Exhibit 99
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Company Profile:
Mirant Corporation and its subsidiaries ("Mirant" or the "Company"),
formerly known as Southern Energy, Inc., is a global competitive energy company
with leading energy marketing and risk management expertise. Mirant has
extensive operations in North America, Europe and Asia. With an integrated
business model, Mirant develops, constructs, owns and operates power plants, and
sells wholesale electricity, gas and other energy-related commodity products.
Mirant owns or controls more than 20,000 megawatts("MW") of electric generating
capacity around the world, with approximately another 9,000 megawatts under
development. At December 31, 2000, Mirant was approximately 80 percent-owned by
Southern Company, which on February 19, 2001 announced plans to distribute to
its stockholders all of its remaining interest in Mirant on April 2, 2001.
In the Americas, Mirant owns and leases power plants in North America
with a total generation capacity of over 12,500 MW, and it controls over 2,600
MW of additional generating capacity through management contracts. This includes
the generating assets recently acquired in Maryland and Virginia, which when
combined with the Company's other generating assets gives Mirant generation
assets within each of the major U.S. markets which the Company has strategically
targeted. Mirant also has projects under development or pending acquisitions of
over 8,500 MW. On August 10, 2000, Mirant completed the acquisition of the 40%
interest of Mirant Americas Energy Marketing ("MAEM") which is now wholly owned
and consolidated in Mirant's financial statements. Through MAEM, Mirant markets
and trades energy and energy-linked commodities, including electricity, gas,
coal, oil and emission allowances. MAEM is one of the leading electricity and
gas marketers in the U.S. In the Caribbean and South America, Mirant has
ownership interests in electric utilities, power plants and transmission
facilities. These assets are located in the Bahamas, Trinidad and Tobago, Brazil
and Chile. Mirant is pursuing the sale of its Chilean subsidiary.
In Europe, Mirant owns a 49% economic interest in Western Power
Distribution ("WPD"), which distributes electricity to approximately 1.4 million
end-users in Southwest England and a 49% economic interest in WPD Limited, which
distributes electricity to approximately 1 million end-users in Southern Wales
and provides water and sewage to most of Wales and adjoining parts of England. A
binding sale agreement has been signed to sell the water and waste water
treatment services business, subject to the satisfaction of certain conditions.
Mirant also owns a 26% interest in Bewag AG, an electric utility serving over 2
million customers in Berlin, Germany. Mirant's European marketing and risk
management business began trading power in the Nordic energy markets in 1999.
Mirant began trading power in Germany, the Netherlands and Switzerland in 2000
and expects to start gas trading in the UK on the International Petroleum
Exchange ("IPE") in 2001. Mirant's other target markets for energy marketing and
trading include Austria, Italy and central Europe.
In the Asia-Pacific region, Mirant has a net ownership interest in over
3,100 MW of generation capacity in the Philippines and China, with ownership
interest in another 250 MW under construction. Most of Mirant's revenues in the
Asia-Pacific region are derived from contracts with government entities or
regional power boards and are predominantly linked to the U. S. dollar to
mitigate foreign currency exchange risk.
Effects of Certain Organizational Changes
The following discussion and analysis of Mirant's financial condition
and results of operations should be read in light of the organizational changes
related to the Company's marketing and risk management operations and the
resulting impacts on operating revenues and expenses. On September 1, 1997,
Mirant formed MAEM, a joint venture with Vastar Resources, Inc. ("Vastar"), and
both parties contributed substantially all of their North American gas marketing
and risk management assets to the venture. On January 1, 1998, Mirant and Vastar
contributed their North American electric marketing and risk management
operations to the MAEM joint venture. From January 1, 1998 through August 9,
2000, Mirant accounted for its investment in this joint venture under the equity
method of accounting as Vastar had significant participation rights in MAEM.
1
As a result, Mirant's share of MAEM's earnings is included in other income
for all periods through August 9, 2000. Effective August 10, 2000, Mirant
acquired Vastar's 40% interest in MAEM for $250 million. Upon the closing of the
transaction, Vastar transferred its interest in MAEM to Mirant and MAEM became
Mirant's wholly owned indirect subsidiary and has been consolidated in Mirant's
financial statements since August 10, 2000.
On August 25, 2000, Mirant completed the sale of its 55% indirect
interest in Hidroelectrica Alicura S.A. ("Alicura") to The AES Corporation 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. Mirant's sale of
Alicura did not materially impact its financial position and did not have a
material effect on its results of operations.
On October 30, 2000, WPD Limited, a 49% owned affiliate, finalized its
acquisition of Hyder plc ("Hyder") for a total purchase price for the ordinary
shares of Hyder of approximately (pound)565 million (approximately $847
million). Associated with this acquisition, Mirant and PPL Corporation ("PPL"),
the owners of WPDH, agreed to modify their ownership of the voting rights in
WPDH to 50% each, so that both parties equally share operational and
management control. As a result, effective December 1, 2000, WPD was no longer
consolidated for accounting purposes. Instead, Mirant's investment has been
accounted for under the equity method and its net income is included in other
income since December 1, 2000.
On December 19, 2000, Mirant, through its subsidiaries and together with
lessors in a lease transaction, closed the acquisition of Potomac Electric
Power Company's ("PEPCO") generation assets in Maryland and Virginia. The net
purchase price for these assets was approximately $2.75 billion, which
included working capital and capital expenditures of approximately $100 million
and approximately $1.5 billion provided by a leveraged lease. As part of the
acquisition, the Company also assumed net liabilities, primarily transition
power agreements and obligations under power purchase agreements, of
approximately $2.4 billion. The acquired assets consist of four generating
stations totaling 5,154 MW, three separate coal ash storage areas, a 51.5 mile
oil pipeline, and an engineering and maintenance service facility and related
assets. The Company 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, a three-year operation and maintenance
agreement for PEPCO's two generating stations located in the District of
Columbia and the assumption of five of PEPCO's power purchase agreements
totaling 735 MW.
In September 1999, Mirant's UK subsidiary, WPD Holdings UK ("WPDH"), sold
its supply business to London Electricity plc for (pound)160 million ($264
million) and the assumption by the purchaser of certain liabilities. The supply
business retained the name SWEB and Mirant renamed the remaining distribution
business Western Power Distribution. As a result of the sale, Mirant recorded a
gain of $286 million prior to related expenses, minority interest and income
taxes and a gain of $78 million after these items.
Mirant's operating revenues and expenses are primarily driven by the
operations of its controlled subsidiaries, which are consolidated for accounting
purposes. Significant consolidated subsidiaries include Mirant Americas
Generation, Inc., ("MAGI"), MAEM and Mirant Asia-Pacific's Philippines
operations. Investments in companies over which Mirant exercises significant
influence but does 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, 2000 include Bewag in
Germany, WPDH and WPD Limited in the UK, Mirant Asia-Pacific's investment in the
Shajiao C facility and Shandong International Power Development Company in
China, Power Generation Company of Trinidad and Tobago and Companhia Energetica
de Minas Gerais ("CEMIG") in Brazil.
2
Separation from Southern Company
On January 19, 2001, the Company announced as part of the its separation
from Southern Company, that the Company was changing its name from Southern
Energy, Inc. to Mirant Corporation. The Company began doing business as Mirant
and trading under the Company's new ticker "MIR" on January 22, 2001 and legally
changed its name on February 26, 2001.
On February 19, 2001, Southern Company's Board of Directors approved
the distribution to its stockholders of its remaining interest in Mirant on
April 2, 2001, to Southern Company's stockholders of record as of March 21,
2001. This distribution was contingent upon the timely receipt of a supplemental
ruling from the Internal Revenue Service stating that the distribution qualifies
as a tax-free distribution. The supplemental tax ruling was received by Southern
Company on February 28, 2001, removing the contingency. Mirant has entered into
various agreements with Southern Company related to interim and ongoing
relationships between the two companies. Southern Company has been providing
various interim services to Mirant, in a manner similar to the manner in which
such services were provided to Mirant prior to the separation. The transitional
services generally will be provided 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.
These transitional services generally have a term of two years or less
from the date of separation. However, some transitional services, including
those for engineering services and information technology services, may be
extended beyond the initial two-year period. For a description of these
agreements, reference is made to the section entitled "Agreements Between Us and
Southern Company" (pages 138 to 145) in the prospectus filed by the Company with
the SEC on September 27, 2000.
In connection with Mirant's separation from Southern Company, Mirant
transferred two of its subsidiaries, SE Finance and Capital Funding, to Southern
Company on March 5, 2001. As a result of the transfer, Southern Company has
assumed responsibility for all obligations of SE Finance and Capital Funding.
Basis of Presentation
Mirant's consolidated financial statements include allocations to Mirant
of certain Southern Company corporate assets, including pension assets;
liabilities, including profit sharing, pension and non-qualified deferred
compensation obligations; and expenses, including centralized engineering
services, legal, accounting and human resources, insurance services, information
technology services and other Southern Company corporate and infrastructure
costs. The expense allocations, which Mirant believes meet the requirements of
PUHCA, have been determined on bases that Southern Company and Mirant considered
to be reasonable reflections of the utilization of the services provided to
Mirant or the benefit received by Mirant. The expense allocation methods include
relative sales, investment, headcount, square footage, transaction processing
costs, adjusted operating expenses and others.
On March 5, 2001, Mirant transferred its leasing business, SE Finance, to
Southern Company. Mirant has included the historical results of operations of
the related subsidiaries as a discontinued operation in the consolidated
statements of income. Additionally, because Mirant recently sold its investment
in Argentina and transferred its Capital Funding subsidiary to Southern Company
and intends to dispose of its investment in Empresa Electrica del Norte Grande
("EDELNOR"), future results of operations may not be comparable to the
historical amounts presented after Mirant sells these investments.
The financial information presented may not be indicative of Mirant's
future financial position, results of operations or cash flows or of what its
financial position, results of operations or cash flows would have been had
Mirant been a separate, stand-alone entity for the periods presented.
3
Results of Operations
Year Ended December 31, 2000 as Compared to Year Ended December 31, 1999:
Operating revenues. Mirant's 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 Mirant's acquisition of Vastar's 40% interest in
MAEM effective on August 10, 2000, which is now consolidated in Mirant's
financial statements. The increase in revenue was also attributable to a
full year of operations from the 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 the Sual plant in the Philippines. This increase was
reduced somewhat for provisions taken related to revenues from its
California operations under reliability-must-run ("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 $12,683 million in 2000, an increase
of $10,862 million, or 597%, 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 Mirant's acquisition of the remaining 40% of MAEM, which is
now consolidated in its financial statements. This increase was also
attributable to a full year of operations from the plants in California and
New York, higher natural gas prices and increased electricity market demand
in the western U.S., 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
its plants in California and New York, commencement of commercial
operations of new plants in North America and a full year of operations
from Mirant's Sual plant in the Philippines. This increase was partially
reduced due to the deconsolidation of WPD effective December 1, 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 MAEM, which is now consolidated in Mirant's
financial statements, a full year of operations from the plants in
California and New York, commencement of commercial operations of new
plants in North America and a full year of operations from Mirant's Sual
plant in the Philippines. This increase was partially offset by WPD's sale
of the SWEB supply business and the write down of meter assets in 1999, as
well as the deconsolidation of WPD effective December 1, 2000.
o Selling, general and administrative expense was $520 million in 2000, an
increase of $267 million, or 106%, from 1999. The increase resulted from
the acquisition of the remaining 40% of MAEM, which is now consolidated in
the financial statements, additional variable marketing costs paid to MAEM
(prior to Mirant's acquisition of the remaining 40% of MAEM 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 Mirant's operations in China, as well as the deconsolidation of
WPD effective December 1, 2000.
4
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
meter assets at WPD in 1999.
o Other operating expense was $223 million in 2000, an increase of $35
million, or 19%, 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 1, 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 Company 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 $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 1, 2000, income from MAEM 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 Mirant's 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 the Company's investment in Brazil during
2000.
o Income from recovery of receivables for 1999 was $64 million. 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 explosion and fire at the State Line
facility in 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 on December 31, 2000 and the settlement of a commercial
dispute with an outside advisor from the Company's operations in Asia.
Provision (Benefit) 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 Mirant's transition to a
publicly traded company, as well as additional taxes related to a change in
Mirant's cash repatriation strategy for the Philippine operations. 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 1, 2000. This was offset partially by increased income
from operations in the Philippines and South America.
5
Earnings:
Mirant's consolidated net income from continuing operations was $332 million in
2000, a decease of $30 million or 8% from 1999. This excludes the income from
Mirant's discontinued operations (SE Finance) of $27 million in 2000 and $10
million in 1999. The decrease is attributable to Mirant's 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 Mirant's generating units related to weather and transmission
constraints. In addition, the Company had strong performance from its 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 Mirant's 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 Mirant's 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 Mirant's cash repatriation
strategy for the Philippine operations.
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.
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 Mirant's transition to a publicly traded company as well
as additional compensation expenses related to the change in market value
of its stock. In addition, Mirant 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 Company.
6
Year Ended December 31, 1999 as Compared to Year Ended December 31, 1998:
Operating Revenues. Mirant's operating revenues were $2,265 million in 1999, an
increase of $446 million, or 25%, from 1998. This increase was primarily
attributable to a $678 million increase in the Americas region, the majority of
which resulted from its North American acquisitions in New England, California
and New York. In addition, the commencement of commercial operations of Mirant's
Sual plant in the Philippines contributed revenues of $49 million in 1999. Those
increases were partially offset by a reduction of $297 million, or 23%, in
revenues at Western Power Distribution, primarily as a result of the 1999 sale
of the SWEB supply business.
Operating Expenses. Excluding the write-down of assets, Mirant's operating
expenses for 1999 were $1,761 million, an increase of $245 million, or 16%, from
1998. This increase was primarily attributable to a $574 million increase in the
Americas region, the majority of which resulted from its newly-acquired North
American business units. Western Power Distribution's operating expenses
decreased by $343 million, or 32%, primarily because of the sale of the SWEB
supply business and cost reduction efforts in 1999.
Write-down of Assets. The $308 million pre-tax write-down of assets in 1998
resulted from Mirant's decision to sell its investments in Alicura and EDELNOR.
This charge reduced the carrying value of these assets to their estimated fair
market value. The $60 million write-down of assets in 1999 consisted of two
principal components. First, as Alicura and EDELNOR continued to produce income
pending their sale, additional write-downs totaling $28 million were recorded to
avoid increasing the carrying value of these assets above their estimated fair
values. Second, Mirant recorded a $31 million write-down primarily related to
Western Power Distribution's metering assets to reflect their reduced value as
the United Kingdom metering business becomes competitive. Based on the proposed
changes in regulation, Mirant determined that the assets were impaired by
comparing associated undiscounted cash flows to the carrying value of metering
assets. As a result, Mirant recorded an impairment loss to reflect the amount by
which the carrying value of metering assets exceeds their fair market value. The
fair market value was determined by computing the present value of estimated
future cash flows to be generated by the assets.
Other Income (Expense). Other income was $230 million in 1999, an increase of
$280 million, reflecting a large increase in income from an overall expense in
1998. The following factors were responsible for this increase:
o Interest expense for 1999 was $501 million, an increase of $71 million, or
17%, from 1998 due to higher borrowing to finance acquisitions.
o The increase in gain on sales of assets reflects a gain of $286 million
relating to the 1999 sale of the SWEB supply business, before related
expenses, minority interest and taxes.
o Equity in income of affiliates for 1999 was $110 million, a decrease of $25
million, or 19%, from 1998. This decline is primarily due to a $50 million
reduction in income from Bewag as a result of provisions recorded there for
employee severance and early retirement, partially offset by increases from
Mirant's operations in China.
o Income from recovery of receivables in 1999 was $64 million, an increase of
$35 million, or 121%, from 1998. These amounts represent successful
resolution of negotiations that allowed Mirant to recover certain
receivables previously determined uncollectible.
o Other, net for 1999 was $72 million, an increase of $43 million, or 148%,
from 1998. This increase resulted from several factors. Mirant recognized an
insurance gain of $23 million in 1999 resulting from the receipt of
insurance proceeds in excess of book value of assets destroyed in an
explosion at the State Line plant in Indiana. Additionally, Mirant
recognized higher equipment rental income at Western Power Distribution and
business interruption insurance proceeds related to an equipment failure at
EDELNOR.
6
Income Taxes. The provision for income taxes for 1999 was $129 million, an
increase of $252 million from the $123 million tax benefit recorded for 1998.
This increase is due in part to higher income from operations and the SWEB
supply business sale. In addition, the 1998 benefit reflects the tax effect of
the write-down of South American investments.
Minority Interest. Minority interest in income for 1999 was $183 million, an
increase of $103 million from 1998. This increase primarily relates to the gain
on the sale of the SWEB supply business.
Net Income. Net income for 1999 was $372 million, as compared to $0 for 1998.
The increase in net income is attributable to Mirant's business segments as
follows:
Americas:
Mirant's recorded net income was $93 million in 1999 as compared to a net
loss of $180 million in 1998. This increase primarily resulted from the 1998
write-down of $200 million, after tax, related to Alicura and EDELNOR
compared with write-downs of $18 million, after tax, in 1999 to maintain
those investments for sale at fair value. The remaining increase resulted
from earnings attributable to Mirant's North American acquisitions in New
England, California and New York, the commencement of operations of Southern
Producer Services in 1999 and a gain from insurance proceeds related to the
1998 fire and explosion at the State Line facility.
Europe:
Net income from Mirant's European operations totaled $170 million for 1999,
an increase of $29 million over the prior year. The increase in 1999
earnings reflects a $78 million gain on the sale of the SWEB supply business
in the third quarter, offset by a total of $50 million in charges at Bewag
associated with personnel who accepted voluntary severance and early
retirement packages and the write-down of Western Power Distribution's
metering assets partially offset by cost reduction efforts at Western Power
Distribution.
Asia-Pacific:
Mirant's net income in Asia-Pacific for 1999 totaled $175 million,
representing an increase of $107 million over the prior year. The
significant increase was primarily related to the commencement of operations
of the Sual plant in October 1999, increased contributions from Mirant's
operations in China and successful resolution of negotiations that allowed
Mirant to recover certain receivables previously determined to be
uncollectible.
Corporate:
After tax corporate costs produced a net loss of $66 million in 1999 versus
a $29 million net loss for 1998. The increased loss primarily reflects
additional interest expense from corporate debt incurred during 1999 to
finance acquisitions.
Liquidity and Capital Resources
Historically, Mirant has obtained cash from operations, borrowings under
credit facilities, issuances of commercial paper and senior notes, borrowings
and capital contributions from Southern Company 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. Some of the cash receipts associated
with Mirant's businesses have been transferred to Southern Company from time to
time, and Southern Company has provided funds to cover Mirant's disbursements
from time to time. Mirant will not receive any additional funds from Southern
Company or pay cash dividends to Southern Company.
7
The projects that Mirant develops typically require substantial capital
investment. Some of the projects in which Mirant has an interest have been
financed primarily with non-recourse debt that is repaid from the project's cash
flows. This debt is sometimes 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 to ensure that Mirant is not contractually obligated to repay the
project subsidiary's debts, that is, they are "non-recourse" to Mirant and to
its subsidiaries not involved in the project. However, Mirant has agreed to
undertake limited financial support for some of its project subsidiaries in the
form of limited obligations and contingent liabilities such as guarantees of
specific obligations. To the extent Mirant becomes liable under these guarantees
or other agreements in respect of a particular project, Mirant may have to use
distributions it receives from other projects to satisfy these obligations.
