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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-K/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Mirant Corporation
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(Exact name of registrant as specified in its charter)
Delaware 001-16107 58-2056305
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(State or other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification No.)
1155 Perimeter Center West, Suite 100, Atlanta, Georgia 30338
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(Address of Principal Executive Offices) (Zip Code)
(678) 579-5000
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(Registrant's Telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock,
par value $0.01 per share New York Stock Exchange
Company obligated mandatorily
redeemable Preferred securities,
$27.50 liquidation amount New York Stock Exchange
Securities registered pursuant to Section 12(b) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $3,483,001,700 on February 28, 2002, (based on
$8.68 per share, the closing price in the daily composite list for transactions
on the New York Stock Exchange for that day. As of February 28, 2002, there were
401,425,578 shares of the registrant's Common Stock, $0.01 par value per share
outstanding.
TABLE OF CONTENTS
PART I Page
Item 1 Business ....................................................... 3
Item 2 Properties ..................................................... 16
Item 3 Legal Proceedings............................................... 18
Item 4 Submission of Matters to a Vote of Security Holders............. 20
Item 4A Executive Officers of Mirant Corporation........................ 20
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 22
Item 6 Selected Financial Data......................................... 23
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 26
Item 7A Quantitative and Qualitative Disclosures About Market Risk...... 47
Item 8 Financial Statements and Supplementary Data..................... 62
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 63
PART III
Item 10 Directors and Executive Officers of the Registrant.............. 63
Item 11 Executive Compensation.......................................... 63
Item 12 Security Ownership of Certain Beneficial Owners and Management.. 63
Item 13 Certain Relationships and Related Transactions.................. 63
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 63
i
DEFINITIONS
TERM MEANING
----------------------------------- -------------------------------------------
Alicura............................ Hidroelectrica Alicura S. A.
Allied Queensland Coal............. Allied Queensland Coalfields Pty. Ltd
ALJ................................ Administrative law judge
APB................................ Accounting Principles Board
Bewag.............................. Bewag AG
Birchwood.......................... Birchwood Power Partners, L.P.
BP ................................ BP p.l.c.
Brazos ............................ Brazos Electric Power Cooperative
CAISO.............................. California Independent System Operator
Castex............................. Castex LaTerre, Inc.
CEMIG.............................. Companhia Energetica de Minas Gerais
The Company........................ Mirant Corporation and its subsidiaries
CPUC............................... California Public Utilities Commission
DWR................................ California Department of Water Resources
EDELNOR............................ Empresa Electrica del Norte Grande S.A.
EITF .............................. Emerging Issues Task Force
Enron.............................. Enron Corporation and its affiliates
EPA................................ U. S. Environmental Protection Agency
FASB............................... Financial Accounting Standards Board
FERC............................... Federal Energy Regulatory Commission
Fitch.............................. Fitch, Inc.
GAAP............................... Generally accepted accounting principles
Grand Bahama Power................. Grand Bahama Power Company
Hyder.............................. Hyder Limited
IRS................................ Internal Revenue Service
JPSCo.............................. Jamaica Public Service Company Limited
LIBOR.............................. London InterBank Offered Rate
Mirant Americas Energy Marketing... Mirant Americas Energy Marketing, L. P.
Mirant Canada Energy Marketing..... Mirant Canada Energy Marketing, Ltd.
Mirant Americas Energy Capital..... Mirant Americas Energy Capital, LP
Mirant Americas Generation......... Mirant Americas Generation, LLC
Mirant Asia-Pacific................ Mirant Asia-Pacific Ventures, Inc.
Mirant ............................ Mirant Corporation and its subsidiaries
Mirant California.................. Mirant California, LLC
Mirant Delta....................... Mirant Delta, LLC
Mirant Mid-Atlantic................ Mirant Mid-Atlantic, LLC
Mirant New York.................... Mirant New York, Inc., Mirant New York
Investments, Inc., and subsidiaries
Mirant Potrero..................... Mirant Potrero, LLC
Moody's............................ Moody's Investors Service
NERC............................... North American Electric Reliability Council
MW................................. Megawatts
NYMEX.............................. New York Mercantile Exchange
NPC................................ National Power Corporation
OCI................................ Other comprehensive income
OTC................................ Over-the-counter
Pacific Gas and Electric........... Pacific Gas and Electric Co.
Pan Alberta........................ Pan Alberta Gas, Ltd.
PEPCO.............................. Potomac Electric Power Company
Perryville......................... Perryville Energy Partners, LLC
PowerGen........................... The Power Generation Company of Trinidad
and Tobago
PPL ............................... PPL Corporation
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PUHCA.............................. Public Utility Holding Company Act of 1935,
as amended
PURPA.............................. Public Utility Regulatory Policies Act of
1978, as amended
PX................................. California Power Exchange Corporation
RMR................................ Reliability-Must-Run
SCE................................ Southern California Edison Co.
SEC................................ Securities and Exchange Commission
SE Finance......................... SE Finance Capital Corporation
SFAS............................... Statement of Financial Accounting Standards
Shajiao C.......................... Guangdong Guanghope Power Company
Limited
SIPD............................... Shandong International Power Development
Company Limited
Southern .......................... Southern Company
S&P................................ Standard & Poor's
State Line......................... State Line Energy, L.L.C.
Teesside........................... Teesside Power Station
TransCanada ....................... TransCanada PipeLines Limited
UK................................. United Kingdom
Vastar............................. Vastar Resources Inc.
WPD................................ Western Power Distribution group headed by
WPD 1953 Limited
WPD South Wales ................... Western Power Distribution(South Wales) plc
WPD South West .................... Western Power Distribution(South West) plc
WPDL............................... WPD Limited
2
PART I
Reason for Amendment:
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This Annual Report on Form 10-K/A is being filed as Amendment No. 1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2001 to correct a typographical error in the "Credit Risk" section of Item 7 of
the Management Discussion and Analysis and the risk factor titled "Our credit
ratings have been reduced by Moody's; this and any other reductions in ratings
could materially adversely affect our financial condition." The information in
our original 10-K filed on March 11, 2002, stated that "S&P affirmed its
investment grade credit rating of BBB+ for us and our affiliates." This has been
corrected to say "S&P affirmed its investment grade credit rating of BBB- for us
and our affiliates." This is the only change to our 10-K filed earlier today.
Item 1. Business
OVERVIEW
We are a leading global competitive energy company. We deliver value by
integrating an extensive portfolio of power and natural gas assets with risk
management and marketing expertise. We have facilities in North America, the
Caribbean, Europe and Asia and operate one of the world's largest integrated
asset management and energy marketing organizations from our headquarters in
Atlanta. As of December 31, 2001, we owned or controlled more than 22,000 MW of
electric generating capacity around the world, with approximately 6,800 MW under
development. We consider a project under development when we have contracted to
purchase machinery for the project, we own or control the project site and are
in the permitting process. These projects may or may not have received all of
the necessary permits and approvals to begin construction. We cannot provide
assurance that projects under development will be completed. In North America,
we also control access to approximately 3.9 billion cubic feet per day of
natural gas production, more than 6.4 billion cubic feet per day of natural gas
transportation and approximately 60 billion cubic feet of natural gas storage.
Through our business development offices, we monitor United States and
international economies and energy markets to identify and capitalize on
business opportunities. Through construction and acquisition, we have built a
portfolio of power plants, electric distribution companies and electric
utilities, giving us a net ownership and leasehold interest of over 19,600 MW of
electric generating capacity around the world, and control of over 2,400 MW of
additional generating capacity through management contracts. Our business also
includes managing risks associated with market price fluctuations of energy and
energy-linked commodities for us and our customers. We use our risk management
capabilities to optimize the value of our generating and gas assets and offer
risk management services to others. We also own fully integrated electric
utilities with generation, transmission and distribution capabilities as well as
electricity distribution companies.
We were incorporated in Delaware on April 20, 1993.
The Power and Gas Markets
Historically, the power generation industry has been characterized by
electric utility monopolies selling to a franchised customer base. In response
to increasing customer demand for access to low-cost electricity and enhanced
services, new regulatory initiatives have been and are continuing to be adopted,
primarily to increase wholesale competition in the power industry. As a result
of the recent energy crisis in California, some states have either discontinued
or delayed implementation of initiatives involving retail deregulation. In
deregulating markets, industry trends and regulatory initiatives are
transforming existing franchise customer markets, which are characterized by
vertically integrated, price-regulated utilities, into markets in which
generators compete with each other for their principal customers (wholesale
power suppliers and major end-users) on the basis of price, service quality and
other factors. The NERC anticipates that near-term electricity demand will grow
by 63,800 MW in the periods from 2001-2005 (Reliability Assessment 2001-2010:
The Reliability of Bulk Electric Systems in North America).
During the late 1980s and early 1990s, deregulation of the natural gas
markets created a robust competitive wholesale gas market. Gas demand is
expected to grow from 23 trillion cubic feet per year in 2000 to 30 trillion
cubic feet per year by 2010. The majority of this growth is being driven by the
electric generation market. The competitive electric generation market favors
low-cost generation technologies such as natural gas-fired combustion turbines
or combined-cycle plants to serve growing electricity demand and to replace
older, less-efficient units. Additionally, natural gas continues to be the most
cost-effective fuel source to meet increasingly stringent clean air
requirements. Currently, 16% of United States power generation is fueled by
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natural gas. Cambridge Energy Research Associates estimates that 90% of proposed
power generation development over the next four years in North America is
expected to use natural gas as its primary energy source. While it is unlikely
that all of the proposed additions will actually enter commercial service as
scheduled, it does appear likely that natural gas demand driven by power
generation will be significant. Consequently, the natural gas and power
commodity markets are converging. The converging power and gas markets could
create significant arbitrage opportunities for us as a marketer of natural gas
and power and an owner and controller of significant gas and power assets.
We view our gas and power marketing and risk management and power
generation businesses as an integrated unit. As the natural gas and power
markets continue to deregulate, unbundle and converge, we believe that our
marketing experience, risk management capabilities and products and control of
selected assets in both commodities potentially afford us a wide range of value
creation opportunities which could benefit both us and our customers. The
ongoing restructuring of the power industry should continue to transform
traditional vertically integrated, price-regulated markets into more competitive
and more volatile markets. This transformation requires that generators and
their principal customers manage the risks associated with producing and
delivering energy commodities. As such, this transformation of the energy
markets could have the effect of creating opportunities for us to market energy
commodities and provide services to manage these risks. We believe the move
towards competitive marketplaces will increase in the United States and abroad,
potentially providing additional opportunities for us to grow our risk
management business.
Outside of the United States, we expect the demand for electricity to grow
rapidly. In order to satisfy this anticipated increase in demand, some countries
have adopted government programs designed to encourage private investment in
power plants. In addition, some governments in more developed economies continue
to privatize their utilities, having realized that their energy assets can be
sold to raise capital without impairing system reliability. We expect these
countries to develop regulatory structures to encourage competition in the
electricity sector. We believe that these market trends will continue to create
opportunities to acquire and develop power generation plants outside the United
States.
Competition
As a global competitive energy company, we face intense competition in all
phases of our business, both in the United States and in international markets.
We encounter competition from companies of all sizes, having varying levels of
experience, financial and human resources and differing strategies. In the power
generation markets, we compete in the development and operation of
energy-producing projects, and our competitors in this business include various
utilities, industrial companies and independent power producers (including
affiliates of utilities). In our energy marketing and risk management
operations, we compete with international, national and regional full service
energy providers, merchants, producers and pipelines in our ability to aggregate
competitively priced supplies from a variety of sources and locations and to
utilize efficient transmission or transportation.
The following summarizes our competitive position in several of our key
markets:
o North America: We were ranked as the fifth and sixth-largest
competitive power company in July 2001 and July 2000, respectively,
according to the Platts "Global Power Report." In addition, for the
fourth quarter of 2001, our marketing and risk management operations
were ranked by Power Markets Weekly as the fifth-largest North American
power marketer and by Gas Daily as the largest North American gas
marketer.
o Asia-Pacific: As of July 2001, we are one of the largest
private power companies and we were the second-largest United States
developer, as measured by MW's of equity ownership, according to
Cambridge Energy Research Associates. Specifically, we have an
approximate 20% share of the total installed capacity in the
Philippines, and we are the largest private producer of electricity in
that country. In general, our coal-fired plants in the Philippines are
among the lowest operating cost plants in their market and have exceeded
their contractual availability requirements. In addition, we also hold
interests in power plants located in the Guangdong and Shandong
provinces of China.
4
o Europe: In the UK, our 49% (economic) and 50% (voting) owned
regional electric distribution company, WPD, is an industry leader across
many measures of performance according to energywatch, an independent
consumer protection body in the UK.
During the transition of the energy industry to competitive markets, it is
difficult for us to assess our position versus the position of existing power
providers and new entrants, due to the fact that each company may employ widely
differing strategies in their fuel supply and power sales contracts with regard
to pricing, terms and conditions. Further difficulties in making competitive
assessments of our company arise from the fact that many states and countries
are considering or implementing different types of regulatory and privatization
initiatives that are aimed at increasing competition in the power industry.
Increased competition that has resulted from some of these initiatives has
already contributed to a reduction in electricity prices and put pressure on
electric utilities to lower their costs, including the cost of purchased
electricity. Additionally, our business is rapidly becoming more competitive due
to technological advances in power generation, the increased role of full
service providers and increased efficiency of energy markets.
In general, however, we believe that our experience and expertise in
assessing and managing market and credit risk will allow us to remain
competitive during volatile or otherwise adverse market circumstances.
BUSINESS SEGMENTS
For selected financial information about Segments, see Note 16 of the
"Notes to Consolidated Financial Statements." See "Item 2 Properties" for a full
asset list.
AMERICAS
Through various subsidiaries, we own and control power generation assets,
natural gas assets and have energy marketing operations in the United States and
Canada. We also own various generation, transmission and distribution operations
in the Caribbean and South America.
United States and Canada
In the United States and Canada, we create value through an integrated
business strategy. This strategy uses our risk management, energy marketing and
arbitrage expertise combined with the generation capacity we control and our
access to natural gas to maximize opportunities existing in the power and
natural gas markets. This integration of our strategically located generation
capacity, our access to natural gas and our leading electricity and gas
marketing operations allows us to capitalize on arbitrage opportunities across
energy products, between regions and over time.
Our operations provide us national market access and intelligence, risk
management and arbitrage opportunities, fuel procurement and management
expertise, as well as transmission expertise in power and various types of
fuels. This, coupled with our reliable power supply, gives us a wide range of
opportunities to create value through structured contracts for power and natural
gas as well as the ability to capitalize on market volatility. Our current
development plan, in light of the current issues in our industry, is to continue
with the construction of our existing projects scheduled to begin commercial
operation in 2002 and 2003 and to postpone or cancel projects scheduled for
completion beyond 2003. See "Item 2 Properties" for a list of the projects under
development.
In the United States, we own, lease or control over 16,000 MW of generation
capacity in all of the major United States markets we have strategically
targeted. We have additional projects under development of over 5,700 MW. In the
United States and Canada, we also control access to approximately 3.9 billion
cubic feet per day of natural gas production, more than 6.4 billion cubic feet
5
per day of natural gas transportation and almost 60 billion cubic feet of
natural gas storage. Our energy marketing operations (Mirant Americas Energy
Marketing and Mirant Canada Energy Marketing) operates 24-hours a day and Mirant
Americas Energy Marketing is one of the leading electricity and gas marketers in
the United States markets. Our energy marketing operations trade energy and
energy-linked commodities, including electricity, gas, coal, oil, weather
derivatives and emission allowances. In 2001, we produced 80.6 million
megawatt-hours of electricity, sold 343.5 million megawatt-hours of electricity
and sold or marketed an aggregate average of 13.3 Bcf/D of natural gas.
Access to natural gas storage and transportation is an integral part of our
strategy. This access allows us to manage relatively consistent gas supply
volumes as demand levels fluctuate, helps mitigate risks related to fuel
management of our generation facilities and provides us the ability to
capitalize on market volatility.
For 2001, in North America, we added over 1,200 MW of additional generation
capacity to our portfolio through construction and acquisition. We also
increased our access to natural gas production, storage and transportation with
the acquisition of a 75% working interest in 18 natural gas and oil producing
fields as well as 206,000 acres of mineral rights in southern Louisiana from
Castex LaTerre, Inc. and the acquisition of the majority of the gas marketing
business of TransCanada PipeLines Limited. This transaction included the
purchase of the majority of TransCanada's natural gas marketing business and the
related natural gas transportation and storage contracts. In addition, we
obtained rights to marketable oil and natural gas through Mirant Americas Energy
Capital, which provides secured financing to proven independent oil and gas
producers for the purpose of developing or acquiring or refinancing and
producing oil and gas properties in North America. We believe that Mirant
Americas Energy Capital also enables Mirant Americas Energy Marketing to
aggregate gas commodities for its marketing efforts. Typically, Mirant Americas
Energy Capital provides financing in exchange for the rights to market those
commodities, which rights would be exercised by Mirant Americas Energy
Marketing. Mirant Americas Energy Capital plans to utilize various structures
for its investments, including senior secured debt, volumetric production
payments, prepayment purchases, equity participation and mezzanine financings.
We expect all of Mirant Americas Energy Capital's investments to be secured by
the underlying commodity available for extraction based on an independent
appraisal of the value of the assets and for repayment to be made from
production proceeds.
Caribbean and South America
In the Caribbean and South America, we have ownership interests in electric
utilities, power plants and transmission facilities. These assets are located in
the Bahamas, Trinidad and Tobago, Jamaica, Curacao and Brazil. Our continued
focus is to have investments in strategic locations in the Caribbean, which
create various opportunities for value-creation. On December 31, 2001, we
completed the sale of our 82.3% ownership interest EDELNOR, a partially
integrated electric utility in northern Chile.
Grand Bahama Power
We own a 55.4% interest in Grand Bahama Power, an integrated utility that
generates, transmits, distributes and sells electricity on Grand Bahama Island.
Grand Bahama Power operates generation facilities with a total capacity of 142
MW and has the exclusive right and obligation to supply electric power to
approximately 18,000 residential, commercial and industrial customers on Grand
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Bahama Island. Grand Bahama Power's rates are approved by the Grand Bahama Port
Authority.
PowerGen
We own a 39% interest in PowerGen, a 1,159 MW power generation company that
owns and operates three plants located on the island of Trinidad. The
electricity produced by PowerGen is provided to the Trinidad and Tobago
Electricity Commission, the state-owned transmission and distribution monopoly,
which serves nearly 300,000 customers on the islands of Trinidad and Tobago and
which holds a 51% interest in PowerGen. PowerGen has a power purchase agreement
with the Trinidad and Tobago Electricity Commission, which expires in 2009 and
is unconditionally guaranteed by the government of Trinidad and Tobago.
JPSCo
In March 2001, we acquired 80% of the outstanding shares of JPSCo for $201
million. JPSCo is a 689 MW fully integrated electric utility on the island of
Jamaica. JPSCo operates under a 20-year All-Island Electric License, is under
the direction of the Ministry of Mining and Energy and is subject to monitoring
and rate regulation by the Office of Utilities Regulation.
CEMIG
We own an indirect economic interest of 3.6% in CEMIG, a 5,632 MW fully
integrated utility that generates, transmits, distributes and sells electricity
in the southeast region of Brazil. CEMIG is the second largest Brazilian
electric company, as measured by GWh of energy sold, providing approximately 97%
of the electricity consumed in Minas Gerais.
ASIA-PACIFIC
Through wholly owned subsidiaries, we own one of Asia's largest independent
power producers. Mirant Asia-Pacific has experience in developing, constructing,
owning and operating electric power generation facilities in Asia. The majority
of our assets in Asia-Pacific are located in the Philippines, with additional
assets located in China, Australia, South Korea and Guam. We have a net
ownership interest in approximately 3,170 MW of generation capacity in the
Philippines, China and Guam. We are also conducting business development
activities in Asia-Pacific countries including Australia, China, the
Philippines, South Korea, Singapore and Japan. Most of our revenues in the
Asia-Pacific region have been derived from contracts with government entities or
regional power boards and are predominantly linked to the United States dollar
to mitigate foreign currency exchange risk.
Philippines
Mirant Asia-Pacific has an ownership interest in six plants in the
Philippines totaling 2,040 MW of capacity. Mirant Asia-Pacific has long-term
energy conversion agreements with the government-owned NPC for almost all of
this capacity. Under the energy conversion agreements, Mirant Asia-Pacific
accepts fuel from NPC and converts that fuel to energy. NPC is the national
electric company. In addition to our energy conversion agreements, we have a
joint marketing agreement with NPC for the 218 MW available excess capacity from
our Sual plant. Through this power supply agreement, electricity is supplied to
a select market requiring reliable and cost-effective power such as economic
zones, industries and electric distributors (cooperatives).
We also own a 20% interest in Ilijan, a 1,251 MW power station under
construction in the Philippines. The station has a 20-year energy conversion
agreement with NPC, where NPC receives the rights to 1,200 MW of the station's
capacity. We expect the construction to be completed in the second quarter of
2002.
Under the energy conversion agreements, we receive fixed capacity fees,
variable energy fees and other incidental fees. The energy conversion agreements
are executed under the government's build-operate-transfer program. At the end
of the term of each energy conversion agreement, the associated plant is
required to be transferred to NPC, free from any lien or payment of
compensation. NPC acts as both the fuel supplier and the energy off-taker under
the energy conversion agreements. NPC procures all of the fuel necessary for
each plant, at no cost to Mirant Asia-Pacific's subsidiaries and has accepted
substantially all fuel risks and fuel related obligations other than each
plant's actual fuel burning efficiency. Over 90% of the revenues are expected to
come from fixed capacity charges that are paid without regard to the dispatch
level of the plant. Nearly all of the capacity fees are denominated in United
States dollars. The energy fees and other incidental fees have both United
States dollar and Philippine Peso components that are both indexed to inflation
rates.
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The energy conversion agreements contain a provision under which NPC bears
most of the financial risks for both political force majeure and change of law.
The majority of NPC's obligations under the energy conversion agreements are
guaranteed by the full faith and credit of the Philippine government.
All of the projects in the Philippines have been granted preferred or
pioneer status that, among other things, have qualified them for income tax
abatements of three to six years. The expiration dates of the abatements for
Pagbilao and Sual are 2002 and 2005, respectively.
Deregulation and Privatization
In June 2001, the Philippine Congress approved and passed into law the
Comprehensive Electric Power Industry Reform Act ("EPIRA"), providing the
mandate and the framework to introduce competition in the Philippine electricity
market. Within three years from its effectiveness, competition in the retail
supply of electricity and open access to the transmission and distribution
systems is planned. Prior thereto, concerned government agencies are mandated to
establish a wholesale electricity spot market, ensure the unbundling of
transmission and distribution wheeling rates and remove existing cross-subsidies
provided by industrial and commercial users to residential customers.
A significant component of this legislation is the mandate to privatize the
assets of NPC, including its generation and transmission assets, as well as
contracts with the Independent Power Producers ("IPP"). Under the EPIRA, NPC's
generation assets will be sold through a transparent, competitive public
bidding, while all transmission assets will be transferred to the Transmission
Company ("TRANSCO") - initially a government-owned entity that will eventually
be privatized.
The EPIRA also mandates the creation of the Power Sector Assets and
Liabilities Management Corporation ("PSALM'), which is to accept transfer of all
assets and assume all outstanding obligations of NPC, including its obligations
to the IPP. One of PSALM's responsibilities is to manage these IPP contracts
after NPC's privatization. PSALM is also responsible for privatizing at least
70% of all the transferred generating assets and IPP contracts no later than
three years from the effective date of the law. Consistent with the announced
policy of the government, the law contemplates continued payments of NPC's
obligations under its energy conversion agreements. The energy conversion
agreements of Mirant Asia-Pacific are not involuntarily assignable and will,
therefore, remain with NPC or its successor corporation following privatization.
One of the issues relating to the privatization of NPC is the review of IPP
contracts, including our contracts. A committee has been created by the EPIRA to
review all contracts entered into by NPC with the IPP. One of the objectives of
the review is to determine whether any of these contracts are grossly
disadvantageous or onerous to the government. Our energy conversion agreements
do not grant NPC or the government any rights to modify or reopen the
agreements, and in fact, our energy conversion agreements provide "change in
law" protection. Any efforts to modify or re-open our energy conversion
agreements would raise legal issues with an ultimate outcome that is difficult
to predict. Additionally, the Department of Energy has indicated that the
government will endeavor to honor all its contractual obligations (absent
misrepresentation or fraud, etc.), and changes to the existing contracts will be
made primarily by mutual agreement. Additionally, the Republic of the
Philippines issued performance undertakings (the "Undertakings") to guarantee
the performance of NPC's obligations under each of our energy conversion
agreements. While we have been advised that these Undertakings will not be
affected by the EPIRA or the privatization of NPC's assets and rights, the
ultimate effect of the EPIRA on our operations, our contracts or the
Undertakings cannot now be determined.
The deregulation of the Philippine electricity industry and the
privatization of NPC have been long anticipated and the reform law is not
expected to have a material impact on the existing assets and operations of
Mirant Asia-Pacific.
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Clean Air Act
In July 1999, the Philippines enacted legislation, Republic Act No. 8749,
otherwise known as the Philippine Clean Air Act of 1999 (the "Clean Air Act"),
which applies to stationary emission sources and other operating plants. The
Department of Environment and Natural Resources has promulgated Administrative
Order No. 2000-81, the Act's Implementing Rules and Regulations ("IRRs"), which
took effect on November 25, 2000 and which are in the process of being
implemented. Provisions of the Clean Air Act affect the compliance of operating
plants and their ability to serve as base load capacity for the grid. However,
the IRRs provided regulatory flexibility for existing stationary sources, which
have difficulty complying with the requirements of the Clean Air Act, to achieve
full compliance by July 2004.
The provisions of the Clean Air Act and past practice of the Department of
Environment and Natural Resources suggest potential for increasingly stringent
standards in emissions from all sources to maintain and/or improve the air
quality. This may require additional controls or equipment on some of Mirant
Asia-Pacific's plants in order to comply with the emission reduction goals and
targets set forth in the Clean Air Act.
We believe that the Sual plant and the Ilijan plant can comply with the
current requirements of the Clean Air Act and the IRRs. Some additional
pollution controls or other expenditures may be required for the Pagbilao,
Mindoro and Bulacan plants to comply with the IRRs. We do not expect these
expenditures to be material. We believe that the Navotas I and II plants will
not be affected significantly by the Clean Air Act and the IRRs. Mirant
Asia-Pacific has been closely following the development of the IRRs and is
making contingency plans, which are capable of meeting the standards under the
IRRs within the timeframe of the implementation of the IRRs.
China
Shajiao C
Mirant Asia-Pacific holds a 33% interest in the Shajiao C plant, a 1,914 MW
power plant located close to Hong Kong at Shajiao, Guangdong Province, China.
Shajiao C plant is the largest coal-fired power plant in Guangdong Province. The
operation and off-take agreement has an initial term of 20 years and expires in
June 2016.
All power produced at the plant is sold to Guangdong Guang-Dian Power Grid
Group Company Limited and Guangdong Province Shajiao (Plant-C) Power Generation
Corporation (collectively "Party A"). Party A is responsible for operating and
maintaining the plant and is also responsible for coal supply. Party A bears
demand risk through a contractual take-or-pay requirement, which imposes a
minimum annual off-take quantity of approximately 62% of total generation
capacity, subject to risks such as force majeure and construction defects. Party
A also bears fuel risks.
SIPD
We own a 9.99% interest in SIPD. SIPD is the largest independent power
producer in China's Shandong province. Shandong Electric Power (Group)
Corporation ("Shandong Electric Power"), the sole purchaser of electricity as
well as the grid operator, is the largest shareholder of SIPD. SIPD sells power
to Shandong Electric Power under an off-take contract, pursuant to which
Shandong Electric Power agrees to purchase power in an amount based on average
generation of comparably sized units in all Shandong Province plants under its
jurisdiction. The power is purchased at a price pursuant to a tariff intended to
allow SIPD to recover costs plus a specified return on its average net book
value of fixed assets. SIPD also has an option to acquire, develop and operate
future power projects within Shandong Province for which Shandong Electric Power
has development rights. Shandong province, with a population of 88 million
people and an installed electricity generating capacity of approximately 20,000
MW, has China's second-largest independent provincial power grid.
9
Australia
Kogan Creek
Mirant Asia-Pacific has a shareholders agreement with CS Energy Limited
("CS Energy") to develop the Kogan Creek Power Station in Queensland. The
agreement provides for the joint development of the Kogan Creek Power Station, a
750 MW coal-fired power station to be located west of Brisbane. CS Energy has
acquired 40% of the project while Mirant Asia-Pacific has retained 60% interest.
Based on current market demand, the financial close of Kogan Creek is unlikely
prior to 2003.
Allied Queensland Coal
Mirant Asia-Pacific also holds a 100% interest in Allied Queensland Coal, a
coal mining company located in Queensland, Australia. Allied Queensland Coal has
certain exploration and mining rights over approximately 1.3 billion tons of
low-sulfur steaming coal. Allied Queensland Coal mines and processes up to 1.1
million tons of coal each year for sale to a combination of domestic and export
markets.
Guam
Mirant Asia-Pacific acquired 100% of the shares of HEI Power Corp. Guam in
November 2001. The company operates the 50 MW Tanguisson power plant in Guam, a
territory of the United States. Tanguisson sells power to the Guam Power
Authority under a 20-year energy conversion agreement, which ends in 2017.
EUROPE
In Europe, we own a 49% economic interest and 50% voting interest in WPD
which distributes electricity to approximately 1.4 million end-users in
southwest England and approximately 1 million end-users in South Wales. In
addition, our wholly owned European marketing and risk management business
trades power in the Nordic region, Germany, The Netherlands and Switzerland and
trades natural gas in the UK on the International Petroleum Exchange.
On November 30, 2001, we signed an agreement whereby Vattenfall AB, or an
affiliate, agreed to acquire our 44.8% ownership interest in Bewag for
approximately $1.63 billion. The sale closed on February 11, 2002. In January
2002, we announced our intention to exit our European marketing and risk
management operations.
WPD
We own a 49% economic interest and 50% of the voting control in WPD, with
the balance of ownership being held by a subsidiary of PPL. WPD owns WPD South
West and WPD South Wales. These are two of the privatized regional electricity
companies in England and Wales licensed to distribute and to a limited extent,
generate electricity. A distribution company owns, manages and operates
electricity power lines. The primary activity is the receipt of electricity from
the national grid transmission system and its distribution to end-users of
electricity that are connected to the distribution company's power lines. These
end-users are customers of licensed supply businesses, which in turn are the
distribution business customers. Virtually all electricity supplied to end-users
in WPD's areas is transported through its distribution network, thus providing
distribution volume that is stable from year to year. WPD is the only
distributor of electricity in its authorized areas, and we believe that
economic, environmental and regulatory factors are likely to prevent competitors
from entering the distribution business in its authorized areas.
10
Ancillary Businesses
WPD also has ancillary business activities that support its main
electricity distribution businesses. These include electricity generation, real
estate and telecommunications. WPD owns generating assets with 13 MW of capacity
used to back up the distribution network. In addition, WPD owns minority
interests in windfarms and a 15.4% interest in Teesside Power Limited, owner of
a 1,925 MW natural gas-fired, combined-cycle plant. Enron participates in
Teesside through its European affiliates as an owner, an operator and a power
purchaser of the project. Failure by Enron to perform on its obligations related
to Teesside has created significant risk as to the ongoing viability of the
project at current investment levels. WPD has provided against the full cost of
its equity investment in Teesside. This is partly offset by a provision for the
write-back of a consortium tax liability payable to Teesside, which, in the
event of insolvency, would not be payable. WPD also markets and develops real
estate no longer used in the distribution businesses and is developing an income
stream from the rental of fiber optic cables primarily attached to the overhead
distribution networks.
Regulatory Environment
Virtually all electricity end-users in England and Wales are connected to
the distribution system of the regional electricity companies and cannot choose
their electricity distributor. The Office of Gas and Electricity Markets (the
industry regulator) controls the revenues earned by WPD in its distribution
businesses by applying a price control formula that sets the maximum average
price per unit of electricity distributed. The elements used in the formula are
generally established for a five-year period and are subject to review by the
regulator. In December 1999, the regulator published final price proposals
following its review of the distribution revenue for distribution businesses.
For WPD South West, these proposals represented a 20% reduction to distribution
prices from April 1, 2000, followed by a reduction in real terms of 3% each year
after April 1, 2001. For WPD South Wales, these proposals represented a 26%
reduction to distribution prices from April 1, 2000, followed by a reduction in
real terms of 3% each year after April 1, 2001. This price control is scheduled
to operate until March 2005. In response, WPD has implemented a plan to maximize
efficiency and customer service as a focused distribution company. In order to
achieve these objectives, WPD South West has reduced staffing levels by
approximately 10%. The reductions primarily affected administrative and
corporate functions, with minimal impact on field staff, in order that customer
service is not affected. WPD is currently evaluating further opportunities to
reduce ongoing operating costs. The combination of the two distribution
businesses has delivered significant savings on overhead costs, particularly in
respect of information technology where the incremental cost of a second
distribution business is relatively low. Other savings have been achieved
through the application of WPD's experience in managing information technology
projects, in purchasing efficiency savings and in the use of technology to
manage more efficiently the maintenance of the South Wales network.
REGULATORY ENVIRONMENT
International Regulation
Our international operations are subject to regulation by various foreign
governments and regulatory authorities. The laws and regulations that apply to
each of our international projects are more fully discussed under the
description of the particular project listed above.
United States Public Utility Regulation
The United States electric industry is subject to comprehensive regulation
at the federal and state levels. Currently, most of our United States facilities
are exempt wholesale generators under PUHCA. Our exempt wholesale generators are
subject to regulation by the FERC under the Federal Power Act regarding rate
matters and by state public utility commissions regarding non-rate matters. The
majority of our generation from exempt wholesale generators is sold at market
prices under market rate authority granted by the FERC, although the FERC has
the authority to impose cost of service rate regulation or other types of price
mitigation if it determines that market pricing is not in the public interest.
Our exempt wholesale generators are also subject to the FERC regulation relating
11
to accounting and reporting requirements, as well as oversight of mergers and
acquisitions, securities issuances and dispositions of facilities.
State or local authorities have historically regulated the distribution and
retail sale of electricity, as well as the need for siting and the construction
of generating facilities. In addition, our exempt wholesale generators may be
subject to a variety of state and local regulations regarding maintenance and
expansion of our facilities and financing capital additions if the financing is
subject to state public service commission regulation. Outside of the Electric
Reliability Council of Texas, the wholesale power sales of our exempt wholesale
generators are subject exclusively to FERC regulation under the Federal Power
Act and to market regulation institutions, such as regional transmission groups
and independent system operator market monitoring initiatives authorized by the
FERC.
We are not subject to PUHCA unless we acquire the securities of a public
utility company or public utility assets that are not exempt as an exempt
wholesale generator, foreign utility company or qualifying facility. Our 50%
owned nonconsolidated Birchwood facility is subject to regulation as a
qualifying facility under PURPA. As a qualifying facility, Birchwood is exempt
from most provisions of the Federal Power Act and state laws relating to
securities, rate and financial regulation. PURPA requires electric utilities (i)
to purchase electricity generated by qualifying facilities at a price based on
the utility's avoided cost of purchasing electricity or generating electricity
itself, and (ii) to sell supplementary, back-up, maintenance and interruptible
power to qualifying facilities on a just, reasonable and non-discriminatory
basis. To qualify for qualifying facility status, the Birchwood facility must
satisfy requirements regarding the production of useful thermal energy as well
as limitations on the extent of ownership by utilities or utility affiliates.
Congress is considering legislation to modify federal laws affecting the
electric industry. Bills have been introduced that propose to repeal or modify
both PURPA and the PUHCA. In addition, various states have either enacted or are
considering legislation designed to deregulate the production and sale of
electricity. Deregulation is expected to result in a shift from cost-based rates
to market-based rates for electric energy and related services. Although the
legislation and regulatory initiatives vary, common themes include the
availability of market pricing, retail customer choice, recovery of stranded
costs and separation of generation assets from transmission, distribution and
other assets. It is unclear whether or when all power customers will obtain open
access to power supplies. Decisions by regulatory agencies may have a
significant impact on the future economics of the power marketing business.
In emergency conditions, such as have recently occurred in California, our
public utility operations may be subject to extraordinary and costly emergency
service requirements. The United States Department of Energy recently exercised
its emergency authority to require interconnections and sales of power into the
California market, and further orders of this nature may be issued with respect
to either the California market or other markets in the event the Department of
Energy or other state or federal regulatory agencies deem emergency conditions
to exist.
The FERC has issued power and gas transmission initiatives that require
electric and gas transmission services to be offered on an open-access basis
unbundled from commodity sales. Although these initiatives are designed to
encourage wholesale market transactions for electricity and gas, we cannot
predict the timing of industry changes as a result of these initiatives or the
adequacy of transmission additions in specific markets.
In Canada, Canadian national and provincial governments have instituted
natural gas regulations also designed to encourage the development of
competitive markets. However, we cannot predict the timing and scope of the
development of a competitive market in Canada or the effect of these or future
regulations on these markets.
12
Environmental Regulation
Our operations are subject to extensive federal, state, local and foreign
laws and regulations relating to air quality, water quality, waste management,
natural resources and health and safety. Our projects and facilities in foreign
markets create exposures and obligations to the national, provincial and local
laws of each host country, including environmental standards and other
requirements imposed by these governments. Our compliance with these
environmental requirements necessitates significant capital and operating
expenditures related to monitoring, pollution control equipment, emission fees
and permitting at various operating facilities. Our expenditures, while not
prohibitive in the past, are anticipated to increase in the future along with
the increase in stricter standards, greater regulation, more extensive
permitting requirements and an increase in the number and types of assets we
operate that are subject to environmental regulation. We cannot provide
assurance that future compliance with these environmental requirements will not
adversely affect our operations or financial condition.
Our operations in Europe are subject to comprehensive environmental
regulation similar to that in the United States, and these regulations are
expected to become more stringent in the future. Additionally, like many
countries of the world, the governments of China, the Philippines, Trinidad and
Tobago and several other countries recently have proposed increased
environmental regulation of many industrial activities, including increased
regulation of air quality, water quality and solid waste management.
Over the past several years, the power generation industry, state, federal
and foreign governments and international organizations have been concerned
about global climate change. Recent international negotiations have made the
implementation of the Kyoto Treaty in certain countries more likely, although
the current United States Administration is opposed to the treaty. Because our
fossil fuel-fired plants emit carbon dioxide, the costs of any "greenhouse gas"
restrictions could adversely affect our operations. The impact of any future
greenhouse gas regulations on our domestic and foreign facilities and operations
remains uncertain.
The environmental laws and regulations in the United States illustrate the
comprehensive environmental regulations that govern our operations. Our most
significant environmental requirements in the United States result from the
Clean Air Act and the 1990 Clean Air Act Amendments. Under the Clean Air Act, we
are required to comply with a broad range of restrictions concerning air
emissions, operating practices and pollution control equipment. Several of our
facilities are located in metropolitan areas such as New York City, Boston,
Chicago or San Francisco. These areas are classified by the EPA as not achieving
the ambient air quality standards which cause us to operate under the most
stringent air regulation requirements.
In the future, we anticipate increased regulation of our facilities under
the Clean Air Act and applicable state laws and regulations concerning air
quality. The EPA, several states and several foreign countries are in the
process of enacting more stringent air quality regulatory requirements. For
example, the EPA recently promulgated a new regulation, known as the "Section
126 Rule," which allocates nitrogen oxide emissions allowances to various
electric generating facilities in Delaware, Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia,
West Virginia and the District of Columbia. The Section 126 Rule is scheduled to
become effective in May 2004. The EPA also has established nitrogen oxide
emission caps for several eastern states that must be implemented by these
states beginning May 2004. Under either rule, if a plant exceeds its allocated
allowances, the plant must purchase additional, unused allowances from other
regulated plants or install controls to reduce emissions. EPA is also developing
regulations to govern mercury emissions from power plants. The State of New York
has proposed and the State of Massachusetts has finalized regulations to further
reduce nitrogen oxide and sulfur dioxide emissions from power plants, and the
State of Massachusetts also regulates carbon dioxide emissions. We expect to
incur additional compliance costs as a result of these developments.
On November 3, 1999, the United States Department of Justice filed a
complaint against seven electric utilities for alleged violations of Clean Air
Act requirements related to modifications of existing sources at coal-fired
generation stations located in the southern and mid-western regions of the
United States and also issued an administrative order to the Tennessee Valley
13
Authority for similar violations at seven of its coal-fired power plants. Since
then, the EPA has added additional utilities to the litigation and has also
issued administrative notices of violation alleging similar violations at other
coal-fired power plants. The electric utility industry strongly disagrees with
the EPA's positions in the lawsuits. To date, no lawsuits or administrative
actions alleging similar violations have been brought by the EPA against us, our
subsidiaries or any of our power plants, but the EPA has requested information
concerning our Mid-Atlantic business unit plants. Also, the State of New York
has issued a notice of violation to the previous owner of our Lovett plant. For
more information about the matter, see "Legal Proceedings." We cannot provide
assurance that lawsuits or other administrative actions against our power plants
will not be filed or taken in the future. If an action is filed against us or
our power plants and we are judged to not be in compliance, this could require
substantial expenditures to bring our power plants into compliance and have a
material adverse effect on our financial condition, cash flows and results of
operations.
Several other environmental laws in the United States also affect our
operations. For example, we are required under the Clean Water Act to comply
with effluent and intake requirements, technological controls and operating
practices. Our wastewater discharges are permitted under the Clean Water Act,
and our permits under the Clean Water Act are subject to review every five
years. As with air quality, the requirements applicable to water quality are
expected to increase in the future. For example, the EPA has issued a new rule
that imposes more stringent standards on the cooling water intakes for new
plants and has proposed a similar regulation for intakes on existing plants. We
expect to incur additional compliance costs as a result of the increased
regulation of water quality.
Our facilities are also subject to several waste management laws and
regulations in the United States. The Resource Conservation and Recycling Act
sets forth very comprehensive requirements for handling of solid and hazardous
wastes. The generation of electricity produces non-hazardous and hazardous
materials, and we incur substantial costs to store and dispose of waste
materials from our facilities. EPA may develop new regulations that impose
additional requirements on facilities that store or dispose of fossil fuel
combustion materials, including types of coal ash. If so, we may be required to
change our current waste management practices and expend significant resources
on the increased waste management requirements.
The Federal Comprehensive Environmental Response, Compensation and
Liability Act, known as the Superfund, establishes a framework for dealing with
the cleanup of contaminated sites. Many states have enacted state superfund
statutes. We do not expect any corrective actions to require significant
expenditures.
