,409
Obligations under energy delivery and purchase commitments (Note H) 597 635
Derivative hedging instruments (Notes C and F) 251 327
Accrued restructuring charges 267 -
Liabilities held for sale (Note I) 25 25
Other 172 151
------------------ ----------------------
Total current liabilities 5,999 8,081
------------------ ----------------------
Noncurrent Liabilities:
Notes payable (Note E) 3,989 3,751
Other long-term debt (Note E) 2,027 2,073
Energy marketing and risk management liabilities (Note F) 386 624
Deferred income taxes 105 94
Obligations under energy delivery and purchase commitments (Note H) 1,285 1,376
Derivative hedging instruments (Notes C and F) 129 88
Other 590 542
------------------ ----------------------
Total noncurrent liabilities 8,511 8,548
------------------ ----------------------
Minority Interest in Subsidiary Companies 271 282
Company Obligated Mandatorily Redeemable Securities of a
Subsidiary Holding Solely Parent Company Debentures 345 345
Commitments and Contingent Matters (Notes H and K)
Stockholders' Equity:
Common stock, $.01 par value, per share 4 4
Authorized -- 2,000,000,000 shares
Issued -- March 31, 2002: 401,495,567 shares;
-- December 31, 2001: 400,880,937 shares
Treasury -- March 31, 2002: 100,000 shares
-- December 31, 2001: 100,000 shares
Additional paid-in capital 4,892 4,886
Retained earnings 687 729
Accumulated other comprehensive loss (114) (119)
Treasury stock, at cost (2) (2)
------------------ ----------------------
Total stockholders' equity 5,467 5,498
------------------ ----------------------
Total liabilities and stockholders' equity $ 20,593 $ 22,754
================== ======================
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
5
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury Comprehensive
Stock Capital Earnings Income (Loss) Stock (Loss) Income
------------- ------------- ------------- ----------------- --------------- ------------------------
(in millions)
Balance, December 31, 2001 $ 4 $ 4,886 $ 729 $ (119) $ (2)
Net loss - - (42) - - $ (42)
Other comprehensive income - - - 5 - 5
(Note C)
-----------------
Comprehensive loss $ (37)
=================
Issuance of common stock - 6 - - -
------------- ------------- ------------- ----------------- --------------
Balance, March 31, 2002 $ 4 $ 4,892 $ 687 $ (114) $ (2)
============= ============= ============= ================= ==============
The accompanying notes are an integral part of these condensed consolidated
statements.
6
MIRANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months
Ended March 31,
2002 2001
------------- -------------
(in millions)
Cash Flows from Operating Activities:
Net (loss) income $ (42) $ 180
------------- -------------
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Equity in income of affiliates (79) (76)
Dividends received from equity investments 6 16
Depreciation and amortization 88 92
Obligations under energy delivery and purchase commitments (129) (32)
Energy marketing and risk management activities, net (64) (273)
Restructuring charge 560 -
Deferred income taxes 63 86
Gain on sales of assets (291) -
Minority interest 9 14
Other, net 17 19
Changes in certain assets and liabilities, excluding effects
from acquisitions:
Receivables, net 433 778
Other current assets 74 68
Accounts payable (283) (1,028)
Taxes accrued (96) 137
Other current liabilities 19 (31)
Other, net (10) (61)
------------- -------------
Total adjustments 317 (291)
------------- -------------
Net cash provided by (used in) operating activities 275 (111)
------------- -------------
Cash Flows from Investing Activities:
Capital expenditures (510) (260)
Cash paid for acquisitions (22) (201)
Issuance of notes receivable (102) (62)
Repayments on notes receivable 40 52
Disposal of Southern Company affiliates and other companies - (77)
Proceeds from the sale of investments, net 1,636 -
Other (18) -
------------- -------------
Net cash provided by (used in) investing activities 1,024 (548)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 1,082 75
Repayment of long-term debt (2,358) (220)
Proceeds from issuance of common stock 6 -
Capital contributions from minority interests 3 -
Payment of dividends to minority interests (2) (1)
Issuance (repayment) of short-term debt, net (4) 884
Change in debt service reserve fund 44 52
------------- -------------
Net cash (used in) provided by financing activities (1,229) 790
------------- -------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents - 18
------------- -------------
Net Increase in Cash and Cash Equivalents 70 149
Cash and Cash Equivalents, beginning of period 836 1,049
------------- -------------
Cash and Cash Equivalents, end of period $ 906 $ 1,198
============= =============
Supplemental Cash Flow Disclosures:
Cash paid for interest, net of amounts capitalized $ 87 $ 170
(Refunds received) cash paid for income taxes $ (90) $ 48
Business Acquisitions:
Fair value of assets acquired $ 22 $ 552
Less cash paid 22 201
------------- -------------
Liabilities assumed $ - $ 351
============= =============
The accompanying notes are an integral part of these condensed consolidated
statements.
7
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
Basis of Accounting. These unaudited condensed consolidated financial statements
should be read in conjunction with Mirant's audited 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. Management believes that the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring items, necessary for a fair statement of results for the interim
periods presented. Certain prior-year amounts have been reclassified to conform
with current-year financial statement presentation. The results for interim
periods are not necessarily indicative of the results for the entire year.
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. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and, generally,
adopts a non-amortization and periodic impairment-analysis approach to goodwill
and indefinitely-lived intangibles. SFAS No. 142 is effective for the Company's
2002 fiscal year or for business combinations initiated after 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. On 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 three months
ended March 31, 2002, Mirant completed the transitional impairment test required
by SFAS No. 142 and did not record any impairments of goodwill. Net income and
earnings per share (basic and diluted) for the three months ended March 31, 2001
have been adjusted below to exclude amortization related to goodwill and trading
rights recognized in business combinations (in millions, except per share data).
Earnings Per Share
Net Income Basic Diluted
---------- ------ -------
As reported.......................................... $ 180 $ 0.53 $ 0.52
Effect of goodwill and trading rights amortization... 19 0.06 0.05
----- ------ ------
As adjusted.......................................... $ 199 $ 0.59 $ 0.57
===== ====== ======
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 amends
accounting and reporting standards for the disposal of segments of a business
and addresses various issues related to the accounting for impairments or
disposals of long-lived assets. Mirant adopted SFAS No. 144 on January 1, 2002.
Prior to SFAS No. 144,
8
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the disposition of State Line would not have been classified as a discontinued
operation. Because SFAS No. 144 expanded the breadth of transactions subject to
discontinued operations classification, the disposition of State Line is now
required to be presented as a discontinued operation (Note I).
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.
Concentration of Revenues and Credit Risk. For the three months ended March 31,
2002, revenues earned from a single customer did not exceed 10% of Mirant's
total operating revenues. As of March 31, 2002, no amounts owed from a single
customer 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. For the three months ended March 31, 2001, revenues earned from
Enron through energy marketing and risk management operations approximated 14%
of Mirant's total operating revenues.
Receivables Recovery. During the three months ended March 31, 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 three months ended March 31, 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 with whom the receivables were secured.
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. For the three months
ended March 31, 2002 and 2001, the Company incurred $158 million and $150
million, respectively, in interest costs, of which $38 million and $7 million,
respectively, were capitalized and included in construction work in process. The
remaining interest was expensed during the period.
B. Goodwill and Other Intangible Assets
For the three months ended March 31, 2002, no goodwill was acquired,
impaired or written off. As of March 31, 2002, the North America Group's
goodwill was $2.03 billion and the International Group's goodwill was $1.45
billion.
All of Mirant's other intangible assets are subject to amortization. The
other intangible assets are being amortized on a straight-line basis over the
related useful lives, up to 40 years. On January 1, 2002, trading rights related
to business combinations were reclassified to goodwill. The reclassification
decreased other
9
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
intangible assets by $227 million, net of accumulated amortization of $18
million. During the three months ended March 31, 2002, Mirant transferred $40
million in development rights to construction work in process. Intangible asset
amortization expense for the three months ended March 31, 2002 was $11 million.
The components of other intangible assets acquired as part of a business
combination or an asset acquisition as of March 31, 2002 and December 31, 2001
were as follows (in millions):
March 31, 2002 December 31, 2001
-------------------------------- -------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------- -------------- ----------------- -------------------
Trading rights.................... $ 207 $ (29) $ 453 $ (45)
Development rights................ 258 (7) 299 (9)
Emissions allowances.............. 131 (5) 131 --
Other intangibles................. 48 (6) 40 (9)
------- ------- ------ -----
Total other intangible assets. $ 644 $ (47) $ 923 $ (63)
======= ====== ====== =====
C. Comprehensive Income
Comprehensive income includes unrealized gains and losses on certain
derivatives that qualify as cash flow hedges and hedges of net investments, as
well as the translation effects of foreign net investments. The effect of other
comprehensive income is set forth in the accompanying unaudited condensed
consolidated statements of stockholders' equity.
Components of accumulated other comprehensive loss consisted of the following
(in millions):
Balance, December 31, 2001...................................... $(119)
Other comprehensive income for the period:
Net change in fair value of derivative hedging instruments,
net of tax effect of $23...................................... 55
Reclassification to earnings, net of tax effect of $21 (Note F)(33)
Cumulative translation adjustment ............................ (12)
Share of affiliates' OCI...................................... (5)
-----
Other comprehensive income...................................... 5
-----
Balance, March 31, 2002........................................ $(114)
=====
The $114 million balance of other comprehensive loss at March 31, 2002
includes the impact of $95 million related to interest hedges and interest rate
swap breakage costs and $123 million of currency translation losses, offset by
$104 million of gains on commodity price management hedges.
Mirant estimates that $27 million ($52 million of commodity hedge gains and
$25 million of interest related losses) of net derivative after-tax gains
included in OCI as of March 31, 2002 will be reclassified into earnings or
otherwise settled within the next twelve months as certain forecasted
transactions relating to commodity contracts, foreign denominated contracts and
interest payments are realized.