On October 2, 2000, the Company completed the initial public offering of
66.7 million shares of its common stock at a price of $22.00 per share. In a
concurrent offering, the Company sold 6.9 million 6 1/4% convertible trust
preferred securities for an initial price of $50.00 per preferred security.
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated were the joint
book-running managers and the representatives of the underwriters for both
offerings. The net proceeds from the offerings, after deducting underwriting
discounts, commissions payable and other internal costs incurred by the Company,
were $1,714 million. The Company used the net proceeds of the offerings to repay
$900 million of short-term debt from credit lines and $581 million of commercial
paper. The remaining proceeds were put into short-term investments to be used
for general corporate purposes.
Effects of Mirant's Separation From Southern Company
In connection with Mirant's separation from Southern Company, on March 5,
2001 Mirant transferred to Southern Company its leasing subsidiary, SE
Finance. SE Finance had net cash flows from operations of $141 million in 2000,
$32 million in 1999 and $(37) million in 1998. While there were no cash flows
from investing activities for 2000, SE Finance used cash flows for investing
activities of $271 million in 1999 and $185 million in 1998. It also used cash
flows from financing activities of $76 million in 2000, $240 million in 1999 and
$227 million in 1998.
Under agreements between Southern Company and Mirant, Mirant is required
to indemnify Southern Company for taxation costs if Mirant were to cause the
distribution of its stock to fail to be tax-free. Mirant estimates that the
amount of any indemnification payments would be approximately $2 billion.
Mirant does not currently maintain capital resources to fund potential
indemnification payments to Southern Company for this purpose. Mirant believes
the probability of an event occurring that would require it to make these
payments is sufficiently low and sufficiently under its control that Mirant does
not allocate liquidity for this contingency. If, however, the contingency should
occur, Mirant believes it could fund the indemnification payments through cash
flows from operations, new borrowings and, if necessary, asset sales. Payment of
this obligation would materially affect Mirant's financial condition and its
earnings and impair the ability to achieve its growth strategy.
Operating Activities
Cash provided from operating activities totaled approximately $908 million
for 2000 as compared to approximately $515 million for 1999, an increase of
approximately 76%. This increase is due to Mirant's acquisition of the
remaining 40% of MAEM, which is now consolidated in its financial statements,
and a full year of operations from the plants in California, New York and the
Sual plant in the Philippines. In addition , the Company had increased market
demand and market prices for electricity and gas in the western U.S., as well as
the commencement of commercial operations of new plants in North America.
As a result of Mirant's separation from Southern Company, Mirant has
reviewed the current strategy of earnings deferral from Asia. On July 1, 2000,
Mirant adopted a strategy under which only a portion of the future earnings will
be deferred in order to reinvest funds for further growth in the Philippines,
fund construction efforts, or service debt obligations. The remaining earnings
will be repatriated for reinvestment elsewhere or to service parent debt
obligations.
8
Investing Activities
Cash used in investing activities totaled $2,778 million for 2000 as
compared to $2,121 million for 1999, a increase of approximately 31%. The amount
in 2000 is primarily attributable to the acquisitions of the assets from PEPCO,
and also includes the acquisition Hyder and of the remaining 40% of MAEM from
Vastar. This compares to the acquisitions of the California and New York
operations as well as the commencement of operations of Mirant's Sual plant in
the Philippines in 1999. Mirant has used cash flows provided by financing
activities primarily to finance investments in Mirant's subsidiaries.
Financing Activities
Cash provided from financing activities totaled approximately $2,861
million in 2000 as compared to $1,374 million for 1999, an increase of
approximately 108%. The increase is primarily attributable to the $1,714 million
of net proceeds received for the Company's initial public offering and financing
the acquisition of assets from PEPCO in 2000. This compares to financing
activities during 1999 which included $1,730 million of proceeds from the
issuance of short-term and long-term debt to fund the acquisitions of California
and New York. These inflows were partially offset by $491 million in payments of
long-term debt, $503 million of dividends and return of capital paid to Southern
Company and $28 million in dividends to minority interests during 2000.
Mirant expects its cash and financing needs over the next several years to
be met through a combination of cash flows from operations and debt and equity
financings. Mirant has generally financed the operations of its regional
businesses and their projects primarily using financing arrangements requiring
loans to be repaid solely from cash flows at either the regional or project
level. Credit documents at subsidiaries financed in this manner often restrict
the ability to pay dividends and management fees periodically to Mirant when the
respective subsidiary fails to meet certain minimum criteria such as making
timely payments of debt service, not meeting debt service coverage ratio
thresholds, and certifying that there is no default or event of default under
the relevant credit documents. There may also be additional limitations that are
adapted to the particular characteristics of each project affiliate.
As of December 31, 2000, sources of liquidity included the April 1999
$800 million Citibank credit facility (facilities B and C), the June 2000 $1.0
billion Bank of America credit facility and the August 2000 $100 million
Wachovia letter of credit facility. Additionally, Mirant entered into a $650
million loan agreement with CSFB in September 2000 intended to partially finance
its acquisition of the PEPCO assets. Mirant's existing facilities and cash
position, along with existing credit facilities at its subsidiaries and others,
currently being arranged to finance construction costs, are expected to provide
sufficient liquidity for new investments, working capital and capital
expenditures, including letters of credit, through 2001. As of December 31,
2000, Mirant had drawn $200 million under the September $650 million CSFB credit
facility and issued letters of credit totaling $406 million and $86 million
under the April 1999 $800 million Citibank credit facility and the August 2000
$100 million Wachovia letter of credit facility, respectively. Additionally,
Mirant held $472 million in unrestricted cash at Mirant, most of which was
earmarked for future payments associated with the assumption of transition power
agreements and power purchase agreements from PEPCO.
Mirant has obtained consent from the required majority of its lenders
for each of its facilities to amend the respective credit agreements such that
there is no event of default when Southern distributes Mirant's shares. Mirant
has also obtained similar consents from project lenders where applicable.
Mirant plans to seek proposals in the first half of 2001 for credit
facilities that will replace some existing Mirant corporate bank facilities that
would come due in 2001, unless Mirant elects to exercise term out options of one
year or more. New credit facilities will be designed to provide working capital,
letters of credit and interim financing for smaller investments. Mirant expects
to size new credit facilities to provide a significant amount of additional
liquidity for unforeseen needs. A portion of funds drawn under the credit
facilities may be replaced by a capital markets issue later in 2001.
9
Any projects Mirant develops in the future and those assets Mirant may
seek to acquire, are likely to require substantial capital investment. Mirant
expects to finance new investment primarily at the project or subsidiary level.
Mirant's ability to arrange financing on a substantially non-recourse basis is
dependent on numerous factors. However, Mirant may have to provide more
financial support for the project entity or at a subsidiary level to satisfy its
future capital needs.
The market price of Mirant's common stock at December 31, 2000 was
$28.31 per share and the book value was $12.21 per share based on the 338.7
million shares outstanding at December 31, 2000, representing a market-to-book
ratio of 232%.
Commitments and Capital Expenditures
Energy Marketing and Risk Management
Mirant has approximately $877 million in trade credit support commitments
related to its energy marketing and risk management activities as of December
31, 2000. Mirant has also guaranteed the performance of its obligations under a
multiyear agreement entered into by Mirant with Brazos Electric Power
Cooperative ("Brazos"). Under the agreement, effective January 1999, Mirant
provides all the electricity required to meet the needs of the distribution
cooperatives served by Brazos. Also, Mirant 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's guarantee was
$75 million for the first year of the agreement and declines by $5 million per
year to $55 million in the fifth year of the agreement.
To the extent that Mirant does not maintain an investment grade rating, it
would be required to provide alternative collateral to certain counterparties.
Such collateral might be in the form of letters of credit. Performance
guarantees assure a subsidiary's performance of contractual obligations whether
it is commodity delivery or payment.
Mirant has a $64 million guarantee outstanding at December 31, 2000 related
to Pan Alberta Gas, Ltd.
Vastar, a subsidiary of BP Amoco, and Mirant had issued certain financial
guarantees made in the ordinary course of business, on behalf of MAEM's
counterparties, to financial institutions and other credit grantors. Mirant
has agreed to indemnify BP Amoco against losses under such guarantees in
proportion to Vastar's former ownership percentage of MAEM. At December 31,
2000, such guarantees amounted to approximately $312 million.
MAEM has a contract with BP Amoco through December 31, 2007 to purchase the
natural gas that would have been produced by Vastar (now a unit of BP Amoco) in
Canada, Mexico, and the contiguous states of the United States. The negotiated
purchase price of delivered gas is generally equal to the daily spot rate
prevailing at each delivery point. As part of Mirant's acquisition of Vastar's
40% interest in MAEM, Mirant agreed to amend the gas purchase and sale agreement
whereby BP Amoco is obligated to deliver fixed quantities at identified
delivery points. The agreement will continue to be in effect through December
31, 2007. The amendment became effective November 1, 2000.
Turbine Purchases and Other Construction-Related Commitments
Mirant, either directly or indirectly through its subsidiaries, had
commitments outstanding at December 31, 2000, to purchase 94 turbines and
equipment packages, with an anticipated total capacity of approximately 18,310
MW. Mirant has options to purchase up to an additional 26 turbines, with an
anticipated total capacity of approximately 7,100 MW. Minimum termination
amounts under the contracts were $196 million at December 31, 2000. If all the
turbines are purchased as planned, the total payments under these purchase
agreements and the related long-term service agreements would amount to $3,240
million at December 31, 2000.
10
Mirant has entered into firm commitments to meet ongoing construction
obligations at its projects, including contracts for materials purchases and
engineering, procurement and construction-related services. These commitments at
December 31, 2000 totaled approximately $474 million.
Long-term Service Agreements
Mirant has entered into long-term service agreements for the maintenance
and repair of its combustion turbine or combined cycle generating plants. These
agreements may be terminated in the event a planned construction project is
cancelled. Minimum termination amounts under the agreements were $168 million at
December 31, 2000. At December 31, 2000, the amount committed for construction
projects in process is approximately $2,255 million.
Power Purchases Agreements
Under the asset purchase and sale agreement for PEPCO, Mirant assumed the
obligations and benefits of five power purchase agreements with a total capacity
of 735 MW.
Operating Leases
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $17 million, $17 million, and $25 million during the years ended
December 31, 2000, 1999 and 1998, respectively.
Mirant entered into lease transactions that provided $1.5 billion, net of
associated expenses, of the purchase price at the closing of the PEPCO
transaction. The leases will be treated as operating leases for book purposes
whereby one of Mirant's subsidiaries will record periodic lease rental expenses.
Mirant has the following annual amounts committed for long-term service,
turbine purchases, fuel, power purchases and operating leases (in millions):
Long-Term Turbine
Fiscal Year Ended: Service Purchase Fuel Power Purchase Operating
Agreements Commitments Commitments Agreements Leases
---------- ----------- ----------- -------------- ---------
2001.................... $ 23 $ 1,048 $ 184 $ 26 $ 219
2002.................... 67 1,320 180 11 191
2003.................... 119 712 55 0 170
2004.................... 174 136 54 0 141
2005.................... 180 24 55 0 136
Thereafter.............. 1,692 0 75 0 2,479
------- ------- ------- ---- --------
Total minimum payments $ 2,255 $ 3,240 $ 603 $ 37 $ 3,336
======= ======= ======= ==== ========
Litigation and Other Contingencies
Companhia Energetica de Minas Gerais ("CEMIG"):
In September 1999, the state of Minas Gerais, Brazil, filed a lawsuit
in a state court seeking temporary relief against Southern Electric Brasil
Participacoes, Ltda. ("SEB") exercising voting rights under the shareholders'
agreement, between the state and SEB regarding SEB's interest in CEMIG, as well
as a permanent rescission of the agreement. On March 23, 2000, a state court in
Minas Gerais ruled that the shareholder agreement was invalid. SEB has appealed
that decision and a second decision by the same court invalidating the
shareholder agreement in a case brought by employees of CEMIG against the state
of Minas Gerais. Mirant believes that this is a temporary situation and expects
that the shareholders' agreement will be fully restored. Failure to prevail in
this matter would limit Mirant's influence on the daily operations of CEMIG.
However SEB would still have 33% of the voting shares of CEMIG and hold 4 of 11
seats on CEMIG's board of directors. SEB's economic interest in CEMIG would not
be affected. The significant rights SEB would lose relate to supermajority
rights and the right to participate in the daily operations of CEMIG. SEB
obtained financing from Banco Nacional de Desenvolvimento Economico e Social
(BNDES) for approximately 50% of the total purchase price of the CEMIG shares
which is secured by a pledge of SEB's shares in CEMIG. The interest payment
originally due May 15, 2000, in the amount of $107.8 million, has been deferred
until May 15, 2001.
State Line Energy, L.L.C. ("State Line"):
On July 28, 1998, an explosion occurred at State Line causing a fire and
substantial damage to the plant. The precise cause of the explosion and fire
has not been determined. Thus far, seven personal injury lawsuits have been
filed against Mirant, five of which were filed in Cook County, Illinois. Mirant
filed a motion to dismiss these five cases in 1998 for lack of "in personam"
jurisdiction. The motion was denied in August 1999. In October 1999, the
Appellate Court of Illinois granted Mirant's petition for leave to appeal. The
outcome of these proceedings cannot now be determined and an estimated range of
loss cannot be made.
Mobile Energy Services Company, L.L.C. ("Mobile Energy"):
Mobile Energy is the owner of a facility that generates electricity,
produces steam and in the past processed black liquor as part of a pulp and
paper complex in Mobile, Alabama. On January 14, 1999, Mobile Energy and
Mobile Energy Services Holdings, Inc., which guaranteed debt obligations of
Mobile Energy, filed voluntary petitions in the United States Bankruptcy Court
for the Southern District of Alabama, seeking protection under Chapter 11 of the
United States Bankruptcy Code. Southern Company has guaranteed certain potential
environmental and certain other obligations of Mobile Energy that represent a
maximum contingent liability of $19 million as of December 31, 2000. A major
portion of the maximum contingent liability escalates at the rate equal to the
producer price index. As part of its separation from Southern Company, Mirant
has agreed to indemnify Southern Company for any obligations incurred under such
guarantees.
An amended plan of reorganization was filed by Mobile Energy and Mobile
Energy Services Holdings on February 21, 2001. This amended plan proposes to
cancel the existing taxable and tax-exempt bond debt of Mobile Energy and
transfer ownership of Mobile Energy and Mobile Energy Services Holdings to the
holders of that debt. Approval of that proposed plan of reorganization would
result in a termination of Southern Company's direct and indirect ownership
interests in both entities, but would not affect Southern Company's continuing
guarantee obligations that are described above. The final outcome of this matter
cannot now be determined.
California:
Reliability-Must-Run Agreements: Mirant subsidiaries acquired generation
assets from Pacific Gas & Electric ("PG&E") in April 1999, subject to
reliability-must-run agreements. These agreements allow the California
Independent System Operator Corporation ("CAISO"), under certain conditions, to
require certain Mirant subsidiaries to run the acquired generation assets in
order to support the reliability of the California electric transmission system.
Mirant assumed these agreements from PG&E 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 reliability-must-run
agreements. This revenue requirement was negotiated as part of a prior
settlement of a FERC rate proceeding. Mirant contends that the amount paid by
the CAISO should reflect an allocation based on the CAISO's right to call on the
units (as defined by the reliability-must-run agreements) and the CAISO's actual
calls. This approach would result in annual payments by the CAISO of
approximately $120 million, or 75% of the settled fixed revenue requirement. The
decision in this case will affect the amount the CAISO will pay to Mirant for
the period from June 1,1999 through December 31, 2001. On June 7, 2000, the
administrative law judge 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
administrative law judge's decision to the FERC. The outcome of this appeal
cannot be determined. A final FERC order in this proceeding may be appealed to
the U.S. Court of Appeals.
If Mirant is unsuccessful in its appeal of the administrative law
judge'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, 2000
would have been approximately $138 million, however, there would have been no
effect on net income for 2000. This amount does not include interest that may be
payable in the event of a refund. If Mirant is unsuccessful in its appeal, it
plans to pursue other options available under the reliability-must-run
agreements to mitigate the impact of the administrative law judge's decision
upon its future operations. The outcome of this appeal is uncertain, and Mirant
cannot provide assurance that it will be successful.
CAISO and PX Price Caps: Beginning in May 2000, wholesale energy prices in
the California markets increased to levels well above 1999 levels. In response,
on June 28, 2000, the CAISO Board of Governors reduced the price cap applicable
to the CAISO's wholesale energy and ancillary services markets from $750/Mwh
to $500/Mwh. The CAISO subsequently reduced the price cap to $250/Mwh on August
1, 2000. During this period, however, the California Power Exchange Corporation
("PX") maintained a separate price cap set at a much higher level applicable to
the "day-ahead" and "day-of" markets administered by the PX. On August 23, 2000,
the FERC denied a complaint filed August 2, 2000 by San Diego Gas & Electric
Company (SDG&E) that sought to extend the CAISO's $250 price cap to all
California energy and ancillary service markets, not just the markets
administered by the CAISO. However, in its order denying the relief sought by
SDG&E, the FERC instructed its staff to initiate an investigation of the
California power markets and to report its findings to the FERC and held further
hearing procedures in abeyance pending the outcome of this investigation.
On November 1, 2000, the FERC released a Staff Report detailing the results
of the Staff investigation, together with an "Order Proposing Remedies for
California Wholesale Markets" ("November 1 Order"). In the November 1 Order, the
FERC found that the California power market structure and market rules were
seriously flawed, and that these flaws, together with short supply relative to
demand, resulted in unusually high energy prices. The November 1 Order proposed
specific remedies to the identified market flaws, including: (a) imposition of a
so-called "soft" price cap at $150/MWh to be applied to both the PX and CAISO
markets, which would allow bids above $150/MWh to be accepted, but will subject
such bids to certain reporting obligations requiring sellers to provide cost
data and/or identify applicable opportunity costs and specifying that such bids
may not set the overall market clearing price, (b) elimination of the
requirement that the California utilities sell into and buy from the PX, (c)
establishment of independent non-stakeholder governing boards for the CAISO and
the PX, and (d) establishment of penalty charges for scheduling deviations
outside of a prescribed range. In the November 1 Order the FERC established
October 2, 2000, the date 60 days after the filing of the SDG&E complaint, as
the "refund effective date." Under the November 1 Order rates charged for
service after that date through December 31, 2002 will remain subject to refund
if determined by the FERC not to be just and reasonable. While the FERC
concluded that the Federal Power Act and prior court decisions interpreting that
act strongly suggested that refunds would not be permissible for charges in the
period prior to October 2, 2000, it noted that it was willing to explore
proposals for equitable relief with respect to charges made in that period.
On December 15, 2000, the FERC issued a subsequent order that affirmed in
large measure the November 1 Order (the "December 15 Order"). Various parties
have filed requests for administrative rehearing and for judicial review of
aspects of the FERC's December 15 Order. The outcome of these proceedings, and
the extent to which the FERC or a reviewing court may revise aspects of the
December 15 Order or the extent to which these proceedings may result in a
refund of or reduction in the amounts charged by Mirant's subsidiaries for power
sold in the CAISO and PX markets, cannot be determined at this time, and Mirant
cannot determine what affect any action by the FERC will have on its financial
condition.
