NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and
2005
1. Description of Business and Organization
Mirant is a competitive energy company that produces and sells electricity in the United States. The Company owns or leases 10,280 MW of electric
generating capacity located in markets in the Mid-Atlantic and Northeast regions and in California. Mirant also operates an integrated asset management and energy marketing organization based in Atlanta, Georgia.
Mirant Corporation was incorporated in Delaware on September 23, 2005. Pursuant to the Plan for Mirant and certain of its subsidiaries, on
January 3, 2006, New Mirant emerged from bankruptcy and acquired substantially all of the assets of Old Mirant, a corporation that was formed in Delaware on April 3, 1993, and that had been named Mirant Corporation prior to January 3,
2006. The Plan provides that New Mirant has no successor liability for any unassumed obligations of Old Mirant. Old Mirant was then renamed and transferred to a trust, which is not affiliated with New Mirant.
In the third quarter of 2006, the Company commenced separate auction processes to sell its Philippine (2,203 MW) and Caribbean (1,050 MW) businesses and
six U.S. natural gas-fired facilities totaling 3,619 MW, consisting of the Zeeland (903 MW), West Georgia (613 MW), Shady Hills (469 MW), Sugar Creek (561 MW), Bosque (546 MW) and Apex (527 MW) facilities. On May 1, 2007, the Company completed
the sale of the six U.S. natural gas-fired facilities. On June 22, 2007, the Company completed the sale of its Philippine business. On August 8, 2007, the Company completed the sale of its Caribbean business. In addition, on May 7,
2007, the Company completed the sale of Mirant NY-Gen (121 MW). After transaction costs and repayment of debt, the net proceeds to Mirant from dispositions completed in the year ended December 31, 2007, were approximately $5.071 billion.
See Note 11 for additional information regarding the accounting for these businesses and facilities as discontinued operations.
On
April 9, 2007, Mirant announced that its Board of Directors had decided to explore strategic alternatives to enhance stockholder value. In the exploration process, the Board of Directors considered whether the interests of stockholders would be
best served by returning excess cash from the sale proceeds to stockholders, with the Company continuing to operate its retained businesses or, alternatively, whether greater stockholder value would be achieved by entering into a transaction with
another company, including a sale of the Company in its entirety. On November 9, 2007, Mirant announced the conclusion of the strategic review process. The Company plans to return a total of $4.6 billion of excess cash to its stockholders.
The first stage of the cash distribution is being accomplished through an accelerated share repurchase program for $1 billion, plus open market purchases for up to an additional $1 billion. In the fourth quarter of 2007, in conjunction
with the accelerated share repurchases, the Company repurchased approximately 26.66 million shares of common stock for $1 billion. See Note 13 for further discussion. In addition, Mirant purchased approximately 8.27 million shares of its
common stock for approximately $316 million through open market purchases. Between January 1, 2008 and February 25, 2008, the Company purchased an additional 7.9 million shares in open market purchases for approximately $286 million.
On February 29, 2008, the Company announced that it had decided to return the remaining $2.6 billion of cash through open market purchases of common stock but that it would continue to evaluate the most efficient method to return the cash to
stockholders.
F-7
2. Accounting and Reporting Policies
Basis of Presentation
The accompanying
consolidated financial statements of Mirant and its wholly-owned subsidiaries have been prepared in accordance with GAAP.
The accompanying
financial statements include the accounts of Mirant and its wholly-owned and controlled majority-owned subsidiaries as well as VIEs in which Mirant has an interest and is the primary beneficiary. The financial statements have been prepared from
records maintained by Mirant and its subsidiaries in their respective countries of operation. All significant intercompany accounts and transactions have been eliminated in consolidation. As of December 31, 2007, all of Mirants
subsidiaries are wholly-owned. The Companys obligations to MC Asset Recovery result in its treatment as a variable interest entity in which Mirant is the primary beneficiary as defined in FIN 46R. The entity, therefore, is included in the
Companys consolidated financial statements. See Note 18 for further discussion of MC Asset Recovery.
In preparing the Companys
2006 federal income tax return during 2007, the Company discovered a misstatement in the historical tax basis of its Philippine business. The sale of the Philippine business was completed on June 22, 2007. The result of the misstatement was an
overstatement of the benefit for income taxes as a component of continuing operations and an equivalent understatement of income from discontinued operations by approximately $28 million for the year ended December 31, 2006. Basic and diluted
earnings per share from continuing operations were overstated by $0.10 and $0.09, respectively. Conversely, basic and diluted earnings per share from discontinued operations were understated by the same amounts. The misstatement had no effect on net
income or stockholders equity. The consolidated statement of operations and related footnotes for the year ended December 31, 2006, have been adjusted to reflect the immaterial correction of this misstatement.
In conjunction with Mirants tax planning associated with the utilization of NOLs, the Company reevaluated certain items included in its historical
tax basis balance sheets used in the calculation of the Companys deferred tax assets and liabilities. As a result of this reevaluation, the values of certain components of Mirants inventory of deferred tax assets and liabilities have
been adjusted. Current deferred income tax assets were increased by $134 million and noncurrent deferred income tax assets were decreased by $174 million at December 31, 2006. Current deferred income tax liabilities were increased by $40
million at December 31, 2006. The adjustments had no effect on the net deferred taxes on the accompanying consolidated balance sheets. In addition, the adjustments had no effect on net income, earnings per share or stockholders equity.
The consolidated balance sheet and the income tax disclosures in Note 7 reflect the immaterial correction of this misstatement.
In
preparing the Companys 2007 consolidated statement of cash flow, the Company discovered that capitalized interest expense for projects under construction had been included in cash flows from operating activities, rather than cash flows from
investing activities in 2006. The result of the misstatement was an understatement of cash provided by operating activities and an understatement of cash used in investing activities of approximately $6 million for the year ended December 31,
2006. The misstatement had no effect on cash, net income, or stockholders equity. The consolidated statement of cash flows for the year ended December 31, 2006, has been adjusted to reflect the immaterial correction of this misstatement.
All amounts are presented in U.S. dollars unless otherwise noted. In accordance with SFAS 144, the results of operations of the
Companys businesses and facilities that have been disposed of and have met the criteria for such classification, have been reclassified to discontinued operations and the associated assets and liabilities have been reclassified to assets and
liabilities held for sale for all periods presented. Certain prior period amounts have been reclassified to conform to the current year financial statement presentation.
F-8
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Mirants significant estimates
include:
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determining the fair value of certain derivative contracts;
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estimating future taxable income in determining its deferred tax asset valuation allowance;
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estimating the useful lives of our long-lived assets;
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determining the value of Mirants asset retirement obligations;
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estimating future cash flows in determining impairments of long-lived assets and definite-lived intangible assets;
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estimating the expected return on plan assets, rate of compensation increases and other actuarial assumptions used in estimating pension and other postretirement
benefit plan liabilities;
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estimating losses to be recorded for contingent liabilities; and
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estimating certain assumptions used in the grant date fair value of stock options.
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Revenue Recognition
Mirant recognizes revenue from the sale of energy when earned and
collection is probable. Some sales of energy are based on economic dispatch, or as-ordered by an ISO, based on member participation agreements, but without an underlying contractual commitment. ISO revenues and revenues from sales of
energy based on economic-dispatch are recorded on the basis of MWh delivered, at the relevant day-ahead or real-time prices. When a long-term electric power agreement conveys to the buyer of the electric power the right to use the generating
capacity of Mirants facility, that agreement is evaluated to determine if it is a lease of the generating facility rather than a sale of electric power. Operating lease revenue for the Companys generating facilities is normally recorded
as capacity revenue and included in operating revenues in the consolidated statements of operations.
Derivative Financial Instruments
Derivative financial instruments are recorded in the accompanying consolidated balance sheets at fair value as either assets or
liabilities, and changes in fair value are recognized currently in earnings, unless the Company elects to apply fair value or cash flow hedge accounting based on meeting specific criteria in SFAS 133. For the years ended December 31, 2007, 2006
and 2005, the Company did not have any derivative instruments that it had designated as fair value or cash flow hedges for accounting purposes. Mirants derivative financial instruments are categorized by the Company based on the business
objective the instrument is expected to achieve: asset management or proprietary trading. All derivative contracts are recorded at fair value, except for a limited number of transactions that qualify for the normal purchases or normal sales
exclusion from SFAS 133 and therefore qualify for the use of accrual accounting.
As the Companys commodity derivative financial
instruments have not been designated as hedges for accounting purposes, changes in such instruments fair values are recognized currently in earnings. For asset management activities, changes in fair value of electricity derivative financial
instruments are reflected in operating revenue and changes in fair value of fuel derivative contracts are reflected in cost of fuel, electricity and other products in the accompanying consolidated statements of operations. Changes in the fair value
and settlements of contracts for proprietary trading activities are recorded on a net basis as operating revenue in the accompanying consolidated statements of operations.
F-9
Concentration of Revenues
In 2007, 2006 and 2005, Mirant earned a significant portion of its operating revenue and gross margin from the PJM energy market, where its Mirant Mid-Atlantic generating facilities are located. Mirant
Mid-Atlantics revenues and gross margin as a percentage of Mirants total revenues and gross margin from continuing operations are as follows:
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Years Ended December 31,
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2007
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2006
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2005
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Operating revenues
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56
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%
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62
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%
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46
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%
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Gross margin
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55
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%
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68
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%
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54
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%
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Concentration of Labor Subject to Collective Bargaining Agreements
At December 31, 2007, approximately 48% of Mirants employees are subject to collective bargaining agreements, of which 60% are subject to the
collective bargaining agreement in the Mid-Atlantic region.
Cash and Cash Equivalents
Mirant considers all short-term investments with an original maturity of three months or less to be cash equivalents. At December 31, 2007, except
for amounts held in bank accounts to cover current payables, all of the Companys cash and cash equivalents were invested in AAA-rated U.S. Treasury money market funds.
Restricted Cash
Restricted cash is included in current and noncurrent assets as funds on
deposit and other noncurrent assets in the accompanying consolidated balance sheets. At December 31, 2007, current and noncurrent funds on deposit were $304 million and $7 million, respectively. At December 31, 2006, current and
noncurrent funds on deposit were $235 million and $6 million, respectively. Restricted cash includes deposits with brokers and cash collateral posted with third parties to support the Companys commodity positions as well as a $200 million
deposit by Mirant North America posted under its senior secured term loan to support the issuance of letters of credit.
Inventory
Inventory consists primarily of oil, coal, purchased emissions allowances and materials and supplies. Inventory, including
commodity trading inventory, is generally stated at the lower of cost or market value. Fuel stock is removed from the inventory account as it is used in the production of electricity. Materials and supplies are removed from the inventory account
when they are used for repairs, maintenance or capital projects.
Purchased emissions allowances are recorded in inventory at the lower of
cost or market. Cost is computed on an average cost basis. Purchased emissions allowances for SO2 and NOx are removed from inventory and charged to cost of fuel, electricity and other products in the accompanying consolidated statements of
operations as they are utilized against emissions volumes that exceed the allowances granted to the Company by the EPA.
Inventory at
December 31, 2007 and 2006, consisted of (in millions):
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At December 31,
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2007
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2006
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Fuel
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$
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280
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$
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195
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Materials and supplies
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67
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63
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Emissions allowances
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10
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29
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Total inventory
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$
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357
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$
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287
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F-10
Granted Emissions Allowances
Included in property, plant and equipment are emissions allowances granted by the EPA that were projected to be required to offset physical emissions related to generating facilities owned by the Company. These
emissions allowances were recorded at fair value at the date of the acquisition of the facility and are depreciated on a straight-line basis over the estimated useful life of the respective generating facility and are charged to depreciation and
amortization expense in the accompanying consolidated statements of operations.
Included in other intangible assets are:
(1) emissions allowances granted by the EPA related to generating facilities owned by the Company that are projected to be in excess of those required to offset physical emissions; and (2) emissions allowances related to generating
facilities leased by the Company. Emissions allowances related to leased generating facilities are recorded at fair value at the commencement of the lease. These emissions allowances are amortized on a straight-line basis over a period up to 30
years for emissions allowances related to owned generating facilities or the term of the lease for emissions allowances related to leased generating facilities, and are charged to depreciation and amortization expense in the accompanying
consolidated statements of operations.
As a result of the capital expenditures Mirant is making to comply with the requirements of the
Maryland Healthy Air Act, the Company anticipates that it will have significant excess emissions allowances in future periods. The Company plans to continue to maintain some emissions allowances in excess of expected generation in case its actual
generation exceeds its current forecasts for future periods and for possible future additions of generating capacity. During the fourth quarter of 2007, the Company began a program to sell excess emissions allowances dependent upon market
conditions. The Company sold approximately $24 million of excess emissions allowances and recognized a gain of $22 million, which is included in gain on sales of assets in the consolidated statement of operations for the year ended December 31,
2007. The Company has determined that certain exchanges of emissions allowances that the Company may periodically transact qualify as nonmonetary exchanges under SFAS 153.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, which
includes materials, labor, and associated payroll-related and overhead costs and the cost of financing construction. The cost of routine maintenance and repairs, such as inspections and corrosion removal, and the replacement of minor items of
property are charged to expense as incurred. Certain expenditures incurred during a major maintenance outage of a generating facility are capitalized, including the replacement of major component parts and labor and overhead incurred to install the
parts. Depreciation of the recorded cost of depreciable property, plant and equipment is determined using primarily composite rates. Leasehold improvements are depreciated over the shorter of the expected life of the related equipment or the lease
term. Upon the retirement or sale of property, plant and equipment the cost of such assets and the related accumulated depreciation are removed from the consolidated balance sheets. No gain or loss is recognized for ordinary retirements in the
normal course of business since the composite depreciation rates used by Mirant take into account the effect of interim retirements.
F-11
Capitalization of Interest Cost
Mirant capitalizes interest on projects during their construction period. 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 costs are included in the calculation of the weighted average interest rate used for
determining the capitalization rate. Once placed in service, capitalized interest, as a component of the total cost of the plant, is amortized over the estimated useful life of the plant. For the years ended December 31, 2007, 2006 and 2005,
the Company incurred the following interest costs (in millions):
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Years Ended December 31,
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2007
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2006
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2005
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Total interest costs
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$
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272
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$
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298
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$
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1,404
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Capitalized and included in property, plant and equipment, net
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(25
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)
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(9
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)
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Interest expense
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$
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247
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$
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289
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$
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1,404
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In the third quarter of 2005, the Company determined that it was probable that contractual
interest on liabilities subject to compromise from the Petition Date would be incurred for certain claims expected to be allowed under the Plan and, accordingly, recorded approximately $1.4 billion of interest expense in 2005 on liabilities
subject to compromise.
Operating Leases
Mirant leases various assets under non-cancelable leasing arrangements, including generating facilities, office space and other equipment. The rental expense associated with leases that qualify as operating
leases is recognized on a straight-line basis over the lease term within operations and maintenance expense in the consolidated statement of operations. The Companys most significant operating leases are Mirant Mid-Atlantics
leases of the Morgantown and Dickerson baseload units, which expire in 2034 and 2029, respectively. Mirant has an option to extend these leases. Any extensions of the respective leases would be limited to 75% of the economic useful life of the
facility, as measured from the beginning of the original lease term through the end of the proposed remaining lease term. As of December 31, 2007, the total notional minimum lease payments for the remaining terms of the leases of the
Morgantown and Dickerson baseload units aggregated approximately $2.1 billion.
Curtailment of Other Postretirement Benefits
During the fourth quarter of 2006, Mirant amended its postretirement benefit plan covering non-union employees to eliminate all employer-provided
subsidies through a gradual phase-out by 2011. This action occurred after the Companys September 30 annual measurement date for actuarial purposes used for measuring its December 31, 2006, obligation. The Company recognized a
curtailment gain of approximately $32 million in the first quarter of 2007. This gain is included as a reduction of operations and maintenance expense on the consolidated statement of operations for the year ended December 31, 2007.
Intangible Assets
Intangible
assets with definite useful lives are amortized on a straight-line basis over their respective useful lives ranging up to 40 years to their estimated residual values.
Investments
For the years ended December 31, 2006 and 2005, the Company completed the
sales of investments described below. The related gains are recorded in gain on sales of investments, net in the consolidated statements of operations.
F-12
Equity Investment in InterContinental Exchange.
In 2005, the Company sold a
portion of its investment in InterContinental Exchange for $48 million and realized a gain of $44 million. In 2006, the Company sold its remaining investment in InterContinental Exchange for $58 million and realized a gain of $54 million.
New York Mercantile Exchange Seats.
In late 1998 and early 1999, the Company acquired two seats on
the New York Mercantile Exchange. In 2006, the Company sold its investment for $20 million and recognized a gain of $19 million, which is recorded in gain on sales of investments, net on the Companys consolidated statement of operations.
Environmental Remediation Costs
Mirant accrues for costs associated with environmental remediation when such costs are probable and can be reasonably estimated. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than
completion of the remediation feasibility study. Such accruals are adjusted as further information develops or circumstances change. The cost of future expenditures for environmental remediation obligations are discounted to their present value.
Debt Issuance Costs
Debt
issuance costs are capitalized and amortized as interest expense on a basis that approximates the effective interest method over the term of the related debt.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
SFAS 109 requires that a
valuation allowance be established when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Companys past and
anticipated future performance, the reversal of deferred tax liabilities and the implementation of tax planning strategies.
Objective
positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. It is the Companys view that future sources of taxable
income, reversing temporary differences and implemented tax planning strategies will be sufficient to realize deferred tax assets for which no valuation allowance has been established. A portion of the Companys NOLs (approximately $341
million) is attributable to excess tax deductions primarily related to bankruptcy transactions. The recognition of the tax benefit of these excess tax deductions, either through realization or reduction of the valuation allowance, will be an
increase to additional paid-in-capital in stockholders equity. These NOLs will be the last utilized for financial reporting purposes.
Impairment of Long-Lived Assets
Mirant evaluates long-lived assets, such as property, plant and equipment and
purchased intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such evaluations are performed in accordance with SFAS 144.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
F-13
asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset
exceeds its fair value. Assets to be disposed of are separately presented in the accompanying consolidated balance sheets and are reported at the lower of the carrying amount or fair value less costs to sell, and are not depreciated. The assets and
liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the accompanying consolidated balance sheets.
Cumulative Effect of Changes in Accounting Principles
The Company adopted FIN 47,
effective December 31, 2005, related to the costs associated with conditional legal obligations to retire tangible, long-lived assets. Conditional asset retirement obligations are recorded at the fair value in the period in which they are
incurred by increasing the carrying amount of the related long-lived asset. In each subsequent period, the liability is accreted to its fair value and the capitalized costs are depreciated over the useful life of the related asset. For the year
ended December 31, 2005, the Company recorded a charge as a cumulative effect of changes in accounting principle of approximately $15 million, net of tax, related to the adoption of this accounting standard.
Earnings per Share
Earnings per share
information for 2005 has not been presented. The Company does not think that this information is relevant in any material respect for users of its financial statements. See Note 14 for further discussion.
Basic earnings per share is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is computed using the weighted average number of shares of common stock and dilutive potential common shares, including common shares from warrants, restricted stock shares, restricted stock units and
stock options using the treasury stock method.
Recently Adopted Accounting Standards
In February 2006, the FASB issued SFAS 155, which allows fair value measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event beginning in the first fiscal year after September 15, 2006. At the date of
adoption, any difference between the total carrying amount of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument will be recognized as a cumulative effect adjustment to beginning
retained earnings. The Company adopted SFAS 155 on January 1, 2007. The adoption of SFAS 155 did not affect the Companys statements of operations, financial position or cash flows.
In March 2006, the FASB issued SFAS 156, which requires all separately recognized servicing assets and servicing liabilities to be measured
initially at fair value and permits, but does not require, an entity to measure subsequently those servicing assets or liabilities at fair value. The Company adopted SFAS 156 on January 1, 2007. All requirements for recognition and initial
measurement of servicing assets and servicing liabilities have been applied prospectively to transactions occurring after the adoption of this statement. The adoption of SFAS 156 did not have a material effect on the Companys statements of
operations, financial position or cash flows.
On June 28, 2006, the FASB ratified the EITFs consensus reached on EITF 06-3,
which relates to the income statement presentation of taxes collected from customers and remitted to government authorities. The Task Force affirmed as a consensus on this issue that the presentation of taxes on either a gross basis or a net basis
within the scope of EITF 06-3 is an accounting policy decision that should be disclosed pursuant to APB 22. A company should disclose the amount of those taxes that is recognized on a gross basis in interim and annual financial statements for each
period for which an income statement is presented if those amounts are
F-14
significant. The Company adopted EITF 06-3 on January 1, 2007. While the amounts are not material, the Companys policy is to present such taxes on
a net basis in the consolidated statements of operations.