In connection with asset acquisitions and other transactions, we also may
obtain or be required to provide indemnification against environmental
liabilities and responsibilities. Typically, indemnification we receive is
limited in scope and time period. In some transactions, we did not receive an
environmental indemnity. To minimize our exposure for such liabilities, we
conduct, through environmental due diligence, assessments of the assets we wish
to acquire or operate. Thus far, we have not incurred any material environmental
liabilities arising from our acquisition or divestiture activities; however, the
previously reference Clean Air Act information request for our Mid-Atlantic
assets and notice of violation issued to the previous owner of the New York
Lovett facility, see "Legal Proceedings," could result in material expenditures.
We believe we are in compliance in all material respects with applicable
environmental laws. While we believe our procedures and facilities comply with
applicable environmental laws and regulations, we cannot provide assurances that
additional costs will not be incurred as a result of new interpretations or
applications of existing laws and regulations or the enactment of more stringent
requirements.
EMPLOYEES
At December 31, 2001, our corporate offices and majority owned or
controlled subsidiaries employed approximately 10,000 persons. This number
includes approximately 1,000 in the corporate headquarters in Atlanta and
approximately 9,000 at operating facilities. Approximately 1,200 of our domestic
14
employees are subject to collective bargaining agreements with one of the
following unions: International Brotherhood of Electrical Workers, Utilities
Workers of America or United Steel Workers. About 2,200 of our employees in
international business units belong to unions. These unions include:
o the Managers' Association, the Union of Technical Administrative and
Supervisory Personnel, the National Workers' Union and the Bustamante
Industrial Trade Union in Jamaica;
o Bahamas Industrial Engineers, Managerial and Supervisory Union and the
Commonwealth Electrical Workers Union in the Bahamas;
o Oilfield Workers Trade Union and Senior Staff Association in Trinidad and
Tobago; and
o UNISON, Amalgamated Engineering and Electrical Union, General Municipal
Boilermakers Union, Engineers and Managers Association and Transport and
General Workers Union in England and Wales.
We believe we have satisfactory relations with both union and non-union
employees.
15
Item 2. Properties
Owned and Operated Under Development
-------------------------------------- ----------------------
Expected
Mirant's % Date
Leasehold/ Net Equity Net Equity of
Power Generation Ownership Total Interest/Lease Operated Interest in Commercial
Business Location Primary Fuel Interest (1) MW (4) in Total MW (4) MW (4) Total MW (1) Operation
---------------------- -------------- ---------------- ------------ --------- ---------------- ----------- -------------- ----------
AMERICAS:
North America:
Mirant California..... California Natural Gas 100% 2,942 2,942 2,942 580 2005
Apex.................. Nevada Natural Gas 100 -- -- -- 1,066 2003/2006
Mirant New York....... New York Natural Gas/
Hydro/ Coal/Oil 100 1,659 1,659 1,659 750 2006
Mirant New England(2) Massachusetts Natural Gas/Oil 100 1,229 1,229 1,221 210 2002
State Line Energy..... Indiana Coal/Natural Gas 100 515 515 515 -- --
Birchwood............. Virginia Coal 50 238 119 238 -- --
Mirant Wisconsin...... Wisconsin Natural Gas 100 309 309 309 -- --
Mirant Zeeland........ Michigan Natural Gas 100 310 310 310 540 2002
Wyandotte............. Michigan Natural Gas 100 -- - -- 560 2005
Mirant Mid-Atlantic... Maryland/
Virginia Coal/Oil/Gas 100 5,988 5,988 6,062 -- --
Virginia
Mirant Wichita Falls.. Texas Natural Gas 100 77 77 77 -- --
Mirant Texas.......... Texas Natural Gas 100 545 545 545 -- --
Wrightsville Project.. Arkansas Natural Gas 51 -- -- -- 283 2002
Perryville Project.... Louisiana Natural Gas 100 150 150 -- 281 2002
Brazos................ Texas Oil/Natural Gas 100 1,650 1,650 -- -- --
Sugar Creek........... Indiana Natural Gas 100 -- -- -- 559 2002/2003
Longview Mint Farm.... Washington Natural Gas 100 -- -- -- 298 2003
Coyote Springs 2...... Oregon Natural Gas 50 -- -- -- 133 2002
West Georgia.......... Georgia Natural Gas 100 640 640 640 -- --
Shady Hills........... Florida Natural Gas 100 -- -- -- 460 2002
--------- ---------------- ----------- --------------
Subtotal........... 16,252 16,133 14,518 5,720
Caribbean:
Grand Bahama Power.... Bahamas Oil 55.4 142 78 142 -- --
PowerGen.............. Trinidad Natural Gas
&Tobago 39 1,159 452 1,159 -- --
JPSCo................. Jamaica Oil/Natural
Gas/Hydro 80 689 551 530 93 2002/2003
Curacao............... Netherlands Pitch/Natural
Antilles Gas 25.5 -- -- -- 39 2003
--------- ---------------- ----------- --------------
Subtotal........... 1,990 1,081 1,831 132
South America:
CEMIG................. Brazil Hydro 3.6 5,632 203 -- -- --
--------- ---------------- ----------- --------------
Subtotal........... 5,632 203 -- -- --
EUROPE:
Mirant Europe......... England Oil 100 2 2 -- -- --
WPD (3) .............. England Natural
Gas/Wind/Oil 49 1,954 157 -- -- --
Bewag................. Germany Natural Gas/
Oil/Coal 44.8 2,955 1,323 -- -- --
Italian Greenfields... Italy Natural Gas 90 -- -- -- 342 2004
Norway................ Norway Natural Gas 40 -- -- -- 320 2004
--------- --------------- ----------- --------------
Subtotal........... 4,911 1,482 -- 662
ASIA-PACIFIC:
SIPD.................. China Coal 9.99 4,487 448 -- 130 2002/2003
Shajiao C............. China Coal 33 1,914 632 -- -- --
Sual.................. Philippines Coal 91.9 1,218 1,119 1,218 -- --
Pagbilao.............. Philippines Coal 87.2 735 641 735 -- --
Navotas I............. Philippines Oil 90 190 171 190 -- --
Navotas II............ Philippines Oil 100 95 95 95 -- --
Mindoro............... Philippines Diesel 100 7 7 7 -- --
Ilijan................ Philippines Natural Gas 20 -- -- -- 250 2002
Bulacan............... Philippines Diesel 100 7 7 7 -- --
Guam.................. Guam Island Coal 100 50 50 50 -- --
--------- ---------------- ----------- --------------
Subtotal........... 8,703 3,170 2,302 380
--------- ---------------- ----------- --------------
Total................. 37,488 22,069 18,651 6,894
========= ================ =========== ==============
16
Ownership Customers/
Distribution Business Location Interest End-users
(in thousands)
Grand Bahama Power............. Bahamas 55.4% 18
CEMIG.......................... Brazil 3.6 5,400
WPD............................ England/Wales 49 2,400
JPSCo.......................... Jamaica 80 490
Bewag.......................... Germany 44.8 2,200
------
Total................ 10,508
======
Ownership
Oil & Natural Gas Business (5) Location Interest
Castex......................... United States 75%
TransCanada.................... Canada 100
(1) Amounts reflect Mirant's percent economic interest in the total MW.
(2) Total MW reflects a 1.4 percent interest in the 614 MW Wyman plant.
(3) WPD owns 15.38 percent of Teesside, which has 1,925 MW. This is reflected
in total MW.
(4) MW amounts reflect net dependable capacity.
(5) See "Business Segments" section for additional information related to
Mirant's oil and natural gas business.
17
Item 3. Legal Proceedings
California Rate Payer Litigation: Six lawsuits have been filed and coordinated
in the Superior Courts for San Diego County alleging that certain owners of
electric generation facilities in California and energy marketers, including
Mirant, Mirant Americas Energy Marketing, Mirant Delta and Mirant Potrero,
engaged in various unlawful and anti-competitive acts that served to manipulate
wholesale power markets and inflate wholesale electricity prices in California.
Three of the suits seek class action status, while two of the suits are brought
on behalf of all citizens of California. One lawsuit alleges that, as a result
of the defendants' conduct, customers paid approximately $4 billion more for
electricity than they otherwise would have and seeks an award of treble damages
as well as other injunctive and equitable relief. One lawsuit also names certain
of Mirant's officers individually as defendants and alleges that the state had
to spend more than $6 billion purchasing electricity and that if an injunction
is not issued, the state will be required to spend more than $150 million per
day purchasing electricity. The other suits likewise seek treble damages and
equitable relief. One such suit names Mirant Corporation itself as a defendant.
A listing of the cases is as follows:
CAPTION DATE FILED COURT OF ORIGINAL FILING
------- ---------- ------------------------
People of the State of California v. January 18, 2001 Superior Court of California - San Francisco County
Dynegy, et al.
Gordon v. Reliant Energy, Inc., et November 27, 2000 Superior Court of California - San Diego County
al.
Hendricks v. Dynegy Power November 29, 2000 Superior Court of California - San Diego County
Marketing, Inc., et al.
Sweetwater Authority, et al. V. January 16, 2001 Superior Court of California - San Diego County
Dynegy, Inc., et al.
Pier 23 Restaurant v. PG&E Energy January 24, 2001 Superior Court of California - San Francisco County
Trading, et al.
Bustamante, et al. v. Dynegy, May 2, 2001 Superior Court of California - Los Angeles County
Inc., et al.
The final outcome of these lawsuits cannot now be determined.
Western Power Markets Investigations: The CPUC, the California Senate, the San
Joaquin District Attorney and the Attorney General's offices of Washington,
Oregon and California have each launched civil and criminal investigations into
the California energy markets that have resulted in the issuance of subpoenas of
several of Mirant's entities. In addition, the CPUC has had personnel onsite on
a periodic basis at Mirant's California generating facilities since December
2000. The California Attorney General issued its subpoena to Mirant in February
2001 under the following caption: "In the Matter of the Investigation of
Possibly Unlawful, Unfair, or Anti-Competitive Behavior Affecting Electricity
Prices in California." Each of these subpoenas, as well as the plant visits,
could impose significant compliance costs on Mirant or its subsidiaries. Also on
April 18, 2001, the Attorney General filed suit against us in the San Francisco
Superior Court seeking to compel us to produce documents in the investigation.
With respect to both the CPUC and the California Attorney General's office,
there is ongoing litigation between us and these agencies regarding the scope of
the subpoenas and the confidentiality of our documents. Despite the various
measures taken to protect the confidentiality of sensitive information provided
to these agencies, there remains a risk of governmental disclosure of the
confidential, proprietary and trade secret information obtained by these
agencies throughout this process. In January 2002, the California Attorney
General's office reportedly stated that it found no evidence of criminal
wrongdoing in connection with its investigation, but that it was planning to
file civil suits against the energy generators for unfair trade practices.
While we will vigorously defend against any claims of potential civil
liability or criminal wrongdoing asserted against us, the results of such
investigations cannot now be determined.
California Price Mitigation and Refund Proceeding: On June 19, 2001, the FERC
issued an order that provides for price mitigation in all hours in which power
18
reserves fall below 7%. During these emergency hours, FERC will use a formula
based on the marginal costs of the highest cost generator called on to run to
determine the overall market clearing price. This price mitigation includes all
spot market sales in markets throughout the Western System Coordinating Council.
This price mitigation was implemented on June 20, 2001 and is currently in place
until September 30, 2002. The FERC requires that all public and non-public
utilities which own or control non-hydroelectric generation in California must
offer power in the CAISO's spot markets, to the extent the output is not
scheduled for delivery in the hour. We cannot predict how the FERC will rule on
any future requests/justifications for prices higher than the mitigated price
during future months.
On July 25, 2001, the FERC issued an order requiring hearings to determine
the amount of any refunds and amounts owed for sales made to the CAISO/PX from
October 1, 2000 through June 20, 2001. Hearings are scheduled to be held in
March 2002 and June 2002. In the July 25 order, the FERC also ordered that a
preliminary evidentiary proceeding be held to develop a factual record on
whether there have been unjust and unreasonable charges for spot market
bilateral sales in the Pacific Northwest from December 25, 2000 through June 20,
2001. In the proceeding, the DWR filed to recover certain refunds from parties,
including one of our subsidiaries, for bilateral sales of electricity to the DWR
at the California/Oregon border, claiming that such sales took place in the
Pacific Northwest. A FERC ALJ recently concluded a preliminary evidentiary
hearing related to possible refunds for power sales in the Pacific Northwest. In
a preliminary ruling issued September 24, 2001, the ALJ indicated that she would
order no refunds because the complainants had failed to prove any exercise of
market power or that any prices were unjust or unreasonable. The FERC may accept
or reject this preliminary ruling and the FERC's decision may itself be
appealed. We cannot predict the outcome of this proceeding. If we were required
to refund such amounts, our subsidiaries would be required to refund amounts
previously received pursuant to sales made on their behalf. In addition, our
subsidiaries would be owed amounts for purchases made on their behalf from other
sellers in the Pacific Northwest.
Additionally, on February 13, 2002, the FERC directed its staff to
undertaking a fact-finding investigation into whether any entity manipulated
short-term prices in electric energy or natural gas markets in the West or
otherwise exercised undue influence over wholesale prices in the West, for the
period January 1, 2000 forward. We cannot predict the outcome of this
proceeding. Information from this investigation could be used in any existing or
future complaints before the FERC involving long-term power sales contracts
relevant to the matters being investigated.
Environmental Information Requests: Along with several other electric generators
which own facilities in New York, in October 1999 Mirant New York received an
information request from the state of New York concerning the air quality
control implications of various repairs and maintenance activities of Mirant New
York at its Lovett facility. Mirant New York responded fully to this request and
provided all of the information requested by the state. The state of New York
issued notices of violation to some of the utilities being investigated. The
state issued a notice of violation to the previous owner of Plant Lovett, Orange
and Rockland Utilities, alleging violations associated with the operation of
Plant Lovett prior to the acquisition of the plant by Mirant New York. To date,
Mirant New York has not received a notice of violation. Mirant New York
disagrees with the allegations of violations in the notice of violation issued
to the previous owner. The notice of violation does not specify corrective
actions which the state of New York may require. Under the sales agreement with
Orange and Rockland Utilities for Plant Lovett, Orange and Rockland Utilities is
responsible for fines and penalties arising from historical operations, but
Mirant New York may be responsible for the cost of purchasing and installing
emission control equipment, the cost of which may be material. Mirant New York
is engaged in discussions with the state to explore a resolution of this matter.
In January 2001, EPA, Region 3 issued a request for information to Mirant
Mid-Atlantic concerning the air permitting implications of past repair and
maintenance activities at its Potomac River plant in Virginia and Chalk Point,
Dickerson and Morgantown plants in Maryland. Mirant Mid-Atlantic has responded
fully to this request.
19
We cannot provide assurance that lawsuits or other administrative actions
against our power plants will not be filed or taken in the future. If an action
is filed against us or our power plants and we are judged to not be in
compliance, this could require substantial expenditures to bring our power
plants into compliance and have a material adverse effect on our financial
condition, cash flows and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4A. Executive Officers of Mirant Corporation
(Identification of executive officers of Mirant Corporation is inserted in
Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages
of the officers set forth below are as of December 31, 2001.
Name Age Position
-------------------- --- -----------------------------------------------------
S. Marce Fuller..... 41 President, Chief Executive Officer and Director;
Elected President, Chief Executive Officer
and a Director in July 1999. Served as
President and Chief Executive Officer of
Mirant Americas Energy Marketing from
September 1997 to July 1999 and Executive
Vice President from October 1998 to July
1999. From May 1996 to September 1997, Ms.
Fuller was Senior Vice President of the North
America division, in charge of North American
operations and business development. Prior to
that, from February 1994 to May 1996, she was
the Vice President for domestic business
development. Ms. Fuller is also a director of
Curtiss-Wright Corporation and a director of
EarthLink, Inc. Ms. Fuller joined Southern
Company in 1985 and joined Mirant in 1992.
Raymond D. Hill..... 55 Executive Vice President and Chief Financial Officer;
Elected Chief Financial Officer in January
1999 and Executive Vice President in October
1998. Served as Managing Director of Mirant
Asia-Pacific from July 1997 to December 1998.
From 1993 to July 1997, he served as Chief
Financial Officer and Senior Vice President.
Prior to joining Mirant in 1993, Mr. Hill
served as a Managing Director at Lehman
Brothers, an investment banking firm.
Richard J. Pershing. 55 Executive Vice President, North America;
Elected Chief Executive Officer, Americas
group, in August 1999 and Executive Vice
President in October 1998. Served as Senior
Vice President from November 1997 to October
1998 Prior to joining Mirant in 1992, Mr.
Pershing held various executive and
management positions at Georgia Power
Company. He joined Southern Company in 1971.
Edwin H. Adams...... 37 Senior Vice President, Corporate Development and
Technology;
Elected Senior Vice President, in February 2002.
Previously was Senior Vice President, Commerce and
Technology from 2000 to December 2001 and Senior Vice
President and Chief Financial Officer from January
2002 to March 2002 for Mirant Americas; Executive
Director and Chief Financial Officer for Mirant
Asia-Pacific from 1997 to 2000; and director of
corporate finance for Mirant from 1995 to 1997. Prior
to joining Mirant in 1995 he held various positions
in finance at Southern Company, First Financial
Management Corp. and the Chase Manhattan Bank.
20
Vance N. Booker..... 48 Senior Vice President, Administration and Technical;
Elected Senior Vice President, in August 1999.
Previously was Vice President, Administration. Prior
to joining Mirant in July 1996, he held various
positions at Southern Company in strategic planning,
human resources, accounting and finance. Mr. Booker
joined Southern Company in 1975.
Randall E. Harrison. 50 Senior Vice President, East Region;
Responsibilities include the eastern United
States and Canada. Elected Senior Vice
President, in February 2002. Previously was
Senior Vice President, Mirant Americas and
Chief Executive Officer, West Region from
2000 to February 2002; Chief Executive
Officer of Mirant California from 1999 to
2000; Vice President of development from 1997
to 1998 and project director from 1994 to
1997 for Mirant North America; and project
engineering manager in Mirant's international
business development division from 1989 to
1994. He held various positions in fossil and
hydro generation and human resources at
Georgia Power Company from 1970 to 1989.
J. William Holden II 41 Senior Vice President, Finance and Accounting;
Elected Senior Vice President, in February
2002. Previously was Chief Financial Officer
for Mirant Europe from 2001 to February 2002;
Vice President and Treasurer of Mirant from
1999 to 2001; Vice President of operations
and business development for South America
from 1996 to 1999; and Vice President of
business development for Mirant Asia-Pacific
from 1994 to 1995. He held various positions
at Southern Company from 1985 to 1994
including director of corporate finance.
Frederick D. Kuester 51 Senior Vice President, International;
Elected Chief Executive Officer, Asia-Pacific
group, in August 1999 and Senior Vice
President in August 1999. In addition, since
November 1998, he has served as Chief
Executive Officer of Mirant Asia-Pacific.
From January 1997 to November 1998 Mr.
Kuester served as director of the commercial
group at Mirant Asia-Pacific. Prior to that,
Mr. Kuester served as Vice President of power
generation for Mississippi Power Company, a
subsidiary of Southern Company. Mr. Kuester
started his career at Southern Company in
1971.
Douglas L. Miller... 51 Senior Vice President and General Counsel;
Elected Senior Vice President and General
Counsel in October 1999. From 1997 until he
joined the Company in 1999, Mr. Miller was
managing partner of the Troutman Sanders LLP
Hong Kong office where he oversaw the Project
Development and Finance Practice Group. Mr.
Miller joined Troutman Sanders in 1975.
Gary J. Morsches.... 42 Senior Vice President, West Region;
Responsibilities include the western United
States and the Caribbean. Elected Senior Vice
President, in February 2002. Previously was
Senior Vice President, Mirant Americas and
Chief Executive Officer, East Region from
2000 to February 2002; President from 1999 to
2000 and Senior Vice President and Chief
Operating Officer from January 1997 to 1999
of Mirant Americas Energy Marketing From 1981
to 1996, he held various positions of
increasing responsibility in engineering and
energy trading in the oil and gas industry,
including trading the first NYMEX natural gas
futures contract in April 1990.
21
James A. Ward....... 49 Senior Vice President and Controller;
Elected Senior Vice President and Controller in
August 1999. From June 1994 to August 1999, Mr. Ward
served as Mirant's Vice President, Controller and
Assistant Treasurer. He joined Southern Company
in 1978.
Roy McAllister...... 54 Senior Vice President, External Affairs;
Elected Senior Vice President, External Affairs in
December 2001. From 2000 until he joined the Company,
Mr. McAllister was Vice President, External Affairs
for Cingular Wireless. He has also held various
positions at BellSouth Corporation, including Vice
President, Human Resources and Corporate Affairs for
BellSouth's Mobile Systems Group. Mr. McAllister
joined BellSouth in 1970.
The executive officers of Mirant Corporation were elected to serve until
their successors are elected and have qualified or until their removal,
resignation, death or disqualification.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock
On October 2, 2000, we completed an initial public offering of our
common stock. The following table indicates high and low sales prices for common
stock of Mirant as reported on the New York Stock Exchange, the principal market
in which the securities are traded. Dividends of $503 million were paid to
Southern during 2000 prior to the initial public offering. On February 28, 2002,
the closing price of our common stock was $8.68. On April 2, 2001, Southern
distributed its remaining 80% interest in Mirant to Southern's stockholders.
High Low
2000
Third Quarter.............................. $ 31.87 $ 28.00
Fourth Quarter............................. $ 31.75 $ 20.56
2001
First Quarter.............................. $ 36.00 $ 20.94
Second Quarter............................. $ 47.20 $ 27.70
Third Quarter.............................. $ 39.59 $ 19.25
Fourth Quarter............................. $ 29.35 $ 13.16
Distribution and Redemption of Series B Preferred Stock
As part of our spin-off from Southern, we agreed to contribute our finance
and leveraged lease subsidiaries (See Note 14 to the "Notes to Consolidated
Financial Statements") to Southern. In connection with this contribution, on
August 30, 2000 we issued to Southern one share of Series B preferred stock,
redeemable at the election of us in exchange for the contribution of these
subsidiaries to Southern. On March 5, 2001, we transferred two of our
subsidiaries, SE Finance and Capital Funding, to Southern by redemption of
Southern's share of Series B preferred stock.
22
Dividends
We currently intend to retain any future earnings to fund the development
and growth of our business. Therefore, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future. Under our credit
facilities, our ability to pay dividends is subject to financial tests.
In 2000, we paid a cash dividend to Southern in the amount of $503 million,
funded by short-term borrowings and commercial paper borrowings. These dividends
were authorized under an order issued by the SEC, which allowed us to pay
dividends out of unearned surplus.
Holders of the preferred securities are entitled to receive cash
distributions at an annual rate of 6 1/4% of the $50 liquidation preference per
preferred security. Distributions are cumulative and began to accumulate on the
date of original issuance of the preferred securities, which was October 2,
2000. Distributions are payable quarterly in arrears on January 1, April 1, July
1 and October 1 of each year beginning January 1, 2001, unless we defer interest
payments on the debentures. In 2001, we paid cash distributions totaling
approximately $22 million and on January 2, 2002, we paid cash distributions
totaling approximately $5 million. The distributions for these securities are
included in minority interest on the consolidated statement of income.
Item 6. Selected Financial Data
The following tables present our selected consolidated financial
information. The information set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements and the notes
thereto. The consolidated statement of income and cash flow data for the years
ended December 31, 2001, 2000, 1999, 1998 and 1997 and the selected balance
sheet data as of December 31, 2001, 2000, 1999, 1998 and 1997 are derived from
our audited consolidated financial statements, which were audited by Arthur
Andersen LLP, independent public accountants. The historical financial
information may not be indicative of our future performance and does not reflect
what the financial position and results of operations would have been had we
operated as a separate, stand-alone entity during the periods presented.
The following selected financial information should also be read in light
of the following:
o Our operating revenues declined in 1998 due to our contribution on January
1, 1998 of our power marketing and risk management activities to Mirant
Americas Energy Marketing, our marketing and risk management joint venture
with Vastar formed in September 1997. When the joint venture was formed in
September 1997, we contributed only our gas marketing and risk management
assets to the venture. Prior to the formation of the joint venture, our
marketing and risk management activities were wholly owned and
consolidated. From January 1, 1998 until August 9, 2000, the day prior to
our effective acquisition of Vastar's 40% interest in Mirant Americas
Energy Marketing, we accounted for this joint venture under the equity
method of accounting. For 1997, operating revenues would have been $1.768
billion if we had not consolidated our marketing and risk management
operations. Effective August 10, 2000, we acquired Vastar's 40% interest in
Mirant Americas Energy Marketing which is now wholly owned and consolidated
in our financial statements on a prospective basis.
o The write-down for 1998 includes write-downs of our investments in our
Argentine subsidiary, Alicura, and our Chilean subsidiary, EDELNOR, to
adjust for the difference between the carrying value of the assets and the
fair market value. The write-down for 1999, 2000 and 2001 includes further
write-downs of our investments in Alicura, prior to it being sold in 2000,
and EDELNOR, prior to it being sold in 2001, to maintain the carrying value
at the fair market value as well as our interest in a $31 million
write-down at WPD relating to impaired metering assets.
23
o In connection with our separation from Southern, we transferred two of our
subsidiaries, SE Finance and Capital Funding, to Southern and redeemed
Southern's share of our Series B preferred stock on March 5, 2001. As a
result of the transfer, Southern has assumed responsibility for all
obligations of SE Finance and Capital Funding. On April 2, 2001, Southern
distributed its remaining 80% interest in Mirant to Southern's
stockholders. As a result, we have included the historical results of
operations of the related subsidiaries as a discontinued operation.
Selected Financial Data
Years Ended December 31,
2001 2000 1999 1998 1997
--------- --------- --------- --------- -------
Income Statement Data: (in millions except per share data)
Operating revenues..................... $ 31,502 $ 13,315 $ 2,265 $ 1,819 $ 3,750
-------- -------- ------- ------- -------
Operating expenses:
Cost of fuel, electricity and other
products........................... 28,434 11,437 934 891 2,887
Maintenance.......................... 141 136 116 80 74
Depreciation and amortization........ 396 317 270 221 182
Selling, general and administrative.. 974 512 248 160 188
Impairment loss...................... 85 18 60 308 --
Other................................ 453 231 193 164 147
--------- -------- ------- ------- -------
Operating income (loss)................ 1,019 664 444 (5) 272
--------- -------- ------- ------- -------
Other income (expense), net:
Interest income...................... 129 187 172 146 138
Interest expense..................... (560) (615) (501) (430) (345)
Gain on sales of assets, net......... 4 20 313 41 24
Equity in income of affiliates....... 245 196 110 135 58
Receivables recovery................. 10 -- 64 29 --
Other, net........................... 38 50 72 29 33
--------- -------- ------- ------- -------
Total other (expense) income, net.. (134) (162) 230 (50) (92)
--------- -------- ------- ------- -------
Income (loss) from continuing operations
before income taxes and minority
interest............................. 885 502 674 (55) 180
Provision (benefit) for income taxes:
Continuing operations................ 260 86 129 (123) 27
Windfall profits tax(1).............. -- -- -- -- 148
Minority interest...................... 62 84 183 80 29
-------- -------- ------- ------- -------
Income (loss) from continuing operations 563 332 362 (12) (24)
Income from discontinued operations, net of
income tax benefit of $3 in 2001, $20 in
2000, $15 in 1999, $22 in 1998, and $10
in 1997.............................. 5 27 10 12 8
-------- -------- ------- ------- -------
Net income (loss)...................... $ 568 $ 359 $ 372 $ -- $ (16)
======== ======== ======= ======= =======
Earnings per share information:
Diluted:
From continuing operations........... $ 1.62 $ 1.15 $ 1.33 $ (0.04) $ (0.09)
From discontinued operations......... 0.01 0.09 0.04 0.04 0.03
-------- -------- ------- ------- --------
Net income (loss).................. $ 1.63 $ 1.24 $ 1.37 $ -- $ (0.06)
======== ======== ======= ======= =======
24
Years Ended December 31,
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- ------------
Statement of Cash Flows Data: (in millions)
Cash flow from operating activities............ $ 311 $ 961 $ 573 $ 469 $ 293
Cash flow from investing activities.......... (2,859) (2,831) (2,179) (1,601) (4,232)
Cash flow from financing activities............ 2,317 2,718 1,286 1,295 4,177
Other Operating Data (Unaudited):
EBITDA(2) ..................................... 1,660 $ 1,177 $ 824 $ 351 $ 512
Selected Financial Data
As of December 31,
------------------
2001 2000 1999 1998 1997
----------- ------------ ----------- ---------- -------------
(in millions)
Balance Sheet Data:
Cash and cash equivalents...................... $ 836 $ 1,049 $ 323 $ 561 $ 398
Property, plant and equipment, net............. 7,847 5,681 6,025 4,691 4,255
Investments.................................... 2,244 1,797 1,490 1,540 1,159
Total assets................................... 22,754 24,136 13,863 12,054 10,630
Subsidiary obligated mandatorily
redeemable preferred securities(3).......... -- 950 1,031 1,033 682
Non-recourse debt(4)........................... 5,932 6,136 6,202 5,101 4,615
Notes payable to Southern...................... -- -- -- 926 830
Total long-term debt........................... 5,824 5,596 4,954 3,919 3,689
Total debt..................................... 8,483 7,086 7,152 6,027 5,445
Company obligated mandatorily
redeemable securities of a subsidiary
holding solely parent company
debentures.................................. 345 345 -- -- --
Stockholders' equity........................... 5,498 4,136 3,102 2,642 2,132
(1) In 1997, the UK imposed a windfall profits tax on the UK's privatized
utilities.
(2) EBITDA represents our operating income (loss) plus depreciation and
amortization and our equity in income of affiliates. EBITDA excludes the
impact of minority interests. EBITDA, as defined, is presented because it
is a widely accepted financial indicator used by some investors and
analysts to analyze and compare companies on the basis of operating
performance. EBITDA, as defined, is not intended to represent cash flows
for the period, nor is it presented as an alternative to operating income
or as an indicator of operating performance. It should not be considered in
isolation or as a substitute for a measure of performance prepared in
accordance with GAAP in the United States and is not indicative of
operating income or cash flow from operations as determined under GAAP. Our
method of computation may or may not be comparable to other similarly
titled measures by other companies.
(3) This total of $950 million was preferred securities and capital securities
issued by special purpose financing subsidiaries held by Capital Funding,
the proceeds of which were loaned to Southern. Southern paid interest on
subordinated notes issued in favor of the financing subsidiaries, which
payments were used to pay dividends on those preferred securities. In
addition, Southern guaranteed payments due under the terms of those
securities. These securities were non-recourse to us. In connection with
our separation from Southern, Capital Funding was transferred to Southern
on March 5, 2001.
(4) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Effects of Certain Organizational Changes
Our financial condition and results of operations should be read in light
of the following organizational changes. Future results of operations may not be
comparable to the historical amounts presented.
Our consolidated financial statements for 2000 and 1999 include allocations
to us of certain Southern corporate assets, including pension assets;
liabilities, including profit sharing, pension and non-qualified deferred
compensation obligations; and expenses, including centralized engineering
services, legal, accounting, human resources and insurance services, information
technology services and other Southern corporate and infrastructure costs. The
expense allocations, which we believe meet the requirements of PUHCA, have been
determined on bases that Southern and we considered to be reasonable reflections
of the utilization of the services provided to us or the benefit received by us.
The expense allocation methods include relative sales, investment, headcount,
square footage, transaction processing costs, adjusted operating expenses and
others.
In connection with our separation from Southern, we transferred two of our
subsidiaries, SE Finance and Capital Funding, to Southern and redeemed
Southern's share of our Series B preferred stock on March 5, 2001. As a result
of the transfer, Southern has assumed responsibility for all obligations of SE
Finance and Capital Funding. On April 2, 2001, Southern distributed its
remaining 80% interest in Mirant to Southern's stockholders.
In March 2001, we, through our wholly owned subsidiaries, acquired 80% of
the outstanding shares of JPSCo for $201 million. JPSCo, which was
formerly owned and operated by the Jamaican government, is a vertically
integrated electric utility on the island of Jamaica. JPSCo operates under a
20-year All-Island Electric License, is under the direction of the Ministry of
Mining and Energy and is subject to monitoring and rate regulation by the Office
of Utilities Regulation.
In June 2001, we purchased an additional 18.8% interest in Bewag for
approximately $448 million. Bewag is an electric utility serving over 2 million
customers in Berlin, Germany. This additional purchase gave us a 44.8% ownership
interest in Bewag and joint control of the company with Hamburgische
Electricitaets-Werke AG. In December 2001, we announced that we had entered into
an agreement in which Vattenfall AB (or its affiliate) would buy our 44.8%
ownership interest in Bewag for approximately $1.63 billion. The sale was
completed on February 11, 2002. We received more than $1.05 billion in net
proceeds after repayment of approximately $550 million in debt associated with
our Bewag investment. The net proceeds were used for general corporate purposes,
capital expenditures and repayment of certain drawn balances on revolving credit
facilities.
In August 2001, we acquired a 75% working interest in 18 natural gas and
oil producing fields as well as 206,000 acres of mineral rights in southern
Louisiana from Castex and a number of its affiliates for approximately $162
million. Castex, a privately held Houston-based oil and gas producer, will
retain an interest in the properties and will continue to operate them.
In December 2001, we acquired the majority of the gas marketing business of
TransCanada for approximately $120 million. The transaction included the
purchase of the majority of TransCanada's natural gas marketing business and the
related natural gas transportation and storage contracts. TransCanada also sold
to us the "netback pool," which markets the aggregated supply from 550 Canadian
natural gas producers.
In December 2001, we completed the sale of our interest in EDELNOR for
total consideration of $4.5 million. Our sale of EDELNOR resulted in a reduction
of our long-term debt of approximately $346 million.
26
Our operating revenues and expenses are primarily driven by the operations
of our controlled subsidiaries, which are consolidated for accounting purposes.
Significant consolidated subsidiaries include Mirant Americas Generation, Mirant
Americas Energy Marketing and Mirant Asia-Pacific's Philippines operations.
Investments in companies over which we exercise significant influence but do not
control are accounted for using the equity method of accounting and,
accordingly, the operating results of these entities impact other income in the
form of equity in income of affiliates. Major affiliates accounted for using the
equity method at December 31, 2001 include Bewag in Germany, WPD and WPDL in the
UK, SIPD and the Shajiao C facility in China, PowerGen and CEMIG in Brazil.
In August 2000, we acquired the remaining 40% interest in Mirant Americas
Energy Marketing, which was previously accounted for under the equity method and
is now consolidated in our financial statements, and in December 2000, we
deconsolidated WPD. Due to these and other events, some items in our financial
statements have been significantly affected and therefore affect period to
period comparisons.
The financial information presented may not be indicative of our future
financial position, results of operations or cash flows or of what our financial
position, results of operations or cash flows would have been had we been a
separate, stand-alone entity for all of the periods presented.
Results of Operations
Year Ended December 31, 2001 as Compared to Year Ended December 31, 2000
Operating revenues. Our operating revenues were $31,502 million in 2001, an
increase of $18,187 million, or 137% from 2000. The following are some of the
factors that were responsible for the increase in operating revenues:
o Revenues from generation and energy marketing products were $30,979 million
in 2001, an increase of $18,163 million, or 142% from 2000. This increase
resulted primarily from the combination of unusually high prices for
natural gas and power in the first quarter of 2001, increased market demand
for natural gas and power in the western United States and the inclusion of
revenues from Mirant Americas Energy Marketing which was consolidated in
our financial statements beginning in August 2000 after we completed our
acquisition of the remaining 40% interest. The increases in revenues were
also attributable to the contribution of the plants we acquired in Maryland
and Virginia in December 2000, and the commencement of operations at our
Wisconsin plant in May 2000, at our Michigan plant in June 2001 and at our
Texas plant for the first and second phases in June 2000 and 2001,
respectively. In addition, the 2000 amounts reflect provisions taken
related to revenues from our California operations under RMR contracts.
o Distribution and integrated utility revenues were $475 million in 2001, a
decrease of $2 million from 2000. This decrease was attributable to the
deconsolidation of WPD effective December 2000 and was offset by operations
from JPSCo after the acquisition of our 80% interest in March 2001.
o Other revenues were $48 million in 2001, an increase of $26 million, or
118% from 2000. This increase resulted primarily from higher coal sales
from our Australian coal operations and revenues related to gas and oil
production from our Castex acquisition in August 2001.
Operating expenses. Our operating expenses were $30,483 million, an
increase of $17,832 million or 141% from 2000. The following factors were
responsible for the increase in operating expenses:
o Cost of fuel, electricity and other products was $28,434 million in 2001,
an increase of $16,997 million or 149% from 2000. This increase resulted
27
primarily from the combination of unusually high prices for natural gas in
the first quarter of 2001, increased market demand for natural gas and
power in the western United States and the inclusion of expenses from
Mirant Americas Energy Marketing which was consolidated in our financial
statements beginning in August 2000 after we completed our acquisition of
the remaining 40% interest. The increase was also attributable to
additional costs from the plants we acquired in Maryland and Virginia in
December 2000, our acquisition of an 80% interest of JPSCo in March 2001
and the commencement of operations at our Wisconsin plant in May 2000, at
our Michigan plant in June 2001 and at our Texas plant for the first and
second phases in June 2000 and 2001, respectively.
o Maintenance expense and depreciation and amortization expenses were $537
million in 2001, an increase of $84 million or 19% from 2000. This increase
resulted primarily from the plants we acquired in Maryland and Virginia in
December 2000, the operations from JPSCo after our acquisition of an 80%
interest in March 2001 and the commencement of operations at our Wisconsin
plant in May 2000, at our Michigan plant in June 2001 and at our Texas
plant for the first and second phases in June 2000 and 2001, respectively.
The increase was offset somewhat by the deconsolidation of WPD effective
December 2000.
o Selling, general and administrative expenses were $974 million in 2001, an
increase of $462 million or 90% from 2000. This increase primarily resulted
from expenses associated with the operations of the plants we acquired in
Maryland and Virginia in December 2000, the operations of JPSCo after our
acquisition of an 80% interest in March 2001 and the inclusion of Mirant
Americas Energy Marketing in our consolidated financial statements
beginning in August 2000 after completing our acquisition of the remaining
40% interest. The increase was also attributable to provisions taken in
relation to uncertainties in the California power market, provisions taken
related to amounts due from Enron as a result of their bankruptcy in
December 2001 and a reduction of bad debt expense in 2000 related to the
Shajiao C venture. The increase was partially offset by the deconsolidation
of WPD effective December 2000 and costs related to our transition to a
publicly traded company recorded in 2000.
o Impairment loss was $85 million in 2001, primarily attributable to the $83
million write-off of our investment in our Chilean subsidiary, EDELNOR,
taken in 2001.
o Other operating expense was $453 million in 2001, an increase of $222
million or 96% from 2000. The majority of this increase resulted from
expenses (primarily lease expense) related to the plants we acquired in
Maryland and Virginia in December 2000, the operations from JPSCo after our
acquisition of an 80% interest in March 2001 and increased property taxes.
The increase was offset partially by the deconsolidation of WPD effective
December 2000.
Total other income (expense). Other expense was $134 million in 2001, a
decrease of $28 million or 17% from 2000. The decrease resulted primarily from
an increase in equity in income of affiliates of $49 million or 25% from 2000.
The increase was primarily due to income from WPD after its deconsolidation
effective December 2000 and income from WPD South Wales after our acquisition of
Hyder. This increase was also due to additional income from our increased
ownership in Bewag and was reduced by provisions taken at WPD related to its
investment in Teesside and by lower earnings from our Shajiao C venture as a
result of forced outages. In addition, 2000 amounts include net income from
Mirant Americas Energy Marketing prior to its consolidation in August 2000 after
we acquired the remaining 40% interest.
Provision for income taxes. The provision for income taxes was $260 million
in 2001, an increase of $174 million or 202% from 2000. This increase is
primarily due to the substantial increase in income generated by the Americas
Group. The increase also includes additional provisions related to our
consolidated tax position taken in 2001. The increase was offset somewhat by a
United States income tax expense in 2000 related to our investment in Bewag. As
overall domestic earnings increased, taxes associated with our permanently
28
deferred earnings from our foreign subsidiaries decreased as a percent of our
total tax provision, reducing the positive impact of the permanent deferral of
foreign earnings on our effective rate as compared to 2000.
Minority interest. Minority interest was $62 million in 2001, a decrease of
$22 million or 26% from 2000. The decrease was primarily due to the
deconsolidation of WPD effective December 2000, offset by the accrued dividends
on the trust preferred securities issued in September 2000 and income from the
operations of JPSCo after our acquisition of an 80% interest in March 2001.
Earnings
Our consolidated income from continuing operations was $563 million in
2001, an increase of $231 million or 70% from 2000. Adjusting for the write-off
of our Chilean investment of $54 million taken in 2001, provisions taken by the
Americas and Europe Groups totaling $66 million related to our exposure to Enron
in 2001 as a result of their bankruptcy in December 2001 and costs of $34
million related to our transition to a publicly traded company recorded in 2000,
our income from operations was $683 million in 2001. This represents an increase
of $317 million or 87% from 2000. This excludes the net income from our
discontinued operations (SE Finance) of $5 million and $27 million in 2001 and
2000, respectively. The increase in income from continuing operations is
attributable to our business segments as follows:
Americas
Income from continuing operations for the Americas Group totaled $493
million in 2001. This represents an increase of $316 million from 2000 and is
primarily attributable to the contribution of the plants we acquired in Maryland
and Virginia in December 2000, the operations from JPSCo after our acquisition
of an 80% interest in March 2001 and the commencement of operations at our
Wisconsin plant in May 2000, our plant in Michigan in June 2001 and the first
and second phases of our Texas plant in June 2000 and 2001, respectively. The
increase was also attributable to increased price volatility and market demand
for natural gas and power in the United States and natural gas in Canada during
the first six months of 2001. This increase was partially offset by
approximately $147 million ($245 million pre-tax) which was provided in relation
to the uncertainties in the California power market in 2001. The total amount of
provisions made during 2000 and 2001 in relation to these uncertainties was
approximately $177 million ($295 million pre-tax). As of December 31, 2001, the
total amount owed to us by the CAISO and the PX was approximately $361 million.
In addition, the increase was offset by the net write-off of $54 million ($83
million pre-tax) related to our investment in EDELNOR and $40 million ($68
million pre-tax) which was provided in relation to amounts due from Enron as a
result of their bankruptcy in December 2001. The increase was further offset by
a loss of $44 million ($74 million pre-tax) in 2001 on an energy requirements
contract primarily resulting from new market regulatory requirements. We believe
that we have adequately provided for estimated future losses under this
contract, which terminates at the end of 2003; however, we are subject to
subsequent regulatory and commercial risks under this contract and no assurance
can be given that additional losses will not occur.
