MIRANT AMERICAS GENERATING LLC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO_____

MIRANT AMERICAS GENERATION, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware 51-0390520
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

1155 Perimeter Center West, Suite 100, Atlanta, Georgia 30338
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(Address of Principal Executive Offices) (Zip Code)

(678) 579-5000
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(Registrant's Telephone Number, Including Area Code)

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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]

Registrant meets the conditions set forth in General Instruction H of Form
10-Q and is therefore filing this Form with the permitted reduced disclosure
format.

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MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES

INDEX

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

DEFINITIONS

1

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The information presented in this quarterly report on Form 10-Q includes
forward-looking statements, in addition to historical information. These
statements involve known and unknown risks and relate to future events, Mirant
Americas Generation's future financial performance or projected business
results. In some cases, forward-looking statements may be identified by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "targets," "potential" or "continue" or the
negative of these terms or other comparable terminology.

Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors, which include:

o legislative and regulatory initiatives regarding deregulation,
regulation or restructuring of the electric utility industry;

o the extent and timing of the entry of additional competition in the
markets of our subsidiaries and affiliates;

o our pursuit of potential business strategies, including acquisitions
or dispositions of assets or internal restructuring;

o political, legal and economic conditions and developments and state,
federal and other rate regulations in the United States;

o changes in or application of environmental and other laws and
regulations to which we and our subsidiaries and affiliates are
subject;

o financial market conditions and the results of our or our affiliates
financing efforts or possible future refinancing efforts;

o changes in market conditions, including developments in energy and
commodity supply, volume and pricing and interest rates;

o weather and other natural phenomena;

o developments in the California power markets, including, but not
limited to, governmental intervention, deterioration in the financial
condition of our counterparties, default on receivables due and
adverse results in current or future litigation;

o the direct or indirect effects on our business, including the
availability of insurance, resulting from the terrorist actions on
September 11, 2001 or any other terrorist actions or responses to such
actions, including, but not limited to, acts of war;

o the direct or indirect effects on our business resulting from the
financial difficulties of competitors of Mirant Americas Generation,
including, but not limited to, their effects on liquidity in the
trading and power industry, and their effects on the capital markets'
views of the energy or trading industry and our ability to access the
capital markets on the same favorable terms as in the past;

o the direct or indirect effects on our business of a further lowering
of our credit rating or the credit ratings of Mirant Mid-Atlantic,
Mirant Americas Energy Marketing and Mirant Corporation (or actions we
may take in response to changing credit ratings criteria), including,
refusal by current or potential counterparties to enter into
transactions with us, Mirant Mid-Atlantic, Mirant Americas Energy
Marketing and Mirant and our respective inability to obtain credit or
capital in desired amounts or on terms favorable to us;

o the disposition of the pending litigation described in our Form 10-K
filed March 28, 2002, our Form 10-Q filed on May 13, 2002, as amended
by our Form 10-Q/A on December 20, 2002, and this Form 10-Q;

o the direct or indirect effects of the accounting issues discussed in
Note A in the notes to the unaudited condensed consolidated financial
statements included in this Form 10-Q and any additional issues
arising from the weakness identified by the internal control and
procedures review of Mirant Corporation discussed in Item 4 of this
Form 10-Q;

o the direct or indirect ramifications of the results of the reaudits of
the 2000 and 2001 financial statements of Mirant Corporation, Mirant
Mid-Atlantic and the Company and any restatements that may be required
as a result of these reaudits including potential effects on our or
our affiliates financing arrangements and possible future refinancing
efforts;

o the direct or indirect effects of informal inquiries by the U.S.
Securities & Exchange Commission, the U.S. Department of Justice, and
the Commodities Futures Trading Commission regarding, among other
things, the accounting issues described in Mirant's July 30 and August
14, 2002 press releases and energy trading issues;

o the direct or indirect effects on our business of our or our
subsidiary's failure to timely file our or their Form 10-Q for the
quarters ended June 30, 2002 and September 30, 2002;

o the direct or indirect effects of the change in the way Mirant
Mid-Atlantic calculates its fixed charge coverage ratios and any
restriction on this subsidiary's ability to pay dividends as a result
of this change as discussed in Item 2 of this Form 10-Q; and

o other factors discussed in this Form 10-Q and in our reports filed
from time to time with the SEC (including our Form 10-K filed March
28, 2002 and our Form 10-Q filed on May 13, 2002, as amended by our
Form 10-Q/A filed on December 20, 2002).

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We expressly disclaim a duty to update
any of the forward-looking statements contained herein.

2

MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(WHOLLY-OWNED INDIRECT SUBSIDIARY OF MIRANT CORPORATION)
(IN MILLIONS)

The accompanying notes are an integral part of these condensed
consolidated statements.

3

MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(WHOLLY-OWNED INDIRECT SUBSIDIARY OF MIRANT CORPORATION)

The accompanying notes are an integral part of these condensed
consolidated balance sheets.

4

MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(WHOLLY-OWNED INDIRECT SUBSIDIARY OF MIRANT CORPORATION)

The accompanying notes are an integral part of these condensed
consolidated balance sheets.

5

MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF MEMBER'S EQUITY (UNAUDITED)
(WHOLLY-OWNED INDIRECT SUBSIDIARY OF MIRANT CORPORATION)
(IN MILLIONS)

The accompanying notes are an integral part of these condensed
consolidated statements.

6

MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(WHOLLY-OWNED INDIRECT SUBSIDIARY OF MIRANT CORPORATION)
(IN MILLIONS)

The accompanying notes are an integral part of these condensed
consolidated statements.