D. Earnings Per Share
Mirant calculates basic earnings per share by dividing the income available
to common stockholders by the weighted average number of common shares
outstanding. The following table shows the computation of basic earnings per
share for the three months ended March 31, 2002 and 2001 (in millions, except
per share data). Diluted earnings per share gives effect to stock
options, as well as the assumed conversion of
10
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
convertible trust preferred securities and related after-tax interest expense
addback to net income of approximately $4 million for both the three months
ended March 31, 2002 and 2001, respectively. Because of the loss during the
quarter ended March 31, 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
March 31,
2002 2001
-------- --------
Income (loss) from continuing operations........... $ (44) $ 169
Discontinued operations............................ 2 11
-------- --------
Net income (loss).................................. $ 42 $ 180
======== ========
Basic
Weighted average shares outstanding ............... 401.1 338.7
Earnings per share from:
Continuing operations....................... $ (0.11) $ 0.50
Discontinued operations..................... 0.01 0.03
-------- -------
Net (loss) income........................... $ (0.10) $ 0.53
======== =======
Diluted
Weighted average shares outstanding .............. 338.7
Shares due to assumed exercise of stock
options and equivalents ......................... 2.9
Shares due to assumed conversion of trust
preferred securities............................ 12.5
------
Adjusted shares................................... 354.1
======
Earnings per share from:
Continuing operations........ $ (0.11) $ 0.49
Discontinued operations...... 0.01 0.03
-------- ------
Net (loss) income $ (0.10) $ 0.52
======== ======
E. Debt
At March 31, 2002, Mirant and its subsidiaries had revolving credit
facilities with various lending institutions totaling approximately $3.19
billion. At March 31, 2002, amounts borrowed under such facilities (including
drawn amounts and letters of credit) totaled $2.15 billion and are comprised of
the following: $23 million drawn under the facility expiring in 2002, $975
million drawn under facilities expiring in 2003 (which included amounts
outstanding under Mirant Corporation's 364-Day Credit Facility with an initial
termination date of July 2002) and $1.15 billion drawn under the facilities
expiring in 2004 and beyond. Under its $1.125 billion 364-Day Credit Facility,
Mirant Corporation may elect to convert all revolving credit advances
outstanding on or before the July 2002 termination date thereunder into a term
loan maturing not later than the first anniversary of the termination date.
Except for the credit facility of Mirant Canada Energy Marketing, an indirect
wholly owned subsidiary of Mirant Corporation, bowerings under these these
facilities are recorded as long-term debt in the unaudited condensed
consolidated balance sheet. The credit facilities generally require payment of
commitment fees based on the unused portion of the commitments or the
maintenance of compensating balances with the banks. The schedule below
summarizes the revolving credit facilities held by Mirant Corporation and its
subsidiaries as of March 31, 2002 (in millions).
Drawn Amount
Facility including Letters Amount
Company Amount of Credit Available
------------------------------------------- ------------ ------------------- -------------
Mirant Corporation *....................... $ 2,700 $ 1,904 $ 796
Mirant Americas Generation................. 300 73 227
Mirant Canada Energy Marketing............. 44 23 21
Mirant Americas Energy Capital............. 150 150 -
------- ------- ------
Total.................................... $ 3,194 $ 2,150 $1,044
======= ======= ======
* The $1,904 million drawn amount includes $929 million of letters of
credit outstanding.
11
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Each of Mirant's credit facilities contain various covenants including,
among other things, (i) limitations on dividends, redemptions and repurchases of
capital stock, (ii) limitations on the incurrence of indebtedness and liens, and
(iii) limitations on the sale of assets. 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 March 31, 2002, there were no events of
default under such credit facilities.
Mirant Canada Energy Marketing has extended its credit facility to June
2002. The revolving credit facility of approximately $44 million (denominated as
70 million Canadian dollars) had outstanding borrowings of $23 million, at an
interest rate of 4.75% at March 31, 2002. The credit facility is guaranteed by
Mirant Corporation.
In February 2002, Perryville, the lenders under its credit facility, Mirant
Americas Energy Marketing and Mirant Corporation 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 amended the ratings threshold in the tolling
agreement with respect to Mirant Corporation to at least BB/S&P and Ba2/Moody's,
relating to Mirant Americas Energy Marketing's obligation to post a letter of
credit or other credit support as described in Note H, and (iv) the parties
agreed to certain additional terms in support of the syndication of the credit
facility. Mirant Energy Marketing and Mirant will continue to be obligated under
the tolling agreement and guaranty, respectively, after the closing of the
planned sale of Mirant's interest in Perryville (Note G).
In March 2002, Mirant Americas Energy Capital transferred the borrowing
base assets under its credit facility to a special purpose vehicle and granted
security interests in such assets. The special purpose vehicle is consolidated
with Mirant.
As part of its strategic restructuring, Mirant negotiated certain deferrals
under its equipment purchase facility. Because the term of the deferred
fabrication period for certain turbines exceeds the term of the facility, Mirant
will be obligated under the terms of the facility to purchase these turbines out
of the facility. Consequently, Mirant has included a $35 million liability (and
related construction work in progress) for these turbines on its unaudited
condensed consolidated balance sheet.
In February 2002, Mirant completed the sale of its 44.8% indirect interest
in Bewag for approximately $1.63 billion. Mirant received approximately $1.06
billion in net proceeds after repayment of approximately $550 million in debt
associated with its Bewag investment. The net proceeds were used for general
corporate purposes, capital expenditures and repayment of certain drawn balances
on revolving credit facilities.
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 (Note K).
12
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. 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, "Accounting for Derivative
Instruments and Hedging Activities" and EITF No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities."
Accordingly, they are reflected at fair value in the accompanying unaudited
condensed consolidated balance sheets. The net changes in their market values
are recognized in income in the period of change.
The energy marketing and risk management operations engage 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, including
derivatives used for these purposes, 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 March 31, 2002 was
2.7 years. The net notional amount, or net open position, of the energy
marketing and risk management assets and liabilities at March 31, 2002 was
approximately 1 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 unaudited condensed consolidated balance sheets.
13
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The fair values and average values of Mirant's energy marketing and risk
management assets and liabilities as of March 31, 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 March 31, Average March 31,
Value 2002 Value 2002
--------------- -------------- -------------- ------------
Energy commodity instruments:
Electricity............................ $ 566 $ 504 $ 466 $ 408
Natural gas............................ 903 991 854 889
Crude oil.............................. 7 3 8 3
Other.................................. 45 26 48 26
------- --------- -------- -------
Total................................ $ 1,521 $ 1,524 $ 1,376 $ 1,326
======= ========= ======== =======
Derivative Hedging Instruments
Mirant uses derivative instruments to manage exposures arising from changes
in interest rates, commodity prices and foreign currency exchange rates.
Mirant's objectives for holding derivatives are to minimize the risks using the
most effective methods to eliminate or reduce the impacts of these exposures.
Derivative gains and losses arising from cash flow hedges that are included
in OCI are reclassified into earnings in the same period as the settlement of
the underlying transaction. During the three months ended March 31, 2002, $65
million of pre-tax derivative net gains were reclassified to operating income,
and $11 million of pre-tax derivative net losses were reclassified to interest
expense, as follows (in millions):
Reclassified to operating income....... $ 65
Reclassified to interest expense....... (11)
Tax provision.......................... 21
------
Net reclassification to earnings (Note C) $ 33
======
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 location may be used to hedge a
risk at a different 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 months ended March 31, 2002, $8 million of pre-tax losses arising from
hedge ineffectiveness were recognized in other expense. The maximum term over
which Mirant is hedging exposures to the variability of cash flows is through
2012.
Interest Rate Hedging
Mirant's policy is to manage interest expense using a combination of fixed-
and variable-rate debt. To manage this mix in a cost-efficient manner, Mirant
enters into interest rate swaps in which it agrees to exchange, at specified
intervals, the difference between fixed- and variable-interest amounts
calculated by reference to agreed-upon notional principal amounts. These swaps
are designated to hedge underlying debt obligations. For qualifying hedges, the
changes in the fair value of gains and losses of the swaps are deferred in OCI,
net of tax, and the interest rate differential is reclassified from OCI to
interest expense as an
14
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
adjustment over the life of the swaps. Gains and losses resulting from the
termination of qualifying hedges prior to their stated maturities are recognized
ratably over the 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.
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, the gains and losses are deferred in OCI until the period that
they were being used to hedge. The gains and losses are then recognized in
earnings in the same period as the settlement of the underlying physical
transaction.
At March 31, 2002, Mirant had a net commodity derivative hedging asset of
approximately $111 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 March 31, 2002, these contracts related to periods through 2010. The net
notional amount, or net open position, of the derivative hedging instruments at
March 31, 2002 was 5 million equivalent megawatt-hours. The notional amount is
indicative only of the volume of activity and not of the amount exchanged by the
parties to the financial instruments. Consequently, this amount is not a measure
of market risk.
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 hedging instruments on the unaudited condensed consolidated balance
sheet.
Foreign Currency Hedging
Mirant uses cross-currency swaps and currency forwards to hedge its net
investments in certain foreign subsidiaries. Gains or losses on these
derivatives designated as hedges of net investments are reflected in OCI, net of
tax, and are offset against the translation effects reflected in OCI, net of
tax.
Mirant also utilizes currency forwards intended to offset the effect of
exchange rate fluctuations on forecasted transactions arising from contracts
denominated in a foreign currency. In addition, Mirant utilizes cross-currency
swaps that offset the effect of exchange rate fluctuations on foreign currency
denominated debt and fixes the interest rate exposure. Certain other assets are
exposed to foreign currency risk. Mirant designates currency forwards as hedging
instruments used to hedge the impact of the variability in exchange rates on
accounts receivable denominated in certain foreign currencies. 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.
15
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
virtually 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.
Year of Maturity Number of Notional Unrecognized
Type or Termination Interest Rates Counterparties Amount (Loss) Gain
--------------------------- -------------------- ---------------- -------------------- ------------ ------------------
(in millions)
Interest rate swaps.... 2003-2012 3.85%-7.12% 4 $624 $ (34)
Currency forwards...... 2002-2004 -- 3 1CAD117 (1)
2003 -- 1 (pound)58 --
2002-2003 -- 2 2$14 --
----------
$ (35)
==========
(pound) - Denotes British pounds sterling
CAD - Denotes Canadian dollar
1 Contracts with a notional amount of CAD106 million are included in fair
value of energy marketing and risk management liabilities because hedge
accounting criteria are not met.
2 Contracts are utilized by a foreign subsidiary to hedge U.S. dollar
denominated sales contracts.
The unrecognized 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
unrecognized gain/loss for cross-currency financial instruments is determined
based on current foreign exchange rates.
G. Business Developments
Asset Sales
In February 2002, Mirant completed the sale of its 44.8% indirect interest
in Bewag for approximately $1.63 billion. Mirant received approximately $1.06
billion in net proceeds after repayment of approximately $550 million in debt
associated with its Bewag investment. The net proceeds were used for general
corporate purposes, capital expenditures and repayment of certain drawn balances
on revolving credit facilities.
In February 2002, Mirant announced that it had entered into an agreement to
sell its State Line generating facility for $182 million plus an adjustment for
working capital. The sale is expected to close in the second quarter of 2002.
In March 2002, Mirant announced that it had entered into an agreement to
sell its 50% ownership interest in Perryville to Cleco, who holds the remaining
50% ownership interest in Perryville. Perryville began to commercially operate a
150 MW, natural gas-fired, simple-cycle unit in Louisiana in July 2001 and is
constructing a 562 MW natural gas-fired combined-cycle unit that is expected to
be completed in 2002. Under the agreement, Cleco will assume Mirant's $19.5
million future equity commitment to Perryville and pay $48 million to retire
Mirant's debt related to Perryville. However, Mirant may be required to make a
subordinated loan of $25 million to Perryville upon the occurrence of certain
events in connection with the syndication of the Perryville senior debt. The
sale is expected to close in the second quarter of 2002.