Europe
Income from continuing operations from the Europe Group totaled $99 million
in 2001, an increase of $17 million from 2000. The increase is due to increased
earnings from WPD primarily from the WPD South Wales electricity distribution
business and a gain on the sale of assets, offset by the write-off of
approximately $20 million related to WPD's investment in Teesside as a result of
the Enron bankruptcy. This increase was also due to additional income from our
increased ownership in Bewag. These increases were offset by net losses from the
energy marketing operations including $6 million ($9 million pre-tax) which was
provided in relation to amounts due from Enron and its affiliates as a result of
Enron's European affiliates' insolvency in December 2001. On February 11, 2002,
we completed the sale of our interest in Bewag for approximately $1.63 billion.
Asia-Pacific
Income from continuing operations from the Asia-Pacific Group totaled $190
29
million in 2001, a decrease of $14 million from 2000. The decrease in net income
includes lower earnings from our Shajiao C venture due to a forced outage and
higher earnings in 2000 as a result of a reduction of bad debt expense related
to the Shajiao C venture. These amounts were partially offset by additional
income due to the commencement of the energy supply business in the Philippines
and higher income from SIPD in 2001.
Corporate
After-tax corporate expenses produced a net loss from continuing operations
of $219 million in 2001, an increase of $88 million from 2000. The increase
reflects the dividends on the trust preferred securities, increased advertising,
additional tax provisions related to our consolidated tax position and increased
interest expense on corporate borrowings used to fund acquisitions and working
capital and various other corporate expenses. The 2000 amount includes $34
million in costs related to transitioning to a publicly traded company.
Year Ended December 31, 2000 as Compared to Year Ended December 31, 1999
Operating revenues. Our operating revenues were $13,315 million in 2000, an
increase of $11,050 million, or 488%, from 1999. The following factors were
primarily responsible for the increases in operating revenues:
o Revenues from generation and energy marketing products were $12,816 million
in 2000, an increase of $11,729 million, or 1079%, from 1999. This increase
resulted primarily from our acquisition of Vastar's 40% interest in Mirant
Americas Energy Marketing effective August 2000, which is now consolidated
in our financial statements. The increase in revenue was also attributable
to a full year of operations from our plants in California and New York,
increased market demand in California, as well as the commencement of
commercial operations of new plants in North America and a full year of
operations from our Sual plant in the Philippines. This increase was
reduced somewhat for provisions taken related to revenues from our
California operations under RMR contracts.
o Distribution and integrated utility revenues were $477 million in 2000, a
decrease of $666 million, or 58%, from 1999. This decrease resulted from a
reduction in revenues at WPD associated with the September 1999 sale of the
SWEB supply business.
Operating expenses. Operating expenses were $12,651 million in 2000, an
increase of $10,830 million, or 595%, from 1999. The following factors were
primarily responsible for the increases in operating expenses:
o Cost of fuel, electricity and other products was $11,437 million in 2000,
an increase of $10,503 million, or 1125%, from 1999. This increase resulted
primarily from our acquisition of the remaining 40% of Mirant Americas
Energy Marketing, which is now consolidated in our financial statements.
This increase was also attributable to a full year of operations from our
plants in California and New York, higher natural gas prices and increased
electricity market demand in the western United States, as well as the
commencement of commercial operations of new plants in North America,
partially offset by the sale of the SWEB supply business.
o Maintenance expense was $136 million in 2000, an increase of $20 million,
or 17%, from 1999. This increase was due to a full year of operations from
our plants in California and New York, commencement of commercial
operations of new plants in North America and a full year of operations
from our Sual plant in the Philippines. This increase was partially reduced
due to the deconsolidation of WPD effective December 2000.
o Depreciation and amortization expense was $317 million in 2000, an increase
of $47 million, or 17%, from 1999. This increase was due to the acquisition
of the remaining 40% of Mirant Americas Energy Marketing, which is now
consolidated in our financial statements, a full year of operations from
30
our plants in California and New York, commencement of commercial
operations of new plants in North America and a full year of operations
from our Sual plant in the Philippines. This increase was partially offset
by WPD's sale of the SWEB supply business and the write-down of metering
assets in 1999, as well as the deconsolidation of WPD effective December
2000.
o Selling, general and administrative expense was $512 million in 2000, an
increase of $264 million, or 106%, from 1999. The increase resulted from
the acquisition of the remaining 40% of Mirant Americas Energy Marketing,
which is now consolidated in the financial statements, additional variable
marketing costs paid to Mirant Americas Energy Marketing (prior to our
acquisition of the remaining 40% of Mirant Americas Energy Marketing from
Vastar), a full year of operations from the plants in California, New York
and Sual in the Philippines, as well as a provision taken in relation to
the California receivables. This increase was offset partially by the sale
of the SWEB supply business and a loan receivable provision recorded in
1999 that related to our operations in China, as well as the
deconsolidation of WPD effective December 2000.
o Write-down of assets was $18 million in 2000, a decrease of $42 million, or
70%, from 1999. This decrease was primarily due to the write-down of the
metering assets at WPD in 1999.
o Other operating expense was $231 million in 2000, an increase of $38
million, or 20%, from 1999. The majority of this increase resulted from a
full year of operations from the plants in California and New York and
additional property taxes related to the commencement of commercial
operations of new plants in North America. This was partially reduced due
to the deconsolidation of WPD effective December 2000.
Other Income (Expense). Other expense was $162 million in 2000, an increase
of $392 million from 1999. This change was primarily due to:
o Interest expense was $615 million in 2000, an increase of $114 million, or
23%, from 1999. This increase was due to interest on additional borrowings
to finance acquisitions, fund dividends paid to Southern and the
commencement of commercial operations of new plants in North America, as
well as a full year of operations from the Sual plant in the Philippines.
o Net gain on sale of assets was $20 million in 2000, a decrease of $293
million, or 94%, from 1999. This decrease was primarily due to the sale of
the SWEB supply business in 1999 that resulted in a gain of $286 million
prior to taxes and other expenses.
o Equity in income of affiliates was $196 million in 2000, an increase of $86
million, or 78%, from 1999. This increase was due to income from WPD after
the deconsolidation effective December 2000, income from Mirant Americas
Energy Marketing prior to the acquisition of the remaining 40% and income
from WPD Limited after its acquisition of Hyder. In 1999 equity income from
Bewag decreased by $50 million as a result of provisions for employee
severance and early retirement. This was offset by increases related to the
resolution of disputes from our operations in China. In addition, there was
a devaluation of the Brazilian Real in 1999 and an increase in the tariff
granted by the government from our investment in Brazil during 2000.
o Income from recovery of receivables for 2000 was $0 and $64 million for
1999. This amount represents payments made by Hopewell Holdings Ltd.
pursuant to a warranty claim settlement.
o Other, net was $50 million in 2000, a decrease of $22 million, or 31%, from
1999. This decrease was primarily due to $29 million of insurance proceeds
received in 1999 related to the accident at the State Line facility in
31
Indiana. The 2000 amount was also lower due to the deconsolidation of WPD.
This was partially offset as a result of revenue from the sale of an option
to acquire a stake in CEPA Holding Australia Pty Ltd., which expired
December 2000 and the settlement of a commercial dispute with an outside
advisor to our operations in Asia.
Provision for Income Taxes. The provision for income taxes was $86 million
in 2000, a decrease of $43 million, or 33%, from 1999. The decrease was
primarily due to approximately $76 million of tax related to the 1999 sale of
the SWEB supply business and a favorable $20 million agreement reached at WPD in
the first quarter of 2000 with the UK's taxing authority, Inland Revenue. This
change was offset in 2000 by additional tax related to increased income
generated by the Americas Group, tax expense related to our transition to a
publicly traded company, as well as additional taxes related to a change in the
Asia-Pacific Group's cash repatriation strategy. The tax provision was also
lower due to the deconsolidation of WPD in December of 2000.
Minority Interest. Minority interest was $84 million in 2000, a decrease of
$99 million, or 54%, from 1999. This decrease was primarily attributable to the
sale of the SWEB supply business in the third quarter of 1999 and the
deconsolidation of WPD effective December 2000. This was offset partially by
increased income from operations in the Philippines and South America.
Earnings Our consolidated net income from continuing operations was $332 million
in 2000, a decrease of $30 million or 8% from 1999. This excludes the income
from our discontinued operations (SE Finance) of $27 million in 2000 and $10
million in 1999. The decrease is attributable to our business segments as
follows:
Americas
Net income from the Americas Group was $177 million in 2000, an increase of
$84 million, or 90%, from 1999. This increase was due to a full year of
operations from the plants in California and New York and increased market
demand on our generating units related to weather and transmission constraints.
In addition, we had strong performance from our risk management and marketing
activities in power and natural gas as well as commercial operation of new
plants in North America. This was partially offset by additional provisions
taken in relation to the California receivables and an estimated loss related to
an energy requirements contract. This difference between 2000 and 1999 was also
due to the devaluation of the Brazilian Real in 1999 and an increase in the
tariff granted by the government from our investment in Brazil in 2000. This was
partially offset by insurance proceeds related to the 1998 accident at the State
Line facility which increased 1999 net income by $14 million.
Europe
Net income from the Europe Group was $82 million in 2000, a decrease of $88
million, or 52%, from 1999. This decrease is primarily due to the sale of the
SWEB supply business in 1999, which resulted in a net gain of $78 million.
Adjusting for the sale of the SWEB supply business, net income for the year
ended December 31, 1999 would have been $92 million. The remainder of the
decrease is the result of regulatory decreases in distribution rates, lower
margins at Bewag, a fall in exchange rates and start-up costs incurred by our
European marketing and risk management activities. This was offset partially by
increased expenses in 1999 related to personnel reductions at Bewag.
Asia-Pacific
Net income from the Asia-Pacific Group was $204 million in 2000, an
increase of $29 million, or 17%, from 1999. The increase in net income is
primarily attributable to a full year of operations from the Sual plant in the
Philippines. This was partially offset by additional accrued income taxes in
2000 resulting from a change in the Asia-Pacific Group's cash repatriation
strategy.
SE Finance (Discontinued Operations)
Net income was $27 million in 2000, an increase of $17 million, or 170%,
from 1999. This increase is due to additional income from leases that were
entered into during the fourth quarter of 1999.
32
Corporate
After-tax corporate costs were $131 million in 2000, an increase of $55
million, or 131%, from 1999. This increase is due to costs in 2000 of $34
million related to our transition to a publicly traded company as well as
additional compensation expenses related to the change in market value of our
stock. In addition, we incurred increased interest expense related to additional
corporate debt financings between the fourth quarter of 1999 and the third
quarter of 2000 to fund acquisitions and dividends to Southern.
Liquidity and Capital Resources
Historically, we have obtained cash from operations, borrowings under
credit facilities and issuance of senior notes, proceeds from equity issuances,
capital contributions from Southern and proceeds from non-recourse project
financing. These funds have been used to finance operations, service debt
obligations, fund the acquisition, development and/or construction of generating
facilities and distribution businesses, finance capital expenditures and meet
other cash and liquidity needs.
The projects that we have developed typically required substantial capital
investment. Some of the projects and assets in which we have an interest have
been financed primarily with non-recourse debt that is repaid from the cash
flows of such project assets. Some of this debt is secured by interests in the
physical assets, major project contracts and agreements, cash accounts and, in
some cases, the ownership interest in that project subsidiary. These financing
structures are designed so that Mirant Corporation is not contractually
obligated to repay the debt of the subsidiary, that is, the debt is
"non-recourse" to Mirant Corporation and to its other subsidiaries not involved
in the project or asset. However, we have agreed to undertake limited financial
support for some of our subsidiaries in the form of limited obligations and
contingent liabilities such as guarantees of specific obligations. To the extent
we become liable under these guarantees or other agreements in respect of a
particular project or asset, we may choose to use distributions we receive from
other projects and assets or corporate borrowing capacity to satisfy these
obligations.
Operating Activities
Net cash provided by operating activities per our consoladated statements
of cash flows totaled $311 million in 2001 as compared to $961 million in 2000,
a decrease of approximately 68%. This decrease was due to the following items,
which negatively impacted our cash from operations in 2001:
o We made payments in 2001 to fuel suppliers and others of approximately $140
million, which were accrued in the prior year and related to amounts owed
to us and not collected from the CAISO and California PX.
o We posted $278 million of net cash collateral in 2001 compared to a net
receipt of cash collateral of $45 million in 2000. The increase in 2001 is
due primarily to the downgrade of our credit rating by Moody's in December
2001.
o We paid cash taxes in 2001 in excess of the current tax provision accrued
as compared to 2000 due primarily to changes in estimates of taxable and
non-taxable items in the fourth quarter of 2001, resulting in an
overpayment of our tax liability. Any overpayments due to us as a result of
these changes in estimates are expected to be received in 2002.
o We purchased additional fuel inventory of approximately $48 million for use
at our Mirant Mid-Atlantic operating subsidiaries and made payments in
excess of rental expense in the amount of $131 million related to our
Mirant Mid-Atlantic operating leases.
These decreases in cash flow from operations compared to 2000 were
partially offset by the receipt in 2001 of approximately $218 million due to a
33
prepaid gas transaction we entered into in October. As a result of this
transaction, we received payment in 2001 in exchange for financial settlements
to be made over a future three-year period. Approximately 10% of the contract
notional quantity will settle in 2002 and 2003, respectively, and the remaining
80% will settle in 2004. The amount of these settlements will be based on fixed
notional quantities of gas at index prices on the date of each settlement.
Simultaneous with entering into the prepaid gas transaction, we entered into a
natural gas swap with a third-party independent to the gas transaction to fix
the price of the gas to be settled under the agreement at approximately $250
million. The estimated obligation related to this transaction is recorded as
other current and noncurrent liabilities in our consolidated balance sheet. The
obligations under this transaction are guaranteed by Mirant Corporation.
Excluding the effects of working capital components of our cash flows from
operations, reflected as "Changes in certain assets and liabilities, excluding
effects from acquisitions" in our consolidated statements of cash flows, our
operating cash flows increased by $194 million compared to 2000 operating cash
flows. This increase was due to additional dividends received from equity
investments of $143 million and additional contributions to our cash from
operations as a result of acquisitions and the commencement of commercial
operation of new plants in 2000 and 2001. Contributions from our PEPCO
acquisition were reduced by the impact of after-tax cash payments made in 2001
in the amount of $204 million related to out-of-market energy delivery and power
purchase agreements assumed in connection with the acquisition in December 2000.
In 2001, net income included the release of approximately $275 million in
after-tax provisions recorded in connection with the PEPCO acquisition. The
total after-tax assumed obligation recorded in purchase accounting was $1.4
billion, which was our estimate of actual after-tax cash payments we expected to
make over the term of the contracts as a result of assuming the out-of-market
contracts from PEPCO, based on future price and volume estimates at the time of
our acquisition.
In addition to these factors, our cash from operations in 2000 included the
consolidated results of WPD, as if we owned 100% of this subsidiary, in the
amount of approximately $250 million. WPD was deconsolidated in December 2000,
and our 49% share of dividends from this subsidiary is now reflected as
dividends received from equity investments. Our share of dividends received from
WPD in 2001 was $98 million. Thus, the deconsolidation of WPD resulted in a
decrease of $152 million in our cash from operations as compared to the prior
year.
The decrease in receivables, net of $1,076 million, excluding the effects
of acqusitions, from December 31, 2000 to December 31, 2001 is primarily due to
higher commodity prices in effect during December 2000, as compared to prices in
effect during December 2001, offset by net cash collateral posted as described
above.
The decrease in accounts payable of $1,674 million, excluding the effects
of acqusitions, from December 31, 2000 to December 31, 2001 is primarily due to
higher commodity prices in effect during December 2000, as compared to prices in
effect during December 2001 and also includes payments to fuel suppliers and
others related to California as discussed above.
Investing Activities
Net cash used in investing activities totaled $2,859 million for 2001 as
compared to $2,831 million for 2000, an increase of approximately 1%. The 2001
investing activities include additional capital expenditures in North America,
the acquisition of an additional 18.8% interest in Bewag in June 2001, the
acquisition of 80% of JPSCo in March 2001, our investment in Castex in August
2001, our acquisition of West Georgia in August 2001 and our acquisition of the
majority of TransCanada in December 2001. The 2000 investing activities include
the acquisition of the PEPCO assets, the Hyder acquisition and the acquisition
of the remaining 40% of Mirant Americas Energy Marketing from Vastar. Cash flows
from investing activities also include the repayment of notes receivable in the
form of shareholder's loans to Shajiao C in the amount of $179 million in 2001
and $143 million in 2000. Of these amounts, we are entitled to $145 million and
$141 million respectively, after repayments to minority shareholders.
Financing Activities
Net cash provided by financing activities totaled $2,317 million in 2001 as
compared to $2,718 million for 2000, a decrease of approximately 15%. The
decrease is primarily attributable to higher repayments of long-term and
short-term debt, much of which was completed through refinancing of existing
34
facilities at longer maturities. Issuances of equity, convertible debt,
long-term debt and net short-term debt were $4,567 million in 2001, a 20%
increase over $3,804 million in 2000. Repayments of long-term debt were $2,366
million in 2001, a 382% increase over $491 million in 2000. We have used net
cash flows provided by financing activities primarily to finance investments in
our subsidiaries.
Under our current plan, we expect our cash and financing needs over the
next several years to be met through a combination of cash flows from
operations, availability under our existing credit facilities, new non-recourse
project financings and asset sales. Should market conditions improve, we would
consider new debt and equity financings to fund new projects and investments. A
significant part of our investments are in subsidiaries financed with project or
subsidiary level indebtedness to be repaid solely from the respective
subsidiary's cash flows. Subsidiaries financed in this manner are often
restricted by their respective project credit documents in their ability to pay
dividends and management fees periodically to us. These limitations usually
require that debt service payments be current, debt service coverage and
leverage ratios be met and there be no default or event of default under the
relevant credit documents. There are also additional limitations that are
adapted to the particular characteristics of each subsidiary and its assets.
Our cash from operations, asset sales, existing credit facilities and cash
position, along with existing credit facilities at our subsidiaries, is
expected to provide sufficient liquidity for working capital and capital
expenditures, including letters of credit, over the next 12 months. In addition,
our cash from operations will be sufficient to fund our debt service on an
ongoing basis. Our liquidity could be impacted by changing prices resulting from
abnormal weather, excess capacity, the inability to complete asset sales,
changes in credit ratings and other factors.
Credit Ratings
As of February 28, 2002, we had investment grade credit ratings with two
rating agencies and a non-investment grade credit rating with one rating agency.
On December 19, 2001, Moody's lowered its rating on our senior unsecured
debt from Baa2 (investment grade) to Ba1 (non-investment grade). Moody's also
lowered its rating on the following of our subsidiaries or subsidiary issues:
Mirant Americas Energy Marketing, Mirant Trust I and Mirant Americas Generation.
As a result of Moody's lowering its rating on our senior unsecured debt, as of
February 28, 2002, we had to post additional collateral in the form of cash and
letters of credit in the amount of approximately $492 million.
On December 20, 2001, S&P affirmed its investment grade credit rating of
BBB- for us and our affiliates.
As of December 20, 2001, Fitch had our senior unsecured debt rated as BBB
(investment grade) and our trust preferred securities rated BBB (investment
grade) with a negative watch.
While the foregoing indicates the ratings from these agencies, we note that
these ratings are not a recommendation to buy, sell or hold our securities, that
the ratings may be subject to revision or withdrawal at any time by the
assigning rating organization and that each rating should be evaluated
independently of any other rating.
We analyze our credit quality by examining the potential impact on our
ability to transact and manage the cash and other collateral needs of the
business, due to market moves and potential changes to our credit ratings.
Typically, credit rating moves are followed by adjustments to the credit
thresholds and collateral arrangements that we afford to our counterparties and
those they in turn afford to us. Credit ratings, therefore, affect our
liquidity.
Our analysis focuses on the impact of a potential credit downgrade resulting
in the lowering of credit thresholds currently granted to us by our
35
counterparties. We monitor on a continuous basis the demand for guarantees, cash
and other collateral based on our current portfolio positions stressed by
market moves in an adverse direction, coupled with potential lowering of credit
thresholds afforded to us. This type of analysis is a form of stress-testing of
credit exposures of the business, and senior management is apprised of potential
demands on liquidity on a periodic basis, thereby affording them the opportunity
to initiate appropriate management action(s).
Common Stock
During 2000, we completed an initial public offering of 66.7 million shares
of our common stock for a price of $22.00 per share. The net proceeds from the
offering, after deducting underwriting discounts and commissions payable by us,
were approximately $1.38 billion.
On September 17, 2001, our Board of Directors approved the repurchase of up
to 10 million shares of our common stock. The authorization was effective
immediately and continued for a period of 30 days. Pursuant to the
authorization, 100,000 shares of our common stock were purchased for
approximately $2 million in the open market, in privately negotiated
transactions and/or in block transactions.
On December 26, 2001, we completed the issuance and sale of 60 million
shares of our common stock, par value $0.01 per share. The net proceeds, after
underwriting discounts and commissions, were approximately $759 million.
The market price of our common stock at December 31, 2001 was $16.02 per
share and the book value was $13.72 per share based on the 400,780,937 shares
outstanding at December 31, 2001, representing a market-to-book ratio of 117%.
As of February 28, 2002, Mirant had 166,563 holders of record.
Convertible Senior Debentures
In May 2001, we completed the issuance of $750 million of convertible
senior debentures bearing an annual interest rate of 2.5%, subject to upward
adjustment commencing on June 15, 2004, depending on the market price of our
common stock. The debentures mature on June 15, 2021 and have an equivalent
initial conversion price of $67.95 per share based on the issue price of the
debentures. Holders of the debentures have the right to require us to purchase
all or a portion of their debentures on June 15, 2004, June 15, 2006, June 15,
2011 and June 15, 2016, at a price equal to 100% of the principal amount plus
accrued and unpaid interest. We may repurchase such securities with cash or
common stock, at our election, and intend to use cash for such purposes for
securities of this nature. We have the right to redeem for cash, some or all of
the debentures at any time after June 18, 2006 at a price equal to 100% of the
principal amount plus accrued and unpaid interest.
Convertible Trust Preferred Securities
In October 2000, Mirant Trust I closed the sale of 6.9 million convertible
trust preferred securities for an initial price of $50.00 per preferred
security. The net proceeds from the offering, after deducting underwriting
discounts and commissions payable by us, were $334 million.
Unless we redeem the debentures, and subject to our right to elect a cash
settlement, holders of preferred securities will have the right to convert the
preferred securities into shares of our common stock at any time prior to
October 1, 2030. Preferred securities that have been called for redemption may
only be converted on or before the business day prior to the close of business
on the applicable redemption date. The preferred securities will convert into
our common stock at an initial conversion rate of 1.8182 shares of common stock
for each preferred security. This conversion rate is equivalent to the
conversion price of $27.50 per share of our common stock. The initial conversion
rate may be subject to adjustment. Upon conversion of a preferred security, a
corresponding debenture held by the trust will be canceled.
36
Asset Sales
In February 2002, we completed the sale to an affiliate of Vattenfall AB of
our 44.8% ownership interest in Bewag for approximately $1.63 billion. We
received more than $1.05 billion in net proceeds after repayment of
approximately $550 million in debt associated with our Bewag investment. The net
proceeds were used for general corporate purposes, capital expenditures and
repayment of certain drawn balances on revolving credit facilities.
In February 2002, we announced that we had entered into an agreement to
sell our State Line generating facility to Dominion Resources for $182 million.
The sale is expected to close in the second quarter of 2002.
Available Liquidity and Related Debt to Capitalization Ratios (in millions)
Liquidity
-------------------------------------------------------------
As of December As of January As Adjusted February
31, 2001 31, 2002 28, 2002(1)
------------------ ------------------ -----------------------
Cash at Mirant Corporation.......... $ 406 $ 214 $ 678
Cash at subsidiaries................ 430 593 393
Availability of credit facilities:
Mirant Corporation............... 867 134 658
Mirant Americas Generation........ 227 27 227
Mirant Canada Energy Marketing... 18 5 12
Cash at subsidiaries not available
for immediate payment to parent (2) (294) (244) (244)
-------- ------- -------
Total ............................. $ 1,654 $ 729 $ 1,724
======== ======= =======
(1) Based on January 31, 2002 and adjusted to give effect to the following:
o actual amounts available under credit facilities as of February 28, 2002;
o the January 31, 2002 cash balance for Mirant Corporation adjusted for the
$1.05 billion of cash received from the sale of Bewag less the $595 million
used to repay Mirant Corporation credit facilities; and
o the January 31, 2002 cash balance for Mirant subsidiaries less $200 million
used to re-pay the Mirant Americas Generation credit facility.
(2) Represents estimated cash at the subsidiary level that is required for
operating, working capital or investment purposes at the respective
subsidiary and that is not available for immediate payment to Mirant
Corporation.
The following table contains some key ratios:
Pro-forma
December 31, 2000 December 31, 2001 January 31, 2002 January 31,
2002(1)
------------------ ------------------ ----------------- ----------------
Recourse Debt /Total Capital.... 6.8% 17.9% 21.5% 19.0%
Total Debt /Total Capital....... 63.6% 62.2% 62.5% 59.1%
(1) Pro forma includes completion of the Bewag sale. Bewag sale assumes a $150
million gain, repayment of approximately $550 million of related debt and
use of $595 million proceeds to repay ammounts drawn under our corporate
revolver.
The ratios above include operating leases for Mirant Mid-Atlantic and
guarantees for drawn amounts on off-balance sheet equipment procurement
facilities ("equipment procurement facilities"). The Mirant Mid-Atlantic
operating lease figure represents the present value of the future lease payments
discounted at 10%. Mirant Corporation guarantees the obligations of its
respective subsidiaries in connection with the respective equipment procurement
facilities, including certain payment obligations of such subsidiaries equal to
approximately 89.9% of equipment costs (including financing costs) for such
equipment procurement facilities.
37
Debt
The following table sets forth our short-term and long-term debt as of
December 31, 2000 and 2001 and January 31, 2002 (in millions):
December 31, January 31,
--------------------------------------------
2000 2001 2002
Short-term debt
Mirant Corporation revolving credit facilities......... $ 200 $ -- $ --
Mirant Americas Generation - credit facilities......... 945 -- --
Mirant Americas Energy Marketing....................... 90 -- --
Mirant Canada Energy Marketing......................... 42 26 39
Jamaica Public Service Company......................... -- 22 20
EDELNOR................................................ 5 -- --
Mirant Asia-Pacific Limited - Mirant Asia-Pacific
Singapore Pte Ltd...................................... 7 7 7
------- ------- ---
Total short-term debt............................. 1,289 55 66
Current portion of long-term debt
Mirant Asia-Pacific.................................... -- 792 --
Mirant Chile........................................... 9 -- --
SE Finance Capital..................................... 25 -- --
Sual and Pagbilao project term loans................... 165 1,201 1,117
Mirant Holdings Beteiligungsgesellschaft term loan..... -- 566 551
Mirant Americas, Inc. - deferred acquisition price..... -- 21 21
West Georgia Generating Company........................ -- 5 5
Capital leases - Jamaica............................... -- 9 8
Jamaica Public Service Company......................... -- 8 8
Freeport, Bahamas...................................... 2 2 2
------ ------- -------
Total current portion of long-term debt........... 201 2,604 1,712
Notes Payable
Mirant Corporation senior notes....................... 700 700 700
Mirant Americas Generation senior notes............... -- 2,500 2,500
Mirant Americas Generation revolving credit
facilities.......................................... 1,450 73 273
Mirant Americas, Inc. - deferred acquisition price..... -- 45 45
Mirant Asia-Pacific.................................... 792 -- 192
Mirant Holdings Beteiligungsgesellschaft term loan..... 512 -- --
West Georgia Generating Company........................ -- 140 140
Mirant Americas Energy Capital ........................ -- 150 150
Mirant Grand Bahamas................................... 16 16 16
Freeport, Bahamas...................................... 28 30 30
Mirant Trinidad bonds.................................. -- 73 73
Sual and Pagbilao project term loans................... 1,203 -- --
Mirant Asia-Pacific Limited - Shajiao C................ 66 27 27
Southern Producer Services............................. 50 -- --
SE Finance............................................. 216 -- --
SE Finance Capital Corp................................ 173 -- --
Unamortized debt premium/ discounts on notes........... -- (3) (3)
------ ------- -------
Total notes payable............................... 5,206 3,751 4,143
Other long-term debt
Mirant Corporation convertible senior debentures....... -- 750 750
Mirant Corporation revolving credit facility.......... -- 1,075 1,670
Mirant Holdings Germany - Bewag ....................... 29 -- --
Jamaica Public Service Company......................... -- 125 124
Capital leases - Americas............................. -- 10 10
Capital leases - Jamaica.............................. -- 113 113
EDELNOR................................................ 356 -- --
Cross currency swaps................................... 5 -- --
------- ------- -------
Total other long-term debt........................ 390 2,073 2,667
------- ------- -------
Total debt.................................. $ 7,086 $ 8,483 $ 8,588
======= ======= =======
38
Revolving Credit Facilities
We have revolving credit facilities with various lending institutions
totaling approximately $3.19 billion. At February 28, 2002, amounts borrowed
under such facilities, including drawn amounts and letters of credit, totaled
$2.30 billion, of which $26 million expires during 2002 and $2.27 billion
expires during 2003 and beyond. The credit facilities generally require payment
of commitment fees based on the unused portion of the commitments or the
maintenance of compensating balances with the banks. The schedule below
summarizes amounts available on these facilities held by Mirant Corporation and
the specified subsidiaries as of December 31, 2001 and February 28, 2002 (in
millions).
Amount Available Amount Available
December 31, 2001 February 28, 2002
Facility
Company Amount
------------------------------------------ ---------- ------------------- ------------------
Mirant Corporation...................... $2,700 $867 $658
Mirant Americas Generation ............. 300 227 227
Mirant Canada Energy Marketing......... 44 18 12
Mirant Americas Energy Capital.......... 150 -- --
---------- ------------------- ------------------
Total............................... $3,194 $1,112 $897
========== =================== ==================
Mirant Corporation has three revolving credit facilities: its April 1999
$450 million Credit Facility C, its July 2001 $1.125 billion 364-Day Credit
Facility and its July 2001 $1.125 billion 4-Year Credit Facility. Credit
Facility C matures in April 2004. No amounts were drawn under Credit Facility C
at December 31, 2001 or 2000. However, Mirant Corporation had letters of credit
outstanding under Credit Facility C in the amount of $53 million and $406
million as of December 31, 2001 and 2000, respectively. As of December 31, 2001,
Mirant Corporation had borrowings of $1.075 billion under the 364-Day Credit
Facility at an approximate interest rate of 3% and had issued letters of credit
totaling $705 million under the 4-Year Credit Facility. Under each of the credit
facilities, Mirant Corporation pays interest, facility/commitment fees and
letter of credit fronting fees in an amount determined by reference to its then
existing credit ratings. As of December 31, 2001, the facility/commitment fees
under the 364-Day Credit Facility, the 4-Year Credit Facility and Credit
Facility C were 0.20%, 0.25% and 0.225%, respectively. Under its 364-Day Credit
Facility, Mirant Corporation may elect to convert all revolving credit advances
outstanding on or before the July 2002 termination date thereunder into a term
loan maturing not later than the first anniversary of the termination date.
In addition to other covenants and terms, each of Mirant Corporation's
credit facilities include minimum debt service coverage and a maximum leverage
covenant. As of December 31, 2001, there were no events of default under such
credit facilities.
39
Mirant Americas Generation, an indirect wholly owned subsidiary of Mirant
Corporation, has two credit facilities, each entered into in October 1999: a
$250 million 5-year revolving credit facility (Credit Facility B) for capital
expenditures and general corporate purposes and a $50 million 5-year revolving
credit facility (Credit Facility C) for working capital needs. The commitments
under Credit Facility B and Credit Facility C remain available through October
2004. As of December 31, 2001, the outstanding borrowings under Credit Facility
B were $73 million at an interest rate of 3.39%. As of December 31, 2001, there
were no borrowings under Credit Facility C. Under each of the credit facilities,
Mirant Americas Generation pays interest and facility/commitment fees (0.25% at
December 31, 2001) in an amount determined by reference to its then existing
credit rating.
In addition to other covenants and terms, each of Mirant Americas
Generation's credit facilities includes minimum debt service coverage and a
maximum leverage covenant and a minimum debt service coverage test for dividends
and distributions. As of December 31, 2001, there were no events of default
under such credit facilities.
Mirant Canada Energy Marketing, an indirect wholly owned subsidiary of
Mirant Corporation, has an approximately $44 million (denominated as 70 million
Canadian dollars) revolving credit facility entered into in November 2000. The
credit facility initially matured in November 2001 but was extended to March
2002. Interest under the facility is payable monthly. The interest rate depends
on the currency of the borrowing and type of advance. Interest on bankers
acceptances, letters of credit and LIBOR advances are computed at the applicable
base interest rate (0.35% at December 31, 2001)plus 200 basis points , depending
on Mirant Corporation's then current credit rating. Interest on prime rate and
United States base rate advances are computed at the applicable base rate plus
100 basis points, depending on Mirant Corporation's then current credit rating.
The outstanding borrowings were $26 million, at an interest rate of 3.40% at
December 31, 2001. Amounts outstanding under the credit facility are guaranteed
by Mirant Corporation. We are in the process of seeking commitments to refinance
this credit facility. If we are unable to refinance the credit facility on
acceptable terms, we may repay the amounts outstanding thereunder with cash or
amounts borrowed by us under the corporate credit facilities of Mirant
Corporation, using cash and borrowing capacity that could otherwise be used to
fund our other business activities.
In September 2001, Mirant Americas Energy Capital, an indirect wholly owned
subsidiary of Mirant Corporation, entered into a $150 million credit facility
that matures in September 2004. Under the facility, Mirant Americas Energy
Capital may borrow up to 85% of the calculated market value of eligible
collateral consisting of various producer investments and production payments.
The facility bears interest based on the LIBOR plus 208 basis points with
interest payable quarterly. As of December 31, 2001, the outstanding borrowings
were $150 million at an interest rate of 4.34%. Under the terms of the credit
facility, the facility was initially unsecured with a covenant by Mirant
Americas Energy Capital to secure the obligations thereunder by transferring the
borrowing base assets to a special purpose vehicle and granting security
interests in such assets upon the occurrence of certain events, including
ratings downgrades by Moody's and a specified increase in the yield on Mirant
Americas Generation's publicly traded debt.
As a result of the Moody's downgrade, the yields on Mirant Americas
Generation's publicly traded debt increased and triggered the obligation of
Mirant Americas Energy Capital to secure the obligations thereunder. In March
2002, Mirant Americas Energy Capital transferred the borrowing base assets to
the special purpose vehicle and granted security interests in such assets. The
special purpose vehicle will be consolidated with Mirant. In connection with
entering into the credit facility, Mirant Americas Energy Capital entered into a
total rate of return swap with respect to the credit facility. The obligations
of Mirant Americas Energy Capital under the total rate of return swap are
guaranteed by Mirant Corporation.
Each of our credit facilities contains various covenants in addition to
those described above including, among other things, (i) limitations on
dividends, redemptions and repurchases of capital stock, (ii) limitations on the
incurrence of indebtedness and liens, (iii) limitations on capital expenditures
and (iv) limitations on the sales of assets.
Mirant Asia-Pacific Loans
We indirectly hold a 91.9% interest in the 1,218 MW coal-fired Sual plant
and an 87.2% interest in the 735 MW coal-fired Pagbilao plant, each in the
Philippines. The Sual and Pagbilao plants are financed with non-recourse project
debt. As of January 31, 2002, the aggregate principal amounts outstanding under
the Sual and Pagbilao credit facilities were approximately $781 million and $336
million, respectively. Under the respective credit agreements, the project
companies are required to provide certain specified levels and types of
insurance coverage. Although we have secured such types and levels of insurance
for the Sual and Pagbilao facilities as we believe are normal for prudent
operators of similar facilities, we have been unable to secure certain types and
levels of insurance required by the respective credit agreements as a result of
changes in the insurance markets, including changes attributable to the
terrorist attacks on September 11, 2001. Each of the lenders under the Sual and
40
Pagbilao facilities has executed temporary waivers of default. The waivers are
effective through April 30, 2002. We are working with the respective lender
groups to secure extensions of the waivers. We do not anticipate that the Sual
and Pagbilao lenders will accelerate the respective loans as a result of the
inability of Sual and Pagbilao to provide the specified levels and types of
insurance coverage. However, we can give no assurance that the lenders will
continue to cooperate with us, provide permanent waivers or additional temporary
waivers or, upon expiration of the temporary waivers, refrain from accelerating
the loans. If we could not repay or refinance such loans upon an acceleration,
the loss of the cash flow and assets of Sual and Pagbilao would have a material
adverse effect on us. Further, if we were to refinance such loans, we can give
no assurances that such refinancing would not result in substantial costs and be
on less favorable terms than we currently have in place. In the event the
lenders fail to extend the temporary waivers or to provide permanent waivers,
the respective Sual and Pagbilao project entities will be prohibited under the
financing documentation from making distributions and, thus, amounts that would
otherwise be available for distribution will not be available to Mirant
Corporation or its intermediate holding companies to repay indebtedness or fund
investment activities. As required by U.S. GAAP, we have reclassified the Sual
and Pagbilao credit facilities from long-term debt to current portion of
long-term debt on our consolidated balance sheet until we secure permanent
waivers for these credit facilities. We do not consider the inability to secure
the insurance coverage required under the Sual and Pagbilao credit facilities a
breach of the terms of their respective energy conversion agreements with NPC of
the Philippines.
On January 23, 2002, Mirant Asia-Pacific, an indirect, wholly owned
subsidiary of Mirant Corporation, borrowed $192 million under a new credit
facility to repay, in part, its prior $792 million credit facility. The
repayment of the balance of the prior credit facility was funded by Mirant
Corporation. Mirant Asia-Pacific is in the process of seeking commitments to a
second tranche of up to $208 million in March 2002. The new credit facility
contains various business and financial covenants including, among other things,
(i) limitations on dividends and distributions, including a prohibition on
dividends if Mirant ceases to be rated investment grade by at least two of
Fitch, S&P and Moody's, (ii) mandatory prepayments upon the occurrence of
certain events, including certain asset sales and certain breaches of the Sual
and the Pagbilao energy conversion agreements, (iii) limitations on the ability
to make investments and to sell assets, (iv) limitations on transactions with
affiliates of Mirant and (v) maintenance of minimum debt service coverage
ratios.
Acceleration of the Sual and Pagbilao loans will cause cross-defaults under
the credit facility for Mirant Asia-Pacific. Although we believe that, in the
event of an acceleration, we would be able to refinance the Mirant Asia-Pacific
loan, we can give no assurances to such effect. If we do not repay or refinance
such loans upon acceleration, the loss of the cash flow and assets of Mirant
Asia-Pacific would have a material adverse effect on us. Further, in the event
of a default under the Sual or Pagbilao loans, Mirant Asia-Pacific would be
prohibited under its credit facility from making distributions. As a result,
amounts that would otherwise be available for distribution would not be
available to us to repay indebtedness or fund investment activities.
Contractual Obligations and Commitments
Energy Marketing and Risk Management
Certain financial instruments that we use to manage risk exposure to energy
prices do not meet the hedge criteria under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The fair values of these
instruments are recorded in energy marketing and risk management assets and
liabilities on our consolidated balance sheet. The fair values and average
values of our energy marketing and risk management assets and liabilities, net
41
of credit reserves, as of December 31, 2001 are included in the following table
(in millions). The average values are based on a monthly average for 2001.
Net Energy Marketing
Energy Marketing and Risk Energy Marketing and Risk and Risk Management
Management Assets Management Liabilities Assets/ (Liabilities)
------------------------- ------------------------- ---------------------
Value at Value at
Average December 31, Average December 31, Net Value at
Value 2001 Value 2001 December 31, 2001
---------- ------------- ---------- ------------- ---------------------
Energy commodity
Instruments:
Electricity.............. $ 1,113 $ 756 $ 1,174 $ 671 $ 85
Natural gas.............. 1,337 1,366 1,081 1,314 52
Crude oil................ 110 5 111 6 (1)
Other.................... 91 40 154 42 (2)
-------- -------- ------- ------- -------
Total.................. $ 2,651 $ 2,167 $ 2,520 $ 2,033 $ 134
======== ======== ======= ======= =======
The following table represents the net energy and risk management assets
and liabilities by tenor, complexity and liquidity. As of December 31, 2001,
approximately 87% of the net value was calculated using simple models with high
price discovery. These include forwards, swaps and options at liquid locations.
Also, as of December 31, 2001, approximately 92% of the net value was expected
to be realized within the next two years. Examples of medium and high complexity
models include natural gas transportation and storage, respectively.
Fair Value of Energy Marketing and Risk Management
Assets and Liabilities as of December 31, 2001
(in millions)
--------------------------------------------------------------------------------------------------
Low Complexity Models Medium Complexity Models High Complexity Models
Price Discovery Price Discovery Price Discovery
------------------------- ------------------------------ --------------------------
High Medium Low High Medium Low High Medium Low Total
2002........... $ 50 $ 2 $ -- $ 19 $ 1 $ -- $ 2 $ -- $ 1 $ 75
2003.......... 36 2 2 2 4 -- 1 -- 1 48
2004........... (6) 2 2 1 -- -- -- -- 1 --
2005........... 14 (10) (2) 1 -- -- -- -- -- 3
2006.......... 20 -- (13) 1 -- -- -- -- -- 8
Thereafter .... 3 -- (21) 2 12 4 -- -- -- --
---- ---- ----- ---- ---- ----- ----- ------ --- -----
Net assets.... $117 $ (4) $ (32) $ 26 $ 17 $ 4 $ 3 $ -- $ 3 $ 134
==== ==== ===== ==== ==== ===== ===== ====== === =====
Model Complexity:
o Low - Transactions involving exchange, or exchange look-a-like products
with no operational or other constraints.
o Medium - Transactions involving some operational constraints, but where
these constraints are not the primary drivers of value/risk.
o High - Transactions involving much more complex operational and/or
contractual constraints, incorporating factors such as temperature, and
where these items can be the primary drivers of value/risk.
Level of Price Discovery:
o High - Large, liquid markets with multiple daily third party and/or
exchange settled price quotes available.
o Medium - Less liquid markets with periodic external price quotes available,
or price levels which are validated, on a daily basis, indirectly as
temporal and/or locational spreads off of "High" price discovery data.
o Low - Illiquid markets with little or no external price quotes, or where
the underlying transactions constitute a large portion of the totality of
the transactions in the market.
Additionally, the process of model development, independent testing and
verification of model robustness, system implementation and security, and
version control are all covered by the oversight activities of our Model
Oversight Committee which is chaired by the Risk Control Officer. Documentation
covering this process, including independent testing of model results
by the Risk Control organization, is maintained for audit and oversight
purposes. In addition, the models also undergo a check by our external auditors
who examine the fair value(s) being recorded, the controls, and checks and
balances that are being maintained around the models and transactions.
42
See Item 7A on "Market Risk" for further information.
Mirant Corporation had approximately $1.22 billion trade credit support
commitments outstanding as of December 31, 2001, which included $436 million of
letters of credit, $178 million of net cash collateral posted and $607 million
of parent guarantees, as compared to approximately $883 million trade credit
support commitments, which included $363 million of outstanding letters of
credit, $51 million of net cash collateral held and $571 million of parent
guarantees, as of December 31, 2000.