7

MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(WHOLLY-OWNED INDIRECT SUBSIDIARY OF MIRANT CORPORATION)

A. ACCOUNTING AND REPORTING POLICIES

GENERAL

Mirant Americas Generation, LLC (formerly Mirant Americas Generation, Inc.
and Southern Energy North America Generating, Inc.) and subsidiaries
(collectively, the "Company" or "Mirant Americas Generation") was formed in May
1999. In the same year, all assets and liabilities of Mirant State Line
Ventures, Inc. (purchased from Commonwealth Edison in December 1997), Mirant New
England Investments, Inc. (purchased from Commonwealth Energy System and Eastern
Utilities Associates in December 1998), Mirant New York (purchased from Orange
and Rockland Utilities, Inc. and Consolidated Edison Company of New York in June
1999), Mirant California Investments, Inc., (the assets of which were purchased
from Pacific Gas and Electric Company in April 1999), were merged with and into
Mirant Americas Generation in a common control reorganization. In 2000, Mirant
Mid-Atlantic, LLC, was formed as a subsidiary of Mirant Americas Generation in
conjunction with Mirant Corporation's ("Mirant's") planned acquisition of
generating assets and other related assets from Potomac Electric Power Company.
Mirant Americas Generation is a direct wholly owned subsidiary of Mirant
Americas, Inc. ("Mirant Americas") and is an indirect wholly owned subsidiary of
Mirant Corporation ("Mirant"). Essentially all of the Company's operating
revenue stems from sales to Mirant Americas Energy Marketing (Note F).

Mirant Americas Generation is engaged in the development and operation of
domestic merchant power generation facilities.

ADJUSTMENTS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS. The Company has
restated its previously reported results of operations for the first quarter of
2002 to net income of $77 million from originally reported net income of $88
million. At March 31, 2002, revenue related to Mirant Mid-Atlantic's ECSA with
Mirant Americas Energy Marketing (an affiliate), was reduced by $11 million,
accounts receivable from Mirant Americas Energy Marketing was reduced by $5
million, and capital contribution receivable pursuant to the ECSA (a member's
equity account) was reduced by $6 million. The previously issued financial
statements did not take into account Mirant Americas Energy Marketing's election
under the ECSA in January 2002 to increase the energy purchased from Mirant
Mid-Atlantic for 2002 to 100% of the capacity of its facilities from the
contractual minimum of 75%, as described in Note E. In addition, Mirant
Mid-Atlantic recorded an addition to member's equity, with a corresponding
capital contribution receivable pursuant to the ECSA, of $53 million, to reflect
the excess of the fixed price of the capacity and energy in the ECSA over the
projected market prices when Mirant Mid-Atlantic became committed to provide the
additional energy to Mirant Americas Energy Marketing.

The statement of cash flows has also been restated to reflect amounts
received under the ECSA attributable to the capital contribution received as a
financing activity, rather than an operating activity.

In addition, for the three months ended March 31, 2002, the Company
recorded adjustments to net income related primarily to a decrease of revenue of
approximately $2 million, an increase of maintenance expense of approximately $1
million, an increase of restructuring charges of $1 million, and a decrease of
interest expense of $4 million.

A summary comparison of the previously reported and restated first quarter
2002 unaudited condensed consolidated statement of income follows (in millions):

8

A summary comparison of the previously reported and restated first quarter
2002 unaudited condensed consolidated statement of cash flows follows (in
millions):

The Company has engaged KPMG to reaudit the Company's 2000 and 2001
financial statements for two primary reasons: (i) to address accounting errors
identified during reviews of Mirant's previously disclosed accounting issues;
and (ii) to enable its independent auditors to provide an opinion on the
Company's 2000 and 2001 financial statements in accordance with the new
accounting standard SFAS No. 144. The effects, if any, of such reaudit on the
Company's financial statements cannot be determined. In addition, we are not
currently able to assess the impact on the Company of the reaudit of Mirant and
the accounting issues at Mirant Americas Energy Marketing in light of the
business relationships among the Company, Mirant Mid-Atlantic, Mirant Americas
Energy Marketing and Mirant Corporation.

BASIS OF ACCOUNTING. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited 2000 and
2001 consolidated financial statements and the accompanying footnotes which are
contained in the Company's annual report on Form 10-K, for the year ended
December 31, 2001. As previously discussed, Mirant has engaged its independent
auditors to reaudit its 2000 and 2001 financial statements.

The results for interim periods are not necessarily indicative of the
results for the entire year. Certain prior-year amounts have been reclassified
to conform with the current year financial statement presentation.

Management believes that the accompanying unaudited condensed consolidated
financial statements as of June 30, 2002 and for the three and six months then
ended reflect adjustments, consisting of normal recurring items, necessary for a
fair presentation of results for those interim periods presented.

ACCOUNTING CHANGES. In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). These pronouncements significantly change the
accounting for business combinations, goodwill and intangible assets. SFAS No.
141 establishes that all business combinations will be accounted for using the
purchase method; use of the pooling-of-interests method is no longer allowed.
The statement further clarifies the criteria to recognize intangible assets
separately from goodwill. The provisions of SFAS No. 141 are effective for all
business combinations initiated after June 30, 2001 and for business
combinations accounted for using the purchase method for which the acquisition
date was before July 1, 2001. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and, generally,
adopts a non-amortization and periodic impairment-analysis approach to goodwill
and indefinite-lived intangibles. SFAS No. 142 is effective for the Company's
2002 fiscal year or for business combinations initiated after June 30, 2001.
Mirant Americas Generation adopted these statements on January 1, 2002.

9

Upon initial application of SFAS No. 141, Mirant Americas Generation
reassessed the classification of its intangible assets and determined that
trading rights resulting from business combinations did not meet the new
criteria for recognition apart from goodwill. Effective January 1, 2002, trading
rights related to business combinations were reclassified to goodwill as
required by the Statement. The reclassification increased goodwill by $194
million, net of accumulated amortization of $18 million and net of the effect on
deferred taxes of the adjustment recorded by our parent of $37 million. Since
Mirant Mid-Atlantic is not a taxable entity, all deferred income taxes related
to book/tax differences of the assets and liabilities of Mirant Mid-Atlantic are
recorded by Mirant Americas. A deferred tax liability was not recognized in the
purchase accounting for the non-deductible goodwill attributed to Mirant
Mid-Atlantic. A deferred tax liability was recognized for the book/tax basis
difference related to the trading rights attributed to Mirant Mid-Atlantic. The
reclassification of trading rights to goodwill in connection with the adoption
of SFAS No. 142 resulted in the reversal of the deferred tax liability recorded
by Mirant Americas. The reduction in the deferred tax liability at Mirant
Americas resulted in a reduction in the amount of goodwill attributed to Mirant
Mid-Atlantic.