16
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restructuring Charge
As a result of changing market conditions including constrained access to
capital markets as a result of the Enron bankruptcy and Moody's downgrade of
Mirant's credit rating, Mirant adopted a 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. In the first
quarter of 2002, Mirant recorded a restructuring charge of $562 million
(pre-tax).
The components of the restructuring charge include:
o $285 million related to write-downs of capital previously invested, either
directly into construction or in progress payments on equipment.
o $246 million related to costs to cancel equipment orders and service
agreements per contract terms.
o $31 million related to severance of 500 employees worldwide and other
employee termination-related charges.
Mirant anticipates that it will record additional restructuring charges of
approximately $115 million (pre-tax) in future periods, primarily over the next
three quarters, all of which have been identified. These costs are associated
with the cancellation of additional power plant developments, additional
employee severance and related costs to be finalized in the near future.
H. 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: The CPUC, the California Senate, the San
Joaquin District Attorney and the Attorney General's offices of Washington,
Oregon and California have each launched civil and criminal investigations into
the California energy markets that have resulted in the issuance of subpoenas of
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 subpoenas, 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. In January 2002, the California Attorney
General's office reportedly stated that it found no evidence of criminal
wrongdoing in connection with its investigation, but that it was planning to
file civil suits against the energy generators for unfair trade practices.
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 in San Francisco Superior Court. 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, California's unfair trade practices statutes.
The suit seeks both restitution and penalties in unspecified amounts.
17
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On March 19, 2002, the California Attorney General filed a complaint with
the FERC against certain California generators, 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 of any such refunded
amounts.
Defaults by SCE and Pacific Gas and Electric, and the Bankruptcies of Pacific
Gas and Electric and the PX: On January 16 and 17, 2001, the credit and debt
ratings of SCE and Pacific Gas and Electric were lowered by Moody's and S&P to
"junk" status. 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
March 31, 2002, the total amount owed to Mirant by the CAISO and the PX as a
result of these defaults was $355 million. During 2000 and 2001, Mirant took
provisions in relation to these and other uncertainties arising from the
California power markets of $295 million pre-tax.
On March 9, 2001, as a result of the nonpayments of SCE and Pacific Gas and
Electric, the California PX ceased operation and filed for bankruptcy
protection. Mirant Americas Energy Marketing was appointed as a member of the
official Participants Committee in the PX bankruptcy proceeding. 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 in the United States Bankruptcy Court for the
Northern District of California in San Francisco. It is not known at this time
what effect the bankruptcy filing will have on the ultimate recovery of amounts
owed to Mirant. On September 20, 2001, Pacific Gas and Electric filed a proposed
plan of reorganization. Under the terms of the proposed plan, unsecured
creditors such as Mirant would receive, through a combination of cash and
negotiable debt, 100% of the amounts owed upon approval of the plan.
On March 1, 2002, SCE paid approximately $870 million to the California PX
in satisfaction of all claims of or through the California 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. 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. Mirant assumed these
agreements from Pacific Gas and Electric prior to the outcome of a FERC
proceeding initiated in October 1997 that will determine the percentage of a
$158.8 million annual fixed revenue requirement to be paid to Mirant by the
CAISO under the RMR agreements. This revenue requirement was negotiated as part
of a prior settlement of a FERC rate proceeding. Mirant contends that the amount
paid by the CAISO should reflect an allocation based on the CAISO's right to
call on the units (as defined by the RMR agreements) and the CAISO's actual
calls. This approach would result in annual payments by the CAISO of
approximately $120 million, or 75% of the settled fixed revenue requirement. The
decision in this case will affect the amount the CAISO will pay to Mirant for
the period from June 1, 1999 through the final disposition of the appeal. On
June 7, 2000, the administrative law judge ("ALJ") presiding over the proceeding
issued an initial decision in which responsibility for payment of approximately
3% of the revenue requirement was allocated to the CAISO. On July 7, 2000,
Mirant appealed the ALJ's decision to the FERC.
18
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
If Mirant is unsuccessful in its appeal of the ALJ's decision, it will be
required to refund certain amounts of the revenue requirement paid by the CAISO
for the period from June 1, 1999 until the final disposition of the appeal. The
amount of this refund as of March 31, 2002 would have been approximately $240
million; however, there would have been no effect on net income for the periods
under review as adequate reserves have been recorded. This amount does not
include interest that may be payable in the event of a refund. If Mirant is
unsuccessful in its appeal, Mirant plans to pursue other options available under
the RMR agreements to mitigate the impact of the ALJ's decision upon its future
operations.
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
is currently in place until September 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/PX from
October 1, 2000 through June 20, 2001. A hearing was held in March 2002, and a
second hearing is scheduled to be held in August 2002. In the July 25 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. 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. The Company cannot predict the outcome
of this proceeding. If the Company was required to refund such amounts, its
subsidiaries would be required to refund amounts previously received pursuant to
sales made on their behalf. In addition, its subsidiaries would be owed amounts
for purchases made on their behalf from other sellers in the Pacific Northwest.
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 forward. The Company cannot predict the outcome of this
proceeding. Information from this investigation could be used in any existing or
future complaints before the FERC involving long-term power sales contracts
relevant to the matters being investigated.
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
19
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
24, 2001, Mirant entered into a 19-month agreement with the DWR to provide the
State of California with approximately 500 MW of electricity.
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 Mirant,
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. The contract runs
through December 31, 2002.
California Rate Payer Litigation: Six lawsuits have been filed and coordinated
in the Superior Court for San Diego County alleging that certain owners of
electric generation facilities in California and energy marketers, including
Mirant, Mirant Americas Energy Marketing, Mirant Delta and Mirant Potrero,
engaged in various unlawful and anti-competitive acts that served to manipulate
wholesale power markets and inflate wholesale electricity prices in California.
Three of the 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.
A listing of the cases is as follows:
CAPTION DATE FILED COURT OF ORIGINAL FILING
------------------------------------- ---------------------- -----------------------------------------------------
People of the State of California January 18, 2001 Superior Court of California - San Francisco County
v. Dynegy, et al.
Gordon v. Reliant Energy, Inc., et November 27, 2000 Superior Court of California - San Diego County
al. Hendricks v. Dynegy Power
Marketing, Inc., et al. November 29, 2000 Superior Court of California - San Diego County
Sweetwater Authority, et al. V. January 16, 2001 Superior Court of California - San Diego County
Dynegy, Inc., et al.
Pier 23 Restaurant v. PG&E Energy January 24, 2001 Superior Court of California - San Francisco County
Trading, et al.
Bustamante, et al. v. Dynegy, May 2, 2001 Superior Court of California - Los Angeles County
Inc., et al.
Enron Bankruptcy Proceedings: On December 2, 2001, Enron, along with several of
its subsidiaries, filed for bankruptcy. As of March 31, 2002, the total amount
owed to Mirant by Enron was approximately $77 million. Based on a reserve
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.
20
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 far, seven personal injury
lawsuits have been filed against Mirant, five of which were filed in Cook
County, Illinois. Mirant has settled the claim of one of these plaintiffs, but
the settlement agreement still requires court approval. Mirant filed a motion to
dismiss the five Cook County cases in 1998 for lack of "in personam"
jurisdiction and is in the process of appealing the denial of these motions. 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 the Superior Court of Orange
County, California. 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. At the same time, Mirant and its subsidiaries
entered into a separate agreement with a subsidiary of Enron to purchase an
additional 47.5% ownership interest in EcoElectrica. 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.
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 of Mirant New
York 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. Under the sales agreement with
Orange and Rockland Utilities for Plant Lovett, Orange and Rockland Utilities is
responsible for fines and penalties arising from historical operations, but
Mirant New York may be responsible for the cost of purchasing and installing
emission control equipment, 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 Mid-Atlantic 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. Mirant Mid-Atlantic has
responded fully to this request.
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 books estimated losses from contingencies when
information available indicates that a loss is probable in accordance with SFAS
No. 5, "Accounting for Contingencies."
21
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Commitments and Capital Expenditures
Mirant has made firm commitments to buy materials and services in
connection with its ongoing operations and planned expansion and has made
financial guarantees relative to some of its investments.
The material commitments are discussed in the following sections.
Energy Marketing and Risk Management
Mirant Corporation had approximately $903 million trade credit support
commitments outstanding as of March 31, 2002, which included $460 million of
letters of credit, $56 million of net cash collateral posted and $387 million of
parent guarantees.
Mirant Corporation has also guaranteed the performance of its 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 March 31, 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 related to Pan Alberta Gas, Ltd. of
$64 million issued in 2000 and outstanding at March 31, 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 March 31, 2002, such
guarantees amounted to approximately $92 million.
Perryville, in which Mirant has a 50% ownership interest accounted for
under the equity method, entered into a 20-year tolling agreement with Mirant
Americas Energy Marketing in April 2001. Under the agreement, Perryville will
sell all the electricity generated by the facility to Mirant Americas Energy
Marketing. At March 31, 2002, the total estimated notional commitment under this
agreement was approximately $1.07 billion over the 20-year life of the contract.
In the event that Mirant's credit rating is below BB/S&P or Ba2/Moody's, Mirant
Americas Energy Marketing is required to post a letter of credit or other credit
support in the amount of 125% of the principal amount of the Perryville senior
debt, plus required debt service reserves and the amount of any letters of
credit issued under the Perryville credit facility. Mirant Americas Energy
Marketing and Mirant will continue to be obligated under the tolling agreement
and guaranty, respectively, after the closing of the planned sale of Mirant's
interest in Perryville (Note G).
To the extent that Mirant Corporation does not maintain its current
investment 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.
22
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Turbine Purchases and Other Construction-Related Commitments
During the three months ended March 31, 2002, Mirant committed itself to a
strategic business plan designed to reduce capital spending and operating
expenses. As a result, the Company recorded a restructuring charge for the three
months ended March 31, 2002 related to these changes. The reduced capital
spending plan results in material changes to Mirant's commitments under its
turbine purchase agreements and its turbine procurement facilities. Mirant has
canceled and intends to cancel certain turbines under its purchase agreements
and its off-balance sheet equipment procurement facilities within the next 12
months. The commitments for turbines that Mirant has canceled and intends to
cancel are included in Mirant's restructuring charge (Note G), 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 March 31, 2002, Mirant had agreements to purchase 37 turbines (28 gas
turbines and 9 steam turbines) to support the Company's ongoing and planned
construction efforts. At March 31, 2002, minimum termination amounts under the
remaining 26 turbine purchase contracts that Mirant intends to exercise
consisted of $28 million. Total amounts to be paid under the agreements if the
remaining 26 turbines that Mirant intends to exercise are purchased as planned
are estimated to be $125 million at March 31, 2002. At March 31, 2002, other
construction-related commitments totaled approximately $818 million.