Mirant Corporation has also guaranteed the performance of its obligations
under a multi-year agreement entered into by Mirant Americas Energy Marketing
with Brazos. Under the agreement, effective January 1999, Mirant Corporation
provides all the electricity required to meet the needs of the distribution
cooperatives served by Brazos. Mirant Corporation is entitled to the output of
Brazos' generation facilities and its rights to electricity under power purchase
agreements Brazos has entered into with third parties. Mirant Corporation's
guarantee was $65 million at December 31, 2001, a decrease of $5 million from
December 31, 2000. Mirant Corporation is subject to regulatory and commercial
risks under this energy requirements contract. Mirant Corporation believes that
it has adequately provided for the estimated future losses under this contract,
which terminates at the end of 2003; however, no assurance can be given that
additional losses will not occur.
Mirant Corporation also has a guarantee related to Pan Alberta Gas of $64
million issued in 2000 and outstanding at December 31, 2001.
Vastar, a subsidiary of BP, and Mirant Corporation had issued financial
guarantees made in the ordinary course of business, on behalf of Mirant Americas
Energy Marketing's counterparties, to financial institutions and other credit
grantors. Mirant Corporation has agreed to indemnify BP against losses under
such guarantees in proportion to Vastar's former ownership percentage of Mirant
Americas Energy Marketing. At December 31, 2001, such guarantees amounted to
approximately $92 million.
In June 2001, Mirant provided an air permit guarantee and a wastewater
discharge permit guarantee in connection with a loan agreement between
Perryville and its lenders. Under these guarantees, Mirant guaranteed the debt
payments under the loan agreement if Perryville does not obtain or achieve
necessary air and waste water discharge permit compliance. Perryville is in the
process of satisfying the conditions to release the respective guarantees.
Perryville began to commercially operate a 150 MW, natural gas-fired,
simple-cycle unit in Louisiana in July 2001 and is constructing a 562 MW natural
gas-fired combined-cycle unit that is expected to be completed in 2002. At
December 31, 2001, the outstanding balance under the loan agreement was
approximately $240 million. Mirant has entered into a separate agreement with
Cleco Midstream Resources, LLC ("Cleco"), who holds the remaining 50% ownership
interest in Perryville, under which Mirant is paid a fixed percentage fee based
on 50% of the outstanding draws under the loan agreement for providing the loan
agreement guarantees on behalf of Cleco.
Perryville, in which Mirant Corporation has a 50% ownership interest
accounted for under the equity method, entered into a 20-year tolling agreement
with Mirant Americas Energy Marketing in April 2001. Under the agreement,
Perryville will sell all the electricity generated by the facility to Mirant
Americas Energy Marketing. At December 31, 2001, the total estimated notional
commitment under this agreement was approximately $1.07 billion over the 20-year
life of the contract. Mirant Corporation has guaranteed the obligations of
Mirant Americas Energy Marketing under the tolling agreement.
43
To the extent that Mirant Corporation does not maintain its current
investment grade ratings, it could be required to provide alternative collateral
to certain risk management and energy marketing counterparties based on the
value of our portfolio at such time, in order to continue our current
relationship with them. Mirant could also be required to provide alternative
collateral related to committed pipeline capacity charges. Such collateral could
be in the form of cash and/or letters of credit. There is an additional risk
that in the event of a further reduction of Mirant's credit rating, certain
counterparties may, without contractual justification, request additional
collateral or terminate their obligations to Mirant.
Turbine Purchases and Other Construction-Related Commitments and
Restructuring Charge
At December 31, 2001, we had agreements to purchase 48 turbines (38 gas
turbines and 10 steam turbines) to support the Company's ongoing and planned
construction efforts. Our options to purchase an additional 32 turbines expired
unexercised on December 31, 2001. Minimum termination amounts under all purchase
contracts consisted of a refund of $87 million resulting from our payments
exceeding the minimum termination amounts at December 31, 2001. At December 31,
2001, total amounts to be paid under the agreements if all turbines were
purchased as planned were estimated to be $450 million. At December 31, 2001,
other construction-related commitments totaled approximately $1.05 billion.
In addition to these commitments, we, through certain of our subsidiaries,
have two off-balance sheet equipment procurement facilities. These facilities
are being used to fund equipment progress payments due under purchase contracts
that have been assigned to two separate, independent third party owners. For the
first facility, which is a $1.80 billion notional value facility, contracts for
46 turbines (32 gas turbines and 14 steam turbines) have been assigned to a
third party trust at December 31, 2001. Tranche one of this facility is $700
million, and tranche two, which requires cash collateralization in order to be
drawn, is $1.10 billion. All amounts outstanding under tranche one are required
to be cash collateralized after April 2004. Mirant Americas Development Capital
acts as the trust's agent with regards to obligations under the equipment
purchase contracts. For the second facility, which is a Euro 1.10 billion
notional value facility, contracts for nine engineered equipment packages
("power islands") have been assigned to a third party owner incorporated in The
Netherlands at December 31, 2001. Tranche one of this facility is Euro 600
million, and tranche two, which requires cash collateralization to be drawn, is
Euro 500 million. Mirant Asset Development and Procurement B.V. acts as the
third party owner's agent with respect to the obligations under the power island
purchase contracts.
As part of these assignments, our subsidiaries have entered into agency
agreements with the respective third-party owners whereby we are required to
manage procurement of this equipment. Under the agency agreements, we maintain
purchase options for each individual turbine and power island which, subject to
certain conditions, may be assigned to other third parties. In addition to the
purchase options under the agreements, we also maintain options to lease the
turbines and the power islands after completion. Under the Mirant Asset
Development and Procurement B.V. equipment procurement facility, the lease is
required to be cash collateralized. If upon the end of the respective terms of
the agreements Mirant has failed to exercise either its purchase options or
lease options for each turbine and power island, we may participate in the
re-marketing of this equipment. Mirant Corporation has guaranteed the respective
obligations of Mirant Americas Development Capital and Mirant Asset Development
and Procurement B.V. in connection with the equipment procurement facilities,
including certain payment obligations equal to approximately 89.9 % of equipment
costs (including financing costs), of which approximately $385 million was
incurred as of December 31, 2001. Additionally, if we had elected to exercise
our purchase options with respect to all of the turbines and power islands and
to terminate the procurement contracts at December 31, 2001, minimum termination
amounts due under the turbine and power island procurement contracts would have
been $451 million. If the purchase options or options to lease the turbines and
power islands are exercised, total commitments under the procurement contracts
would be approximately $2.43 billion as of December 31, 2001.
In January 2002, Mirant announced a strategic business plan change designed
to reduce capital spending and operating expenses. As a result, we expect to
44
record a restructuring charge in 2002 related to these changes. The reduced
capital spending plan results in material changes to our commitments under our
turbine purchase agreements and our turbine procurement facilities.
As part of the restructuring, Mirant intends to cancel agreements to
purchase certain turbines under its purchase agreements. At February 28, 2002,
minimum termination amounts under the remaining purchase contracts consisted of
$6 million. Total amounts to be paid under the agreements if the remaining
turbines are purchased as planned are estimated to be $154 million at February
28, 2002.
Additionally, as part of its restructuring, Mirant intends to cancel
agreements to procure certain turbines under its off-balance sheet equipment
procurement facilities. If Mirant had elected to exercise its purchase options
with respect to the remaining turbines and power islands and to terminate the
procurement contracts, minimum termination amounts due would have been $223
million at February 28, 2002. If the purchase options or options to lease the
remaining turbines and power islands are exercised as planned, total commitments
under the procurement contracts would be approximately $740 million.
The following table summarizes Mirant's commitments related to turbine
purchases and turbine leases as discussed above at December 31, 2001 and
February 28, 2002 (in millions).
Turbine Turbine Turbine Turbine
Purchase Purchase Procurement Procurement
Commitments Commitments Facilities Facilities
December 31, February 28, December 31, February 28,
Fiscal Year Ended: 2001 2002 (1) 2001 2002 (1)
--------------------- ------------ ------------- ------------ ------------
2002................. $ 450 $ 154 $ 459 $ 263
2003................. 0 0 1,372 357
2004................. 0 0 579 110
2005................. 0 0 24 10
2006................. 0 0 0 0
Thereafter........... 0 0 0 0
----- ---- ------ -----
Total minimum payments $ 450 $ 154 $2,434 $ 740
===== ===== ====== =====
(1) Remainder of 2002 (amounts do not reflect the payment of termination amounts
as dicussed above).
Long-Term Service Agreements
We have entered into long-term service agreements for the maintenance and
repair by third parties of many of our combustion-turbine and combined-cycle
generating plants. Generally these agreements may be terminated at no cost in
the event a planned construction project is cancelled prior to shipment of the
associated turbine. As of December 31, 2001, the minimum termination amounts for
long-term service agreements associated with completed and shipped turbines were
$495 million, and the total estimated commitments for long-term service
agreements associated with turbines shipped, as of December 31, 2001, were
approximately $642 million.
As a result of the turbine cancellations as part of our restructuring, the
long-term service agreements associated with the turbines will also be
cancelled. We do not intend to cancel long-term service agreements associated
with turbines that have already shipped. Consequently, our restructuring should
not have an impact on the long-term service agreement commitments disclosed
above.
Power Purchase Agreements
Under the asset purchase and sale agreement with PEPCO, we assumed the
obligations and benefits of five power purchase agreements with a total capacity
of 735 MW. Three of the power purchase agreements represent 730 MW. At December
31, 2001, the estimated commitments under the agreements were $1.68 billion, of
which $534 million were included in obligations under energy delivery and
purchase commitments in the consolidated balance sheet. The agreements will
continue to be in effect through 2021.
45
Fuel Commitments
We have fixed volumetric purchase commitments under fuel purchase and
transportation agreements totaling $142 million at December 31, 2001. These
agreements will continue to be in effect through 2011. In addition, we have a
contract with BP whereby BP is obligated to deliver fixed quantities of natural
gas at identified delivery points. The negotiated purchase price of delivered
gas is generally equal to the daily spot rate then prevailing at each delivery
point. The agreement will continue to be in effect through December 31, 2007,
unless terminated sooner. The estimated commitment for the term of this
agreement based on current spot prices is $4.96 billion as of December 31, 2001.
Because this contract is based on the current spot price at the time of
delivery, we have the ability to sell the gas at the same spot price, thereby,
offsetting the full amount of our commitment related to this contract. In the
event we do not maintain our current credit ratings, BP could request
additional collateral. Based on our current estimate, we could be required to
post approximately $270 million of additional collateral.
Operating Leases
We have commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $124 million, $17 million and $17 million during the years ended
December 31, 2001, 2000 and 1999, respectively.
We entered an approximately $1.50 billion lease transaction at the closing
of the PEPCO transaction. The leases are treated as operating leases for book
purposes whereby one of our subsidiaries records periodic lease rental expenses.
We have the following annual amounts committed for contractual obligations
and other commercial commitments as of December 31, 2001 (in millions):
Contractual Cash Obligations by Year
-----------------------------------------------------------
Total Less than 1 to 3 4 to 5 After 5
1 year years years years
---------------------------------------------------------------------------------------------------------
Long-term debt (1).......................... $ 8,428 $ 2,604 $ 1,732 $ 743 $3,349
Operating leases............................ 3,622 226 381 327 2,688
Long-term service agreements................ 642 45 116 106 375
Fuel commitments............................ 142 21 43 44 34
Power purchase agreements................... 2,751 244 528 368 1,611
-----------------------------------------------------------
Total contractual obligations and
commercial commitments................ $15,585 $3,140 $ 2,800 $ 1,588 $ 8,057
======= ====== ======== ======== ========
(1) Includes amounts classified as interest for capital lease obligations. In
addition, as mentioned above approximately $1.2 billion of project debt
related to Sual and Pagbilao is reflected as current on the accompanying
consolidated balance sheet, as of December 31, 2001, because waivers
granted with respect to defaults under such project debt expire in April
2002. Mirant expects to extend the current waivers and obtain permanent
waivers to address the potential defaults. The final maturity for the Sual
and Pagbilao project loans are 2012 and 2007, respectively. The table
assumes that all debt classified as current is repaid in 2002.
Litigation
Reference is made to Notes 11 and 18 to the "Notes to Consolidated
Financial Statements" filed as part of this Form 10-K relating to the following
litigation matters:
o RMR Agreements;
46
o Defaults by SCE and Pacific Gas and Electric and Bankruptcy of Pacific Gas
and Electric;
o California Power Exchange Bankruptcy;
o DWR Power Purchases;
o California Rate Payer Litigation;
o Western Power Market Investigations;
o State Line;
o Enron Bankruptcy Proceedings;
o California Price Mitigation and Refund Proceeding; and
o Environmental Information Requests
In addition to the proceedings described above, we experience routine
litigation from time to time in the normal course of our business, which is not
expected to have a material adverse effect on our consolidated financial
condition or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As part of our energy marketing and risk management activities, our energy
marketing and risk management subsidiaries enter into a variety of contractual
commitments, such as forward purchase and sale agreements, futures contracts,
swaps, swap options, option contracts and cap and floor agreements. These
contracts generally require future settlement and are either executed on an
exchange or marketed as OTC instruments. Contractual commitments have widely
varying terms and have tenors that range from a few days to a number of years,
depending on the instrument.
Our accounting and financial statement presentation of contractual
commitments depends on both the type and purpose of the contractual commitment
held or issued. As discussed in the summary of accounting policies in Note 1 to
the "Notes to Consolidated Financial Statements," we record all contractual
commitments used for energy marketing purposes, including those used to hedge
marketing positions, at fair value. Consequently, changes in the amounts
recorded in our consolidated balance sheets resulting from movements in fair
value are included in operating revenues in the period in which they occur.
Contractual commitments expose us to both market risk and credit risk.
Market Risk
Market risk is the potential loss that we may incur as a result of changes
in the fair value of a particular instrument or commodity. All financial and
commodities-related instruments, including derivatives, are subject to market
risk. Our exposure to market risk is determined by a number of factors,
including the size, tenor, composition and diversification of positions held and
the absolute and relative levels of commodity prices, interest rates, as well as
market volatility of the commodity prices and liquidity. For instruments such as
options, the time period during which the option may be exercised and the
relationship between the current market price of the underlying instrument and
the option's contractual strike or exercise price also affects the level of
market risk. We manage market risk by actively monitoring compliance with stated
risk management policies as well as monitoring the effectiveness of our hedging
policies and strategies through our risk oversight committees. Our risk
oversight committees review and monitor compliance with risk management policies
that limit the amount of total net exposure during the stated periods. Our
Corporate Risk Control Officer is a member of the group risk oversight
committees to ensure that information is communicated to our senior management
and audit committee as needed.
Market risk is a function not only of the behavior of the prices and the
structure of the markets for the commodities in which we operate, but it also
depends on the nature and complexity of the energy marketing and risk management
transactions into which we enter. Therefore, a risk exists that our models do
not fully capture the essential details of the contractual arrangements. In
order to ensure that the model of risk is properly controlled through a process
of systematic model development, deployment and control, we created and utilize
a Model Oversight Committee, as described earlier in the Contractual Obligations
and Commitments section. The Model Risk Oversight Committee sets the guidelines
47
for the model development, testing, implementation process and responsibilities.
The Risk Control organization and the Mid-Office have the joint responsibility
for ensuring proper oversight and reporting of the values and risks of
transactions employing different models of value and risk. We employ a
systematic approach to the evaluation and management of the risks associated
with our energy marketing and risk management related contracts, including
Value-at-Risk ("VaR"). VaR is defined as the maximum loss that is not expected
to be exceeded with a given degree of confidence and over a specified holding
period. We use a 95% confidence interval and holding periods that vary by
commodity and tenor to evaluate our VaR exposure. A 95% confidence interval
means there is a 5% probability that the actual loss will be greater than the
estimated loss under the VaR. Therefore, we expect that the loss in our
portfolio value will not exceed our VaR for 95% of the time. A holding period is
the time period it would take to liquidate our portfolio. Our VaR measurement
takes into account the relative liquidity of different commodity positions
across different time horizons and locations through the use of different
holding periods. For very liquid commodity positions, such as natural gas for
delivery within one year, we use a five-day holding period, whereas for a less
liquid commodity position, such as physical coal, we employ a three-month
holding period. As a result, the VaR that we measure, monitor and report on a
daily basis is larger than what would be obtained using a one-day holding period
for all positions, commodities and commitments. We also incorporate seasonally
updated correlations between commodity prices in arriving at the portfolio VaR.
For the year ended December 31, 2001, the average VaR, using various
holding periods and a 95% confidence interval, was $52 million and the VaR as of
December 31, 2001, was $38 million. In order to enable comparison on a common
base with our peers in the sector, we also report the portfolio VaR levels using
a one-day holding period for all positions and commitments in our portfolio.
Based on a 95% confidence interval and employing a one-day holding period for
all positions, our portfolio VaR was $12 million at December 31, 2001 and the
average over the calendar year 2001 was $18 million. During the year ended
December 31, 2001, the actual daily loss on a fair value basis exceeded the
corresponding daily VaR calculation six times, which falls within our 95%
confidence interval. In addition to VaR, we utilize additional risk control
mechanisms such as commodity position limits and stress testing of the total
portfolio and its components. In stress testing, we stress both the price and
volatility curves for the entire portfolio in 10% increments to determine the
effects on the fair value.
The fair values of our energy marketing and risk management assets recorded
in the consolidated balance sheets at December 31, 2001, were comprised
primarily of approximately 35% electricity and 63% natural gas. The fair values
of our energy marketing and risk management liabilities recorded in the
consolidated balance sheets at December 31, 2001, were comprised primarily of
approximately 33% electricity and 65% natural gas.
Credit Risk
In conducting our energy marketing and risk management activities, we
regularly transact business with a broad range of entities and a wide variety of
end users, energy companies and financial institutions. To examine and manage
credit risk, we look at credit risk from our stance as being exposed to
potential default by our counterparties. Credit risk is measured by the loss we
would record if our counterparties failed to perform pursuant to the terms of
their contractual obligations, and the value of collateral held by us, if any,
was not adequate to cover such losses. We have established controls to determine
and monitor the creditworthiness of counterparties, as well as the quality of
pledged collateral and use master netting agreements whenever possible to
mitigate our exposure to counterparty credit risk. Master netting agreements
enable us to net certain assets and liabilities by counterparty. We also net
across product lines and against cash collateral, provided such provisions are
established in the master netting and cash collateral agreements. Additionally,
we may require counterparties to pledge additional collateral when deemed
necessary. We try to manage the portfolio of our positions such that the average
48
credit quality of our portfolio falls inside an authorized range. We conduct
internal assessments of counterparties without external credit ratings. The
average credit quality is monitored on a regular basis and reported to the risk
oversight committees on a periodic basis together with steps initiated to bring
credit exposures into line within the authorized range. The average credit
rating of the counterparties included in the net fair value of our energy
marketing and risk management assets was BBB+ at December 31, 2001.
We also monitor the concentration of credit risk from various positions,
including contractual commitments. Credit concentration risk exists when groups
of counterparties have similar business characteristics, and/or are engaged in
like activities that would cause their ability to meet their contractual
commitments to be adversely affected, in a similar manner, by changes in the
economy or other market conditions. We monitor credit concentration risk on both
an individual basis and a group counterparty basis.
In addition to continuously monitoring our credit exposure to our
counterparties, we also take appropriate steps to limit the exposures, initiate
actions to lower credit exposure and take credit reserves as appropriate. The
process of establishing and monitoring credit reserves is based on a standard
methodology of employing default probabilities to the current and potential
exposures by both settled and open contracts.
As of December 31, 2001, the California Department of Water Resources owed
us approximately $338 million (includes accounts receivable and open contract
positions), which represented more than 10% of our total credit exposure. No
single counterparty represented 10% or more of our credit exposure at December
31, 2000. Our total credit exposure is computed as total accounts and notes
receivable, adjusted for energy marketing, risk management and derivative
hedging activities and netted against offsetting payables and posted collateral
as appropriate. Our overall exposure to credit risk may be impacted, either
positively or negatively, because our counterparties may be similarly affected
by changes in economic, regulatory or other conditions.
Interest Rate Risk
Our policy is to manage interest expense using a combination of fixed- and
variable-rate debt. To manage this mix in a cost-efficient manner, we enter into
interest rate swaps in which we agree to exchange, at specified intervals, the
difference between fixed- and variable-interest amounts calculated by reference
to agreed-upon notional principal amounts. These swaps are designated to hedge
underlying debt obligations. For qualifying hedges, the changes in the fair
value of gains and losses of the swaps are deferred in OCI, net of tax, and the
interest rate differential is reclassified from OCI to interest expense as an
adjustment over the life of the swaps. Gains and losses resulting from the
termination of qualifying hedges prior to their stated maturities are recognized
ratably over the remaining life of the hedged instrument.
We use interest rate swaps to hedge underlying debt obligations. These
swaps hedge specific debt issuances and currently qualify for hedge accounting.
Consequently, the interest rate differential associated with a swap is reflected
as an adjustment to interest expense over the life of the instruments. In
October 2001, Mirant Americas Energy Capital entered into a forward starting
interest rate swap intended to hedge its anticipated draw down of its revolving
credit facility. Further, some of our other subsidiaries have entered into
interest rate swaps in foreign currencies. These swaps are designated as hedges
of those subsidiaries' related debt issuances in the same currency. If we
sustained a 100 basis point change in interest rates for all variable rate debt
in all currencies, the change would affect net income by approximately $15
million, based on variable rate debt and derivatives, cash balances and other
interest rate sensitive instruments outstanding at December 31, 2001.
Foreign Currency Hedging
We use cross-currency swaps and currency forwards to hedge our net
investments in certain foreign subsidiaries. Gains or losses on these
derivatives are designated as hedges of net investments and are offset against
the foreign currency translation effects reflected in OCI, net of tax.
49
We also utilize currency forwards intended to offset the effect of exchange
rate fluctuations on forecasted transactions arising from contracts denominated
in a foreign currency. In addition, we also utilize cross-currency swaps that
offset the effect of exchange rate fluctuations on foreign currency denominated
debt and fix the interest rate exposure. Certain other assets are exposed to
foreign currency risk. We designate currency forwards as hedging instruments
used to hedge the impact of the variability in exchange rates on accounts
receivable denominated in certain foreign currencies. When these hedging
strategies qualify as cash flow hedges, the gains and losses on the derivatives
are deferred in OCI, net of tax, until the forecasted transaction affects
earnings. The reclassification is then made from OCI to earnings in the same
revenue or expense category as the hedged transaction.
We use long-term cross-currency agreements to hedge a significant portion
of our net investments in WPD. These cross-currency agreements hedge our cash
exposure to fluctuations in the British Pound Sterling exchange rates with the
United States dollar. We also have investments in various emerging market
countries where the net investments are not hedged, including Jamaica, The
Netherlands Antilles, Trinidad and Tobago, the Bahamas, South Korea, the
Philippines and China. We rely on either contractual or regulatory links to the
United States dollar to mitigate currency risks attributable to these
investments. As a result of these links to the United States dollar, we do not
believe we have a material cash exposure to changes in exchange rates between
the United States dollar and the currencies of these countries.
We use currency spot and forward contracts to hedge payments denominated in
Canadian dollars related to our fixed-price service contract with Pan Alberta.
We also utilize currency swaps and forward agreements to hedge our forecasted
exposure to Canadian dollar-denominated transactions as part of our energy
marketing and risk management activities. The fair value of these contracts is
marked-to-market through earnings because they do not meet the criteria for
hedge accounting.
In addition, we have currency exposure which we are unable to hedge related
to our investment in CEMIG. Revenues at CEMIG and dividends from CEMIG are
denominated in Brazilian Reals and a significant portion of debt incurred to
finance CEMIG is required to be repaid in other currencies. CEMIG's agreements
with the Brazilian government provide for rate increases in the event of a
devaluation of the Real and indexes power purchases to the United States dollar.
These agreements provide us some protection against a devaluation of the Real;
however, they do not completely cover our exposure.
We utilize currency swaps and forward agreements to hedge United States
dollar-denominated debt issued by WPD. These swaps offset the dollar cash flows,
thereby effectively converting debt to the respective subsidiary's functional
currency. Gains and losses related to qualifying hedges of foreign currency firm
commitments are deferred and included in the basis of the underlying
transactions. To the extent that a qualifying hedge is terminated or ceases to
be effective as a hedge, any deferred gains and losses to that point continue to
be deferred and are included in the basis of the underlying transaction.
We measure currency earnings risk related to our international holdings
based on changes in foreign currency rates using a sensitivity analysis. The
sensitivity analysis measures the potential loss in earnings based on a
hypothetical 10% change in currency exchange rates. We used exchange rates and
currency positions as of December 31, 2001 to perform the sensitivity analysis.
Such analysis indicates that a hypothetical 10% change in foreign currency
exchange rates would have decreased net income by approximately $4 million had
the United States dollar exchange rate increased relative to the currencies with
which we had exposure.
For all derivative financial instruments, we are exposed to losses in the
event of nonperformance by counterparties to these derivative financial
instruments. We have established controls to determine and monitor the
creditworthiness of counterparties to mitigate our exposure to counterparty
credit risk, and we record credit reserves as appropriate.
50
Interest Rate and Currency Swaps
The interest rates noted in the following table represent the range of
fixed interest rates that we paid on the related interest rate swaps as of
December 31, 2001. On virtually all of these interest rate swaps, we received
floating interest rate payments at LIBOR. The currency derivatives mitigate our
exposure arising from certain foreign currency transactions.
Unrecognized (Loss)
Range of Number of Notional Gain at December
Type Terms of Instrument Interest Rates Counterparties Amount 31, 2001
(in millions)
------------------------ ---------------------- -------------------- -------------------- -----------------------------------
Interest rate swaps.... 2002-2012 3.85%-7.03% 5 $874 $ (44)
2002-2007 4.98%-5.79% 3 (euro)353 (8)
Cross currency swaps... 2002 -- 2 (pound)22 2
Currency forwards...... 2002-2004 -- 2 (1)CAD67 --
2002 -- 4 (pound)36 --
2002 -- 5 (euro)1,600 (10)
2002 -- 2 AUD32 --
----------
$ (60)
==========
(pound) - Denotes British pounds sterling
Euro - Denotes Eurodollar
CAD - Denotes Canadian dollar
AUD - Denotes Australian dollar
(1) - Contracts with a notional amount of CAD54M million are included in the
fair value of energy marketing and risk management liabilities because
hedge accounting criteria are not met.
The unrecognized gain/loss for interest rate swaps is determined based on
the estimated amount that we would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The
unrecognized gain/loss for cross-currency financial instruments is determined
based on current foreign exchange rates.
Critical Accounting Policies
The accounting policies described below are viewed by management as
"critical" because their correct application requires the use of material
estimates and have a material impact on our financial results and position. To
aid in our application of these critical accounting policies, management invests
substantial human and financial capital in the development and maintenance of
models and other forecasting tools and operates a robust environment of internal
controls surrounding these areas in particular. These tools, in part, facilitate
the measurement of less liquid financial instruments accounted for at fair value
and ensure that such measurements are applied consistently across periods. In
addition, separate tools enable management to forecast our global income tax
position to ensure that tax charges are appropriate in each period.
Revenue Recognition/Fair Value Accounting: We derive the substantial portion of
our revenues from sales of physical power in the wholesale electricity market as
well as from energy marketing and risk management activities. With respect to
physical power sales, we consider revenue earned upon output, delivery or
satisfaction of specific targets, all as specified by contractual terms.
Revenues under long-term power sales arrangements are recognized on an accrual
basis. In addition, we account for various transactions and activities at fair
value. The majority of these represent energy trading and marketing contracts
which are marked-to-market under EITF No. 98-10, "Accounting for Contracts
51
Involved in Energy Trading and Risk Management Activities" and derivatives which
are carried at fair value in accordance with SFAS No. 133. In addition, we
follow investment company accounting for our investments in oil and gas
producing properties which requires that those investments be carried at fair
value. For energy marketing and risk management activities, we follow either the
mark-to-market method of accounting as prescribed by EITF No. 98-10 or SFAS No.
133. Under the mark-to-market method of accounting, financial instruments and
contractual commitments are recorded at fair value upon contract execution. The
initial recognition of value as well as subsequent changes in value affect
reported earnings in the respective period. The values of those instruments that
remain open at the balance sheet date represent unrealized gains or losses and
are presented as energy marketing and risk management assets and liabilities in
the consolidated balance sheets.
SFAS No. 133 requires that derivative instruments be recorded in the
balance sheet at fair value as either assets or liabilities, and that changes in
fair value be recognized currently in earnings, unless specific hedge accounting
criteria are met. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized currently in earnings. If the derivative is
designated as a cash flow hedge, the changes in the fair value of the derivative
are recorded in OCI and the gains and losses related to these derivatives are
recognized in earnings in the same period as the settlement of the underlying
hedged transaction. Any ineffectiveness relating to these hedges is recognized
currently in earnings. The assets and liabilities related to derivative
instruments for which hedge accounting criteria are met are reflected as
derivative hedging instruments in the accompanying consolidated balance sheet at
December 31, 2001. Many of our power sales and fuel supply agreements that
otherwise would be required to follow derivative accounting qualify as normal
purchases and normal sales under SFAS No. 133 and are therefore exempt from fair
value accounting treatment.
The determination of fair value of energy marketing and risk management
contracts as well as derivatives can be complex and relies on judgements
concerning future prices and liquidity among other things. Generally speaking
the longer the term of the contract and the more operational constraints
involved, the more difficult it is to estimate accurate fair value. We recognize
reserves as appropriate to account for uncertainties in the modeling process
used to derive fair value.
We recognize our revenue and related expense from energy marketing and risk
management activities on a gross basis in accordance with EITF No. 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent." We believe this
treatment is proper given our role in the related transactions.
Income Taxes: SFAS No. 109, "Accounting for Income Taxes," requires the asset
and liability approach for financial accounting and reporting for deferred
income taxes. We use the asset and liability method of accounting for deferred
income taxes and provide deferred income taxes for all significant income tax
temporary differences (See Note 8 to the "Notes to Consolidated Financial
Statements" for additional details).
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as depreciation, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet.
We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. To the extent we establish a valuation allowance or
increase this allowance in a period, we must include an expense within the tax
provisions in the statement of income.
52
We have recorded on our consolidated balance sheet net deferred tax assets
of $657 million at December 31, 2001. These net deferred tax assets include
capital loss carryforwards in the amount of $128 million related to the disposal
of our Alicura and EDELNOR investments, and state operating loss carryforwards
in the amount of $33 million. We believe there will be sufficient capital gains
and taxable income in the future allowing us to utilize these loss carryforwards
in the tax jurisdictions where they exist.
We have also recorded deferred taxes on undistributed earnings of foreign
subsidiaries if those earnings are to be repatriated to the United States.
Deferred tax assets have been recorded for foreign tax credits that we expect to
utilize in the future as we generate taxable income from our foreign
subsidiaries. Deferred taxes have not been accrued if those earnings have been,
or are intended to be, indefinitely reinvested.
Off Balance Sheet Financing: We have three material off balance sheet financing
structures which utilize Special Purpose Entities ("SPEs"). Those structures
include our operating lease for the PEPCO generating assets as described in
Notes 11 and 12 to the "Notes to Consolidated Financial Statements" as well as
two equipment procurement facilities used to fund some of our vendor progress
payments for the manufacture of turbines for use in generating facilities. For a
more detailed discussion of these financings, see Note 11 to the "Notes to
Consolidated Financial Statements" included as part of this Form 10-K. Based on
existing accounting guidance, we believe that it is appropriate to keep our
obligations under these structures off of our consolidated balance sheet.
However, the FASB and others have initiated discussions to re-evaluate the
accounting for transactions involving SPEs. Key issues that are being addressed
include equity at risk requirements as well as the identification of the sponsor
or beneficiary of the SPE's activities. It is possible that any changes to the
existing requirements would not grandfather SPE transactions executed prior to
the effective date of the new guidance. It is therefore possible that these
obligations could be required to be recorded on our balance sheet. We do not
view this potential treatment as an adverse outcome as we have historically and
continue to fully disclose these arrangements. The potential treatment would
likely impact the pattern of expense recognition related to these obligations as
we would likely change from our current straight-line recognition of rental
expense to an annual recognition of the straight-line depreciation on the
financed assets as well as the interest component of the financings which is
weighted more heavily toward the early years of the obligations.
Goodwill, Intangibles and Other Long-lived Assets: We evaluate long-lived
assets, such as property, plant and equipment, equity method investments,
goodwill, and specifically identifiable intangibles, when events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. Factors we consider important, which could trigger an impairment
include, among others:
o Significant underperformance relative to historical or projected future
operating results;
o Significant changes in the manner of our use of the acquired assets or the
strategy for our overall business;
o Significant negative industry or economic trends; and o Significant
declines in stock value for a sustained period.
The determination of whether an impairment has occurred is based on an
estimate of undiscounted cash flows attributable to the assets, as compared to
the carrying value of the assets. If an impairment has occurred, the amount of
the impairment loss recognized would be determined by estimating the fair value
of the assets and recording a loss if the fair value was less than the book
value. For equity method investments and assets identified as held for sale, the
book value is compared to the estimated fair value to determine if an impairment
loss is required. For equity method investments, we would record a loss when the
decline in value is other than temporary.
Our assessment regarding the existence of impairment factors is based on
market conditions, operational performance and legal factors of our businesses.
Our review of factors present and the resulting appropriate carrying value of
our goodwill, intangibles, and other long-lived assets are subject to judgments
53
and estimates that management is required to make. Future events could cause us
to conclude that impairment indicators exist and that our goodwill, intangibles,
and other long-lived assets might be impaired.
Capitalization Policies: Our investment in Property, Plant and Equipment
("PP&E") is stated at original cost at the time of construction, purchase, or
acquisition. Original costs include such things as materials, labor, interest
and other appropriately allocated costs. As costs are expended for new
construction, the entire amount is capitalized as PP&E on our balance sheet and
is subject to depreciation upon completion of construction. The cost of routine
maintenance and repairs, such as inspections and corrosion removal, and the
replacement of minor items of property, as defined in our policy, are charged to
expense as incurred. Certain expenditures incurred during a major maintenance
outage are capitalized, including the replacement of major component parts and
labor and overheads incurred to install the parts.
We capitalize interest on projects during the advanced stages of
development and the construction period, in accordance with SFAS No. 34,
"Capitalization of Interest Cost", as amended by SFAS No. 58, "Capitalization of
Interest Cost in Financial Statements That Include Investments Accounted for by
the Equity Method." We determine which debt instruments represent a reasonable
measure of the cost of financing construction assets in terms of interest cost
incurred that otherwise could have been avoided. These debt instruments and
associated interest cost are included in the calculation of the weighted average
interest rate used for determining the capitalization rate. Upon commencement of
commercial operations of the plant or project, capitalized interest, as a
component of the total cost of the plant, is amortized over the estimated useful
life of the plant.
Other costs capitalized on our balance sheet include business development
costs (external, direct and incremental costs necessary to bring a potential
acquisition or construction project to completion). Business development costs
are only capitalized when there is reason to believe that the costs are probable
of recovery and that efforts will result in future value to the company. The
appropriateness of the carrying value of these costs is evaluated each reporting
period; unrecoverable amounts of capitalized costs for projects no longer
probable are charged to expense currently.
Reference is made to Note 1 to the "Notes to Consolidated Financial
Statements" for additional information on other accounting policies and new
accounting pronouncements.
Special Note Regarding Forward-Looking Statements
Special note regarding forward-looking statements: The information
presented in this Form 10-K includes forward-looking statements, in addition to
historical information. These statements involve known and unknown risks and
relate to future events, Mirant's future financial performance or projected
business results. In some cases, forward-looking statements by terminology may
be identified by statements such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "targets," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors, which include: (1) legislative and regulatory initiatives regarding
deregulation, regulation or restructuring of the electric utility industry; (2)
the extent and timing of the entry of additional competition in the markets of
our subsidiaries and affiliates; (3) our pursuit of potential business
strategies, including acquisitions or dispositions of assets or internal
restructuring; (4) state, federal and other rate regulations in the United
States and in foreign countries in which our subsidiaries and affiliates
operate; (5) changes in or application of environmental and other laws and
regulations to which we and our subsidiaries and affiliates are subject; (6)
political, legal and economic conditions and developments in the United States
and in foreign countries in which our subsidiaries and affiliates operate; (7)
financial market conditions and the results of our financing efforts; (8)
changes in market conditions, including developments in energy and commodity
supply, volume and pricing and interest rates; (9) weather and other natural
54
phenomena; (10) performance of our projects undertaken and the success of our
efforts to invest in and develop new opportunities; (11) developments in the
California power markets, including, but not limited to, governmental
intervention, deterioration in the financial condition of our counterparties,
default on receivables due and adverse results in current or future litigation;
(12) the direct or indirect effects on our business, including the availability
of insurance, resulting from the terrorist actions on September 11, 2001 or any
other terrorist actions or responses to such actions, including, but not limited
to, acts of war; (13) the direct or indirect effects on our business resulting
from the financial difficulties of Enron, or other competitors of Mirant,
including, but not limited to, their effects on liquidity in the trading and
power industry, and its effects on the capital markets views of the energy or
trading industry and our ability to access the capital markets on the same
favorable terms as in the past; (14) the direct or indirect effects on our
business of a lowering of our credit rating (or actions we may take in response
to changing credit ratings criteria), including, increased collateral
requirements to execute our business plan, demands for increased collateral by
our current counterparties, refusal by our current or potential counterparties
to enter into transactions with us and our inability to obtain credit or capital
in amounts or on terms favorable to us; and (15) other factors discussed in this
Form 10-K and in other reports filed from time to time with the SEC.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We expressly disclaim a duty to update
any of the forward-looking statements contained herein.
Additional Factors that Could Affect Future Performance
In addition to the discussion of certain risks in Management's Discussion
and Analysis of Financial Condition and Results of Operations and the notes to
Mirant's consolidated financial statements, other factors that could affect the
Company's future performance (business, financial condition or results of
operations) are set forth below.
Changes in commodity prices may impact financial results, either favorably
or unfavorably.
Mirant's generation and distribution businesses are subject to changes in
power prices and fuel costs which may impact their financial results and
financial position by increasing the cost of producing power and decreasing the
amounts they receive from the sale of power. In addition, actual power prices
and fuel costs may differ from those assumed in Mirant's financial models.
Many factors influence the level of commodity prices, including weather,
illiquid markets, transmission or transportation inefficiencies, availability of
competitively priced alternative energy sources, demand for energy commodities,
natural gas, crude oil and coal production, natural disasters, wars, embargoes
and other catastrophic events, and federal, state and foreign energy and
environmental regulation and legislation.
Additionally, Mirant may, at times, have an open position in the market,
within established guidelines, resulting from the management of its portfolio.
To the extent open positions exist, fluctuating commodity prices can impact
financial results and financial position, either favorably or unfavorably.
Furthermore, the risk management procedures Mirant has in place may not always
be followed or may not always work as planned. As a result of these and other
factors, Mirant cannot predict with precision the impact that its risk
management decisions may have on its businesses, operating results or financial
position. Although Mirant devotes a considerable amount of management efforts to
these issues, their outcome is uncertain.
Mirant's profitability may decline if its hedging strategies do not work as
planned or if it is not able to execute its hedging strategy.
To lower Mirant's financial exposure related to commodity price
fluctuations, Mirant's energy marketing and risk management operations routinely
55
enter into contracts to hedge purchase and sale commitments, weather conditions,
fuel requirements and inventories of natural gas, coal, electricity, crude oil
and other commodities. As part of this strategy, Mirant routinely utilizes
fixed-price forward physical purchase and sales contracts, futures, financial
swaps and option contracts traded in the over-the-counter markets or on
exchanges. However, Mirant does not expect to cover the entire exposure from
market price volatility of its assets and the coverage will vary over time. In
addition, as a result of marketplace illiquidity and other factors, Mirant's
energy marketing and risk management operations may, at times, be unable to
fully hedge our portfolios for market risks. Failure to hedge against changes in
commodity prices may cause Mirant's profitability to decline.
Mirant's projects located outside of the United States expose it to risks
related to laws of other countries, taxes, economic conditions, fluctuations
in currency rates, labor supply and relations, political conditions and
policies of foreign governments. These risks may delay or reduce Mirant's
realization of value from its international projects.
Mirant has substantial operations outside the United States. In 2001,
Mirant derived approximately 47.6% of its net income from foreign operations.
The acquisition, financing, development and operation of projects outside the
United States entail significant political and financial risks, which vary by
country, including:
o changes in laws or regulations,
o changes in foreign tax laws and regulations, including unexpected tax
liabilities,
o changes in United States laws, including tax laws, related to foreign
operations,
o compliance with United States foreign corrupt practices laws,
o changes in government policies or personnel,
o changes in general economic conditions affecting each country,
o difficulty in converting earnings to United States dollars or moving funds
out of the country in which the funds were earned,
o fluctuations in currency exchange rates,
o changes in labor relations in operations outside the United States,
o political instability and civil unrest, and
o expropriation and confiscation of assets and facilities.
Despite contractual protections Mirant has against many of these risks for
its operations in the Philippines, China and some other countries in which
Mirant operates or may invest in the future, Mirant's actual results may be
affected by the occurrence of any of these events.
Risk from fluctuations in currency exchange rates can arise when Mirant's
foreign subsidiaries borrow funds in one type of currency but receive revenue in
another. In such cases, an adverse change in exchange rates can reduce Mirant's
ability to meet debt service obligations. Foreign currency risk can also arise
when the revenues received by Mirant's foreign subsidiaries are not in United
States dollars. In such cases, a strengthening of the United States dollar could
reduce the amount of cash and income it receives from these foreign
subsidiaries.
While Mirant believes it has hedges and contracts in place to mitigate its
most significant foreign currency exchange risks, it has some exposure that is
not hedged. For example, while Mirant uses long-term cross-currency agreements
to hedge a significant portion of its net investment in WPD, it has a portion
that is not hedged. Mirant also has currency risks with its investment in CEMIG
in Brazil. Mirant believes that these risks are material but it has decided not
to hedge them due to the high cost and the uncertain effectiveness of
implementing such a hedge.
Mirant's international operations are subject to regulation by various
foreign governments and regulatory authorities. The laws and regulations of
some countries may limit Mirant's ability to hold a majority interest in
some of the projects that it may develop or acquire, thus limiting its
56
ability to control the development, construction and operation of those
projects. In addition, the legal environment in foreign countries in which
Mirant currently owns assets or projects or may develop projects in the
future could make it more difficult for it to enforce its rights under
agreements relating to such projects.
Mirant's international projects may also be subject to risks of being
delayed, suspended or terminated by the applicable foreign governments or may be
subject to risks of contract invalidation by commercial or governmental
entities. For example, the Philippines electricity reform laws and implementing
regulations are intended to break-up and privatize most of the Philippines NPC,
Mirant's main customer. Mirant does not believe that these regulations will have
a material adverse effect on its operations in the Philippines, but it cannot
provide assurance that this will be the case.