California Power Markets:
Department of Energy Order: On December 14, 2000, the Secretary of the
Department of Energy ("DOE") ordered that certain suppliers of electricity
provide electricity to the CAISO for delivery to California utility companies
when the CAISO certified that there was inadequate electrical supply. Subsequent
orders extended this requirement to February 7, 2001. The DOE orders expired at
that time and have not been renewed. Mirant subsidiaries were called upon by the
CAISO to provide power to the CAISO under the DOE orders.
Proposed CAISO and PX Tariff Amendments: On January 4, 2001, the CAISO
filed for approval of a tariff amendment whereby its credit rating requirements
for certain electricity purchasers would be reduced. The action was taken in
response to reports that Moody's and S&P were on the verge of reducing the
credit ratings of Southern California Edison ("SCE") and PG&E to ratings that
would not allow SCE and PG&E to purchase electricity from the CAISO unless they
posted collateral for their purchases. In its filing, the CAISO announced its
intention to implement the reduced credit requirements immediately in order to
ensure the reliability of the California power grid. On January 5, 2001, the PX
filed a similar request with respect to the PX's tariffs as the CAISO had
requested on January 4. On February 14, 2001, the FERC ruled that the tariff
amendment requested by the PX should be rejected because it had ceased to
operate its day-ahead and day-of markets. With respect to the CAISO's request,
the FERC allowed the CAISO to amend its tariff to remove the credit-worthiness
requirements only with respect to the scheduling by a utility purchaser from the
CAISO of power from generation owned by that purchaser. The FERC rejected the
proposed amendment with respect to purchases by the CAISO from third-party
suppliers. The application of this ruling by the FERC to the CAISO's purchases
under its emergency dispatch authority is currently being disputed.
Defaults by SCE and PG&E: On January 16 and 17, 2001, SCE's and PG&E's
credit and debt ratings were lowered by Moody's and S&P to "junk" or "near junk"
status. On January 16, 2001, SCE indicated that it would suspend indefinitely
certain obligations including a $215 million payment due to the PX and a $151
million payment due to a qualifying facility. On January 30, 2001, the PX
suspended operation of its "day ahead" and "day of" markets. On February 1,
2001, PG&E indicated that it intended to default on payments of over $1 billion
due to the PX and qualifying facilities.
DWR Power Purchases: On January 17, 2001, the Governor of California issued
an emergency proclamation giving the California Department of Water Resources
("DWR") authority to enter into arrangements to purchase power in order to
mitigate the effects of electrical shortages in the state. The DWR began
purchasing power under that authority the next day. On February 1, 2001, the
Governor of California signed Assembly Bill No. 1X authorizing the DWR to
purchase power in the wholesale markets to supply retail consumers in California
on a long-term basis. The Bill became effective immediately upon its execution
by the Governor. The Bill did not, however, address the payment of amounts owed
for power previously supplied to the CAISO or PX for purchase by SCE and PG&E.
The CAISO and PX have not paid the full amounts owed to MAEM 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 PX or the CAISO for sales that were not arranged by the DWR.
Mirant through its subsidiaries has approximately 3000 MW of generating
capacity in California. This includes facilities which operate during periods of
higher-than-average (intermediate load) and very high (peak) demand levels.
Mirant's California subsidiaries generated an amount equivalent to about 4% of
the total California energy consumption in 2000. The Company's combined
receivables from both the PX and the CAISO as of December 31, 2000 and as of
late February 2001 (unaudited) were approximately $375 million and $385 million
(unaudited), respectively, net of settlements due to the PX. There are other
sources of collateral and revenues which could potentially provide additional
offset to this net receivable listed above. On a going-forward basis, Mirant
does not expect a material portion of its income to be derived from receivables
due from the PX and CAISO attributable to purchases on behalf of
non-credit-worthy entities in California. In addition, Mirant has taken a
provision which it believes adequately covered its exposure as of December 31,
2000 related to the increased credit and payment risks associated with the
California power situation. The Company continues to monitor the situation in
California and will re-evaluate the amount of the provision needed at the end
of the first quarter of 2001.
Attorney General and California Public Utilities Commission Investigations.
The California Public Utilities Commission ("CPUC") and the California Attorney
General's office have each launched investigations into the California energy
markets that have resulted in the issuance of subpoenas to several Mirant
entities. The CPUC issued one subpoena to Mirant entities in mid-August of 2000
and one in September of 2000. 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 of 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. Despite various measures taken to protect the confidentiality
of sensitive information provided to these agencies, there remains a risk of
governmental disclosure of the confidential, proprietary, and trade secret
information obtained by the CPUC and the Attorney General through this process.
While Mirant will vigorously defend any claims of potential civil liability or
criminal wrong-doing asserted against it or its subsidiaries, the results of
such investigations cannot now be determined.
California Class Action Litigation: Five lawsuits have been filed in the
superior courts of California alleging that certain owners of electric
generation facilities in California and energy marketers, including Mirant
Corporation, Mirant Americas Energy Marketing, LP, Mirant Delta, Mirant Potrero,
and Southern Company, engaged in various unlawful and anticompetitive acts that
served to manipulate wholesale power markets and inflate wholesale electricity
prices in California. Four of the suits seek class action status. One lawsuit
alleges that, as a result of the defendants' conduct, customers paid
approximately $4 billion more for electricity than they otherwise would have and
seeks an award of treble damages, as well as other injunctive and equitable
relief. The other suits likewise seek treble damages and equitable relief. While
two of the suits name Southern Company as a defendant, it appears that the
allegations, as they may relate to Southern Company and its subsidiaries, are
directed to activities of subsidiaries of Mirant Corporation. One such suit
names Mirant Corporation itself as a defendant. Southern Company has notified
Mirant of its claim for indemnification for costs associated with these actions
under the terms of the Master Separation Agreement that governs the separation
of Mirant from Southern Company, and Mirant has undertaken the defense of all of
the claims. The final outcome of the lawsuits cannot now be determined.
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 NY 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, U.S. Environmental Agency, 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 is in the process of responding fully to this request.
Bewag:
On August 10, 2000, E.on Energie announced that it had reached an
agreement with Hamburgische Electricitaets-Werke AG (HEW) to sell E.on Energie's
49% share of Bewag effective January 1, 2001. Mirant, through its subsidiaries,
had previously made an offer to purchase E.on Energie's 49% interest in Bewag.
On August 14, 2000, at the request of the State of Berlin, the Berlin district
court issued a temporary injunction preventing E.on Energie from selling part of
its stake in Bewag, as it had not obtained the approval of the State of Berlin.
This temporary injunction was extended by the Berlin high court on August 16,
2000. On August 15, 2000, the Berlin high court issued a separate preliminary
injunction, at Mirant's request, to prevent the sale of E.on Energie's shares in
Bewag to HEW. This injunction was upheld on December 4, 2000. The matter is
currently scheduled for binding arbitration. E.on Energie has submitted a
counterclaim to the arbitrator seeking recovery of damages it claims it suffered
as a result of the injunction issued by the Berlin court. The first meeting of
the parties with the arbitrators is scheduled for March 9, 2001. Upon E.on
Energie's request, Mirant instituted legal proceedings in the state court of
Berlin seeking the same injunction as in the arbitration. Both proceedings are
in their initial stage. Therefore, Mirant is uncertain as to the result of the
pending proceedings. Mirant has also stated its desire to negotiate a settlement
with E.on Energie and HEW with respect to a joint partnership with HEW regarding
their combined shares in Bewag including the shares presently owned by E.on
Energie.
WPD and SWE Pension Issues:
WPD and South Wales Electricity plc face potential regulatory issues
related to their use of a pension surplus which was primarily utilized to offset
the cost of providing early pensions to terminated employees. An independent
pension arbitrator has issued a ruling directing that another industry employer
should refund such amounts with interest to the Electricity Supply Pension
Scheme (ESPS). This ruling is currently being appealed to the House of Lords.
The ESPS provides pension and other related defined benefits, based on final
pensionable pay, to substantially all employees throughout the electricity
supply industry in the United Kingdom. The majority of both Western Power
Distribution's and South Wales Electricity plc's employees are ESPS members.
Mirant cannot provide assurance that this appeal will succeed or that neither
Western Power Distribution nor South Wales plc will be required to refund to the
ESPS any amounts previously used to fund early retirement costs, which
management estimates to be approximately (pound)27 million (approximately $40
million). Under SFAS 87 "Employers' Accounting for Pensions," the Company
does not anticipate any immediate impact to its net income.
International Energy Limited Arbitration Award:
In December 2000, an arbitration award was handed down against Mirant
Asia Pacific ("MAP") relating to fees in the amount of $26 million owed to
International Energy Limited ("IEL") for the Tanjung Jati project. The matter
relates to an agreement with IEL entered into by MAP prior to Mirant's
acquisition of MAP from Hopewell Holdings Ltd. ("HHL"). In 1997 MAP sold the
Tanjung Jati project to HHL. Under the Sales Agreement, HHL provided an
indemnity obligation from HHL for certain matters, including such matters as
this claim. To date HHL has acknowledged the indemnity and defended the suit.
Mirant fully expects HHL to perform its obligation to indemnify MAP for any
liability incurred in connection with enforcement of the award.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mirant is exposed to market risks, including changes in interest rates and
currency exchange rates. Through various hedging mechanisms, the Company
attempts to mitigate some of the impact of changes in energy prices, fuel costs,
interest rates and exchange rates on its results of operations. To manage the
volatility inherent in these market risks, the Company nets the exposures to
take advantage of natural offsets. In addition, Mirant may enter into hedging
transactions to mitigate the remaining exposures as part of its risk management
program.
Energy Commodity Price Risk
Mirant's energy marketing and risk management subsidiaries enter into a
variety of contractual commitments, such as swaps, swap options, cap and floor
agreements, futures contracts, forward purchase and sale agreements, and option
contracts. These contracts generally require future settlement and are either
executed on an exchange or traded as Over-the-Counter ("OTC") instruments.
Contractual commitments have widely varying terms and have durations that range
from a few days to a number of years, depending on the instrument.
The way in which Mirant accounts for and presents contractual commitments
in its financial statements depends on both the type and purpose of the
contractual commitment held or issued. As discussed in the summary of accounting
policies, the Company records all contractual commitment used for trading
purposes, including those used to hedge trading positions, at fair value.
Consequently, changes in the amounts recorded in the Company's consolidated
balance sheets resulting from movements in fair value are included in trading
revenues in the period in which they occur. Mirant also engages in commodity
related marketing and price risk management activities 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 include primarily
forwards, futures, and swaps. The gains and losses related to these derivatives
are recognized in the same period as the settlement of underlying physical
transaction. These realized gains and losses are included in operating revenues
and operating expenses in the accompanying consolidated statement of income.
Contractual commitments expose the Company to both market risk and credit risk.
Interest Rate Risk
The Company uses 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 August and September of 2000, MAGI entered into forward starting
interest rate swaps intended to hedge anticipated bond issuances in 2001.
Further, some of Mirant's 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 Mirant 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 $10 million,
based on variable rate debt and derivatives, cash balances and other interest
rate sensitive instruments outstanding at December 31, 2000.
Foreign Currency Exchange Rate Risk
Mirant uses long-term cross-currency agreements to hedge a significant
portion of its net investments in both Western Power Distribution and Bewag.
These cross-currency agreements hedge Mirant's cash exposure to fluctuations in
the British Pound Sterling and Deutschemark exchange rates with the U.S. Dollar.
The Company also has investments in various emerging market countries where the
net investments are not hedged, including Chile, Trinidad and Tobago, the
Bahamas, the Philippines and China. The Company relies on either contractual or
regulatory links to the U.S. Dollar to mitigate currency risks attributable to
these investments. As a result of these links to the U.S. Dollar, the Company
does not believe it has a material cash exposure to changes in exchange rates
between the U.S. Dollar and the currencies of these countries. The Company has
also entered short-term forward agreements to hedge inter-company loans and
equity provided to purchase a portion of Hyder. Mirant intends to roll these
out into long-term cross-currency agreements similar to those used for
investments in Western Power Distribution and Bewag.
In addition, Mirant has currency exposure which it is unable to hedge
related to its 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 U.S. dollar. These
agreements provide the Company some protection against a devaluation of the
Real; however, it does not completely cover its exposure. For example, the
devaluation of the Real in January 1999 resulted in a write down of $83 million,
net of income tax effects, in the currency translation account category included
in Mirant's equity accounts.
Mirant utilizes currency swaps and forward agreements to hedge U.S.
dollar-denominated debt issued by its Southern Investments UK and Hyder plc
affiliates. These swaps offset the dollar cash flows, thereby effectively
converting debt to the respective subsidiary's functional currency. Gains and
losses related to qualified 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.
Mirant has hedge transactions that may not continue to qualify for hedge
accounting under the Financial Accounting Standards Board ("FASB") proposed
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133") and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities an Amendment of FASB Statement No. 133" ("SFAS No. 138").
Mirant measures currency earnings risk related to its 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. The Company used
exchange rates and currency positions as of December 31, 2000 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
$6 million had the U.S. Dollar exchange rate increased relative to the
currencies with which Mirant had exposure.
For all derivative financial instruments, the Company is exposed to losses
in the event of nonperformance by counterparties to these derivative financial
instruments. The Company has established controls to determine and monitor the
creditworthiness of counterparties to mitigate its exposure to counterparty
credit risk.
Interest and Currency Swaps
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 an agreed-upon notional principal amount. These swaps
are designated to hedge underlying debt obligations. For qualifying hedges, the
interest rate differential is reflected as an adjustment to interest expense
over the life of the swaps. Gains and losses resulting from the termination of
qualified hedges prior to their stated maturities are recognized ratably over
the remaining life of the instrument being hedged.
Currency swaps are used by Mirant to hedge its net investment in certain
foreign subsidiaries. Gains or losses on these currency swaps designated as
hedges of net investments are offset against the translation effects reflected
in other comprehensive income, net of tax. Currency forwards are used to hedge
contracts denominated in a foreign currency.
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 Interest Number of Notional Unrecognized
Type or Termination Rates Counterparties Amount Gain (Loss)
- ---- -------------- ----- -------------- ------ -----------
(in millions)
Interest rate swaps 2002-2012 6.55%-7.12% 9 $2,150 $ (110)
2002-2007 4.98%-5.79% 2 DM691 $ (5)
Cross currency swaps 2002 - 2 (pound)44 1
Cross currency swaption 2003 - 2 DM338 24
Currency forwards 2001-2003 - 1 CAD19 -
2001 - 4 (pound)116 (5)
---------
$ (95)
(pound) - Denotes British Pounds Sterling.
DM - Denotes Deutschemark.
CAD - Denotes Canadian Dollars.
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. As indicated in the previous table, if
the existing derivative financial instruments at December 31, 2000 had been
discontinued or Mirant counterparties defaulted on those dates, Mirant would
have recognized losses of approximately $95 million. However, at December 31,
2000, Mirant believes that its exposure to credit risk due to nonperformance by
the counterparties to its financial derivatives is not material, based on the
investment grade rating of the counterparties.
Market Risk
Market risk is the potential loss that Mirant 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. Mirant's exposure to market risk is determined by a number of
factors, including the size, duration, composition, and diversification of
positions held and the absolute and relative levels of interest rates, as well
as market volatility and liquidity. For instruments such as options, the time
period during which the option may be exercised and the relationship between the
current market price of the underlying instrument and the option's contractual
strike or exercise price also affects the level of market risk. The most
significant factor influencing the overall level of market risk to which Mirant
is exposed is its use of various risk management techniques. Mirant manages
market risk by actively monitoring compliance with stated risk management
policies as well as monitoring the effectiveness of its hedging policies and
strategies through its risk oversight committees. Mirant's risk oversight
committees review and monitor compliance with risk management policies that
limit the amount of total net exposure and rolling net exposure during the
stated periods. These policies, including related risk limits, are approved by
the Group Boards of Directors and are regularly assessed by management to ensure
their appropriateness given Mirant's objectives. Mirant's corporate risk control
officer is a member of the Group risk oversight committees to ensure that
information is communicated to Mirant's senior management and audit committee as
needed.
Mirant uses a systematic approach to the evaluation and management of
risk associated with its marketing and risk management-related commodity
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 within
a specified holding period.
Mirant uses a 95% confidence interval and holding periods that vary by
commodity and tenor to evaluate its risks with respect to VAR. Based on a 95%
confidence interval and employing a one-day holding period for all positions,
Mirant's portfolio of positions had a VAR of $25.6 million at December 31, 2000.
During 2000, the actual daily change in fair value never exceeded this daily VAR
calculation. Mirant also utilizes additional risk control mechanisms such as
commodity position limits and stress testing.
The fair values of Mirant's assets from risk management activities
recorded in the consolidated balance sheets at December 31, 2000, were comprised
primarily of approximately 52% electricity and 45% natural gas. The fair values
of the liabilities from risk management activities recorded in the consolidated
balance sheets at December 30, 2000, were comprised primarily of approximately
52% electricity and 45% natural gas.
Credit Risk
In conducting its energy marketing and risk management activities, Mirant
regularly transacts business with a broad range of entities and a wide variety
of end users, trading companies, and financial institutions. Credit risk is
measured by the loss Mirant would record if its counterparties failed to
perform pursuant to the terms of their contractual obligations and the value of
collateral held, if any, were not adequate to cover such losses. Mirant has
established controls to determine and monitor the creditworthiness of
counterparties, as well as the quality of pledged collateral, and uses master
netting agreements whenever possible to mitigate Mirant's exposure to
counterparty credit risk. Master netting agreements enable Mirant to net certain
assets and liabilities by counterparty. Mirant also nets across product lines
and against cash collateral, provided such provisions are established in the
master netting and cash collateral agreements. Additionally, Mirant may require
counterparties to pledge additional collateral when deemed necessary.
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. Mirant
monitors credit risk on both an individual basis and a group counterparty basis.
No single counterparty represents 10% or more of Mirant's credit exposure
at December 31, 2000. Mirant's overall exposure to credit risk may be impacted,
either positively or negatively, because its counterparties may be similarly
affected by changes in economic, regulatory, or other conditions.
Accounting Pronouncements
In June 2000, the FASB issued SFAS No. 138, an amendment of SFAS No. 133,.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, and for hedging activities. The Statement requires that
certain derivative instruments be recorded in the balance sheet as either assets
or liabilities measured at fair value, and that changes in the fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Mirant adopted the provisions of SFAS No. 133, as amended, on January
1, 2001 and such adoption is expected to result in a cumulative after-tax
reduction in other comprehensive income of approximately $300 million in the
first quarter of fiscal year 2001. Mirant anticipates that SFAS No. 133 will
increase the volatility in other comprehensive income because the derivative
instruments are valued based on market indices. The adoption will also impact
assets and liabilities recorded on the balance sheet.
The application of SFAS No. 133 is still evolving and further guidance from
the FASB is expected. In particular, there are two implementation questions that
remain unresolved by the FASB that specifically relate to Mirant's industry. The
first issue relates to the unplanned netting of electricity transactions with
the same counterparty (referred to as a "bookout") which is used in the electric
utility industry as a scheduling convenience when two utilities happen to have
offsetting transactions. The FASB has yet to conclude on whether bookouts
represent gross settlement or net settlement.
If bookouts are determined to be net settlement features, then the related
contracts cannot qualify for the normal purchases and sales exception; however,
if a bookout is viewed by the FASB to be viewed as gross settlement, the
contract would qualify for this normal purchases and sales exception.