In addition to these commitments, 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 two separate, independent third-party
owners. For the first facility, which is a $1.8 billion notional value 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 March
31, 2002 was a Euro 1.1 billion notional value facility, remaining contracts for
six engineered equipment packages ("power islands") have been assigned to a
third-party owner incorporated in The Netherlands (Note K).
As part of its strategic restructuring, Mirant negotiated certain deferrals
under both equipment purchase facilities. Because the term of the deferred
fabrication period for certain turbines included in the $1.80 billion notional
value facility exceeds the defined fabrication period, the Company will not have
the option to enter into a lease arrangement for this equipment, thereby forcing
Mirant to exercise its purchase option. Consequently, Mirant has included a $35
million liability (and related construction work in progress) for these turbines
on the accompanying unaudited condensed consolidated balance sheet. At March 31,
2002, Mirant Corporation's guarantees in connection with the equipment
procurement facilities, including certain payment obligations were approximately
$373 million with respect to the turbines for which the facilities have a
contractual obligation (excluding the $35 million which is now included in
"Other long-term debt" on its unaudited condensed consolidated balance sheet).
If Mirant had elected not to exercise its purchase options with respect to the
remaining 11 turbines and power islands and to terminate the procurement
contracts, minimum termination amounts due would have been $181 million at March
31, 2002. If the purchase options or options to lease the remaining 11 turbines
and power islands are exercised as planned, total commitments would be
approximately $477 million.
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 and combined-cycle
generating plants. Generally, these agreements may be terminated at little or no
cost in the event that the shipment of the associated turbine is canceled. As of
23
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31, 2002, the minimum termination amounts for long-term service agreements
associated with completed and shipped turbines were $536 million. As of March
31, 2002, the total estimated commitments for long-term service agreements
associated with turbines already completed and shipped were approximately $684
million. These commitments are payable over the course of each agreement's
terms, which are projected to range from between ten to twenty years.
As a result of the turbine cancellations as part of Mirant's restructuring,
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 Mirant. Mirant does
not intend to cancel long-term service agreements associated with turbines that
have already shipped. Consequently, the Company's restructuring should not have
an impact on the long-term service agreement commitments disclosed above.
Power Purchase Agreements
Under the asset purchase and sale agreement for PEPCO, Mirant assumed the
obligations and benefits of five power purchase agreements with a total capacity
of 735 MW. At March 31, 2002, the estimated commitments under the agreements
were $1.63 billion, of which $517 million is included in obligations under
energy delivery and purchase commitments in the unaudited condensed consolidated
balance sheets. The agreements expire over periods through 2021.
Fuel Commitments
Mirant has fixed volumetric purchase commitments under fuel purchase and
transportation agreements totaling $139 million at March 31, 2002. These
agreements will continue to be in effect through 2011. In addition, 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 daily spot rate then prevailing at each delivery
point. The agreement will continue to be in effect through December 31, 2007,
unless terminated sooner. The estimated commitment for the term of this
agreement based on current spot prices is $6.29 billion as of March 31, 2002.
Because this contract is based on the current 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 the
event the Company does not maintain its current credit ratings, BP could request
additional collateral. Based on the Company's current estimate and the pricing
as of March 31, 2002, Mirant could be required to post approximately $266
million of additional collateral.
Operating Leases
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $31 million and $30 million during the three months ended March
31, 2002 and 2001, respectively. As of March 31, 2002, estimated minimum rental
commitments for non-cancelable operating leases were $3.61 billion.
Perryville Guarantee
On March 22, 2002, Perryville achieved the air and wastewater discharge
permit compliance thereby terminating Mirant's guarantees for certain debt
payments in connection with a loan agreement between Perryville and its lenders
with respect to such permits.
24
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Discontinued Operations
In February 2002, Mirant announced that it had entered into an agreement to
sell its State Line generating facility for $182 million plus an adjustment for
working capital. This asset is expected to be sold at book value based on the
value of the asset at the date of sale. The sale is expected to close in the
second quarter of 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.
Mirant's results of discontinued operations for the three months ended
March 31, 2002 and 2001 were as follows (in millions):
For the Three Months
Ended March 31,
2002 2001
----- ------
Revenue................................................ $ 15 $ 14
Leveraged lease income.................................. - 10
Expense................................................. 9 9
Impairment loss......................................... 2 0
Equity in income/(loss) of affiliates.................. - (3)
---- ----
Pre-tax income......................................... 4 12
Taxes.................................................. 2 1
---- ----
Net income............................................. $ 2 $ 11
==== ====
The table below presents the components of State Line's balance sheet
accounts classified as current assets and liabilities held for sale as of March
31, 2002 and December 31, 2001 (in millions):
March 31, 2002 December 31, 2001
------------------------------------------- ----------------- --------------------
Current Assets:
Accounts receivable.................... $ 5 $ 5
Inventory.............................. 3 3
Other.................................. 1 1
Property, plant and equipment.......... 173 175
Intangibles............................ 9 9
-------- --------
Total current assets held for sale.. $ 191 $ 193
======== ========
Current Liabilities:
Taxes and other payables............... $ 10 $ 10
Deferred taxes......................... 15 15
------ --------
Total current liabilities held for sale $ 25 $ 25
====== ========
25
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. 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 March 31, 2002 and 2001
Corporate and
North America International Eliminations Consolidated
------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
(in millions)
Operating Revenues:
Generation and energy marketing $6,477 $8,039 $ 433 $ 87 $ - $ - $6,910 $ 8,126
Distribution & integrated utility revenues 108 36 - - - - 108 36
Other 11 - 8 6 - - 19 6
--------- ---------- -------- --------- --------- -------- -------- ---------
Total operating revenues 6,596 8,075 441 93 - - 7,037 8,168
Operating Expenses:
Cost of fuel, electricity and other
products 6,155 7,368 310 13 - - 6,465 7,381
--------- ----------- ------- --------- --------- --------- -------- ---------
Gross Margin 441 707 131 80 - - 572 787
Other Operating Expenses:
Depreciation and amortization 54 51 23 33 2 1 79 85
Maintenance 27 22 5 5 - - 32 27
Selling, general, and administrative 104 223 34 28 17 45 155 296
Impairment loss - 4 - - - - - 4
Restructuring charges 486 - 65 - 11 - 562 -
Other operating expenses 98 92 2 3 7 4 107 99
--------- ----------- ------- --------- --------- --------- -------- ---------
Total other operating expenses 769 392 129 69 37 50 935 511
--------- ----------- ------- --------- --------- --------- -------- ---------
Operating (Loss) Income (328) 315 2 11 (37) (50) (363) 276
Other Income (Expense):
Interest expense, net (34) (37) (29) (29) (40) (25) (103) (91)
Equity in income of affiliates 7 7 72 72 - - 79 79
Gain on sales of assets, net - - 291 - - - 291 -
Other (4) (1) 10 8 - - 6 7
(Loss) Income From Continuing Operations --------- ----------- ------- --------- --------- --------- -------- ---------
Before Income Taxes and Minority Interest (359) 284 346 62 (77) (75) (90) 271
(Benefit) Provision for income taxes (141) 115 109 (20) (29) (7) (61) 88
Minority interest 1 1 8 8 6 5 15 14
--------- ----------- ------- --------- --------- --------- -------- ---------
(Loss) Income From Continuing Operations (219) 168 229 74 (54) (73) (44) 169
Income From Discontinued Operations,
Net of Tax Benefit 2 6 - - - 5 2 11
--------- ----------- ------- --------- --------- --------- -------- ---------
Net (Loss) Income $ (217) $ 174 $ 229 $ 74 $ (54) $ (68) $ (42) $ 180
========= =========== ======= ========= ========= ========= ======== =========
26
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Selected Balance Sheet Information by Segment
At March 31, 2002
Corporate and
North America International Eliminations Total
------------------- ---------------- --------------- -----------------
(in millions)
Current assets $ 6,766 $ 934 $ (1,813) $ 5,887
Property, plant & equipment,
including leasehold interest 5,942 1,766 112 7,820
Total assets 17,187 5,222 (1,816) 20,593
Total debt 5,068 1,413 758 7,239
Common equity 4,193 2,807 (1,533) 5,467
27
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Subsequent Events
Mirant Asia-Pacific Loans
Each of the lenders under the Sual and Pagbilao facilities has executed
temporary waivers of default with respect to the obligations to provide specific
levels of insurance coverage. As of April 23, 2002, Mirant has secured from its
lenders waivers which extend to the insurance renewal date of November 1, 2002.
Should the insurance program to be put into place prior to the expiration of
such waivers not meet the types and levels of coverage required by the
respective credit facilities, the Sual and Pagbilao lenders will have a right to
declare an event of default and accelerate the respective loans. Acceleration of
the Sual or Pagbilao loans would cause cross-default under the credit facility
for Mirant Asia-Pacific. Although Mirant believes that in the event of an
acceleration it would be able to refinance the Mirant Asia-Pacific loan, Mirant
can give no assurances to such effect. If Mirant does not repay or refinance
such loans upon acceleration, the loss of the cash flow and assets of Mirant
Asia-Pacific would have a material adverse effect on the Company. Further, in
the event that a Sual or Pagbilao cross-default occurs, Mirant Asia-Pacific
would be prohibited under its credit facility from making distributions. As a
result, amounts that would otherwise be available for distribution would not be
available to Mirant to repay indebtedness or fund investment activities (Note
E).
California Attorney General Litigation
On April 9, 2002, the California Attorney General filed a second civil suit
against Mirant and several of its wholly owned subsidiaries in San Francisco
Superior Court. The lawsuit alleges that the companies violated the California
Unfair Competition Act by failing to properly file its 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's fees.
On April 15, 2002, the California Attorney General filed a third civil
lawsuit against Mirant and several of its wholly owned subsidiaries in the U.S.
District Court for the Northern District of California. The lawsuit alleges that
the Company's acquisition and possession of its Potrero and Delta power plants
has, and will continue to, substantially lessen competition, all in violation of
the Clayton Act and state unfair trade practices statutes. 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.
California Rate Payer Litigation
On April 23, 2002, a class action was filed on behalf of all customers of
electricity distributed into California by the defendants (other than the
defendants and their affiliates) by T&E Pastorino Nursery and Pastorino & Son
Nursery against several California generators, including Mirant and several of
its subsidiaries, in the Superior Court for the County of San Mateo, California.