Some of Mirant's facilities depend on only one or a few customers or
suppliers. These parties, as well as other parties with whom Mirant has
contracts, may fail to perform their obligations, or may terminate their
existing agreements, which may result in a default on project debt or loss
in revenues and may require Mirant to institute legal proceedings to enforce
its agreements.
Several of Mirant's power production facilities rely on a single customer
or a few customers to purchase most or all of the facility's output or on a
single supplier or a few suppliers to provide fuel, water and other services
required for the operation of the facility. Mirant's sale and procurement
agreements for these facilities may also provide support for any project debt
used to finance the related facilities. The financial performance of these
facilities is dependent on the continued performance by customers and suppliers
of their obligations under their long-term agreements.
In addition, Mirant's energy marketing and risk management operations are
exposed to the risk that counterparties which owe it money or energy as a result
of market transactions will not perform their obligations. Mirant is currently
owed significant past due revenues from the PX and CAISO as a result of the
failure of Pacific Gas and Electric and SCE to perform their obligations to the
PX and CAISO. Mirant has had to take legal action against some counterparties in
the past because of their failure to perform, and one counterparty filed for
bankruptcy protection as a result.
Finally, revenue under some of our power sales agreements may be reduced
significantly upon their expiration or termination. Much of the electricity we
generate from our existing portfolio is sold under long-term power sales
agreements that expire at various times. When the terms of each of these power
sales agreements expire, it is possible that the price paid to us for the
generation of electricity may be reduced significantly, which would
substantially reduce our revenue under such agreements.
Failures of companies within our sector could have a materially adverse
effect on us.
The failure of companies within our sector could have a materially negative
effect on our business. Adverse effects could include increased negative
sentiment and reactions from our customers, investors, lenders or credit rating
agencies, increased requirements for collateral in the transaction of our
businesses, increased pressure on our liquidity and reduced or no access to
additional capital. These reactions, and others, could impair our ability to
achieve our business plan.
Our credit ratings have been reduced by Moody's; this and any other
reductions in ratings could materially adversely affect our financial
condition.
On December 19, 2001, Moody's lowered its rating on our senior unsecured
debt from Baa2 (investment grade) to Ba1 (non-investment grade). Moody's also
lowered its rating on the following of our subsidiaries or subsidiary issues:
Mirant Americas Energy Marketing, Mirant Trust I and Mirant Americas Generation.
S&P has assigned a rating to our senior unsecured debt of "BBB-", and Fitch has
assigned a rating to our senior unsecured debt of "BBB" with a negative watch.
57
While the foregoing indicates the ratings from the various rating agencies, we
note that these ratings are not a recommendation to buy, sell or hold our
securities and that each rating should be evaluated independently of any other
rating. There can be no assurance that a rating will remain in effect for any
given period of time or that a rating will not be lowered or withdrawn entirely
by a rating agency if, in its judgment, circumstances in the future so warrant.
The downgrade by Moody's increased requirements for collateral in the
transaction of our businesses, increased pressure on our liquidity and reduced
our ability to raise capital. A reduction of our credit rating by the other
credit rating agencies could have a material adverse effect on our financial
condition. Adverse effects of further ratings reductions could include increased
negative sentiment and reactions from our customers, investors, lenders or other
credit rating agencies, increased requirements for collateral in the transaction
of our businesses, increased pressure on our liquidity and reduced or no access
to additional capital. These reactions, and others, could impair our ability to
achieve our business plan.
Due to current market conditions and our current subinvestment grade rating
by Moody's, we may be unable to obtain the financing we need to pursue our
business plan, and any future financing or refinancing received may be less
favorable than our current arrangements.
Each of our projects under development and those projects and businesses we
may seek to acquire or construct will require capital investment. In addition,
we have existing indebtedness that will need to be refinanced as it comes due.
Our attempts to consummate future financing transactions may not be successful
or may require us to agree to more restrictive covenants and default provisions,
increased financing costs and lower leverage.
We have generally been able to arrange for a majority of the financing of
each project or business on a basis that is substantially non-recourse to us. We
may attempt to continue this practice where and when we determine it to be in
our best interest, but we cannot provide assurance that market conditions and
other factors will permit future project and acquisition financings on terms
similar to those our subsidiaries have previously received. If we are not able
to obtain additional debt on acceptable terms, it could have a material adverse
effect on our business plan and may require us to issue additional equity. Any
future equity financings could be dilutive to existing holders of our common
stock and could have a material adverse effect on the market price of our common
stock.
Our activities are restricted by substantial indebtedness. This
indebtedness may be accelerated if we are unable to service it.
Acceleration of some of our debt may cause other lenders to accelerate
other debt obligations.
We have incurred substantial indebtedness on a consolidated basis to
finance our business. As of December 31, 2001, our total consolidated
indebtedness was $8.48 billion (approximately, $2.55 billion of which was
recourse to Mirant Corporation), our total consolidated assets were $22.75
billion and our stockholders' equity was $5.50 billion. Our ability to meet our
debt service obligations and to repay our outstanding indebtedness will depend
primarily upon cash flow produced by our business. Our level of indebtedness has
important consequences, including:
o limiting our ability to refinance existing indebtedness as it comes due and
to borrow additional amounts for working capital, capital expenditures,
debt service requirements, execution of our business plan or other
purposes,
o limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
service our debt,
o increasing our vulnerability to general adverse economic and industry
conditions, and
o limiting our ability to capitalize on business opportunities and to react
to competitive pressures and adverse changes in government regulation.
58
In addition, some of our existing debt agreements contain restrictive
covenants which, among other things, can limit or prohibit our ability of to:
o incur indebtedness,
o make prepayments of indebtedness in whole or in part,
o pay dividends,
o make investments,
o engage in transactions with affiliates,
o create liens,
o sell assets, and
o acquire facilities or other businesses.
If Mirant or a subsidiary is unable to comply with the terms of its debt
agreements, the relevant debt holders may accelerate the maturity of the
obligations of such borrower. Although a default or acceleration of debt at the
subsidiary level would not trigger a cross-default under Mirant Corporation's
credit arrangements, a default or acceleration of debt of Mirant or a subsidiary
could cause cross-defaults or cross-accelerations under the obligations of such
borrower and, in certain instances, the obligations of other Mirant
subsidiaries. In such event, and because of our substantial indebtedness, Mirant
may be unable to refinance such indebtedness and the respective borrower may be
unable to repay such debt.
Our costs of compliance with environmental laws are significant and the
cost of compliance with new environmental laws could adversely affect our
profitability.
Our operations are subject to extensive federal, state, local and foreign
statutes, rules and regulations relating to environmental protection. To comply
with these legal requirements, we must spend significant sums on environmental
monitoring, pollution control equipment and emission fees. We may be exposed to
compliance risks from new projects, as well as from plants we have acquired.
Our failure to comply with environmental laws may result in the assessment
of penalties and fines against us by regulatory authorities. With the trend
toward stricter standards, greater regulation, more extensive permitting
requirements and an increase in the number and types of assets operated by us
subject to environmental regulation, we expect our environmental expenditures to
be substantial in the future. As is true in many countries of the world, the
governments of the United States, China, the Philippines, various European
nations and Trinidad and Tobago have proposed increased environmental regulation
of many industrial activities, including increased regulation of air quality,
water quality and solid waste management. For example, the United States EPA has
promulgated more stringent air quality standards for particulate matter emitted
from power plants. The scope and extent of new environmental regulations,
including their effect on our operations, is unclear.
Unless our contracts with customers expressly permit us to pass through
increased costs attributable to new statutes, rules and regulations, we may not
be able to recover capital costs of complying with new environmental
regulations, which may adversely affect our profitability. Most of our contracts
with customers do not permit us to recover capital costs incurred to comply with
new environmental regulations.
Our business in the United States is subject to complex government
regulations and changes in these regulations or in their implementation may
affect the costs of operating our facilities or our ability to operate our
facilities, which may negatively impact our results of operations.
The majority of our generation operations in the United States are exempt
wholesale generators that sell electricity exclusively into the wholesale
market. Generally, our exempt wholesale generators are subject to regulation by
the FERC regarding rate matters and state public utility commissions regarding
59
non-rate matters. The majority of our generation from exempt wholesale
generators is sold at market prices under market rate authority exercised by the
FERC, although the FERC has the authority to impose "cost of service" rate
regulation or other market power mitigation measures if it determines that
market pricing is not in the public interest. A loss of our market-based rate
authority would prohibit electricity sales at market rates and would require all
sales to be cost-based. A loss of our market-based rate authority could severely
impair our execution of our business plan and could have a materially negative
impact on our business.
To conduct our business, we must obtain licenses, permits and approvals for
our plants. We cannot provide assurance that we will be able to obtain and
comply with all necessary licenses, permits and approvals for our plants. If we
cannot comply with all applicable regulations, our business, results of
operations and financial condition could be adversely affected.
The United States Congress is considering legislation that would repeal
PURPA entirely, or at least eliminate the future obligation of utilities to
purchase power from qualifying facilities, and also repeal PUHCA. In the event
of a PUHCA repeal, competition from independent power generators and from
utilities with generation, transmission and distribution would likely increase.
Repeal of PURPA or PUHCA may or may not be part of comprehensive
legislation to restructure the electric utility industry, allow retail
competition and deregulate most electric rates. We cannot predict the effect of
this type of legislation, although we anticipate that any legislation would
result in increased competition. If we were unable to compete in an increasingly
competitive environment, our business and results of operation may suffer.
We cannot predict whether the federal government, state legislatures or
foreign governments will adopt legislation relating to the deregulation of the
energy industry. We cannot provide assurance that the introduction of new laws
or other future regulatory developments will not have a material adverse effect
on our business, results of operations or financial condition.
Our facilities may not operate as planned, which may lead to poor
financial performance and the acceleration of the affected project debt.
Our operation of power plants involves many risks, including the breakdown
or failure of generation equipment or other equipment or processes, labor
disputes, fuel interruption and operating performance below expected levels. In
addition, weather related incidents and other natural disasters can disrupt both
generation and transmission delivery systems. Operation of our power plants
below expected capacity levels may result in lost revenues or increased
expenses, including higher maintenance costs and penalties. In addition, we may
not be able to repay the project debt for an under-performing facility, which
could trigger default provisions in a project subsidiary's or project
affiliate's financing agreements and might allow the affected lenders to
accelerate that debt.
Our operations depend substantially on the performance of our subsidiaries
and affiliates, some of which we do not control and some of which are
subject to restrictions and taxation on dividends and distributions.
Almost all of our operations are conducted through our subsidiaries and
affiliates. As a result, we depend almost entirely upon their earnings and
cash flow.
Six of our major affiliates, listed below, are not subject to our control
of management and policies to the same extent as our consolidated subsidiaries:
o Birchwood, which owns the Birchwood power plant in Fredericksburg,
Virginia,
o WPD which distributes power in southwest England and South Wales,
o Shajiao C, which owns the Shajiao C plant in China,
o CEMIG in Brazil,
60
o PowerGen of Trinidad and Tobago, and
o SIPD in China.
However, we do exercise significant influence over the operations of these
affiliates, and we account for these investments using the equity method of
accounting. These affiliates contributed approximately 43.6% of our income from
continuing operations in 2001.
The debt agreements of some of our subsidiaries and affiliates restrict
their ability to pay dividends, make distributions or otherwise transfer funds
to us prior to the payment of other obligations, including operating expenses,
debt service and reserves. Further, if we elect to receive distributions of
earnings from our foreign operations, we may incur United States taxes, net of
any available foreign tax credits, on such amounts. Dividend payments from our
international projects to us are, in some countries, also subject to withholding
taxes.
Our business development activities may not be successful and, as such,
projects may be cancelled or otherwise may not commence operation as
scheduled despite the expenditure of significant amounts of capital.
Our business involves numerous risks relating to the acquisition,
development and construction of large power plants. Our success in developing a
particular project may be contingent upon, among other things, negotiation of
satisfactory engineering, construction, fuel supply and power sales contracts,
receipt of required governmental permits and timely implementation and
satisfactory completion of construction. We may be unsuccessful in accomplishing
any of these matters or in doing so on a timely basis. Although we may attempt
to minimize the financial risks in the development of a project by securing a
favorable power sales agreement, obtaining all required governmental permits and
approvals and arranging adequate financing prior to the commencement of
construction, the development of a power project may require us to expend
significant sums for preliminary engineering, permitting, legal, equipment
fabrication and other expenses before we can determine whether a project is
feasible, economically attractive or capable of being financed.
Currently, we have power plants under development or construction and we
intend to pursue the expansion of existing plants and the development of other
new plants. Our completion of these facilities without delays or cost overruns
is subject to substantial risks, including changes in market prices; shortages
and inconsistent qualities of equipment, material and labor; work stoppages;
permitting and other regulatory matters; adverse weather conditions; unforeseen
engineering problems; environmental and geological conditions; unanticipated
cost increases; and our attention to other projects, any of which could give
rise to delays, cost overruns or the termination of the plant expansion,
construction or development.
If we were unable to complete the development of a facility, we would
generally not be able to recover our investment in the project. The process for
obtaining initial environmental, siting and other governmental permits and
approvals is complicated, expensive and lengthy, often taking more than one
year, and is subject to significant uncertainties. In addition, construction
delays and contractor performance shortfalls can result in the loss of revenues
and may, in turn, adversely affect our results of operations. The failure to
complete construction according to specifications can result in liabilities,
reduced plant efficiency, higher operating costs and reduced earnings.
Mirant is currently under audit by the IRS for the tax years 1996-1999.
The IRS has completed its audit of Mirant for all tax years through 1995.
For years subsequent to 1995, the IRS may raise issues that may have a material
effect on Mirant's cash flows and net income. However, Mirant believes that it
has substantial authority for the positions it has taken.
61
Our historical financial results from when we were a subsidiary of Southern
may not be representative of our results as a separate company.
The historical financial information included in this Form 10-K does not
necessarily reflect what our financial position, results of operations and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented. Our costs and expenses reflect charges from Southern for
centralized corporate services and infrastructure costs, including engineering,
legal, accounting, information technology, investor relations and stockholder
services, insurance and risk management, tax, environmental, human resources and
payroll and external affairs, including marketing and public relations.
These allocations have been determined based on regulatory limitations and
other bases that we and Southern considered to be reasonable reflections of the
utilization of services provided to us for the benefits received by it. This
historical financial information is not necessarily indicative of what our
results of operations, financial position and cash flows will be in the future.
We experienced significant changes in our cost structure, funding and operations
as a result of our separation from Southern, including increased marketing
expenses related to building a company brand identity separate from Southern and
increased costs associated with being a publicly traded, stand-alone company.
Terrorist attacks, such as the attacks that occurred in New York,
Pennsylvania and Washington, D.C. on September 11, 2001, and future war or
risk of war may adversely impact our results of operations, our ability to
raise capital or our future growth.
The impact that the terrorist attacks of September 11, 2001 may have on our
industry in general, and on us in particular, is not known at this time.
Uncertainty surrounding retaliatory military strikes or a sustained military
campaign may impact our operations in unpredictable ways, including changes in
insurance markets, disruptions of fuel supplies and markets, particularly oil,
and the possibility that infrastructure facilities, including electric
generation, transmission and distribution facilities, could be direct targets
of, or indirect casualties of, an act of terror. War or risk of war may also
have an adverse effect on the economy. The terrorist attacks on September 11,
2001 and the changes in the insurance markets attributable to the terrorist
attacks have made it difficult for us to obtain certain types of insurance
coverage. We may be unable to secure the levels and types of insurance we would
otherwise have secured prior to September 11, 2001. There can be no assurance
that insurance will be available to us without significant additional costs. A
lower level of economic activity could also result in a decline in energy
consumption, which could adversely affect our revenues or restrict our future
growth. Instability in the financial markets as a result of terrorism or war
could also affect our ability to raise capital.
Capital market conditions may adversely affect growth prospects.
Current conditions in the capital markets have resulted in the need for
additional liquidity. Continuation of these conditions could adversely affect
our results of operations and growth prospects. To respond to these conditions,
we have taken steps, including issuing an additional 60,000,000 shares of our
common stock to raise additional equity of $759 million, reducing our planned
capital expenditures by deferring or canceling certain construction and
acquisition projects through 2003, reducing corporate overhead expenses and
undertaking the sale of generation assets. There can be no assurance that
conditions in the energy equity markets will not continue to adversely affect
our ability to efficiently conduct our marketing operations and affect our
results of operations.
Item 8. Financial Statements and Supplementary Data
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.
62
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 of Form 10-K relating to directors who
are nominees for election as directors at Mirant's Annual Meeting of
Shareholders to be held on April 25, 2002 is set forth in Mirant's Proxy
Statement and is incorporated herein by reference.
Item 11. Executive Compensation
The information regarding executive compensation is set forth in Mirant's
Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information regarding executive compensation is set forth in Mirant's
Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information regarding executive compensation is set forth in Mirant's
Proxy Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement schedules and Reports on Form 8-K
(a) (1) and (2) Statements and Financial Statement schedules. See "Index to
Financial Statements" set forth on page F-1.
(a) (3) Exhibit Index
Exhibit No. Exhibit Name
----------- -----------------------------------------------------------------------------------------------------------------
1.1* Underwriting Agreement dated December 20, 2001, by and between the Registrant and Credit
Suisse First Boston Corporation.
3.1* Restated Certificate of Incorporation (Designated on Form S-1 in Registration No.
333-35390 as Exhibit 3.1)
3.2* Bylaws of the Company (Designated on Form S-1in Registration No. 333-35390 as Exhibit
3.2)
4.1* Specimen Stock Certificate (Designated on Form S-1 in Registration No. 333-35390 as
Exhibit 4.1)
4.2* Certificate of Trust (Designated on Form S-1 in Registration No. 333-41680 as Exhibit
4.2)
4.3* Trust Agreement (Designated on Form S-1 in Registration No. 333-41680 as Exhibit 4.3)
4.4* Certificate of Designation of Series A Preferred Stock (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 4.11)
4.5* Certificate of Designation of Series B Preferred Stock (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 4.12)
63
4.6* Rights Agreement between Southern Energy, Inc. (now Mirant Corporation) and
ChaseMellon Shareholder Services, L.L.C. (Designated on Form S-1 in Registration No.
333-35390 as Exhibit 4.13)
10.1* Form of Master Separation and Distribution Agreement (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 10.1)
10.2* Form of Transitional Services Agreement (Designated on Form S-1in Registration No.
333-35390 as Exhibit 10.2)
10.3* Form of Indemnification and Insurance Matters Agreement (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 10.3)
10.4* Form of Technology and Intellectual Property Ownership and Licenses Agreement
(Designated on Form S-1 in Registration No. 333-35390)
10.5* Form of Confidential Disclosure Agreement (Designated on Form S-1 in Registration No.
333-35390 as Exhibit 10.5)
10.6* Form of Employee Matters Agreement (Designated on Form S-1 in Registration No. 333-35390
as Exhibit 10.6)
10.7* Form of Amendment Number One to the Employee Matters Agreement(Designated on Form 10-K filed on
March 21 , 2001 as Exhibit 10.7)
10.8* Form of Tax Indemnification Agreement (Designated on Form S-1 in Registration No.
333-35390 as Exhibit 10.7)
10.9* Form of Registration Rights Agreement (Designated on Form S-1 in Registration No.
333-35390 as Exhibit 10.8)
10.10 Form of Mirant Corporation Employee Stock Purchase Plan
10.11* Deferred Compensation Agreement with S. Marce Fuller (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 10.11)
10.12* Deferred Compensation Agreement with Raymond D. Hill (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 10.12)
10.13* Deferred Compensation Agreement with Richard J. Pershing (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 10.13)
10.14* Amended and Restated Employment Retention Agreement with Frederick D. Kuester
(Designated on Form S-1 in Registration No. 333-35390 as Exhibit 10.14)
10.16* Formation Agreement by and between SEI Holdings, Inc. and Vastar Resources, Inc. dated
August 8, 1997 (Designated on Form S-1 in Registration No. 333-35390 as Exhibit 10.17)
10.17* Energy Conversion Agreement for a Coal Fired Thermal Power Station at Sual Pangasinan,
Philippines between National Power Corporation and CEPA Pangasinan Electric Limited
dated May 20, 1994 (Designated on Form S-1 in Registration No. 333-35390 as Exhibit
10.18)
10.18* Build, Operate and Transfer Project Agreement for a Gas
Turbine Power Station in Navotas, Manila between National
Power Corporation and Hopewell Project Management Company
Limited dated 16th November, 1988 (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 10.19)
10.19* Navotas II, Build, Operate and Transfer Project Agreement for a Gas Turbine Power
Station in Navotas, Manila between National Power Corporation and Hopewell Energy
International Limited, dated 29 June, 1992 (Designated on Form S-1 in Registration No.
333-35390 as Exhibit 10.20)
10.20* Energy Conversion Agreement for a Coal Fired Thermal Power
Station at Barangay Ibabang Pulo, Pagbilao, Quezon,
Philippines between National Power Corporation and Hopewell
Energy International Limited, dated 9th November, 1991
(Designated on Form S-1 in Registration No. 333-35390 as
Exhibit 10.21)
10.21* Amendment Agreement, dated the 30th day of March 1993, to an Energy Conversion Agreement
between Hopewell Energy International Limited, National Power Corporation and Hopewell
Power (Philippines) Corp. dated 9th November 1991 (Designated on Form S-1 in
Registration No. 333-35390 as Exhibit 10.22)
64
10.22* Asset Purchase and Sale Agreement for Generating Plants and Related Assets by and
between Potomac Electric Power Company and Southern Energy, Inc., dated June 7, 2000,
and exhibit thereto (Designated on Form S-1 in Registration No. 333-35390 as Exhibit
10.23)
10.23 Form of Mirant Services Employee Savings Plan
10.24 Form of Mirant Services Bargaining Unit Employee Savings Plan
10.25* Amendment to Change in Control Agreement with S. Marce Fuller (Designated as Exhibit
10.25 on Form 8-K filed November 29, 2001).
10.26* Amendment to Change in Control Agreement with Raymond D. Hill (Designated as Exhibit
10.26 on Form 8-K filed November 29, 2001).
10.27* Amendment to Change in Control Agreement with Richard J Pershing (Designated as Exhibit
10.27 on Form 8-K filed November 29, 2001).
10.28* Change in Control Agreements with Douglas L. Miller (Designated as Exhibit 10.28 on Form
8-K filed November 29, 2001).
10.29 Form of Amended and Restated Mirant Corporation Omnibus Incentive Compensation Plan
10.31 Form of Amended and Restated Mirant Services Supplemtal Executive Retirement Plan
10.32 Form of Mirant Corporation Change in Control Benefit Plan Determination Policy
10.33* Change in Control Agreement with Vance N. Booker (Designated as Exhibit 10.33 on Form
8-K filed November 29, 2001).
10.34* Change in Control Agreement with James Ward (Designated as Exhibit 10.34 on Form 8-K
filed November 29, 2001).
10.35* Amended and Restated Change in Control Agreement with Frederick D. Kuester (Designated
as Exhibit 10.35 on Form 8-K filed November 29, 2001).
10.39* Bewag Share Purchase Agreement (Designated as Exhibit 10.39 on Form 8-K filed December
21, 2001)
10.40 Employment Retention Agreement with Roy P. McAllister
10.41 Change in Control Agreement with Roy P. McAllister
10.42 Change in Control Agreement with S. Marce Fuller
10.43 Change in Control Agreement with Raymond Hill
10.44 Change in Control Agreement with Richard J. Pershing
10.45 Amendment to Change in Control Agreement with Douglas L. Miller
10.46 Amendment to Change in Control Agreement with James A. Ward
10.47 Amendment to Change in Control Agreement with Vance N. Booker
10.48 Form of First Amendment to the Mirant Services Bargaining Unit Employee Savings Plan
10.49 Form of Second Amendment to the Mirant Services Bargaining Unit Employee Savings Plan
10.50 Form of Third Amendment to the Mirant Services Bargaining Unit Employee Savings Plan
10.51 First Amendment to the Mirant Services Employee Savings Plan
10.52 Form of Second Amendment to the Mirant Services Employee Savings Plan
10.53 Form of Third Amendment to the Mirant Services Employee Savings Plan
10.54 Form of Fourth Amendment to the Mirant Services Employee Savings Plan
10.55 Form of Amended and Restated Mirant Corporation Deferred Compensation Plan for Directors
and Select Employees
10.56 First Amendment to Mirant Corporation Deferred Compensation Plan for Directors and
Select Employees
10.57 Form of Mirant Services Supplemental Benefit Plan
10.58 First Amendment to the Mirant Services Supplement Benefit Plan
10.59 Form of Mirant Services Supplemental Compensation Plan
10.60 First Amendment to the Mirant Services Supplemental Compensation Plan
10.61 Form of First Amendment to the Amended and Restated Mirant Services Supplemental Executive Retirement Plan
10.62 Form of Second Amendment to the Amended and Restated Mirant Services Supplemental Executive Retirement Plan
10.63 Employment Agreement with Douglas L Miller
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney
* Asterisk indicates exhibits incorporated by reference.
65
(b) Reports on Form 8-K
During the quarter ended December 31, 2001, we filed a Current Report on
Form 8-K dated October 3, 2001. Item 5 was reported and no financial statements
were filed.
During the quarter ended December 31, 2001, we filed a Current Report on
Form 8-K dated October 29, 2001. Items 5 and 7 were reported and financial
statements were filed.
During the quarter ended December 31, 2001, we filed a Current Report on
Form 8-K dated December 5, 2001. Item 9 was reported and no financial statements
were filed.
During the quarter ended December 31, 2001, we filed a Current Report on
Form 8-K dated December 21, 2001. Item 5 was reported and no financial
statements were filed.
66
INDEX TO FINANCIAL STATEMENTS
MIRANT CORPORATION AND SUBSIDIARIES
Page
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.............. F-3
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999........................................ F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999............................ F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999........................................ F-7
Notes to Consolidated Financial Statements................................ F-8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Mirant Corporation:
We have audited the accompanying consolidated balance sheets of MIRANT
CORPORATION (a Delaware corporation) AND SUBSIDIARIES (formerly Southern Energy,
Inc.) as of December 31, 2001 and 2000, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mirant Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 1 to the financial statements, effective January 1,
2001, Mirant Corporation and subsidiaries changed their method of accounting for
derivative and hedging instruments.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 22, 2002
F-2
MIRANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In Millions)
ASSETS: 2001 2000
------------------ ---------------------
Current Assets:
Cash and cash equivalents $ 836 $ 1,049
Receivables:
Customer accounts, less provision for uncollectibles
of $159 and $72 for 2001 and 2000, respectively 2,136 3,399
Other, less provision for uncollectibles
of $32 and $22 for 2001 and 2000, respectively 858 629
Notes receivable 24 219
Energy marketing and risk management assets (Note 9) 1,458 2,678
Derivative hedging instruments (Notes 1, 3 and 9) 348 -
Deferred income taxes 364 275
Inventories 362 293
Other 381 309
------------------ ---------------------
Total current assets 6,767 8,851
------------------ ---------------------
Property, Plant and Equipment:
Property, plant and equipment 4,522 3,648
Less accumulated provision for depreciation and depletion (355) (228)
------------------ ---------------------
4,167 3,420
Leasehold interests, net of accumulated amortization
of $297 and $216 for 2001 and 2000, respectively 1,751 1,843
Construction work in progress 1,929 418
------------------ ---------------------
Total property, plant and equipment, net 7,847 5,681
------------------ ---------------------
Noncurrent Assets:
Investments (Note 12) 2,244 1,797
Notes and other receivables, less provision for uncollectibles
of $116 and $49 for 2001 and 2000, respectively 287 359
Notes receivable from related parties (Note 7) - 979
Energy marketing and risk management assets (Note 9) 709 1,230
Goodwill, net of accumulated amortization
of $277 and $184 for 2001 and 2000, respectively 3,245 3,292
Other intangible assets, net of accumulated amortization
of $63 and $34 for 2001 and 2000, respectively 869 738
Investment in leveraged leases - 596
Derivative hedging instruments (Notes 1, 3 and 9) 136 -
Deferred income taxes 402 334
Other 248 279
------------------ ---------------------
Total noncurrent assets 8,140 9,604
------------------ ---------------------
Total assets $ 22,754 $ 24,136
================== =====================
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
MIRANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In Millions, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY: 2001 2000
------------------ --------------------
Current Liabilities:
Short-term debt (Note 7) $ 55 $ 1,289
Current portion of long-term debt:
Sual and Pagbilao project loans (Note 7) 1,201 165
Mirant Asia-Pacific (Notes 7 and 18) 792 -
Mirant Holdings Beteiligungsgesellschaft (Notes 7 and 18) 566 -
Other (Note 7) 45 36
Accounts payable and accrued liabilities 2,724 4,240
Taxes accrued 161 216
Energy marketing and risk management liabilities (Note 9) 1,409 2,899
Obligations under energy delivery and purchase commitments (Note 11) 635 790
Derivative hedging instruments (Notes 1, 3 and 9) 327 -
Other (Note 9) 151 140
------------------ --------------------
Total current liabilities 8,066 9,775
------------------ --------------------
Noncurrent Liabilities:
Subsidiary obligated mandatorily redeemable preferred securities - 950
Notes payable (Note 7) 3,751 5,206
Other long-term debt (Note 7) 2,073 390
Energy marketing and risk management liabilities (Note 9) 624 906
Deferred income taxes (Note 8) 109 53
Obligations under energy delivery and purchase commitments (Note 11) 1,376 1,514
Derivative hedging instruments (Notes 1, 3 and 9) 88 -
Other (Note 9) 542 307
------------------ --------------------
Total noncurrent liabilities 8,563 9,326
------------------ --------------------
Preferred Stock held by Southern Company - 242
Minority Interest in Subsidiary Companies 282 312
Company Obligated Mandatorily Redeemable Securities of a
Subsidiary Holding Solely Parent Company Debentures 345 345
Commitments and Contingent Matters (Notes 11 and 18)
Stockholders' Equity:
Common stock, $.01 par value, per share 4 3
Authorized -- 2,000,000,000 shares
Issued -- 2001: 400,880,937 shares;
-- 2000: 338,701,000 shares
Treasury -- 2001: 100,000 shares
Additional paid-in capital 4,886 4,084
Retained earnings 729 166
Accumulated other comprehensive loss (119) (117)
Treasury stock, at cost (2) -
------------------ --------------------
Total stockholders' equity 5,498 4,136
------------------ --------------------
Total liabilities and stockholders' equity $22,754 $ 24,136
================== ====================
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
MIRANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
(In Millions, Except Per Share Data)
2001 2000 1999
------------- ------------- ------------
Operating Revenues $ 31,502 $13,315 $ 2,265
------------- ------------- ------------
Operating Expenses:
Cost of fuel, electricity and other products 28,434 11,437 934
Maintenance 141 136 116
Depreciation and amortization 396 317 270
Selling, general and administrative 974 512 248
Impairment loss (Note 2) 85 18 60
Other 453 231 193
------------- ------------- ------------
Total operating expenses 30,483 12,651 1,821
------------- ------------- ------------
Operating Income 1,019 664 444
------------- ------------- ------------
Other Income (Expense), net:
Interest income 129 187 172
Interest expense (560) (615) (501)
Gain on sales of assets, net (Note 12) 4 20 313
Equity in income of affiliates (Notes 1 and 13) 245 196 110
Receivables recovery (Note 1) 10 - 64
Other, net 38 50 72
------------- ------------- ------------
Total other (expense) income, net (134) (162) 230
------------- ------------- ------------
Income From Continuing Operations Before
Income Taxes and Minority Interest 885 502 674
Provision for Income Taxes 260 86 129
Minority Interest 62 84 183
------------- ------------- ------------
Income From Continuing Operations 563 332 362
------------- ------------- ------------
Income from Discontinued Operations, net
of tax benefit of $3, $20 and $15
in 2001, 2000 and 1999, respectively 5 27 10
------------- ------------- ------------
Net Income $ 568 $ 359 $ 372
============= ============= ============
Earnings Per Share:
Basic:
From continuing operations $ 1.65 $ 1.15 $ 1.33
From discontinued operations 0.01 0.09 0.04
------------- ------------- ------------
Net income $ 1.66 $ 1.24 $ 1.37
============= ============= ============
Diluted:
From continuing operations $ 1.62 $ 1.15 $ 1.33
From discontinued operations 0.01 0.09 0.04
------------- ------------- ------------
Net income $ 1.63 $ 1.24 $ 1.37
============= ============= ============
The accompanying notes are an integral part of these consolidated statements.
F-5
MIRANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
(In Millions)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury Comprehensive
Stock Capital Earnings Income (Loss) Stock Income (Loss)
------------ ------------- ------------- ----------------- --------------- ------------------
Balance, December 31, 1998 $ 3 $ 2,624 $ - $ 15 $ - $ 372
Net income - - 372 - -
Cumulative translation adjustment,
net of tax - - - (107) - (107)
-----------------
Comprehensive income $ 265
=================
Dividends - - (165) - -
Capital contributions - 360 - - -
------------ ------------- ------------- ----------------- ---------------
Balance, December 31, 1999 3 2,984 207 (92) -
Net income - - 359 - - $ 359
Cumulative translation adjustment,
net of tax - - - (25) - (25)
-----------------
Comprehensive income $ 334
=================
Dividends and return of capital - (345) (400) - -
Capital contributions - 65 - - -
Common stock offering - 1,380 - - -
------------ ------------- ------------- ----------------- ---------------
Balance, December 31, 2000 3 4,084 166 (117) -
Net income - - 568 - - $ 568
Other comprehensive loss (Note 3) - - - (2) - (2)
-----------------
Comprehensive income $ 566
=================
Dividends and return of capital - - (5) - -
Issuance of common stock 1 802 - - -
Common stock repurchased, at cost - - - - (2)
------------ ------------- ------------- ----------------- ----------------
Balance, December 31, 2001 $ 4 $ 4,886 $ 729 $ (119) $ (2)
============ ============= ============= ================= ===============
The accompanying notes are an integral part of these consolidated statements.
F-6
MIRANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(In Millions)
2001 2000 1999
------------ --------- -------------
Cash Flows from Operating Activities:
Net income $ 568 $ 359 $ 372
------------ --------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of affiliates (243) (174) (95)
Dividends received from equity investments 196 53 58
Depreciation and amortization 427 333 286
Obligations under energy delivery and purchase commitments (338) (33) -
Impairment loss (Note 2) 85 18 60
Energy marketing and risk management activities, net (54) (46) -
Deferred income taxes 192 114 166
Gain on sales of assets (4) (20) (313)
Minority interest 41 84 183
Other, net 57 45 (113)
Changes in certain assets and liabilities, excluding effects
from acquisitions:
Receivables, net 1,076 (2,515) (133)
Other current assets (147) (21) (15)
Accounts payable (1,674) 2,694 (81)
Taxes accrued (53) 69 22
Other current liabilities 42 12 156
Other, net 140 (11) 20
------------ --------- -------------
Total adjustments (257) 602 201
------------ --------- -------------
Net cash provided by operating activities 311 961 573
------------ --------- -------------
Cash Flows from Investing Activities:
Capital expenditures (1,761) (616) (747)
Cash paid for acquisitions (1,348) (3,147) (1,771)
Issuance of notes receivable (270) (864) (199)
Repayments on notes receivable 560 232 341
Disposal of Southern Company affiliates and other companies (93) - -
Property insurance proceeds 13 22 34
Proceeds received from the sale of investments (Note 12) 40 1,542 284
Purchase of preferred shares - - (121)
------------ --------- -------------
Net cash used in investing activities (2,859) (2,831) (2,179)
------------ --------- -------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 4,002 329 1,372
Repayment of long-term debt (2,366) (491) (503)
Proceeds from issuance of common stock 803 1,380 -
Capital contributions from Southern Company - 65 360
Capital contributions from minority interests 47 14 18
Return of capital to Southern Company - (113) -
Payment of dividends to Southern Company - (390) (165)
Payment of dividends to minority interests (28) (28) (66)
Purchase of treasury stock (2) - -
Issuance (repayment) of short-term debt, net (238) 1,761 358
Proceeds from issuance of preferred securities - 334 -
Change in debt service reserve fund 99 (143) (88)
------------ --------- -------------
Net cash provided by financing activities 2,317 2,718 1,286
------------ --------- -------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 18 (34) (6)
------------ --------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (213) 814 (326)
Cash and Cash Equivalents, beginning of year 1,049 235 561
------------ --------- -------------
Cash and Cash Equivalents, end of year $ 836 $ 1,049 235
============ ========= =============
Supplemental Cash Flow Disclosures:
Cash paid for interest, net of amounts capitalized $ 490 $ 676 $ 419
Cash paid (refunds received) for income taxes $ 323 $ (96) $ (114)
Business Acquisitions:
Fair value of assets acquired $ 2,221 $ 7,858 $ 1,803
Less cash paid 1,348 3,147 1,771
------------ --------- -------------
Liabilities assumed $ 873 $ 4,711 $ 32
============ ========= =============
The accompanying notes are an integral part of these consolidated statements.
F-7
Mirant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
1. Accounting and Reporting Policies
General
Mirant Corporation (formerly Southern Energy, Inc.) was incorporated in
Delaware in 1993. Mirant Corporation and its subsidiaries (collectively,
"Mirant" or the "Company") acquire, develop, build, own and operate power
production and delivery facilities and provide a broad range of energy-related
services to utilities and industrial companies around the world. Mirant's
business includes independent power projects, integrated utilities, a
distribution company and energy marketing and risk management operations. Mirant
has operations and development offices in North America and the Caribbean, Asia,
Australia, Europe and South America. Additionally, Mirant operates a business
development and management operation.
Operating entities, of which Mirant has less than 100% ownership at December
31, 2001, are as follows:
Economic Voting
Ownership Interest
Percentage at Percentage at
Country of Year of December 31, December 31,
Operations Investment 2001 2001
---------- ------------------------- ---------
Entities Consolidated:
Mirant Pagbilao Corporation ("Pagbilao")......... Philippines 1997 87.2% 87.2%
Mirant Sual Corporation ("Sual") ................ Philippines 1997 91.9 91.9
Mirant Navotas Corporation ("Navotas I")......... Philippines 1997 90.0 90.0
Grand Bahama Power Company ("Grand Bahama Power") Bahamas 1993 55.4 55.4
Jamaica Public Service Company Limited ("JPSCo"). Jamaica 2001 80.0 80.0
Castex LaTerre, Inc. ("Castex")................. United States 2001 75.0 75.0
Wrightsville Power Facility, L.L.C.
("Wrightsville") ................................ United States 2000 51.0 51.0
Entities not consolidated, accounted for
under the equity method:
WPD 1953 Limited ("WPD")
(Note 12)...................................... United Kingdom 1995 49.0 50.0
Birchwood Power Partners L.P. ("Birchwood").... United States 1994 50.0 50.0
Perryville Energy Partners, L.L.C. ("Perryville") United States 2001 50.0 50.0
Bewag AG ("Bewag") (Note 18)..................... Germany 1997 44.8 46.1
Guangdong Guanghope Power Company
Limited ("Shajiao C").......................... China 1997 33.0 40.0
Shandong International Power Development Company
Limited ("SIPD")............................. China 1999 9.9 10.0 to 38.0
Companhia Energetica de Minas Gerais ("CEMIG"). Brazil 1998 3.6 8.2
The Power Generation Company of
Trinidad and Tobago ("PowerGen")............... Trinidad 1994 39.0 39.0
Curacao,
Netherlands
Curacao Utilities Company ("Curacao")............ Antilles 2001 25.5 25.5
F-8
Basis of Presentation. The consolidated financial statements of Mirant are
presented in United States dollars in conformity with accounting principles
generally accepted in the United States ("U.S. GAAP"). The accompanying
financial statements have not been prepared in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation." This pronouncement, under which most
rate-regulated United States electric utilities report financial statements,
applies to entities that are subject to cost-based rate regulation. By contrast,
Mirant's operating investments are not subject to cost-based rate regulation,
and therefore, the provisions of SFAS No. 71 do not apply.
The financial statements include the accounts of Mirant and its wholly owned
as well as controlled majority-owned subsidiaries and have been prepared from
records maintained by Mirant and its subsidiaries in their respective countries
of operation. Certain prior year amounts have been reclassified to conform to
the current year financial statement presentation.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Investments in companies in which Mirant exercises significant
influence over operating and financial policies are accounted for using the
equity method. In addition, majority or jointly owned affiliates where control
does not exist are accounted for using the equity method of accounting.
Use of Estimates. The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition. Mirant derives the substantial portion of its revenues from
sales of physical power in the wholesale electricity market as well as from
energy marketing and risk management activities. Revenues derived from power
generation are recognized upon output, product delivery or satisfaction of
specific targets, as specified by contractual terms. Substantially all of
Mirant's energy marketing and risk management operations are accounted for under
the mark-to-market method of accounting. Under the mark-to-market method of
accounting, financial instruments and contractual commitments are recorded at
fair value upon contract execution. The net changes in market values are
recognized as operating revenues in the period of change. The unrealized gains
or losses are recorded as energy marketing and risk management assets and/or
liabilities in the accompanying consolidated balance sheets. The gains and
losses related to financial instruments and contractual commitments for hedging
activities are recognized in the same period as the settlement of underlying
physical transactions. These realized gains and losses are included in operating
revenues and operating expenses in the accompanying consolidated statements of
income. Mirant recognizes its revenue and related expense from energy marketing
and risk management activities on a gross basis in accordance with Emerging
Issues Task Force ("EITF") No. 99-19 "Reporting Revenue Gross as a Principal
versus Net as an Agent." Mirant believes this treatment is proper given its role
in the related transactions.
Concentration of Revenues and Credit Risk. Revenues earned from Enron
Corporation and its affiliates ("Enron") through energy marketing and risk
management operations approximated 15% of Mirant's total revenues for the year
ended December 31, 2001. As a result of Enron's bankruptcy, Mirant has recorded
a provision of approximately 90% of its credit exposure to this counterparty
plus anticipated legal fees. This provision is recorded in selling, general and
administrative expense in the accompanying consolidated statement of income.
During 2000, revenue earned from a single customer did not exceed 10% of
Mirant's total revenues. Revenues earned under Mirant's long-term power sales
agreements with the Philippines' National Power Corporation ("NPC") approximated
14% of Mirant's total revenues during 1999.
As of December 31, 2001, the California Department of Water Resources
("DWR") owed Mirant approximately $338 million (includes accounts receivable and
F-9
open contract positions), which represented more than 10% of Mirant's total
credit exposure. The DWR exposure is not currently supported by the state of
California's credit and is subject to the risk that the California State
Legislature will not adequately appropriate funds to support the DWR's
obligations with respect to its contracts with Mirant. The Company's total
credit exposure is computed as total accounts and notes receivable, adjusted for
energy marketing and risk management and derivative hedging activities and
netted against offsetting payables and posted collateral as appropriate.
Cash and Cash Equivalents. Mirant considers all short-term investments with an
original maturity of three months or less to be cash equivalents.