On July 13, 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. On January 1, 2007, the Company adopted the provisions of FIN 48. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date were recognized or
continue to be recognized. The total effect of adopting FIN 48 was an increase in stockholders equity of $117 million. See Note 7 for additional information on FIN 48.
On May 2, 2007, the FASB issued FSP FIN 48-1, which amended FIN 48 to provide guidance on how an enterprise should determine whether a tax
position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. In determining whether a tax position is effectively settled, companies are required to make the assessment on a position-by-position basis;
however, a company could conclude that all positions in a particular tax year are effectively settled. The Companys initial adoption of FIN 48 on January 1, 2007, was consistent with the provisions of FSP FIN 48-1.
New Accounting Standards Not Yet Adopted
On September 29, 2006, the FASB issued SFAS 158, which includes the requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end statement. This requirement is effective for fiscal
years ending after December 15, 2008. The Company currently uses a September 30 measurement date each year and will transition to a fiscal year-end measurement date by December 31, 2008. This transition will result in a direct
adjustment to retained earnings during 2008 that represents one quarter of the annual net periodic benefit cost.
On September 15,
2006, the FASB issued SFAS 157, which establishes a framework for measuring fair value under GAAP and expands disclosure about fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according
to a fair value hierarchy (i.e., levels 1, 2 and 3 as defined). Additionally, companies are required to provide enhanced disclosure regarding fair value measurements in the level 3 category, including a reconciliation of the beginning and ending
balances separately for each major category of assets and liabilities accounted for at fair value. Mirant adopted the provisions of SFAS 157 on January 1, 2008, for financial instruments and nonfinancial assets and liabilities recognized or
disclosed at fair value in the financial statements on a recurring basis. The FASB deferred the effective date to January 1, 2009, for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a
recurring basis.
SFAS 157 nullifies a portion of the guidance in EITF 02-3. Under EITF 02-3, the transaction price presumption prohibited
recognition of a day one gain or loss at the inception of a derivative contract unless the fair value of that derivative was substantially based on quoted prices or a valuation process incorporating observable inputs. Day one gains or losses on
transactions that had been deferred under EITF 02-3 were recognized in the period that valuation inputs became observable or when the contract performed.
In addition, SFAS 157 also clarifies that an issuers credit standing should be considered when measuring liabilities at fair value, precludes the use of a block discount when measuring instruments traded in an
actively quoted market at fair value and requires costs relating to acquiring instruments carried at fair value to be recognized as expense when incurred. SFAS 157 requires that a fair value measurement reflect the assumptions market participants
would use in pricing an asset or liability based on the best available information.
SFAS 157 clarified that fair value should be measured
at the exit price, which is the price to sell an asset or transfer a liability. The exit price may or may not equal the transaction price and the exit price objective applies regardless of a companys intent or ability to sell the asset or
transfer the liability at the measurement date. The
F-15
Company currently measures fair value using the approximate mid-point of the bid and ask prices. Upon adoption of SFAS 157, the Company will measure fair
value based on the bid or ask price for its price risk management assets and liabilities in accordance with the exit price objective.
The
provisions of SFAS 157 are to be applied prospectively, except for the initial effect on three specific items: (1) changes in fair value measurements of existing derivative financial instruments measured initially using the transaction price
presumption under EITF 02-3, (2) existing hybrid financial instruments measured initially at fair value using the transaction price, and (3) blockage factor discounts. Adjustments to these items required under SFAS 157 are to be recorded
as a transition adjustment to beginning retained earnings in the year of adoption.
Upon adoption, the Company recognized a gain of
approximately $1 million as a cumulative-effect adjustment to accumulated deficit, net of income tax on January 1, 2008. The cumulative-effect adjustment relates entirely to the recognition of inception gains and losses formerly deferred under
EITF 02-3.
On February 15, 2007, the FASB issued SFAS 159, which permits an entity to measure many financial instruments and certain
other items at fair value by electing a fair value option. Once elected, the fair value option may be applied on an instrument by instrument basis, is irrevocable and is applied only to entire instruments. SFAS 159 also requires companies with
trading and available-for-sale securities to report the unrealized gains and losses for which the fair value option has been elected within earnings for the period presented. SFAS 159 is effective at the beginning of the first fiscal year after
November 15, 2007. The Company adopted SFAS 159 on January 1, 2008. The adoption of SFAS 159 did not have a material effect on the Companys statements of operations, financial position or cash flows as the Company did not elect the
fair value option for any of its financial instruments.
On April 30, 2007, the FASB issued FSP FIN 39-1, which amended
FIN 39, to indicate that the following fair value amounts could be offset against each other if certain conditions of FIN 39 are otherwise met: (a) those recognized for derivative instruments executed with the same counterparty under a
master netting arrangement and (b) those recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments.
In addition, a reporting entity is not precluded from offsetting the derivative instruments if it determines that the amount recognized upon payment or receipt of cash collateral is not a fair value amount. FSP FIN 39-1 is effective at the
beginning of the first fiscal year after November 15, 2007. The adoption of FSP FIN 39-1 requires retrospective application for all financial statements presented as a change in accounting principle. The Company adopted FSP FIN 39-1
on January 1, 2008, and elected to continue to net the price risk management assets and liabilities subject to master netting agreements. The Company will reflect the adoption of FSP FIN 39-1 in its consolidated financial position at
March 31, 2008, and reclassify amounts at December 31, 2007, to be consistent with the March 31, 2008, presentation. The adoption of FSP FIN 39-1 has no effect on the Companys consolidated statements of operations or cash
flows.
On December 21, 2007, the SEC issued SAB 110, which amends SAB 107 to allow for the continued use of the simplified method to
estimate the expected term in valuing stock options beyond December 31, 2007. The simplified method can only be applied to certain types of stock options for which sufficient exercise history is not available. The Company adopted SAB 110 on
January 1, 2008, and will continue to use the simplified method until sufficient exercise history is available.
F-16
3.
|
Accounts Receivable and Notes Receivable
|
Receivables consisted of the following at December 31, 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Customer accounts
|
|
$
|
250
|
|
|
$
|
316
|
|
Notes receivable
|
|
|
13
|
|
|
|
20
|
|
Other
|
|
|
64
|
|
|
|
87
|
|
Less: allowance for uncollectibles
|
|
|
(14
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
313
|
|
|
|
391
|
|
Less: long-term receivables included in other long-term assets
|
|
|
(16
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Total current receivables
|
|
$
|
297
|
|
|
$
|
381
|
|
|
|
|
|
|
|
|
|
|
Commodity Financial Instruments
The Company manages the risks around fuel supply and power to be generated from its physical asset positions. Mirant manages the
price risk associated with asset management activities through a variety of methods. Mirants Risk Management Policy requires that asset management activities are restricted to only those activities that are risk-reducing in nature. In
addition, the Company, through its proprietary trading and fuel oil management activities, attempts to achieve incremental returns by entering into energy contracts where it has specific market expertise or physical asset positions. Proprietary
trading and fuel oil management activities increase risk and expose the Company to risk of loss if prices move differently than expected.
Mirant enters into a variety of derivative financial and physical instruments to manage its exposure to the prices of the fuel it acquires for generating electricity, as well as the electricity that it sells. These include contractual
agreements, such as forward purchase and sale agreements, futures, swaps and option contracts. Futures are traded on national exchanges and swaps are typically traded in OTC financial markets. Option contracts are traded on both a national exchange
and in OTC financial markets. These contractual agreements have varying terms, notional amounts and durations, or tenors, which range from a few days to a number of years, depending on the instrument. As part of its proprietary trading activities,
the Company is exposed to certain market risks in an effort to generate gains from changes in market prices by entering into derivative instruments, including exchange-traded and OTC contracts, as well as other contractual arrangements.
Derivative instruments are recorded at their estimated fair value in the Companys accompanying consolidated balance sheets as price risk
management assets and liabilities except for a limited number of transactions that qualify for the normal purchase or normal sale exception election that allows accrual accounting treatment. Changes in the fair value and settlements of electricity
derivative financial instruments are reflected in operating revenue and changes in the fair value and settlements of fuel derivative contracts are reflected in cost of fuel and other products in the accompanying consolidated statements of
operations. As of December 31, 2007 and 2006, the Company does not have any derivative instruments for which hedge accounting has been elected.
F-17
The fair values of Mirants price risk management assets and liabilities, net of credit reserves, at
December 31, 2007 and 2006, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
Net Price Risk
Management
Assets
|
|
Net Price Risk
Management
Liabilities
|
|
|
Net Fair
Value
|
|
|
|
Current
|
|
|
Noncurrent
|
|
Current
|
|
|
Noncurrent
|
|
|
Electricity
|
|
$
|
131
|
|
|
$
|
28
|
|
$
|
(132
|
)
|
|
$
|
(137
|
)
|
|
$
|
(110
|
)
|
Natural Gas
|
|
|
9
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
3
|
|
Oil
|
|
|
28
|
|
|
|
2
|
|
|
(58
|
)
|
|
|
|
|
|
|
(28
|
)
|
Coal
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Other, including credit reserves
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
173
|
|
|
$
|
30
|
|
$
|
(196
|
)
|
|
$
|
(137
|
)
|
|
$
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
Net Price Risk
Management
Assets
|
|
Net Price Risk
Management
Liabilities
|
|
|
Net Fair
Value
|
|
|
|
Current
|
|
|
Noncurrent
|
|
Current
|
|
|
Noncurrent
|
|
|
Electricity
|
|
$
|
603
|
|
|
$
|
99
|
|
$
|
(247
|
)
|
|
$
|
(8
|
)
|
|
$
|
447
|
|
Back-to-Back Agreement
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
(389
|
)
|
|
|
(425
|
)
|
Natural Gas
|
|
|
21
|
|
|
|
1
|
|
|
(26
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Oil
|
|
|
83
|
|
|
|
|
|
|
(10
|
)
|
|
|
(29
|
)
|
|
|
44
|
|
Coal
|
|
|
13
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
10
|
|
Other, including credit reserves
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
715
|
|
|
$
|
100
|
|
$
|
(322
|
)
|
|
$
|
(428
|
)
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Settlement Agreement and Release (the Settlement Agreement) with Pepco and various
affiliates of Pepco (collectively the Pepco Settling Parties) dated May 30, 2006, became fully effective August 10, 2007, and, as a result, the contractual agreement with Pepco with respect to certain PPAs (the
Back-to-Back Agreement) was rejected and terminated. As a result, the Company had no price risk management liabilities related to the Back-to-Back Agreement at December 31, 2007. The fair value of the price risk management liability
related to the Back-to-Back Agreement was reversed and the Company recognized a gain of $341 million in other income, net in the consolidated statements of operations. See Pepco Litigation in Note 19 for further discussion of
the Settlement Agreement.
F-18
The following table represents the net price risk management assets and liabilities by tenor
(in millions):
|
|
|
|
|
|
|
At December 31,
2007
|
|
2008
|
|
$
|
(23
|
)
|
2009
|
|
|
(66
|
)
|
2010
|
|
|
(40
|
)
|
2011
|
|
|
(1
|
)
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Net assets (liabilities)
|
|
$
|
(130
|
)
|
|
|
|
|
|
The volumetric weighted average maturity, or weighted average tenor, of the price risk management
portfolio at December 31, 2007, was approximately 12 months. The net notional amount, or net short position, of the price risk management assets and liabilities at December 31, 2007, was approximately 26 million equivalent MWh.
Fair Values
Financial
instruments recorded at market or fair value include cash and interest-bearing cash equivalents, derivative financial instruments and financial instruments used for price risk management purposes. The following methods are used by Mirant to estimate
the fair value of all financial instruments that are not subject to compromise and not otherwise carried at fair value on the accompanying consolidated balance sheets:
Notes and Other Receivables.
The fair value of Mirants notes receivable are estimated using interest rates it would receive currently for similar types of arrangements.
Long- and Short-Term Debt.
The fair value of Mirants long- and short-term debt is estimated
using quoted market prices, when available.
The carrying amounts and fair values of Mirants financial instruments at
December 31, 2007 and 2006 are as follows (in millions):
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
Carrying Amount
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
Long-and short-term debt
|
|
$
|
3,095
|
|
$
|
3,009
|
|
|
|
Other:
|
|
|
|
|
|
|
Notes and other receivables
|
|
$
|
20
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
Carrying Amount
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
Long-and short-term debt
|
|
$
|
3,275
|
|
$
|
3,338
|
|
|
|
Other:
|
|
|
|
|
|
|
Notes and other receivables
|
|
$
|
13
|
|
$
|
13
|
F-19
Property, plant and equipment,
net consisted of the following at December 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
Depreciable
Lives (years)
|
|
|
2007
|
|
|
2006
|
|
|
Production
|
|
$
|
2,448
|
|
|
$
|
2,505
|
|
|
14 to 35
|
Construction work in progress
|
|
|
645
|
|
|
|
192
|
|
|
|
Other
|
|
|
219
|
|
|
|
208
|
|
|
2 to 12
|
Less: accumulated depreciation, depletion and amortization and provision for impairment
|
|
|
(722
|
)
|
|
|
(704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
2,590
|
|
|
$
|
2,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of the recorded cost of property, plant and equipment is recognized on a
straight-line basis over the estimated useful lives of the assets. Acquired emissions allowances related to owned facilities that were projected to be required to offset physical emissions are included in production assets above, and are depreciated
on a straight-line basis over the average life of the related generating facilities.
Intangible Assets, net
Following is a summary of intangible assets at December 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
At December 31, 2006
|
|
|
|
Weighted Average
Amortization
Lives
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Trading rights
|
|
26 years
|
|
$
|
27
|
|
$
|
(5
|
)
|
|
$
|
27
|
|
$
|
(3
|
)
|
Development rights
|
|
38 years
|
|
|
62
|
|
|
(11
|
)
|
|
|
62
|
|
|
(9
|
)
|
Emissions allowances
|
|
32 years
|
|
|
151
|
|
|
(29
|
)
|
|
|
151
|
|
|
(25
|
)
|
Other intangibles
|
|
27 years
|
|
|
14
|
|
|
(3
|
)
|
|
|
14
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
254
|
|
$
|
(48
|
)
|
|
$
|
254
|
|
$
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading rights are intangible assets recognized in connection with asset purchases that represent
the Companys ability to generate additional cash flows by incorporating Mirants trading activities with the acquired generating facilities.
Development rights represent the right to expand capacity at certain acquired generating facilities. The existing infrastructure, including storage facilities, transmission interconnections and fuel delivery systems
and contractual rights acquired by Mirant, provide the opportunity to expand or repower certain generating facilities.
Emissions
allowances recorded in intangible assets relate to emissions allowances granted for owned generating facilities that were projected at the time of acquisition to be in excess of those required to offset physical emissions and emissions allowances
granted for the leasehold baseload units at the Morgantown and Dickerson facilities.
Emissions allowances granted by the EPA that were
projected at the time of acquisition to be required to offset physical emissions for owned assets are recorded within property, plant and equipment, net on the consolidated balance sheets.
Amortization expense was approximately $8 million for the years ended December 31, 2007, 2006 and 2005. Assuming no future acquisitions,
dispositions or impairments of intangible assets, amortization expense is estimated to be approximately $9 million for each of the next five years.
F-20
Impairments on Assets Held and Used
In accordance with SFAS 144, an asset classified as held and used shall be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
An asset impairment charge must be recognized if the sum of the undiscounted expected future cash flows from a long-lived asset is less than the carrying value of that asset. The amount of any impairment charge is calculated as the excess of the
carrying value of the asset over its fair value. Fair value is estimated based on the discounted future cash flows from that asset or determined by other valuation techniques.
Year Ended December 31, 2007
Background
Mirant Lovett has been in ongoing discussions with the NYSDEC and the New York State Office of the Attorney General regarding environmental controls at
the Lovett generating facility in New York. On June 11, 2003, Mirant New York, Mirant Lovett and the State of New York entered into a consent decree (the 2003 Consent Decree). Under the terms of the 2003 Consent Decree, Mirant
Lovett was required to install certain environmental controls on unit 5 of the Lovett facility, convert unit 5 to operate exclusively on natural gas, or discontinue operation of unit 5 by April 30, 2007. The 2003 Consent Decree
also required that certain environmental controls be installed on unit 4 by April 30, 2008, or operation of unit 4 had to be discontinued.
On May 10, 2007, Mirant Lovett entered into an amendment to the 2003 Consent Decree with the State of New York that switched the deadlines for shutting down units 4 and 5 so that the deadline for compliance by
unit 5 was extended until April 30, 2008, and the deadline for unit 4 was shortened. Unit 4 discontinued operation as of May 7, 2007. In addition, unit 3 discontinued operation because it was uneconomic for the unit to
continue to run.
On May 8, 2007, Mirant New York, Mirant Lovett, Mirant Bowline and Hudson Valley Gas also entered into an agreement
(the Tax Assessments Agreement) with the Town of Stony Point, the Town of Haverstraw and the Village of Haverstraw to set the assessed values for the Lovett and Bowline facilities and the pipeline owned by Hudson Valley Gas for 2007 and
2008 for property tax purposes at the values established for 2006 under a settlement agreement entered into by the Mirant entities and those taxing authorities in December 2006.
The Bankruptcy Court approved the amendment to the 2003 Consent Decree and the Tax Assessments Agreement on May 10, 2007. The United States District
Court for the Southern District of New York approved the amendment to the 2003 Consent Decree on May 11, 2007.
On October 20,
2007, Mirant Lovett submitted notices of its intent to discontinue operations of unit 5 of the Lovett generating facility as of midnight on April 19, 2008, to the New York Public Service Commission, the NYISO, Orange and Rockland and
several other potentially affected transmission and distribution companies in New York.
In its impairment analysis of the Lovett
generating facility in prior periods, the Company assumed multiple scenarios, including the operation of all units of the Lovett facility beyond April 2008. Entering into the amendment to the 2003 Consent Decree and the Tax Assessments
Agreement prompted management to test for recoverability of the Lovett facility under SFAS 144 in the second quarter of 2007.
Assumptions and Results
The Companys assessment of Lovett under SFAS 144 in the second quarter of 2007 involved developing two scenarios for the future
expected operation of the Lovett facility. The first scenario considered was the shutdown of unit 5 by April 30, 2008, in accordance with the amendment to the 2003 Consent Decree. The Company also considered a second scenario that assumed
operation of unit 5, utilizing coal as the primary fuel
F-21
source, through 2012 to allow the Lovett facility to continue to contribute to the reliability of the electric system of the State of New York. Property
taxes under both scenarios were assumed at the assessed levels specified in the Tax Assessments Agreement for those periods. Additionally, both scenarios included an estimated cost for demolition of the facility to reduce future property taxes, a
value for the land on which the facility operates and the sale of previously granted emissions allowances for periods beyond the shutdown date. For purposes of measuring an impairment loss, a long-lived asset or assets must be grouped at the lowest
level of independent identifiable cash flows. All of the units at Mirant Lovett are viewed as one group. As required under SFAS 144, the assessment did not include the value of new generating capacity that could potentially be constructed at the
current Lovett facility site.
As a result of this assessment, in the second quarter of 2007, the Company recorded an impairment loss of
$175 million to reduce the carrying value of the Lovett facility to its estimated fair value. The carrying value of the Lovett facility prior to the impairment was approximately $185 million. The remaining depreciable life for the Lovett
facility was also adjusted to April 30, 2008, based on the high likelihood of a shutdown of unit 5 on that date.
Year Ended December 31,
2006
In 2006, the Companys assessment of the Bowline unit 3 suspended construction project resulted in the conclusion that
the Bowline unit 3 project as configured and permitted was not economically viable. As a result of this conclusion, the Company determined the estimated value of the equipment and project termination liabilities. At December 31, 2006, the
carrying value of the development and construction costs for Bowline unit 3 exceeded the estimated undiscounted cash flows from the abandonment of the project. The Company recorded an impairment of $120 million, which is reflected in
impairment losses on the consolidated statement of operations for the year ended December 31, 2006.