The second issue relates to capacity contracts. A unique characteristic of
the electric utility industry is that electricity cannot be stored and as a
result, contracts to buy and sell electricity generally allow the purchaser some
flexibility in determining when to take electricity, as well as the quantity to
take, in order to match power delivery to fluctuating demand. Such power
contracts typically include a charge (the capacity or demand charge) to recover
the significant cost of related plant and financing and also a separate charge
to recover the variable cost of producing power (the energy charge). The FASB
has yet to conclude on whether such contracts should uniquely qualify for the
normal purchases and normal sales exception even though they appear to give the
buyer some optionality, SFAS No. 133 does not allow option contracts to qualify
for the normal purchases and sales exception.
Mirant's SFAS No. 133 current accounting policies assume that bookouts
qualify for the normal purchases and sales exception. Additionally, Mirant's
accounting policies assume that contracts containing capacity and energy charges
qualify for the normal purchases and sales exception. When established, the
final conclusions from the FASB concerning these two issues may have additional
impacts on Mirant's financial statements.
During 2000, the Company adopted EITF Issue No. 00-17, "Measuring the Fair
Value of Energy-Related Contracts in Applying Issue No. 98-10" without material
impact on its earnings or financial position. This EITF provides additional
clarification to companies in the energy industry in accounting for energy
trading and risk management contracts.
Special note regarding forward-looking statements:
The information presented in this Form 8-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: (i) legislative and regulatory initiatives regarding
deregulation, regulation or restructuring of the electric utility industry;
(ii) the extent and timing of the entry of additional competition in the markets
of Mirant's subsidiaries and affiliates; (iii) Mirant's pursuit of potential
business strategies, including acquisitions or dispositions of assets or
internal restructuring; (iv) state, federal and other rate regulations in the
United States and in foreign countries in which Mirant's subsidiaries and
affiliates operate; (v) changes in or application of environmental and other
laws and regulations to which Mirant and its subsidiaries and affiliates are
subject; (vi) political, legal and economic conditions and developments in the
United States and in foreign countries in which Mirant's subsidiaries and
affiliates operate; (vii) financial market conditions and the results of
Mirant's financing efforts; changes in commodity prices and interest rates;
weather and other natural phenomena; (viii) performance of Mirant's projects
undertaken and the success of efforts to invest in and develop new
opportunities; (ix) unanticipated developments in the California power markets,
including, but not limited to, unanticipated governmental intervention,
deterioration in the financial condition of counterparties, default on
receivables due, adverse results in current or future litigation and adverse
changes in the tariffs of the California Power Exchange Corporation or
California Independent System Operator Corporation, and (x) other factors,
discussed elsewhere herein and in other reports (including Mirant's Form S-1
filed September 27, 2000 and Mirant's Form 10-K) filed from time to time by
Mirant with the SEC.
Although Mirant believes that the expectations reflected in the forward
looking statements are reasonable, Mirant cannot guarantee future results,
events, levels of activity, performance or achievements. Mirant does not
undertake a duty to update any of the forward-looking statements.
Report of Independent Public Accountants
To 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, 2000 and 1999, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 28, 2001
Mirant Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 and 1999
(In Millions)
ASSETS 2000 1999
-------- --------
Current Assets:
Cash and cash equivalents......................................... $ 1,280 $ 323
Receivables:
Customer accounts, less provision for uncollectibles of
$72 and $23 for 2000 and 1999, respectively.................... 3,399 236
Other, less provision for uncollectibles of $22 and $21
for 2000 and 1999, respectively............................... 629 341
Notes receivable ............................................... 365 139
Assets from risk management activities (Note 9)................... 2,678 1
Deferred income taxes (Note 8) ................................... 275 -
Other............................................................. 526 245
-------- --------
Total current assets.......................................... 9,152 1,285
-------- --------
Property, Plant and Equipment (Notes 2 and 4):.................... 3,648 4,147
Less accumulated provision for depreciation....................... (228) (421)
-------- --------
3,420 3,726
Leasehold interests, net of accumulated amortization of $216
and $137 for 2000 and 1999, respectively (Note 1)............... 1,843 1,934
Construction work in progress..................................... 418 365
-------- --------
Total property, plant, and equipment, net..................... 5,681 6,025
-------- --------
Noncurrent Assets:
Investments (Notes 1, 3, 12 and 13)............................... 1,797 1,490
Notes and other receivables, less provision for
uncollectibles of $49 and $61 for 2000 and 1999, respectively... 213 297
Notes receivables from related party (Note 7)..................... 979 979
Assets from risk management activities (Note 9)................... 1,230 -
Goodwill, net of accumulated amortization of $221 and $164 for
2000 and 1999, respectively (Notes 1 and 12).................... 3,292 2,106
Other intangible assets, net of accumulated amortization of
$34 and $13 for 2000 and 1999, respectively (Notes 1 and 12).... 738 447
Concession agreement, net of accumulated amortization of $90 for
1999 (Notes 1 and 2)............................................ - 268
Investment in leveraged leases (Note 14).......................... 596 556
Deferred income taxes (Note 8) ................................... 334 0
Miscellaneous deferred charges.................................... 124 410
-------- --------
Total noncurrent assets....................................... 9,303 6,553
-------- --------
Total assets.................................................. $ 24,136 $ 13,863
======== ========
The accompanying notes are an integral part of these consolidated statements.
Mirant Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 and 1999
(In Millions)
Liabilities and Stockholders' Equity 2000 1999
-------- --------
Current Liabilities:
Short-term debt (Note 7)......................................... $ 1,289 $ 1,961
Current portion of long-term debt (Note 7)....................... 201 237
Accounts payable................................................. 4,240 625
Taxes accrued.................................................... 216 218
Liabilities from risk management activities (Note 9)............. 2,899 5
Obligations under energy delivery commitments (Note 9)........... 790 15
Other............................................................ 140 167
-------- --------
Total current liabilities.................................... 9,775 3,228
-------- --------
Noncurrent Liabilities:
Subsidiary obligated mandatorily redeemable preferred
Securities (Notes 7 and 9)..................................... 950 1,031
Notes payable (Notes 7 and 9).................................... 5,206 4,557
Other long-term debt (Notes 7 and 9)............................. 390 397
Liabilities from risk management activities -(Note 9)............ 906 -
Deferred income taxes (Note 8)................................... 53 680
Obligations under energy delivery commitments (Note 9)........... 1,514 15
Miscellaneous deferred credits................................... 307 128
-------- --------
Total noncurrent liabilities................................. 9,326 6,808
-------- --------
Preferred stock held by Southern Company (Note 10)............... 242 -
Minority Interest in Subsidiary Companies........................ 312 725
Company obligated mandatorily redeemable securities of a
subsidiary holding solely parent company debentures (Note 7)... 345 -
Commitments and Contingent Matters (Notes 7, 9, 10 and 11)
Stockholders' Equity:
Common stock, $.01 par value; 2,000,000,000 shares authorized;
338,701,000 and 272,000,000 shares issued and outstanding
(Note 15)...................................................... 3 3
Additional paid-in capital....................................... 4,084 2,984
Accumulated other comprehensive loss............................. (117) (92)
Retained earnings................................................ 166 207
-------- --------
Total stockholders' equity................................... 4,136 3,102
-------- --------
Total liabilities and stockholders' equity................... $ 24,136 $ 13,863
========= ========
The accompanying notes are an integral part of these consolidated statements.
Mirant Corporation and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 2000, 1999 and 1998
(In Millions, Except Per Share Data)
2000 1999 1998
-------- -------- --------
Operating Revenues.............................................. $ 13,315 $ 2,265 $ 1,819
-------- ------- -------
Operating Expenses:
Cost of fuel, electricity and other products.................... 11,437 934 891
Maintenance..................................................... 136 116 80
Depreciation and amortization................................... 317 270 221
Selling, general, and administrative............................ 520 253 160
Write-down of assets (Note 2)................................... 18 60 308
Other........................................................... 223 188 164
-------- ------- ------
Total operating expenses...................................... 12,651 1,821 1,824
-------- ------- ------
Operating Income (Loss)......................................... 664 444 (5)
-------- ------- -------
Other Income (Expense):
Interest income................................................. 187 172 146
Interest expense................................................ (615) (501) (430)
Gain on sales of assets, net (Note 12).......................... 20 313 41
Equity in income of affiliates (Notes 1, 3, and 13)............. 196 110 135
Receivables recovery (Note 1)................................... - 64 29
Other, net...................................................... 50 72 29
------- ------- -------
Total other (expense) income.................................. (162) 230 (50)
-------- ------- -------
Income (Loss) From Continuing Operations Before Income
Taxes and Minority Interest................................... 502 674 (55)
Provision (Benefit) for Income Taxes............................ 86 129 (123)
Minority Interest............................................... 84 183 80
------- ------- -------
Income (Loss) From Continuing Operations........................ 332 362 (12)
------- ------- -------
Income From Discontinued Operations, Net of Tax Benefit
of $20, $15 and $22 in 2000, 1999, and 1998, respectively..... 27 10 12
------- ------- -------
Net Income...................................................... $ 359 $ 372 $ -
======= ======= =======
Earnings Per Share:
Basic (and Diluted for 2000)
From continuing operations.................................... $ 1.15 $ 1.33 $ (0.04)
From discontinued operations.................................. 0.09 0.04 0.04
---------- -------- --------
Net income.................................................... $ 1.24 $ 1.37 $ -
======== ======== =======
The accompanying notes are an integral part of these consolidated statements.
Mirant Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
(In Millions)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Comprehensive
Stock Capital Earnings Income (Loss) Income
------ ---------- -------- ------------- -------------
Balance, December 31, 1997............. $ 3 $ 2,122 $ - $ 7
Net income........................... - - - - $ -
Cumulative translation adjustment,
net of tax.......................... - - - 8 8
------
Comprehensive income................. $ 8
======
Capital contributions................ - 502 - -
----- -------- ------ ------
Balance, December 31, 1998............. 3 2,624 - 15
Net income........................... - - 372 - $ 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)
===== ======== ====== ======
The accompanying notes are an integral part of these consolidated statements.
Mirant Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
(In Millions)
2000 1999 1998
-------- -------- -------
Cash Flows From Operating Activities:
Net income......................................... $ 359 $ 372 $ -
-------- -------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in income of affiliates................... (174) (95) (121)
Depreciation and amortization.................... 333 286 229
Write-down of assets............................. 18 60 308
Deferred income taxes............................ 114 166 (40)
Gain on sales of assets.......................... (20) (313) (41)
Minority interest................................ 84 183 80
Other, net....................................... 34 (93) (27)
Changes in certain assets and liabilities,
excluding effects from acquisitions:
Receivables, net............................... (2,515) (133) 133
Risk management activities, net................ (46) - -
Obligations under Energy Delivery Commitments (33) - -
Other current assets........................... (21) (15) (47)
Accounts payable............................... 2,079 (81) (141)
Taxes accrued.................................. 69 22 (12)
Other current liabilities...................... 627 156 81
-------- -------- --------
Total adjustments............................ 549 143 402
-------- -------- --------
Net cash provided by operating activities.... 908 515 402
-------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures............................... (616) (747) (647)
Cash paid for acquisitions......................... (3,147) (1,771) (998)
Issuance of notes receivable....................... (864) (199) (191)
Repayments on notes receivable..................... 232 341 398
Funds loaned to Southern Company................... - - (361)
Purchase of preferred shares....................... - (121) -
Property insurance proceeds........................ 22 34 -
Proceeds received from the sale of
investments (Note 12).............................. 1,542 284 198
Dividends received from equity investments......... 53 58 67
-------- -------- --------
Net cash used in investing activities........ (2,778) (2,121) (1,534)
-------- -------- --------
Cash Flows From Financing Activities:
Capital contributions from Southern Company........ 65 360 502
Capital contributions from minority interests...... 14 18 -
Return of capital to Southern Company.............. (113) - -
Payment of dividends to Southern Company........... (390) (165) -
Payment of dividends to minority interests......... (28) (66) (22)
Proceeds from issuance of common stock............. 1,380 - -
Proceeds from issuance of short-term debt, net..... 1,761 358 122
Proceeds from issuance of long-term debt........... 329 1,372 730
Proceeds from issuance of preferred securities..... 334 - 338
Repayment of long-term debt........................ (491) (503) (375)
-------- -------- ---------
Net cash provided by financing activities.... 2,861 1,374 1,295
-------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents...................................... (34) (6) -
-------- --------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents........................................ 957 (238) 163
Cash and Cash Equivalents, beginning of year....... 323 561 398
-------- -------- --------
Cash and Cash Equivalents, end of year............. $ 1,280 $ 323 $ 561
======== ======== ========
Supplemental Cash Flow Disclosures:
Cash paid for interest, net of amounts capitalized. $ 676 $ 419 $ 349
======== ======== ========
Refunds received for income taxes.................. $ (96) $ (114) $ (33)
======== ======== ========
Business Acquisitions:
Fair value of assets acquired...................... $ 7,858 $ 1,803 $ 1,072
Less cash paid..................................... 3,147 1,771 998
-------- -------- --------
Liabilities assumed.............................. $ 4,711 $ 32 $ 74
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
Mirant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
1. Accounting and Reporting Policies
General
Mirant Corporation (formerly Southern Energy, Inc.) is an 80% owned
subsidiary of Southern Company ("Southern" or the "Parent") and was incorporated
in Delaware in 1993. Mirant Corporation and its subsidiaries (collectively,
"Mirant") 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 trading operations. Mirant has operations and development offices
in North America and the Caribbean, Asia, Europe, and South America.
Additionally, Mirant operates a business development and management entity.
Operating entities, of which Mirant has less than 100% ownership at December 31,
2000, are as follows:
Economic Voting
Ownership Interest
Percentage at Percentage at
Country of Year of December 31, December 31,
Operations Investment 2000 2000
---------- ---------- ------------- -------------
Entities Consolidated:
Southern Energy Quezon, Inc. ("Pagbilao").... Philippines 1997 87.2% 87.2%
Southern Energy Pangasinan, Inc. ("Sual").... Philippines 1997 91.9 91.9
Southern Energy Navotas, Inc. ("Navotas I").. Philippines 1997 90.0 90.0
Empresa Electrica del Norte Grande
("EDELNOR") S.A. (Note 2)................. Chile 1993 82.3 82.3
Freeport Power Company....................... Bahamas 1993 55.4 55.4
Entities not consolidated, accounted for
under equity method:
South Western Electricity plc, dba Western
Power Distribution ("WPD") (Note 12)...... United Kingdom 1995 49.0 50.0
WPD Limited ("WPDL") (Note 12)............. United Kingdom 2000 49.0 50.0
Birchwood Power Partners L.P.("Birchwood")... United States 1994 50.0 50.0
Bewag AG ("Bewag")........................... Germany 1997 26.0 28.7
Guangdong Guanghope Power Company
Limited ("Shajiao C")...................... China 1997 32.0 40.0
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
Shandong International Power
Development Company Limited ("SIPD")....... China 1999 9.9 10.0 to 38.0
Mirant currently has a 49% economic interest in WPD Holdings UK, the UK
parent of WPD, yet shares operational and management control with 50% of the
voting rights. Mirant's economic interest in Shajiao C is stated after a
preferential distribution to Guangdong Generation Corporation, the joint venture
partner in China. Mirant's voting interest in SIPD can increase to 38% when
certain shareholders become ineligible to vote on matters when there is a
conflict of interest, according to rules governing the listing of securities on
the Stock Exchange of Hong Kong Ltd.
Basis of Presentation
The consolidated financial statements of Mirant are presented in U.S.
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 U.S. electric utilities
report financial statements, applies to entities that are subject to cost-based
rate regulation. By contrast, Mirant's operating investments generally are
not subject to cost-based rate regulation, and therefore, the provisions
of SFAS No. 71 do not apply. Financial statements presented in accordance with
SFAS No. 71 contain deferred items which have not yet been included in rates
charged to customers in compliance with the respective regulatory authorities
but which would have been included in the income statement of enterprises in
general under U.S. GAAP. The accompanying financial statements of Mirant do not
contain such deferrals.
The financial statements include the accounts of Mirant and its wholly
owned and its 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 with
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
Revenues derived from power generation are recognized upon output, product
delivery, or satisfaction of specific targets, all 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 their market values are recognized as energy marketing and
risk management revenues in the period of change. The unrealized gains or losses
are recorded as assets and liabilities from risk management activities in the
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 transaction.
These realized gains and losses are included in operating revenues and
operating expenses in the accompanying consolidated statements of income.
Concentration of Revenues
During 2000 and 1998, 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.
Cash and Cash Equivalents
Mirant considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
Inventory
Inventory consists primarily of natural gas, fuel oil and coal. The
inventory maintained by Mirant's energy marketing and risk management
operations is reflected at fair value in the accompanying consolidated balance
sheets. The inventory maintained by Mirant's subsidiaries for their use is
reflected at the lower of cost or market in other current assets on the
accompanying consolidated balance sheets.
Long-Lived Assets and Intangibles
Mirant records goodwill for the difference between the excess of the fair
value of investments over the purchase price. Goodwill is amortized on a
straight-line basis over a period between 30 and 40 years. 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 20 and 40 years.
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, their
estimated fair value is reevaluated when circumstances or events change.
Restricted Deposits
Mirant has restricted deposits for self-insurance reserves, contractual,
legal, or other corporate purposes. Restricted deposits are included in other
current assets in the accompanying consolidated balance sheets and amounted to
$1 million and $50 million at December 31, 2000 and 1999, respectively.
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
estimated cost of debt funds used during construction. The cost of maintenance,
repairs, and replacement of minor items of property is charged to maintenance
expense as incurred.
Depreciation of the recorded cost of depreciable property, plant, and
equipment is provided by using composite straight-line rates (Note 4). Leasehold
improvements are amortized over the shorter of the respective lease terms or the
useful lives of the improvements. Mirant's capitalization policy expenses the
cost of certain immaterial assets when purchased.
Upon the retirement or sale of assets, the cost of such assets and the
related accumulated depreciation are removed from the balance sheets and the
gain or loss, if any, is credited or charged to income.
Leasehold Interests
Certain of Mirant Asia-Pacific Limited's ("Mirant Asia-Pacific") power
generation facilities are developed under "build, operate, and transfer
agreements" ("BOT") with the respective local country government. Under these
agreements, Mirant Asia-Pacific 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
Asia-Pacific. 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.
Concession Agreement
The amount recorded at December 31, 1999 as a concession agreement in the
accompanying balance sheets corresponds with the total value, net of
amortization, assigned by the Argentine government to the assets delivered to
Mirant's Argentine subsidiary, Hidroelectrica Alicura S.A. ("Alicura"),
for operating purposes pursuant to the concession contract for the Alicura
hydroelectric complex. This intangible asset was being amortized using the
straight-line method over 30 years (the concession period) from August 1993,
which was the takeover date of the hydroelectric complex.
During December 1998, Mirant, having received the appropriate approval from
executive management and the board of directors, committed itself to a formal
plan to dispose of its investment in Alicura. The disposal was completed during
2000 (Note 2).
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 (Note 14).
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 liability method of accounting for deferred income taxes
and provides deferred income taxes for all significant income tax temporary
differences (Note 8).
Receivables Recovery
During 1999, Mirant recorded amounts totaling approximately $64 million in
successful resolution of negotiations by Mirant which allowed it to collect
receivables that were assumed in conjunction with the Mirant Asia-Pacific
Limited business acquisition. 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 $40
million, plus related interest, as of December 31, 2000, which it has fully
reserved due to the risk of non collection.
Foreign Currency Translation
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. The financial statements of
international operations where the U.S. Dollar is the functional currency
reflect certain transactions denominated in a local currency that have been
remeasured in U.S. Dollars. The remeasuring of local currencies into U.S.