As a result of the adoption of SFAS No. 142, Mirant Americas Generation
discontinued amortization of goodwill effective January 1, 2002. During the
first quarter of 2002, Mirant Americas Generation completed the transitional
impairment test required by SFAS No. 142 and did not record any impairments of
goodwill. Net income for the three and six months ended June 30, 2001 has been
adjusted below to exclude amortization related to goodwill and trading rights
recognized in business combinations (in millions).

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial
accounting and reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The provisions of
SFAS No. 143 are effective for the Company's 2003 fiscal year. Mirant Americas
Generation has not yet determined the financial statement impact of this
statement.

In October 2001, the FASB issued SFAS No. 144, which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 amends accounting and reporting standards
for the disposal of segments of a business and addresses various issues related
to the accounting for impairments or disposals of long-lived assets. Mirant
Americas Generation adopted SFAS No. 144 on January 1, 2002. Prior to SFAS No.
144, the disposition of State Line would not have been classified as a
discontinued operation. Because SFAS No. 144 expanded the breadth of
transactions subject to discontinued operations classification, the disposition
of State Line is now required to be presented as a discontinued operation (Note
H).

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires companies to recognize certain costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company will
adopt SFAS No. 146 on January 1, 2003 and does not believe that it will have a
material impact on its financial statements.

10

In June 2002, the EITF reached consensus on certain issues related to EITF
Issue 02-3, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities," with the main consensus being that gains and losses on
energy trading contracts should be reported net in the statement of income. In
October 2002, the Task Force rescinded EITF Issue 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" resulting
in energy-related contracts that are not accounted for pursuant to SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS No. 133") such as transportation contracts, storage contracts and tolling
agreements, being accounted for as executory contracts using the accrual method
of accounting and not at fair value. The consensus reached on EITF Issue 02-3
and the rescission of EITF Issue 98-10 do not impact the Company's financial
statements.

CONCENTRATION OF REVENUES AND CREDIT RISK. Essentially all of the Company's
operating revenue stems from sales to Mirant Americas Energy Marketing (Note F).
However, under its agreements with Mirant Americas Energy Marketing, the Company
retains the ultimate credit risk from the sales that Mirant Americas Energy
Marketing engages in on its behalf to third-parties, except for sales under the
Mirant Mid-Atlantic ECSA (Note F). During the three and six months ended June
30, 2002, approximately 15% and 15%, respectively, of the Company's revenues
were attributable to sales to the DWR, as compared to approximately 40% and 24%,
respectively for the same periods in 2001. In addition, during the three and six
months ended June 30, 2002, approximately 31% and 29%, respectively, of the
Company's revenues were attributable to sales to Mirant Americas Energy
Marketing through the Company's subsidiary, Mirant Mid-Atlantic under the ECSA,
whereby the ultimate credit risk to the Company from these sales is with Mirant
Americas Energy Marketing.

As of June 30, 2002, the DWR (a non-affiliate of Mirant), Mirant, Mirant
Americas, Inc., Mirant Americas Energy Marketing and Mirant Potomac River, a
direct wholly owned subsidiary of Mirant, owed Mirant Americas Generation $177
million (includes accounts receivable and open contract positions), $241
million, $256 million, $142 million and $152 million, respectively, each
representing more than 10% of Mirant Americas Generation's total credit
exposure. The DWR exposure is not currently supported by the state of
California's credit and is subject to the risk that the California State
Legislature will not adequately appropriate funds to support the DWR's
obligations with respect to its contracts with Mirant Americas Generation. The
Mirant exposure is related to participation in Mirant's cash management program
by the Company's subsidiaries, including interest, in which the available cash
of the Company's subsidiaries is loaned to Mirant on a daily basis (Note F). The
Company's total credit exposure is computed as total accounts and notes
receivable, adjusted for risk management and derivative hedging activities,
netted where appropriate.

CAPITALIZATION OF INTEREST COST. Mirant Americas Generation capitalizes
interest on projects during the advanced stages of development and the
construction period, in accordance with SFAS No. 34, "Capitalization of Interest
Cost," as amended by SFAS No. 58, "Capitalization of Interest Cost in Financial
Statements That Include Investments Accounted for by the Equity Method." The
Company determines which debt instruments represent a reasonable measure of the
cost of financing construction assets in terms of interest cost incurred that
otherwise could have been avoided. These debt instruments and associated
interest cost are included in the calculation of the weighted average interest
rate used for determining the capitalization rate. Upon commencement of
commercial operations of the plant or project, capitalized interest, as a
component of the total cost of the plant, is amortized over the estimated useful
life of the plant. For the three and six months ended June 30, 2002, the Company
incurred $60 million and $127 million, respectively, in interest costs, of which
$6 million and $14 million, respectively, were capitalized and included in
construction work in progress. For the three and six months ended June 30, 2001,
the Company incurred $50 million and $97 million, respectively, in interest
costs, of which $4 million and $8 million, respectively, were capitalized and
included in construction work in process. The remaining interest was expensed
during the periods.

As part of Mirant's restructuring plan announced in March of 2002, the
Company suspended construction on several projects and no longer capitalizes
interest on these projects. The construction cost related to these projects is
shown as "Investment in suspended construction" on the unaudited condensed
consolidated balance sheet.

11

B. GOODWILL AND OTHER INTANGIBLE ASSETS

During the first quarter of 2002, Mirant Americas Generation recorded $31
million of goodwill, net of $3 million of accumulated amortization when Mirant
Americas transferred its ownership interest in Mirant New England, LLC to Mirant
Americas Generation. Subsequent to June 30, 2002, there may be an impairment of
goodwill at Mirant Americas Generation as a result of the overall conditions
impacting the energy sector. Mirant Americas Generation cannot currently
estimate the potential goodwill impairment charge, if any, until completion of
its assessment of the book values of long-lived assets, estimated future cash
flows associated with such assets as well as the completion of the 2003
financial planning process. The Company expects to complete its analysis prior
to reporting its 2002 results. As of June 30, 2002, Mirant Americas Generation's
goodwill was $1.6 billion.