Restricted Cash. Mirant has restricted cash for self-insurance reserves,
contractual, legal or other corporate purposes. Restricted cash is included in
other current and other noncurrent assets in the accompanying consolidated
balance sheets and amounted to $140 million and $62 million, respectively, at
December 31, 2001 and $199 million and $155 million, respectively, at December
31, 2000.
Receivables Recovery. During 2001 and 1999, Mirant received $10 million and $64
million, respectively, related to receivables that were assumed in conjunction
with the Mirant Asia-Pacific Limited business acquisition. No amounts were
received in 2000. At the time of the purchase, Mirant did not place value on the
receivables due to the uncertain credit standing of the party with whom the
receivables were secured. Mirant has rights to an additional $30 million, plus
related interest, as of December 31, 2001, which it has fully reserved due to
the continuing risk of noncollection.
Financial Instruments and Contractual Commitments. Mirant accounts for various
transactions and activities at fair value. These activities include energy
marketing and risk management activities, derivatives subject to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and investments
in oil and gas producing properties. Energy marketing and risk management
transactions and related expenses are recorded on a trade-date basis. Financial
instruments and contractual commitments utilized in connection with energy
marketing and risk management activities are accounted for using the
mark-to-market method of accounting as required by EITF No. 98-10, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities."
Under the mark-to-market method of accounting, financial instruments and
contractual commitments, including derivatives used for energy marketing and
risk management purposes, are recorded at fair value. Fair value includes
assumptions and estimates about future values of transactions. The determination
of fair value considers various factors, including closing exchange or
over-the-counter ("OTC") market price quotations, time value and volatility
factors underlying options and contractual commitments, price activity for
equivalent or synthetic instruments in markets located in different time zones
and counterparty credit quality.
The fair values of swap agreements, swap options, caps and floors and
forward contracts in a net receivable position, as well as options held, are
reported as energy marketing and risk management assets in the accompanying
consolidated balance sheets. Similarly, financial instruments and contractual
commitments in a net payable position, as well as options written, are reported
as energy marketing and risk management liabilities in the accompanying
consolidated balance sheets. The energy marketing and risk management assets and
liabilities associated with financial instruments and contractual commitments
are reported net by counterparty, provided a legally enforceable master netting
agreement exists, and are netted across products when such provisions are stated
in the master netting agreement.
F-10
Income Taxes. SFAS No. 109, "Accounting for Income Taxes," requires the asset
and liability approach for financial accounting and reporting for deferred
income taxes. Mirant uses the asset and liability method of accounting for
deferred income taxes and provides deferred income taxes for all significant
income tax temporary differences (Note 8).
Inventory. Inventory consists primarily of natural gas, fuel, oil, coal and
purchased emission certificates. The inventory maintained by Mirant's energy
marketing and risk management operations for marketing purposes is reflected at
fair value in the accompanying consolidated balance sheets. The inventory
maintained by Mirant's generating subsidiaries for their use is reflected at the
lower of cost or market value, computed using an average cost basis.
Property, Plant and Equipment. Property, plant and equipment are recorded at
cost to Mirant, which includes materials, labor, appropriate administrative and
general costs and the cost of funding construction. The cost of routine
maintenance and repairs, such as inspections and corrosion removal, and the
replacement of minor items of property, as defined in the Company's policy, are
charged to expense as incurred. Certain expenditures incurred during a major
maintenance outage are capitalized, including the replacement of major component
parts and labor and overheads incurred to install the parts.
Depreciation of the recorded cost of depreciable property, plant and
equipment is provided by using primarily composite straight-line rates (Note 4).
Oil and gas production assets are depreciated using a units-of-production method
based on estimated proven reserves.
Upon the retirement or sale of assets, the cost of such assets and the
related accumulated depreciation are removed from the balance sheet. 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.
Leasehold Interests. Certain of Mirant's Asian power generation facilities are
developed under "build, operate, and transfer agreements" ("BOT") with
government controlled agencies of the respective local country government. Under
these agreements, Mirant builds power generation facilities, operates them for a
period of several years (a "cooperation period") and transfers ownership to the
local country government at the end of the cooperation period. Additionally, the
land subject to the BOT agreements is not controlled by Mirant. During
construction, the cost of these facilities is recorded as construction work in
progress. Upon completion of a facility, its entire cost is reclassified to
leasehold interests where the balance is amortized over the length of the
respective cooperation period.
F-11
Long-Lived Assets and Intangibles. Mirant records goodwill for the excess of the
purchase price over the fair value of investments. Goodwill recorded prior to
July 1, 2001 is amortized on a straight-line basis over periods between 30 and
40 years. Goodwill related to business combinations completed after June 30,
2001 is not amortized but rather is tested at least annually for impairment.
Mirant recognizes specifically identifiable intangibles when specific rights and
contracts are acquired. These intangibles are amortized on a straight-line basis
over the lesser of their contractual or estimated useful lives, between 10 and
40 years. Certain rights, such as operating permits and emission allowances
purchased as a result of a business combination, are included in property, plant
and equipment in the consolidated balance sheets as they are considered an
integral part of the tangible assets. Mirant evaluates long-lived assets, such
as property, plant and equipment, goodwill and specifically identifiable
intangibles, when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. The determination of whether an
impairment has occurred is based on an estimate of undiscounted cash flows
attributable to the assets, as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value of the assets and recording a provision
for loss if the carrying value is greater than fair value. For assets identified
as held for sale, the carrying value is compared to the estimated fair value
less cost to sell to determine if an impairment provision is required. Until the
assets are disposed of, they are reported at the lower of carrying amount or
fair value less cost to sell.
Investment in Leveraged Leases. Mirant's net investment in leveraged leases
consists of rentals receivable, net of principal and interest on the related
nonrecourse debt, the estimated residual value of the leased facilities and
unearned income. The earned income is included in the consolidated statements of
income as income from discontinued operations. Initial direct costs incurred in
consummating a leveraged lease transaction are accounted for as part of the
investment in the lease and are amortized over the term of the lease. As of
December 31, 2001, Mirant had no investments in leveraged leases (Note 14).
Foreign Currency Translation and Remeasurement. Assets and liabilities of
international operations where the local currency is the functional currency
have been translated at year-end exchange rates, and revenues and expenses have
been translated using average exchange rates prevailing during the year.
Adjustments resulting from translation have been recorded in other comprehensive
income ("OCI"). The financial statements of international operations where the
United States dollar is the functional currency reflect certain transactions
denominated in a local currency that have been remeasured in United States
dollars. The remeasuring of local currencies into United States dollars creates
gains and losses from foreign currency transactions that are included in net
income in the amount of $1 million, $2 million and $2 million for 2001, 2000 and
1999, respectively. The effect of the translation adjustment on OCI is disclosed
in the accompanying consolidated statements of stockholders' equity.
Comprehensive Income. Comprehensive income, which includes net income,
unrealized gains and losses on certain derivatives that qualify as either cash
flow hedges or net investment hedges and foreign currency translation
adjustments, is presented in the accompanying consolidated statements of
stockholders' equity. The objective of the statement is to report a measure of
all changes in common stock equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners.
Accounting Changes. Effective January 1, 2001, Mirant adopted SFAS No. 133. The
statement requires that certain derivative instruments be recorded in the
balance sheet as either assets or liabilities measured at fair value, and that
changes in the fair value be recognized currently in earnings, unless specific
hedge accounting criteria are met or the transactions are considered normal
purchases and sales under SFAS No. 133. If the derivative is designated as a
fair value hedge, the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized currently in
earnings. If the derivative is designated as a cash flow hedge, the changes in
F-12
the fair value of the derivative are recorded in OCI, and the gains and losses
related to these derivatives are recognized in earnings in the same period as
the settlement of the underlying hedged transaction. If the derivative is
designated as a net investment hedge, the changes in the fair value of the
derivative are also recorded in OCI and recognized in earnings in the same
period as the disposal of the underlying investment. Any ineffectiveness
relating to these hedges is recognized currently in earnings. The assets and
liabilities related to derivative instruments for which hedge accounting
criteria are met are reflected as derivative hedging instruments in the
accompanying consolidated balance sheet at December 31, 2001. The impact of the
adoption of SFAS No. 133 was immaterial to the Company's consolidated statement
of income (Note 3).
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." These pronouncements significantly change the accounting for
business combinations, goodwill and intangible assets. SFAS No. 141 establishes
that all business combinations will be accounted for using the purchase method;
use of the pooling-of-interests method is no longer allowed. The statement
further clarifies the criteria to recognize intangible assets separately from
goodwill. The provisions of SFAS No. 141 are effective for all business
combinations initiated after June 30, 2001. SFAS No. 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets and,
generally, adopts a non-amortization and periodic impairment-analysis approach
to goodwill and indefinitely-lived intangibles. SFAS No. 142 is effective for
the Company's 2002 fiscal year or for business combinations initiated after June
30, 2001. Management expects the application of the non-amortization provisions
of the statement will result in an increase in net income of approximately $74
million in 2002. As of December 31, 2001, Mirant has an unamortized goodwill
balance of $3.25 billion. Mirant has not yet finalized the financial statement
impact of both pronouncements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of SFAS No. 143
are effective for the Company's 2003 fiscal year. Mirant has not yet determined
the financial statement impact of this pronouncement.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 amends accounting and reporting standards
for the disposal of segments of a business and addresses various issues related
to the accounting for impairments or disposals of long-lived assets (Note 18).
2. Write-Off of Assets
Mirant sold its 82.3% ownership interest in Empresa Electrica del Norte
Grande S.A. ("EDELNOR"), a partially integrated electric utility in northern
Chile, on December 31, 2001 (Note 12). In 2001, Mirant had a net write-off of
its remaining investment in EDELNOR of $83 million ($54 million after-tax). In
2000, Mirant completed the sale of its 55% indirect interest in Hidroelectrica
Alicura S. A. ("Alicura") (Note 12). These assets impacted the consolidated
statements of income as follows (in millions):
Operating Operating Consolidated
Revenues Income Net Income
---------- ---------- -----------
Year:
2001..... $ 95 $ (70) $ (54)
2000..... 148 4 (13)
1999..... 171 23 2
F-13
3. Comprehensive Income
Comprehensive income includes unrealized gains and losses on certain
derivatives that qualify as cash flow hedges and hedges of net investments, as
well as the translation effects of foreign net investments. The effect of other
comprehensive income (loss) is set forth in the accompanying consolidated
statement of stockholders' equity.
Components of accumulated other comprehensive loss consisted of the following
(in millions):
Balance, December 31, 2000...................................... $ (117)
Other comprehensive income (loss) for the period:
Transitional adjustment from adoption of SFAS No. 133,
net of tax effect of $204................................... (310)
Net change in fair value of derivative instruments,
net of tax effect of $(267)................................. 375
Reclassification to earnings, net of tax effect of $51........ (76)
Cumulative translation adjustment ............................ 1
Share of affiliates' OCI...................................... 8
---------
Other comprehensive loss........................................ (2)
---------
Balance, December 31, 2001..................................... $ (119)
=========
The $119 million balance of other comprehensive loss at December 31, 2001
includes the impact of $109 million of interest rate swap breakage costs and
$115 million of currency translation losses, offset by $100 million of gains on
commodity price management hedges and $5 million representing Mirant's share of
unconsolidated affiliates' other comprehensive income.
Mirant estimates that $3 million ($34 million of commodity hedge gains and
$31 million of interest related losses) of net derivative after-tax gains
included in OCI as of December 31, 2001 will be reclassified into earnings or
otherwise settled within the next twelve months as certain forecasted
transactions relating to commodity contracts, foreign denominated contracts and
interest payments are realized.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31,
2001 and 2000 (in millions):
2001 2000
------- -------
Production........................... $ 3,751 $ 3,318
Transmission and distribution........ 307 137
Oil and gas.......................... 193 0
Other................................ 271 193
------- -------
$ 4,522 $ 3,648
======= =======
Mirant records depletion expense for its oil and gas production assets on a
units-of-production method based on estimated proven reserves. Mirant records
depreciation expense on a straight-line basis using the following estimated
useful lives (in years):
Production........................... 5 to 42
Transmission and distribution........ 5 to 39
Other................................ 3 to 35
Mirant capitalizes interest on projects during the advanced stages of
development and the construction period, in accordance with SFAS No. 34,
"Capitalization of Interest Cost", as amended by SFAS No. 58, "Capitalization of
Interest Cost in Financial Statements That Include Investments Accounted for by
the Equity Method." The Company determines which debt instruments represent a
reasonable measure of the cost of financing construction assets in terms of
interest cost incurred that otherwise could have been avoided. These debt
F-14
instruments and associated interest cost are included in the calculation of the
weighted average interest rate used for determining the capitalization rate.
Upon commencement of commercial operations of the plant or project, capitalized
interest, as a component of the total cost of the plant, is amortized over the
estimated useful life of the plant. In 2001, 2000 and 1999, the Company incurred
$626 million, $635 million and $565 million, respectively, in interest costs, of
which $66 million, $20 million and $64 million, respectively, were capitalized
and included in construction work in process. The remaining interest was
expensed during the year.
5. Related-Party Transactions
Mirant has agreements with Southern Company Services, Inc. ("SCS") a wholly
owned subsidiary of Southern Company, and each of the system operating companies
owned by Southern Company ("Southern") under which those companies provide
various interim services to Mirant. These transitional services agreements
generally provide for a fee equal to the greater of the cost, including the
actual direct and indirect costs, of providing the services or the market value
for such services. The transitional services agreements generally expire on
December 31, 2002. SCS and each of Southern's operating companies provided the
following services to Mirant at cost for 2000 and 1999: general engineering,
design engineering, accounting and statistical budgeting, business promotion and
public relations, systems and procedures, training, and administrative and
financial services. In 2001, SCS provided primarily administrative services to
Mirant at cost. Such costs amounted to approximately $4 million, $21 million and
$20 million during 2001, 2000 and 1999, respectively.
Included in these costs are both directly incurred costs and allocated
costs prior to Mirant's separation from Southern (Note 12). The allocated costs
related to SCS's corporate general and administrative overhead were immaterial
for 2001 and amounted to approximately $7 million and $5 million during 2000 and
1999, respectively.
Mirant incurred interest expense on a note payable to Southern of $37
million during 1999. No interest was incurred during 2001 or 2000, as no amounts
were outstanding on the note.
Prior to taking full ownership of Mirant Americas Energy Marketing, L.P.
("Mirant Americas Energy Marketing") (Note 12), Mirant had various agreements
with Mirant Americas Energy Marketing in which Mirant Americas Energy Marketing
had agreed to develop and manage the bidding strategy, manage fuel requirements,
sell the energy and provide accounting and settlement services for several
generating plants of Mirant. These agreements applied to Mirant's California,
New York and New England operating entities and generally covered a term of 1 to
2.5 years. The first of these agreements was in place in December 1998 and the
most recent in July 1999, as amended in January 2000. During 1999, total fees
paid to Mirant Americas Energy Marketing under the marketing agreements totaled
$17 million, and payments made for fuel to Mirant Americas Energy Marketing
totaled $258 million. During 2000, prior to taking full ownership of Mirant
Americas Energy Marketing, total fees paid under the marketing arrangements
totaled $52 million, and payments made for fuel to Mirant Americas Energy
Marketing totaled $261 million.
Mirant's revenues and expenses related to its agreements with Mirant
Americas Energy Marketing during 1999 were $445 million and $275 million,
respectively. During 2000, prior to taking full ownership of Mirant Americas
Energy Marketing, Mirant's revenues and expenses related to its agreements with
Mirant Americas Energy Marketing were $767 million and $313 million,
respectively. Intercompany profits and losses recognized by Mirant Americas
Energy Marketing on a mark-to-market accounting basis have been appropriately
eliminated in consolidation.
Mirant has various agreements with, or with respect to its investment in,
Perryville including a tolling agreement, an air permit guarantee and a
wastewater discharge permit guarantee (Note 11). Mirant has a 50% ownership
interest in Perryville and accounts for its investment under the equity method
(Note 1).
F-15
6. Employee Benefit Plans
Mirant offers pension benefits to its employees through various pension
plans. The measurement date for the Domestic Benefit Plans is September 30 for
each year presented. Prior to its spin-off from Southern (Note 12), Mirant
management employees participated in the Southern Company Pension Plan, a
defined benefit, trusteed, noncontributory plan covering substantially all
regular employees.
During 2000, Mirant modified its voting rights in WPD, resulting in WPD
being accounted for under the equity method and no longer being consolidated in
Mirant's financial statements. As a result of WPD's deconsolidation, pension
assets recorded at WPD are no longer consolidated in the financial statements.
Grand Bahama Power participates in a defined benefit, trusteed, contributory
pension plan that covers substantially all union employees. Plan benefits are
based on the employees' years of service and employment grades. Plan assets are
primarily invested in equity and debt securities. The measurement date for Grand
Bahama Power is December 31 for each year presented. All nonunion employees of
Grand Bahama Power are covered under a defined benefit, noncontributory pension
plan. Benefits earned under this plan reflect the employee's years of service,
age at retirement and average compensation for the highest five years out of the
ten years immediately preceding retirement. Plan assets are primarily invested
in equity and debt securities.
In March 2001, the Company acquired JPSCo (Note 12). As a result, the
following disclosure includes the pension obligations of JPSCo assumed on
acquisition. JPSCo participates in a defined benefit, trusteed, contributory
plan covering substantially all employees. The measurement date for JPSCo is
December 31 for the year presented. Benefits earned are based on years of
service, age at retirement and the highest average annual salary during any
consecutive three-year period.
Mirant also has noncontributory, defined benefit plans covering
substantially all union employees at recently acquired facilities. Plan benefits
are based on final average pay, age at retirement and service at Mirant and the
former employer. These plans are funded according to Internal Revenue Code
requirements and are accounted for pursuant to SFAS No. 87, "Accounting for
Pensions."
The rates assumed in the actuarial calculations for the pension plans
(excluding WPD and JPSCo) of Mirant as of their respective measurement dates
were as follows:
2001 2000
---- ----
Discount rate.......................... 7.5% 7.5%
Rate of compensation increase.......... 4.5 5.0
Expected return on plan assets......... 9.0 8.5
F-16
The following tables show the collective actuarial results for the defined
benefit pension plans (excluding WPD and JPSCo) of Mirant (in millions):
2001 2000
Change in Benefit Obligation: ----- -----
Benefit obligation, beginning of year.............. $ 140 $ 63
Service cost..................................... 8 6
Interest cost.................................... 9 4
Benefits paid.................................... (1) (1)
Actuarial loss................................... (13) 5
Special termination benefits..................... 2 0
Amendments....................................... 4 1
Acquisitions..................................... 0 61
Plan curtailment................................ (2) 0
Net liability transferred from Southern......... (2) 1
----- ----
Benefit obligation, end of year............. $ 145 $140
===== ====
Changes in Plan Assets:
Fair value of plan assets, beginning of year....... $ 56 $ 44
Return on plan assets............................ (3) 6
Net assets transferred to Southern............... (3) 0
Employer contributions........................... 4 2
Benefits paid.................................... (1) (1)
Receivables due to transfers..................... 0 5
----- ----
Fair value of plan assets, end of year...... $ 53 $ 56
===== ====
Funded Status:
Funded status at end of year....................... $ (92) $(84)
Unrecognized prior service cost.................. 5 4
Unrecognized net gain............................ (19) (13)
----- ----
Net amount recognized in the consolidated
balance sheets..................................... $(106) $(93)
===== ====
The rates assumed in the actuarial calculations for the pension plan of JPSCo
were as follows:
2001
-----
Discount rate.......................... 9.0%
Rate of compensation increase.......... 7.0
Expected return on plan assets......... 10.0
F-17
The following tables show the collective actuarial results for the defined
benefit pension plan of JPSCo (in millions):
2001
----
Change in Benefit Obligation:
Benefit obligation, beginning of year.............. $ 0
Service cost..................................... 2
Interest cost.................................... 3
Benefits paid.................................... (1)
Actuarial loss................................... (3)
Acquisitions..................................... 43
---
Benefit obligation, end of year............. $44
===
Changes in Plan Assets:
Fair value of plan assets, beginning of year....... $ 0
Return on plan assets............................ 5
Employer contributions........................... 1
Benefits paid.................................... (1)
Members' total contributions..................... 2
Acquisitions..................................... 56
---
Fair value of plan assets, end of year...... $63
===
Funded Status:
Funded status at end of year....................... $19
Unrecognized net gain............................ (16)
---
Net amount recognized in the consolidated
balance sheets..................................... $ 3
===
As a result of WPD's sale to London Electricity of its supply business
during 1999, a curtailment and settlement of a portion of WPD's pension plan
occurred for the pension assets and obligations that transferred to the buyer.
In accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
a curtailment gain of $5 million and a settlement loss of $14 million were
recorded during 1999 in conjunction with this event.
The components of Mirant's pension plans' net pension expense (income) (a
portion of which is capitalized) during the years ended December 31 are shown
below (in millions). The 1999 results include WPD.
2001 2000 1999
------- ------- ------
Service cost................ $ 8 $ 6 $ 16
Interest cost............... 9 4 62
Expected return on plan
assets...................... (5) (4) (104)
Employee contributions...... 0 0 (4)
Curtailment................. 2 1 (5)
Settlement.................. (2) 0 14
Expense related to special
termination benefits...... 2 0 0
Net amortization............ 1 0 2
------ ------ ------
Net pension expense (income) $ 15 $ 7 $ (19)
====== ====== =======
F-18
The components of JPSCo's pension plan's net pension expense (income) (a
portion of which is capitalized) during the period from the date of acquisition
to December 31, 2001 is shown below (in millions).
2001
----
Service cost..................... $ 2
Interest cost.................... 3
Expected return on plan assets... (4)
Net amortization................. (1)
------
Net pension expense (income) $ 0
======
Other Postretirement Benefits
Mirant also provides certain medical care and life insurance benefits for
its retired employees, substantially all of whom may become eligible for these
benefits when they retire.
Under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," medical care and life insurance benefits for retired employees
are accounted for on an accrual basis using a specified actuarial method based
on benefits and years of service.
An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate for
pre-age 65 participants and post-age 65 participants of 10.0% and 14.0%,
respectively, for 2001, decreasing gradually to 5.50% and 5.50%, respectively,
through the year 2008 and remaining at that level thereafter. An annual increase
or decrease in the assumed medical care cost trend rate of 1% would
correspondingly increase or decrease the accumulated benefit obligation at
December 31, 2001 by $11 million and $9 million, respectively. All other
components would not be affected materially by a 1% change in the medical care
cost trend rate.
The weighted average rates assumed in the actuarial calculations for the
other postretirement benefits of Mirant as of their respective measurement dates
were as follows:
2001 2000
---- ----
Discount rate................. 7.5% 7.5%
Rate of compensation increase. 4.5 5.0
Expected return on plan assets 9.0 8.5
2001 2000
---- ----
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 60 $ 19
Service cost..................... 3 1
Interest cost.................... 4 2
Actuarial gain................... 7 1
Amendments....................... 6 0
Liability transferred to Southern
(settlement)................... (2) 0
Acquisitions..................... 0 37
---- ----
Benefit obligation, end of year.... $ 78 $ 60
==== ====
Funded Status:
Funded status at end of year....... $(78) $(60)
Unrecognized net loss............ 8 2
Unrecognized past service cost... 6 0
---- -----
Net amount recognized.............. $(64) $(58)
==== =====
The postretirement benefits were unfunded at December 31, 2001 and 2000. The
actuarially based costs of Mirant's postretirement benefits during 2001, 2000
and 1999 were not material.
Stock-Based Compensation
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," Mirant
has elected to account for its stock-based compensation plan under APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and adopt the disclosure-only
provisions of SFAS No. 123. Accounting for cash-settled awards under SFAS No.
123 is consistent with the accounting for such awards under APB Opinion No. 25.
Mirant Corporation Options
Stock option grants in Mirant common stock have been made from Mirant's
Omnibus Incentive Compensation Plan. Mirant options have a 10-year term. This
term may be shortened through termination of employment. Generally, options vest
equally on each of the first, second and third anniversaries of the grant date.
Mirant options are nontransferable, except through death. The exercise price of
Mirant options is equal to the stock price on the date of grant.
F-19
Transactions are summarized as follows:
Weighted
Average
Mirant Exercise
Options Price
--------- ------------
Outstanding at December 31, 1999... 0 $ 0.00
Granted.......................... 8,631,094 17.89
Exercised........................ (633) 15.42
Forfeited........................ (71,106) 20.72
---------- -----
Outstanding at December 31, 2000... 8,559,355 17.87
Granted.......................... 8,491,079 25.16
Exercised........................ (1,090,925) 14.72
Forfeited........................ (602,353) 22.19
----------- -----
Outstanding at December 31, 2001... 15,357,156 $ 21.95
========== =====
Options exercisable at December 31,
2000............................... 1,159,650 $ 13.32
========== =====
Options exercisable at December 31,
2001............................... 4,019,713 $ 18.62
========= =====
Exercise prices for Mirant stock options outstanding as of December 31, 2001
ranged from $3.35 to $39.30. The following table provides certain information
with respect to Mirant stock options outstanding at December 31, 2001:
Weighted
Weighted Average
Average Remaining
Options Exercise Contractual
Range of Exercise Prices Outstanding Price Life
------------------------ ----------- ----- ----
$ 0.00 -- $ 3.93........ 206,710 $ 3.44 4.5
$11.80 -- $15.72........ 1,810,760 14.31 5.7
$15.73 -- $19.65........ 2,154,385 17.89 8.1
$19.66 -- $23.58........ 4,465,093 21.80 8.3
$23.59 -- $27.51........ 6,323,709 25.51 8.9
$27.52 -- $31.44........ 91,424 28.59 9.6
$31.45 -- $35.37........ 260,417 34.70 9.3
$35.38 -- $39.30........ 44,658 39.30 9.4
-----------
Total................... 15,357,156 21.95 8.2
===========
The following table provides certain information with respect to stock
options exercisable at December 31, 2001:
Weighted
Average
Options Exercise
Range of Exercise Prices Exercisable Price
------------------------ ----------- -----
$0.00 -- $3.93 ........ 144,974 $ 3.48
$11.80 -- $15.72........ 1,127,739 14.05
$15.73 -- $19.65........ 666,828 17.90
$19.66 -- $23.58........ 1,594,638 21.64
$23.59 -- $27.51........ 485,534 24.81
---------
Total................... 4,019,713 18.62
=========
The weighted average fair value at date of grant for options granted during
2001 and 2000 was $10.06 and $7.94, respectively, and was estimated using the
Black-Scholes option valuation model with the following weighted average
assumptions:
2001 2000
------ ------
Expected life in
years............... 5 5
Interest rate....... 5.03% 6.66%
Volatility.......... 49.50% 40.00%
Dividend yield...... 0 0
Southern Company Options
Stock option grants in Southern common stock have been made from Southern
Company's Performance Stock Plan periodically and vest equally on each of the
first, second and third anniversaries of the grant date. Grants fully vest upon
termination resulting from death, total disability or retirement. Exercise price
is the average of the high and low fair market value of Southern Company's
common stock on the date granted. All of the outstanding Southern Company stock
options were converted to Mirant stock options on April 2, 2001.
F-20
Transactions are summarized as follows:
Weighted
Average
Southern Exercise
Options Price
----------- ----------
Outstanding at December 31, 1998.... 795,471 $ 23.67
Granted........................... 516,967 26.56
Exercised......................... (6,001) 22.46
Forfeited......................... (21,845) 25.31
----------- --------
Outstanding at December 31, 1999.... 1,284,592 24.81
Granted........................... 1,247,663 23.25
Exercised......................... (61,126) 21.68
Forfeited......................... (64,630) 23.66
Transfers of employees between
Southern and Mirant, net......... (22,291) 24.09
Outstanding at December 31, 2000.... 2,384,208 24.09
Granted........................... 5,039 30.23
Exercised......................... (346,126) 23.74
Forfeited......................... (14,588) 23.25
Converted to Mirant options....... (2,028,533) 24.17
------------ -----
Outstanding at December 31, 2001.... 0 $ 0.00
============= ======
The weighted average fair values at date of grant for options granted during
2001, 2000 and 1999 were $4.37, $3.36 and $6.29, respectively, and were
estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
2001 2000 1999
---- ---- ----
Expected life in
years............... 4.0 4.0 3.7
Interest rate....... 5.03% 6.66% 5.79%
Volatility.......... 25.40% 20.94% 20.74%
Dividend yield...... 7.02% 5.80% 5.00%
If compensation costs had been determined as prescribed by SFAS No. 123 for
options in Southern and Mirant, Mirant's net income would have been reduced by
approximately $49 million in 2001, by approximately $23 million in 2000 and by
approximately $12 million in 1999. Diluted earnings per share would have been
reduced by $0.14, $0.07 and $0.05 for the same periods, respectively.
Phantom Stock
During 1999, Mirant made awards of approximately 39,000 phantom Southern
stock shares and approximately 130,000 phantom Mirant stock shares to certain
employees and officers. The aggregate amount awarded was approximately $2.7
million with cliff vesting during 2003. Mirant records compensation expense
ratably during the vesting period, taking into account the fluctuations in
market value of the underlying stock during each period. During 2001 and 2000,
Mirant made awards of approximately 235,893 and 304,925 Mirant phantom stock
shares, respectively, to certain employees and officers. The aggregate amount
awarded was approximately $6.0 million and $6.7 million with vesting based on
stock price appreciation for 2001 and 2000, respectively. Compensation expense
during 2001, 2000 and 1999 was approximately $14.9 million, $1.7 million and
$500,000, respectively. At December 31, 2001, 94,362 shares of phantom stock
were outstanding.
Value Creation Plan
In 1997, Mirant initiated a long-term incentive plan, the Value Creation
Plan, which granted appreciation rights to eligible employees to receive unit
appreciation over a preestablished value on a stated number of units per
employee. Base values and subsequent annual valuations were calculated using a
discounted cash flow methodology, the key assumptions of which included cash
flow forecasts for each of Mirant's investments for the future five to seven
years, a terminal value assumption equal to 103% and a discount rate of 13% for
all periods presented. Employees were granted two types of appreciation rights:
F-21
standard appreciation rights which paid each eligible employee for any
appreciation over a fixed base value and indexed appreciation rights which paid
each eligible employee for any appreciation over a base value which increased
each year by a predetermined interest rate. Standard appreciation rights vested
25% per year for four years, and indexed appreciation rights vested 100% after
four years. Mirant recorded compensation expense ratably during the vesting
period for any appreciation of the units over a fixed base value in accordance
with APB Opinion No. 25. This expense amounted to approximately $6 million, $23
million and $2 million in 2001, 2000 and 1999, respectively.
Transactions are summarized as follows:
Weighted Weighted
Average Average
Standard Exercise Indexed Exercise
Rights Price Rights Price
----------- ------------- ---------- ----------
Outstanding at December 31, 1998... 1,653,428 $ 9.82 2,783,593 $11.30
Granted............................ 1,456,665 11.61 325,138 12.77
Exercised.......................... (14,411) 9.90 0 0.00
Forfeited.......................... (24,995) 9.83 (91,216) 12.77
----------- ----- ----------- -----
Outstanding at December 31, 1999... 3,070,687 10.67 3,017,515 12.77
Granted............................ 2,237,806 13.72 0 0.00
Exercised.......................... (5,668) 9.73 0 0.00
Forfeited.......................... (45,900) 13.46 0 0.00
Converted to stock options/SARs.... (5,256,925) 11.94 (3,017,515) 12.77
----------- ------- ------------ -------
Outstanding at December 31, 2000... 0 $ 0.00 0 $ 0.00
============ ===== ============ ========
Employee Stock Purchase Plan
In September 2000, the Company's Board of Directors adopted a
non-compensatory Employee Stock Purchase Plan (the "ESPP") under Section 423 of
the Internal Revenue Code ("Section 423"). Under the ESPP, employees of the
Company who elect to participate are granted options to purchase common stock at
a 15 percent discount from the lower of the market value of such stock at the
beginning or the ending of each 6-month purchase period. The ESPP permits an
enrolled employee to make contributions to purchase shares of common stock by
having withheld from his or her salary or short-term incentive an amount up to
$21,250 per year, subject to Section 423 limitations. The total number of shares
of common stock that may be issued pursuant to options granted under the ESPP is
4,000,000. A total of approximately 913,000 shares of common stock have been
issued under the ESPP.
Employee Savings Plan
The Company maintains an Employee Savings Plan ("ESP") with a profit sharing
arrangement ("PSA") whereby employees may contribute a portion of their base
compensation, subject to limits under the Internal Revenue Code. The Company
provides a matching contribution, each payroll period, in the ESP equal to 75%
of the employee's contributions on up to 6% of the employee's pay for that
period (levels vary for the various bargaining units). Under the PSA, the
Company contributes a quarterly 3% fixed contribution and may make an annual
discretionary contribution for those employees not accruing a benefit under the
defined benefit pension plan. Expenses recognized for matching contributions
were as follows (in millions):
ESP PSA
---- ----
1999................ $ 4.0 $ 0
2000................ 5.8 0
2001................ 7.0 2.4
F-22
7. Debt
At December 31, 2001 and 2000, the long-term debt (including current
maturities) of Mirant and its subsidiaries was as follows (in millions):
2001 2000
---- ----
Capital markets debt:
Dollar-denominated:
7.40% senior notes, due 2004................. $ 200 $ 200
10.20% notes, due 2006....................... 73 0
7.625% senior notes, due 2006................ 500 0
7.20% senior notes, due 2008................. 300 0
7.90% senior notes, due 2009................. 500 500
8.30% senior notes, due 2011................ 850 0
2.50% convertible senior debentures, due 2021 750 0
8.50% senior notes, due 2021................. 450 0
9.125% senior notes, due 2031................ 400 0
Debt supported by banking arrangements:
Dollar-denominated:
5.95% to 11.90%, due 2002.................... 2,001 1,942
2.95% to 9.75%, due 2000 to 2003............. 1,225 71
3.145% to 9.50%, due 2000 to 2004............ 223 68
Variable rate (7.47% at December 31, 2000),
due 2004.......................................... 0 300
7.69% to 10.00%, due 2005.................... 46 422
5.08% to 11.90%, due 2000 to 2006............ 135 49
7.16% to 10.25%, due 2007.................... 14 427
5.95% to 10.56%, due 2000 to 2011............ 0 754
Deutschemark-denominated:
5.13% to 5.14%, due 2002..................... 566 0
5.14% to 5.17%, due 2004..................... 0 512
Other debt:
Dollar-denominated:
8.11% note payable, due 2002 to 2004......... 66 0
7.75% and 10.50% senior loan participation
certificate, due 2005 and 2006............. 0 340
7.78% to 11.00% loans, due 2000 to 2007...... 0 25
9.50% capital leases, due 2013............... 10 0
14.50% capital leases, due 2016.............. 122 0
8.12% notes, due 2018........................ 0 153
Sterling-denominated:
0% to 7.64% loans, due 2000 and 2002......... 0 5
Deutschemark-denominated:
5.35% loan, due 2008......................... 0 29
Unamortized debt premiums (discounts), net........ (3) 0
------- -------
Total long-term debt....................... 8,428 5,797
Less debt classified as current .................. 2,604 201
------- -------
Total...................................... $ 5,824 $ 5,596
======= =======
F-23
As mentioned below approximately $1.2 billion of project debt related to
Sual and Pagbilao is reflected as current on the accompanying consolidated
balance sheet, as of December 31, 2001, because waivers granted with respect to
defaults under such project debt expire in April 2002. Mirant expects to extend
the current waivers and obtain permanent waivers to address the potential
defaults. The final maturities of the Sual and Pagbilao project loans are 2012
and 2007, respectively.
At December 31, 2001, the annual scheduled repayments of long-term debt
during the next five years, assuming all debt classified as current is repaid in
2002, were as follows (in millions):
2002........... $2,604
2003........... 1,268
2004........... 464
2005........... 29
2006........... 714
Thereafter..... 3,349
Revolving Credit Facilities
At December 31, 2001, Mirant and its subsidiaries had revolving credit
facilities with various lending institutions totaling approximately $3.19
billion. At December 31, 2001, amounts borrowed, including drawn amounts and
letters of credit, under such facilities totaled $2.08 billion, of which $26
million expires during 2002 and $2.06 billion expires during 2003 and beyond.
Except for the credit facility of Mirant Canada Energy Marketing, Ltd., an
indirect wholly owned subsidiary of Mirant Corporation ("Mirant Canada Energy
Marketing"), these facilities are recorded as long-term debt and included in the
table above. The credit facilities generally require payment of commitment fees
based on the unused portion of the commitments or the maintenance of
compensating balances with the banks. The schedule below summarizes the
revolving credit facilities held by Mirant Corporation and its subsidiaries as
of December 31, 2001 (in millions).
Drawn Amount Amount
Facility including Letters Available
Company Amount of Credit
----------------- ------------ ------------------- -------------
Mirant Corporation......................... $ 2,700 $ 1,833 $ 867
Mirant Americas Generation, LLC ........... 300 73 227
Mirant Canada Energy Marketing............. 44 26 18
Mirant Americas Energy Capital, LP......... 150 150 0
------------ ------------------- -------------
Total.................................... $ 3,194 $ 2,082 $1,112
============ =================== =============
As of December 31, 2001, Mirant Corporation had three revolving credit
facilities: its April 1999 $450 million Credit Facility C, its July 2001 $1.125
billion 364-Day Credit Facility and its July 2001 $1.125 billion 4-Year Credit
Facility. Credit Facility C matures in April 2004. No amounts were drawn under
Credit Facility C at December 31, 2001 or 2000. However, Mirant had letters of
credit outstanding under Credit Facility C in the amount of $53 million and $406
million as of December 31, 2001 and 2000, respectively. As of December 31, 2001,
Mirant Corporation had borrowings of $1.075 billion under the 364-Day Credit
Facility at an approximate interest rate of 3% and had issued letters of credit
totaling $705 million under the 4-Year Credit Facility. Under each of the credit
facilities, Mirant Corporation pays interest, facility/commitment fees and
letter of credit fronting fees in an amount determined by reference to its then
existing credit ratings. As of December 31, 2001, the facility/commitment fees
under the 364-Day Credit Facility, the 4-Year Credit Facility and Credit
Facility C were 0.20%, 0.25% and 0.225%, respectively. Under its 364-Day Credit
Facility, Mirant Corporation may elect to convert all revolving credit advances
outstanding on or before the July 2002 termination date thereunder into a term
loan maturing not later than the first anniversary of the termination date.
In addition to other covenants and terms, each of Mirant Corporation's
credit facilities includes minimum debt service coverage and a maximum leverage
covenant. As of December 31, 2001, there were no events of default under such
credit facilities.
As of December 31, 2001, Mirant Americas Generation, LLC ("Mirant Americas
Generation"), an indirect wholly owned subsidiary of Mirant Corporation, had two
credit facilities each entered into in October 1999, a $250 million 5-year
revolving credit agreement ("Credit Facility B") for capital expenditures and
general corporate purposes and a $50 million 5-year revolving credit facility
("Credit Facility C") for working capital needs. The commitments under Credit
Facility B and Credit Facility C remain available through October 2004. As of
December 31, 2001, the outstanding borrowings under Credit Facility B were $73
million at an interest rate of 3.39%. As of December 31, 2001, there were no
borrowings under Credit Facility C. Under each of the credit facilities, Mirant
Americas Generation pays interest and facility/commitment fees (0.25% at
December 31, 2001) in an amount determined by reference to its then existing
credit rating.
In addition to other covenants and terms, each of Mirant Americas
Generation's credit facilities includes minimum debt service coverage, a maximum
leverage covenant and a minimum debt service coverage test for dividends and
distributions. As of December 31, 2001, there were no events of default under
such credit facilities.
As of December 31, 2001, Mirant Canada Energy Marketing had an
approximately $44 million (denominated as 70 million Canadian dollars) revolving
credit facility entered into in November 2000. The credit facility initially
matured in November 2001 but was extended to March 2002. Interest under the
facility is payable monthly. The interest rate depends on the currency of the
borrowing and type of advance. Interest on bankers acceptances, letters of
credit and London InterBank Offered Rate ("LIBOR") advances are computed at the
applicable base interest rate (0.35% at December 31, 2001) plus 200 basis
points, depending on Mirant Corporation's then current credit rating. Interest
on prime rate and United States base rate advances are computed at the
F-24
applicable base rate plus 100 basis points, depending on Mirant Corporation's
then current credit rating. The outstanding borrowings were $26 million (United
States dollar), at an interest rate of 3.40% at December 31, 2001. Amounts
outstanding under the credit facility are guaranteed by Mirant Corporation.
Mirant Canada Energy Marketing is in the process of seeking commitments to
refinance this credit facility. If it is unable to refinance the credit facility
on acceptable terms, it may repay the amounts outstanding thereunder with cash
or amounts borrowed by Mirant Corporation under Mirant's corporate credit
facilities, using cash and borrowing capacity that could be used otherwise to
fund Mirant's other business activities.
In September 2001, Mirant Americas Energy Capital, LP ("Mirant Americas
Energy Capital"), an indirect wholly owned subsidiary of the Company, entered
into a $150 million credit facility that matures in September 2004. Under the
facility, Mirant Americas Energy Capital may borrow up to 85% of the calculated
market value of eligible collateral consisting of various producer loans and
production payments. The facility bears interest based on the LIBOR plus 208
basis points with interest payable quarterly. As of December 31, 2001, the
outstanding borrowings were $150 million at an interest rate of 4.34%. Under the
terms of the credit facility, the facility was initially unsecured with a
covenant by Mirant Americas Energy Capital to secure the obligations thereunder
by transferring the borrowing base assets to a special purpose vehicle and
granting security interests in such assets upon the occurrence of certain
events, including ratings downgrades and a specified increase in the yield on
Mirant Americas Generation's publicly traded debt.
As a result of the Moody's downgrade, the yields on Mirant Americas
Generation's publicly traded debt increased and triggered the obligation of
Mirant Americas Energy Capital to secure the obligations thereunder. As of
December 31, 2001, Mirant Americas Energy Capital was in the process of
transferring the borrowing base assets to the special purpose vehicle and
granting security interests in such assets. In connection with entering into the
credit facility, Mirant Americas Energy Capital entered into a total rate of
return swap with respect to the credit facility. The obligations of Mirant
Americas Energy Capital under the total rate of return swap are guaranteed by
Mirant Corporation. See Note 18 for additional information on the Mirant
Americas Energy Capital loan.
On December 19, 2001, Moody's lowered its rating on the Company's senior
unsecured debt from Baa2 (investment grade) to Ba1 (non-investment grade).
Moody's also lowered its rating on the following of the Company's subsidiaries
or subsidiary issues: Mirant Americas Energy Marketing, Mirant Trust I and
Mirant Americas Generation. As a result of Moody's lowering its rating on
Mirant's senior unsecured debt, as of December 31, 2001, the Company had to post
additional collateral in the form of cash and letters of credit, transfer the
borrowing base assets under the Mirant Americas Energy Capital facility to a
special purpose vehicle, pay increased interest costs and comply with stricter
financial tests under the Mirant Americas Generation facilities. Otherwise, the
action by Moody's triggered no material obligations under the Company's debt
arrangements.