Dollars creates gains and losses from foreign currency transactions that are
included in net income in the amount of $2 million, $2 million and $4 million
for 2000, 1999 and 1998, respectively. The effect of the translation adjustment
on other comprehensive income is disclosed in the statements of stockholders'
equity.
Comprehensive Income
Mirant's comprehensive income, consisting of net income and foreign
currency translation adjustments, net of taxes is presented in the 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.
Financial Instruments and Contractual Commitments
Mirant engages in risk management in connection with its energy marketing
and trading activities. All trading transactions and related expenses are
recorded on a trade-date basis. Financial instruments and contractual
commitments utilized in connection with energy marketing and trading 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 trading purposes, are
recorded at fair value. 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 "assets from risk management activities" on the accompanying
consolidated balance sheets. Similarly, financial instruments and contractual
commitments in a net payable position, as well as options written, are reported
as "liabilities from risk management activities" on the accompanying
consolidated balance sheets. The assets and liabilities from risk management
activities 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 and against cash collateral
when such provisions are stated in the master netting agreement.
New Accounting Standards
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Statement requires that certain derivative instruments be recorded in the
balance sheet as either assets or liabilities measured at fair value, and that
changes in the fair value be recognized currently in earnings, unless specific
hedge accounting criteria are met. Mirant adopted the provisions of SFAS No.
133, as amended, on January 1, 2001 and such adoption is expected to result in a
cumulative after-tax reduction in other comprehensive income of approximately
$300 million in the first quarter of fiscal year 2001. Mirant anticipates that
SFAS No. 133 will increase the volatility in other comprehensive income because
the derivative instruments are valued based on market indices. The adoption will
also impact assets and liabilities recorded on the balance sheet.
The application of SFAS No. 133 is still evolving and further guidance from
the FASB is expected. In particular, there are two implementation questions that
remain unresolved by the FASB that specifically relate to Mirant's industry. The
first issue relates to the unplanned netting of electricity transactions with
the same counterparty (referred to as a "bookout") which is used in the electric
utility industry as a scheduling convenience when two utilities happen to have
offsetting transactions. The FASB has yet to conclude on whether bookouts
represent gross settlement or net settlement. If bookouts are determined to be
net settlement features, then the related contracts cannot qualify for the
normal purchases and sales exception; however, if bookouts are viewed by the
FASB as gross settlements, the related contracts would qualify for this normal
purchases and sales exception.
The second issue relates to capacity contracts. A unique characteristic of
the electric utility industry is that electricity cannot be stored and, as a
result, contracts to buy and sell electricity generally allow the purchaser some
flexibility in determining when to take electricity, as well as the quantity to
take, in order
to match power delivery to fluctuating demand. Such power contracts typically
include a charge (the capacity or demand charge) to recover the significant cost
of related plant and financing and also a separate charge to recover the
variable cost of producing power (the energy charge). The FASB has yet to
conclude on whether such contracts should uniquely qualify for the normal
purchases and normal sales exception. Even though FASB appears to give the buyer
some optionality SFAS No. 133 does not allow option contracts to qualify for the
normal purchases and sales exception.
Mirant's SFAS No. 133 current accounting policies assume that bookouts
qualify for the normal purchases and sales exception. Additionally, Mirant's
accounting policies assume that contracts containing capacity and energy charges
qualify for the normal purchases and sales exception. When established, the
final conclusions from the FASB concerning these two issues may have additional
impacts on Mirant's financial statements.
During 2000, the Company adopted EITF Issue No. 00-17, "Measuring the Fair
Value of Energy-Related Contracts in Applying Issue No. 98-10," without material
impact on its earnings or financial position. This EITF provides additional
clarification to companies in the energy industry in accounting for energy
trading and risk management contracts.
2. Write-Down of Assets
In December 1998, Mirant designed and implemented a plan to dispose of its
Argentine and Chilean investments. As a result, Mirant recorded a write-down of
approximately $308 million in 1998 to reflect the difference between the
carrying value of these assets and the estimated fair value of the businesses.
Mirant recorded additional write-downs of $16 million and $28 million in 2000
and 1999, respectively, to eliminate the impact of net earnings from the
investments in order to prevent increasing the carrying value of these assets
above their estimated fair market value. Depreciation expense was suspended at
the time of the initial write-down. Mirant estimated the fair value of the
businesses held for sale based on bids received from prospective buyers, if
available, or the discounted expected future cash flows to be generated by the
assets. During 2000, Mirant completed the sale of its 55% indirect interest in
Alicura (Note 12). The adjusted carrying value of the Chilean assets held for
disposal at December 31, 2000 was approximately $88 million. These assets
impacted the consolidated statements of income as follows (in millions):
Operating Operating Consolidated
Revenues Income Net Income
--------- --------- ------------
Year:
2000...... $ 148 $ 4 $ (13)
1999...... 171 23 2
1998...... 180 37 5
During 1999, Mirant recorded a write-down in accordance with SFAS No. 121
of approximately $31 million related to WPD's metering assets. These assets are
held and used by WPD.
3. Joint Venture Information
On September 1, 1997, Mirant and Vastar Resources, Inc. ("Vastar") entered
into a 99-year partnership agreement designed to further develop both parties'
energy marketing and risk management operations and formed Mirant Americas
Energy Marketing ("MAEM"). The general and limited partnership interest was 60%
owned, indirectly, by Mirant and 40% owned, indirectly, by Vastar.
Mirant and Vastar accounted for their respective initial investments in
MAEM as a joint venture. The partnership agreement provided both Mirant and
Vastar with significant participatory rights with respect to the operations of
MAEM. Accordingly, Mirant accounted for its interest in the joint venture under
the equity method of accounting. On September 11, 2000, Mirant closed its
acquisition of Vastar's 40% interest in MAEM, effective August 10, 2000, for
$250 million, which is now consolidated in Mirant's financial statements (Note
12).
4. Property, Plant and Equipment
Property, plant, and equipment consisted of the following at December 31,
2000 and 1999 (in millions) (See Note 12 for Acquisitions):
2000 1999
------- ------
Production....................... $ 3,318 $1,615
Transmission and distribution.... 137 2,417
Other............................ 193 115
------- ------
$ 3,648 $4,147
======= ======
Mirant records depreciation expense on a straight-line basis, using the
following estimated useful lives (in years):
Production....................... 15 to 42
Transmission and distribution.... 35 to 40
Other............................ 3 to 30
5. Related-Party Transactions
Mirant has agreements with Southern Company Services, Inc. ("SCS", a
wholly owned subsidiary of Southern) and each of the system operating companies
owned by Southern under which those companies provide the following services to
Mirant at cost: general engineering, design engineering, accounting and
statistical budgeting, business promotion and public relations, systems and
procedures, training, and administrative and financial services. In addition to
these services, certain facilities of the system companies are made available to
Mirant and its customers. Mirant reimburses SCS and the various system operating
companies at cost for these services. Such costs amounted to approximately $21
million, $20 million and $17 million during 2000, 1999 and 1998, respectively.
Included in these costs are both directly incurred costs and allocated
costs. The allocated costs related to SCS's corporate general and administrative
overhead amounted to approximately $7 million, $5 million and $4 million during
2000, 1999 and 1998, respectively.
SCS allocates costs to Southern Company subsidiaries based on single-year
statistical data on a one-year lag. Using these statistics, SCS allocated these
costs to Mirant based on several methods of allocation. The majority of these
costs were allocated based on the following methodologies, which Mirant believes
are reasonable:
o Financial Basis: Mirant was charged a percentage of SCS costs subject
to allocation based on net fixed assets, operating expenses and
operating revenue. The amounts allocated to Mirant were based on its
net fixed assets, operating expenses and operating revenue as a
percentage of Southern Company's total net fixed assets, operating
expenses and operating revenue.
o Employee Basis: Mirant was charged a percentage of SCS costs subject to
allocation based on employee headcount. The amounts of the charges
allocated to Mirant were based on the number of its employees as a
percentage of the number of employees of all of SCS's client companies
receiving allocations. Employee groups not benefiting from the services
are not included in the allocation.
o Market-Based Equity Basis: Mirant was charged a percentage of SCS costs
subject to allocation based on market equity. The amounts allocated to
Mirant were based on the ratio of its total book equity, adjusted to
fair market value, to the sum of the total market-based equity of all
SCS client companies receiving allocations.
Southern and its affiliates will continue to provide various interim
services to Mirant as detailed above. The transitional services generally will
be provided 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.
These transitional services generally have a term of two years or less from
the date of Mirant's separation from Southern (Note 10). However, some
transitional services, including those for engineering services, and information
technology services, may be extended beyond the initial two-year period.
Mirant incurred interest expense on a note payable to Southern Company of
$37 million and $53 million during 1999 and 1998, respectively. No interest was
incurred during 2000, as no amounts were outstanding on the note (Note 7).
Prior to taking full ownership of MAEM (Notes 3 and 12), Mirant had various
agreements with MAEM in which MAEM 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. Total fees paid to MAEM under the marketing agreements totaled $17 million
in 1999, and payments made for fuel to MAEM totaled $258 million. During 2000,
prior to taking full ownership of MAEM, total fees paid under the marketing
arrangements totaled $52 million, and payments made for fuel to MAEM totaled
$261 million.
Mirant's revenues and expenses related to its agreements with MAEM during
1999 were $445 million and $275 million, respectively. During 2000, prior to
taking full ownership of MAEM, Mirant's revenues and epxenses related to its
agreements with MAEM were $767 and $313 million, respectively. Intercompany
profits and losses recognized by MAEM on a mark-to-market accounting basis have
been appropriately eliminated in consolidation. Activity with MAEM during 1998
was not material to Mirant.
6. Employee Benefit Plans
Mirant offers pension benefits to its employees through various pension
plans. During 2000, Mirant modified its voting rights in WPD, resulting in WPD
being accounted for under the equity method. In previous periods, WPD had been
consolidated.
Mirant participates in the Southern Company Pension Plan, a defined
benefit, trusteed, noncontributory plan covering substantially all regular
employees. The measurement date for the Domestic Benefit Plans is September 30
for each year presented.
Freeport Power Company 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 Freeport Power is December 31 for each year presented.
All nonunion employees of Freeport Power Company 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.
Mirant also has noncontributory, defined benefit plans covering
substantially all union employees at recently acquired facilities. These 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) of Mirant, summarized below, as of their respective measurement
dates were as follows:
2000 1999
----- -----
Discount rate..................... 7.5% 7.5%
Rate of compensation increase..... 5.0 5.0
Expected return on plan assets.... 8.5 8.5
The following tables show the collective actuarial results for the defined
benefit pension plans (excluding WPD) of Mirant (in millions):
Pension Plan
2000 1999
------ ------
Change in Benefit Obligation:
Benefit obligation, beginning of year............. $ 57 $ 32
Service cost.................................... 5 3
Interest cost................................... 4 3
Benefits paid................................... (1) 0
Actuarial loss.................................. 4 2
Amendments...................................... 1 0
Acquisitions.................................... 61 17
----- -----
Benefit obligation, end of year........... $ 131 $ 57
===== =====
Changes in Plan Assets:
Fair value of plan assets, beginning of year...... $ 44 $ 30
Return on plan assets........................... 6 4
Employer contributions.......................... 2 1
Benefits paid................................... (1) 0
Receivables due to transfers.................... 5 9
----- -----
Fair value of plan assets, end of year.... $ 56 $ 44
===== =====
Funded Status:
Funded status at end of year..................... $ (75) $ (13)
Unrecognized prior service cost................. 2 2
Unrecognized net gain........................... (17) (14)
----- -----
Net amount recognized on the consolidated
balance sheets............................. $ (90) $ (25)
===== ======
WPD participates in the Electricity Supply Pension Scheme ("ESPS"), which
provides pension and other related defined benefits based on final pensionable
pay to substantially all employees throughout the electricity supply industry in
the United Kingdom. The measurement date for WPD is December 31 for each year
presented.
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 rates assumed in the actuarial calculations for the WPD pension plan as
of December 31, 1999 were as follows:
Discount rate................ 6.50%
Rate of compensation increase 4.00
Expected return on plan assets 8.75
The following tables show the actuarial results for the WPD defined benefit
pension plan as of December 31, 1999 (in millions):
Change in Benefit Obligation:
Benefit obligation, beginning of year........... $ 1,063
Service cost.................................. 13
Interest cost................................. 59
Benefits paid................................. (70)
Actuarial gain................................ (91)
Amendments.................................... 41
Curtailment................................... (7)
Settlement.................................... (41)
Foreign currency exchange rate change......... (30)
-------
Benefit obligation, end of year............ $ 937
=======
Changes in Plan Assets:
Fair value of plan assets, beginning of year.... $ 1,308
Return on plan assets......................... 233
Employer contributions........................ 0
Participants' contributions................... 4
Benefits paid................................. (70)
Settlement.................................... (59)
Foreign currency exchange rate change......... (37)
-------
Fair value of plan assets, end of year..... $ 1,379
=======
Funded Status:
Funded status at the end of year................ $ 442
Unrecognized prior service cost................. 42
Unrecognized net gain........................... (251)
-------
Net amount recognized on the consolidated
balance sheets............................ $ 233
=======
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). 1999 and 1998 results include WPD.
2000 1999 1998
------- ------- ------
Service cost............... $ 4 $ 16 $ 13
Interest cost.............. 4 62 71
Expected return on plan (3) (104) (107)
assets.....................
Employee contributions..... 0 (4) (6)
Curtailment................ 1 (5) 0
Settlement................. 0 14 0
Net amortization........... 0 2 0
------ ------ ------
Net pension expense (income) $ 6 $ (19) $ (29)
====== ====== ======
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 of 7.74%
and 6.08% for 2000, decreasing gradually to 5.5% and 5.5% through the year 2005
and remaining at that level thereafter for pre-age 65 participants and post-age
65 participants, respectively. 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, 2000 by $2 million. 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, summarized below, as of their
respective measurement dates were as follows:
2000 1999
---- ----
Discount rate..................... 7.5% 7.5%
Rate of compensation increase..... 5.0 5.0
Expected return on plan assets.... 8.5 8.5
2000 1999
---- ----
Change in Benefit Obligation:
Benefit obligation, beginning of year... $ 19 $ 8
year....................................
Service cost.......................... 1 1
Interest cost......................... 2 1
Actuarial gain........................ 1 (1)
Amendments............................ 0 0
Acquisitions.......................... 37 10
---- ----
Benefit obligation, end of year......... $ 60 $ 19
==== ====
Funded Status:
Funded status at end of year............ $(60) $(19)
Unrecognized net loss................. 2 1
Accruals for acquisitions............. 0 0
---- ----
Net amount recognized................... $(58) $(18)
===== ====
The postretirement benefits were unfunded at December 31, 2000 and 1999.
The actuarially based costs of Mirant's postretirement benefits during 2000,
1999 and 1998 were not material.
Stock-Based Compensation
Value Creation Plan
In 1997, Mirant initiated a long-term incentive plan, the value creation
plan, which grants 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 are calculated using a
discounted cash flow methodology, the key assumptions of which include 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 are granted two types of appreciation rights:
standard appreciation rights which pay each eligible employee for any
appreciation over a fixed base value and indexed appreciation rights which pay
each eligible employee for any appreciation over a base value which increases
each year by a predetermined interest rate. Standard appreciation rights vest
25% per year for four years, and indexed appreciation rights vest 100% after
four years. Mirant records compensation expense ratably during the vesting
period for any appreciation of the units over a fixed base value in accordance
with APB Opinion 25. This expense amounted to $23.3 million and $1.7 million in
2000 and 1999, respectively, and was not material in 1998.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation", Mirant
has elected to account for its stock-based compensation plan under APB Opinion
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.
Transactions are summarized as follows:
Weighted Weighted
Average Average
Standard Exercise Indexed Exercise
Rights Price Rights Price
----------- --------- ---------- -----------
Outstanding at December 31, 1997....... $ 559,579 $ 10.00 2,729,011 $ 10.00
Granted................................ 1,093,849 9.73 54,582 11.30
Exercised.............................. 0 0.00 0 0.00
Forfeited.............................. 0 0.00 0 0.00
----------- ------- --------- --------
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
=========== ======= ========= ========
Units exercisable at December 31, 1998. 139,883 $ 10.00 0 $ 0.00
=========== ======= ========= ========
Units exercisable at December 31, 1999. 538,816 $ 9.87 $ 0.00
=========== ======= ========= ========
Units exercisable at December 31, 2000 0 $ 0.00 0 $ 0.00
=========== ======= ========= ========
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. 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 stock price on the date of grant.
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
========= =======
Options exercisable at December 31, 2000. 1,159,650 $ 13.32
========= =======
Exercise prices for Mirant stock options outstanding as of December 31,
2000 ranged from $3.35 to $22.00. The following table provides certain
information with respect to Mirant stock options outstanding at December 31,
2000:
Weighted
Weighted Average
Average Remaining
Options Exercise Contractual
Range of Exercise Prices Outstanding Price Life
--------------------------- ------------ --------- -----------
$ 3.35 -- $ 4.40........ 364,442 $ 3.40 6.6
$11.01 -- $13.20........ 798,906 12.93 6.5
$13.21 -- $15.40........ 407,479 13.29 5.5
$15.41 -- $17.60........ 2,029,549 15.92 8.2
$17.61 -- $19.80........ 1,605,407 18.59 9.2
$19.81 -- $22.00........ 3,353,572 22.00 9.7
---------
Total................... 8,559,355 17.87 8.6
=========
The following table provides certain information with respect to stock
options exercisable at December 31, 2000:
Weighted
Average
Options Exercise
Range of Exercise Prices Exercisable Price
--------------------------- ------------ --------
$ 3.35 -- $ 4.40........ 77,446 $ 3.50
$11.01 -- $13.20........ 399,443 12.93
$13.21 -- $15.40........ 305,596 13.29
$15.41 -- $17.60........ 375,097 15.78
$17.61 -- $19.80........ 2,068 19.04
--------- -------
Total................... 1,159,650 13.32
=========
The weighted average fair value at date of grant for options granted during
2000 was $7.94 and was estimated using the Black-Scholes option valuation model
with the following weighted-average assumptions:
Expected life in years... 5
Interest rate............ 6.66%
Volatility............... 40.00%
Dividend yield........... 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 because of 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.