Long-term debt at
December 31, 2007 and 2006, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
Interest Rate
|
|
Secured/
Unsecured
|
|
|
2007
|
|
|
2006
|
|
|
|
Long-term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mirant Americas Generation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due 2011
|
|
$
|
811
|
|
|
$
|
850
|
|
|
8.30%
|
|
Unsecured
|
Due 2021
|
|
|
450
|
|
|
|
450
|
|
|
8.50%
|
|
Unsecured
|
Due 2031
|
|
|
400
|
|
|
|
400
|
|
|
9.125%
|
|
Unsecured
|
Unamortized debt premium/discount
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
|
|
Mirant North America:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured term loan, due 2008 to 2013
|
|
|
555
|
|
|
|
693
|
|
|
LIBOR + 1.75%
|
|
Secured
|
Senior notes, due 2013.
|
|
|
850
|
|
|
|
850
|
|
|
7.375%
|
|
Unsecured
|
Capital leases, due 2008 to 2015
|
|
|
32
|
|
|
|
36
|
|
|
7.375% - 8.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,095
|
|
|
|
3,275
|
|
|
|
|
|
Less: current portion of long-term debt
|
|
|
(142
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, excluding current portion
|
|
$
|
2,953
|
|
|
$
|
3,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Mirant Americas Generation Senior Notes
In 2006, Mirants wholly-owned subsidiary, Mirant Americas Generation, reinstated $1.7 billion of senior notes maturing in 2011, 2021 and 2031.
The reinstated senior notes are senior unsecured obligations of Mirant Americas Generation and are not recourse to any subsidiary or affiliate of Mirant Americas Generation. In the fourth quarter of 2007, the Company purchased and retired $39
million of Mirant Americas Generation senior notes due in 2011.
Mirant North America Senior Secured Credit Facilities
Mirant North America, a wholly-owned subsidiary of Mirant Americas Generation, entered into senior secured credit facilities in January 2006, which
are comprised of an $800 million senior secured revolving credit facility and a senior secured term loan with an initial principal balance of $700 million amortized to $555 million as of December 31, 2007. At the closing, $200 million
drawn under the senior secured term loan was deposited into a cash collateral account to support the issuance of up to $200 million of letters of credit. At December 31, 2007, there were approximately $199 million of letters of credit
outstanding under the senior secured term loan and approximately $91 million of letters of credit outstanding under the $800 million senior secured revolving credit facility. At December 31, 2007, a total of $710 million was available
under the senior secured revolving credit facility and the senior secured term loan for cash draws or for the issuance of letters of credit.
In addition to the quarterly installments of $1.75 million, Mirant North America is required to prepay a portion of the outstanding senior secured term loan principal balance once a year. The prepayment is based on an adjusted EBITDA
calculation that determines excess free cash flows, as defined in the loan agreement. At December 31, 2007, the current estimate of the mandatory principal prepayment of the term loan in the first quarter of 2008 is approximately $132 million.
This amount has been reclassified from long-term debt to current portion of long-term debt at December 31, 2007.
The senior secured
credit facilities are senior secured obligations of Mirant North America. In addition, certain subsidiaries of Mirant North America (not including Mirant Mid-Atlantic or Mirant Energy Trading) have jointly and severally guaranteed, as senior secured
obligations, the senior secured credit facilities. The senior secured credit facilities are nonrecourse to any other Mirant entities.
Mirant North
America Senior Notes
In December 2005, Mirant North America issued senior notes in an aggregate principal amount of
$850 million that bear interest at 7.375% and mature on December 31, 2013. The original senior notes were issued in a private placement and were not registered with the SEC. The proceeds of the original senior notes offering initially were
placed in escrow pending the emergence of Mirant North America from bankruptcy. The proceeds were released from escrow in connection with Mirant North Americas emergence from bankruptcy and the closing of the senior secured credit facilities.
In connection with the issuance of the original senior notes, Mirant North America entered into a registration rights agreement under
which it agreed to complete an exchange offer for the original senior notes. On June 29, 2006, Mirant North America completed its registration under the Securities Act of $850 million of the senior notes and initiated the exchange offer. The
exchange offer was completed on August 4, 2006, with $849.965 million of the outstanding original senior notes being tendered for the senior notes. The terms of the senior notes are identical in all material respects to the terms of the
original senior notes, except that the senior notes are registered under the Securities Act and generally are not subject to transfer restrictions or registration rights.
Interest on the notes is payable on each June 30 and December 31. The senior notes are senior unsecured obligations of Mirant North America. In addition, certain subsidiaries of Mirant North America (not
including Mirant Mid-Atlantic or Mirant Energy Trading) have jointly and severally guaranteed, as senior unsecured
F-23
obligations, the senior notes. The senior notes are nonrecourse to any other Mirant entities. The notes are redeemable at the option of Mirant North America,
in whole or in part, at any time prior to December 31, 2009, at a price equal to 100% of the principal amount, plus accrued and unpaid interest, plus a make-whole premium. At any time on or after December 31, 2009, Mirant North America may
redeem the notes at specified redemption prices, together with accrued and unpaid interest, if any, to the date of redemption. At any time prior to December 31, 2008, Mirant North America may redeem up to 35% of the original principal amount of
the notes with the proceeds of certain equity offerings at a redemption price of 107.375% of the principal amount of the notes, together with accrued and unpaid interest, if any, to the date of redemption. Under the terms of the notes, the
occurrence of a change of control will be a triggering event requiring Mirant North America to offer to purchase all or a portion of the notes at a price equal to 101% of their principal amount, together with accrued and unpaid interest, if any, to
the date of purchase. In addition, certain asset dispositions or casualty events will be triggering events which may require Mirant North America to use the proceeds from those asset dispositions or casualty events to make an offer to purchase the
notes at 100% of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase if such proceeds are not otherwise used, or committed to be used, within certain time periods, to repay senior secured indebtedness,
to repay indebtedness under the senior secured credit facilities (with a corresponding reduction in commitments) or to invest in capital assets related to its business.
Debt Maturities
At December 31, 2007, the annual scheduled maturities of debt during
the next five years and thereafter were as follows (in millions):
|
|
|
|
2008
|
|
$
|
142
|
2009
|
|
|
11
|
2010
|
|
|
11
|
2011
|
|
|
822
|
2012
|
|
|
9
|
Thereafter
|
|
|
2,100
|
|
|
|
|
Total
|
|
$
|
3,095
|
|
|
|
|
With the exception of 2008, the annual scheduled maturities above do not include estimates of
Mirant North Americas required payments of its senior secured term loan based on its EBITDA.
Capital Leases
Long-term debt includes a capital lease by Mirant Chalk Point. At December 31, 2007 and 2006, the current portion of the long-term debt under this
capital lease was $3 million. The amount outstanding under the capital lease, which matures in 2015, is $30 million with an 8.19% annual interest rate. This lease is of an 84 MW peaking electric power generating facility. Depreciation expense
related to this lease was approximately $2 million for each of the years ended December 31, 2007, 2006 and 2005. The annual principal payments under this lease are approximately $3 million in 2008 through 2010, $4 million in 2011 through
2012 and $14 million thereafter. The gross amount of assets under the capital lease, recorded in property, plant and equipment, net as of December 31, 2007 and 2006, was $24 million. The related accumulated depreciation was $12 million and
$10 million as of December 31, 2007 and 2006, respectively.
Sources of Funds and Capital Structure
The principal sources of liquidity for the Companys future operations and capital expenditures are expected to be: (1) existing cash on hand
and cash flows from the operations of the Companys subsidiaries; (2) letters of credit issued or borrowings made under Mirant North Americas $800 million senior secured revolving credit
F-24
facility; and (3) $200 million letter of credit capacity available under Mirant North Americas senior secured term loan.
The Company and certain of its subsidiaries, including Mirant Americas Generation and Mirant North America, are holding companies and, as a result, the
Company and such subsidiaries are dependent upon dividends, distributions and other payments from their respective subsidiaries to generate the funds necessary to meet their obligations. The ability of certain of the Companys subsidiaries to
pay dividends and make distributions is restricted under the terms of their debt or other agreements. In particular, a substantial portion of the cash from the Companys operations is generated by Mirant Mid-Atlantic. The Mirant Mid-Atlantic
leveraged leases contain a number of covenants, including limitations on dividends, distributions and other restricted payments. Under its leveraged leases, Mirant Mid-Atlantic is not permitted to make any dividends, distributions and other
restricted payments unless: (1) it satisfies the fixed charge coverage ratio on a historical basis for the last period of four fiscal quarters; (2) it is projected to satisfy the fixed charge coverage ratio for the next two periods of four
fiscal quarters; and (3) no significant lease default or event of default has occurred and is continuing. In the event of a default under the leveraged leases or if the restricted payments test is not satisfied, Mirant Mid-Atlantic would not be
able to distribute cash. Based on the Companys calculation of the fixed charge coverage ratios under the leveraged leases as of December 31, 2007, Mirant Mid-Atlantic meets the required 1.7 to 1.0 ratio for restricted payments, both on a
historical and projected basis.
Mirant North America is an intermediate holding company that is a subsidiary of Mirant Americas Generation
and the parent of its indirect subsidiaries, including Mirant Mid-Atlantic. Mirant North America incurred certain indebtedness pursuant to its senior notes and senior secured credit facilities secured by the assets of Mirant North America and its
subsidiaries (other than Mirant Mid-Atlantic and Mirant Energy Trading). The indebtedness of Mirant North America includes certain covenants typical in such notes and credit facilities, including restrictions on dividends, distributions and other
restricted payments. Further, the notes and senior secured credit facilities include financial covenants that will exclude from the calculation the financial results of any subsidiary that is unable to make distributions or pay dividends at the time
of such calculation. Thus, the ability of Mirant Mid-Atlantic to make distributions to Mirant North America under the leveraged lease transaction could have a material effect on the calculation of the financial covenants under the senior notes and
senior secured credit facilities of Mirant North America and on its ability to make distributions to Mirant Americas Generation.
The
ability of Mirant Americas Generation to pay its obligations is dependent on the receipt of dividends from Mirant North America, capital contributions from Mirant and its ability to refinance all or a portion of those obligations as they become due.
7. Income Taxes
Income from continuing operations before income taxes for the years ended December 31, 2007 and 2006, was $442 million and $1.202 billion, respectively. For the year ended December 31, 2005, the Company had a loss from continuing
operations before taxes of $1.403 billion.
The income tax provision (benefit) from continuing operations consisted of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
Current income tax provision (benefit)
|
|
$
|
9
|
|
$
|
2
|
|
|
$
|
(4
|
)
|
Deferred income tax provision (benefit)
|
|
|
|
|
|
(552
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
9
|
|
$
|
(550
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
A reconciliation of the Companys federal statutory income tax provision to the effective income tax
provision adjusted for restructuring items for the years ended December 31, 2007, 2006 and 2005, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Provision (benefit) for income taxes based on United States federal statutory income tax rate
|
|
$
|
154
|
|
|
$
|
419
|
|
|
$
|
(492
|
)
|
State and local income tax (benefit), net of federal income taxes
|
|
|
(95
|
)
|
|
|
79
|
|
|
|
73
|
|
Discontinued operations
|
|
|
21
|
|
|
|
(64
|
)
|
|
|
(27
|
)
|
Return to provision adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees during bankruptcy
|
|
|
|
|
|
|
65
|
|
|
|
|
|
Previously deferred intercompany gain
|
|
|
|
|
|
|
22
|
|
|
|
|
|
Foreign reorganization gain
|
|
|
|
|
|
|
83
|
|
|
|
|
|
Other
|
|
|
(86
|
)
|
|
|
50
|
|
|
|
|
|
Effect of Internal Revenue Code Section §382(1)(6) and §382(1)(5)
|
|
|
(321
|
)
|
|
|
297
|
|
|
|
|
|
Effect of implementing FIN 48
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Netherlands NOL write-off
|
|
|
|
|
|
|
|
|
|
|
164
|
|
Reorganization adjustments
|
|
|
(170
|
)
|
|
|
|
|
|
|
12
|
|
Taxes accrued on foreign earnings
|
|
|
|
|
|
|
16
|
|
|
|
31
|
|
Excess tax deductions related to bankruptcy transactions
|
|
|
(212
|
)
|
|
|
(22
|
)
|
|
|
(107
|
)
|
Change in deferred tax asset valuation allowance
|
|
|
671
|
|
|
|
(1,513
|
)
|
|
|
260
|
|
Other differences, net
|
|
|
3
|
|
|
|
18
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit)
|
|
$
|
9
|
|
|
$
|
(550
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences between the carrying amounts of assets and liabilities in
the consolidated financial statements and their respective tax bases which give rise to deferred tax assets and liabilities for continuing operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
64
|
|
|
$
|
30
|
|
Reserves
|
|
|
25
|
|
|
|
80
|
|
Loss carryforwards
|
|
|
1,464
|
|
|
|
1,333
|
|
Tax basis in excess of book basis in foreign investments expected to be realized
|
|
|
|
|
|
|
335
|
|
Property and intangible assets
|
|
|
158
|
|
|
|
146
|
|
Energy marketing and risk management contracts
|
|
|
52
|
|
|
|
|
|
Other
|
|
|
62
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,825
|
|
|
|
1,983
|
|
Valuation allowance
|
|
|
(1,786
|
)
|
|
|
(1,115
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
39
|
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Energy marketing and risk management contracts
|
|
|
|
|
|
|
(92
|
)
|
Taxes accrued on foreign earnings
|
|
|
|
|
|
|
(15
|
)
|
Other
|
|
|
(39
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(39
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
721
|
|
|
|
|
|
|
|
|
|
|
F-26
NOLs
As required by applicable accounting principles, an enterprise that anticipates the realization of a pre-tax gain must recognize the benefit or detriment of the deferred tax assets and liabilities associated with the transaction in the year
in which it becomes more likely than not that the gain will be realized. In accordance with EITF 93-17,
Recognition of Deferred Tax Assets for a Parent Companys Excess Tax Basis in the Stock of a Subsidiary that Is Accounted for as a
Discontinued Operation
, the Company recognized a tax benefit in 2006 arising from and related solely to the sale of the Philippine business. Conversely, in 2007, the Company recognized an income tax provision of $721 million that arose from
and was specifically related to the sale of the Philippine business. The entire amount of this provision was recorded in income from discontinued operations in the consolidated statement of operations for the year ended December 31, 2007.
At December 31, 2006, Mirant considered it to be more likely than not that it would elect treatment under Internal Revenue Code
Section (§) §382(l)(5). As a result of further tax planning, the Company made the decision to follow §382(l)(6) in its 2006 income tax return that was filed on September 15, 2007. As a result, the recorded deferred
income tax items, including pre-emergence NOLs, are presented in accordance with the §382(l)(6) treatment at December 31, 2007. This change had no net effect on the consolidated balance sheets or consolidated statements of operations
because the increase in deferred tax asset NOLs was equally offset by an increase in the related deferred tax asset valuation allowance.
Under §382(l)(6), the Company is subject to an annual limitation on the use of its NOLs that arose prior to its emergence from bankruptcy on January 3, 2006. The annual limitation is based on a number of factors including the
emergence date value of the Companys stock (as defined for tax purposes), its net unrealized built in gain position on that date, the occurrence or occurrences of realized built in gains in the post emergence years or in future years, and the
effects of subsequent ownership changes (as defined for tax purposes), if any. The NOLs under this election will not be subject to any previous adjustments for interest accrued on debt settled with stock as required under §382(l)(5). The
Company elected in its 2006 tax return to reduce the income tax basis of depreciable assets for any cancellation of debt income that arises from making the §382(l)(6) election.
On March 15, 2007, Mirant filed a check-the-box election under which Mirant Asia-Pacific will be treated as a corporation for U.S. federal income
tax purposes effective January 1, 2007. As a result of this election, Mirant recognized a taxable gain for U.S. federal income tax purposes in 2006, which was fully offset by other deductions and losses arising in that year.
The December 31, 2007, federal NOL carryforward for financial reporting was $3.3 billion with expiration dates from 2022 to 2026. The
December 31, 2006, NOL balance under §382(l)(6) was $3.2 billion as adjusted for the effect of the Mirant Asia-Pacific check-the-box election discussed above. Similarly, there is an aggregate amount of $6.5 billion of state NOL
carryforwards with various expiration dates (based on the application of apportionment factors and other state tax limitations).
SFAS 109
requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Companys past
and anticipated future performance, the reversal of deferred tax liabilities and the implementation of tax planning strategies.
Objective
positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. It is the Companys view that future sources of taxable
income, reversing temporary differences and implemented tax planning strategies will be sufficient to realize deferred tax assets for which no valuation allowance has been established. The Company continues to maintain its valuation allowance
against its deferred tax assets. As of December 31, 2007, the Companys deferred tax assets reduced by the valuation allowance are completely offset with its deferred tax liabilities. A portion of the Companys NOLs (approximately $341
million) is attributable to excess tax
F-27
deductions primarily related to bankruptcy transactions. The recognition of the tax benefit of these excess tax deductions, either through realization or
reduction of the valuation allowance, will be an increase to additional paid-in-capital in stockholders equity. These NOLs will be the last utilized for financial reporting purposes.
Tax Uncertainties
The Company adopted the
provisions of FIN 48 on January 1, 2007. Prior to adoption of FIN 48, Mirant recognized contingent liabilities related to tax uncertainties when it was probable that a loss had occurred and the loss or range of loss could be
reasonably estimated. The recognition of contingent losses for tax uncertainties required management to make significant assumptions about the expected outcomes of certain tax contingencies. Upon adoption of FIN 48, the Company changed its
method to recognize only liabilities for uncertain tax positions that are less than or subject to the measurement threshold of the more-likely-than-not standard. As a result of the implementation of FIN 48, for continuing operations, the
Company recognized a decrease in accrued liabilities of $61 million and an increase of $26 million in taxes receivable. For discontinued operations, the adoption of FIN 48 resulted in a decrease in liabilities held for sale and
accumulated deficit of $30 million. The total effect of adopting FIN 48 was an increase in stockholders equity of $117 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits for continuing
operations is as follows (in millions):
|
|
|
|
Unrecognized tax benefits, January 1, 2007
|
|
$
|
13
|
Increases based on tax positions related to the current year
|
|
|
|
Increases for tax positions for prior years
|
|
|
2
|
Settlements
|
|
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
Unrecognized tax benefits, December 31, 2007
|
|
$
|
15
|
|
|
|
|
The unrecognized tax benefit included the review of tax positions relating to open tax years
beginning in 1999 and continuing to the present. The Companys major tax jurisdictions are U.S. federal and multiple state jurisdictions. For U.S. federal income taxes, all tax years prior to 2004 are closed and for state income taxes, the
earliest open year is 1999. However, both the federal and state NOL carryforwards from any closed year is subject to examination until the year that such NOL carryforwards are utilized and that year is closed for audit. The Company does not
anticipate any significant changes in its unrecognized tax benefits over the next 12 months. Included in the balance at December 31, 2007 and 2006, the Company had $4 million and $3 million, respectively, of unrecognized tax benefits that would
affect the effective tax rate if it were recognized. The Companys tax provision continues to include an immaterial amount related to the accrual for any penalties and interest subsequent to its adoption of FIN 48.
8. Employee Benefit Plans
Pension
Plans
Mirant provides pension benefits to its non-union and union employees through various defined benefit and defined
contribution pension plans. These benefits are based on pay, service history and age at retirement. Defined benefit pensions are not provided for non-union employees hired after April 1, 2000, who participate in a profit sharing arrangement.
Most pension benefits are provided through tax-qualified plans that are funded in accordance with ERISA and Internal Revenue Service requirements. Certain executive pension benefits that cannot be provided by the tax-qualified plans are provided
through unfunded non-tax-qualified plans. The measurement date for the defined benefit plans is September 30 for each year presented.
SFAS 158 is designed to improve financial reporting by requiring an employer to recognize the overfunded or underfunded status of pension, retiree medical and other postretirement benefit plans on its balance sheets rather than only
disclosing the funded status in the financial statement footnotes. The Company adopted SFAS 158 on December 31, 2006, and recognized an increase in other noncurrent liabilities of $21 million related to its underfunded defined benefit pension
plans. Effective December 31, 2008, SFAS 158 also requires that
F-28
companies measure the funded status of plans as of the year-end balance sheet date. Mirant currently uses September 30 as the date to measure the funded
status of its plans. SFAS 158 offers two transition methods for companies that do not use a year-end measurement date to transition to a December 31, 2008, measurement date. Mirant has elected to use the alternative transition method under SFAS
158 for changing its measurement date, which resulted in an increase to accumulated deficit of $1.8 million as of January 1, 2008.