Each of Mirant's credit facilities contain various covenants in addition to
those described above including, among other things, (i) limitations on
dividends, redemptions and repurchases of capital stock, (ii) limitations on the
incurrence of indebtedness and liens, (iii) limitations on capital expenditures
and (iv) limitations on the sale of assets.
Mirant Asia-Pacific Ventures, Inc. ("Mirant Asia-Pacific") Loans
Mirant Corporation indirectly holds a 91.9% interest in the 1,218 MW
coal-fired Sual plant and an 87.2% interest in the 735 MW coal-fired Pagbilao
plant, each in the Philippines. The Sual and Pagbilao plants are financed with
non-recourse project debt. As of December 31, 2001, the aggregate principal
amounts outstanding under the Sual and Pagbilao credit facilities were
approximately $827 million and $374 million, respectively. Under the respective
credit agreements, the project companies are required to provide certain
specified levels and types of insurance coverage. Although Mirant Corporation
has secured such types and levels of insurance for the Sual and Pagbilao
facilities as it believes are normal for prudent operators of similar
facilities, it has been unable to secure certain types and levels of insurance
F-25
required by the respective credit agreements as a result of changes in the
insurance markets, including changes attributable to the terrorist attacks on
September 11, 2001. Each of the lenders under the Sual and Pagbilao facilities
has executed temporary waivers of default. The waivers are effective through
April 30, 2002. Mirant is working with the respective lender groups to secure
extensions of the waivers. As of December 31, 2001, Mirant does not anticipate
that the Sual and Pagbilao lenders will accelerate the respective loans as a
result of the inability of Sual and Pagbilao to provide the specified levels and
types of insurance coverage. However, as of December 31, 2001, Mirant could give
no assurance that the lenders would continue to cooperate with it, provide
permanent waivers or additional temporary waivers or, upon expiration of the
temporary waivers, refrain from accelerating the loans. If Mirant could not
repay or refinance such loans upon an acceleration, the loss of the cash flow
and assets of Sual and Pagbilao would have a material adverse effect on Mirant.
Further, if it were to refinance such loans, Mirant can give no assurances that
such refinancing would not result in substantial costs and be on less favorable
terms than Mirant currently has in place. In the event the lenders fail to
extend the temporary waivers or to provide permanent waivers, the respective
Sual and Pagbilao project entities will be prohibited under the financing
documentation from making distributions and, thus, amounts that would otherwise
be available for distribution will not be available to Mirant or its
intermediate holding companies to repay indebtedness or fund investment
activities. As required by U.S. GAAP, Mirant has reclassified the Sual and
Pagbilao credit facilities from long-term debt to current portion of long-term
debt on its consolidated balance sheet until it secures permanent waivers for
these credit facilities. Mirant does not consider the inability to secure the
insurance coverage required under the Sual and Pagbilao credit facilities a
breach of the terms of their respective energy conversion agreements with NPC of
the Philippines.
As of December 31, 2001, a failure by the Sual or Pagbilao lenders to
extend the temporary waivers or provide permanent waivers with respect to the
defaults under the Sual or Pagbilao credit agreements would have caused
cross-defaults under the credit facility for Mirant Asia-Pacific, a subsidiary
of Mirant Corporation and an indirect parent company of Sual and Pagbilao. As of
December 31, 2001, the aggregate principal amount outstanding under the Mirant
Asia-Pacific credit facility was approximately $792 million. Although no
assurances can be given that, in the event of such cross-defaults, the Mirant
Asia-Pacific lenders will refrain from declaring a default or accelerating the
loan, at December 31, 2001, Mirant does not anticipate that such lenders will
declare a default and accelerate the loan in the event of such cross-defaults.
In addition, although Mirant believes that, in the event of an acceleration, it
would be able to refinance the Mirant Asia-Pacific loan, Mirant can give no
assurances to such effect. If Mirant does not repay or refinance such loans upon
acceleration, the loss of the cash flow and assets of Mirant Asia-Pacific would
have a material adverse effect on it. Further, the Mirant Asia-Pacific loan
matures in January 2002 and, as a result of the potential cross-defaults, Mirant
Asia-Pacific may be unable to refinance such loan on acceptable terms. In such
event, Mirant may repay the Mirant Asia-Pacific loan with amounts borrowed by it
under existing Mirant credit facilities, using borrowing capacity that could be
used to fund other investment activities. Further, in the event that a Sual or
Pagbilao cross-default occurs and the Mirant Asia-Pacific lenders declare a
default under the credit facility, Mirant Asia-Pacific would be prohibited under
its credit facility from making distributions. As a result, amounts that would
otherwise be available for distribution would not be available to Mirant to
repay indebtedness or fund investment activities. See Note 18 for additional
information on the Mirant Asia-Pacific loan.
Convertible Senior Debentures
In May 2001, Mirant Corporation completed the issuance of $750 million of
convertible senior debentures bearing an annual interest rate of 2.5%, subject
to upward adjustment commencing on June 15, 2004, depending on the market price
of its common stock. The debentures mature on June 15, 2021 and have an
equivalent initial conversion price of $67.95 per share based on the issue price
F-26
of the debentures. Holders of the debentures have the right to require the
Company to purchase all or a portion of their debentures on June 15, 2004, June
15, 2006, June 15, 2011 and June 15, 2016, at a price equal to 100% of the
principal amount plus accrued and unpaid interest. Mirant may repurchase such
securities with cash or common stock, at its election, and intends to use cash
for such purposes for securities of this nature. Mirant has the right to redeem
for cash, some or all of the debentures at any time after June 18, 2006 at a
price equal to 100% of principal amount plus accrued and unpaid interest.
Preferred Securities and Related Notes Receivable from Southern Company
In a series of transactions during 1998 and 1997, subsidiaries of Mirant
borrowed $350 million and $682 million, respectively, dollar denominated income
preferred securities. The securities are due between 2027 and 2037 with fixed
interest rates between 6.875% and 8.235%. Mirant entered into a swap agreement
to effectively convert the $82 million security borrowed in 1997 to British
Pounds Sterling at the time of issuance. This amount is not included in 2001 or
2000, as WPD is no longer consolidated for accounting purposes effective
December 1, 2000.
The subsidiary obligated mandatorily redeemable preferred securities were
issued by special purpose financing entities of Mirant. Substantially all of the
assets of these special financing entities are junior subordinated notes issued
by subsidiaries of Mirant in the amount of $979 million and held by Southern.
Payment terms and interest rates on the note receivables from Southern are
identical to the related preferred securities. The notes are due between 2027
and 2037 with fixed interest rates between 6.875% and 8.19%. These receivables
from Southern are included in notes receivable in the accompanying consolidated
balance sheet at December 31, 2000. The preferred securities and related notes
receivable were transferred to Southern as part of Mirant's separation from
Southern during 2001.
Convertible Trust Preferred Securities
In October 2000, Mirant Trust I closed the sale of 6.9 million convertible
trust preferred securities for an initial price of $50.00 per preferred
security. The net proceeds from the offering, after deducting underwriting
discounts and commissions payable by Mirant, were $334 million.
Unless Mirant redeems the debentures, and subject to its right to elect a
cash settlement, holders of preferred securities will have the right to convert
the preferred securities into shares of Mirant's common stock at any time prior
to October 1, 2030. Preferred securities that have been called for redemption
may only be converted on or before the business day prior to the close of
business on the applicable redemption date. The preferred securities will
convert into Mirant common stock at an initial conversion rate of 1.8182 shares
of common stock for each preferred security. This conversion rate is equivalent
to the conversion price of $27.50 per share of Mirant common stock. The initial
conversion rate may be subject to adjustment. Upon conversion of a preferred
security, a corresponding debenture held by the trust will be canceled.
8. Income Taxes
Details of the income tax provision for the years ended December 31, 2001,
2000 and 1999 are as follows (in millions):
2001 2000 1999
---- ---- ----
Income Tax Provision (Benefit):
Income tax from continuing operations:
United States:
Current provision (benefit)................. $ 80 $ 44 $(16)
Deferred provision ......................... 183 43 36
International:
Current (benefit) provision................. (1) (2) 18
Deferred (benefit) provision................ (2) 1 91
------- ------- -----
Total provision from continuing
operations............................. $260 $86 $129
==== ===== ======
Income tax from discontinued operations:
Current benefit............................. (14) (90) (54)
Deferred provision.......................... 11 70 39
------ ------- -----
Total benefit from discontinued operations $(3) $(20) $(15)
===== ======= =====
F-27
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases which give rise to deferred tax assets and liabilities are as follows (in
millions):
2001 2000
----- ------
Deferred Tax Assets:
Obligations under energy delivery and
purchase commitments..................... $ 775 $ 820
Capital loss carryforward................. 128 98
Employee benefits......................... 113 81
Reserves.................................. 89 38
Accumulated other comprehensive income.... 63 55
Operating loss carryforwards ............. 33 7
Deferred costs............................ 24 18
Deferred revenue.......................... 15 7
------ ------
Total................................... $1,240 $1,124
Deferred Tax Liabilities:
Property and intangible assets............ (423) (457)
Energy marketing and risk management
contracts............................... (75) (46)
Tax accrued on foreign earnings........... (5) (31)
Other..................................... (80) (34)
------ ------
Total................................... (583) (568)
------ ------
Net deferred tax assets ................ $ 657 $ 556
====== ======
Deferred tax assets and liabilities attributable to the same tax
jurisdiction are netted where appropriate in the accompanying consolidated
balance sheets.
A reconciliation of Mirant's federal statutory income tax rate to the
effective income tax rate for continuing operations for the years ended December
31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
------- ---- ------
Statutory income tax rate......... 35% 35% 35%
State income tax, net of federal
benefit........................... 6 4 1
Equity income..................... (7) (6) (1)
Tax accrued on foreign earnings... 1 (3) -
Permanent deferral of foreign
earnings.......................... (9) (14) (10)
Tax credits....................... (1) (3) (3)
Other............................. 4 4 (3)
------- ---- -----
Effective income tax rate....... 29% 17% 19%
===== ===== =====
The difference between the statutory rate and the effective income tax rate
for discontinued operations for 2001, 2000 and 1999 is primarily due to the
utilization of domestic tax credits.
Mirant will file a consolidated federal income tax return with Southern and
its subsidiaries for the period beginning January 1, 2001 and ending April 2,
2001. Mirant will file a consolidated federal income tax return for the period
beginning April 3, 2001 and ending December 31, 2001. Under a joint income tax
agreement, each subsidiary's current and deferred tax expense is computed on a
stand-alone basis, and tax payments and refunds are allocated to each entity
based on this computation.
The undistributed earnings of certain foreign subsidiaries aggregated $677
million as of December 31, 2001, which, under existing tax law, will not be
subject to United States income tax until distributed. On July 1, 2000, Mirant
adopted a strategy under which only a portion of the future earnings of certain
foreign subsidiaries will be deferred in order to reinvest funds for further
growth in Asia, fund construction efforts or service debt obligations. The
remaining earnings will be repatriated for reinvestment elsewhere in the world
or to service parent debt obligations. Of the total undistributed earnings,
provisions for United States taxes have not been accrued on $428 million related
to earnings that have been, or are intended to be, permanently reinvested.
F-28
9. Financial Instruments
Energy Marketing and Risk Management Activities
Mirant provides energy marketing and risk management services to its
customers in the North American and European markets. These services are
provided through a variety of exchange-traded and OTC energy and energy-related
contracts, such as forward contracts, futures contracts, option contracts and
financial swap agreements.
These contractual commitments are presented as energy marketing and risk
management assets and liabilities in the accompanying consolidated balance
sheets and are accounted for using the mark-to-market method of accounting in
accordance with EITF No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities." Accordingly, they are reflected at fair
value in the accompanying consolidated balance sheets. The net changes in their
market values are recognized in income in the period of change.
The energy marketing and risk management operations engage in risk
management activities with counterparties. All such transactions and related
expenses are recorded on a trade-date basis. Financial instruments and
contractual commitments related to these activities are accounted for using the
mark-to-market method of accounting. Under the mark-to-market method of
accounting, financial instruments and contractual commitments, including
derivatives used for these purposes, are recorded at fair value in the
accompanying consolidated balance sheets. The determination of fair value
considers various factors, including closing exchange or over-the-counter market
price quotations, time value and volatility factors underlying options and
contractual commitments.
The volumetric weighted average maturities, or weighted average tenor of
the portfolio, at December 31, 2001 were 2.8 years and 4.1 years for the North
American portfolio and European portfolio, respectively. The net notional
amount, or net open position, of the energy marketing and risk management assets
and liabilities at December 31, 2001 was approximately 8 million equivalent
megawatt-hours. This is equivalent to approximately 1,000 MW, or approximately
5% of Mirant's generation portfolio. The notional amount is indicative only of
the volume of activity and not of the amount exchanged by the parties to the
financial instruments. Consequently, these amounts are not a measure of market
risk.
Certain financial instruments that Mirant uses to manage risk exposure to
energy prices do not meet the hedge criteria under SFAS No. 133 and therefore,
the fair values of these instruments are included in energy marketing and risk
management assets and liabilities in the consolidated balance sheets. The fair
values and average values of Mirant's energy marketing and risk management
assets and liabilities as of December 31, 2001 are included in the following
table (in millions). The average values are based on a monthly average for 2001.
Energy Marketing and Risk Energy Marketing and Risk
Management Assets Management Liabilities
----------------------------- -------------------------------
Value at Value at
Average December 31, Average December 31,
Value 2001 Value 2001
--------------- -------------- -------------- ----------------
Energy commodity instruments:
Electricity.......................... $1,113 $ 756 $ 1,174 $ 671
Natural gas.......................... 1,337 1,366 1,081 1,314
Crude oil............................ 110 5 111 6
Other................................ 91 40 154 42
----------- -------------- ------------ -----------------
Total.............................. $2,651 $ 2,167 $ 2,520 $ 2,033
=========== ============== ============ ==================
F-29
Derivative Hedging Instruments
Mirant uses derivative instruments to manage exposures arising from changes
in interest rates, commodity prices and foreign currency exchange rates.
Mirant's objectives for holding derivatives are to minimize the risks using the
most effective methods to eliminate or reduce the impacts of these exposures.
Derivative gains and losses arising from cash flow hedges that are included
in OCI are reclassified into earnings in the same period as the settlement of
the underlying transaction. During 2001, $143 million of pre-tax derivative net
gains were reclassified to operating income, $25 million of pre-tax derivative
net losses were reclassified to interest expense and $9 million of pre-tax
derivative net gains were reclassified to other income, net. The derivative
gains and losses reclassified to earnings were partly offset by realized gains
and losses arising from the settlement of the underlying physical transactions
being hedged. Under SFAS No. 133, transactions may meet the requirements for
hedge treatment but may be less than 100% effective. For example, a derivative
instrument specifying one location may be used to hedge a risk at a different
location. The price differential between the two locations is considered the
ineffective portion of the hedge. Any changes in the fair value of the
ineffective portion must be recorded currently in earnings. During 2001, $5
million of pre-tax gains arising from hedge ineffectiveness were recognized in
other income, net. The maximum term over which Mirant is hedging exposures to
the variability of cash flows is through 2012.
Interest Rate Hedging
Mirant's policy is to manage interest expense using a combination of fixed-
and variable-rate debt. To manage this mix in a cost-efficient manner, Mirant
enters into interest rate swaps in which it agrees to exchange, at specified
intervals, the difference between fixed- and variable-interest amounts
calculated by reference to agreed-upon notional principal amounts. These swaps
are designated to hedge underlying debt obligations. For qualifying hedges, the
changes in the fair value of gains and losses of the swaps are deferred in OCI,
net of tax, and the interest rate differential is reclassified from OCI to
interest expense as an adjustment over the life of the swaps. Gains and losses
resulting from the termination of qualifying hedges prior to their stated
maturities are recognized ratably over the original remaining life of the
hedging instrument, provided the underlying hedged transactions are still
probable. Otherwise the gains and losses will be recorded currently in earnings.
Commodity Price Hedging
Mirant enters into commodity financial instruments in order to hedge market
risk and exposure to electricity and to natural gas, coal and other fuels
utilized by its generation assets. These financial instruments primarily include
forwards, futures and swaps. Where these derivatives are designated as cash flow
hedges, the gains and losses are recognized in earnings in the same period as
the settlement of the underlying physical transaction.
At December 31, 2001, Mirant had a net derivative hedging asset of
approximately $126 million. The fair value of its commodity hedging financial
instruments is determined using various factors, including closing exchange or
over-the-counter market price quotations, time value and volatility factors
underlying options and contractual commitments.
At December 31, 2001, Mirant had contracts that related to periods through
2010. The net notional amount, or net open position, of the derivative hedging
instruments at December 31, 2001 was 4 million equivalent megawatt-hours. This
is equivalent to approximately 500 MW, or 3% of Mirant's generation portfolio.
The notional amount is indicative only of the volume of activity and not of the
amount exchanged by the parties to the financial instruments. Consequently, this
amount is not a measure of market risk.
F-30
Foreign Currency Hedging
Mirant uses cross-currency swaps and currency forwards to hedge its net
investments in certain foreign subsidiaries. Gains or losses on these
derivatives designated as hedges of net investments are reflected in OCI, net of
tax, and are offset against the translation effects reflected in OCI, net of
tax.
Mirant also utilizes currency forwards intended to offset the effect of
exchange rate fluctuations on forecasted transactions arising from contracts
denominated in a foreign currency. In addition, Mirant utilizes cross-currency
swaps that offset the effect of exchange rate fluctuations on foreign currency
denominated debt and fixes the interest rate exposure. Certain other assets are
exposed to foreign currency risk. Mirant designates currency forwards as hedging
instruments used to hedge the impact of the variability in exchange rates on
accounts receivable denominated in certain foreign currencies. When these
hedging strategies qualify as cash flow hedges, the gains and losses on the
derivatives are deferred in OCI, net of tax, until the forecasted transaction
affects earnings. The reclassification is then made from OCI to earnings to the
same revenue or expense category as the hedged transaction.
Interest Rate and Currency Swaps
The interest rates noted in the following table represent the range of
fixed interest rates that Mirant pays on the related interest rate swaps. On
virtually all of these interest rate swaps, Mirant receives floating interest
rate payments at LIBOR. The currency derivatives mitigate Mirant's exposure
arising from certain foreign currency transactions.
Year of Maturity Number of Notional Unrecognized
Type or Termination Interest Rates Counterparties Amount (Loss) Gain
--------------------------- -------------------- ---------------- ------------------ ------------- -----------------
(in millions)
Interest rate swaps.... 2002-2012 3.85%-7.03% 5 $874 $ (44)
2002-2007 4.98%-5.79% 3 353 (8)
Cross currency swaps... 2002 -- 2 (pound)22 2
Currency forwards...... 2002-2004 -- 2 (1)CAD67 -
2002 -- 4 (pound)36 -
2002 -- 5 1,600 (10)
2002 -- 2 AUD32 -
----------
$ (60)
==========
(pound) - Denotes British pounds sterling
- Denotes Eurodollar
CAD - Denotes Canadian dollar
AUD - Denotes Australian dollar
(1) Contracts with a notional amount of CAD54 million are included in fair value
of energy marketing and risk management liabilities because hedge accounting
criteria are not met.
The unrecognized gain/loss for interest rate swaps is determined based on
the estimated amount that Mirant would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The
unrecognized gain/loss for cross-currency financial instruments is determined
based on current foreign exchange rates.
Other Financial Instruments
In October 2001, Mirant Americas Energy Marketing entered into a prepaid
gas transaction. As a result of this transaction, Mirant Americas Energy
Marketing received a $218 million payment in October 2001 in exchange for
financial settlements to be made over a three-year period. Approximately 10% of
the contract notional quantity will settle in October 2002 and October 2003,
respectively, and the remaining 80% will settle in October 2004. The amount of
these settlements will be based on fixed notional quantities of gas at index
prices on the date of each settlement. Simultaneous with entering into the
F-31
prepaid gas transaction, Mirant Americas Energy Marketing entered into a natural
gas swap with a third-party independent of the gas transaction to fix the price
of the natural gas to be settled under the prepaid gas transaction at
approximately $250 million. The estimated obligation related to this transaction
is included in current and noncurrent liabilities on Mirant's consolidated
balance sheet at December 31, 2001 and the cash received in October is reflected
in cash from operations in the accompanying consolidated statement of cash flows
for the year ended December 31, 2001. The obligations of Mirant Americas Energy
Marketing under this transaction are guaranteed by Mirant Corporation.
Fair Values
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of the fair value of all financial instruments.
Financial instruments recorded at market or fair value include cash and
interest-bearing equivalents, financial instruments used for energy marketing
and risk management purposes, commodities and related instruments used for
energy marketing and risk management purposes, including options and contractual
commitments. See the Derivative Hedging Instruments section in this note where
commodity contracts for hedging purposes are discussed. The following methods
were used by Mirant to estimate the fair value of all other financial
instruments not carried at fair value on the accompanying consolidated balance
sheets:
Notes Receivable. The fair value of Mirant's notes receivable is
estimated using interest rates it would receive based on similar types of
arrangements.
Notes Payable and Other Long- and Short-Term Debt. The fair value of
Mirant's notes payable and long- and short-term debt is estimated using
discounted cash flow analysis based on current market interest rates for
similar types of borrowing arrangements and market quotes, when available.
Subsidiary Obligated Mandatorily Redeemable Preferred Securities. The
fair value of Mirant's subsidiary obligated preferred securities is
calculated based on current market price.
Company Obligated Mandatorily Redeemable Securities. The fair value of
Mirant's company obligated preferred securities is calculated based on
current market price.
The carrying or notional amounts and fair values of Mirant's financial
instruments at December 31, 2001 and 2000 were as follows (in millions):
2001 2000
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- -------- --------- --------
Notes receivable, including current portion..... $ 311 $ 311 $ 1,553 $ 1,553
Notes payable and long- and short-term debt..... 8,483 7,884 7,086 6,553
Subsidiary obligated mandatorily redeemable
preferred securities............................ 0 0 950 934
Company obligated mandatorily redeemable
securities of a subsidiary holding solely parent
company debentures............................. 345 280 345 428
10. Capital Transactions
In December 2001, Mirant completed a public offering of 60 million shares
of its common stock for a price of $13.70 per share. The net proceeds from the
offering, after deducting underwriting discounts and commissions payable by
Mirant, were $759 million.
During 2000, Mirant completed an initial public offering of 66.7 million
shares of its common stock for a price of $22.00 per share. The net proceeds
from the offering, after deducting underwriting discounts and commissions
payable by Mirant, were $1.38 billion.
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11. Commitments and Contingent Matters
Litigation and Other Contingencies
Reliability-Must-Run Agreements: Mirant's subsidiaries acquired generation
assets from Pacific Gas and Electric Company ("Pacific Gas and Electric") in
April 1999, subject to reliability-must-run ("RMR") agreements. These agreements
allow the California Independent System Operator ("CAISO"), under certain
conditions, to require certain of Mirant's subsidiaries to run the acquired
generation assets in order to support the reliability of the California electric
transmission system. Mirant assumed these agreements from Pacific Gas and
Electric prior to the outcome of a Federal Energy Regulatory Commission ("FERC")
proceeding initiated in October 1997 that will determine the percentage of a
$158.8 million annual fixed revenue requirement to be paid to Mirant by the
CAISO under the RMR agreements. This revenue requirement was negotiated as part
of a prior settlement of a FERC rate proceeding. Mirant contends that the amount
paid by the CAISO should reflect an allocation based on the CAISO's right to
call on the units (as defined by the RMR agreements) and the CAISO's actual
calls. This approach would result in annual payments by the CAISO of
approximately $120 million, or 75% of the settled fixed revenue requirement. The
decision in this case will affect the amount the CAISO will pay to Mirant for
the period from June 1, 1999 through the final disposition of the appeal. On
June 7, 2000, the administrative law judge ("ALJ") presiding over the proceeding
issued an initial decision in which responsibility for payment of approximately
3% of the revenue requirement was allocated to the CAISO. On July 7, 2000,
Mirant appealed the ALJ's decision to the FERC.
If Mirant is unsuccessful in its appeal of the ALJ's decision, it will be
required to refund certain amounts of the revenue requirement paid by the CAISO
for the period from June 1, 1999 until the final disposition of the appeal. The
amount of this refund as of December 31, 2001 would have been approximately $219
million; however, there would have been no effect on net income for the periods
under review as adequate reserves have been recorded. This amount does not
include interest that may be payable in the event of a refund. If Mirant is
unsuccessful in its appeal, Mirant plans to pursue other options available under
the RMR agreements to mitigate the impact of the ALJ's decision upon its future
operations. The outcome of this appeal is uncertain, and Mirant cannot provide
assurance that it will be successful.
Defaults by SCE and Pacific Gas and Electric and Bankruptcy of Pacific Gas
and Electric: On January 16 and 17, 2001, the credit and debt ratings of
Southern California Edison ("SCE") and Pacific Gas and Electric were lowered by
Moody's Investors Service ("Moody's") and Standard & Poor's ("S&P") to
"non-investment grade" status. On January 16, 2001, SCE indicated that it would
suspend indefinitely certain obligations including a $215 million payment due to
the California Power Exchange Corporation ("PX") and a $151 million payment due
to a qualifying facility. On April 6, 2001, Pacific Gas and Electric filed a
voluntary petition under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of California in San Francisco. It is
not known at this time what effect the bankruptcy filing will have on the
ultimate recovery of amounts owed to Mirant. On September 20, 2001, Pacific Gas
and Electric filed a proposed plan of reorganization. Under the terms of the
proposed plan, unsecured creditors such as Mirant would receive 60% of the
amounts owed upon approval of the plan. The remaining 40% would be paid in
negotiable debt with terms from 10 to 30 years.
California PX Bankruptcy: On March 9, 2001, the California PX filed for
bankruptcy. Mirant Americas Energy Marketing has been named to the participants'
committee. The PX's ability to repay its debt is directly dependent on the
extent that it receives payments from Pacific Gas and Electric and SCE and on
the outcome of its litigation with the California state government. As of
December 31, 2001, the total amount owed to Mirant by the CAISO and the PX was
$361 million. The total amount of provisions made during 2000 and 2001 in
relation to uncertainties in the California power market was $295 million
pre-tax. It is uncertain what effect the PX's bankruptcy will have on the
receivables owed to the Company.
DWR Power Purchases: On January 17, 2001, the Governor of California issued an
emergency proclamation giving the DWR authority to enter into arrangements to
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purchase power in order to mitigate the effects of electrical shortages in the
state. The DWR began purchasing power under that authority the next day. On
February 1, 2001, the Governor of California signed Assembly Bill No. 1X
authorizing the DWR to purchase power in the wholesale markets to supply retail
consumers in California on a long-term basis. The Bill became effective
immediately upon its execution by the Governor. The Bill did not, however,
address the payment of amounts owed for power previously supplied to the CAISO
or PX for purchase by SCE and Pacific Gas and Electric. The CAISO and PX have
not paid the full amounts owed to Mirant's subsidiaries for power delivered to
the CAISO and PX in prior months and are expected to pay less than the full
amount owed on further obligations coming due in the future for power provided
to the CAISO for sales that were not arranged by the DWR. The ability of the DWR
to make future payments is subject to the DWR having a continued source of
funding, whether from legislative or other emergency appropriations, from a bond
issuance or from amounts collected from SCE and Pacific Gas and Electric for
deliveries to their customers. On May 24, 2001, Mirant entered into a 19-month
agreement with the DWR to provide the State of California with approximately 500
MW of electricity. The contract runs through December 31, 2002.
California Rate Payer Litigation: Six lawsuits have been filed and coordinated
in the Superior Courts for San Diego County alleging that certain owners of
electric generation facilities in California and energy marketers, including
Mirant, Mirant Americas Energy Marketing, Mirant Delta, LLC ("Mirant Delta") and
Mirant Potrero, LLC ("Mirant Potrero"), engaged in various unlawful and
anti-competitive acts that served to manipulate wholesale power markets and
inflate wholesale electricity prices in California. Three of the suits seek
class action status, while two of the suits are brought on behalf of all
citizens of California. One lawsuit alleges that, as a result of the defendants'
conduct, customers paid approximately $4 billion more for electricity than they
otherwise would have and seeks an award of treble damages as well as other
injunctive and equitable relief. One lawsuit also names certain of Mirant's
officers individually as defendants and alleges that the state had to spend more
than $6 billion purchasing electricity and that if an injunction is not issued,
the state will be required to spend more than $150 million per day purchasing
electricity. The other suits likewise seek treble damages and equitable relief.
One such suit names Mirant Corporation itself as a defendant. The final outcome
of these lawsuits cannot now be determined.
Western Power Markets Investigations: The California Public Utilities Commission
("CPUC"), the California Senate, the San Joaquin District Attorney and the
Attorney General's offices of Washington, Oregon and California have each
launched civil and criminal investigations into the California energy markets
that have resulted in the issuance of subpoenas of several of Mirant's entities.
In addition, the CPUC has had personnel onsite on a periodic basis at Mirant's
California generating facilities since December 2000. The California Attorney
General issued its subpoena to Mirant in February 2001 under the following
caption: "In the Matter of the Investigation of Possibly Unlawful, Unfair, or
Anti-Competitive Behavior Affecting Electricity Prices in California." Each of
these subpoenas, as well as the plant visits, could impose significant
compliance costs on Mirant or its subsidiaries. Also, on April 18, 2001, the
Attorney General filed suit against the Company in the San Francisco Superior
Court seeking to compel it to produce documents in the investigation. With
respect to both the CPUC and the California Attorney General's office, there is
ongoing litigation between Mirant and these agencies regarding the scope of the
subpoenas and the confidentiality of the Company's documents. Despite the
various measures taken to protect the confidentiality of sensitive information
provided to these agencies, there remains a risk of governmental disclosure of
the confidential, proprietary and trade secret information obtained by these
agencies throughout this process.
While Mirant will vigorously defend against any claims of potential civil
liability or criminal wrongdoing asserted against the Company or its
subsidiaries, the results of such investigations cannot now be determined.
State Line: On July 28, 1998, an explosion occurred at the Company's State Line
plant causing a fire and substantial damage to the plant. The precise cause of
F-34
the explosion and fire has not been determined. Thus far, seven personal injury
lawsuits have been filed against Mirant, five of which were filed in Cook
County, Illinois. Mirant has settled the claim of one of these plaintiffs, but
the settlement agreement still requires court approval. Mirant filed a motion to
dismiss the five Cook County cases in 1998 for lack of "in personam"
jurisdiction and is in the process of appealing the denial of these motions. The
outcome of these proceedings cannot now be determined and an estimated range of
loss cannot be made; however, the Company has significant insurance coverage for
losses occurring as a result of the explosion.
Enron Bankruptcy Proceedings: On December 2, 2001, Enron, along with several of
its subsidiaries, filed for bankruptcy. As of December 31, 2001, the total
amount owed to Mirant by Enron was approximately $77 million. Based on a reserve
recorded in 2001, the Company does not expect the outcome of the bankruptcy
proceeding to have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
California Price Mitigation and Refund Proceeding: On June 19, 2001, the FERC
issued an order that provides for price mitigation in all hours in which power
reserves fall below 7 %. During these emergency hours, the FERC will use a
formula based on the marginal costs of the highest cost generator called on to
run to determine the overall market clearing price. This price mitigation
includes all spot market sales in markets throughout the Western System
Coordinating Council. This price mitigation was implemented on June 20, 2001 and
will extend until September 30, 2002. The FERC requires that all public and
non-public utilities which own or control non-hydroelectric generation in
California must offer power in the CAISO's spot markets, to the extent the
output is not scheduled for delivery in the hour. Mirant cannot predict how the
FERC will rule on any future requests or justifications for prices higher than
the mitigated price during future months.
On July 25, 2001, the FERC issued an order requiring hearings to determine
the amount of any refunds and amounts owed for sales made to the CAISO/PX from
October 1, 2000 through June 20, 2001. Hearings are scheduled to be held in
March 2002 and June 2002. In the July 25 order, the FERC also ordered that a
preliminary evidentiary proceeding be held to develop a factual record on
whether there have been unjust and unreasonable charges for spot market
bilateral sales in the Pacific Northwest from December 25, 2000 through June 20,
2001. In the proceeding, the DWR filed to recover certain refunds from parties,
including a Mirant subsidiary, for bilateral sales of electricity to the DWR at
the California/Oregon border, claiming that such sales took place in the Pacific
Northwest. The FERC ALJ has concluded a preliminary evidentiary hearing related
to possible refunds for power sales in the Pacific Northwest. In a preliminary
ruling issued September 24, 2001, the ALJ indicated that she would order no
refunds because the complainants had failed to prove any exercise of market
power or that any prices were unjust or unreasonable. The FERC may accept or
reject this preliminary ruling and the FERC's decision may itself be appealed.
Mirant cannot predict the outcome of this proceeding. If the Company were
required to refund such amounts, its subsidiaries would be required to refund
amounts previously received pursuant to sales made on their behalf. In addition,
Mirant's subsidiaries would be owed amounts for purchases made on their behalf
from other sellers in the Pacific Northwest.
Environmental Information Requests: Along with several other electric generators
which own facilities in New York, in October 1999 Mirant New York received an
information request from the state of New York concerning the air quality
control implications of various repairs and maintenance activities of Mirant New
York at its Lovett facility. Mirant New York responded fully to this request and
provided all of the information requested by the state. The state of New York
issued notices of violation to some of the utilities being investigated. The
state issued a notice of violation to the previous owner of Plant Lovett, Orange
F-35
and Rockland Utilities, alleging violations associated with the operation of
Plant Lovett prior to the acquisition of the plant by Mirant New York. To date,
Mirant New York has not received a notice of violation. Mirant New York
disagrees with the allegations of violations in the notice of violation issued
to the previous owner. The notice of violation does not specify corrective
actions which the state of New York may require. Under the sales agreement with
Orange and Rockland Utilities for Plant Lovett, Orange and Rockland Utilities is
responsible for fines and penalties arising from historical operations, but
Mirant New York may be responsible for the cost of purchasing and installing
emission control equipment, the cost of which may be material. Mirant New York
is engaged in discussions with the state to explore a resolution of this matter.
In January 2001, the U.S. Environmental Protection Agency (the "EPA"),
issued a request to Mirant Mid-Atlantic for information under the Clean Air Act
concerning the air permitting implications of past repair and maintenance
activities at its Potomac River plant in Virginia and Chalk Point, Dickerson and
Morgantown plants in Maryland. Mirant Mid-Atlantic has responded fully to this
request.
The Company cannot provide assurance that lawsuits or other administrative
actions against its power plants will not be filed or taken in the future. If an
action is filed against the Company or its power plants and it is judged to not
be in compliance, this could require substantial expenditures to bring the
Company's power plants into compliance and have a material adverse effect on its
financial condition, cash flows and results of operations.
In addition to the matters discussed above, Mirant is party to legal
proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on the Company's consolidated results of operations, cash flows or
financial position. The Company books estimated losses from contingencies when
information available indicates that a loss is probable in accordance with SFAS
No. 5, "Accounting for Contingencies."
Commitments and Capital Expenditures
Mirant has made firm commitments to buy materials and services in
connection with its ongoing operations and planned expansion and has made
financial guarantees relative to some of its investments.
The material commitments are discussed in the following sections.
Energy Marketing and Risk Management
Mirant Corporation had approximately $1.22 billion trade credit support
commitments outstanding as of December 31, 2001, which included $436 million of
letters of credit, $178 million of net cash collateral posted and $607 million
of parent guarantees, as compared to approximately $883 million trade credit
support commitments, which included $363 million of outstanding letters of
credit, $51 million of net cash collateral held and $571 million of parent
guarantees, as of December 31, 2000.
Mirant Corporation has also guaranteed the performance of its obligations
under a multi-year agreement entered into by Mirant Americas Energy Marketing
with Brazos Electric Power Cooperative ("Brazos"). Under the agreement,
effective January 1999, Mirant Corporation provides all the electricity required
to meet the needs of the distribution cooperatives served by Brazos. Mirant
Corporation is entitled to the output of Brazos' generation facilities and its
rights to electricity under power purchase agreements Brazos has entered into
with third parties. Mirant Corporation's guarantee was $65 million at December
31, 2001, a decrease of $5 million from December 31, 2000. Mirant Corporation is
subject to regulatory and commercial risks under this energy requirements
contract. Mirant Corporation believes that it has adequately provided for
estimated future losses under this contract, which terminates at the end of
2003; however, no assurance can be given that additional losses will not occur.
Mirant Corporation also has a guarantee related to Pan Alberta Gas, Ltd. of
$64 million issued in 2000 and outstanding at December 31, 2001.
Vastar Resources, Inc. ("Vastar"), a subsidiary of BP p.l.c. ("BP"), and
Mirant Corporation had issued certain financial guarantees made in the ordinary
course of business, on behalf of Mirant Americas Energy Marketing's
counterparties, to financial institutions and other credit grantors. Mirant
F-36
Corporation has agreed to indemnify BP against losses under such guarantees in
proportion to Vastar's former ownership percentage of Mirant Americas Energy
Marketing (Note 12). At December 31, 2001, such guarantees amounted to
approximately $92 million.
Perryville, in which Mirant has a 50% ownership interest accounted for
under the equity method, entered into a 20-year tolling agreement with Mirant
Americas Energy Marketing in April 2001. Under the agreement, Perryville will
sell all the electricity generated by the facility to Mirant Americas Energy
Marketing. At December 31, 2001, the total estimated notional commitment under
this agreement was approximately $1.07 billion over the 20-year life of the
contract.
To the extent that Mirant Corporation does not maintain its current
investment ratings, it could be required to provide alternative collateral to
certain risk management and marketing counterparties based on the value of the
Company's portfolio at such time, in order to continue its current relationship
with those counterparties. Mirant could also be required to provide alternative
collateral related to committed pipeline capacity charges. Such collateral might
be in the form of cash and/or letters of credit. There is an additional risk
that in the event of a further reduction of Mirant's credit rating that
certain counterparties may, without contractual justification, request
additional collateral or terminate their obligations to Mirant.
Turbine Purchases and Other Construction-Related Commitments
Mirant had agreements to purchase 48 turbines (38 gas turbines and 10 steam
turbines) to support the Company's ongoing and planned construction efforts.
Mirant's options to purchase an additional 32 turbines expired unexercised on
December 31, 2001. Minimum termination amounts under all purchase contracts
consisted of a refund of $87 million resulting from Mirant's payments exceeding
the minimum termination amounts at December 31, 2001. At December 31, 2001,
total amounts to be paid under the agreements if all turbines were purchased as
planned were estimated to be $450 million. At December 31, 2001, other
construction-related commitments totaled approximately $1.05 billion.
In addition to these commitments, Mirant, through certain of its
subsidiaries, has two off-balance sheet equipment procurement facilities. These
facilities are being used to fund equipment progress payments due under purchase
contracts that have been assigned to two separate, independent third party
owners. For the first facility, which is a $1.80 billion notional value
facility, contracts for 46 turbines (32 gas turbines and 14 steam turbines) have
been assigned to a third party trust. Tranche one of this facility is $700
million, and tranche two, which requires cash collateralization in order to be
drawn, is $1.10 billion. All amounts outstanding under tranche one are required
to be cash collateralized after April 2004. Mirant Americas Development Capital
acts as the trust's agent with regards to obligations under the equipment
purchase contracts. For the second facility, which is a Euro 1.10 billion
notional value facility, contracts for nine engineered equipment packages
("power islands") have been assigned to a third party owner incorporated in The
Netherlands. Tranche one of this facility is Euro 600 million, and tranche two,
which requires cash collateralization to be drawn, is Euro 500 million. Mirant
Asset Development and Procurement B.V. acts as the third party owner's agent
with respect to the obligations under the power island purchase contracts.
As part of these assignments, Mirant's subsidiaries have entered into
agency agreements with the respective third-party owners whereby Mirant is
required to manage procurement of this equipment. Under the agency agreements,
Mirant maintains purchase options for each individual turbine and power island,
which, subject to certain conditions, may be assigned to other third parties. In
addition to the purchase options under the agreements, Mirant also maintains
options to lease the turbines and the power islands after completion. Under the
Mirant Asset Development and Procurement B.V. equipment procurement facility,
the lease is required to be cash collateralized. If upon the end of the
respective terms of the agreements Mirant has failed to exercise either its
purchase options or lease options for each turbine and power island, Mirant may
participate in the re-marketing of this equipment. Mirant has guaranteed the
respective obligations of Mirant Americas Development Capital and Mirant Asset
Development and Procurement B.V. in connection with the equipment procurement
facilities, including certain payment obligations equal to approximately 89.9%
of equipment costs (including financing costs), of which approximately $385
F-37
million was incurred as of December 31, 2001. Additionally, if Mirant had
elected to exercise its purchase options with respect to all of the turbines and
power islands and to terminate the procurement contracts at December 31, 2001,
minimum termination amounts due under the turbine and power island procurement
contracts would have been $451 million. At December 31, 2001, if the purchase
options or options to lease the turbines and power islands are exercised, total
commitments under the procurement contracts would be approximately $2.43 billion
as of December 31, 2001. See Note 18 for additional information on turbine
purchases and other construction-related commitments.
Long-term Service Agreements
Mirant has entered into long-term service agreements for the maintenance
and repair by third parties of many of its combustion-turbine and combined-cycle
generating plants. These agreements may be terminated at no cost in the event a
planned construction project is cancelled prior to shipment of the associated
turbine. As of December 31, 2001, the minimum termination amount for long-term
service agreements associated with completed and shipped turbines was $495
million, and the total estimated commitments for long-term service agreements
for turbines shipped as of December 31, 2001 were approximately $642 million.
Power Purchase Agreements
Under the asset purchase and sale agreement for Potomac Electric Power
Company ("PEPCO"), Mirant assumed the obligations and benefits of five power
purchase agreements with a total capacity of 735 MW (Note 12). Three of the
power purchase agreements represent 730 MW. At December 31, 2001, the estimated
commitments under the agreements were $1.68 billion, of which $534 million is
included in obligations under energy delivery and purchase commitments in the
consolidated balance sheets. The agreements will continue to be in effect
through 2021.
Fuel Commitments
Mirant has fixed volumetric purchase commitments under fuel purchase and
transportation agreements totaling $142 million at December 31, 2001. These
agreements will continue to be in effect through 2011. In addition, Mirant has a
contract with BP whereby BP is obligated to deliver fixed quantities of natural
gas at identified delivery points. The negotiated purchase price of delivered
gas is generally equal to the daily spot rate then prevailing at each delivery
point. The agreement will continue to be in effect through December 31, 2007,
unless terminated sooner. The estimated commitment for the term of this
agreement based on current spot prices is $4.96 billion as of December 31, 2001.