Transactions are summarized as follows:
Weighted
Average
Southern Exercise
Options Price
--------- --------
Outstanding at December 31, 1997............ 517,371 $ 21.81
Granted................................... 283,864 27.03
Exercised................................. (4,071) 21.87
Forfeited................................. (1,693) 23.00
--------- -----
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
========= =======
Options exercisable at December 31, 1998.... 277,788 $ 21.91
========= =======
Options exercisable at December 31, 1999.... 502,276 $ 22.83
========= =======
Options exercisable at December 31, 2000.... 812,982 $ 24.11
========= =======
Exercise prices for Southern stock options outstanding as of December 31,
2000 ranged from $21.01 to $28.00. The following table provides certain
information with respect to Southern stock options outstanding at December 31,
2000:
Weighted
Weighted Average
Average Remaining
Options Exercise Contractual
Range of Exercise Prices Outstanding Price Life
--------------------------- ----------- -------- -----------
$21.01 -- $24.00......... 1,621,122 $ 22.88 8.1
$24.01 -- $28.00......... 763,086 26.73 7.7
---------
Total.................... 2,384,208 24.09 8.0
=========
The following table provides certain information with respect to stock
options exercisable at December 31, 2000:
Weighted
Average
Options Exercise
Range of Exercise Prices Exercisable Price
--------------------------- --------------------
$21.01 -- $24.00......... 448,328 $ 21.91
$24.01 -- $28.00......... 364,654 26.81
-------
Total................... 812,982 24.11
=======
The weighted average fair values at date of grant for options granted
during 2000, 1999 and 1998 were $3.36, $6.29 and $5.69, respectively, and were
estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
2000 1999 1998
------- ------- ------
Expected life in years.. 4.0 3.7 3.7
Interest rate........... 6.66% 5.79% 5.46%
Volatility.............. 20.94% 20.74% 19.16%
Dividend yield.......... 5.80% 5.00% 5.00%
Had compensation costs been determined as prescribed by SFAS No. 123 for
options in Southern and Mirant, Mirant's net income would have been reduced by
approximately $23 million in 2000, by approximately $12 million in 1999 and by
approximately $6 million in 1998. Earnings per share would have been reduced by
$0.07, $0.05 and $0.02 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 2000, Mirant
made awards of approximately 304,925 Mirant phantom stock shares to certain
employees and officers. The aggregate amount awarded was approximately $6.7
million with vesting based on stock price appreciation. Mirant records
compensation expense as shares become vested. Compensation expense during 2000
and 1999 was approximately $1.7 million and $500,000, respectively.
7. Debt
At December 31, 2000 and 1999, Mirant's long-term debt (including current
maturities) was as follows (in millions):
2000 1999
------ ------
Senior notes:
Dollar-denominated:
7.40% notes, due 2004......................... $ 200 $ 200
7.90% notes, due 2009......................... 500 500
Sterling-denominated:
6.38% notes, due 2001*........................ 0 163
6.80% notes, due 2006*........................ 0 321
Debt supported by long-term banking arrangements:
Dollar-denominated:
7.10% to 7.34% note, due 2001................. 0 6
7.76% to 8.00% notes, due 2002............... 1,942 792
8.06% to 9.75% note, due 2003................. 71 21
8.06% to 9.50% notes, due 2004................ 68 89
Variable rate (7.47% at December 31, 2000),
04........................................... 300 140
5.43% note, due 2004, guaranteed by Mirant.... 0 100
7.69% to 10.00% notes, due 2005............... 422 417
7.64% to 9.70% notes, due 2006................ 49 51
7.16% to 10.25% notes, due 2007............... 427 495
5.95% to 10.56% notes, due 2011............... 754 742
Deutsche mark-denominated:
5.14% to 5.17% note, due 2004................. 512 522
Other long-term debt:
Dollar-denominated:
11.00% note, due 2000......................... 0 71
7.75% and 10.50% senior loan participation
certificate, due 2005 and 2006............... 340 340
7.78% to 11.00% loans, due 2000 to 2007....... 25 24
8.12% notes, due 2018......................... 153 153
Sterling-denominated:
0% to 7.64% loans, due 2000 and 2002.......... 5 13
Deutsche Mark-denominated:
5.35% loan, due 2008.......................... 29 31
------- -------
Total long-term debt........................ 5,797 5,191
Less current maturities............................ 201 237
------- -------
Total $ 5,596 $ 4,954
======= =======
*WPD long-term debt was consolidated in 1999.
At December 31, 2000, the annual scheduled maturities of long-term debt
during the next five years were as follows (in millions):
2001........ $201
2002........ 2,138
2003........ 261
2004........ 1,195
2005........ 432
Bank Arrangements
Mirant has bank credit arrangements with various lending institutions
totaling approximately $6,647 million. At December 31, 2000, used credit
arrangements with banks totaled $4,190 million, of which $1,298 million expires
during 2001 and $2,892 million during 2002 and beyond. The credit arrangements
generally require payment of commitment fees based on the unused portion of the
commitments or the maintenance of compensating balances with the banks. These
balances are not legally restricted from withdrawal.
In April 1999, Mirant entered into three revolving credit agreements with a
group of lending banks, as agent, with commitments totaling $1,300 million. Each
of the corporate credit facilities is available for general corporate purposes,
including commercial paper backstop. Facility A with total commitments of $500
million was intended to be a temporary facility until Mirant completed
subsequent financings. Accordingly, this facility was cancelled in October 1999.
Facility B, a $350 million, 364-day revolving line of credit with an annual
commitment fee of $532,000, originally matured in March 2000; however, it has
extension and commitment increase options subject to the lenders' approval and
currently matures in March 2001. Facility C, totaling $450 million with an
annual commitment fee of $798,000, also has a letter of credit option and
matures in April 2004. No amounts were drawn under the Facility C credit
arrangement at December 31, 2000 or 1999. However, Mirant had letters of credit
outstanding under Facility C in the amount of $406 million and $250 million at
December 31, 2000 and 1999, respectively. In April 1999, Mirant also instituted
a commercial paper program that is used in conjunction with the corporate credit
facilities as an alternate funding source. At December 31, 2000 and 1999, $0 and
$50 million were outstanding, respectively, under this program.
The April 1999 Credit Agreements contain various business and financial
covenants 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, (iv)
limitations on ratio of recourse debt to recourse capital and (v) maintenance of
minimum ratios of Corporate Debt Service to Corporate Interest.
In October 1999, Mirant Americas Generation, Inc. ("MAGI") completed a
$1,450 million corporate-style bank financing consisting of three credit
facilities. Facility A is a $1,150 million 364-day term loan with a two-year
term-out option and no commitment fee. Facility B is a $250 million five-year
revolving credit facility, with an annual commitment fee of $380,000, to be used
for capital expenditures, and Facility C is a $50 million five-year revolving
credit facility, with an annual commitment fee of $76,000, for working capital
needs. The draws under Facilities B and C, in the amount of $300 million and
$140 million at December 31, 2000 and 1999, respectively, are included in
long-term debt in the accompanying balance sheets. The term out of Facility A
was executed in October 2000, and the facility will mature in October 2002. The
MAGI facilities contain covenants substantially equivalent to those discussed
above for the April 1999 Credit Agreement.
In May 2000, Mirant entered into a revolving credit agreement with Bank of
America, as agent, with commitments totaling $550 million. In June 2000, the
facility was syndicated among a group of lending banks and increased to $1,000
million to be used for general corporate purposes, including commercial paper
backstop. The June 2000 credit agreement contains covenants substantially
equivalent to those discussed above for the April 1999 credit agreement.
In August 2000, Mirant entered into a letter of credit facility with
commitments totaling $100 million to be used for general corporate purposes. As
of December 31, 2000, Mirant had $85.5 million in letters of credit issued
under this facility. The August 2000 credit agreement contains covenants
substantially equivalent to those discussed above for the April 1999 and June
2000 credit agreements.
In connection with the Potomac Electric Power Company ("PEPCO") acquisition
in December 2000 (Note 12), Mirant entered into credit agreements with a
syndicate of banks that provided two facilities to MAGI totaling $1,020 million
with recourse to MAGI and one facility of $650 million to Mirant with recourse
to Mirant. At December 31, 2000 $1,145 million was outstanding under these
agreements.
During 2000, MAEM renewed its existing line-of-credit facility with a group
of lenders for an additional 364-day term and increased its borrowing capacity
by $30 million to $180 million. The facility bears interest based on the London
Interbank Offering Rate plus a variable spread based on MAEM's credit rating at
the date of the borrowing, payable monthly. MAEM had $90 million outstanding
under this line-of-credit facility at December 31, 2000. In July 1999, MAEM
entered into a commercial paper agreement with certain financial institutions.
Each note has a maturity of 366 days or less. As of December 31, 2000, MAEM had
no commercial paper outstanding.
On July 21, 2000, Mirant Americas Energy Marketing Canada Ltd. ("MAEMC")
entered into a $35 million (Canadian dollar) revolving credit facility. On
November 20, 2000, MAEMC amended the initial facility increasing the maximum
borrowing amount to $70 million (Canadian dollar). The one-year agreement can be
extended an additional year on November 1, 2001. The facility's interest is
payable monthly. The interest rate depends on the currency of the borrowing and
generally is computed at LIBOR plus 85 to 100 basis points. At December 31,
2000, the outstanding borrowings were $41.8 million (U.S. Dollar borrowings).
On March 3, 2000, Mirant Americas Energy Capital entered into a $50 million
credit facility that matures on March 3, 2003. The facility's interest is
payable monthly. For base rate advances, interest is computed as the U.S. prime
rate plus zero points. For London Interbank Offering Rate advances, interest is
computed as LIBOR plus 200 basis points. At December 31, 2000, the outstanding
borrowings were $50 million.
Mirant believes it is in compliance with all of the covenants in the
preceding agreements at December 31, 2000.
In addition, Mirant, from time-to-time, borrows under uncommitted lines of
credit with banks and through commercial paper programs that have the liquidity
support of committed bank credit arrangements.
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 2000
as WPD is no longer consolidated for accounting purposes effective December 1,
2000. $950 million and $1,031 million were outstanding on the securities at
December 31, 2000 and 1999, respectively (Note 9).
These subsidiary obligated mandatorily redeemable preferred securities have
been 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 Company. Payment terms and interest rates on the note receivables from
Southern Company 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 balance sheets (Note 9). These will be transferred to Southern
Company as part of Mirant's separation from Southern Company.
Convertible Trust Preferred Securities
On October 2, 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 after
October 2, 2001 and 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.
From October 2, 2001 and until the next business day following the date of
the distribution of Mirant common stock held by Southern Company to its
stockholders, Mirant may elect to make a cash settlement in respect of any
preferred securities surrendered for conversion. The amount of cash that holders
of the preferred securities will receive if Mirant elects a cash settlement will
be equal to the value of the underlying shares of common stock.
8. Income Taxes
Details of the income tax provision for the years ended December 31, 2000,
1999 and 1998 are as follows (in millions):
2000 1999 1998
---- ---- ----
Income Tax Provision:
Income tax from continuing operations:
United States:
Current provision (benefit)................. $ 44 $ (16) $ (87)
Deferred provision (benefit)................ 43 36 (44)
International:
Current (benefit) provision................. (2) 18 15
Deferred provision (benefit)................ 1 91 (7)
----- ----- ----
Total provision (benefit) from continuing
operations............................... $ 86 $ 129 $(123)
===== ====== =====
Income tax from discontinued operations:
Current benefit............................. (90) (54) (33)
Deferred provision.......................... 70 39 11
----- ------ -----
Total benefit from discontinued operations $ (20) $ (15) $ (22)
===== ====== =====
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):
2000 1999
------ ------
Deferred Tax Liabilities:
Property and intangibles basis differences $(377) $(699)
Pensions.................................. 0 (64)
Other..................................... (204) (49)
----- -----
Total................................... $(581) $(812)
===== =====
Deferred Tax Assets:
Obligations under energy delivery $ 802 $ 6
commitments...............................
Impairment loss........................... 84 85
Deferred costs............................ 12 20
Other..................................... 239 21
----- -----
Total................................... 1,137 132
----- -----
Net deferred tax assets (liabilities)... $ 556 $(680)
===== =====
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, 2000, 1999 and 1998 is as follows:
2000 1999 1998
---- ------- -----
Statutory income tax rate................. 35% 35% (35)%
State income tax, net of federal benefit.. 4 1 3
Non-U.S. taxes............................ (23) (17) (192)
Other..................................... 1 0 0
---- ----- ----
Effective income tax rate....... 17% 19% (224)%
==== ===== =====
The difference between the statutory rate and the effective income tax rate
for discontinued operations for 2000, 1999 and 1998 is primarily due to the
utilization of domestic tax credits.
Mirant and the other subsidiaries of Southern file a consolidated federal
income tax return. Under a joint income tax agreement, each company's current
and deferred tax expense is computed on a stand-alone basis. Under this
agreement, Mirant received tax refunds from Southern of approximately $136
million, $99 million and $118 million during 2000, 1999 and 1998, respectively.
Approximately $85 million and $100 million of the other current receivables
balance at December 31, 2000 and 1999, respectively, are comprised of tax
refunds under the consolidated income tax agreement or from various tax
authorities. Approximately $168 million and $152 million of the other current
payables balance at December 31, 2000 and 1999, respectively, are comprised of
income taxes currently payable to various tax authorities.
The undistributed earnings of certain foreign subsidiaries aggregated $773
million as of December 31, 2000, which, under existing tax law, will not be
subject to U.S. income tax until distributed. Of the total undistributed
earnings, provisions for U.S. taxes have not been accrued on $382 million
related to earnings that have been, or are intended to be, indefinitely
reinvested.
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.
9. Financial Instruments
Commodity Trading Activities
Mirant provides risk management services associated with the energy
industry to its customers in the North American and European markets. These
services are provided through a variety of exchange-traded energy contracts,
forward contracts, futures contracts, option contracts, and financial swap
agreements. These contractual commitments, which represent risk management
assets and liabilities, are accounted for using the mark-to-market method of
accounting. Accordingly, they are reflected at fair value in the accompanying
consolidated balance sheets.
The trading operations engage in risk management activities. All such
transactions and related expenses are recorded on a trade-date basis. Financial
instruments and contractual commitments utilized in connection with these
activities are accounted for using the mark-to-market method of accounting.
Under the mark-to-market method of accounting, financial instruments and
contractual commitments, including derivatives used for these purposes, are
recorded at fair value. The determination of fair value considers various
factors, including closing exchange or over-the-counter ("OTC") market price
quotations, time value and volatility factors underlying options and contractual
commitments.
The volumetric weighted average maturities at December 31, 2000 were 3.1
years and 2.3 years for the North American portfolio and European portfolio,
respectively. The net notional amount of the risk management assets and
liabilities at December 31, 2000 was approximately 18 million equivalent
megawatt-hours. The notional amount is indicative only of the volume of activity
and not of the amount exchanged by the parties to the financial instruments.
Consequently, these amounts are not a measure of market risk.
Risk management assets and liabilities as of December 31, 2000 primarily
relate to MAEM, the North American energy marketing subsidiary. As discussed in
Note 12, this subsidiary was accounted for under the equity method of accounting
until the August 10, 2000 purchase by Mirant of the remaining interest in the
subsidiary. The fair value of the North American and European risk management
assets and liabilities recorded in the consolidated balance sheets as of
December 31, 2000 and the average for the year then ended are included in the
following table. The averages are based on quarter-end balances during the
entire year.
Risk Management Assets Risk Management Liabilities
--------------------------- ----------------------------
Value at Value at
Average December 31, Average December 31,
Value 2000 Value 2000
------- ------------ ------- ------------
Energy commodity instruments:
Electricity....................... $1,513 $ 2,017 $1,505 $1,971
Natural gas....................... 1,065 1,738 1,068 1,721
Crude oil......................... 59 85 40 83
Other............................. 56 68 32 30
------ ------- ------ ------
Total........................... $2,693 $ 3,908 $2,645 $3,805
====== ======= ====== ======
Asset and Liability Management
Mirant is exposed to market risk, including changes in interest rates,
currency exchange rates, and certain commodity prices. To manage the volatility
relating to these exposures, Mirant enters into various derivative transactions
pursuant to its policies in such areas such as counterparty exposure and hedging
practices.
Commodity Contracts
Mirant engages in commodity-related marketing and price risk management
activities 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. The gains
and losses related to these derivatives are recognized in the same period as the
settlement of the underlying physical transaction. These realized gains and
losses are included in operating revenues and operating expenses in the
accompanying income statements.
At December 31, 2000, Mirant had unrealized net losses of approximately
$397 million related to these financial instruments. The fair value of its
nontrading commodity financial instruments is determined using various factors,
including closing exchange or over-the-counter market price quotations, time
value and volatility factors underlying options and contractual commitments.
At December 31, 2000, Mirant had contracts that related to periods through
2003. The net notional amount of the risk management assets and liabilities at
December 31, 2000 was 4.9 million equivalent megawatt-hours. The notional amount
is indicative only of the volume of activity and not of the amount exchanged by
the parties to the financial instruments. Consequently, these amounts are not a
measure of market risk.
Interest Swaps
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 an agreed-upon notional principal amount. These swaps are
designated to hedge underlying debt obligations. For qualifying hedges, the
interest rate differential is reflected as an adjustment to interest expense
over the life of the swaps. Gains and losses resulting from the termination of
qualified hedges prior to their stated maturities are recognized ratably over
the remaining life of the instrument being hedged.
Currency swaps are used by Mirant to hedge its net investment in certain
foreign subsidiaries. Gains or losses on these currency swaps designated as
hedges of net investments are offset against the translation effects reflected
in other comprehensive income, net of tax. Currency forwards are used to hedge
contracts denominated in a foreign currency.
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 manage Mirant's exposure
arising on certain foreign currency transactions.
Year of Maturity Interest Number of Notional Unrecognized
Type or Termination Rates Counterparties Amount (Loss) Gain
- ---- -------------- ------------ -------------- ------ -------------
(in millions)
Interest rate swaps 2002-2012 6.55%-7.12% 9 $2,150 $ (110)
2002-2007 4.98%-5.79% 2 DM691 (5)
Cross currency swaps 2002 - 2 (pound)44 1
Cross currency swaption 2003 - 2 DM338 24
Currency forwards 2001-2003 - 1 CAD19 -
2001 - 4 (pound)116 (5)
------
$ (95)
======
(pound) - Denotes British pounds sterling
DM - Denotes Deutschemark
CAD - Denotes Canadian Dollars
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. If the existing asset and liability
management derivative financial instruments at December 31, 2000 and 1999 had
been discontinued or Mirant counterparties defaulted on those dates, Mirant
would have recognized losses of approximately $95 million and $57 million,
respectively. However, at December 31, 2000, Mirant believes that its exposure
to credit risk due to nonperformance by the counterparties to its asset and
liability management financial derivatives is not material based on the
investment grade rating of the counterparties.
Market Risk
Market risk is the potential loss Mirant may incur as a result of changes
in the market or fair value of a particular instrument or commodity. All
financial and commodities-related instruments, including derivatives, are
subject to market risk. Mirant's exposure to market risk is determined by a
number of factors, including the size, duration, composition, and
diversification of positions held, the absolute and relative levels of interest
rates as well as market volatility and illiquidity. The most significant factor
influencing the overall level of market risk to which Mirant is exposed is its
use of hedging techniques to mitigate such risk. Mirant manages market risk by
actively monitoring compliance with stated risk management policies as well as
monitoring the effectiveness of its hedging policies and strategies.
Mirant's risk management policies limit the amount of total net exposure
and rolling net exposure during stated periods. These policies, including
related risk limits, are regularly assessed to ensure their appropriateness
given Mirant's objectives.
Credit Risk
Mirant is exposed to losses in the event of nonperformance by
counterparties to its derivative financial instruments for those instruments
that are not exchange-traded. Credit risk is measured by the loss Mirant would
record if its counterparties failed to perform pursuant to terms of their
contractual obligations and the value of collateral held, if any, was not
adequate to cover such losses. Mirant has established controls to determine and
monitor the creditworthiness of counterparties, as well as the quality of
pledged collateral, and uses master netting agreements whenever possible to
mitigate Mirant's exposure to counterparty credit risk. Additionally, Mirant may
require counterparties to pledge additional collateral when deemed necessary.
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. Mirant
monitors credit risk on both an individual and group counterparty basis.
Accordingly, management does not expect any material adverse impact to its
financial position or results of operations as a result of counterparty
nonperformance.