The following table shows the benefit obligations and funded status for the defined benefit pension plans of Mirants continuing operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-Qualified
|
|
|
Non-Tax Qualified
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
244
|
|
|
$
|
245
|
|
|
$
|
9
|
|
|
$
|
12
|
|
Service cost
|
|
|
8
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
1
|
|
Benefits paid
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
(15
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
243
|
|
|
$
|
244
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
151
|
|
|
$
|
109
|
|
|
$
|
|
|
|
$
|
|
|
Return on plan assets
|
|
|
21
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
41
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
205
|
|
|
$
|
151
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at measurement date
|
|
$
|
(38
|
)
|
|
$
|
(93
|
)
|
|
$
|
(9
|
)
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation exceeded the fair value of plan assets at year-end 2007 for the
tax qualified pension plans. The total accumulated benefit obligation as of September 30, 2007, was $213 million.
The weighted
average assumptions used for measuring year-end pension benefit obligations as of their respective measurement dates are listed in the table below. The discount rate used as of September 30, 2007, was determined based on individual
bond-matching models comprised of portfolios of high quality corporate bonds with projected cash flows and maturity dates reflecting the expected time horizon during which that benefit will be paid. Bonds included in the model portfolios are from a
cross-section of different issuers, are rated AA-rated or better, and are non-callable so that the yield to maturity can actually be attained without intervening calls. For 2006, the discount rate was based on the Moodys Aa Corporate Bond Rate
as of September 30, 2006.
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
6.12
|
%
|
|
5.66
|
%
|
Rate of compensation increases
|
|
3.64
|
%
|
|
3.70
|
%
|
Additional amounts recognized in the consolidated balance sheets under SFAS 158 are shown below at
December 31, 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-Qualified
|
|
|
Non-Tax Qualified
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Noncurrent liabilities
|
|
$
|
(38
|
)
|
|
$
|
(93
|
)
|
|
$
|
(9
|
)
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability recognized at measurement date
|
|
|
(38
|
)
|
|
|
(93
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability recognized at year-end
|
|
$
|
(38
|
)
|
|
$
|
(93
|
)
|
|
$
|
(9
|
)
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
Amounts recognized in accumulated other comprehensive income at December 31, 2007 and 2006, under
SFAS 158 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-Qualified
|
|
|
Non-Tax Qualified
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net gain (loss)
|
|
$
|
7
|
|
|
$
|
(17
|
)
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Prior service cost
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts included in accumulated other comprehensive
income (expense)
|
|
$
|
4
|
|
|
$
|
(20
|
)
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected amortization payments.
The estimated net gain (loss) and
prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.2 million and $0.5 million, respectively. Additionally, as of
January 1, 2008, Mirant expects to recognize no net gain/(loss) and $0.1 million of prior service cost as other comprehensive income as a result of the adjustment to retained earnings related to the change in measurement date under SFAS 158.
The components of the net periodic benefit cost of Mirants continuing operations pension plans for the years ended December 31,
2007, 2006 and 2005, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
9
|
|
Interest cost
|
|
|
14
|
|
|
|
14
|
|
|
|
12
|
|
Expected return of plan assets
|
|
|
(13
|
)
|
|
|
(10
|
)
|
|
|
(8
|
)
|
Net amortization(1)
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
11
|
|
|
$
|
16
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net amortization amount includes prior service cost and actuarial gains or losses.
|
Other changes in plan assets and benefit obligation recognized in other comprehensive income for the year ended December 31, 2007, are shown below (in millions):
|
|
|
|
|
Net gain
|
|
|
$ (24)
|
|
Prior service credit
|
|
|
(1
|
)
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
(25
|
)
|
|
|
|
|
|
The resulting total amount recognized in net periodic benefit cost and other comprehensive income
for the year ended December 31, 2007, was $14 million.
The weighted average assumptions used for measuring pension benefit cost each
year were as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
5.66
|
%
|
|
5.36
|
%
|
Rate of compensation increase
|
|
3.70
|
%
|
|
3.82
|
%
|
Expected long-term rate of return on plan assets
|
|
8.50
|
%
|
|
8.50
|
%
|
In determining the long-term rate of return for plan assets, the Company evaluates historic and
current market factors such as inflation and interest rates before determining long-term capital market assumptions. The Company also considers the effects of diversification and portfolio rebalancing. To check for reasonableness and
appropriateness, the Company reviews data about other companies, including their historic returns.
F-30
The following table shows the target allocation and percentage of fair value of plan assets by asset
category for Mirants qualified pension plans for 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Target
Allocation
|
|
|
Percent of
Fair Value of
Plan Assets
|
|
|
Target
Allocation
|
|
|
Percent of
Fair Value of
Plan Assets
|
|
U.S. Stocks
|
|
50
|
%
|
|
55
|
%
|
|
55
|
%
|
|
56
|
%
|
Non-U.S. Stocks
|
|
20
|
|
|
15
|
|
|
15
|
|
|
14
|
|
Fixed income
|
|
30
|
|
|
30
|
|
|
30
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the qualified pension plans, Mirant uses a mix of equities and fixed income investments in an
attempt to maximize the long-term return of plan assets for a prudent level of risk. The Companys risk tolerance is established through consideration of plan liabilities, plan funded status and corporate financial condition. Equity investments
are diversified across U.S. and non-U.S. stocks. For U.S. stocks, Mirant employs both a passive and active approach by investing in an index that mirrors the Russell 1000 Index and an actively managed small cap fund. For non-U.S. stocks, Mirant is
invested in an international equity fund that is benchmarked against the Europe, Australia and Far East Index. Fixed income investments include a passive bond market index fund and a long U.S. government/credit index fund which seek to replicate the
Lehman Brothers Long Government/Credit Bond Index. Investment risk is monitored on an ongoing basis through quarterly portfolio reviews and annual pension liability measurements.
During 2008, Mirant expects to contribute approximately $22 million to the qualified pension plans and approximately $0.3 million to the
non-tax-qualified pension plans. Additionally, Mirant expects the following benefits to be paid from the pension plans (in millions):
|
|
|
|
|
|
|
Projected Benefit Payments to
Plan Participants
|
|
Tax-
Qualified
|
|
Non-Tax
Qualified
|
2008
|
|
$
|
8.2
|
|
$
|
0.3
|
2009
|
|
|
8.6
|
|
|
0.3
|
2010
|
|
|
9.1
|
|
|
0.3
|
2011
|
|
|
9.8
|
|
|
0.3
|
2012
|
|
|
10.8
|
|
|
0.3
|
2013 through 2017
|
|
|
75.7
|
|
|
2.2
|
Other Postretirement Benefits
Mirant also provides certain medical care and life insurance benefits for eligible retired employees which are accounted for on an accrual basis using an
actuarial method that recognizes the net periodic costs as employees render service to earn the postretirement benefits. The measurement date for these other postretirement benefit plans is September 30 for each year presented.
The Company adopted SFAS 158 on December 31, 2006, and recognized a decrease in other noncurrent liabilities of $5 million related to its other
postretirement benefit plans. Effective December 31, 2008, SFAS 158 also requires that companies measure the funded status of plans as of the year-end balance sheet date. Mirant currently uses September 30 as the date to measure the funded
status of its plans. SFAS 158 offers two transition methods for companies that do not use a year-end measurement date to transition to a December 31, 2008, measurement date. Mirant has elected to use the alternative transition method under SFAS
158 for changing its measurement date, which has resulted in a decrease to accumulated deficit of $0.2 million as of January 1, 2008.
During the fourth quarter of 2006, Mirant amended the postretirement benefit plan covering non-union employees to eliminate all employer provided subsidies through a gradual phase-out by 2011. As a result, Mirant recognized a reduction in
other postretirement liabilities of $32 million. Since the amendment occurred after the 2006 measurement date, the plan curtailment was recognized during the first quarter of fiscal 2007.
F-31
The following table shows the benefit obligations and funded status for other postretirement benefit
plans of Mirant (in millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
107
|
|
|
$
|
127
|
|
Service cost
|
|
|
1
|
|
|
|
4
|
|
Interest cost
|
|
|
4
|
|
|
|
7
|
|
Amendments
|
|
|
(9
|
)
|
|
|
(17
|
)
|
Actuarial gain
|
|
|
(12
|
)
|
|
|
(11
|
)
|
Curtailments
|
|
|
(32
|
)
|
|
|
|
|
Benefits paid
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
|
57
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
2
|
|
|
|
3
|
|
Benefits paid
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at measurement date
|
|
$
|
(57
|
)
|
|
$
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used for other postretirement benefit obligations as of their
respective measurement dates were as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
6.06
|
%
|
|
5.66
|
%
|
Rate of compensation increases
|
|
3.00
|
%
|
|
3.00
|
%
|
Assumed medical inflation for next year
|
|
|
|
|
|
|
Before age 65
|
|
8.00
|
%
|
|
9.00
|
%
|
After age 65
|
|
9.50
|
%
|
|
11.00
|
%
|
Assumed ultimate medical inflation rate
|
|
5.00
|
%
|
|
5.00
|
%
|
Year in which ultimate rate is reached
|
|
2015
|
|
|
2011
|
|
An annual increase or decrease in the assumed medical care cost trend rate of 1% would
correspondingly increase or decrease the total accumulated benefit obligation at December 31, 2007, by an inconsequential amount.
Additional amounts recognized in the consolidated balance sheet for other postretirement benefit plans at December 31, 2007 and 2006, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
|
2006
|
|
Current liabilities
|
|
$
|
(3
|
)
|
|
|
|
$
|
(4
|
)
|
Noncurrent liabilities
|
|
|
(54
|
)
|
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total liability recognized at measurement date
|
|
|
(57
|
)
|
|
|
|
|
(107
|
)
|
Net employer contributions after measurement date
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability recognized at year-end
|
|
$
|
(57
|
)
|
|
|
|
$
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
F-32
Amounts recognized in accumulated other comprehensive income for other postretirement benefit plans at
December 31, 2007 and 2006, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
|
2006
|
|
Net loss
|
|
|
$(15
|
)
|
|
|
|
$
|
(43
|
)
|
Prior service credit
|
|
|
38
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts included in accumulated other comprehensive income
|
|
$
|
23
|
|
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected amortization payments.
The estimated net (gain) loss and
prior service cost (credit) for other postretirement benefit plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.7 million and $(6.6) million, respectively.
Additionally, as of January 1, 2008, Mirant expects to recognize $0.2 million of net loss and $1.7 million of prior service credit as other comprehensive income as a result of the adjustment to retained earnings related to the change in
measurement date under SFAS 158.
The components of the net periodic cost for Mirants postretirement benefit plans during each year
are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
Service cost
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
4
|
Interest cost
|
|
|
4
|
|
|
|
7
|
|
|
|
8
|
Net amortization(1)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
2
|
Curtailment
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
(29
|
)
|
|
$
|
10
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net amortization amount includes prior service credit and actuarial gains or losses.
|
Other changes in plan assets and benefit obligation recognized in other comprehensive income for other postretirement benefit plans for the year ended December 31, 2007, were as follows (in millions):
|
|
|
|
|
Net gain
|
|
$
|
(12
|
)
|
Prior service credit
|
|
|
(9
|
)
|
Amortization of:
|
|
|
|
|
Net gain
|
|
|
(15
|
)
|
Prior service cost
|
|
|
19
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
(17
|
)
|
|
|
|
|
|
The resulting total amount recognized in net periodic postretirement benefit cost and other
comprehensive income for the year ended December 31, 2007, was $(46) million.
F-33
The weighted average assumptions used for Mirants postretirement benefit costs during each year are
shown below:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
5.66
|
%
|
|
5.36
|
%
|
Rate of compensation increases
|
|
3.00
|
%
|
|
3.00
|
%
|
Assumed medical inflation for current year
|
|
|
|
|
|
|
Before age 65
|
|
9.00
|
%
|
|
10.00
|
%
|
After age 65
|
|
11.00
|
%
|
|
12.50
|
%
|
Assumed ultimate medical inflation rate
|
|
5.00
|
%
|
|
5.00
|
%
|
Year in which ultimate rate is reached
|
|
2011
|
|
|
2011
|
|
An annual increase or decrease in the assumed medical care cost trend rate of 1% would
correspondingly increase or decrease the aggregate of the service and interest cost components of the annual postretirement benefit cost in 2007 by an inconsequential amount.
Mirant expects the following net benefits to be paid from the postretirement benefit plans (in millions):
|
|
|
|
|
|
|
Projected Benefit Payments to
Plan Participants
|
|
Before
Medicare
Subsidy
|
|
Medicare
Subsidy
|
2008
|
|
$
|
2.8
|
|
$
|
0.0
|
2009
|
|
|
2.8
|
|
|
0.0
|
2010
|
|
|
2.8
|
|
|
0.0
|
2011
|
|
|
2.3
|
|
|
0.0
|
2012
|
|
|
2.7
|
|
|
0.0
|
2013 through 2017
|
|
|
19.9
|
|
|
0.6
|
Employee Savings Plan
The Company maintains a defined contribution employee savings plan with a profit sharing arrangement whereby employees may contribute a portion of their base compensation to the employee savings plan, subject to
limits under the Internal Revenue Code. The Company provides a matching contribution each payroll period equal to 75% of the employees contributions up to 6% of the employees pay for that period. For unionized employees, matching levels
vary by bargaining unit.
Under the profit sharing arrangement, the Company contributes a quarterly fixed contribution of 3% of eligible
pay and may make an annual discretionary contribution for those employees not accruing a benefit under the defined benefit pension plan.
Expenses recognized for the matching and profit sharing contributions were as follows (in millions):
|
|
|
|
|
|
|
|
|
Matching
|
|
Profit
Sharing
Arrangement
|
2007
|
|
$
|
5
|
|
$
|
4
|
2006
|
|
|
5
|
|
|
3
|
2005
|
|
|
5
|
|
|
4
|
F-34
Stock-based Compensation
The Mirant Corporation 2005 Omnibus Incentive Plan for certain employees and directors of Mirant became effective on January 3, 2006. The Omnibus Incentive Plan provides for the granting of nonqualified stock
options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards, other stock-based awards, covered employee annual incentive awards and non-employee
director awards. Under the Omnibus Incentive Plan, 18,575,851 shares of Mirant common stock are available for issuance to participants. Shares covered by an award are counted as used only to the extent that they are actually issued. Any shares
related to awards that terminate by expiration, forfeiture, cancellation or otherwise without the issuance of such shares will be available again for grant under the Omnibus Incentive Plan. The Company had both service condition and performance
condition forms of stock-based compensation at December 31, 2007.
On October 5, 2006, the Compensation Committee of the Board of
Directors approved the implementation of a special bonus plan to reward participants for successful completion of the Companys planned business and asset sales as well as to provide certain participants with an incentive to remain with the
Company. The grants consisted of cash and restricted stock units. On November 13, 2006, the Companys Compensation Committee, pursuant to the Companys 2005 Omnibus Incentive Plan, awarded certain equity grants to five executive
management members. The grants consist of options to acquire the Companys common stock and restricted stock units. These grants were considered performance condition awards, as the payout under the November 13, 2006, awards was based on
achieving certain target amounts related to the sales of the Companys Philippine and Caribbean businesses and six natural gas-fired facilities in the United States. The performance conditions were met at December 31, 2007, and the awards
become fully vested and non forfeitable on June 30, 2008.
SFAS 123R was adopted by the Company during the first quarter of 2006,
using the modified prospective transition method. For the year ended December 31, 2007, the Company recognized approximately $21 million and $8 million of compensation expense, respectively, related to service condition and performance
condition stock-based compensation. For the year ended December 31, 2006, the Company recognized approximately $16 million and $1 million, respectively, related to service condition and performance condition stock-based compensation. These
amounts are included in operations and maintenance expense in the consolidated statements of operations, with the exception of approximately $4 million for the year ended December 31, 2007, which is included in income (loss) from discontinued
operations, net.
Prior to the Companys adoption of SFAS No.123R, Mirant accounted for stock-based employee compensation plans under
the intrinsic-value method of accounting for recognition, but disclosed fair value pro forma information. Under that method, compensation expense for employee stock options is measured on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The following table illustrates the effect on net income for the year ended December 31, 2005, if the fair-value-based method had been applied to all outstanding and unvested stock-based awards
(in millions):
|
|
|
|
|
|
|
Year Ended
December 31,
2005
|
|
Net loss, as reported
|
|
$
|
(1,307
|
)
|
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax
effects
|
|
|
(3
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(1,310
|
)
|
|
|
|
|
|
All share-based payment awards issued prior to the Companys emergence from bankruptcy were
cancelled. As a result, the presentation of information above for the year ended December 31, 2005, is not comparable to the information that follows for the years ending December 31, 2006 and 2007. Additionally, the Companys
F-35
pre-bankruptcy capital structure differed significantly from the Companys post-emergence capital structure, further degrading comparability between the
pre-emergence and post-emergence periods.
As of December 31, 2007, there were approximately $24 million and $3 million, respectively,
of total unrecognized compensation cost, excluding estimated forfeitures, related to non-vested share-based compensation granted through service condition and performance condition awards, which is expected to be recognized on a straight-line basis
over a weighted average period of 1 year.
Stock Options
The fair value of stock options is estimated on the date of grant using a Black-Scholes option-pricing model based on the assumptions noted in the following table. As a result of the Companys bankruptcy and
other factors, historical information concerning the Companys stock price volatility for purposes of valuing stock option grants is not sufficient. Therefore, the implied volatility derived from peer group companies was used as the basis for
valuing the stock options granted through September 30, 2006. Beginning in the fourth quarter 2006, the Company re-evaluated the use of implied volatility derived from peer group companies and determined that sufficient evidence existed to
place exclusive reliance on Mirants own implied volatility of its traded options in accordance with SAB 107. As a result of the lack of exercise history for the Company, the simplified method for estimating expected term has been used in
accordance with SAB 107, to the extent applicable. For performance condition awards, the Company utilized the contractual term as the expected term. The risk-free rate for periods within the contractual term of the stock option is based on the
U.S. Treasury yield curve in effect at the time of the grant. The table below includes significant assumptions used in valuing the Companys stock options:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
|
Range
|
|
Weighted
Average
|
|
Range
|
|
Weighted
Average
|
Expected volatility
|
|
15-28%
|
|
19.9%
|
|
21 - 37%
|
|
31.6%
|
Expected dividends
|
|
%
|
|
%
|
|
%
|
|
%
|
Expected term
|
|
|
|
|
|
|
|
|
Service condition awards
|
|
2.7- 3.5 years
|
|
3.48 years
|
|
5.2 - 6 years
|
|
5.9 years
|
Performance condition awards
|
|
|
|
|
|
3 years
|
|
3 years
|
Risk-free rate
|
|
4 - 4.7%
|
|
4%
|
|
4.3 - 5.1%
|
|
4.5%
|
Service Condition Awards
During 2006, Mirant made awards of nonqualified stock options to purchase approximately 3 million shares. These stock options were granted with a 10-year term. Options to purchase approximately 1.8 million
shares vest 25% six months from the grant date, and 25% on each of the first, second and third anniversaries of the grant date. Options to purchase approximately 1.1 million shares vest in three equal installments on each of the first, second
and third anniversaries of the grant date. Options to purchase approximately 41,000 shares were granted to non-management members of the Board of Directors and vest one year from the grant date.
During 2007, the Company granted options to purchase a total of approximately 605,000 shares. These stock options were granted with a five-year term, and
vest in three equal installments on each of the first, second and third anniversaries of the grant date. Options to purchase approximately 15,000 shares were granted to non-management members of the Board of Directors and vest one year from the
grant date.
The granted options provide for accelerated vesting if there is a change of control (as defined in the Omnibus Incentive Plan)
or, in certain circumstances, as a result of a termination of employment. Options to purchase approximately 1.1 million and 525,000 shares vested during 2007 and 2006, respectively, of which approximately 177,000 and 87,000 respectively, became
exercisable as a result of accelerated vesting resulting
F-36
from the termination of an employee. The weighted average grant-date fair value of stock options granted during the years ended December 31, 2007 and
2006, was $8.44 and $10.42 per share, respectively.