Because this contract is based on the current spot price at the time of
delivery, Mirant has the ability to sell the gas at the same spot price,
thereby, offsetting the full amount of its commitment related to this
contract. In the event the Company does not maintain its current credit
ratings BP could request additional collateral. Based on the Company's current
estimate, Mirant could be required to post approximately $270 million of
additional collateral.
Operating Leases
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $124 million, $17 million and $17 million during the years ended
December 31, 2001, 2000 and 1999, respectively.
Mirant entered into lease transactions that provided approximately $1.50
billion, net of associated expenses, of the purchase price at the closing of the
PEPCO transaction (Note 12). The leases are treated as operating leases for book
purposes whereby one of Mirant's subsidiaries records periodic lease rental
expenses.
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The following table summarizes Mirant's obligations discussed above
excluding the BP contract. As of December 31, 2001 Mirant has the following
annual commitments for long-term service, turbine purchases, turbine procurement
facilities, fuel, power purchases and operating leases (in millions):
Long-Term Turbine Turbine Power
Service Purchase Procurement Fuel/Transportation Purchase Operating
Agreements Commitments Facilities Commitment Agreements Leases
------------------------------------------------------------------------------------------
Fiscal Year Ended:
2002.................... $ 45 $ 450 $ 459 $ 21 $ 244 $ 226
2003.................... 58 0 1,372 21 264 206
2004.................... 58 0 579 22 264 175
2005................... 55 0 24 22 264 169
2006.................... 51 0 0 22 104 158
Thereafter.............. 375 0 0 34 1,611 2,688
----- ------ ------ ---- ------- ------
Total minimum payments.. $ 642 $ 450 $2,434 $142 $ 2,751 $3,622
====== ====== ====== ==== ======= ======
Environmental Guarantee
In June 2001, Mirant entered into an air permit guarantee and a wastewater
discharge permit guarantee in connection with a loan agreement between
Perryville (Note 1) and its lenders. Under these guarantee agreements, Mirant
guaranteed the debt payments under the loan agreement if Perryville does not
obtain or achieve necessary air and wastewater discharge permit compliance.
These guarantee agreements will continue to be in effect through 2003.
Perryville began to commercially operate a 150 MW, natural gas-fired,
simple-cycle unit in Louisiana in July 2001 and is constructing a 562 MW natural
gas-fired combined-cycle unit that is expected to be completed in 2002. At
December 31, 2001, the outstanding balance under the loan agreement was
approximately $240 million. Mirant has entered into a separate agreement with
Cleco Midstream Resources, LLC ("Cleco"), who holds the remaining 50% ownership
interest in Perryville, under which Mirant is paid a fixed percentage fee based
on 50% of the outstanding draws under the loan agreement for providing the loan
agreement guarantees on behalf of Cleco.
Labor Subject to Collective Bargaining Agreements
At its Midwest business unit, Mirant has a labor contract with the United
Steel Workers that extends to January 1, 2004 and involves 91 employees at the
State Line facility in Indiana, as well as 12 employees at the Zeeland, Michigan
facility and another 4 employees at the Sugar Creek (Terre Haute), Indiana
facility. These union employees represent approximately 75% of the facilities'
total personnel.
At its Mid-Atlantic facilities located in Washington D.C., Maryland and
Virginia, Mirant has a labor contract with the International Brotherhood of
Electrical Workers that covers approximately 680 employees, or 70% of Mirant's
Mid-Atlantic facilities total personnel. The term of the Agreement extends to
May 31, 2003 and continues for succeeding periods of 12 calendar months each,
unless either party, prior to April 1, 2003, or April 1 of any year thereafter,
serves written notice of its desire to amend and/or terminate the Agreement as
of the following June 1.
Mirant's California business has a labor contract with the International
Brotherhood of Electrical Workers that extends to October 2004. This contract
covers approximately 157 employees, or 75% of Mirant's California total
personnel.
Mirant's New York business has a labor contract with the International
Brotherhood of Electrical Workers that extends to June 2003 and involves
approximately 165 employees, or 70% of Mirant's New York total personnel.
Mirant Kendall, a subsidiary of Mirant located in Cambridge, Massachusetts
has extended its contract with the Utilities Workers' Union of America to March
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2003. Mirant Canal, a subsidiary of Mirant located in Sandwich, Massachusetts
has a labor contract with the Utilities Workers' Union of America that expires
on May 31, 2006. These contracts involve approximately 77% and 61% of each
facility's employees.
JPSCo, of which Mirant owns an 80% interest, has four labor contracts. The
four contracts are with the Managers' Association, the Union of Technical
Administrative and Supervisory Personnel ("UTASP"), the National Workers' Union
("NWU") and the Bustamante Industrial Trade Union ("BITU"). These contracts
involve approximately 13%, 27%, 27% and 19%, respectively, of JPSCo's total
personnel. The contract with the Managers' Association expired on November 30,
2001, and the contracts with the UTASP, NWU and BITU expired on December 31,
2001. Negotiations are currently underway with respect to new contracts.
Grand Bahama Power, of which Mirant owns a 55.4% interest, has two labor
contracts with the Bahamas Industrial Engineers, Managerial and Supervisory
Union and the Commonwealth Electrical Workers Union that extend to December 31,
2004 and March 31, 2005, respectively. These contracts involve approximately
19% and 73%, respectively, of Grand Bahama Power's total personnel.
Uncertainties Related to Contract Sales
Several of Mirant's significant power generation facilities rely on either
Power Purchase Agreements or Energy Conversion Agreements ("ECAs" and
collectively with the Power Purchase Agreements, the "Power Contracts") with one
or a limited number of entities for the majority of, and in some cases all of,
the relevant facility's output over the life of the Power Contracts.
The Power Contracts related to Mirant's facilities are generally long-term
agreements covering the sale of power for 20 or more years. However, the
operation of such facilities is dependent on the continued performance by
customers and suppliers of their obligations under the relevant Power Contract,
and, in particular, on the credit quality of the purchasers. If a substantial
portion of Mirant's long-term Power Contracts were modified or terminated,
Mirant would be adversely affected to the extent that it was unable to find
other customers at the same level of profitability. Some of Mirant's long-term
Power Contracts are for prices above current market prices. The loss of one or
more significant Power Contracts or the failure by any of the parties to a Power
Contract to fulfill its obligations thereunder could have a material adverse
effect on Mirant's business, results of operations and financial condition.
Mirant has entered into two significant Power Contracts. These two contracts
are ECAs between subsidiaries of Mirant Asia-Pacific and the NPC of the
Philippines. The contract for the Pagbilao plant is for 29 years and terminates
in August 2025. The contract for the Sual plant is for 25 years and terminates
in October 2024. The contracted capacity is 735 MW and 1,000 MW for Pagbilao and
Sual, respectively. The capacity fees are payable as compensation for capacity
available for power generation. These fees consist of capital recovery fees,
fixed operating fees, infrastructure fees and the components of service fees.
Over 90% of the revenues are expected to come from fixed capacity charges that
are paid without regard to dispatch level of the plant. The energy fees are
based on energy sold and are designed to cover variable operating and
maintenance costs. In accordance with the contracts, NPC assumes all fuel
procurement risks, including price and delivery.
Minority Shareholder Put Options
Sual
Under shareholder agreements, the minority shareholders of the Mirant
Asia-Pacific subsidiary which holds the Sual project ("MSC") can exercise a put
option requiring Mirant Asia-Pacific and/or its subsidiaries who hold the shares
of MSC to purchase the minority shareholders' interests in the project. The put
option can be exercised (i) between December 21, 2002 and December 21, 2005, the
F-40
third and sixth anniversaries of the completion of the project construction or,
(ii) in the event of any change in control, a change in MSC's charter documents
or the transfer of sponsor in violation of the sponsor support agreement on the
earlier of the date of such changes/events or December 21, 2011, the twelfth
anniversary of the completion of project construction. The price would be
determined by a formula including the discounted future annual net cash flow
less the total liabilities outstanding plus the current assets as of the date of
the put notice. Discounted future annual net cash flow is comprised of capacity
and energy fees less operating and maintenance costs less capital expenditures.
If, at any time, MSC proposes to transfer shares to any proposed transferee
(other than public offering), MSC shall afford each of the minority shareholders
the opportunity to participate proportionately in such stock transfer. However,
management does not currently expect all parties to exercise their options.
Pagbilao
Under shareholder agreements, the minority shareholders of the Mirant
Asia-Pacific subsidiary which holds the Pagbilao project ("MPagC") can exercise
a put option requiring Mirant Asia-Pacific and/or its subsidiaries who hold
shares of MPagC to purchase the minority shareholders' interests in the project.
The put option can be exercised (i) between August 5, 2002 and August 5, 2008,
the sixth and twelfth anniversaries of the completion of the project
construction or, (ii) in the event of any change in control, a change in MPagC's
charter documents or the transfer of sponsor in violation of the sponsor
completion support agreement. The put option may be exercised on the earlier of
the date of such changes/events or August 5, 2008, the twelfth anniversary of
the completion of project construction. The price would be determined by a
formula including the discounted future annual net cash flow less the total
liabilities outstanding plus the current assets as of the date of the put
notice. Discounted future annual net cash flow is comprised of capacity and
energy fees less operating and maintenance costs less capital expenditures. If,
at any time, MPagC proposes to transfer shares to any proposed transferee (other
than public offering), MPagC shall afford each of the minority shareholders the
opportunity to participate proportionately in such stock transfer. However,
management does not currently expect all parties to exercise their options.
Employee Contracts
Certain executives of the Company have contracts, which generally provide
benefits in the event of termination or involuntary resignation for "good
reason" accompanied by a change in control of Mirant, as defined. Employment
agreements provide for severance payments not in excess of three times annual
base salary and bonus and the continuation for stipulated periods of other
benefits, as defined.
Upon a preliminary change in control, a Rabbi trust is funded to protect
the benefits described above for all covered employees. As of December 31, 2001,
the Company had accrued approximately $40 million related to earned benefits
under these contracts.
12. Business Developments
Sale of EDELNOR: On December 31, 2001, Mirant completed the sale of its 82.3%
interest in EDELNOR for total consideration of $4.5 million. Mirant's sale of
EDELNOR resulted in a reduction to its long-term debt of approximately $346
million (Note 2).
TransCanada PipeLines Limited ("TransCanada"): In December 2001, Mirant acquired
the majority of the gas marketing business of TransCanada for approximately $120
million. The transaction, accounted for under the purchase method of accounting,
included the purchase of the majority of TransCanada's natural gas trading and
marketing business and the related natural gas transportation and storage
contracts. TransCanada also sold to Mirant the "netback pool," which markets the
aggregated supply from 550 Canadian natural gas producers. As the TransCanada
acquisition was recently completed, Mirant has not finalized the purchase price
allocation.
Castex: In August 2001, Mirant acquired a 75% working interest in 18 natural gas
and oil producing fields as well as 206,000 acres of mineral rights in southern
Louisiana from Castex and a number of its affiliates for approximately $162
F-41
million. Castex, a privately held Houston-based oil and gas producer, will
retain an interest in the properties and will continue to operate them.
Bewag: On June 28, 2001, Mirant purchased an additional 18.8% interest in Bewag
for approximately $448 million. Bewag is an electric utility serving over 2
million customers in Berlin, Germany. This additional purchase gave Mirant a
44.8% ownership position in Bewag and joint control of the company with
Hamburgische Electricitaets-Werke AG. On December 3, 2001, Mirant announced that
it had entered into an agreement in which Vattenfall AB will buy Mirant's 44.8%
ownership position in Bewag for approximately $1.63 billion (Note 18). During
December 2001, in anticipation of the Bewag closing, Mirant's related net
investment hedges were terminated, generating cash proceeds of $38 million. This
amount is reflected as proceeds received from the sale of investments in the
accompanying consolidated statement of cash flows.
Commercial Insurance: The worldwide commercial insurance industry has steadily
contracted since mid-year 2000 making property and business interruption
insurance coverage less available and more expensive. The September 11, 2001
attacks on the World Trade Center and Pentagon have further weakened the
markets' condition. Mirant's deductibles for property insurance have increased
from an average of $750,000 per occurrence to $5 million per occurrence, and
business interruption deductibles have increased from an average of 45 days per
occurrence to 60 days per occurrence. Mirant's maximum exposure for catastrophic
events has increased from $10 million to $35 million. The limits available for
such insurance, excluding terrorism and sabotage, have also been reduced but
still exceed several hundred million dollars per occurrence. This change in
Mirant's insurance coverage took effect on the November 1, 2001 renewal date.
The availability of terrorism and sabotage insurance is also significantly
reduced due to the September 11, 2001 attacks. In response, Mirant has a new
program for physical damage and business interruption arising from terrorism or
sabotage events. The program provides for worldwide coverage limited to $100
million with deductibles of $5 million for physical damage and 60 days for
business interruption.
JPSCo: On March 30, 2001, the Company, through its wholly owned subsidiaries,
acquired 80% of the outstanding shares of JPSCo for $201 million. JPSCo, which
was formerly owned and operated by the state, is a fully integrated electric
utility on the island of Jamaica. JPSCo operates under a 20-year All-Island
Electric License, is under the direction of the Ministry of Mining and Energy
and is subject to monitoring and rate regulation by the Office of Utilities
Regulation.
Transfer of SE Finance Capital Corporation ("SE Finance") and Capital Funding:
In connection with Mirant's separation from Southern, Mirant transferred two of
its subsidiaries, SE Finance and Capital Funding, to Southern and redeemed
Southern's share of Mirant series B preferred stock on March 5, 2001. As a
result of the transfer, Southern has assumed responsibility for all obligations
of SE Finance and Capital Funding (Note 14). On April 2, 2001, Southern Company
distributed its remaining 80% interest in Mirant to Southern's stockholders
completing Mirant's spin-off.
Acquisition of Generating Assets of PEPCO: On December 19, 2000, Mirant, through
its subsidiaries and together with lessors in a lease transaction, closed the
asset purchase of PEPCO's generation assets in Maryland and Virginia. The net
purchase price paid for these acquisitions was approximately $2.75 billion,
which includes working capital and capital expenditures of approximately $100
million and approximately $1.50 billion provided by a lease transaction (Note
11). As part of the acquisition, Mirant assumed net liabilities, primarily
transition power agreements and obligations under power purchase agreements
(Note 11). The acquisition was accounted for as a purchase business combination
F-42
in accordance with APB Opinion No. 16. The final purchase price allocation is as
follows (in millions):
Current assets................................. $ 47
Property, plant and equipment.................. 1,402
Goodwill and other intangibles................. 1,487
Deferred tax asset resulting from acquisition.. 771
Out-of-market (Contractual amount in
excess of fair value) contract liabilities
assumed........................................ (2,328)
Other liabilities.............................. (124)
-------
Net purchase price......................... $ 1,255
=======
The acquired assets consist primarily of four generating stations,
Morgantown, Chalk Point, Dickerson and Potomac River, which provide
approximately 5,256 MW of capacity. Immediately upon completion of the purchase,
Mirant Mid-Atlantic, LLC ("Mirant Mid-Atlantic") entered into a $1.50 billion
long-term lease transaction with respect to two of the purchased generating
facilities (Note 11). In addition to the electric generating stations, Mirant,
through its subsidiaries, acquired three separate coal ash storage facilities, a
51.5 mile oil pipeline and an engineering and maintenance service facility and
related assets. Mirant also entered into a lease of the land on which the
Potomac River station is located, power sales agreements with PEPCO under two
separate transition power agreements with terms of up to four years, a local
area support agreement with PEPCO requiring the Potomac River station to operate
for purposes of supporting a local load pocket and a three-year operation and
maintenance agreement for PEPCO's two generating stations located in the
District of Columbia. In addition, Mirant assumed five of PEPCO's power purchase
agreements totaling 735 MW (Note 11).
The following unaudited pro forma results of operations for Mirant's fiscal
years ended December 31, 2000 and 1999 have been prepared assuming the
acquisition of PEPCO was effective January 1999. Pro forma results are not
necessarily indicative of the actual results that would have been realized had
the acquisition occurred on the assumed date, nor are they necessarily
indicative of future results. Pro forma operating results are for information
purposes only and are as follows:
Pro Forma
As reported (Unaudited)
----------------------------------------------- ------------ ---------------
2000
Operating revenues (in millions) $13,315 $14,624
Consolidated net income (in millions) 359 288
Basic earnings per share 1.24 1.00
1999
Operating revenues (in millions) 2,265 3,482
Consolidated net income (in millions) 372 205
Basic earnings per share 1.37 1.05
Hyder Limited ("Hyder"): On October 30, 2000, WPD Limited ("WPDL"), a company
controlled jointly by a subsidiary of Mirant and by a subsidiary of PPL
Corporation ("PPL"), finalized its acquisition of Hyder for a total purchase
price for the ordinary shares of Hyder of approximately (pound)565 million
(approximately $847 million), or 365 pence (approximately $5.47) per Hyder
share, plus the assumption of approximately (pound)2.1 billion (approximately
$3.2 billion) of debt.
As part of the arrangement between Mirant and PPL, Mirant had a call right
to acquire an additional 9% of the shares in WPDL from PPL and to acquire a
proportionate interest (based on its ownership interest) of the shareholder
loans to WPDL and WPD for a total consideration of approximately $38 million.
Mirant exercised that right effective December 1, 2000, which increased Mirant's
economic interest in WPDL to 49%.
In conjunction with the completion of this acquisition and with the
approval of lenders, Mirant and a subsidiary of PPL, effective December 1, 2000,
modified the voting rights of WPD to 50% each so that each party equally shares
operational and management control of WPD. As of December 1, 2000, WPD was
deconsolidated and its income included in equity in income of affiliates on
Mirant's consolidated statements of income. In March 2001, WPD South Wales (the
electricity distribution business) was transferred from the WPDL/Hyder group to
the WPD group. Substantially all of Hyder's other assets and businesses have
been sold.
F-43
The following unaudited pro forma results of operations for Mirant's fiscal
years ended December 31, 2000 and 1999 have been prepared assuming the
acquisition of Hyder was effective January 1999. Pro forma results are not
necessarily indicative of the actual results that would have been realized had
the acquisition occurred on the assumed date, nor are they necessarily
indicative of future results. Pro forma operating results are for information
purposes only and are as follows:
Pro Forma
As reported (Unaudited)
----------------------------------------------- ------------ --------------
2000
Operating revenues (in millions) $13,315 $13,001
Consolidated net income (in millions) 359 357
Basic earnings per share 1.24 1.24
1999
Operating revenues (in millions) 2,265 1,289
Consolidated net income (in millions) 372 370
Basic earnings per share 1.37 1.36
Mirant Americas Energy Marketing: On September 11, 2000, Mirant closed its
acquisition of Vastar's 40% interest in Mirant Americas Energy Marketing for
$250 million. The acquisition was effective as of August 10, 2000. As a result
of this transaction, Mirant Americas Energy Marketing became a wholly owned
indirect subsidiary and has been consolidated in Mirant's financial statements
since the effective date.
The following unaudited pro forma results of operations for the years ended
December 31, 2000 and 1999 have been prepared assuming the acquisition of Mirant
Americas Energy Marketing was effective January 1999. Pro forma results are not
necessarily indicative of the actual results that would have been realized had
the acquisition occurred on the assumed date, nor are they necessarily
indicative of future results. Pro forma operating results are for information
purposes only and are as follows:
Pro Forma
As reported (Unaudited)
----------------------------------------------- ------------ --------------
2000
Operating revenues (in millions) $13,315 $22,828
Consolidated net income (in millions) 359 360
Basic earnings per share 1.24 1.25
1999
Operating revenues (in millions) 2,265 13,671
Consolidated net income (in millions) 372 359
Basic earnings per share 1.37 1.32
Sale of WPD (formerly SWEB) Supply Business: In September 1999, SWEB sold its
electricity supply business to London Electricity for the British Pound Sterling
equivalent of $264 million and the assumption of certain liabilities resulting
in a gain of $286 million prior to expenses, minority interest, and income
taxes, and a gain of $78 million after these items. The Company retained its 49%
interest in the distribution business, the trading name of which has been
changed to Western Power Distribution. The Company continues to own 49% economic
interest (50% voting interest) of WPD.
Sale of Louisiana Generating LLC: During September 1999, the Company sold its
50% investment in Louisiana Generating LLC to its partner for $17 million. The
Company recognized approximately $10 million as an after-tax gain on the sale,
which is included in gain on sale of assets in the accompanying consolidated
statements of income.
Sale of Alicura: On August 25, 2000, Mirant completed the sale of its 55%
indirect interest in Alicura for total consideration of $205 million, including
the assumption of debt and the buy-out of minority partners. Alicura's principal
asset is a concession to operate a 1,000 MW hydroelectric facility located in
the province of Neuquen, Argentina. As part of the sale, Mirant was released
from $200 million of credit support obligations related to Alicura's bank
financing. The sale of Alicura did not materially impact Mirant's financial
position and did not have a material effect on Mirant's results of operations
(Note 2).
F-44
SIPD: On June 30, 1999, the Company, through a wholly owned subsidiary, acquired
a 9.99% interest in SIPD for $107 million. As of December 31, 1999, SIPD had an
ownership interest in 18 coal-fired power generating units with a total
installed capacity of 5,125 MW in China's Shandong province. The Company
accounts for its investment in SIPD under the equity method of accounting due to
the preferential board representation and significant operating influence.
Mirant New York: On June 30, 1999, the Company, through certain of its wholly
owned subsidiaries (collectively referred to as Mirant New York), acquired the
generating asset business in the state of New York with a total capacity of
1,659 MW, from Orange & Rockland Utilities, Inc. and Consolidated Edison Company
of New York for a net purchase price of approximately $476 million, plus an
additional $17 million to cover the market value of existing inventories. The
acquisition was recorded under the purchase method of accounting. A portion of
the purchase price has been allocated to assets acquired and liabilities assumed
based on the estimated fair market value at the date of acquisition while the
balance of $47 million was recorded as goodwill.
Mirant California, LLC ("Mirant California"): On April 16, 1999, the Company,
through Mirant California, acquired various generating assets in California with
a total capacity of 2,942 MW from Pacific Gas and Electric for $801 million plus
$39 million for fuel inventory, capital expenditures and property taxes.
13. Investments in Affiliates
The following table sets forth certain summarized income statement
information of Mirant's investments in 50% or less-owned investments accounted
for under the equity method for the years ended December 31, 2001, 2000 and
1999. The figures below represent 100% of the results of the underlying entities
in which Mirant owns a portion. These figures are not comparable to the
Company's equity income from affiliates due to purchase accounting and other
adjustments. WPD is only included in the following table for 2001 and 2000, as
it was consolidated in 1999.
2001 2000 1999
------ ------- ------
(In Millions)
Combined Investments
Income Statement:
Revenues.................................. $ 6,298 $ 5,879 $5,608
Operating income.......................... 1,442 1,565 703
Net income from continuing operations..... 830 772 100
Balance Sheet:
Current assets............................ 4,874 4,084
Noncurrent assets......................... 19,041 15,013
Current liabilities....................... 4,124 4,455
Noncurrent liabilities.................... 10,539 8,516
As of December 31, 2001, Mirant had accumulated $191 million in
undistributed earnings of entities accounted for by the equity method of
accounting.
14. SE Finance (Discontinued Operations)
Mirant had investments in leveraged leases through its leasing subsidiary,
SE Finance. As part of its spin-off from Southern, Mirant contributed SE Finance
to Southern on March 5, 2001 (Note 12). Mirant entered into leveraged leases in
December of 1999, 1998 and 1996. Mirant's net investment in leveraged leases
consisted of the following at December 31, 2000 (in millions):
2000
--------
Net rentals receivable................ $ 1,430
Unearned income....................... (834)
-------
Investment in leveraged leases........ 596
Deferred taxes arising from leveraged
leases.............................. (129)
-------
Net investment in leveraged leases.... $ 467
=======
The following is a summary of the components of the income from leveraged
leases, which is a component of income from discontinued operations in the
accompanying consolidated statements of income for the years ending December 31,
2001, 2000 and 1999 (in millions):
2001 2000 1999
------------------
Pretax leveraged lease $10 $ 61 $ 28
income.....................
Income tax expense......... 3 21 10
---- ----- ----
Income from leveraged leases $ 7 $ 40 $ 18
==== ===== ====
F-45
15. Earnings Per Share
Mirant calculates basic earnings per share by dividing the income available
to common stockholders by the weighted average number of common shares
outstanding. The following table shows the computation of basic earnings per
share for 2001, 2000 and 1999 (in millions, except per share data) after giving
effect to the stock split that occurred prior to the offering of common stock
during 2000. Diluted earnings per share gives effect to stock options, as well
as the assumed conversion of convertible trust preferred securities and related
after-tax interest expense addback to net income of approximately $14 million
and $4 million for 2001 and 2000, respectively. Mirant had no dilutive
securities outstanding during 1999.
2001 2000 1999
---- ---- ----
Income from continuing operations $ 563 $ 332 $ 362
Discontinued operations 5 27 10
------- --------- -------
Net income $ 568 $ 359 $ 372
======== ======== =======
Basic
Weighted average shares outstanding 341.8 288.7 272.0
Earnings per share from:
Continuing operations $ 1.65 $ 1.15 $ 1.33
Discontinued operations 0.01 0.09 0.04
------- --------- -------
Net income $ 1.66 $ 1.24 $ 1.37
======== ======== =======
Diluted
Weighted average shares outstanding 341.8 288.7
Shares assumed due to conversion of stock options
and 2.6 1.2
equivalents
Shares assumed due to conversion of trust preferred 12.5 3.1
----- ------
securities 356.9 293.0
===== =====
Adjusted shares
Earnings per share from:
Continuing operations $ 1.62 $ 1.15
Discontinued operations 0.01 0.09
------ -----
Net income $ 1.63 $ 1.24
======= ======
F-46
16. Segment Reporting
The Americas Group has ownership and control of power generation and
natural gas assets and energy marketing and risk management operations in the
U.S. and Canada, and generation, transmission and distribution operations in
South America and the Caribbean. Mirant is one of Asia's largest
independent power producers with experience in developing, constructing and
operating electric power generation facilities in Asia. The majority of the Asia
Group's assets are located in the Philippines, with additional assets located in
China and Australia. The Europe Group owns a 49% economic interest and a 50%
voting interest in WPD which distributes electricity to approximately 1.4
million end-users in southwest England and approximately 1 million end-users in
South Wales. Our European marketing and risk management business trades power in
the Nordic region, Germany, The Netherlands and Switzerland and trades gas in
the United Kingdom on the International Petroleum Exchange.
Business Segments
SE Corporate and
Americas Europe Asia-Pacific Finance Eliminations Consolidated
---------------------------------------------------------------------------------
2001: (in millions)
Operating Revenues
Generation and energy marketing $ 29,970 $ 505 $ 504 $ - $ - $ 30,979
Distribution and integrated utilities 475 - - - - 475
Other 25 - 23 - - 48
------------ ------------ ---------- ------------ ---------------- --------------
Total operating revenues 30,470 505 527 - - 31,502
------------ ------------ ---------- ------------ ---------------- --------------
Operating Expenses:
Cost of fuel, electricity and other
products 27,872 554 8 - - 28,434
Depreciation and amortization 258 3 130 - 5 396
Write-down of assets 85 - - - - 85
Other operating expenses 1,245 54 127 - 142 1,568
------------ ------------ ---------- ------------ ---------------- --------------
Total operating expenses 29,460 611 265 - 147 30,483
------------ ------------ ---------- ------------ ---------------- --------------
Operating Income (Loss) 1,010 (106) 262 - (147) 1,019
Other Income (Expense)
Interest income (expense) (169) (22) (102) - (138) (431)
Equity in income of affiliates 18 177 50 - - 245
Other 23 2 23 - 4 52
------------ ------------ ---------- ------------ ---------------- --------------
Income (Loss) From Continuing Operations
Before Income Taxes and Minority Interest 882 51 233 - (281) 885
Provision (Benefit) for Income Taxes 380 (48) 11 - (83) 260
Minority Interest 9 - 32 - 21 62
------------ ------------ ---------- ------------ ---------------- --------------
Income (Loss) From Continuing Operations 493 99 190 - (219) 563
Income From Discontinued Operations,
net of tax benefit - - - 5 - 5
------------ ------------ ---------- ------------ ---------------- --------------
Net Income (Loss) $ 493 $ 99 $ 190 $ 5 $ (219) $ 568
============ ============ ========== ============ ================ ==============
Total assets $ 17,080 $ 2,024 $ 4,230 $ - $ (580) $ 22,754
Gross property additions 1,625 2 61 - 73 1,761
Increase in goodwill 46 - - - - 46
Investment in equity method subsidiaries 167 1,708 369 - - 2,244
F-47
Business Segments
SE Corporate and
Americas Europe Asia-Pacific Finance Eliminations Consolidated
---------------------------------------------------------------------------------
2000:
Operating Revenues
Generation and energy marketing $ 12,327 $ - $ 489 $ - $ - $ 12,816
Distribution and integrated utilities 163 314 - - - 477
Other - - 13 - 9 22
------------ ------------ ---------- ------------ --------------- -------------
Total operating revenues 12,490 314 502 - 9 13,315
------------ ------------ ---------- ------------ --------------- -------------
Operating Expenses:
Cost of fuel, electricity and other
products 11,408 27 2 - - 11,437
Depreciation and amortization 115 69 130 - 3 317
Write-down of assets 18 - - - - 18
Other operating expenses 588 103 104 - 84 879
------------ ------------ ---------- ------------ --------------- --------------
Total operating expenses 12,129 199 236 - 87 12,651
------------ ------------ ---------- ------------ --------------- --------------
Operating Income (Loss) 361 115 266 - (78) 664
Other Income (Expense)
Interest income (expense) (152) (97) (101) - (78) (428)
Equity in income of affiliates 56 83 57 - - 196
Other 22 12 36 - - 70
------------ ------------ ---------- ------------ --------------- --------------
Income (Loss) From Continuing Operations
Before Income Taxes and Minority Interest 287 113 258 - (156) 502
Provision (Benefit) for Income Taxes 113 (16) 19 - (30) 86
Minority Interest (3) 47 35 - 5 84
------------ ------------ ---------- ------------ --------------- --------------
Income (Loss) From Continuing Operations 177 82 204 - (131) 332
Income From Discontinued Operations,
net of tax benefit - - - 27 - 27
------------ ------------ ---------- ------------ --------------- --------------
Net Income (Loss) $ 177 $ 82 $ 204 $ 27 $ (131) $ 359
============ ============ ========== ============ =============== ==============
Total assets $ 16,796 $ 1,362 $ 4,500 $613 $ 865 $ 24,136
Gross property additions 449 90 55 - 22 616
Increase in goodwill 1,523 - - - - 1,523
Investment in equity method subsidiaries 163 1,228 338 61 - 1,790
1999:
Operating Revenues
Generation and energy marketing $ 772 $ (3) $ 318 $ - $ - $ 1,087
Distribution and integrated utilities 167 976 - - - 1,143
Other - - 24 - 11 35
------------ ------------ ---------- ------------ --------------- --------------
Total operating revenues 939 973 342 - 11 2,265
------------ ------------ ---------- ------------ --------------- --------------
Operating Expenses:
Cost of fuel, electricity and other
products 435 499 - - - 934
Depreciation and amortization 73 90 104 - 3 270
Write-down of assets 29 31 - - - 60
Other operating expenses 255 135 115 - 52 557
------------ ------------ ---------- ------------ --------------- --------------
Total operating expenses 792 755 219 - 55 1,821
------------ ------------ ---------- ------------ --------------- --------------
Operating Income (Loss) 147 218 123 - (44) 444
Other Income (Expense)
Interest income (expense) (80) (115) (53) - (81) (329)
Equity in income of affiliates 18 9 83 - - 110
Other 57 315 77 - - 449
------------ ------------ ---------- ------------ ---------------- --------------
Income (Loss) From Continuing Operations
Before Income Taxes and Minority Interest 142 427 230 - (125) 674
Provision (Benefit) for Income Taxes 58 92 28 - (49) 129
Minority interest (9) 165 27 - - 183
------------ ------------ ---------- ------------ ----------------- --------------
Income (Loss) From Continuing Operations 93 170 175 - (76) 362
Income From Discontinued Operations,
net of tax benefit - - - 10 - 10
------------ ------------ ---------- ------------ ----------------- --------------
Net Income (Loss) $ 93 $ 170 $ 175 $ 10 $ (76) $ 372
============ ============ ========== ============ ================= ==============
Total assets $ 4,071 $ 3,810 $ 4,430 $ 722 $ 830 $ 13,863
Gross property additions 419 115 194 - 19 747
Increase in goodwill 48 - - - - 48
Investment in equity method subsidiaries 248 762 254 76 - 1,340
F-48
Geographic Areas
Revenue
International
---------------------------------------------------------
United The United All
States Canada Philippines Kingdom Jamaica Germany Other Consolidated
(in millions)
---------- --------- ----------- ---------- --------- ----------- ------- ---------------
2001............... $ 26,541 $3,454 $ 506 $ 0 $ 324 $ 552 $ 125 $31,502
2000............... 10,968 1,369 491 314 0 0 173 13,315
1999............... 736 0 320 976 0 0 233 2,265
Long-Lived Assets
International
---------------------------------------------------------
United The United All
States China Philippines Kingdom Jamaica Germany Other Consolidated
------------ ---------- ------------- ---------- -------- --------- ------------- --------------
(in millions)
2001............... $ 8,141 $ 332 $ 1,875 $ 484 $503 $1,229 $ 1,659 $ 14,223
2000............... 5,832 488 1,901 484 0 751 2,654 12,110
17. Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for 2001 and 2000 are as follows:
Per Common Share
----------------
Operating Operating Consolidated Price Range
Quarter Ended Revenues Income Net Income Earnings High Low
------------------- ------------- ------------- --------------- ----------- -------- -------
2001: (in millions)
March........... $ 8,182 $ 279 $ 180 $ 0.52 $36.00 $20.94
June............ 7,928 252 124 0.36 47.20 27.70
September...... 8,185 457 234 0.69 39.59 19.25
December....... 7,207 31 30 0.09 29.35 13.16
2000:
March.......... $ 519 $ 169 $ 101 $ 0.37 $ - $ -
June........... 640 141 93 0.34 - -
September...... 4,198 217 98 0.36 31.87 28.00
December....... 7,958 137 67 0.23 31.75 20.56
18. Subsequent Events
Western Power Markets Investigations: In January 2002, the California Attorney
General's office reportedly stated that it found no evidence of criminal
wrongdoing in connection with its investigation (Note 11), but that it was
planning to file civil suits against the energy generators for unfair trade
practices.
California Price Mitigation and Refund Proceeding: On February 13, 2002, the
FERC directed its staff to undertake a fact-finding investigation into whether
any entity manipulated short-term prices in electric energy or natural gas
markets in the West or otherwise exercised undue influence over wholesale prices
in the West, for the period January 1, 2000, forward. Mirant cannot predict the
outcome of this proceeding. Information from this investigation could be used in
any existing or future complaints before the FERC involving long-term power
sales contracts relevant to the matters being investigated.
Perryville Tolling Agreement: In April 2001, in connection with Perryville
entering into a non-recourse financing for the construction of the Perryville
generating facility, Mirant Americas Energy Marketing and Perryville entered
into a 20-year tolling agreement. Under the terms of the financing and the
tolling agreement, Mirant Americas Energy Marketing was required to provide
certain credit support - either a guarantee from an investment grade guarantor
or a letter of credit - in the event it was rated below investment grade. On
December 19, 2001, Moody's lowered its rating on Mirant Americas Energy
Marketing's senior unsecured debt below investment grade. On February 1, 2002,
Perryville, the lenders under its credit facility, Mirant Americas Energy
Marketing and Mirant Corporation entered into the following transactions: (i) an
F-49
indirect, wholly owned subsidiary of Mirant Corporation made a subordinated loan
of $48 million to Perryville, (ii) Mirant Corporation agreed to guarantee the
obligations of Mirant Americas Energy Marketing under the tolling agreement,
(iii) Perryville (with the consent of its lenders) and Mirant Americas Energy
Marketing amended the ratings threshold in the tolling agreement with respect to
Mirant to at least BB/S&P and Ba2/Moody's and (iv) the parties agreed to certain
additional terms in support of the syndication of the credit facility.
Sale of Bewag: The sale of Mirant's 44.8% interest in Bewag to Vattenfall AB was
completed on February 11, 2002 for approximately $1.63 billion and resulted in a
gain of approximately $150 million.
Mirant Asia-Pacific Loan: On January 23, 2002, Mirant Asia-Pacific borrowed $192
million under a new credit facility to repay, in part, its prior $792 million
credit facility. The repayment of the balance of the prior credit facility was
funded by Mirant Corporation. Mirant Asia-Pacific is in the process of seeking
commitments to a second tranche of up to $208 million in March 2002. The new
credit facility contains various business and financial covenants including,
among other things, (i) limitations on dividends and distributions, including a
prohibition on dividends if Mirant ceases to be rated investment grade by at
least two of Fitch, Inc. ("Fitch"), S&P and Moody's, (ii) mandatory prepayments
upon the occurrence of certain events, including certain asset sales and certain
breaches of the Sual and the Pagbilao energy conversion agreements, (iii)
limitations on the ability to make investments and to sell assets, (iv)
limitations on transactions with affiliates of Mirant and (v) maintenance of
minimum debt service coverage ratios.
Subsequent Events (Unaudited)
DWR Power Purchases: On February 25, 2002, the CPUC and the California
Electricity Oversight Board ("EOB") filed separate complaints at FERC against
certain sellers of energy under long-term agreements with the California DWR,
including Mirant, alleging that the terms of these contracts are unjust and
unreasonable and that the contracts should be abrogated or the prices under the
contracts should be reduced. In particular, the EOB claims that the contracts
should be voidable at the option of the State of California. The complaints
allege that the DWR was basically forced to enter into these long-term contracts
due to dysfunctions in the California market and the alleged market power of the
sellers. The outcome of this proceeding cannot now be determined and any
potential losses cannot now be determined. The Company's contract with the DWR
runs through December 31, 2002.
State Line: In February 2002, Mirant announced it had entered into an agreement
to sell its State Line generating facility to Dominion Resources for
approximately $182 million. The sale is expected to close in the second quarter
of 2002 and is not expected to have a material effect on the Company's results
of operations.
Restructuring Charge: In January 2002, Mirant announced a strategic business
plan change designed to reduce capital spending and operating expenses. As a
result, the Company expects to record a restructuring charge in 2002 related to
these changes. The reduced capital spending plan results in material reductions
to the Company's commitments, estimated below as of February 28, 2002.
As part of the restructuring, Mirant intends to cancel agreements to
purchase certain turbines under its purchase agreements. At February 28, 2002,
minimum termination amounts under the remaining purchase contracts consisted of
$6 million. Total amounts to be paid under the agreements if the remaining
turbines are purchased as planned are estimated to be $154 million at February
28, 2002.
Additionally, as part of its restructuring, Mirant intends to cancel
agreements to procure certain turbines under its off-balance sheet equipment
procurement facilities. If Mirant had elected to exercise its purchase options
with respect to the remaining turbines and power islands and to terminate the
procurement contracts, minimum termination amounts due would have been $223
million at February 28, 2002. If the purchase options or options to lease the
remaining turbines and power islands are exercised as planned, total commitments
under the procurement contracts would be approximately $740 million.
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As a result of the turbine cancellations, the long-term service agreements
associated with the turbines will also be cancelled. The long-term service
agreements may be terminated at no cost in the event a planned construction
project is cancelled prior to shipment of the associated turbine. Mirant does
not intend to cancel long-term service agreements associated with turbines that
have already shipped. Consequently, Mirant's restructuring should not have an
impact on the long-term service agreement commitments previously disclosed (Note
11).
The following table summarizes Mirant's commitments for turbine purchases
and turbine leases as discussed above at February 28, 2002 (in millions).
Turbine Turbine
Fiscal Year Ended: Purchase Procurement
Commitments Facilities
----------- ------------
Remainder of 2002....... $ 154 $ 263
2003.................... 0 357
2004.................... 0 110
2005.................... 0 10
2006.................... 0 0
Thereafter.............. 0 0
------ ------
Total minimum payments $ 154 $ 740
===== =====
California PX Bankruptcy: On March 1, 2002, SCE paid approximately $870 million
to the California PX in satisfaction of all claims of or through the California
PX and the CAISO through approximately January 18, 2001. No payment is expected
to be made to creditors of the California PX or CAISO until the bankruptcy judge
orders such payment. Mirant cannot now determine the timing of such payment or
the extent to which such payment would satisfy its claims.
Mirant Americas Energy Capital: In March 2002, Mirant Americas Energy Capital
transferred the borrowing base assets under its credit facility to a special
purpose vehicle and granted security interests in such assets. The special
purpose vehicle will be consolidated with Mirant.
F-51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 11th day of March,
2002.
MIRANT CORPORATION
By: /s/Raymond D. Hill By: /s/James A. Ward
Raymond D. Hill James A. Ward
Executive Vice President, and Senior Vice President,
Chief Financial Officer and Controller
(Principal Financial Officer) (Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange act of 1934, this report
has been signed below on March 11, 2002 by the following persons on behalf of
the registrant and in the capacities indicated.
Signatures Title
/s/A. W. Dahlberg Chairman of the Board
-----------------
A. W. Dahlberg
/s/S. Marce Fuller President, Chief Executive Officer
------------------ And Director (Principal Executive Officer)
S. Marce Fuller
/s/A. D. Correll Director
----------------
A. D. Correll
/s/Stuart E. Eizenstat Director
----------------------
Stuart E. Eizenstat
/s/Carlos Ghosn Director
----------------
Carlos Ghosn
/s/William M. Hjerpe Director
--------------------
William M. Hjerpe
/s/David J. Lesar Director
-----------------
David J. Lesar
/s/James F. McDonald Director
--------------------
James F. McDonald
/s/Ray M. Robinson Director
------------------
Ray M. Robinson
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and
Stockholders of Mirant Corporation:
We have audited, in accordance with generally accepted auditing standards in
the United States, the consolidated financial statements of Mirant Corporation
included in this Annual Report on Form 10-K and have issued our report thereon
dated February 22, 2002. Our audits were made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the
accompanying index is the responsibility of the Company's management, is
presented for purposes of complying with the Securities and Exchange
Commission's rules, and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 22, 2002
MIRANT CORPORATION AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2001, 2000 and 1999
(Stated in Thousands of Dollars)
Additions
Balance at Beginning Charged to Charged to Other Balance at End
Description of Period Income Accounts Deductions of Period
----------------- --------------------- ---------- ------------------- -------------- ------------------
Provision for
Uncollectible
Accounts (current)
2001.............. $ 93,696 $ 108,002 $ 2,761 $ 13,500 (Note 1) $ 190,959
2000.............. 43,586 54,145 747 4,782 (Note 1) 93,696
1999.............. 101,243 19,566 (11,805) 65,418 (Note 1) 43,586
Provision for
Uncollectible
Accounts (long-term)
2001.............. 49,144 67,581 (717) 0 116,008
2000.............. 60,543 29,398 (40,797) 0 49,144
1999.............. 40,000 30,543 (10,000) 0 60,543
----------
Note 1: Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.