The suit is related to events in the California wholesale electricity market
occurring over the last three years. The suit alleges that the defendants
violated the state unfair trade practices statutes by engaging in unfair,
unlawful and deceptive practices and by acquiring generating plants in
California that allowed them to exercise market power to withhold capacity and
raise prices above competitive levels. The plaintiffs seek restitution,
injunctive relief and unspecified compensatory and general damages.
28
MIRANT CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
With respect to each of these lawsuits, the Company cannot currently
determine the outcome of the proceedings or the amounts of any potential losses
from such proceedings.
Turbine Facilities
In April 2002, Mirant restructured its Euro denominated facility by
reducing the size of the facility from Euro 1.10 billion notional value to Euro
550 million notional value and by shortening the maturity date of the facility
from December 31, 2004 to December 31, 2003 (Note H).
Mirant New England Guarantee
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. Under the agreement, 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.
Both the guarantee and the agreement expire in February 2005.
Asset Sales
In May 2002, Mirant sold its 60% ownership interest in the 750 MW Kogan
Creek power project, located near Chinchilla in southeast Queensland, Australia,
and associated coal deposits to CS Energy Ltd ("CS Energy") for approximately
$29 million. The project was a 40/60 joint venture between CS Energy and Mirant.
In May 2002, Mirant sold its 9.99% ownership interest in SIPD, located in
the Shandong Province, China, for approximately $120 million.
Fuel Purchase Agreement
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 will purchase a minimum of 2.4 million tons of
fuel per annum through December 2007. This minimum purchase commitment will
become effective upon the commencement of the synthetic fuel plant operation at
the Morgantown facility, currently expected to be June 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.
29
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
We are a leading global competitive energy company. We deliver value by
integrating an extensive portfolio of power and natural gas assets with risk
management and marketing expertise. We have facilities in the United States,
Canada, the Caribbean, Asia and Europe and operate one of the world's largest
integrated asset management and energy marketing organizations from our
headquarters in Atlanta. As of March 31, 2002, we owned or controlled more than
21,500 MW of electric generating capacity around the world, with approximately
6,000 MW under development. We consider a project under development when we have
contracted to purchase machinery for the project, we own or control the project
site and are in the permitting process. These projects may or may not have
received all of the necessary permits and approvals to begin construction. We
cannot provide assurance that projects under development will be completed. In
North America, we also control access to approximately 3.8 billion cubic feet
per day of natural gas production, more than 4.0 billion cubic feet per day of
natural gas transportation and approximately 65 billion cubic feet of natural
gas storage.
With the sale of our investment in Bewag and our restructuring, we have
changed our principal business segments from Americas, Asia-Pacific and Europe
to North America and International. 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.
Through our business development offices, we monitor the United States and
international economies and energy markets to identify and capitalize on
business opportunities. Through construction and acquisition, we have built a
portfolio of power plants, electric distribution companies and electric
utilities, giving us a net ownership and leasehold interest of over 18,700 MW of
electric generating capacity around the world, and control of over 2,800 MW of
additional generating capacity through management contracts. Our business also
includes managing risks associated with market price fluctuations of energy and
energy-linked commodities for us and our customers. We use our risk management
capabilities to optimize the value of our generating and gas assets and offer
risk management services to others. We also own fully integrated electric
utilities with generation, transmission and distribution capabilities as well as
electricity distribution companies.
30
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
FIRST QUARTER 2002 vs. FIRST QUARTER 2001
Significant income statement items appropriate for discussion include
the following:
Increase (Decrease)
First Quarter
------------------------------
(in millions)
Operating revenues................................. $(1,131) (14%)
Cost of fuel, electricity and other products....... (916) (12%)
Other operating expenses
Maintenance..................................... 5 19%
Depreciation and amortization................... (6) (7%)
Selling, general and administrative............. (141) (48%)
Restructuring charge............................ 562 -
Other income/expense
Interest income................................. (35) (67%)
Interest expense................................ (23) (16%)
Gain on sale of assets.......................... 291 -
Equity in income of affiliates.................. - -
Receivables recovery............................ 19 190%
(Benefit) provision for income taxes............... (149) (169%)
Operating revenues. Our operating revenues for the three months ended
March 31, 2002 were $7,037 million, a decrease of $1,131 million over the same
period in 2001. The following factors were responsible for the decrease in
operating revenues:
o Revenues from generation and energy marketing products for the three months
ended March 31, 2002, were $6,910 million, compared to $8,126 million for
the same period in 2001. This decrease of $1,216 million resulted primarily
from decreased prices for natural gas and power and reduced generation
primarily in the western U.S., which was partially offset by higher
revenues from our European energy marketing operations due to higher
physical volumes in the German market, the commencement of operations at
our Michigan plant in June 2001 and the commencement of the second phase of
our Texas plant in June 2001.
o Distribution and integrated utility revenues for the three months ended
March 31, 2002, were $108 million, compared to $36 million for the same
period in 2001. This increase of $72 million was attributable to our
Jamaican investment which was acquired in March 2001, offset somewhat by
the elimination of revenue due to the sale of our Chilean operations in
December 2001.
o Other revenues for the three months ended March 31, 2002, were $19 million,
compared to $6 million for the same period in 2001. This increase of $13
million was primarily attributable to revenues related to the gas and oil
operations we acquired from Castex in August 2001.
31
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Cost of fuel, electricity and other products. Cost of fuel, electricity and
other products for the three months ended March 31, 2002, was $6,465 million,
compared to $7,381 million for the same period in 2001. This decrease of $916
million was primarily attributable to decreased prices for natural gas and
reduced generation primarily in the western U.S., partially offset by higher
costs from our European energy marketing operations due to higher physical
volumes in the German market and the operating expenses in the first quarter of
2002 from our Jamaican investment which was acquired in March 2001. The decrease
was offset by the commencement of operations at our Michigan plant in June 2001
and of the second phase of our Texas plant in June 2001.
Other operating expenses. Other operating expenses for the three months
ended March 31, 2002 were $935 million, a decrease of $424 million over the
same period in 2001. The following factors were responsible for the decrease in
operating expenses:
o Depreciation and amortization expense for the three months ended March 31,
2002, was $79 million, compared to $85 million for the same period in 2001.
This decrease of $6 million resulted primarily from the elimination of
goodwill amortization of approximately $18 million, offset by additional
depreciation from our Jamaican investment which was acquired in March 2001,
from the commencement of operations at our Michigan plant in June 2001 and
from commencement of the second phase of our Texas plant in June 2001.
o Maintenance expense for the three months ended March 31, 2002, was $32
million, compared to $27 million for the same period in 2001. This increase
of $5 million resulted primarily from the plants and businesses we acquired
in North America.
o Selling, general and administrative expense for the three months ended
March 31, 2002, was $155 million, compared to $296 million for the same
period in 2001. The majority of the decrease of $141 million resulted from
provisions taken in the first quarter of 2001 related to uncertainties in
the California power markets. In addition, the amount of stock related
compensation was higher in 2001. These decreases were offset somewhat by
operating expenses in the first quarter of 2002 from our Jamaican
investment which was acquired in March 2001.
o Restructuring charge for the three months ended March 31, 2002, was $562
million. The components of the restructuring charge include:
- $285 million related to write-downs of capital previously invested,
either directly into construction or in progress payments on
equipment.
- $246 million related to costs to cancel equipment orders and service
agreements per contract terms.
- $31 million related to the severance of 500 employees and other
employee termination-related charges.
Total other income (expense). Other income for the three months ended March
31, 2002 was $273 million, compared to other expense of $5 million for the same
period in 2001. The increase in other income of $278 million was primarily due
to the following:
o Gain on the sale of our investment in Bewag in February 2002 was $290
million.
32
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
o Interest income for the three months ended March 31, 2002, was $17 million,
compared to $52 million for the same period in 2001. This decrease of $35
million was primarily due to lower interest revenue from our loan
receivables related to Shajiao C and Hyder, lower overall bank balances and
lower interest rates earned on those balances. In addition, we had interest
income of approximately $12 million from the Capital Funding subsidiary
transferred to Southern in March 2001.
o Interest expense for the three months ended March 31, 2002, was $120
million, compared to $143 million for the same period in 2001. This
decrease of $23 million was primarily due to higher capitalized interest in
the first quarter of 2002. Capitalized interest for the three months ended
March 31, 2002 was $38 million, compared to $7 million for the same period
in 2001. The increase in capitalized interest resulted from higher levels
of construction in progress in the first quarter of 2002. In addition, we
had interest expense of approximately $12 million from the Capital Funding
subsidiary transferred to Southern in March 2001.
o Equity in income of affiliates for both the three months ended March 31,
2002 and 2001 was $79 million. There was a decrease due to lower earnings
from Bewag, offset by higher earnings from our Shajiao C venture due to a
forced outage in 2001 and higher earnings from CEMIG primarily due to a
tariff settlement.
o Receivables recovery of $29 million was received by us as final payment
related to receivables that were assumed in conjunction with the Mirant
Asia-Pacific Limited business acquisition. During the three months ended
March 31, 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 with whom the receivables were
secured.
(Benefit) provision for income taxes. The benefit for income taxes for the
three months ended March 31, 2002, was $61 million, compared to a provision of
$88 million for the same period in 2001. This represents a change of $149
million primarily due to restructuring charges taken, the decrease in income
generated in North America in the first quarter of 2002 and additional
provisions related to our consolidated tax position taken in the first quarter
of 2001. This change was offset somewhat by additional taxes related to the gain
on the sale of our investment in Bewag in February 2002 and additional taxes in
2002 related to SIPD.
Earnings
Our consolidated net loss for the three months ended March 31, 2002, was
$42 million ($0.10 per diluted share) compared to net income of $180 million
($0.52 per diluted share) for the corresponding period of 2001. The decrease in
net income of $222 million from the same period in 2001 is attributable to our
business segments as follows:
North America
Net loss for the North America Group totaled $217 million for the three
months ended March 31, 2002. This represents a decrease in income of $391
million from the same period in 2001 and is primarily attributable to
restructuring charges of $294 million, decreased prices for natural gas and
power and reduced generation primarily in the western U.S. during the first
quarter of 2002. This was partly offset 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
taken 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
March 31, 2002, the total amount owed to us by the CAISO and the PX was $355
million.
33
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
International
Net income for the International Group totaled $229 million for the three
months ended March 31, 2002, an increase of $155 million from the same period in
2001. This increase was primarily attributable to the after-tax gain of $167
million from the sale of our interest in Bewag, higher amounts received related
to receivables that were assumed in conjunction with the Mirant Asia-Pacific
Limited business acquisition, the elimination of goodwill amortization, higher
earnings from our Shajiao C venture due to a forced outage in 2001 and higher
earnings from CEMIG primarily due to a tariff settlement. The increase was
partially offset by restructuring charges of $43 million and lower income from
operations of Bewag and SIPD in the first quarter of 2002.