A summary of the Companys option activity under the Omnibus Incentive Plan is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding at January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
2,987,936
|
|
|
$
|
24.89
|
|
|
|
|
|
Exercised or converted
|
|
(23,287
|
)
|
|
$
|
25.05
|
|
|
|
|
|
Forfeited
|
|
(162,930
|
)
|
|
$
|
24.96
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
2,801,719
|
|
|
$
|
24.89
|
|
9.2
|
|
$
|
18,720
|
Granted
|
|
605,386
|
|
|
$
|
37.91
|
|
|
|
|
|
Exercised or converted
|
|
(371,306
|
)
|
|
$
|
25.98
|
|
|
|
|
|
Forfeited
|
|
(131,755
|
)
|
|
$
|
29.64
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
2,904,044
|
|
|
$
|
27.25
|
|
7.4
|
|
$
|
34,069
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable or convertible at December 31, 2006
|
|
501,669
|
|
|
$
|
24.83
|
|
9.1
|
|
$
|
3,379
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable or convertible at December 31, 2007
|
|
1,095,190
|
|
|
$
|
22.64
|
|
8.0
|
|
$
|
15,230
|
|
|
|
|
|
|
|
|
|
|
|
|
The range of exercise prices for stock options granted is presented below:
|
|
|
|
|
|
|
|
|
Hi
|
|
Low
|
2007
|
|
$
|
45.77
|
|
$
|
37.71
|
2006
|
|
$
|
28.89
|
|
$
|
23.70
|
Cash received from the exercise of stock options under the Omnibus Incentive Plan for the years
ended December 31, 2007 and 2006, was approximately $10 million and $583,000, respectively, and no tax benefit was realized during the years then ended.
Performance Condition Awards
On November 13, 2006, Mirant made awards of nonqualified stock options to purchase
approximately 830,000 shares to five members of executive management. These options were granted with a 3-year term and vest on June 30, 2008, provided that the Company achieved the performance target amounts by December 31, 2007, which it
did. The options provide for accelerated vesting if there is a change of control (as defined in the Omnibus Incentive Plan) or, in certain circumstances, as a result of a termination of employment. As of December 31, 2007, options to purchase
approximately 100,000 shares became exercisable as a result of accelerated vesting resulting from the termination of an employee. The weighted average grant date fair value of performance condition stock options granted during the year ended
December 31, 2006, was $6.08 per share. There were no performance condition stock options granted during 2007.
F-37
A summary of option activity for performance condition awards under the Omnibus Incentive Plan is
presented below:
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Number
of Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding at January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
830,000
|
|
$
|
28.89
|
|
|
|
|
|
Exercised or converted
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
830,000
|
|
$
|
28.89
|
|
2.9
|
|
$
|
2,224
|
Granted
|
|
|
|
|
|
|
|
|
|
|
Exercised or converted
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
830,000
|
|
$
|
28.89
|
|
1.9
|
|
$
|
8,375
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable or convertible at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable or convertible at December 31, 2007
|
|
100,000
|
|
$
|
28.89
|
|
1.9
|
|
$
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Shares and Restricted Stock Units
Service Condition Awards
During 2006, the Company
issued approximately 392,000 restricted stock units and 205,000 restricted stock shares under the Omnibus Incentive Plan. Approximately 350,000 restricted stock units vest 25% six months from the grant date, and 25% on each of the first, second and
third anniversaries of the grant date. Approximately 34,000 of the restricted stock units and 205,000 of the restricted stock shares vest in three equal installments on each of the first, second and third anniversaries of the grant date.
Approximately 8,000 of the restricted stock units were granted to non-management members of the Board of Directors and vest one year from the grant date. The granted restricted stock units and restricted stock shares provide for accelerated vesting
if there is a change of control (as defined in the Omnibus Incentive Plan) or, in certain circumstances, as a result of a termination of employment. Approximately 105,000 restricted stock units vested during the year ended December 31, 2006, of
which approximately 17,000 became fully vested as a result of the termination of an employee.
During 2007, the Company issued
approximately 428,000 restricted stock units under the Omnibus Incentive Plan. Approximately 419,000 of the restricted stock units vest on each of the first, second and third anniversaries of the grant date. Approximately 9,000 of the restricted
stock units were granted to non-management members of the Board of Directors and vest one year from the grant date. The granted restricted stock units and restricted stock shares provide for accelerated vesting if there is a change of control (as
defined in the Omnibus Incentive Plan) or, in certain circumstances, as a result of a termination of employment. Approximately 213,000 and 105,000 restricted stock units vested during the years ended December 31, 2007 and 2006, respectively, of
which, approximately 54,000 and 17,000, respectively, became fully vested as a result of the termination of an employee.
F-38
The grant date fair value of the restricted stock shares and restricted stock units is equal to the
Companys closing stock price on the grant date. A summary of the Companys restricted stock shares and restricted stock units for service condition award is presented below:
|
|
|
|
|
|
|
Restricted Stock Shares and Restricted Stock Units
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
Outstanding at January 1, 2006
|
|
|
|
|
|
|
Granted
|
|
597,596
|
|
|
$
|
24.89
|
Vested
|
|
(104,991
|
)
|
|
$
|
24.84
|
Forfeited
|
|
(32,586
|
)
|
|
$
|
24.96
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
460,019
|
|
|
$
|
24.90
|
Granted
|
|
428,035
|
|
|
$
|
37.89
|
Vested
|
|
(212,700
|
)
|
|
$
|
26.65
|
Forfeited
|
|
(45,381
|
)
|
|
$
|
33.16
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
629,973
|
|
|
$
|
32.54
|
|
|
|
|
|
|
|
Performance Condition Awards
During 2006, the Company issued 283,554 restricted stock units under the Omnibus Incentive Plan. Approximately 140,000 were awarded on October 31, 2006 to certain key employees and approximately 143,000 on
November 13, 2006, to five members of executive management. The restricted stock units vest on June 30, 2008, provided that the Company achieves the performance target amounts by December 31, 2007, which it did. The granted restricted
stock units provide for accelerated vesting if there is a change of control (as defined in the Omnibus Incentive Plan) or, in certain circumstances, as a result of a termination of employment. Approximately 37,000 restricted stock units and shares
vested during the year ended December 31, 2007, as a result of the termination of an employee. The grant date fair value of the restricted stock and restricted stock units for performance condition awards is equal to the Companys closing
stock price on the grant date.
A summary of the Companys restricted stock units awarded is as follows:
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
Outstanding at January 1, 2006
|
|
|
|
|
|
|
Granted
|
|
283,554
|
|
|
$
|
29.23
|
Vested
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the December 31, 2006
|
|
283,554
|
|
|
$
|
29.23
|
Granted
|
|
|
|
|
|
|
Vested
|
|
(36,891
|
)
|
|
$
|
29.25
|
Forfeited
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
246,663
|
|
|
$
|
29.22
|
|
|
|
|
|
|
|
F-39
9.
|
Asset Retirement Obligations
|
Effective
January 1, 2003, the Company adopted SFAS 143, which requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. Additionally, effective December 31, 2005, the
Company adopted FIN 47, which expands the scope of asset retirement obligations to be recognized to include asset retirement obligations that may be uncertain as to the nature or timing of settlement. Upon initial recognition of a liability for
an asset retirement obligation or a conditional asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. Over time, the
liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Retirement obligations associated with long-lived assets included within the scope of SFAS 143 and FIN 47
are those for which a legal obligation exists under enacted laws, statutes and written or oral contracts, including obligations arising under the doctrine of promissory estoppel.
The Company identified certain asset retirement obligations within its power generating facilities. These asset retirement obligations are primarily
related to asbestos abatement in facilities on owned or leased property and other environmental obligations related to fuel storage facilities, wastewater treatment facilities, ash disposal sites and pipelines.
Asbestos abatement is the most significant type of asset retirement obligation identified for recognition in the Companys adoption of FIN 47.
The EPA has regulations in place governing the removal of asbestos. Due to the nature of asbestos, it can be difficult to ascertain the extent of contamination in older facilities unless substantial renovation or demolition takes place. Therefore,
the Company incorporated certain assumptions based on the relative age and size of its facilities to estimate the current cost for asbestos abatement. The actual abatement cost could differ from the estimates used to measure the asset retirement
obligation. As a result, these amounts will be subject to revision when actual abatement activities are undertaken.
The following table
sets forth the balances of the asset retirement obligations as of January 1, 2006, and the additions and accretion of the asset retirement obligations for the years ended December 31, 2007 and 2006. The asset retirement obligations are
included in noncurrent liabilities in the consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Beginning balance January 1
|
|
$
|
40
|
|
|
$
|
34
|
|
Liabilities recorded in the period
|
|
|
3
|
|
|
|
5
|
|
Liabilities settled during the period
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Accretion expense
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
44
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
The following represents, on a pro forma basis, the amount of the liability for asset retirement
obligations as if FIN 47 had been applied during all periods affected (in millions):
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2005
|
|
Beginning balance January 1
|
|
$
|
36
|
|
Revisions to cash flows for liabilities recognized upon adoption of SFAS 143
|
|
|
(5
|
)
|
Accretion expense
|
|
|
3
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
34
|
|
|
|
|
|
|
F-40
10.
|
Commitments and Contingencies
|
Mirant has made
firm commitments to buy materials and services in connection with its ongoing operations and has made financial guarantees relative to some of its investments.
Cash Collateral
In order to sell power and purchase fuel in the forward markets and perform other energy trading
and marketing activities, the Company often is required to provide trade credit support to its counterparties or make deposits with brokers. In addition, the Company often is required to provide cash collateral for access to the transmission grid to
participate in power pools and for other operating activities. In the event of default by the Company, the counterparty can apply cash collateral held to satisfy the existing amounts outstanding under an open contract.
The following is a summary of cash collateral posted with counterparties as of December 31, 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2007
|
|
|
|
2006
|
Cash collateral postedenergy trading and marketing
|
|
$
|
96
|
|
|
|
$
|
27
|
Cash collateral postedother operating activities
|
|
|
14
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110
|
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
Commitments
In addition to debt and other obligations in the consolidated balance sheets, Mirant has the following annual commitments under various agreements at December 31, 2007, related to its operations
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations, Off-Balance Sheet Arrangements and
Contractual Obligations by Year
|
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
>5
Years
|
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mirant Mid-Atlantic operating leases
|
|
$
|
2,133
|
|
$
|
121
|
|
$
|
142
|
|
$
|
140
|
|
$
|
134
|
|
$
|
132
|
|
$
|
1,464
|
Other operating leases
|
|
|
70
|
|
|
10
|
|
|
10
|
|
|
10
|
|
|
9
|
|
|
8
|
|
|
23
|
Fuel commitments
|
|
|
506
|
|
|
314
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term service agreements
|
|
|
31
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
5
|
|
|
18
|
Other
|
|
|
153
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maryland Healthy Air Act
|
|
|
713
|
|
|
689
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
3,606
|
|
$
|
1,289
|
|
$
|
370
|
|
$
|
152
|
|
$
|
145
|
|
$
|
145
|
|
$
|
1,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
Mirant Mid-Atlantic leases the Morgantown and Dickerson baseload units and associated property through 2034 and 2029, respectively. Mirant Mid-Atlantic has an option to extend the leases. Any extensions of the
respective leases would be limited to 75% of the economic useful life of the facility, as measured from the beginning of the original lease term through the end of the proposed remaining lease term. The Company is accounting for these leases as
operating leases and recognizes rent expense on a straight-line basis. Rent expense totaled $96 million for the years ended December 31, 2007 and 2006 and $99 million for the year ended
F-41
December 31, 2005, and is included in operations and maintenance expense in the accompanying consolidated statements of operations. As of
December 31, 2007 and 2006, the Company has paid approximately $330 million and $314 million, respectively, of lease payments in excess of rent expense recognized, which is recorded in prepaid rent on the consolidated balance sheets.
As of December 31, 2007, the total notional minimum lease payments for the remaining terms of the leases aggregated approximately
$2.1 billion and the aggregate termination value for the leases was approximately $1.4 billion and generally decreases over time. Mirant Mid-Atlantic leases the Morgantown and the Dickerson baseload units from third party owner lessors.
These owner lessors each own the undivided interests in these baseload generating facilities. The subsidiaries of the institutional investors who hold the membership interests in the owner lessors are called owner participants. Equity funding by the
owner participants plus transaction expenses paid by the owner participants totaled $299 million. The issuance and sale of pass through certificates raised the remaining $1.2 billion needed for the owner lessors to acquire the undivided
interests.
The pass through certificates are not direct obligations of Mirant Mid-Atlantic. Each pass through certificate represents a
fractional undivided interest in one of three pass through trusts formed pursuant to three separate pass through trust agreements between Mirant Mid-Atlantic and U.S. Bank National Association (as successor in interest to State Street Bank and Trust
Company of Connecticut, National Association), as pass through trustee. The property of the pass through trusts consists of lessor notes. The lessor notes issued by an owner lessor are secured by that owner lessors undivided interest in the
lease facilities and its rights under the related lease and other financing documents.
Mirant has commitments under other operating leases
with various terms and expiration dates. Minimum lease payments under non-cancelable operating leases approximate $7 million in each of 2008, 2009 and 2010, $6 million in 2011, $5 million in 2012, and $19 million thereafter.
Fuel Commitments
Fuel commitments primarily relate
to long-term coal agreements and other fuel purchase agreements. As of December 31, 2007, Mirants total estimated fuel commitments were $506 million. In addition, the Company has transactions for which commercial terms have been
negotiated but for which contracts have not yet been executed. Individual transactions may or may not be binding prior to execution of a contract.
Long-Term Service Agreements
As of December 31, 2007, the total estimated commitments under LTSAs associated with
turbines were approximately $31 million. These commitments are payable over the terms of the respective agreements, which range from ten to twenty years. These agreements have terms that allow for cancellation of the contracts by the Company
upon the occurrence of certain events during the term of the contracts. Estimates for future commitments for the LTSAs are based on the stated payment terms in the contracts at the time of execution. These payments are subject to an annual
adjustment for inflation.
Other
Other represents the open purchase orders less invoices received related to open purchase orders for procurement of products and services purchased in the ordinary course of business. These include construction, maintenance and labor
activities at the Companys generating facilities.
Maryland Healthy Air Act
Maryland Healthy Air Act commitments are contracts and open purchase orders related to capital expenditures that the Company expects to incur to comply
with the limitations for SO2 and NOx emissions under the Maryland Healthy Air Act.
F-42
Guarantees
Mirant generally conducts its business through various operating subsidiaries, which enter into contracts as a routine part of their business activities. In certain instances, the contractual obligations of such
subsidiaries are guaranteed by, or otherwise supported by, Mirant or another of its subsidiaries, including expressed guarantees or letters of credit issued under the credit facilities of Mirant North America.
In addition, Mirant and its subsidiaries enter into various contracts that include indemnification and guarantee provisions. Examples of these contracts
include financing and lease arrangements, purchase and sale agreements, commodity purchase and sale agreements, construction agreements, engagement agreements with vendors and other third parties. While the primary obligation of Mirant or a
subsidiary under such contracts is to pay money or render performance, such contracts may include obligations to indemnify the counterparty for damages arising from the breach thereof and, in certain instances, other existing or potential
liabilities. In many cases, the Companys maximum potential liability cannot be estimated, since some of the underlying agreements contain no limits on potential liability.
Upon issuance or modification of a guarantee, the Company determines if the obligation is subject to initial recognition and measurement of a liability
and/or disclosure of the nature and terms of the guarantee. Generally, guarantees of the performance of a third party are subject to the recognition and measurement, as well as the disclosure provisions, of FIN 45. Such guarantees must initially be
recorded at fair value, as determined in accordance with the interpretation. The Company did not have any guarantees that met the recognition requirements under FIN 45 at December 31, 2007.
Alternatively, guarantees between and on behalf of entities under common control are subject only to the disclosure provisions of the interpretation. The
Company must disclose information as to the term of the guarantee and the maximum potential amount of future gross payments (undiscounted) under the guarantee, even if the likelihood of a claim is remote.
Letters of Credit
As of December 31, 2007,
Mirant and its subsidiaries were contingently obligated for $290 million under letters of credit issued under the credit facilities of Mirant North America, which includes $199 million letters of credit issued pursuant to its senior secured
term loan and $91 million letters of credit issued pursuant to its revolving credit facility. Most of these letters of credit are issued in support of the obligations of Mirant North America and its subsidiaries to perform under commodity
agreements, financing or lease agreements or other commercial arrangements. In the event of default by the Company, the counterparty can draw on a letter of credit to satisfy the existing amounts outstanding under an open contract. A majority of
these letters of credit expire within one year of issuance, and it is typical for them to be renewed on similar terms.
Following is a
summary of letters of credit issued as of December 31, 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2007
|
|
2006
|
Letters of creditenergy trading and marketing
|
|
$
|
100
|
|
$
|
100
|
Letters of creditdebt service and rent reserves
|
|
|
78
|
|
|
84
|
Letters of creditother operating activities
|
|
|
112
|
|
|
15
|
|
|
|
|
|
|
|
Total
|
|
$
|
290
|
|
$
|
199
|
|
|
|
|
|
|
|
F-43
Purchase and Sale Guarantees and Indemnifications
In connection with the purchase or sale of an asset or a business by Mirant or a subsidiary, Mirant is typically required to provide certain assurances
to the counterparties for the performance of the obligations of such a subsidiary under the purchase or sale agreements. Such assurances may take the form of a guarantee issued by Mirant or a subsidiary on behalf of the obligor subsidiary. The scope
of such guarantees would typically include any indemnity obligations owed to such counterparty. While the terms thereof vary in the scope, exclusions, thresholds and applicable limits, the indemnity obligations of a seller typically include
liabilities incurred as a result of a breach of a purchase and sale agreement, including the indemnifying partys representations or warranties, unpaid and unreserved tax liabilities and specified retained liabilities, if any. These obligations
generally have a term of 12 months from the closing date and are intended to protect the non-indemnifying parties against breaches of the agreement or risks that are difficult to predict or estimate at the time of the transaction. In most cases, the
contract limits the liability of the indemnifying party. Subject to certain standard exclusions, the potential indemnity exposure of Mirant under the recent sales of its Caribbean business, its Philippine business and its six U.S. natural gas-fired
facilities is limited to fifteen percent (15%), ten percent (10%) and ten percent (10%) of the respective sale prices. As of December 31, 2007, Mirant and its subsidiaries contingent obligation for such assurances was $532
million. The Company does not expect that it will be required to make any material payments under these guarantee and indemnity provisions.
Commercial
Purchase and Sales Arrangements
In connection with the purchase and sale of fuel, emission allowances and energy to and from third
parties with respect to the operation of Mirants generating facilities, the Company may be required to guarantee a portion of the obligations of certain of its subsidiaries. These obligations may include liquidated damages payments or other
unscheduled payments. The majority of the guarantees are set to expire before the end of 2010, although the obligations of the issuer will remain in effect until all the liabilities created under the guarantee have been satisfied or no longer exist.
As of December 31, 2007, Mirant and its subsidiaries were contingently obligated for a total of $93 million under such arrangements. The Company does not expect that it will be required to make any material payments under these guarantees.
Other Guarantees and Indemnifications
As of December 31, 2007, Mirant has issued $67 million of guarantees of obligations that its subsidiaries may incur as a provision for construction agreements, equipment leases, and on-going litigation. The Company does not expect that
it will be required to make any material payments under these guarantees.
The Company, through its subsidiaries, participates in several
power pools with RTOs. The rules of these RTOs require that each participant indemnify the pool for defaults by other members. Usually, the amount indemnified is based upon the activity of the participant relative to the total activity of the pool
and the amount of the default. Consequently, the amount of such indemnification by the Company cannot be quantified.
On a routine basis in
the ordinary course of business, Mirant and its subsidiaries indemnify financing parties and consultants or other vendors who provide services to the Company. The Company does not expect that it will be required to make any material payments under
these indemnity provisions.
Because some of the guarantees and indemnities Mirant issues to third parties do not limit the amount or
duration of its obligations to perform under them, there exists a risk that the Company may have obligations in excess of the amounts described above. For those guarantees and indemnities that do not limit the Companys liability exposure, the
Company may not be able to estimate its potential liability until a claim is made for payment or performance, because of the contingent nature of these contracts.
F-44
Overview
The Company had no assets or liabilities held for sale at December 31, 2007. Assets and liabilities held for sale at December 31, 2006,
included discontinued operations and other assets that the Company disposed of in 2007. In the third quarter of 2006, Mirant commenced separate auction processes to sell its Philippine (2,203 MW) and Caribbean
(1,050 MW) businesses and six U.S. natural gas-fired facilities totaling 3,619 MW, consisting of the Zeeland (903 MW), West Georgia (613 MW), Shady Hills (469 MW), Sugar Creek (561 MW), Bosque
(546 MW) and Apex (527 MW) facilities.