All of Mirant Americas Generation's other intangible assets are subject to
amortization. Other intangible assets are being amortized on a straight-line
basis over the related useful lives, up to 40 years. Effective January 1, 2002,
trading rights related to business combinations were reclassified to goodwill.
The reclassification decreased other intangible assets by $227 million, net of
accumulated amortization of $18 million. These provisions of SFAS No. 141 do not
apply to asset acquisitions, therefore trading rights resulting from asset
acquisitions continue to be recognized apart from goodwill. The trading rights
represent the Company's ability to create additional cash flows by incorporating
Mirant's trading organization activities with generation assets. In a
deregulated marketing structure, trading rights are the ability to create value
beyond that of the tangible assets through developing markets. During the three
and six months ended June 30, 2002, the Company transferred $0 and $36 million,
net of accumulated amortization of $4 million, in development rights to
construction work in process. Development rights represent the ability to expand
capacity at certain acquired generation facilities. The existing infrastructure,
including storage facilities, transmission interconnections, and fuel delivery
systems, and contractual rights acquired by Mirant provide the opportunity to
expand or repower generation facilities. This ability to repower or expand is at
significant cost savings compared to greenfield construction. Other intangible
asset amortization expense for the three and six months ended June 30, 2002 was
approximately $4 million and $8 million, respectively. The components of other
intangible assets as of June 30, 2002 and December 31, 2001 were as follows (in
millions):

Assuming no future acquisitions, dispositions or impairments of the
intangible assets, amortization expense is estimated to be $21 million for the
year ended December 31, 2002 and $17 million for each of the following four
years.

C. COMPREHENSIVE INCOME/(LOSS)

Other comprehensive income(loss) includes unrealized gains and losses on
certain derivatives that qualify as cash flow hedges. The following table sets
forth the comprehensive income for the three and six months ended June 30, 2002
and 2001 (in millions):

12

Components of accumulated other comprehensive loss consisted of the
following, net of tax (in millions):

BALANCE, DECEMBER 31, 2001 ...................................... $ (61)

Other comprehensive income for the period:
Change in fair value of derivative instruments, net of tax
effect of $(24) ......................................... 37
Reclassification to earnings, net of tax effect of $28 ........ (24)
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Other comprehensive income ...................................... 13
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BALANCE, JUNE 30, 2002 .......................................... $ (48)
======

The $48 million balance of accumulated other comprehensive loss at June 30,
2002 includes the impact of $123 million related to interest rate swap breakage
costs and $75 million of gains on commodity price management hedges.

Mirant Americas Generation estimates that $27 million ($44 million of
commodity hedge gains and $17 million of interest rate hedging losses) of net
derivative after-tax gains included in OCI as of June 30, 2002 will be
reclassified from OCI into earnings or otherwise settled within the next twelve
months as certain transactions relating to commodity contracts and interest
payments are realized.

D. DEBT

As of June 30, 2002, Mirant Americas Generation had noncurrent notes
payable outstanding of $2.57 billion, including senior notes and bank credit
facilities.

In May 2002, Mirant Americas Generation completed the exchange offer of its
$750 million senior unsecured notes issued under Rule 144A of the Securities Act
in October of 2001. The notes exchanged included $300 million of 7.2% senior
notes due 2008 and $450 million of 8.5% senior notes due 2021. The Company
received no additional proceeds from this exchange and the new notes contain the
same terms as the original notes.

At June 30, 2002, the Company had two credit facilities, each entered into
in October 1999, which consisted of a $250 million 5-year revolving credit
agreement ("Credit Facility B") for capital expenditures and general corporate
purposes and a $50 million 5-year revolving credit facility ("Credit Facility
C") for working capital needs. The commitments under Credit Facility B and
Credit Facility C remain available through October 2004. As of June 30, 2002,
the outstanding borrowings under Credit Facility B were $73 million at an
interest rate of 3.09%. As of June 30, 2002, there were no borrowings under
Credit Facility C.

In addition to other covenants and terms, each of Mirant Americas
Generation's credit facilities includes minimum debt service coverage, a maximum
leverage covenant and a minimum debt service coverage test for dividends and
distributions. As of June 30, 2002, there were no events of default under such
credit facilities.

In July 2002, the Company fully drew the commitments under its two credit
facilities. As of September 30, 2002, the outstanding borrowings under Credit
Facility B were $250 million at an interest rate of 3.31%, and the outstanding
borrowings under Credit Facility C were $50 million at an interest rate of
3.31%. The net proceeds from additional borrowings of approximately $227 million
were used primarily to repay $131 million of notes payable to affiliates. The
remaining amount is expected to be used for working capital and capital
expenditures.

13

E. FINANCIAL INSTRUMENTS

DERIVATIVE HEDGING INSTRUMENTS

Mirant Americas Generation uses derivative instruments to manage exposures
arising from changes in commodity prices and interest rates. Mirant Americas
Generation's objective for holding derivative instruments is to minimize risks
using the most effective methods to eliminate or reduce the impacts of these
exposures and to provide a measure of stability to the Company's cash flows in a
time of volatile changes in commodity prices.

Derivative gains and losses arising from cash flow hedges that are included
in OCI are reclassified into earnings in the same period as the settlement of
the underlying transaction. Amounts reclassified to operating income include
commodity net gains and losses from both taxable and non-taxable entities. Taxes
are provided on the commodity net gains and losses related to the taxable
entities within Mirant Americas Generation. After-tax derivative net gains and
losses of $(14) million and $24 million during the three and six months ended
June 30, 2002, respectively, were reclassified as follows (in millions):

The derivative gains and losses reclassified to earnings were partly offset
by realized gains and losses arising from the settlement of the underlying
physical transactions being hedged. Under SFAS No. 133, transactions may meet
the requirements for hedge treatment, but may be less than 100% effective. For
example, a derivative instrument specifying one commodity delivery location may
be used to hedge a risk at a different commodity delivery location. The price
differential between the two locations is considered the ineffective portion of
the hedge. Any changes in the fair value of the ineffective portion must be
recorded currently in earnings. During the three and six months ended June 30,
2002, gains or losses arising from hedge ineffectiveness were immaterial. At
June 30, 2002, the maximum term over which the Company is hedging exposures to
the variability of cash flows is through 2007.

COMMODITY PRICE HEDGING

Mirant Americas Generation enters into commodity financial instruments and
other contracts in order to hedge its exposure to market prices for electricity
expected to be produced by its generation assets. These contracts are primarily
physical forward sales but may also include options and other financial
instruments. Mirant Americas Generation also uses commodity financial
instruments and other contracts to hedge its exposure to market prices for
natural gas, coal and other fuels expected to be utilized by its generation
assets. These contracts primarily include futures, options and swaps. Where
these contracts are derivatives and are designated as cash flow hedges, the
gains and losses are deferred in OCI and are then recognized in earnings in the
same period as the settlement of the underlying physical transaction.