Corporate
After-tax corporate expenses produced a net loss from continuing operations
of $54 million for the three months ended March 31, 2002. The decreased costs
for the quarter resulted from higher compensation in 2001 and additional tax
provisions related to our consolidated tax position in 2001. These decreases
were offset somewhat by increased interest expense in 2002 on corporate
borrowings used to fund working capital and construction.
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/or construction of generating
facilities and distribution businesses, finance capital expenditures and meet
other cash and liquidity needs.
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 projects and assets or corporate borrowing capacity to satisfy these
obligations.
Operating Activities
Net cash provided by operating activities per our unaudited condensed
consolidated statements of cash flows totaled $275 million for the three months
ended March 31, 2002, as compared to net cash used in operating activities of
$111 million for the same period in 2001. This increase was due to the following
items:
o 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.
34
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
o We received $170 million of net cash collateral in the first quarter of
2002 compared to a net payment of cash collateral of $25 million in the
first quarter of 2001. The receipts in 2002 were due primarily to a
reduction in our energy marketing credit exposure as a result of lower
prices in the first quarter of 2002 and expanding the use of our master
netting agreements.
o We received net tax refunds of $90 million in March 2002 as a result of
over payments made in the fourth quarter of 2001 due to changes in
estimates related to the 2001 tax year compared to $48 million paid in the
first quarter of 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 three months ended March 31, 2002 increased by $112 million compared to the
same period in 2001. This increase was due primarily to a $78 million after tax
reduction in relation to our funding obligation for the energy delivery and
purchase agreements associated with the acquisition of our Mid-Atlantic assets
in December 2000.
For the three months ended March 31, 2002, net income included the release
of approximately $68 million in after-tax provisions recorded in connection with
the PEPCO acquisition compared to $73 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 $1,024 million for the
three months ended March 31, 2002, as compared to net cash used in investing
activities of $548 million for the same period in 2001. For the three months
ended March 31, 2002, we received proceeds from the sale of our indirect
interest in Bewag of approximately $1.63 billion. This was offset by capital
expenditures of approximately $510 million. The 2001 investing activities
included capital expenditures in North America and the acquisition of our
Jamaican investment 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 $7 million in 2002 and $52 million in 2001. Of these
amounts, we are entitled to approximately $7 million and $47 million
respectively, after repayments to minority shareholders.
Financing Activities
Net cash used for financing activities totaled $1,229 million for the three
months ended March 31, 2002, as compared to net cash provided by financing
activities of $790 million for the same period in 2001. The decrease is
primarily attributable to higher repayments of long-term debt, much of which was
completed using the proceeds received from the sale of our indirect interest in
Bewag.
Under our current plan, we expect our cash and financing needs over the
next several years to be met through a combination of cash flows from
operations, availability under our existing and renewed credit facilities, new
non-recourse project financings and asset sales. Based on market conditions, we
would consider new capital market financings to fund new projects and
investments and to replace drawn balances under credit facilities. A significant
35
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
part of our 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 us. 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.
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,
including letters of credit, over the next 12 months. In addition, our cash from
operations will be sufficient to fund our debt service on an ongoing basis. Our
liquidity could be impacted by changing prices resulting from abnormal weather,
excess capacity, the inability to complete asset sales, changes in credit
ratings and other factors.
Common Stock
The market price of our common stock at March 31, 2002 was $14.45 per share
and the book value was $13.62 per share based on the 401,495,567 shares
outstanding at March 31, 2002, representing a market-to-book ratio of 106%.
Asset Sales
In February 2002, we completed the sale of our 44.8% ownership interest in
Bewag for approximately $1.63 billion. We received approximately $1.06 billion
in net proceeds after repayment of approximately $550 million in debt associated
with our Bewag investment. The net proceeds were used for general corporate
purposes, capital expenditures and repayment of certain drawn balances on
revolving credit facilities.
In February 2002, we announced that we had entered into an agreement to
sell our State Line generating facility for $182 million plus an adjustment for
working capital. The sale is expected to close in the second quarter of 2002.
In March 2002, we announced that we had entered into an agreement to sell
our 50% ownership interest in Perryville to Cleco, who holds the remaining 50%
ownership interest in Perryville. Perryville began to commercially operate a 150
MW, natural gas-fired, simple-cycle unit in Louisiana in July 2001 and is
constructing a 562 MW natural gas-fired combined-cycle unit that is expected to
be completed in 2002. Under the agreement, Cleco will assume our $19.5 million
future equity commitment to Perryville and pay $48 million to retire our debt
related to Perryville. The sale is expected to close in the second quarter of
2002. Under the terms of the sale, however, we may be required to make a
subordinated loan of $25 million to Perryville upon the occurrence of certain
events in connection with the syndication of the Perryville senior debt.
In May 2002, we sold our 60% ownership interest in the 750 MW Kogan Creek
power project, located near Chinchilla in southeast Queensland, Australia, and
associated coal deposits to CS Energy Ltd ("CS Energy") for approximately $29
million . The project was a 40/60 joint venture between CS Energy and Mirant.
In May 2002, we sold our 9.99% ownership interest in SIPD, located in the
Shandong Province, China, for approximately $120 million.
36
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Available Liquidity and Related Debt to Capitalization Ratios
The following table contains our available liquidity as of March 31, 2002 and
December 31, 2001 (in millions):
Liquidity
---------------------------------------
As of March 31, As of December 31,
2002 2001
------------------ --------------------
Cash at Mirant Corporation.......... $ 441 $ 406
Cash at subsidiaries................ 465 430
Availability of credit facilities:
Mirant Corporation............... 796 867
Mirant Americas Generation........ 227 227
Mirant Canada Energy Marketing... 21 18
Cash at subsidiaries not available for
immediate payment to parent (1). (337) (294)
------- ---------
Total ............................. $ 1,613 $ 1,654
======= =========
(1) Represents estimated cash at the subsidiary level that is required for
operating, working capital or investment purposes at the respective
subsidiary and that is not available for immediate payment to Mirant
Corporation.
The following table contains some of our key debt to capitalization ratios
as of March 31, 2002 and December 31, 2001:
March 31, 2002 December 31, 2001
---------------- ------------------
Recourse Debt /Total Recourse Capital. 33.0% 33.1%
Total Debt /Total Capital............. 59.2% 62.2%
The ratios above include operating leases for Mirant Mid-Atlantic and
guarantees for drawn amounts on off-balance sheet equipment procurement
facilities ("equipment procurement facilities"). The Mirant Mid-Atlantic
operating lease figure represents the present value of the future lease payments
discounted at 10%. Mirant Corporation guarantees the obligations of its
respective subsidiaries in connection with the respective equipment procurement
facilities, including certain payment obligations of such subsidiaries equal to
approximately 89.9% of equipment costs (including financing costs) for such
equipment procurement facilities.
37
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Debt
The following table sets forth our short-term and long-term debt as of
December 31, 2001 and March 31, 2002 (in millions):
March 31, December 31,
2002 2001
---------- -------------
Short-term debt
Mirant Canada Energy Marketing......................... $ 23 $ 26
Jamaica Public Service Company......................... 23 22
Mirant Asia-Pacific Limited - Mirant Asia-Pacific
Singapore Pte Ltd...................................... 7 7
------- -------
Total short-term debt............................. 53 55
Current portion of long-term debt
Mirant Asia-Pacific.................................... 14 792
Sual and Pagbilao project term loans................... 1,118 1,201
Mirant Asia-Pacific Ltd - Shajiao C.................... 1 0
Mirant Holdings Beteiligungsgesellschaft term loan..... -- 566
Mirant Americas, Inc. - deferred acquisition price..... 21 21
West Georgia Generating Company........................ 5 5
Capital leases - Jamaica............................... 9 9
Jamaica Public Service Company......................... -- 8
Grand Bahama Power Company............................. 2 2
------- -------
Total current portion of long-term debt........... 1,170 2,604
Notes Payable
Mirant Corporation senior notes ....................... 700 700
Mirant Americas Generation senior notes................ 2,500 2,500
Mirant Americas Generation revolving credit facilities. 73 73
Mirant Americas, Inc. - deferred acquisition price..... 45 45
Mirant Asia-Pacific.................................... 240 --
West Georgia Generating Company........................ 140 140
Mirant Americas Energy Capital ........................ 150 150
Mirant Grand Bahamas................................... 16 16
Grand Bahama Power Company............................. 29 30
Mirant Trinidad bonds.................................. 73 73
Mirant Asia-Pacific Limited - Shajiao C................ 26 27
Unamortized debt premium/ discounts on notes........ (3) (3)
------- -------
Total notes payable............................... 3,989 3,751
Other long-term debt
Mirant Corporation convertible senior debentures....... 750 750
Mirant Corporation revolving credit facilities......... 975 1,075
Mirant Americas Development Capital.................... 35 --
Jamaica Public Service Company......................... 133 125
Mirant Caribe.......................................... 9 0
Capital leases - North America........................ 11 10
Capital leases - Jamaica.............................. 114 113
------- -------
Total other long-term debt........................ 2,027 2,073
------- -------
Total debt................................... $ 7,239 $ 8,483
======= =======
We have revolving credit facilities with various lending institutions
totaling approximately $3.19 billion. At March 31, 2002, amounts borrowed under
such facilities (including drawn amounts and letters of credit) totaled $2.15
billion and are comprised of the following: $23 million drawn under the facility
expiring in 2002, $975 million drawn under facilities expiring in 2003 (which
included amounts outstanding under Mirant Corporation's 364-Day Credit Facility
with an initial termination date of July 2002) and $1.15 billion drawn under the
facilities expiring in 2004 and beyond. Under its $1.125 billion 364-Day Credit
Facility, Mirant Corporation may elect to convert all revolving credit advances
outstanding on or before the July 2002 termination date thereunder into a term
loan maturing not later than the first anniversary of the termination date.
Except for the credit facility of Mirant Canada Energy Marketing, an indirect
wholly owned subsidiary of Mirant Corporation, bowerings under these these
facilities are recorded as long-term debt in the unaudited condensed
consolidated balance sheet.
38
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The credit facilities generally require payment of commitment fees based on the
unused portion of the commitments or the maintenance of compensating balances
with the banks. The schedule below summarizes amounts available on these
facilities held by Mirant Corporation and the specified subsidiaries as of
December 31, 2001 and March 31, 2002 (in millions).
Amount Available
-------------------------------------
Company Facility December 31,
Amount March 31, 2002 2001
------------------------------------------ ---------- ------------------- -----------------
Mirant Corporation *.................... $2,700 $ 796 $ 867
Mirant Americas Generation ............. 300 227 227
Mirant Canada Energy Marketing......... 44 21 18
Mirant Americas Energy Capital.......... 150 -- --
------ ------ -------
Total............................... $3,194 $1,044 $ 1,112
====== ====== ========
* At March 31, 2002, there was $1,904 million of drawn amounts which included
$929 million of letters of credit outstanding compared to $1,833 million of
drawn amounts which included $758 million of letters of credit outstanding at
December 31, 2001.