The sale of the six U.S. natural gas-fired facilities was completed on
May 1, 2007. In the third quarter of 2006, the Company recorded an impairment loss of $396 million to reduce the carrying value of the six facilities held for sale to estimated fair value. In subsequent periods, the Company recorded
reductions to the impairment loss of approximately $51 million resulting from the sale process. As a result, the Company recognized a cumulative loss of $345 million related to the sale of the six facilities. The net proceeds to Mirant after
transaction costs and retiring $83 million of project-related debt were $1.306 billion.
The Company completed the sale of Mirant
NY-Gen on May 7, 2007. The Company recognized a gain of $8 million related to the sale. The proceeds related to the sale were immaterial as a result of the transfer of the net liabilities of Mirant New York-Gen.
The sale of the Philippine business was completed on June 22, 2007. The Company recognized a gain of $2.003 billion related to the sale. The net
proceeds to Mirant after transaction costs and the repayment of $642 million of debt were $3.21 billion.
The sale of the Caribbean
business was completed on August 8, 2007. The Company recognized a gain of approximately $63 million in the third quarter of 2007 related to the sale. The net proceeds to Mirant after transaction costs were $555 million. The gain and
net proceeds are subject to final working capital adjustments.
The table below presents the components of the balance sheet accounts
classified as assets and liabilities held for sale for the year ended December 31, 2006 (in millions):
|
|
|
|
|
|
At December 31,
2006
|
Current Assets
|
|
$
|
893
|
Property, Plant and Equipment, net
|
|
|
3,489
|
|
|
|
|
Total Assets
|
|
|
4,382
|
|
|
Noncurrent Assets:
|
|
|
|
Investments
|
|
|
224
|
Other Noncurrent Assets
|
|
|
381
|
|
|
|
|
Total Noncurrent Assets
|
|
|
605
|
|
|
|
|
Total Assets
|
|
$
|
4,987
|
|
|
|
|
Current Liabilities:
|
|
|
|
Short-term Debt
|
|
$
|
25
|
Current Portion of Long-term Debt
|
|
|
166
|
Other Current Liabilities
|
|
|
245
|
|
|
|
|
Total Current Liabilities
|
|
|
436
|
|
|
Noncurrent Liabilities:
|
|
|
|
Long-term Debt
|
|
|
1,149
|
Other Noncurrent Liabilities
|
|
|
633
|
|
|
|
|
Total Noncurrent Liabilities
|
|
|
1,782
|
|
|
|
|
Total Liabilities
|
|
$
|
2,218
|
|
|
|
|
F-45
During the second quarter of 2007, the Company recognized $9 million of other comprehensive income,
net of tax, related to the sale of the Philippine business. Of this amount, $5 million was related to a pension liability that was settled as part of the sale and $4 million was related to a cumulative translation adjustment. During the
third quarter of 2007, the Company recognized $11 million of other comprehensive loss, net of tax, related to pension and other postretirement benefits as part of the sale of the Caribbean business.
Discontinued Operations
The Company has
reclassified amounts for prior periods in the financial statements to report separately, as discontinued operations, the revenues and expenses of components of the Company that have been disposed of as of December 31, 2007.
The Company sold its Wrightsville power generating facility in 2005, but retained transmission credits that arose from transmission system upgrades
associated with the construction of the Wrightsville facility. During the third quarter of 2007, Mirant entered into an agreement that established the amount of the outstanding transmission credits. As a result of the agreement, Mirant recognized a
gain of $24 million in income from discontinued operations in the third quarter of 2007.
For the year ended December 31, 2007,
income from discontinued operations included the results of operations of the Caribbean business, the Philippine business, the six U.S. natural gas-fired facilities and Mirant NY-Gen through their respective dates of sale and the gain related to
Wrightsville described above. For the year ended December 31, 2006, income from discontinued operations included the results of operations of all the discontinued businesses and assets for the entire year, as well as the Wichita Falls facility
in Texas through its May 2006 date of sale. For the year ended December 31, 2005, income from discontinued operations also included the results of operations of the Wrightsville generating facility through its date of sale in the third
quarter of 2005.
A summary of the operating results for these discontinued operations for the years ended December 31, 2007, 2006 and
2005 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
U.S.
|
|
|
Philippines
|
|
|
Caribbean
|
|
|
Total
|
|
Operating revenues
|
|
$
|
82
|
|
|
$
|
200
|
|
|
$
|
514
|
|
|
$
|
796
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of assets
|
|
|
(38
|
)
|
|
|
(2,003
|
)
|
|
|
(63
|
)
|
|
|
(2,104
|
)
|
Other operating expenses
|
|
|
56
|
|
|
|
67
|
|
|
|
433
|
|
|
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses (income)
|
|
|
18
|
|
|
|
(1,936
|
)
|
|
|
370
|
|
|
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
64
|
|
|
|
2,136
|
|
|
|
144
|
|
|
|
2,344
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
704
|
|
|
|
13
|
|
|
|
717
|
|
Other expense (income), net
|
|
|
|
|
|
|
33
|
|
|
|
32
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
64
|
|
|
$
|
1,399
|
|
|
$
|
99
|
|
|
$
|
1,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
U.S.
|
|
|
Philippines
|
|
|
Caribbean
|
|
Total
|
|
Operating revenues
|
|
$
|
303
|
|
|
$
|
469
|
|
|
$
|
825
|
|
$
|
1,597
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sales of assets
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
375
|
|
Other operating expenses
|
|
|
221
|
|
|
|
187
|
|
|
|
686
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
596
|
|
|
|
187
|
|
|
|
686
|
|
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(293
|
)
|
|
|
282
|
|
|
|
139
|
|
|
128
|
|
Provision (benefit) for income taxes
|
|
|
1
|
|
|
|
(104
|
)
|
|
|
26
|
|
|
(77
|
)
|
Other expense (income), net
|
|
|
9
|
|
|
|
30
|
|
|
|
54
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(303
|
)
|
|
$
|
356
|
|
|
$
|
59
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
U.S.
|
|
|
Philippines
|
|
|
Caribbean
|
|
Total
|
Operating revenues
|
|
$
|
344
|
|
|
$
|
488
|
|
|
$
|
729
|
|
$
|
1,561
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sales of assets
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
|
|
|
8
|
Other operating expenses
|
|
|
315
|
|
|
|
196
|
|
|
|
623
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
324
|
|
|
|
195
|
|
|
|
623
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
20
|
|
|
|
293
|
|
|
|
106
|
|
|
419
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
135
|
|
|
|
6
|
|
|
141
|
Other expense (income), net
|
|
|
103
|
|
|
|
44
|
|
|
|
38
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(83
|
)
|
|
$
|
114
|
|
|
$
|
62
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 12, 2006, the Companys Sual generating facility in the Philippines had an
unplanned outage of unit 2 as a result of a failure of the generator. The repairs on unit 2 were completed on March 4, 2007, and the unit returned to operation. On October 23, 2006, unit 1 at the Sual generating facility had
an unplanned outage as a result of a failure of the generator. The repairs on unit 1 were completed on June 12, 2007, and the unit returned to operation.
As part of the sale of the Philippine business, Mirant retained the rights to future insurance recoveries related to the Sual outages. In 2007, the Company received a total of $23 million related to these
recoveries. Additional recoveries will be recognized in discontinued operations when outstanding claims are resolved.
As part of the sale
of Mirant NY-Gen, Mirant retained the rights to future insurance recoveries related to repairs of the dam at the Swinging Bridge facility. In the fourth quarter of 2007, the Company reached an insurance settlement and recognized a gain of $10
million, which is included in income from discontinued operations.
12.
|
Bankruptcy Related Disclosures
|
Mirants Plan
was confirmed by the Bankruptcy Court on December 9, 2005, and the Company emerged from bankruptcy on January 3, 2006. For financial statement presentation purposes, Mirant recorded the effects of the Plan at December 31, 2005.
At December 31, 2007 and 2006, amounts related to allowed claims, estimated unresolved claims and professional fees associated with
the bankruptcy that are to be settled in cash were $27 million and $28 million, respectively, and these amounts were recorded in accounts payable and accrued liabilities on the accompanying consolidated balance sheets. These amounts do not include
unresolved claims that will be settled in common stock or the stock portion of claims that are expected to be settled with cash and stock. For the year ended December 31, 2007, the Company paid approximately $53 million in cash related to
bankruptcy claims, which is reflected in cash flows from operating activities from continuing operations. For the year ended December 31, 2006, the Company paid approximately $1.849 billion, in cash related to bankruptcy claims. Of this amount,
approximately $990 million is reflected in cash flows from financing activities from continuing operations and $45 million from discontinued operations and together represent the principal amount of debt claims. As of December 31, 2007,
approximately one million of the shares of Mirant common stock to be distributed under the Plan have not yet been distributed and have been reserved for distribution with respect to claims that are disputed by the Mirant Debtors and have yet to be
resolved. See Note 18 for further discussion of the Chapter 11 proceedings.
F-47
Mirant New York Subsidiaries
The Companys New York subsidiaries, Mirant New York, Mirant Bowline, Mirant Lovett, Hudson Valley Gas and Mirant NY-Gen, remained in bankruptcy at December 31, 2006. On January 26, 2007, Mirant New
York, Mirant Bowline (which owns the Bowline facility) and Hudson Valley Gas (collectively the Emerging New York Entities) filed their Supplemental Joint Chapter 11 Plan of Reorganization with the Bankruptcy Court and subsequently filed
amendments to that plan (as subsequently amended, the Supplemental Plan). The Supplemental Plan was confirmed by the Bankruptcy Court on March 23, 2007, and became effective on April 16, 2007, resulting in the Emerging New York
Entities emergence from bankruptcy. For financial statement presentation purposes, the effects of the Supplemental Plan were recorded on March 31, 2007.
On January 31, 2007, Mirant New York entered into an agreement for the sale of Mirant NY-Gen, which owned the Hillburn and Shoemaker gas turbine facilities and the Swinging Bridge, Rio and Mongaup
hydroelectric generating facilities. The sale closed on May 7, 2007, and the Company recognized a gain of $8 million. Mirant NY-Gen emerged from bankruptcy under a plan of reorganization that incorporated the sale and was approved by the
Bankruptcy Court on April 27, 2007.
On July 13, 2007, Mirant Lovett (which owns the Lovett facility) filed a plan of
reorganization (the Mirant Lovett Plan) with the Bankruptcy Court. The Mirant Lovett Plan was confirmed by the Bankruptcy Court on September 19, 2007, and became effective on October 2, 2007, resulting in Mirant Lovetts
emergence from bankruptcy. For financial statement presentation purposes, the effects of the Mirant Lovett Plan were recorded on September 30, 2007. As a result of Mirant Lovetts emergence, Mirant has no subsidiaries that remain in
bankruptcy. See Note 18 for further discussion regarding Mirant Lovetts emergence from bankruptcy.
Reorganization Items, net
Reorganization items, net represents expense, income and gain or loss amounts that were recorded in the financial statements as a result
of the bankruptcy proceedings. In 2006, reorganization items, net relate to refunds received from various New York tax jurisdictions for the settlement of the property tax dispute related to the New York subsidiaries. Reorganization items, net for
the years ended December 31, 2007, 2006 and 2005, are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Gain on the implementation of the Plan
|
|
|
$
|
|
|
$
|
|
|
|
$
|
(285
|
)
|
Gain on New York property tax settlement
|
|
|
|
|
|
|
(163
|
)
|
|
|
|
|
Estimated claims and losses on rejected and amended contracts(1)
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Professional fees and administrative expense
|
|
|
3
|
|
|
|
2
|
|
|
|
226
|
|
Interest income, net
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$(2
|
)
|
|
$
|
(164
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Estimated claims and losses on rejected and amended contracts relate primarily to rejected energy contracts, such as tolling agreements and gas transportation and electric
transmission contracts.
|
Interest Expense
In the third quarter of 2005, the Company determined that it was probable that contractual interest on liabilities subject to compromise from the Petition Date would be incurred for certain claims expected to be
allowed under Mirants Plan. As a result, the Company recorded interest expense of approximately $1.4 billion in 2005 on liabilities subject to compromise. This amount represents interest from the Petition Date through the effective date
of the Plan. The interest amount was calculated based on the provisions of the Plan. The $1.4 billion expense amount included approximately $450 million related to Mirant Americas Generation senior notes maturing in 2011, 2021 and 2031,
which were reinstated under the confirmed Plan.
F-48
On January 3,
2006, all shares of Mirants old common stock were cancelled and 300 million shares of Mirants new common stock were issued. At December 31, 2007, approximately one million shares of common stock are reserved for unresolved
claims pursuant to Mirants emergence from bankruptcy.
Mirant also issued two series of warrants that will expire on January 3,
2011. The Series A and Series B warrants entitle the holders to purchase an aggregate of approximately 35 million and 18 million shares of New Mirant common stock, respectively. The exercise price of the Series A and
Series B warrants is $21.87 and $20.54 per share, respectively. The exercise price and number of common shares issuable are subject to adjustments based on the occurrence of certain events, including (1) dividends or distributions,
(2) rights offerings or (3) other distributions. Mirants common stock is currently traded on the NYSE under the ticker symbol MIR. At December 31, 2007 and 2006, approximately 182,000 and 88,000 of Series A warrants,
respectively and 463,000 and 11,000 of Series B warrants, respectively, have been exercised. At December 31, 2007, 35,023,201 and 17,172,929 of Series A and Series B warrants, respectively, remain outstanding.
On January 3, 2006, the Omnibus Incentive Plan for certain employees and directors of Mirant became effective. Under the Omnibus Incentive Plan,
18,575,851 shares of Mirant common stock are available for issuance to participants. See Note 8 for further discussion of the Omnibus Incentive Plan.
During the third quarter of 2006, the Company repurchased 43 million shares of Mirant common stock for an aggregate purchase price of approximately $1.228 billion. On September 28, 2006, the Company
announced that its Board of Directors had authorized a $100 million share repurchase program which expired in September 2007. As of September 30, 2007, the Company had repurchased 1.18 million shares under this program.
In January 2007, the Company began a program of repurchasing shares at market prices from stockholders holding less than 100 shares of Mirant stock.
For the year ended December 31, 2007, the Company repurchased approximately 245,000 shares for approximately $9 million.
In the
fourth quarter of 2007, the Company announced that it would return a total of $4.6 billion of excess cash to its stockholders. Mirant entered into an accelerated share repurchase program with JP Morgan Chase Bank, National Association, London
Branch (JP Morgan). Under the terms of the accelerated share repurchase program, Mirant repurchased 26.66 million shares of its outstanding common stock from JP Morgan, for a total of $1 billion based on the closing price of
Mirants common stock on November 9, 2007. Upon receipt of the shares, the accelerated share repurchase program met the necessary criteria to be accounted for as an equity contract. As such, changes in the fair value will not be recorded
in the Companys consolidated financial statements. Under the accelerated share repurchase program, the final price of shares repurchased will be determined based on a discount to the volume weighted average trading price of Mirants
common stock over a period not to exceed six months. Depending on the final price and number of shares repurchased, JP Morgan may deliver additional shares to Mirant at the completion of the transaction, or Mirant may deliver to JP Morgan either
cash or shares that were previously delivered under the accelerated share repurchase agreement. In addition to the accelerated share repurchase program, the Company also entered into an open market purchase agreement with JP Morgan Securities, Inc.
to purchase up to $1 billion of its outstanding common stock. As of December 31, 2007, the Company had purchased approximately 8.27 million shares in open market purchases for approximately $316 million. Between January 1, 2008 and
February 25, 2008, the Company purchased an additional 7.9 million shares in open market purchases for approximately $286 million. On February 29, 2008, the Company announced that it had decided to return the remaining $2.6 billion of
cash through open market purchases of common stock but that it would continue to evaluate the most efficient method to return the cash to stockholders.
F-49
On January 3, 2006, all
shares of Mirants old common stock were cancelled and 300 million shares of new common stock were issued. Mirant also issued two series of warrants that will expire on January 3, 2011. Therefore, earnings per share information for
2005 has not been presented because the information is not relevant in any material respect for users of its financial statements.
Mirant
calculates basic EPS by dividing income available to stockholders by the weighted average number of common shares outstanding. Diluted EPS gives effect to dilutive potential common shares, including unvested restricted shares and restricted stock
units, stock options and warrants. The Company excluded 465,024 and 3.4 million of potential common shares representing antidilutive stock options from the earnings per share calculations for the years ended December 31, 2007 and 2006,
respectively.
The following table shows the computation of basic and diluted EPS for the years ended December 31, 2007 and 2006 (in
millions except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net income (loss) from continuing operations
|
|
$
|
433
|
|
$
|
1,752
|
|
$
|
(1,400
|
)
|
Net income from discontinued operations
|
|
|
1,562
|
|
|
112
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$
|
1,995
|
|
$
|
1,864
|
|
$
|
(1,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic
|
|
|
252
|
|
|
285
|
|
|
|
|
Shares related to assumed exercise of warrants
|
|
|
24
|
|
|
11
|
|
|
|
|
Shares related to assumed exercise of options
|
|
|
1
|
|
|
|
|
|
|
|
Shares related to assumed vesting of restricted shares and restricted stock units
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted
|
|
|
277
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
EPS from continuing operations
|
|
$
|
1.72
|
|
$
|
6.15
|
|
|
|
|
EPS from discontinued operations
|
|
|
6.20
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
7.92
|
|
$
|
6.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
EPS from continuing operations
|
|
$
|
1.56
|
|
$
|
5.90
|
|
|
|
|
EPS from discontinued operations
|
|
|
5.64
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
7.20
|
|
$
|
6.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
The Company has four operating
segments: Mid-Atlantic, Northeast, California and Other Operations. The Mid-Atlantic segment consists of four generating facilities located in Maryland and Virginia with total net generating capacity of 5,244 MW. The Northeast segment consists of
generating facilities located in Massachusetts and New York with total net generating capacity of 2,689 MW. The Companys California segment consists of three generating facilities located in or near the City of San Francisco, which have total
net generating capacity of 2,347 MW. Other Operations includes proprietary trading, fuel oil management, and gains and losses related to the Back-to-Back Agreement which was terminated pursuant to a settlement that became effective in the third
quarter of 2007. See Note 19 for further discussion of the Back-to-Back Agreement. Other Operations also includes unallocated corporate overhead, interest on debt at Mirant Americas Generation and Mirant North America and interest income on the
Companys invested cash balances. In the following tables, eliminations are primarily related to intercompany sales of emissions allowances and interest on intercompany notes receivable and notes payable.
Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-
Atlantic
|
|
|
Northeast
|
|
|
California
|
|
|
Other
Operations
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(in millions)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,133
|
|
|
$
|
664
|
|
|
$
|
177
|
|
|
$
|
45
|
|
|
$
|
|
|
|
$
|
2,019
|
|
Cost of fuel, electricity and other products
|
|
|
528
|
|
|
|
427
|
|
|
|
42
|
|
|
|
(67
|
)
|
|
|
(18
|
)
|
|
|
912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
605
|
|
|
|
237
|
|
|
|
135
|
|
|
|
112
|
|
|
|
18
|
|
|
|
1,107
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
|
360
|
|
|
|
179
|
|
|
|
74
|
|
|
|
94
|
|
|
|
|
|
|
|
707
|
|
Depreciation and amortization
|
|
|
81
|
|
|
|
25
|
|
|
|
13
|
|
|
|
10
|
|
|
|
|
|
|
|
129
|
|
Impairment losses
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
Gain on sales of assets, net
|
|
|
|
|
|
|
(49
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
11
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
441
|
|
|
|
330
|
|
|
|
85
|
|
|
|
99
|
|
|
|
11
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
164
|
|
|
|
(93
|
)
|
|
|
50
|
|
|
|
13
|
|
|
|
7
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
(282
|
)
|
|
|
|
|
|
|
(299
|
)
|
Income (loss) from continuing operations before reorganization items and
income taxes
|
|
|
169
|
|
|
|
(86
|
)
|
|
|
55
|
|
|
|
295
|
|
|
|
7
|
|
|
|
440
|
|
Reorganization items, net
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
169
|
|
|
$
|
(84
|
)
|
|
$
|
55
|
|
|
$
|
286
|
|
|
$
|
7
|
|
|
$
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,804
|
|
|
$
|
645
|
|
|
$
|
192
|
|
|
$
|
5,983
|
|
|
$
|
(1,172
|
)
|
|
$
|
9,452
|
|
Gross property additions
|
|
$
|
531
|
|
|
$
|
17
|
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
560
|
|
F-51
Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-
Atlantic
|
|
|
Northeast
|
|
|
California
|
|
|
Other
Operations
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(in millions)
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,901
|
|
|
$
|
811
|
|
|
$
|
171
|
|
|
$
|
204
|
|
|
$
|
|
|
|
$
|
3,087
|
|
Cost of fuel, electricity and other products
|
|
|
583
|
|
|
|
464
|
|
|
|
56
|
|
|
|
86
|
|
|
|
(38
|
)
|
|
|
1,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,318
|
|
|
|
347
|
|
|
|
115
|
|
|
|
118
|
|
|
|
38
|
|
|
|
1,936
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
|
333
|
|
|
|
116
|
|
|
|
63
|
|
|
|
80
|
|
|
|
|
|
|
|
592
|
|
Depreciation and amortization
|
|
|
74
|
|
|
|
25
|
|
|
|
13
|
|
|
|
25
|
|
|
|
|
|
|
|
137
|
|
Impairment losses
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
119
|
|
Gain on sales of assets, net
|
|
|
(7
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
(40
|
)
|
|
|
44
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
400
|
|
|
|
213
|
|
|
|
76
|
|
|
|
66
|
|
|
|
44
|
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
918
|
|
|
|
134
|
|
|
|
39
|
|
|
|
52
|
|
|
|
(6
|
)
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense (income), net
|
|
|
(4
|
)
|
|
|
9
|
|
|
|
(34
|
)
|
|
|
128
|
|
|
|
|
|
|
|
99
|
|
Income (loss) from continuing operations before reorganization items and
income taxes
|
|
|
922
|
|
|
|
125
|
|
|
|
73
|
|
|
|
(76
|
)
|
|
|
(6
|
)
|
|
|
1,038
|
|
Reorganization items, net
|
|
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164
|
)
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
(552
|
)
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
922
|
|
|
$
|
287
|
|
|
$
|
73
|
|
|
$
|
476
|
|
|
$
|
(6
|
)
|
|
$
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,404
|
|
|
$
|
1,185
|
|
|
$
|
443
|
|
|
$
|
3,326
|
|
|
$
|
(1,849
|
)
|
|
$
|
6,509
|
|
Gross property additions
|
|
$
|
112
|
|
|
$
|
12
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
133
|
|
F-52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-
Atlantic
|
|
Northeast
|
|
|
California
|
|
|
Other
Operations
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(in millions)
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,197
|
|
$
|
1,013
|
|
|
$
|
166
|
|
|
$
|
245
|
|
|
$
|
(1
|
)
|
|
$
|
2,620
|
|
Cost of fuel, electricity and other products
|
|
|
742
|
|
|
818
|
|
|
|
53
|
|
|
|
187
|
|
|
|
(16
|
)
|
|
|
1,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
455
|
|
|
195
|
|
|
|
113
|
|
|
|
58
|
|
|
|
15
|
|
|
|
836
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
|
341
|
|
|
210
|
|
|
|
69
|
|
|
|
64
|
|
|
|
(1
|
)
|
|
|
683
|
|
Depreciation and amortization
|
|
|
64
|
|
|
33
|
|
|
|
5
|
|
|
|
33
|
|
|
|
|
|
|
|
135
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
Loss (gain) on sales of assets, net
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
19
|
|
|
|
8
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
405
|
|
|
233
|
|
|
|
74
|
|
|
|
125
|
|
|
|
7
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
50
|
|
|
(38
|
)
|
|
|
39
|
|
|
|
(67
|
)
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense (income), net
|
|
|
18
|
|
|
6
|
|
|
|
1
|
|
|
|
1,414
|
|
|
|
(26
|
)
|
|
|
1,413
|
|
Income (loss) from continuing operations before reorganization items and income taxes
|
|
|
32
|
|
|
(44
|
)
|
|
|
38
|
|
|
|
(1,481
|
)
|
|
|
34
|
|
|
|
(1,421
|
)
|
Reorganization items, net
|
|
|
22
|
|
|
7
|
|
|
|
(169
|
)
|
|
|
96
|
|
|
|
26
|
|
|
|
(18
|
)
|
Provision (benefit) for income taxes
|
|
|
|
|
|
6
|
|
|
|
9
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
10
|
|
$
|
(57
|
)
|
|
$
|
198
|
|
|
$
|
(1,544
|
)
|
|
$
|
8
|
|
|
$
|
(1,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,334
|
|
$
|
1,017
|
|
|
$
|
379
|
|
|
$
|
4,354
|
|
|
$
|
(1,763
|
)
|
|
$
|
7,321
|
|
Gross property additions
|
|
$
|
67
|
|
$
|
15
|
|
|
$
|
14
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Areas
Property, Plant and Equipment and Other Intangible Assets
|
|
|
Mid-
Atlantic
|
|
Northeast
|
|
California
|
|
Other
Operations
|
|
Eliminations
|
|
|
Total
|
|
|
(in millions)
|
At December 31, 2007
|
|
$
|
2,999
|
|
$
|
381
|
|
$
|
153
|
|
$
|
62
|
|
$
|
(799
|
)
|
|
$
|
2,796
|
At December 31, 2006
|
|
$
|
2,450
|
|
$
|
563
|
|
$
|
163
|
|
$
|
38
|
|
$
|
(799
|
)
|
|
$
|
2,415
|
F-53
16.
|
Quarterly Financial Data (Unaudited)
|
Summarized
quarterly financial data for 2007, 2006 and 2005, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue
|
|
Operating
Income (Loss)
|
|
|
Income
(Loss)
from
Continuing
Operations
|
|
|
Income (Loss)
Before
Cumulative
Effect of
Changes in
Accounting
Principles
|
|
|
Consolidated
Net
Income (Loss)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
|
|
$
|
352
|
|
$
|
(103
|
)
|
|
$
|
(133
|
)
|
|
$
|
(52
|
)
|
|
$
|
(52
|
)
|
June
|
|
|
542
|
|
|
(71
|
)
|
|
|
(83
|
)
|
|
|
1,256
|
|
|
|
1,256
|
|
September
|
|
|
717
|
|
|
318
|
|
|
|
642
|
|
|
|
775
|
|
|
|
775
|
|
December
|
|
|
408
|
|
|
(3
|
)
|
|
|
7
|
|
|
|
16
|
|
|
|
16
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
|
|
$
|
957
|
|
$
|
481
|
|
|
$
|
422
|
|
|
$
|
467
|
|
|
$
|
467
|
|
June
|
|
|
619
|
|
|
153
|
|
|
|
107
|
|
|
|
99
|
|
|
|
99
|
|
September
|
|
|
963
|
|
|
282
|
|
|
|
248
|
|
|
|
(26
|
)
|
|
|
(26
|
)
|
December
|
|
|
548
|
|
|
221
|
|
|
|
975
|
|
|
|
1,324
|
|
|
|
1,324
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
|
|
$
|
530
|
|
$
|
(8
|
)
|
|
$
|
(49
|
)
|
|
$
|
11
|
|
|
$
|
11
|
|
June
|
|
|
583
|
|
|
(14
|
)
|
|
|
7
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
September
|
|
|
401
|
|
|
(305
|
)
|
|
|
(1,556
|
)
|
|
|
(1,515
|
)
|
|
|
(1,515
|
)
|
December
|
|
|
1,106
|
|
|
319
|
|
|
|
213
|
|
|
|
222
|
|
|
|
207
|
|
17.
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, 2006 and 2005
|
|
|
|
|
Additions
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
Charged
to
Income
|
|
Charged to
Other
Accounts
|
|
|
Deductions
|
|
|
Balance at
End of
Period
|
|
|
(in millions)
|
Provision for uncollectible accounts (current)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
75
|
|
$
|
11
|
|
$
|
3
|
|
|
$
|
(77
|
)
|
|
$
|
12
|
2006
|
|
|
84
|
|
|
15
|
|
|
(24
|
)
|
|
|
|
|
|
|
75
|
2005
|
|
|
234
|
|
|
16
|
|
|
(167
|
)
|
|
|
1
|
|
|
|
84
|
Provision for uncollectible accounts (noncurrent)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
24
|
|
$
|
|
|
$
|
(3
|
)
|
|
$
|
(15
|
)
|
|
$
|
6
|
2006
|
|
|
72
|
|
|
14
|
|
|
24
|
|
|
|
(86
|
)
|
|
|
24
|
2005
|
|
|
161
|
|
|
|
|
|
7
|
|
|
|
(96
|
)
|
|
|
72
|
18.
|
Litigation and Other Contingencies
|
The Company is
involved in a number of significant legal proceedings. In certain cases, plaintiffs seek to recover large and sometimes unspecified damages, and some matters may be unresolved for several years. The Company cannot currently determine the outcome of
the proceedings described below or the ultimate amount of potential losses and therefore has not made any provision for such matters unless specifically noted below. Pursuant to SFAS 5, management provides for estimated losses to the extent
information becomes available indicating that losses are probable and that the amounts are reasonably estimable. Additional losses could have a material adverse effect on the Companys consolidated financial position, results of operations or
cash flows.
F-54
Environmental Matters
Kivalina Suit
. On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the United States District Court for the Northern District of California
against several owners of generating facilities, including Mirant Corporation, several oil companies and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska that they contend is being destroyed by erosion
allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The Plaintiffs assert claims for nuisance and contend that the defendants have acted in concert and are therefore jointly and
severally liable for the plaintiffs damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Mirant intends to oppose this action vigorously,
but cannot predict its outcome.
EPA Information Request.
In January 2001, the EPA issued a request for
information to Mirant concerning the implications under the EPAs NSR regulations promulgated under the Clean Air Act of past repair and maintenance activities at the Potomac River facility in Virginia and the Chalk Point, Dickerson and
Morgantown facilities in Maryland. The requested information concerned the period of operations that predates the Company subsidiaries ownership and lease of those facilities. Mirant responded fully to this request. Under the APSA, Pepco is
responsible for fines and penalties arising from any violation associated with operations prior to the acquisition or lease of the facilities by subsidiaries of the Company. If a violation is determined to have occurred at any of the facilities, the
Company subsidiary owning or leasing the facility may be responsible for the cost of purchasing and installing emissions control equipment, the cost of which may be material. The Companys subsidiaries owning or leasing the Chalk Point,
Dickerson and Morgantown facilities in Maryland are installing a variety of emissions control equipment on those facilities to comply with the Maryland Healthy Air Act, but that equipment may not include all of the emissions control equipment that
could be required if a violation of the EPAs NSR regulations is determined to have occurred at one or more of those facilities. If such a violation is determined to have occurred after the Companys subsidiaries acquired or leased the
facilities or, if occurring prior to the acquisition or lease, is determined to constitute a continuing violation, the Companys subsidiary owning or leasing the facility at issue could also be subject to fines and penalties by the state or
federal government for the period after its acquisition or lease of the facility, the cost of which may be material, although applicable bankruptcy law may bar such liability for periods prior to January 3, 2006, when the Plan became effective
for the Company and its subsidiaries that own or lease these facilities.
Morgantown Particulate Emissions
NOV
. On March 3, 2006, Mirant Mid-Atlantic received a notice sent on behalf of the MDE alleging that violations of particulate matter emissions limits applicable to unit 1 at the Morgantown facility occurred on
nineteen days in June and July 2005. The notice advises that the potential civil penalty is up to $25,000 per day for each day that unit 1 exceeded the applicable particulate matter limit. The letter further advises that the MDE has asked the
Maryland Attorney General to file a civil suit under Maryland law based upon the alleged violations.
Morgantown SO2
Exceedances.
Mirant Mid-Atlantic received an NOV dated March 8, 2006, asserting that on three days in June 2005 and January 2006, the Morgantown facility exceeded SO2 emissions limitations specified in its air permit.
The NOV indicates that on two of those days the SO2 emissions limitation was exceeded by two different units of the Morgantown facility each day. The NOV did not seek a specific penalty amount but noted that the violations identified could subject
Mirant Mid-Atlantic to a civil penalty of up to $25,000 per day.
Morgantown Emissions Observation NOV
. On
June 30, 2006, the MDE issued an NOV to Mirant Mid-Atlantic indicating that it had failed to comply with the air permit for the Morgantown facility by operating the combustion turbines at the facility for more than 168 hours without performing
an EPA Reference Method 9 observation of stack emissions for an 18-minute period. The NOV did not seek a specific penalty amount but noted that the violation identified could subject Mirant Mid-Atlantic to a civil penalty of up to $25,000 per day.
Mirant Potomac River NAAQS Exceedance.
On March 23, 2007, the Virginia DEQ issued an NOV to Mirant
Potomac River alleging that it violated Virginias Air Pollution Control Law and regulations on February 23, 2007, by operating the Potomac River facility in a manner that resulted in a monitored exceedance
F-55
in a twenty-four hour period of the NAAQS for SO2. As noted in the NOV, Mirant Potomac River was operating on February 23, 2007, as directed by PJM in
accordance with a DOE order during a scheduled outage of the Pepco transmission lines serving Washington, D.C. The NOV asserts that plant operators did not implement appropriate actions to minimize SO2 emissions. The NOV did not seek a specific
penalty amount but noted that the violations identified could subject Mirant Potomac River to civil penalties of varying amounts under different provisions of the Virginia Code, including a potential civil fine of up to $100,000.
New York State Administrative Claim.
On January 24, 2006, the State of New York and the NYSDEC filed a notice of
administrative claims in the Companys Chapter 11 proceedings asserting a claim seeking to require the Company to provide funding to its subsidiaries owning generating facilities in New York to satisfy certain specified environmental compliance
obligations. The State of New York cited various existing outstanding matters between the State and the Companys subsidiaries owning generating facilities in New York related to compliance with environmental laws and regulations. The State of
New York and the NYSDEC executed a stipulated order with the Company, its New York subsidiaries and the other Mirant Debtors to stay resolution of this administrative claim. That stipulated order was approved by the Bankruptcy Court on
February 23, 2006. Although this administrative claim remains stayed, the bulk of the existing outstanding matters upon which the claim was based have been separately resolved with the NYSDEC.
Riverkeeper Suit Against Mirant Lovett.
On March 11, 2005, Riverkeeper, Inc. filed suit against Mirant Lovett in
the United States District Court for the Southern District of New York under the Clean Water Act. The suit alleges that Mirant Lovett failed to implement a marine life exclusion system at its Lovett generating facility and to perform monitoring for
the exclusion of certain aquatic organisms from the facilitys cooling water intake structures in violation of Mirant Lovetts water discharge permit issued by the State of New York. The plaintiff requested the court to enjoin Mirant
Lovett from continuing to operate the Lovett generating facility in a manner that allegedly violates the Clean Water Act, to impose civil penalties of $32,500 per day of violation, and to award the plaintiff attorneys fees. Mirant
Lovetts view is that it has complied with the terms of its water discharge permit, as amended by a Consent Order entered June 29, 2004. On April 20, 2005, the district court approved a stipulation agreed to by the plaintiff and
Mirant Lovett that stayed the suit until 60 days after the entry of the order by the Bankruptcy Court confirming the plan of reorganization for Mirant Lovett became final and non-appealable, which stay expired in late 2007.
Lovett/Bowline SPDES Notices of Violation
. On March 8, 2007, Mirant Lovett and Mirant Bowline received NOVs from the
NYSDEC alleging certain violations of their State Pollutant Discharge Elimination System (SPDES) permits. On April 6, 2007, the NYSDEC filed a complaint against Mirant Lovett and Mirant Bowline based on these allegations. The
complaint seeks a penalty of $500,000. On December 31, 2007, Mirant Bowline entered into a Consent Order with the NYSDEC that resolved the NOV issued to it. In the Consent Order, Mirant Bowline agreed to pay a fine of $50,000 and to fund an
environmental benefit project in the amount of $250,000. Mirant Lovett is in discussions with the NYSDEC to resolve the NOV issued to it and has not yet responded to the complaint filed by the NYSDEC.
Notices of Intent to Sue for Alleged Violations of the Endangered Species Act.
Mirant and Mirant Delta have received two
letters, one dated September 27, 2007, sent on behalf of the Coalition for a Sustainable Delta, four water districts, and an individual and the second dated October 16, 2007, sent on behalf of San Francisco Baykeeper (collectively with the
parties sending the September 27, 2007, letter, the Noticing Parties), providing notice that the Noticing Parties intend to file suit alleging that Mirant Delta has violated, and continues to violate, the federal Endangered Species
Act through the operation of its Contra Costa and Pittsburg generating facilities. The Noticing Parties contend that the facilities use of water drawn from the Sacramento-San Joaquin Delta for cooling purposes results in harm to four species of fish
listed as endangered species. The Noticing Parties assert that Mirant Deltas authorizations to take (i.e., cause harm to) those species, a biological opinion and incidental take statement issued by the National Marine Fisheries Service on
October 17, 2002, for three of the fish species and a biological opinion and incidental take statement issued by the United States Fish and Wildlife Service on November 4, 2002, for the fourth fish species have not been complied with by
Mirant Delta and no longer apply to permit the effects on the four fish species caused by the operation of the Contra Costa and Pittsburg generating facilities. Following receipt of these letters, in late October 2007, Mirant Delta received
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correspondence from the U.S. Fish and Wildlife Service, the National Marine Fisheries Service and the Army Corps of Engineers clarifying that Mirant Delta
continued to be authorized to take the four species of fish protected under the federal Endangered Species Act. In a subsequent letter, the Coalition for a Sustainable Delta also alleged violations of the National Environmental Policy Act and the
California Endangered Species Act associated with the operation of Mirant Deltas facilities. Mirant Delta disputes the allegations made by the Noticing Parties. No lawsuits have been filed to date, and San Francisco Baykeeper on
February 1, 2008, withdrew its notice of intent to sue.
Chapter 11 Proceedings
On July 14, 2003, and various dates thereafter, Mirant Corporation and certain of its subsidiaries (collectively, the Mirant Debtors)
filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Mirant and most of the Mirant Debtors emerged from bankruptcy on January 3, 2006, when the Plan became effective. The remaining Mirant
Debtors, Mirant New York, Mirant Bowline, Mirant Lovett, Mirant NY-Gen and Hudson Valley Corporation, emerged from bankruptcy on various dates in 2007. As of December 31, 2007, approximately one million of the shares of Mirant common stock to
be distributed under the Plan had not yet been distributed and have been reserved for distribution with respect to claims disputed by the Mirant Debtors that have not been resolved. Under the terms of the Plan, to the extent unresolved claims are
resolved now that Mirant has emerged from bankruptcy, the claimants will receive the same pro rata distributions of Mirant common stock, cash, or both common stock and cash as previously allowed claims.
To the extent the aggregate amount of the payouts determined to be due with respect to disputed claims ultimately exceeds the amount of the funded claim
reserve, Mirant would have to issue additional shares of common stock to address the shortfall, which would dilute existing Mirant stockholders, and Mirant and Mirant Americas Generation would have to pay additional cash amounts as necessary under
the terms of the Plan to satisfy such pre-petition claims. If Mirant is required to issue additional shares of common stock to satisfy unresolved claims, certain parties who received approximately 21 million of the 300 million shares of
common stock distributed under the Plan are entitled to receive additional shares of common stock to avoid dilution of their distributions under the Plan.
Actions Pursued by MC Asset Recovery
In 2005, Mirant Corporation and various of its subsidiaries filed actions in
the Bankruptcy Court against several parties seeking to recover damages for fraudulent transfers that occurred prior to the filing of Mirants bankruptcy proceedings, and asserting other related claims. Each of those actions alleges that the
defendants engaged in transactions with Mirant or its subsidiaries at a time when they were insolvent or were rendered insolvent by the resulting transfers and that they did not receive fair value for those transfers. In addition to these avoidance
actions, the official Committee of Unsecured Creditors of Mirant Corporation filed an action against Arthur Andersen on behalf of the Mirant Debtors alleging malpractice. Under the Plan, the rights to most of these avoidance actions, and the suit
filed against Arthur Andersen, were transferred to MC Asset Recovery. MC Asset Recovery, while wholly-owned by Mirant, is governed by managers that are independent of Mirant and its other subsidiaries. Mirant is obligated to make capital
contributions to MC Asset Recovery as necessary to pay up to $20 million of professional fees and to pay certain other costs incurred by MC Asset Recovery, including expert witness fees and other costs of the avoidance actions and the Andersen
suit, which costs are not capped and for which Mirant has accrued $45 million.