At June 30, 2002, Mirant Americas Generation had a net commodity derivative
hedging asset of approximately $103 million. The fair value of the Company's
commodity derivative hedging instruments is determined using various factors,
including closing exchange or over-the-counter market price quotations, time
value and volatility factors underlying options and contractual commitments.

At June 30, 2002, these contracts relate to periods through 2007. The net
notional amount, or net short position, of the commodity derivative hedging
instruments for natural gas, electricity, crude oil and residual fuel at June
30, 2002 was approximately 5 million equivalent megawatt-hours. Following is a
summary of the units, equivalent megawatt-hours and duration by commodity. These
notional amounts are indicative only of

14

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.

Power sales agreements and other contracts that are used to mitigate
exposure to commodity prices but which either do not meet the definition of a
derivative or are excluded under certain exceptions under SFAS No. 133 are not
included in derivative hedging instruments in the accompanying unaudited
condensed consolidated balance sheets.

INTEREST RATE HEDGING

Mirant Americas Generation'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 Americas Generation from time to time enters into
interest rate swaps in which it agrees to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference
to agreed-upon notional amounts. These swaps are designated to hedge underlying
debt obligations. For qualifying hedges, the changes in the fair value of gains
and losses of the swaps are deferred in OCI, net of tax, and the interest rate
differential is reclassified from OCI to interest expense as an adjustment over
the life of the swaps. Gains and losses resulting from the termination of
qualifying hedges prior to their stated maturities are recognized ratably over
the remaining life of the hedged instruments. At June 30, 2002, the Company was
not a party to any interest rate swaps.

RISK MANAGEMENT ACTIVITIES

Certain financial instruments that Mirant Americas Generation uses to
manage risk exposure to energy prices do not meet the hedge criteria under SFAS
No. 133. Therefore, the fair values of these financial instruments are included
in risk management assets and liabilities in the accompanying unaudited
condensed consolidated balance sheets. These financial instruments include
contracts such as forward contracts, futures contracts, option contracts and
financial swap agreements.

At June 30, 2002, the Company had contracts that related to periods through
2010. The net notional amount, or net long position, of the risk management
assets and liabilities at June 30, 2002 was approximately 1 million equivalent
megawatt-hours. Following is a summary of the units, equivalent megawatt-hours
and duration by commodity. These amounts are 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.

The fair values of Mirant Americas Generation's risk management assets and
liabilities as of June 30, 2002 are included in the following table (in
millions).

15

F. RELATED PARTY TRANSACTIONS

MID-ATLANTIC SALES AGREEMENT WITH MIRANT AMERICAS ENERGY MARKETING

Mirant Mid-Atlantic has entered into an Energy and Capacity Sales Agreement
("ECSA"), which is a fixed rate power purchase agreement with Mirant Americas
Energy Marketing. Under the terms of the ECSA, Mirant Mid-Atlantic supplies all
of its capacity and energy of its facilities to Mirant Americas Energy Marketing
for the period from August 1, 2001 through June 30, 2004, extendable through
December 31, 2004 at Mirant Americas Energy Marketing's option. For 2002 and
2003, Mirant Americas Energy Marketing has elected to keep its committed
capacity and energy purchases at 100% of the total output of the Mirant
Mid-Atlantic facilities. For 2004, Mirant Americas Energy Marketing has the
option to purchase up to 100% (in blocks of 25%) of the total output of Mirant
Mid-Atlantic's facilities, with no minimum commitment. Mirant Americas Energy
Marketing is a party to transitional power agreements with PEPCO under which
PEPCO has a similar option to purchase energy with respect to PEPCO's load
requirements.

Prior to August 1, 2001, Mirant Mid-Atlantic sold its power to Mirant
Americas Energy Marketing pursuant to a master sales agreement. Under this
agreement the price Mirant Mid-Atlantic received was based on the market price
for energy in the PJM market at the time the energy was delivered. Mirant
Mid-Atlantic also sold power to Mirant Americas Energy Marketing under fixed
price contracts.

Mirant Mid-Atlantic's affiliated companies, Mirant Potomac River and Mirant
Peaker, have also entered into fixed rate power purchase agreements with Mirant
Americas Energy Marketing, on the same terms and effective over the same period
as the agreement outlined above. Through the capital contribution agreement
between Mirant Mid-Atlantic and Mirant, the cash available from these affiliated
companies is paid as a dividend to Mirant, which in turn makes an indirect
capital contribution to Mirant Mid-Atlantic for the same amount.

At the inception date of the ECSA, the pricing of Mirant Americas Energy
Marketing's minimum committed capacity and energy purchases was favorable to
Mirant Mid-Atlantic and its affiliates when compared to estimated market rates
in the PJM for power to be delivered over the initial term of the agreement. The
estimated market rates were based on quoted market prices in the PJM, as
adjusted upwards by approximately 12% for what Mirant Mid-Atlantic believed, at
the time, to be temporary anomalies in such market prices based on forecasted
demand growth and other factors. At inception, the aggregate value to Mirant
Mid-Atlantic and its affiliates relating to the favorable pricing variance was
approximately $167 million. The amount related specifically to the Mirant
Mid-Atlantic owned or leased facilities amounted to $120 million and was
reflected as both an addition to member's equity and an offsetting capital
contribution receivable pursuant to the ECSA on the Company's consolidated
balance sheet and statement of member's equity at the inception of the
agreements. At inception, Mirant Mid-Atlantic had assumed that in 2002 Mirant
Americas Energy Marketing would elect to take the contracted minimum 75% of the
capacity and output of Mirant Mid-Atlantic's facilities. In January 2002, Mirant
Americas Energy Marketing elected to keep its committed capacity at 100% of the
total output of Mirant Mid-Atlantic's facilities. Therefore, the Company has
recorded an additional equity contribution of $53 million in the first quarter
of 2002 to reflect the favorable pricing terms related to the additional 25%
capacity and energy that Mirant Americas Energy Marketing committed to take in
2002. This adjustment is reflected in the accompanying unaudited condensed
consolidated balance sheet and statement of member's equity as both an addition
to member's interest and an offsetting capital contribution receivable pursuant
to the ECSA.