Each of our credit facilities contains various covenants including, among
other things, (i) limitations on dividends, redemptions and repurchases of
capital stock, (ii) limitations on the incurrence of indebtedness and liens, and
(iii) limitations on the sales of assets. In addition to other covenants and
terms, each our credit facilities includes minimum debt service coverage and a
maximum leverage covenant and a minimum debt service coverage test for dividends
and distributions. As of March 31, 2002, there were no events of default under
such credit facilities.
Mirant Canada Energy Marketing has extended its credit facility to June
2002. The revolving credit facility of approximately $44 million (denominated as
70 million Canadian dollars) had outstanding borrowings $23 million, at an
interest rate of 4.75% at March 31, 2002. The credit facility is guaranteed by
Mirant Corporation.
In February 2002, Perryville, the lenders under its credit facility, Mirant
Americas Energy Marketing and Mirant Corporation 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 amended the ratings threshold in the tolling
agreement with respect to Mirant to at least BB/S&P and Ba2/Moody's, related to
Mirant Americas Energy Marketing's obligation to post a letter of credit or
other credit support as disclosed in Note H, and (iv) the parties agreed to
certain additional terms in support of the syndication of the credit facility.
Mirant Americas Energy Marketing and Mirant will continue to be obligated under
the tolling agreement and guaranty, respectively, after the closing of the
planned sale of Mirant's interest in Perryville (Note G).
In March 2002, Mirant Americas Energy Capital transferred the borrowing
base assets under its credit facility to a special purpose vehicle and granted
security interests in such assets. The special purpose vehicle will be
consolidated with Mirant.
Each of the lenders under the Sual and Pagbilao facilities has executed
temporary waivers of default with respect to the obligations to provide specific
levels of insurance coverage. The waivers are effective through April 30, 2002.
In April 2002, Mirant secured from its lenders waivers which extend to the
insurance renewal date on November 1, 2002.
39
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
Each of the lenders under the Sual and Pagbilao facilities has executed
temporary waivers of default with respect to the obligations to provide specific
levels of insurance coverage. As of April 23, 2002, Mirant has secured from its
lenders waivers which extend to the insurance renewal date of November 1, 2002.
Should the insurance program to be put into place prior to the expiration of
such waivers not meet the types and levels of coverage required by the
respective credit facilities, the Sual and Pagbilao lenders will have a right to
declare an event of default and accelerate the respective loans. Acceleration of
the Sual or Pagbilao loans would cause cross-default under the credit facility
for Mirant Asia-Pacific. Although Mirant believes that in the event of an
acceleration it would be able to refinance the Mirant Asia-Pacific loan, Mirant
can give no assurances to such effect. If Mirant does not repay or refinance
such loans upon acceleration, the loss of the cash flow and assets of Mirant
Asia-Pacific would have a material adverse effect on the Company. Further, in
the event that a Sual or Pagbilao cross-default occurs, Mirant Asia-Pacific
would be prohibited under its credit facility from making distributions. As a
result, amounts that would otherwise be available for distribution would not be
available to Mirant to repay indebtedness or fund investment activities.
Contractual Obligations and Commitments
Energy Marketing and Risk Management
Certain financial instruments that we use to manage risk exposure to energy
prices do not meet the hedge criteria under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The fair values of these
instruments are recorded in energy marketing and risk management assets and
liabilities on our unaudited condensed consolidated balance sheet.
The following table provides an assessment of the factors impacting the
change in net fair value of the energy marketing and risk management asset and
liability accounts during the three months ended March 31, 2002 (in millions).
Net fair value of portfolio at January 1, 2002......................... $ 134
Gains (losses) recognized in the period, net (1)....................... 86
Contracts settled during the period, net............................... (73)
Change in fair value as a result of a change in valuation technique(2). --
Other changes in fair value, net (3)................................... (22)
Deferred option premiums, net.......................................... 73
-----
Net fair value of portfolio at March 31, 2002.......................... $ 198
=====
(1) This amount includes approximately $5 million which represents management's
estimate of initial value of new contracts entered into during the three
months ended March 31, 2002.
(2) Mirant's modeling methodology has been consistently applied for the three
months ended March 31, 2002.
(3) Consists primarily of purchase accounting and other adjustments to energy
marketing and risk management assets (liabilities).
40
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fair values and average values of our energy marketing and risk
management assets and liabilities, net of credit reserves, as of March 31, 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 March 31, Average March 31, Net Value at
Value 2002 Value 2002 March 31, 2002
Energy commodity
Instruments:
Electricity................. $ 566 $ 504 466 $ 408 $ 96
Natural gas................. 903 991 854 889 102
Crude oil................... 7 3 8 3 --
Other....................... 45 26 48 26 --
------ -------- ------- ------ ----
Total..................... $1,521 $ 1,524 $ 1,376 $1,326 $ 198
====== ======== ======= ====== =========
The following table represents the net energy and risk management assets
and liabilities by tenor, complexity and liquidity. As of March 31, 2002,
approximately 67% of the net value was calculated using simple models with high
price discovery. These include forwards, swaps and options at liquid locations.
Also, as of March 31, 2002, approximately 70% of the net value 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 March 31, 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........... $ 29 $ 4 $ 2 $ 23 $ -- $ -- $ 1 $ -- $ -- $ 59
2003........... 51 11 5 10 1 -- 1 -- -- 79
2004........... (1) 5 4 3 1 -- -- -- -- 12
2005........... 22 (12) (4) 3 -- 1 -- -- -- 10
2006........... 28 -- (16) 3 -- -- -- -- -- 15
Thereafter .... 3 1 (15) 4 22 8 -- -- -- 23
---- --- ---- ---- ---- ---- ----- ----- ---- -----
Net assets.... $132 $ 9 $(24) $ 46 $ 24 $ 9 $ 2 $ -- $ -- $ 198
==== === ===== ==== ==== ==== ===== ===== ==== =====
Model Complexity:
o Low - Transactions involving exchange, or exchange look-a-like products
with no operational or other constraints.
o Medium - Transactions involving some operational constraints, but where
these constraints are not the primary drivers of value/risk.
o 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:
o High - Large, liquid markets with multiple daily third-party and/or
exchange settled price quotes available.
o 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.
o 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.
41
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Additionally, 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 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. In
addition, the models also undergo a check by our external auditors who examine
the fair value(s) being recorded, the controls, and checks and balances that are
being maintained around the models and transactions.
Mirant Corporation had approximately $903 million trade credit support
commitments outstanding as of March 31, 2002, which included $460 million of
letters of credit, $56 million of net cash collateral posted and $387 million of
parent guarantees.
Mirant Corporation has also guaranteed the performance of its 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 March 31, 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 related to Pan Alberta Gas of $64
million issued in 2000 and outstanding at March 31, 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 March 31, 2002, such guarantees amounted to
approximately $92 million.
In June 2001, Mirant provided an air permit guarantee and a wastewater
discharge permit guarantee in connection with a loan agreement between
Perryville and its lenders. Under these guarantees, Mirant guaranteed the debt
payments under the loan agreement if Perryville does not obtain or achieve
necessary air and waste water discharge permit compliance. In March 2002,
Perryville achieved the air and wastewater discharge permit compliance thereby
terminating Mirant's guarantee with respect to the air and wastewater discharge
permits for the debt payments in connection with a loan agreement between
Perryville and its lenders.
Perryville, in which Mirant Corporation has a 50% ownership interest
accounted for under the equity method, entered into a 20-year tolling agreement
with Mirant Americas Energy Marketing in April 2001. Under the agreement,
Perryville will sell all the electricity generated by the facility to Mirant
Americas Energy Marketing. At March 31, 2002, the total estimated notional
commitment under this agreement was approximately $1.07 billion over the 20-year
life of the contract. Mirant Corporation has guaranteed the obligations of
Mirant Americas Energy Marketing under the tolling agreement. In the event that
Mirant's credit rating is below BB/S&P or Ba2/Moody's, Mirant Americas Energy
Marketing is required to post a letter of credit or other credit support in the
amount of 125% of the principal amount of the Perryville senior
42
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
debt, plus required debt service reserves and the amount of any letters of
credit issued thereunder. Mirant Americas Energy Marketing and Mirant will
continue to be obligated under the tolling agreement and guaranty, respectively,
after the closing of the planned sale of Mirant's interest in Perryville (Note
G).
To the extent that Mirant Corporation does not maintain its current
investment grade 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.
Turbine Purchases and Other Construction-Related Commitments
During the three months ended March 31, 2002, Mirant committed itself to a
strategic business plan designed to reduce capital spending and operating
expenses. As a result, we recorded a restructuring charge for the three months
ended March 31, 2002 related to these changes. The reduced capital spending plan
results in material changes to our commitments under our turbine purchase
agreements and our turbine procurement facilities. We have canceled and intend
to cancel certain turbines under our purchase agreements and off-balance sheet
equipment procurement facilities within the next 12 months. The commitments for
turbines that we have canceled and intend to cancel are included in our
restructuring charge. We plan to formally terminate the orders for the turbines
that we intend to cancel at various times within one year of the restructuring
commitment date. Our financial plan does not contemplate purchasing the turbines
that we have designated for termination. From a contractual perspective,
however, until the contracts are cancelled, we have the option to purchase the
turbines designated for termination at various times up to and through 2003.
As of March 31, 2002, we had agreements to purchase 37 turbines (28 gas
turbines and 9 steam turbines) to support the our ongoing and planned
construction efforts. At March 31, 2002, minimum termination amounts under the
remaining 26 turbine purchase contracts that we intend to exercise consisted of
$28 million. Total amounts to be paid under the agreements if the remaining 26
turbines that we intend to exercise are purchased as planned are estimated to be
$125 million at March 31, 2002. At March 31, 2002, other construction-related
commitments totaled approximately $818 million.
In addition to these commitments, we, through certain of our subsidiaries,
have 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 two separate, independent third-party owners. For the
first facility, which is a $1.8 billion notional value 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 was reduced from
a Euro 1.1 billion notional value facility to a Euro 550 million notional value
facility in April 2002, remaining contracts for six engineered equipment
packages ("power islands") have been assigned to a third-party owner
incorporated in The Netherlands.