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 trading purposes,
commodities, and related instruments used for trading purposes, including
options and contractual commitments. See the Asset and Liability Management
section in this note where commodity contracts for nontrading purposes are
discussed. The following methods were used by Mirant to estimate its fair value
disclosures for all other financial instruments not carried at fair value on the
accompanying balance sheets:
Notes Receivable. The fair value of Mirant's note receivables 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, 2000 and 1999 were as follows (in millions):
2000 1999
----------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------- -------- -------
Notes receivable, including current portion.... $ 1,553 $ 1,553 $ 1,415 $ 1,324
Notes payable and long- and short-term debt.... 7,086 6,653 7,152 6,779
Subsidiary obligated mandatorily redeemable
preferred Securities.......................... 950 934 1,031 907
Company obligated mandatorily redeemable
securities of a subsidiary holding solely
parent company debentures..................... 345 428 0 0
10. Capital Transactions
Initial Public Offering. During 2000, Mirant completed an initial public
offering of 58 million shares of its common stock for an initial price of $22.00
per share. Simultaneously, the underwriters exercised options to purchase from
Mirant an additional 8,700,000 shares of common stock at the initial price of
$22.00 per share. The net proceeds from the offering, after deducting
underwriting discounts and commissions payable by Mirant, were $1.4 billion.
Mirant used the net proceeds of the offering and the sale of convertible
preferred securities (Note 7) to repay $900 million of short-term debt from
credit lines and $581 million of commercial paper. The remaining proceeds were
to be used for general corporate purposes.
As part of its planned spin-off from Southern, Mirant agreed to contribute
its finance and leveraged lease subsidiaries (Note 14) to Southern. In
connection with this contribution, on August 30, 2000, Mirant issued to Southern
one share of Series B preferred stock, redeemable at the election of Mirant in
exchange for the contribution of these subsidiaries to Southern. The issuance of
the preferred share on August 30, 2000 has been accounted for as a non-cash
transaction by Mirant at the book value of these subsidiaries, resulting in a
reduction of shareholders equity during 2000. Mirant has not called its Series B
preferred share for redemption. There will not be a gain or loss from the
disposal because of the transfer accuring at book value.
11. Commitments and Contingent Matters
California:
Reliability-Must-Run Agreements: Mirant subsidiaries acquired generation
assets from Pacific Gas & Electric ("PG&E") in April 1999, subject to
reliability-must-run agreements. These agreements allow the California
Independent System Operator Corporation ("CAISO"), under certain conditions, to
require certain Mirant subsidiaries to run the acquired generation assets in
order to support the reliability of the California electric transmission system.
Mirant assumed these agreements from PG&E 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 reliability-must-run
agreements. This revenue requirement was negotiated as part of a prior
settlement of a FERC rate proceeding. Mirant contends that the amount paid by
the CAISO should reflect an allocation based on the CAISO's right to call on the
units (as defined by the reliability-must-run agreements) and the CAISO's actual
calls. This approach would result in annual payments by the CAISO of
approximately $120 million, or 75% of the settled fixed revenue requirement. The
decision in this case will affect the amount the CAISO will pay to Mirant for
the period from June 1,1999 through December 31, 2001. On June 7, 2000, the
administrative law judge 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
administrative law judge's decision to the FERC. The outcome of this appeal
cannot be determined. A final FERC order in this proceeding may be appealed to
the U.S. Court of Appeals.
If Mirant is unsuccessful in its appeal of the administrative law judge'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, 2000
would have been approximately $138 million, however, there would have been no
effect on net income for 2000. This amount does not include interest that may be
payable in the event of a refund. If Mirant is unsuccessful in its appeal, it
plans to pursue other options available under the reliability-must-run
agreements to mitigate the impact of the administrative law judge's decision
upon its future operations. The outcome of this appeal is uncertain, and Mirant
cannot provide assurance that it will be successful.
CAISO and California Power Exchange Corporation ("PX")Price Caps: Beginning
in May 2000, wholesale energy prices in the California markets increased to
levels well above 1999 levels. In response, on June 28, 2000, the CAISO Board of
Governors reduced the price cap applicable to the CAISO's wholesale energy and
ancillary services markets from $750/Mwh to $500/Mwh. The CAISO subsequently
reduced the price cap to $250/Mwh on August 1, 2000. During this period,
however, the PX maintained a separate price cap set at a much higher level
applicable to the "day-ahead" and "day-of" markets administered by the PX. On
August 23, 2000, the FERC denied a complaint filed August 2, 2000 by San Diego
Gas & Electric Company ("SDG&E") that sought to extend the CAISO's $250/Mwh
price cap to all California energy and ancillary service markets, not just the
markets administered by the CAISO. However, in its order denying the relief
sought by SDG&E, the FERC instructed its staff to initiate an investigation of
the California power markets and to report its findings to the FERC and held
further hearing procedures in abeyance pending the outcome of this
investigation.
On November 1, 2000, the FERC released a Staff Report detailing the results
of the Staff investigation, together with an "Order Proposing Remedies for
California Wholesale Markets" ("November 1 Order"). In the November 1 Order, the
FERC found that the California power market structure and market rules were
seriously flawed, and that these flaws, together with short supply relative to
demand, resulted in unusually high energy prices. The November 1 Order proposed
specific remedies to the identified market flaws, including: (a) imposition of a
so-called "soft" price cap at $150/MWh to be applied to both the PX and CAISO
markets, which would allow bids above $150/MWh to be accepted, but will subject
such bids to certain reporting obligations requiring sellers to provide cost
data and/or identify applicable opportunity costs and specifying that such bids
may not set the overall market clearing price, (b) elimination of the
requirement that the California utilities sell into and buy from the PX, (c)
establishment of independent non-stakeholder governing boards for the CAISO and
the PX, and (d) establishment of penalty charges for scheduling deviations
outside of a prescribed range. In the November 1 Order the FERC established
October 2, 2000, the date 60 days after the filing of the SDG&E complaint, as
the "refund effective date." Under the November 1 Order rates charged for
service after that date through December 31, 2002 will remain subject to refund
if determined by the FERC not to be just and reasonable. While the FERC
concluded that the Federal Power Act and prior court decisions interpreting that
act strongly suggested that refunds would not be permissible for charges in the
period prior to October 2, 2000, it noted that it was willing to explore
proposals for equitable relief with respect to charges made in that period.
On December 15, 2000, the FERC issued a subsequent order that affirmed in
large measure the November 1 Order (the "December 15 Order"). Various parties
have filed requests for administrative rehearing and for judicial review of
aspects of the FERC's December 15 Order. The outcome of these proceedings,
and the extent to which the FERC or a reviewing court may revise aspects of the
December 15 Order or the extent to which these proceedings may result in a
refund of or reduction in the amounts charged by Mirant's subsidiaries for power
sold in the CAISO and PX markets, cannot be determined at this time, and Mirant
cannot determine what affect any action by the FERC will have on its financial
condition.
Class Action Litigation: Five lawsuits have been filed in the superior
courts of California alleging that certain owners of electric generation
facilities in California and energy marketers, including Mirant Corporation,
Mirant Americas Energy Marketing, LP, Mirant Delta, Mirant Potrero, and
Southern Company, engaged in various unlawful and anti-competitive acts that
served to manipulate wholesale power markets and inflate wholesale electricity
prices in California. Four of the suits seek class action status. One lawsuit
alleges that, as a result of the defendants' conduct, customers paid
approximately $4 billion more for electricity than they otherwise would have and
seeks an award of treble damages, as well as other injunctive and equitable
relief. The other suits likewise seek treble damages and equitable relief. While
two of the suits name Southern Company as a defendant, it appears that the
allegations, as they may relate to Southern Company and its subsidiaries, are
directed to activities of subsidiaries of Mirant Corporation. One such suit
names Mirant Corporation itself as a defendant. Southern Company has notified
Mirant of its claim for indemnification for costs associated with these actions
under the terms of the Master Separation Agreement that governs the separation
of Mirant from Southern Company, and Mirant has undertaken the defense of all of
the claims. The final outcome of the lawsuits cannot now be determined.
Department of Energy Order: On December 14, 2000, the Secretary of the
Department of Energy ("DOE") ordered that certain suppliers of electricity
provide electricity to the CAISO for delivery to California utility companies
when the CAISO certified that there was inadequate electrical supply.
Bewag:
On August 10, 2000, E.on Energie announced that it had reached an agreement
with Hamburgische Electricitaets-Werke AG ("HEW") to sell E.on Energie's 49%
share of Bewag effective January 1, 2001. Mirant, through its subsidiaries, had
previously made an offer to purchase E.on Energie's 49% interest in Bewag. On
August 14, 2000, at the request of the State of Berlin, the Berlin district
court issued a temporary injunction preventing E.on Energie from selling part of
its stake in Bewag, as it had not obtained the approval of the State of Berlin.
This temporary injunction was extended by the Berlin high court on August 16,
2000. On August 15, 2000, the Berlin high court issued a separate preliminary
injunction, at Mirant's request, to prevent the sale of E.on Energie's
shares in Bewag to HEW. This injunction was upheld on December 4, 2000. The
matter is currently scheduled for binding arbitration. E.on Energie has
submitted a counterclaim to the arbitrator seeking recovery of damages it claims
it suffered as a result of the injunction issued by the Berlin court. The first
meeting of the parties with the arbitrators is scheduled for March 9, 2001. Upon
E.on Energie's request, Mirant instituted legal proceedings in the state court
of Berlin seeking the same injunction as in the arbitration. Both proceedings
are in their initial stage. Therefore, Mirant is uncertain as to the result of
the pending proceedings. Mirant has also stated its desire to negotiate a
settlement with E.on Energie and HEW with respect to a joint partnership with
HEW regarding their combined shares in Bewag including the shares presently
owned by E.on Energie.
Companhia Energetica de Minas Gerais ("CEMIG"):
In September 1999, the state of Minas Gerais, Brazil, filed a lawsuit in a
state court seeking temporary relief against Southern Electric Brasil
Participacoes, Ltda. ("SEB") exercising voting rights under the shareholders'
agreement, between the state and SEB regarding SEB's interest in CEMIG, as well
as a permanent rescission of the agreement. On March 23, 2000, a state court in
Minas Gerais ruled that the shareholder agreement was invalid. SEB has appealed
that decision and a second decision by the same court invalidating the
shareholder agreement in a case brought by employees of CEMIG against the state
of Minas Gerais. Mirant believes that this is a temporary situation and expects
that the shareholders' agreement will be fully restored. Failure to prevail in
this matter would limit Mirant's influence on the daily operations of CEMIG.
However, SEB would still have 33% of the voting shares of CEMIG and hold 4 of 11
seats on CEMIG's board of directors. SEB's economic interest in CEMIG would not
be affected. The significant rights SEB would lose relate to supermajority
rights and the right to participate in the daily operations of CEMIG. SEB
obtained financing from Banco Nacional de Desenvolvimento Economico e Social
("BNDES") for approximately 50% of the total purchase price of the CEMIG shares
which is secured by a pledge of SEB's shares in CEMIG. The interest payment
originally due May 15, 2000, in the amount of $107.8 million, has been deferred
until May 15, 2001.
State Line Energy, L.L.C. ("State Line"):
On July 28, 1998, an explosion occurred at State Line causing a fire and
substantial damage to the plant. The precise cause of the explosion and fire has
not been determined. Thus far, seven personal injury lawsuits have been filed
against Mirant, five of which were filed in Cook County, Illinois. Mirant filed
a motion to dismiss these five cases in 1998 for lack of "in personam"
jurisdiction. The motion was denied in August 1999. In October 1999, the
Appellate Court of Illinois granted Mirant's petition for leave to appeal. The
outcome of these proceedings cannot now be determined and an estimated range of
loss cannot be made.
Mobile Energy Services Company, L.L.C.("Mobile Energy"):
Mobile Energy is the owner of a facility that generates electricity,
produces steam and in the past processed black liquor as part of a pulp and
paper complex in Mobile, Alabama. On January 14, 1999, Mobile Energy and Mobile
Energy Services Holdings, Inc., which guaranteed debt obligations of Mobile
Energy, filed voluntary petitions in the United States Bankruptcy Court for
the Southern District of Alabama, seeking protection under Chapter 11 of the
United States Bankruptcy Code. Southern Company has guaranteed certain potential
environmental and certain other obligations of Mobile Energy that represent a
maximum contingent liability of $19 million as of December 31, 2000. A major
portion of the maximum contingent liability escalates at the rate equal to the
producer price index. As part of its separation from Southern Company, Mirant
has agreed to indemnify Southern Company for any obligations incurred under such
guarantees.
An amended plan of reorganization was filed by Mobile Energy and Mobile
Energy Services Holdings on February 21, 2001. This amended plan proposes to
cancel the existing taxable and tax-exempt bond debt of Mobile Energy and
transfer ownership of Mobile Energy and Mobile Energy Services Holdings to the
holders of that debt. Approval of that proposed plan of reorganization would
result in a termination of Southern Company's direct and indirect ownership
interests in both entities, but would not affect Southern Company's continuing
guarantee obligations that are described above. The final outcome of this matter
cannot now be determined.
In addition to the matters discussed above, Mirant is party to legal
proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on the results of operations or financial position of Mirant.
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 has approximately $877 million trade credit support commitments
related to its energy marketing and risk management activities as of December
31, 2000. Mirant has also guaranteed the performance of its obligations under a
multi-year agreement entered into by Mirant with Brazos Electric Power
Cooperative ("Brazos"). Under the agreement, effective January 1999, Mirant
provides all the electricity required to meet the needs of the distribution
cooperatives served by Brazos. Also, Mirant 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's guarantee was
$75 million for the first year of the agreement and declines by $5 million per
year to $55 million in the fifth year of the agreement.
To the extent that Mirant does not maintain an investment grade rating, it
would be required to provide alternative collateral to certain counterparties.
Such collateral might be in the form of letters of credit. Performance
guarantees assure a subsidiary's performance of contractual obligations whether
it is commodity delivery or payment.
Mirant also has a guarantee related to Pan Alberta Gas, Ltd. of $64
million issued in 2000 and outstanding at December 31, 2000.
Vastar, a subsidiary of BP Amoco, and Mirant had issued certain financial
guarantees made in the ordinary course of business, on behalf of MAEM's
counterparties, to financial institutions and other credit grantors. Mirant has
agreed to indemnify BP Amoco against losses under such guarantees in proportion
to Vastar's former ownership percentage of MAEM (Note 12). At December 31, 2000,
such guarantees amounted to approximately $312 million.
MAEM has a contract with BP Amoco through December 31, 2007 to purchase the
natural gas that would have been produced by Vastar (now a unit of BP Amoco) in
Canada, Mexico, and the contiguous states of the United States. The negotiated
purchase price of delivered gas is generally equal to the daily spot rate
prevailing at each delivery point. As part of Mirant's acquisition of Vastar's
40% interest in MAEM (Note 12), Mirant agreed to amend the gas purchase and sale
agreement whereby BP Amoco is obligated to deliver fixed quantities at
identified delivery points. The agreement will continue to be in effect through
December 31, 2007. The amendment became effective November 1, 2000.
Turbine Purchases and Other Construction-Related Commitments
Mirant, either directly or indirectly through its subsidiaries, entered
into agreements to purchase 94 turbines and equipment packages scheduled to be
completed and delivered through 2005. Minimum termination amounts under the
contracts were $196 million at December 31, 2000. Total amounts to be paid under
the agreements if all turbines and equipment packages are purchased as planned
were approximately $3,240 million at December 31, 2000.
Mirant has entered into firm commitments to meet ongoing construction
obligations at its projects, including contracts for materials purchases and
engineering, procurement and construction-related services. These commitments at
December 31, 2000 totaled approximately $474 million.
Long-term Service Agreements
Mirant has entered into long-term service agreements for the maintenance
and repair of its combustion turbine and combined cycle generating plants. These
agreements may be terminated in the event a planned construction project is
cancelled. Minimum termination amounts under the agreements were $168 million
at December 31, 2000. At December 31, 2000, the amount committed for
construction projects in process was approximately $2,255 million.
Power Purchase Agreements
Under the asset purchase and sale agreement for PEPCO, Mirant also
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.
Operating Leases
Mirant has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $17 million, $17 million, and $25 million during the years ended
December 31, 2000, 1999 and 1998, respectively.
Mirant entered into lease transactions that provided $1.5 billion, net of
associated expenses, of the purchase price at the closing of the Potomac
Electric Power Company ("PEPCO") transaction (Note 12). The leases will be
treated as operating leases for book purposes whereby one of Mirant's
subsidiaries will record periodic lease rental expenses. Mirant has the
following annual amounts committed for long-term service, turbine purchases,
fuel, power purchases and operating leases (in millions):
Long-Term Turbine
Service Purchase Fuel Power Purchase Operating
Fiscal Year Ended: Agreements Commitments Commitments Agreements Leases
---------- ----------- ----------- -------------- ---------
2001.................... $ 23 $ 1,048 $ 184 $ 26 $ 219
2002.................... 67 1,320 180 11 191
2003.................... 119 712 55 0 170
2004.................... 174 136 54 0 141
2005.................... 180 24 55 0 136
Thereafter.............. 1,692 0 75 0 2,479
------ ------- ------- ---- -------
Total minimum payments $2,255 $ 3,240 $ 603 $ 37 $ 3,336
====== ======= ======= ==== =======
Labor Subject to Collective Bargaining Agreements
At its State Line facilities in Indiana, Mirant has a labor contract with
the United Steel Workers that extends to January 1, 2004 and involves 92
employees, or approximately 75% of State Line's total personnel. Some of these
employees are currently working at facilities in Michigan and Wisconsin.
At its newly acquired Mid-Atlantic facilities in and around Washington D.C.
and Maryland, Mirant has a labor contract with the International Brotherhood of
Electrical Workers that extends to January 2003 and involves approximately 680
employees, or 70% of Mirant's Mid-Atlantic facilities total personnel.
Mirant's California business recently reached agreement on a labor contract
with the International Brotherhood of Electrical Workers that extends to October
2004. This contract will cover approximately 150 employees, or 75% of Mirant's
California total personnel, who will be hired on April 16, 2001 as a result of
the 1999 asset acquisition from Pacific Gas & Electric Company.
Mirant's New York business recently reached agreement on 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, MA, has
recently extended its contract with the Utilities Workers' Union of America to
March 2003. Mirant Canal, a subsidiary of Mirant located in Sandwich, MA, is
currently in negotiations with the Utilities Workers' Union of America regarding
its contract that expires on June 1, 2001. These contracts involve approximately
75% and 70% of each facility's employees, respectively.
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 National
Power Corporation ("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 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 ("SEPI") can exercise a put
option requiring Mirant Asia-Pacific and/or its subsidiaries who hold the shares
of SEPI to purchase the minority shareholders' interest in the project. The put
option can be exercised between December 21, 2002 and December 21, 2005, the
third and sixth anniversaries of the completion of the project construction or,
in the event of any change in control, a change in SEPI's charter documents or
the transfer of sponsor in violation of the sponsor support agreement. The put
option may be exercised on the earlier of the date of such changes or December
21, 2011, the twelfth anniversary of the completion of project construction. The
price would be determined by a formula including the present value of the
remaining years of cash flow less the liabilities outstanding plus the current
assets.
Pagbilao
Under shareholder agreements, the minority shareholders of the Mirant
Asia-Pacific subsidiary which holds the Pagbilao project ("SEQI") can exercise a
put option requiring Mirant Asia-Pacific and/or its subsidiaries who holds
shares of SEQI to purchase the minority shareholders' interests in the project.