16

The contractual amounts payable under the ECSA in excess of the amount of
revenue recognized due to the favorable pricing variances were $33 million and
$61 million for the three and six months ended June 30, 2002, respectively.
These amounts are generally received in the month following the month the
related revenue is recognized and are recorded as a reduction in the capital
contribution receivable pursuant to the ECSA when received. During the six
months ended June 30, 2002, Mirant Mid-Atlantic received $53 million under the
ECSA that was applied as a reduction to the capital contribution receivable
pursuant to the ECSA. The capital contribution receivable pursuant to the ECSA
was $91 million at June 30, 2002, of which $12 million represents amounts
received subsequent to June 30, 2002 related to the revenue recognized prior to
that date and $79 million relates to the favorable pricing variance over the
remaining months of 2002.

The favorable pricing variance accounted for as a capital contribution
receivable is not adjusted for subsequent changes in energy prices. As a result,
amounts recognized as revenue under the ECSA do not necessarily reflect market
prices at the time the energy is delivered. Amounts recognized as revenue for
capacity and energy delivered under the ECSA exceeded the amounts based on
current market prices by approximately $60 million and $157 million for the
three and six months ended June 30, 2002, respectively.

On November 15, 2002, Mirant Americas Energy Marketing elected to keep its
committed capacity at 100% of the output of Mirant Mid-Atlantic's facilities for
2003. The aggregate value to the Company and its affiliates relating to the
favorable price variance from this election was approximately $170 million. The
amount allocated specifically to Mirant-Mid Atlantic's owned or leased
facilities was approximately $120 million. Accordingly, an adjustment of
approximately $120 million to member's equity and an offsetting capital
contribution receivable pursuant to the ECSA will be recorded in the fourth
quarter of 2002.

SERVICES AND ADMINISTRATION ARRANGEMENTS

The Company and its subsidiaries utilize the services of Mirant, Mirant
Services and Mirant Americas Energy Marketing. The significant arrangements with
these affiliated companies are described below. Management believes that the
amounts allocated or charged to the Company are reasonable and are substantially
similar to costs it would have incurred on a stand-alone basis. The following
table summarizes the amounts incurred under the arrangements that are recorded
in the accompanying unaudited condensed consolidated statements of income as
selling, general and administrative expenses - affiliates:

Management, Personnel and Services Agreement with Mirant Services

Mirant Services provides the Company with various management, personnel and
other services. The Company reimburses Mirant Services for amounts equal to
Mirant Services' direct costs of providing such services.

The total costs incurred under the agreement with Mirant Services for the
three and six months ended June 30, 2002 and 2001 have been included in the
accompanying unaudited condensed consolidated statements of income as follows
(in millions):

17

Services Agreements with Mirant Americas Energy Marketing

The Company, through its subsidiaries, is a party to separate services
agreements with Mirant Americas Energy Marketing. Mirant Americas Energy
Marketing is responsible for marketing and scheduling the majority of the
capacity from the Company's Mid-Atlantic, New York, California and New England
facilities. Mirant Americas Energy Marketing has no minimum purchase
requirements under these agreements, except for a commitment with Mirant
Mid-Atlantic under its ECSA which runs through the end of 2003 with an option by
Mirant Americas Energy Marketing to extend it through 2004.

Effective April 1, 2002, Mirant Americas Generation's operating
subsidiaries, except Mirant Mid-Atlantic, entered into new power sales, fuel
supply and services agreements with Mirant Americas Energy Marketing. The terms
of these new agreements are similar to the terms under the agreements in effect
during 2001 and the first quarter of 2002; however, the new agreements do not
contain a bonus for Mirant Americas Energy Marketing based on the percentage by
which revenues exceeded costs under the agreement. There was no bonus expense
during the three and six months ended June 30, 2002 and approximately $141
million during both the three and six months ended June 30, 2001. Under the new
agreements, the various operating subsidiaries of Mirant Americas Generation,
except for Mirant Mid-Atlantic, will pay Mirant Americas Energy Marketing a
fixed administrative fee of approximately $10 million for the period from April
1, 2002 through December 31, 2002. The new agreements expire December 31, 2002.

During the three and six months ended June 30, 2002, the Company incurred
approximately $6 million and $10 million, respectively, in costs under the power
sales, fuel supply and services agreements it has with Mirant Americas Energy
Marketing as compared to $5 million and $10 million, respectively, for the same
periods in 2001. These costs are included in selling, general and administrative
expenses - affiliates in the accompanying unaudited condensed consolidated
statements of income.

Effective July 1, 2002, the Company and Mirant Americas Energy Marketing
amended the services and risk management agreement with Mirant Americas Energy
Marketing with regard to the provision of the residual fuel oil requirements at
the Company's Bowline, Lovett, Canal, Chalk Point and certain other facilities.
The revised agreement is an all-requirements contract with pricing based on the
daily Platts New York Harbor mean index for residual fuel oil plus a delivery
charge. Pursuant to the revised agreement, Mirant Americas Energy Marketing will
also manage the fuel oil storage associated with these facilities. The Company
believes that its fuel price risk can be more effectively managed because the
forward fuel oil hedge instruments frequently purchased by the Company typically
settle against the New York Harbor index. The new arrangement is expected to
lower the working capital requirements for the Company, as Mirant Americas
Energy Marketing will now own the majority of fuel oil inventory. Under the new
arrangement, the generating facilities will be obligated to purchase residual
fuel oil at the index price on the day it is utilized at the facility.
Previously, these facilities ordered residual fuel oil at market prices in
advance of its use. Fuel will be purchased by the facilities as burned. In July
2002, the Company sold fuel oil inventory at its book value of approximately $15
million to Mirant Americas Energy Marketing.

Administration Arrangement with Mirant Services

Beginning in May 2002, Mirant Services implemented a fixed administration
charge to various subsidiaries of Mirant, including Mirant Americas Generation
and Mirant Mid-Atlantic, which serves to reimburse Mirant Services for various
indirect administrative services performed on the subsidiaries' behalf,
including, but not limited to, information technology services, regulatory
support, consulting, legal and accounting and financial services. The fixed
charge is approximately $2.7 million per month and the initial term of the
agreement expires on December 31, 2002. For the three months ended June 30,
2002, the Company incurred approximately $5.4 million in costs under this
arrangement which are included in selling, general and administrative expense in
the accompanying unaudited condensed consolidated statements of income. Prior to

18

May 2002, similar administrative services were charged by Mirant Services to the
Company based on incremental costs directly attributable to the Company.