Under the Plan, any cash recoveries received by MC Asset
Recovery from the avoidance actions or the Andersen suit, net of costs incurred in prosecuting the actions (including all capital contributions from Mirant), are to be paid to the unsecured creditors of Mirant Corporation in the Chapter 11
proceedings and the holders of the equity interests in Mirant Corporation immediately prior to the effective date of the Plan except where such a recovery results in an allowed claim in the bankruptcy proceedings, as described below. Mirant may not
reduce such payments for the taxes owed on any net recoveries up to $175 million. If the aggregate recoveries exceed $175 million net of costs, then Mirant may reduce the payments to be made to such unsecured creditors and former holders
of equity interests under the Plan by the amount of any taxes it will owe on the amount in excess of $175 million. Most of the actions transferred to MC Asset Recovery remain pending, and through December 31, 2007, none of those actions
has resulted in any recovery.
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If MC Asset Recovery succeeds in obtaining any recoveries on the avoidance claims transferred to it, the
party or parties from which such recoveries are obtained could seek to file claims in Mirants bankruptcy proceedings. Mirant would vigorously contest any such claims on the grounds that, among other things, the avoidance claims being pursued
by MC Asset Recovery seek to recover only amounts received by third parties in excess of fair value and that the recovery of such amounts does not reinstate any enforceable pre-petition obligation that could give rise to a claim. If such a claim
were to be allowed by the Bankruptcy Court as a result of a recovery by MC Asset Recovery, then the party receiving the claim would be entitled to either Mirant common stock or such stock and cash as provided under the Plan. Under such
circumstances, the order entered by the Bankruptcy Court on December 9, 2005, confirming the Plan provides that Mirant would retain from the net amount recovered an amount equal to the dollar amount of the resulting allowed claim rather than
distribute such amount to the creditors and former equity holders as described above.
California and Western Power Markets
FERC Refund Proceedings Arising Out of California Energy Crisis.
High prices experienced in California and western
wholesale electricity markets in 2000 and 2001 caused various purchasers of electricity in those markets to initiate proceedings seeking refunds. Several of those proceedings remain pending either before the FERC or on appeal to the United States
Court of Appeals for the Ninth Circuit (the Ninth Circuit). The proceedings that remain pending include proceedings (1) ordered by FERC on July 25, 2001, (the FERC Refund Proceedings) to determine the amount of any
refunds and amounts owed for sales made by market participants, including Mirant Americas Energy Marketing, in the CAISO or the Cal PX markets from October 2, 2000, through June 20, 2001 (the Refund Period), (2) ordered by
FERC to determine whether there had been unjust and unreasonable charges for spot market bilateral sales in the Pacific Northwest from December 25, 2000, through June 20, 2001 (the Pacific Northwest Proceeding), and
(3) arising from a complaint filed in 2002 by the California Attorney General that sought refunds for transactions conducted in markets administered by the CAISO and the Cal PX outside the Refund Period set by the FERC and for transactions
between the DWR and various owners of generation and power marketers, including Mirant Americas Energy Marketing and subsidiaries of Mirant Americas Generation. Various parties appealed FERC orders related to these proceedings to the Ninth Circuit
seeking review of a number of issues, including changing the Refund Period to include periods prior to October 2, 2000, and expanding the sales of electricity subject to potential refund to include bilateral sales made to the DWR and other
parties. While various of these appeals remain pending, the Ninth Circuit has ruled that the FERC should consider further whether to grant relief for sales of electricity made in the CAISO and Cal PX markets prior to October 2, 2000, at rates
found to be unjust, and, in the proceeding initiated by the California Attorney General, what remedies, including potential refunds, are appropriate where entities, including Mirant Americas Energy Marketing, purportedly did not comply with certain
filing requirements for transactions conducted under market based rate tariffs.
On January 14, 2005, Mirant and certain of its
subsidiaries (the Mirant Settling Parties) entered into a Settlement and Release of Claims Agreement (the California Settlement) with PG&E, Southern California Edison Company, San Diego Gas and Electric Company, the CPUC,
the DWR, the EOB and the Attorney General of the State of California (collectively, the California Parties). The California Settlement was approved by the FERC on April 13, 2005, and became effective on April 15, 2005, upon its
approval by the Bankruptcy Court. The California Settlement resulted in the release of most of Mirant Americas Energy Marketings potential liability (1) in the FERC Refund Proceedings for sales made in the CAISO or the Cal PX markets,
(2) in the Pacific Northwest Proceeding, and (3) in any proceedings at the FERC resulting from the complaint filed in 2002 by the California Attorney General. Under the California Settlement, the California Parties and those other market
participants who have opted into the settlement have released the Mirant Settling Parties, including Mirant Americas Energy Marketing, from any liability for refunds related to sales of electricity and natural gas in the western markets from
January 1, 1998, through July 14, 2003. Also, the California Parties have assumed the obligation of Mirant Americas Energy Marketing to pay any refunds determined by the FERC to be owed by Mirant Americas Energy Marketing to other parties
that do not opt into the settlement for transactions in the CAISO and Cal PX markets during the Refund Period, with the liability of the California Parties for such refund
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obligation limited to the amount of certain receivables assigned by Mirant Americas Energy Marketing to the California Parties under the California
Settlement. The settlement did not relieve Mirant Americas Energy Marketing of liability for any refunds that the FERC determines it to owe (1) to participants in the Cal PX and CAISO markets that are not California Parties (or that did not
elect to opt into the settlement) for periods outside the Refund Period and (2) to participants in bilateral transactions with Mirant Americas Energy Marketing that are not California Parties (or that did not elect to opt into the settlement).
Resolution of the refund proceedings that remain pending before the FERC or that currently are on appeal to the Ninth Circuit could
ultimately result in the FERC concluding that the prices received by Mirant Americas Energy Marketing in some transactions occurring in 2000 and 2001 should be reduced. The Companys view is that the bulk of any obligations of Mirant Americas
Energy Marketing to make refunds as a result of sales completed prior to July 14, 2003, in the CAISO or Cal PX markets or in bilateral transactions either have been addressed by the California Settlement or have been resolved as part of Mirant
Americas Energy Marketings bankruptcy proceedings. To the extent that Mirant Americas Energy Marketings potential refund liability arises from contracts that were transferred to Mirant Energy Trading as part of the transfer of the
trading and marketing business under the Plan, Mirant Energy Trading may have exposure to any refund liability related to transactions under those contracts.
FERC Show Cause Proceeding Relating to Trading Practices.
On June 25, 2003, the FERC issued a show cause order (the Trading Practices Order) to more than 50 parties,
including Mirant Americas Energy Marketing and subsidiaries of Mirant Americas Generation. The Trading Practices Order identified certain specific trading practices that the FERC indicated could constitute gaming or anomalous market behavior in
violation of the CAISO and Cal PX tariffs, and required sellers previously involved in transactions of those types to demonstrate why such transactions were not violations of the CAISO and Cal PX tariffs. On September 30, 2003, and
December 19, 2003, the Mirant entities filed with the FERC for approval of a settlement agreement (the Trading Settlement Agreement) entered into between certain Mirant entities and the FERC Trial Staff and an amendment to that
agreement, under which Mirant Americas Energy Marketing would pay $332,411 and the FERC would have an allowed unsecured claim in Mirant Americas Energy Marketings bankruptcy proceeding for $3.67 million to settle the show cause
proceeding. The FERC approved the Trading Settlement Agreement, as amended, on June 27, 2005, and the Bankruptcy Court approved it on August 24, 2005. Certain parties filed motions for rehearing with the FERC, which it denied on
October 11, 2006. A party to the proceeding has appealed the FERCs June 27, 2005, order to the Ninth Circuit.
Maryland Public
Service Commission Complaint to the FERC re PJM Offer Capping Rules
In certain market conditions, such as where congestion
requires the dispatch of a generating facility that bid a higher price for electricity than other available generating facilities, PJMs market rules (the Offer Capping Rules) limit the amount that the owner of a generating facility
may bid to sell electricity from that facility to its incremental cost of service to produce that electricity. As approved by the FERC, the Offer Capping Rules contain exemptions for generating facilities entering service during certain years (none
of which are owned by the Company) and for generating facilities (some of which are owned by the Company) that can relieve congestion arising at certain defined transmission interfaces. On January 15, 2008, the Maryland Public Service
Commission (the MD PSC) filed a complaint with the FERC requesting that the FERC remove all exemptions to the Offer Capping Rules during hours when the PJM market reflects potentially non-competitive conditions, as determined by the PJM
Market Monitor. The complaint alleges that these exemptions to the Offer Capping Rules likely result in higher market clearing prices for electricity in PJM, and higher revenues to the Company and the other owners of generation that are selling
electricity, during the periods when the exemptions prevent the application of the Offer Capping Rules to one or more generating facilities. The MD PSC requested that the FERC require a rerunning of the dispatch of the PJM energy markets without
application of the exemptions to the Offer Capping Rules for each day from January 15, 2008, through the date that the Commission grants the requested relief and that it require owners of generation to refund any revenues received in excess of
the amounts that would have been received had the exemptions not been applied.
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In addition, the MD PSC alleged that PJM violated its tariff by not publicly disclosing since mid 2006
quarterly analyses performed by the PJM Market Monitor of the potential for the exercise of market power by owners of generation during periods when market conditions caused the exemptions to the Offer Capping Rules to apply. The MD PSC requested
the FERC to initiate an investigation of whether owners of generation exercised market power during such periods, and, if so, to order refunds beginning as of September 8, 2006, or the first date that the FERC determines that PJM violated its
tariff.
The Company disputes the allegations made by the MD PSC in its complaint and intends to oppose the complaint and the relief
requested. If the FERC were to remove the exemptions to the Offer Capping Rules, and apply the removal retroactively from January 15, 2008, or an earlier date, PJM would have to rerun its day-ahead market from that date forward to determine
what prices would have resulted in the absence of the exemptions. Such a rerun of the PJM day-ahead market likely would result in refunds being owed by all sellers, including the Company, but the potential amount cannot be quantified.
Stockholder-Bondholder Litigation
Mirant
Securities Consolidated Action.
Twenty lawsuits filed in 2002 against Mirant and four of its officers have been consolidated into a single action, In re Mirant Corporation Securities Litigation, before the United States
District Court for the Northern District of Georgia. In their original complaints, the plaintiffs alleged, among other things, that the defendants violated federal securities laws by making material misrepresentations and omissions to the investing
public regarding Mirants business operations and future prospects during the period from January 19, 2001, through May 6, 2002, due to potential liabilities arising out of its activities in California during 2000 and 2001. The
plaintiffs sought unspecified damages, including compensatory damages, and the recovery of reasonable attorneys fees and costs.
In
November 2002, the plaintiffs filed an amended complaint that added as defendants the Southern Company (Southern), the directors of Mirant immediately prior to its initial public offering of stock and various firms that were
underwriters for the initial public offering by the Company. In addition to the claims set out in the original complaint, the amended complaint asserted claims under the Securities Act, alleging that the registration statement and prospectus for the
initial public offering in 2000 of Mirants old common stock cancelled under the Plan misrepresented and omitted material facts. On December 11, 2003, the plaintiffs filed a proof of claim against Mirant in the Chapter 11 proceedings, but
they subsequently withdrew their claim in October 2004. On August 29, 2005, the district court, at the request of the plaintiffs, dismissed Mirant as a defendant in this action.
A master separation agreement between Mirant and Southern entered into in conjunction with Mirants spin-off from Southern in 2001 obligates Mirant
to indemnify Southern for any losses arising out of any acts or omissions by Mirant and its subsidiaries in the conduct of the business of Mirant and its subsidiaries. Mirant filed to reject the separation agreement in the Chapter 11 proceedings.
Any damages determined to be owed to Southern arising from the rejection of the separation agreement will be addressed as a claim in the Chapter 11 proceedings under the terms of the Plan. The underwriting agreements between Mirant and the various
firms added as defendants that were underwriters for the initial public offering by the Company in 2000 also provide for Mirant to indemnify such firms against any losses arising out of any acts or omissions by Mirant and its subsidiaries. The
underwriters filed a claim against Mirant in the Chapter 11 proceedings that was subordinated to claims of Mirants creditors and extinguished under the Plan.
Other Legal Matters
The Company is involved in various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Companys financial position, results of operations or cash flows.
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19.
|
Settlements and Other Charges
|
Pepco Litigation
In 2000, Mirant purchased power generating facilities and other assets from Pepco, including certain PPAs between Pepco and third parties.
Under the terms of the APSA, Mirant and Pepco entered into the Back-to-Back Agreement with respect to certain PPAs, including Pepcos long-term PPA with Panda-Brandywine, LP, under which (1) Pepco agreed to resell to Mirant all capacity,
energy, ancillary services and other benefits to which it is entitled under those agreements and (2) Mirant agreed to pay Pepco each month all amounts due from Pepco to the sellers under those agreements for the immediately preceding month
associated with such capacity, energy, ancillary services and other benefits. The Back-to-Back Agreement, which did not expire until 2021, obligated Mirant to purchase power from Pepco at prices that typically were higher than the market prices for
power.
In the bankruptcy proceedings, the Mirant Debtors sought to reject the Back-to-Back Agreement or to recharacterize it as
pre-petition debt, which efforts, if successful, would have resulted in the Mirant Debtors having no further obligation to perform and in Pepco receiving a claim in the bankruptcy proceedings for its resulting damages. Pending a final determination
of the Mirant Debtors ability to reject or recharacterize the Back-to-Back Agreement and certain other agreements with Pepco, the Plan provided that the Mirant Debtors obligations under the APSA and the Back-to-Back Agreement were
interim obligations of Mirant Power Purchase and were unconditionally guaranteed by Mirant.
On May 30, 2006, Mirant and
various of its subsidiaries (collectively the Mirant Settling Parties) entered into the Settlement Agreement with the Pepco Settling Parties. The Settlement Agreement could not become effective until it had been approved by the
Bankruptcy Court and that approval order had become a final order no longer subject to appeal. The Bankruptcy Court entered an order approving the Settlement Agreement on August 9, 2006. That order was appealed, but the appeal was dismissed by
agreement of the parties in August 2007, and the Settlement Agreement became effective August 10, 2007. The Settlement Agreement fully resolved the contract rejection motions that remained pending in the bankruptcy proceedings, as well as
other matters disputed between Pepco and Mirant and its subsidiaries. Under the Settlement Agreement, Mirant Power Purchase assumed the remaining obligations under the APSA, and Mirant has guaranteed its performance. The Back-to-Back Agreement was
rejected and terminated effective as of May 31, 2006.
The Settlement Agreement granted Pepco a claim against Old Mirant in Old
Mirants bankruptcy proceedings that was to result in Pepco receiving common stock of Mirant and cash having a value, after liquidation of the stock by Pepco, equal to $520 million. Shortly after the Settlement Agreement became effective,
Mirant distributed approximately 14 million shares of Mirant common stock from the shares reserved for disputed claims under the Plan to Pepco to satisfy its claim. The Mirant shares in the share reserve, including the shares distributed to
Pepco, have been treated as issued and outstanding since Mirant emerged from bankruptcy. Pepcos liquidation of those shares resulted in net proceeds of approximately $522 million and Pepco paid Mirant the amount in excess of
$520 million. Pepco also refunded to Mirant Power Purchase approximately $36 million Pepco had received under the Back-to-Back Agreement for energy, capacity or other services delivered after May 31, 2006, through the date the
Settlement Agreement became effective. The appeal of the Bankruptcy Courts August 9, 2006, approval order had resulted in Mirant paying Pepco $70 million under the terms of the Settlement Agreement shortly after the appeal was filed.
Pepco repaid the $70 million once the Settlement Agreement became fully effective.
Upon the distribution of the shares to Pepco,
Mirant recognized a gain of $379 million. The gain included (1) $341 million representing the fair value of the price risk management liability that was reversed as a result of the rejection of the Back-to-Back Agreement,
(2) $36 million refunded by Pepco for payments made under the Back-to-Back Agreement for periods after May 31, 2006, and (3) $2 million for the excess payment Pepco received from liquidation of the shares that were
distributed to it. The $341 million and $2 million are included in other income, net and the $36 million is included in gross margin in the consolidated statement of operations.
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New York Tax Proceedings
Mirant New York, Mirant Bowline, Mirant Lovett and Hudson Valley Gas (collectively with Mirant New York, Mirant Bowline and Mirant Lovett, the New York Companies) were the petitioners in various
proceedings (the Tax Certiorari Proceedings) initially brought in the New York state courts challenging the assessed values determined by local taxing authorities for the Bowline and Lovett generating facilities and a natural gas
pipeline (the HVG Property) owned by Hudson Valley Gas. Mirant Bowline had challenged the assessed value of the Bowline generating facility and the resulting local tax assessments for tax years 1995 through 2006. Mirant Bowline succeeded
to rights held by Orange and Rockland for the tax years prior to its acquisition of the Bowline facility in 1999 under its agreement with Orange and Rockland for the purchase of that facility. Mirant Lovett had challenged the assessed
value of the Lovett facility for each of the years 2000 through 2006. Hudson Valley Gas had challenged the assessed value of the HVG Property for each of the years 2004 through 2006. As of December 31, 2006, Mirant Bowline and Mirant Lovett had
not paid property taxes on the Bowline and Lovett generating facilities that fell due in the period from September 30, 2003, through December 31, 2006, in order to preserve their respective rights to offset the overpayments of taxes made
in earlier years against the sums payable on account of current taxes. Hudson Valley Gas had not paid property taxes that fell due in the period from September 30, 2004, through December 31, 2006.
On December 13, 2006, Mirant and the New York Companies entered into a settlement agreement (the Tax Settlement Agreement) with the Town
of Haverstraw (Haverstraw), the Town of Stony Point (Stony Point), the Haverstraw-Stony Point Central School District (the School District), the County of Rockland (the County), the Village of
Haverstraw (Haverstraw Village), and the Village of West Haverstraw (West Haverstraw Village and collectively with Haverstraw, Stony Point, the School District, the County, and Haverstraw Village, the Tax
Jurisdictions). The Tax Settlement Agreement was approved by the Bankruptcy Court on December 14, 2006, and resolved all pending disputes regarding real property taxes between the New York Companies and the Tax Jurisdictions. Under the
agreement, the New York Companies received total refunds of $163 million from the Tax Jurisdictions and paid unpaid but accrued taxes to the Tax Jurisdictions of $115 million, resulting in the New York Companies receiving a net cash payment in the
amount of $48 million. The refunds and unpaid taxes were paid in February 2007. The $163 million of total refunds received by the New York Companies was recognized as a gain in the financial statements in the fourth quarter of 2006. In addition, the
New York Companies had previously accrued a liability based upon the unpaid taxes as billed by the Tax Jurisdictions. Due to the reductions of the unpaid taxes that occurred pursuant to the terms of the Tax Settlement Agreement, the New York
Companies also recognized in the fourth quarter of 2006 a reduction of operating expenses of approximately $23 million related to 2006 and a gain of approximately $71 million related to prior periods.
California Settlement
The California
Settlement described in Note 18 in
California and Western Power MarketsFERC Refund Proceedings Arising Out of California Energy Crisis
included a provision that either (1) the partially constructed Contra Costa 8 project, which was
a planned 530 MW combined cycle generating facility, and related equipment (collectively, the CC8 Assets) were to be transferred to PG&E or (2) PG&E would receive additional alternative consideration of $70 million (the
CC8 Alternative Consideration). To fund the CC8 Alternative Consideration, PG&E received an allowed, unsecured claim in the bankruptcy proceedings against Mirant Delta that resulted in a distribution to PG&E of cash and Mirant
common stock with an aggregate value of approximately $70 million. PG&E was required to liquidate the common stock received as part of that distribution and place the net resulting amount plus any cash received into an escrow account.
The California Settlement provided that if the transfer of the CC8 Assets to PG&E did not occur on or before June 30, 2008, then
the CC8 Alternative Consideration was to be paid to PG&E and the Mirant Settling Parties would retain the CC8 Assets. If PG&E closed on its acquisition of the CC8 Assets, the funds in the
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escrow account were to be paid to Mirant Delta. The transfer of the CC8 Assets to PG&E was completed on November 28, 2006, and the $70 million
escrow account was paid to Mirant Delta. The Company recognized in the fourth quarter of 2006 a gain of $27 million for the amount by which the escrow account exceeded the carrying amount of the CC8 Assets. The gain was included in other income in
the Companys consolidated statements of operations.
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