The put option can be exercised between August 5, 2002 and August 5, 2008, the
sixth and twelfth anniversaries of the completion of the project construction
or, in the event of any change in control, a change in SEQI'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 or August 5, 2008, the twelfth anniversary of the completion of project
construction. The price would be determined by a formula including the present
value of the remaining years of cash flow less the liabilities outstanding plus
the current assets.
12. Business Developments
Sale of Hidroelectrica Alicura S. A. ("Alicura"): On August 25, 2000,
Mirant completed the sale of its 55% indirect interest in Alicura to The AES
Corporation 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.
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 plc ("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 of March 31, 2000.
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 Holdings UK for a total consideration of approximately $38
million. Mirant exercised that right effective December 1, 2000, which increased
Mirant's economic interest in WPD Holdings UK 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,
have modified the voting rights of WPD Holdings UK to 50% each so that each
party will equally share operational and management control of WPD Holdings UK.
As of December 1, 2000, WPD Holdings UK was deconsolidated and its income is
included in equity in earnings on Mirant's consolidated statement of income.
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
Acquisition of Generating Assets of PEPCO: On December 19, 2000, Mirant,
through its subsidiaries and together with lessors in a leveraged 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 that includes working capital and capital
expenditures of approximately $100 million and approximately $1.5 billion
provided by a leveraged 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 in accordance with APB Opinion
No. 16. The preliminary purchase price allocation is as follows (in millions):
Current assets................................. $ 63
Property, plant and equipment.................. 2,913
Goodwill and other intangibles................. 1,498
Deferred tax asset resulting from acquisition.. 683
Out-of-market contract liabilities assumed..... (2,416)
--------
Total purchase price....................... $ 2,741
========
The acquired assets consist primarily of four generating stations,
Morgantown, Chalk Point, Dickerson and Potomac River, which provide
approximately 5,154 MW capacity. Immediately upon completion of the purchase,
Mirant Mid-Atlantic, LLC ("MMA") entered into a $1.5 billion long-term leveraged
lease transaction with respect to two of the purchased generating facilities
(Note 11). In addition to the electric generating stations, Mirant, through
subsidiaries, also 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, 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
MAEM: On September 11, 2000, Mirant closed its acquisition of Vastar's 40%
interest in MAEM for $250 million. The acquisition was effective as of August
10, 2000. As a result of this transaction, MAEM became a wholly owned indirect
subsidiary and has been consolidated in Mirant's financial statements since the
effective date.
As part of the transaction, Mirant agreed to amend the gas purchase and
sale agreement whereby BP Amoco is obligated to deliver fixed quantities to MAEM
at identified delivery points. The agreement will continue to be in effect
through December 31, 2007. The amendment became effective November 1, 2000. As
part of the transaction, Mirant was relieved of any financial obligations to
Vastar under the MAEM partnership agreement, including any guaranteed minimum
cash distributions and any outstanding arbitration (Note 11).
The following unaudited pro forma results of operations for the years ended
December 31, 2000 and 1999 have been prepared assuming the acquisition of MAEM
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
Mirant California: On April 16, 1999, the Company, through Mirant
California, acquired various generating assets in California with a total
capacity of 3,065 MW from Pacific Gas & Electric Company for $801 million plus
$39 million for fuel inventory, capital expenditures and property taxes.
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
1,794 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 $48 million was recorded as goodwill. The purchase price
allocation for this acquisition is preliminary and further refinements will be
made based on the completion of the final valuation studies. The pro forma
operating results of this acquisition for the years presented was not materially
different from actual results. The initial allocation of the purchase price is
as follows (in millions):
Current assets............. $ 60
Property, plant and equipment 433
Goodwill................... 47
Liabilities assumed and other (47)
-----
Purchase price............. $ 493
=====
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.
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 the accompanying statements of income.
CEMIG: In January 1998, Mirant, as a shareholder in Cayman Energy Traders
("CET"), did not exercise its option to withdraw as a shareholder of CET and,
therefore, transferred approximately $114 million to CET in exchange for a
27.59% economic interest in CET in order to continue to participate in the CEMIG
project. Prior to this time, the Company had no economic interest in CET or
CEMIG. In May 1998, this transaction was completed when Southern Energy
transferred an additional $21 million to CET. The Company accounts for this
investment under the equity method due to significant influence evidenced by 33%
voting shares held by the Company and its investing partner. Through our
acquisition of a 27.59% economic interest in CET in 1998, it acquired a 3.6%
economic interest in CEMIG.
EDELNOR: During 1998, the Company purchased an additional 15% interest in
its Chilean investment in Empresa Electrica del Norte Grande S.A. for
approximately $57 million. The purchase price resulted in $32 million of
negative goodwill which was recorded as a reduction in the basis of the
Company's long-lived assets.
Sale of Interest in WPD (formerly SWEB): On June 18, 1998, the Company sold
a 26% interest in its subsidiary, SWEB Holdings Limited ("Holdings") to PP&L for
approximately $170 million. The Company recorded a pretax gain of approximately
$20 million on the sale, which is included in the accompanying statements of
income. This sale increased PP&L's economic interest in Holdings to 51% and,
conversely, reduced Mirant's economic interest to 49%. Subsequently, on June 18,
1998, shares of Holdings held by Southern Company and PP&L were exchanged
for equivalent shares in SWEB Holdings U.K. ("Holdings U.K."). Mirant continues
to hold 50% of the voting shares in Holdings U.K.
Mirant New England: On December 30, 1998, the Company, through a wholly
owned subsidiary, Mirant New England, LLC ("Mirant New England"), acquired the
generating asset business, with a total capacity of 1,245 MW, from subsidiaries
of Commonwealth Energy Systems and Eastern Utilities Associates for $536
million. 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 $261 million was recorded as goodwill. The pro
forma operating results of this acquisition for 1997 and 1998 was not materially
different from actual results. The purchase price was allocated as follows (in
millions):
Current assets.................... $ 13
Property, plant, and equipment.... 188
Acquired intangibles.............. 143
Goodwill.......................... 261
Liabilities assumed and other..... (69)
------
Purchase price.................. $ 536
======
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, 2000, 1999 and 1998
(in millions). WPD is included in the following table for 2000 only as it was
consolidated in 1999 and 1998.
2000 1999 1998
------ ------- ------
(in millions)
Combined Investments
Income Statement:
Revenues.............................. $ 5,879 $ 5,608 $ 5,051
Operating income...................... 1,565 703 1,147
Net income from continuing operations. 772 100 540
Balance Sheet:
Current assets........................ 4,084 1,794
Noncurrent assets..................... 15,013 11,642
Current liabilities................... 4,455 3,193
Noncurrent liabilities................ 8,516 5,534
As of December 31, 2000, the Company had accumulated $144 million in
undistributed earnings of entities accounted for by the equity method of
accounting.
14. SE-Finance (Discontinued Operations)
Mirant has investments in leveraged leases through its leasing subsidiary
SE-Finance. Mirant entered into leveraged leases in December of 1996, 1998 and
1999. Mirant's net investment in leveraged leases consists of the following at
December 31, 2000 and 1999 (in millions):
2000 1999
------- --------
Net rentals receivable........................ $1,430 $ 1,339
Unearned income............................... (834) (783)
------ -------
Investment in leveraged leases................ 596 556
Deferred taxes arising from leveraged leases.. (129) (58)
------ -------
Net investment in leveraged leases............ $ 467 $ 498
====== =======
The following is a summary of the components of the income from leveraged
leases for the years ending December 31, 2000, 1999 and 1998 (in millions):
2000 1999 1998
----- ------------
Pretax leveraged lease income... $ 61 $ 28 $ 5
Income tax expense.............. 21 10 2
---- ----- ----
Income from leveraged leases.... $ 40 $ 18 $ 3
==== ===== ====
As part of its planned spin-off from Southern, Mirant agreed to contribute
SE-Finance to Southern (Note 10).
15. Earnings Per Share
Mirant calculates basic earnings per share by dividing the income
available to common shareholders by the weighted average number of common shares
outstanding. The following table shows the computation of basic earnings per
share for 2000, 1999 and 1998 (in millions, except per share data) after giving
effect to the stock split that occurred prior to the offering of common stock
during 2000 (Note 10). Diluted earnings per share for 2000 gives effect to the
conversion of Mirant's value creation plan ("VCP") standard units into stock
options and the grant of new stock options on September 27, 2000 (Note 6), as
well as the assumed conversion of convertible trust preferred securities (Note
10) and the related interest expense addback to net income of $3.5 million.
Mirant had no dilutive securities outstanding during 1999 or 1998. For
comparability among periods, pro forma basic earnings per share is calculated as
though the offering of common stock during 2000 had taken place during all
periods presented. Pro forma diluted earnings per share includes the conversion
of VCP standard units (which impacted net income by $6 million and $1 million
in 2000 and 1999, respectively) and the issuance of convertible trust preferred
securities (Note 10) as though potentially dilutive for all periods and is not
presented for 1998 due to antidilution.
2000 1999 1998
------ ----- -----
Income from continuing operations $ 332 $ 362 $(12)
Discontinued operations 27 10 12
------ ----- ----
Net income $ 359 $ 372 $ -
====== ===== ====
Basic
Weighted average shares outstanding 288.7 272.0 272.0
Earnings per share from:
Continuing operations $1.15 $1.33 $(0.04)
Discontinued operations 0.09 0.04 0.04
----- ----- ------
Net income $1.24 $1.37 $ -
===== ===== ======
Diluted
Weighted average shares outstanding 288.7
Shares assumed due to conversion of stock options
and equivalents 1.2
Shares assumed due to conversion of trust
preferred securities 3.1
-----
Adjusted shares 293.0
=====
Earnings per share from:
Continuing operations $1.15
Discontinued operations 0.09
-----
Net income $1.24
=====
Pro Forma Basic (Unaudited)
Shares outstanding after initial public offering 338.7 338.7 338.7
Earnings per share from:
Continuing operations $0.98 $1.07 $(0.04)
Discontinued operations 0.08 0.03 0.04
----- ----- ------
Net income $1.06 $1.10 $ -
===== ===== ======
Pro Forma Diluted (Unaudited)
Shares outstanding after initial public offering 338.7 338.7
Shares assumed due to conversion of stock options
and equivalents 1.9 0.8
Shares assumed due to conversion of trust
preferred securities 12.5 12.5
----- -----
353.1 352.0
===== =====
Adjusted Shares Earnings per share from:
Continuing operations $0.97 $1.03
Discontinued operations 0.08 0.03
----- -----
Net income $1.05 $1.06
===== =====
16. Segment Reporting
Mirant's principal business segments consist of the geographic areas in
which it conducts business -- Americas, Asia-Pacific, and Europe. The other
reportable business segments are Mirant's financing segment ("SE-Finance") and
its business development and general corporate activities segment ("Corporate").
Intersegment revenues are not material. Financial data for business segments,
products and services, and geographic areas is as follows (in millions):
Business Segments
SE
Americas Europe Asia-Pacific Finance Corporate Consolidated
--------- ------- ------------ ------- --------- ------------
2000:
Operating revenues.............. $ 12,490 $ 314 $ 502 $ 0 $ 9 $ 13,315
Depreciation and amortization... 115 69 130 0 3 317
Interest expense, net........... 152 97 101 0 78 428
Income taxes from operations.... 113 (16) 19 0 (30) 86
Write-down of generating assets. 18 0 0 0 0 18
Net income from equity method
subsidiaries.................. 56 83 57 196
Segment net income (loss)....... 177 82 204 27 (131) 359
Total assets.................... 16,796 1,362 4,500 613 865 24,136
Investments in equity method
subsidiaries.................. 163 1,228 338 61 0 1,790
Gross property additions........ 449 90 55 0 22 616
Increase in goodwill............ 1,523 0 0 0 0 1,523
1999:
Operating revenues.............. 939 973 342 0 11 2,265
Depreciation and amortization... 73 90 104 0 3 270
Interest expense, net........... 80 115 53 0 81 329
Income taxes from operations.... 58 92 28 0 (49) 129
Write-down of generating Assets. 29 31 0 0 0 60
Net income from equity method
subsidiaries.................. 18 9 83 0 0 110
Segment net income (loss)....... 93 170 175 10 (76) 372
Total assets.................... 4,071 3,810 4,430 722 830 13,863
Investments in equity method
Subsidiaries.................. 248 762 254 76 0 1,340
Gross property additions........ 419 115 194 0 19 747
Increase in goodwill............ 48 0 0 0 0 48
1998:
Operating revenues.............. 261 1,273 273 0 12 1,819
Depreciation and amortization... 44 79 96 0 2 221
Interest expense, net........... 49 123 67 0 45 284
Income taxes from operations.... (113) 22 (12) 0 (20) (123)
Write-down of generating assets. 308 0 0 0 0 308
Net income from equity method
subsidiaries.................. 27 64 44 0 0 135
Segment net income (loss)....... (180) 141 68 12 (41) 0
Total assets................ 2,166 3,890 4,520 428 1,050 12,054
Investments in equity method
subsidiaries.................. 373 923 131 84 0 1,511
Gross property additions........ 101 120 426 0 0 647
Increase in goodwill............ 261 0 0 0 0 261
Products and Services
-------------------------
Generation Distribution
and And
Energy Integrated
Marketing Utility Other Total
----------- ------------ -------- --------
(Revenue in millions)
2000........... 12,816 477 22 13,315
1999........... 1,087 1,143 35 2,265
1998........... 495 1,273 51 1,819
Geographic Areas
-------------------------
International
United The United All
States Philippines Kingdom Other Consolidated
------- ----------- ------------ ----- ------------
(Revenue in millions)
2000............. 12,337 491 314 173 13,315
1999............. 736 320 976 233 2,265
1998............. 53 257 1,273 236 1,819
International
------------------------
United The United All
States China Philippines Kingdom Other Consolidated
------ ----- ----------- ------- ----- ------------
(Long-Lived Assets in millions)
2000.......... 8,726 488 1,901 479 2,940 14,534
1999.......... 3,989 534 1,966 2,449 3,254 12,192
1998.......... 2,156 368 1,834 2,463 3,427 10,248
17. Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for 2000 and 1999 is as follows:
Per Common Share
----------------------------
Operating Operating Consolidated Price Range
Quarter Ended Revenues Income Net Income Earnings High Low
-------------- --------- --------- ------------ ------- ---- ---
(in millions)
2000:
March....... $ 519 $ 169 $ 101 $ 0.37 $ - $ -
June........ 640 141 93 0.34 - -
September... 4,198 217 98 0.36 31.875 28.000
December.... 7,958 137 67 0.23 31.750 20.560
1999:
March....... 522 77 80 0.29 - -
June........ 503 97 69 0.26 - -
September... 686 129 156 0.57 - -
December.... 554 141 67 0.25 - -
18. Subsequent Events
California Power Markets
Department of Energy Order: On December 14, 2000, the Secretary of the
Department of Energy ("DOE") ordered that certain suppliers of electricity
provide electricity to the CAISO for delivery to California utility companies
when the CAISO certified that there was inadequate electrical supply. Subsequent
orders extended this requirement to February 7, 2001. The DOE orders expired at
that time and have not been renewed. Mirant subsidiaries were called upon by the
CAISO to provide power to the CAISO under the DOE orders.
Proposed CAISO and PX Tariff Amendments: On January 4, 2001, the CAISO
filed for approval of a tariff amendment whereby its credit rating requirements
for certain electricity purchasers would be reduced. The action was taken in
response to reports that Moody's and S&P were on the verge of reducing the
credit ratings of Southern California Edison ("SCE") and PG&E to ratings that
would not allow SCE and PG&E to purchase electricity from the CAISO unless they
posted collateral for their purchases. In its filing, the CAISO announced its
intention to implement the reduced credit requirements immediately in order to
ensure the reliability of the California power grid. On January 5, 2001, the PX
filed a similar request with respect to the PX's tariffs as the CAISO had
requested on January 4. On February 14, 2001, the FERC ruled that the tariff
amendment requested by the PX should be rejected because it had ceased to
operate its day-ahead and day-of markets. With respect to the CAISO's request,
the FERC allowed the CAISO to amend its tariff to remove the credit-worthiness
requirements only with respect to the scheduling by a utility purchaser from the
CAISO of power from generation owned by that purchaser. The FERC rejected the
proposed amendment with respect to purchases by the CAISO from third-party
suppliers. The application of this ruling by the FERC to the CAISO's purchases
under its emergency dispatch authority is currently being disputed.
Defaults by SCE and PG&E: On January 16 and 17, 2001, SCE's and PG&E's
credit and debt ratings were lowered by Moody's and S&P to "junk" or "near junk"
status. On January 16, 2001 SCE indicated that it would suspend indefinitely
certain obligations including a $215 million payment due to the PX and a $151
million payment due to a qualifying facility. On January 30, 2001, the PX
suspended operation of its "day ahead" and "day of" markets. On February 1,
2001, PG&E indicated that it intended to default on payments of over $1 billion
due to the PX and qualifying facilities.
DWR Power Purchases: On January 17, 2001, the Governor of California issued
an emergency proclamation giving the California Department of Water Resources
("DWR") authority to enter into arrangements to purchase power in order to
mitigate the effects of electrical shortages in the state. The DWR began
purchasing power under that authority the next day. On February 1, 2001, the
Governor of California signed Assembly Bill No. 1X authorizing the DWR to
purchase power in the wholesale markets to supply retail consumers in California
on a long-term basis. The Bill became effective immediately upon its execution
by the Governor. The Bill did not, however, address the payment of amounts owed
for power previously supplied to the CAISO or PX for purchase by SCE and PG&E.
The CAISO and PX have not paid the full amounts owed to MAEM 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 PX or the CAISO for sales that were not arranged by the DWR.
Mirant through its subsidiaries has approximately 3000 MW of generating
capacity in California. This includes facilities which operate during periods
of higher-than-average (intermediate load) and very high (peak) demand levels.
Mirant's California subsidiaries generated an amount equivalent to about 4% of
the total California energy consumption in 2000. The Company's combined
receivables from the both the PX and the CAISO as of December 31, 2000 and
as of late February 2001 (unaudited) were approximately $375 million and
$385 million (unaudited), respectively, net of settlements due to the PX. There
are other sources of collateral and revenues which could potentially provide
additional offset to this net receivable. On a going-forward basis, Mirant does
not expect a material portion of its income to be derived from receivables due
from the PX and CAISO attributable to purchases on behalf of non-credit-worthy
entities in California. In addition, Mirant has taken a provision which it
believes adequately covered its exposure as of December 31, 2000 related to the
increased credit and payment risks associated with the California power
situation. The Company continues to monitor the situation in California and will
re-evaluate the amount of the provision needed at the end of the first quarter
of 2001.
Attorney General and California Public Utilities Commission Investigations.
The California Public Utilities Commission ("CPUC") and the California Attorney
General's office have each launched investigations into the California energy
markets that have resulted in the issuance of subpoenas to several Mirant
entities. The CPUC issued one subpoena to Mirant entities in mid-August of 2000
and one in September of 2000. 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
of 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. Despite
various measures taken to protect the confidentiality of sensitive information
provided to these agencies, there remains a risk of governmental disclosure of
the confidential, proprietary, and trade secret information obtained by the CPUC
and the Attorney General through this process. While Mirant will vigorously
defend any claims of potential civil liability or criminal wrong-doing asserted
against it or its subsidiaries, the results of such investigations cannot now be
determined.
Transfer of SE Finance and Capital Funding to Southern: (Unaudited)
On March 5, 2001, Mirant transferred SE Finance and Capital Funding
subsidiaries to Southern Company. See Note 10 and 14.