NOTES PAYABLE TO AND NOTES RECEIVABLE FROM AFFILIATES

Mirant Peaker and Mirant Potomac River borrowed funds from Mirant
Mid-Atlantic in order to finance their respective acquisitions of generation
assets. At both June 30, 2002 and December 31, 2001, notes receivable from these
two affiliates consisted of the following (in millions):

Mirant Potomac River and Mirant Peaker have a capital contribution
agreement with Mirant in which they make quarterly distributions to Mirant of
all cash available after taking into consideration projected cash requirements,
including mandatory debt service, prepayments permitted under the terms of the
notes payable and maintenance reserves.

Under the capital contribution agreement, the owner lessors, the holders of
the lessor notes, and the indenture trustee of Mirant Mid-Atlantic's lease
arrangements (Note G) have the ability to enforce the payment terms of the notes
receivable.

Principal is due on maturity with interest due semiannually, in arrears, on
June 30 and December 30. Any amount not paid when due bears interest thereafter
at 12%. Mirant Potomac River and Mirant Peaker may prepay up to $5 million and
$3 million per year, respectively. Interest earned by Mirant Mid-Atlantic from
Mirant Potomac and Mirant Peaker was $6 million for both the three months ended
June 30, 2002 and 2001 and $11 million for both the six months ended June 30,
2002 and 2001.

Under Mirant's cash management program, the available cash of the Company's
subsidiaries was loaned to Mirant on a daily basis and kept in a Mirant account.
Participation in Mirant's cash management program exposed such subsidiaries to
Mirant credit risk as unsecured creditors in the full amount of cash held by
Mirant pursuant to the cash management loan agreements. Repayment by Mirant of
any advances under the cash management program was subordinated to the repayment
of the senior obligations of Mirant. Furthermore, Mirant Americas Energy
Marketing makes substantially all of the Company's sales on the Company's behalf
and collects all cash receipts from sales made on the Company's behalf. As such,
the Company is also subject to the risk of collection from Mirant Americas
Energy Marketing of substantially all of the Company's outstanding accounts
receivables at any point in time.

At June 30, 2002, the subsidiaries of the Company had made net advances to
Mirant under the cash management agreements totaling $168 million (consisting of
approximately $235 million in advances to Mirant recorded as a notes receivable
from affiliates on the unaudited condensed consolidated balance sheet and
approximately $67 million in advances from Mirant recorded as a notes payable to
affiliates on the unaudited condensed consolidated balance sheet). These
advances were due on demand and accrued interest at various rates. Effective
February 1, 2002, the interest rate payable on advances from Mirant Mid-Atlantic
was changed to LIBOR plus 180 basis points from an interest rate based on the
actual return obtained by Mirant on its short-term investments.

Effective October 21, 2002, Mirant Mid-Atlantic discontinued its
involvement in Mirant's cash management program and commenced the operation of
bank deposit and money market accounts in Mirant Mid-Atlantic's own name. As of
October 21, 2002, the net principal balance outstanding under the cash
management program of $83 million was received by the Company from Mirant.
Similarly, effective December 19, 2002, the remaining subsidiaries of the
Company that participated in Mirant's cash management program discontinued their
participation and commenced the operation of bank deposit and money market
accounts in the Company's

19

own name. As of December 19, 2002, the net balance outstanding under the cash
management program of approximately $90 million was received by the Company from
Mirant.

CONTRIBUTION OF MIRANT NEW ENGLAND, LLC TO MIRANT AMERICAS GENERATION

Effective January 1, 2002, Mirant Americas transferred its ownership
interest in Mirant New England, LLC (a wholly owned subsidiary of Mirant
Americas) to Mirant Americas Generation. The transfer was accounted for as cash
and non-cash capital contributions of approximately $7 million and $270 million,
respectively to Mirant Americas Generation in the first quarter of 2002. The
assets and liabilities of Mirant New England, LLC are reflected in the
accompanying unaudited condensed consolidated financial statements at their
historical cost.

At January 1, 2002, Mirant New England, LLC's significant assets were $7
million of cash, a $255 million note receivable from Mirant Americas, Inc.,
interest receivable from Mirant Americas, Inc. of $37 million, goodwill of $28
million and other current assets of $28 million. The note receivable is payable
on demand and bears interest at 6%, which is payable monthly. Mirant New
England, LLC's liabilities consisted primarily of accounts payable of $49
million, deferred tax liabilities of $25 million and other current liabilities
of $10 million.

MIRANT NEW ENGLAND, LLC GUARANTEE

Mirant New England, LLC is required to sell electricity at fixed prices to
Cambridge and Commonwealth in order for them to meet their supply requirements
to certain retail customers. In April 2002, Mirant Corporation issued a
guarantee in the amount of $188 million for any obligations Mirant New England,
LLC may incur under its Wholesale Transition Service Agreement with Cambridge
Electric Light Company and Commonwealth Electric Company. Both the guarantee and
the agreement expire in February 2005.

CAPITAL CONTRIBUTION OF NOTES PAYABLE TO AFFILIATE

During 2002, Mirant Americas made cash capital contributions of $40 million
to certain operating subsidiaries of the Company. In addition, Mirant Americas
made noncash capital contributions to the Company of $217 million of notes
payable by certain operating subsidiaries of the Company to Mirant Americas, and
in turn, the Company made subsequent capital contributions to the respective
intermediate and ultimate operating subsidiaries that were obligated with
respect to such notes payable. These capital contributions are reflected in the
accompanying unaudited condensed consolidated financial statements.

CAPITAL CONTRIBUTION AGREEMENT

Under a capital contribution agreement, Mirant Potomac River and Mirant
Peaker, which are both wholly owned subsidiaries of Mirant, make distributions
to Mirant at least once per quarter, if funds are available. Distributions are
equal to all cash available after taking into account projected cash
requirements, including mandatory debt service, prepayments permitted under the
Mirant Potomac River and Mirant Peaker notes, and maintenance reserves, as
reasonably determined by Mirant. Mirant will contribute or cause these amounts
to be contributed to Mirant Mid-Atlantic. Total capital contributions received
by Mirant Mid-Atlantic under this agreement totaled $24 million for the six
months ended June 30, 2002, as compared to $15 million for the same period in
2001.