As part of our strategic restructuring, we negotiated certain deferrals
under both equipment purchase facilities. Because the term of the deferred
fabrication period for certain turbines included in the $1.80 billion notional
value facility exceeds the defined fabrication period, we will not have the
option to enter a lease arrangement for this equipment, thereby forcing us to
exercise our purchase option. Consequently, we have included a $35 million
liability (and related construction work in progress) for these turbines on our
43
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
accompanying unaudited condensed consolidated balance sheet. At March 31, 2002,
Mirant Corporation's guarantees in connection with the equipment procurement
facilities, including certain payment obligations were approximately $373
million with respect to the turbines for which the facilities have a contractual
obligation (excluding the $35 million which is now included in "Other long-term
debt" on our unaudited condensed consolidated balance sheet). If we had elected
not to exercise our purchase options with respect to the remaining 11 turbines
and power islands and to terminate the procurement contracts, minimum
termination amounts due would have been $181 million at March 31, 2002. If the
purchase options or options to lease the 11 remaining turbines and power islands
are exercised as planned, total commitments would be approximately $477 million.
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 and combined-cycle
generating plants. Generally these agreements may be terminated at little or no
cost in the event that the shipment of the associated turbine is canceled. As of
March 31, 2002, the minimum termination amounts for long-term service agreements
associated with completed and shipped turbines were $536 million. As of March
31, 2002, the total estimated commitments for long-term service agreements
associated with turbines already completed and shipped were approximately $684
million. These commitments are payable over the course of each agreement's
terms, which are projected to range from between ten to twenty years.
As a result of the turbine cancellations as part of our restructuring, 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, our restructuring should not have an impact on the long-term
service agreement commitments disclosed above.
Power Purchase Agreements
Under the asset purchase and sale agreement with PEPCO, we assumed the
obligations and benefits of five power purchase agreements with a total capacity
of 735 MW. Three of the power purchase agreements represent 730 MW. At March 31,
2002, the estimated commitments under the agreements were $1.63 billion, of
which $517 million were included in obligations under energy delivery and
purchase commitments in the unaudited condensed consolidated balance sheets. The
agreements expire over periods through 2021.
Fuel Commitments
We have fixed volumetric purchase commitments under fuel purchase and
transportation agreements totaling $139 million at March 31, 2002. These
agreements will continue to be in effect through 2011. In addition, we have 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 daily spot rate then prevailing at each delivery
point. The agreement will continue to be in effect through December 31, 2007,
unless terminated sooner. The estimated commitment for the term of this
agreement based on current spot prices is $6.29 billion as of March 31, 2002.
Because this contract is based on the current spot price at the time of
delivery, we have the ability to sell the gas at the same spot price, thereby
offsetting the full amount of our commitment related to this contract. In the
event we do not maintain our current credit
44
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ratings, BP could request additional collateral. Based on our current estimate
with pricing as of March 31, 2002, we could be required to post approximately
$266 million of additional collateral.
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 will purchase a minimum of 2.4 million tons of
fuel per annum through December 2007. This minimum purchase commitment will
become effective upon the commencement of the synthetic fuel plant operation at
the Morgantown facility, currently expected to be June 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.
Operating Leases
We have commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $31 million and $30 million during the three months ended March
31, 2002 and 2001, respectively. As of March 31, 2002, estimated minimum rental
commitments for non-cancelable operating leases were $3.61 billion.
We entered an approximately $1.50 billion lease transaction at the closing
of the PEPCO transaction. The leases are treated as operating leases for book
purposes whereby one of our subsidiaries records periodic lease rental expenses.
Mirant New England Guarantee
In April 2002, Mirant 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. Under the agreement, 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. Both the guarantee
and the agreement expire in February 2005.
Litigation and Other Contingencies
Reference is made to Note H to the financial statements filed as part of
this quarterly report on Form 10-Q relating to the following litigation matters
and other contingencies:
Litigation:
o California Attorney General Litigation
o Defaults by SCE and Pacific Gas and Electric, and the Bankruptcies
of Pacific Gas and Electric and the PX
o RMR Agreements
o Western Power Markets Price Mitigation and Refund Proceedings
o California Rate Payer Litigation
o Enron Bankruptcy Proceedings
o State Line
o Edison Mission Energy Litigation
o Environmental Information Requests
45
MIRANT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other Contingencies:
o Western Power Markets Investigations
o DWR Power Purchases
o Energy Marketing and Risk Management
o Turbine Purchases and Other Construction-Related Commitments
o Long-Term Service Agreements
o Power Purchase Agreements
o Fuel Commitments
o Operating Leases
Additionally, for recent events occurring after March 31, 2002 reference is
made to Note K to the financial statements filed as part of this quarterly
report on Form 10-Q.
In addition to the proceedings described above, we experience routine
litigation from time to time in the normal course of our business, which is not
expected to have a material adverse effect on our consolidated financial
condition, cash flows or results of operations.
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 committees review and monitor 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 group risk oversight committees
to ensure that information is communicated to our senior management and audit
committee as needed.
46
MIRANT CORPORATION AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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 three months ended March 31, 2002, the average VaR, using various
holding periods and a 95% confidence interval, was $30.8 million and the VaR as
of March 31, 2002, was $33.8 million. 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 $11.1 million at March 31, 2002 and the
average over the three months ended March 31, 2002 was $10.2 million. During the
three months ended March 31, 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. 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 sheets at March 31, 2002, were
comprised primarily of approximately 33% electricity and 65% natural gas. The
fair values of our energy marketing and risk management liabilities recorded in
the unaudited condensed consolidated balance sheets at March 31, 2002, were
comprised primarily of approximately 31% electricity and 67% natural gas.
Credit Risk
In conducting our energy marketing and risk management activities, we
regularly transact business with a broad range of entities and a wide variety of
end users, 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
47
MIRANT CORPORATION AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 to the
risk oversight committees 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 BBB+ at March 31, 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 March 31, 2002, no amounts owed from a single customer represented
more than 10% of Mirant's total credit exposure. Our total credit exposure is
computed as total accounts and notes receivable, adjusted for energy marketing,
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
Our policy is to manage interest expense using a combination of fixed- and
variable-rate debt. To manage this mix in a cost-efficient manner, we enter into
interest rate swaps in which we agree to exchange, at specified intervals, the
difference between fixed- and variable-interest amounts calculated by reference
to agreed-upon notional principal amounts. These swaps are designated to hedge
underlying debt obligations. For qualifying hedges, the changes in the fair
value of gains and losses of the swaps are deferred in OCI, net of tax, and the
interest rate differential is reclassified from OCI to interest expense as an
adjustment over the life of the swaps. Gains and losses resulting from the
termination of qualifying hedges prior to their stated maturities are recognized
ratably over the remaining life of the hedged instrument.
48
MIRANT CORPORATION AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Hedging
We use cross-currency swaps and currency forwards to hedge our net
investments in certain foreign subsidiaries. Gains or losses on these
derivatives are designated as hedges of net investments and are offset against
the foreign currency translation effects reflected in OCI, net of tax.
We also utilize currency forwards intended to offset the effect of exchange
rate fluctuations on forecasted transactions arising from contracts denominated
in a foreign currency. In addition, we also utilize cross-currency swaps that
offset the effect of exchange rate fluctuations on foreign currency denominated
debt and fix the interest rate exposure. Certain other assets are exposed to
foreign currency risk. We designate 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 in 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 we pay on the related interest rate swaps. On
virtually all of these interest rate swaps, we receive floating interest rate
payments at LIBOR. The currency derivatives mitigate our exposure arising from
certain foreign currency transactions.
Year of Maturity Number of Notional Unrecognized
Type or Termination Interest Rates Counterparties Amount (Loss) Gain
--------------------------- -------------------- ---------------- ------------------ ------------- -----------------
(in millions)
Interest rate swaps.... 2003-2012 3.85%-7.12% 4 $624 $ (34)
Currency forwards...... 2002-2004 -- 3 1CAD117 (1)
2003 -- 1 (pound)58 --
2002-2003 -- 2 2$14 --
----------
$ (35)
==========
(pound) - Denotes British pounds sterling
CAD - Denotes Canadian dollar
1 Contracts with a notional amount of CAD106 million are included in fair
value of energy marketing and risk management liabilities because hedge
accounting criteria are not met.
2 Contracts are utilized by a foreign subsidiary to hedge U. S. dollar
denominated sales contracts.
The unrecognized gain/loss for interest rate swaps is determined based on
the estimated amount that we would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The
unrecognized gain/loss for cross-currency financial instruments is determined
based on current foreign exchange rates.
49
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The following information updates previously reported litigation or sets forth
information concerning litigation that has begun subsequent to the filing of our
Form 10-K/A on March 11, 2002. A background for the updates can be found in
Notes H and K to the financial statements herein or in our annual report on Form
10-K/A filed March 11, 2002. With respect to each of the following matters, we
cannot currently determine the outcome of the proceedings or the amounts of any
potential losses from such proceedings.
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 in San Francisco Superior Court. 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 its
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, California's unfair trade practices statutes.
The suit seeks both restitution and penalties in unspecified amounts.
On March 19, 2002, the California Attorney General filed a complaint with
the FERC against certain California generators, 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 of any such refunded
amounts.
On April 9, 2002, the California Attorney General filed a second civil suit
against Mirant and several of its wholly owned subsidiaries in San Francisco
Superior Court. The lawsuit alleges that the companies violated the California
Unfair Competition Act by failing properly to file its 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.
On April 15, 2002, the California Attorney General filed a third civil
lawsuit against Mirant and several of its wholly owned subsidiaries in the U.S.
District Court for the Northern District of California. The lawsuit alleges that
the Company's acquisition and possession of its Potrero and Delta power plants
has, and will continue to, substantially lessen competition, all in violation of
the Clayton Act and state unfair trade practices statutes. 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.
California Rate Payer Litigation: On April 23, 2002, a class action lawsuit was
filed on behalf of all customers of electricity distributed into California by
the defendants (other than the defendants and their affiliates) by T&E Pastorino
Nursery and Pastorino & Son Nursery against several California generators,
including Mirant and several of its subsidiaries, in the Superior Court for the
County of San Mateo, California. The suit is related to events in the California
wholesale electricity market occurring over the last three years. The suit
alleges that the defendants violated the California Unfair Business Practices
Act by engaging in unfair, unlawful and deceptive practices and by acquiring
generating plants in California that allowed them to exercise market power to
withhold capacity and raise prices above competitive levels. The plaintiffs seek
restitution, injunctive relief and unspecified compensatory and general damages.
50
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
-----------------
10.64 Form of Change in Control Agreement for Edwin H. Adams, Randall E.
Harrison, William J. Holden and Gary J. Morsches
10.65 Form of Retention Agreement with Edwin H. Adams, Randall E. Harrison,
Gary J. Morsches
(b) Reports on Form 8-K.
--------------------
During the quarter ended March 31, 2002, we filed a Current Report on Form 8-K
dated March 20, 2002. Item 5 was reported and no financial statements were
filed.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MIRANT CORPORATION
By /S/ James A. Ward
------------------------------------
James A. Ward
Senior Vice President and Controller
(Principal Accounting Officer)
Date: May 13, 2002