RESTRUCTURING CHARGE

As a result of changing market conditions including constrained access to
capital markets attributable primarily to the Enron bankruptcy and Moody's
December 2001 downgrade of Mirant's credit rating, Mirant adopted a plan to
restructure its operations by exiting certain business operations, canceling and
suspending planned power plant developments, closing business development
offices and severing employees. During the

20

three and six months ended June 30, 2002, the Company recorded pre-tax
restructuring charges of $6 million and $10 million, respectively, for severance
costs and costs related to suspending planned power plant developments.

G. COMMITMENTS AND CONTINGENT MATTERS

LITIGATION AND OTHER CONTINGENCIES

With respect to each of the following matters, the Company cannot currently
determine the outcome of the proceedings or the amounts of any potential losses
from such proceedings.

Western Power Markets Investigations: Several governmental entities have
launched investigations into the western power markets, including activities by
several Mirant Americas Generation entities. Those governmental entities include
the FERC, the U.S. Department of Justice, the CPUC, the California Senate, the
California State Auditor, California's Electricity Oversight Board, the General
Accounting Office of the U.S. Congress, the San Joaquin District Attorney and
the Attorney General's offices of Washington, Oregon and California. These
investigations, some of which are civil and some criminal, have resulted in the
issuance of civil investigative demands, subpoenas, document requests, requests
for admission, and interrogatories directed to several Mirant Americas
Generation entities. In addition, the CPUC has had personnel onsite on a
periodic basis at Mirant Americas Generation's California generating facilities
since December 2000. Each of these civil investigative demands, subpoenas,
document requests, requests for admission, and interrogatories, as well as the
plant visits, could impose significant compliance costs on Mirant Americas
Generation and its subsidiaries. Despite the various measures taken to protect
the confidentiality of sensitive information provided to these agencies, there
remains a risk of governmental disclosure of the confidential, proprietary and
trade secret information obtained by these agencies throughout this process.

Additionally, on February 13, 2002, the FERC directed its staff to
undertake a fact-finding investigation into whether any entity manipulated
short-term prices in electric energy or natural gas markets in the West or
otherwise exercised undue influence over wholesale prices in the West, for the
period January 1, 2000 forward. Information from this investigation could be
used in any existing or future complaints before the FERC relevant to the
matters being investigated, including the California refund proceeding described
below in Western Power Markets Price Mitigation and Refund Proceedings. On
August 13, 2002, the FERC Staff issued an initial report regarding its
preliminary findings. The report recommended that the FERC initiate separate
proceedings to further investigate specific instances of inappropriate conduct
by several companies, none of which are affiliated with Mirant Americas
Generation. In addition, the report recommended that the natural gas indices
used for purposes of calculating potential refunds in the California refund case
be replaced with indices at a different location plus a transportation
component.

The initial report of the FERC Staff described its investigation of the
effect on spot electric prices in the West of trading strategies employed by
Enron subsidiaries and other entities but could not quantify the exact economic
impact. The FERC Staff will continue to investigate whether the questionable
trading strategies had an indirect effect on other products sold in the West,
such as long-term contracts. The staff report also recommended imposition of
certain limitations on entities with market-based rate authority designed to
prohibit trading strategies based on the submission of false information or the
omission of material information to the FERC, independent system operators, or
other market participants. The staff report is a preliminary report, and the
staff continues to investigate a variety of matters. The Company cannot predict
the impact of the initial staff report on any FERC action that might be taken in
this investigation docket or any other ongoing proceeding at the FERC.

Subsequent to the issuance of the FERC Staff's report, some companies that
sell natural gas at wholesale have announced that certain of their employees did
not correctly report transactional information to the trade press that publish
natural gas spot price data. Mirant Americas Generation cannot at this time
predict what effect, if any, such misreporting of information to the trade press
will have upon the use of spot price data

21

published by the trade press in the ongoing proceeding before FERC or upon other
transactions to which Mirant Americas Generation is a party that utilize such
published spot price data as part of the price terms. The FERC Staff has
requested information from various market participants, including Mirant
Americas Generation, regarding the reporting of transactional information to the
trade press.

In September 2002, the CPUC issued a report that purported to show that on
days in the fall of 2000 through the spring of 2001 during which the CAISO had
to declare a system emergency requiring interruption of interruptible load or
imposition of rolling blackouts, Mirant Americas Generation and the other four
out of state purchasers of generation in California had generating capacity that
either was not operated or was out of service due to an outage and that could
have avoided the problem if operated. The report identified two specific days on
which Mirant Americas Generation allegedly had capacity available that was not
used or that was on outage and that if operated could have avoided the system
emergency. Mirant has publicly responded to the report pointing out a number of
material inaccuracies and errors that it believes cause the CPUC's conclusions
to be wrong with respect to Mirant Americas Generation.

In November 2002, Mirant received a subpoena from the Department of Justice
acting through the United States Attorney's office for the Northern District of
California requesting information about its activities and those of its
subsidiaries, including Mirant Americas Generation entities, for the period
since January 1, 1998. The subpoena requests information related to the
California energy markets and other topics, including the reporting of
inaccurate information to the trade press that publish natural gas or
electricity spot price data. The subpoena was issued as part of a grand jury
investigation. Mirant Americas Generation intends to cooperate fully with the
United States Attorney's office in this investigation.

California Attorney General Litigation: On March 11, 2002, the California
Attorney General filed a civil suit against Mirant and several of its wholly
owned subsidiaries (including Mirant Americas Generation entities). The lawsuit
alleges that between 1998 and 2001 the companies effectively double-sold their
capacity by selling both ancillary services and energy from the same generating
units, such that if called upon, the companies would have been unable to perform
their contingent obligations under the ancillary services contracts. The
California Attorney General claims that this alleged behavior violated both the
tariff of the CAISO and, more importantly, the California Unfair Competition
Act. The suit seeks both restitution and penalties in unspecified amounts.
Mirant removed this suit from the state court in which it was originally filed
to the United States District Court for the Northern District of California.
This suit has been consolidated for joint administration with the California
Attorney General suits filed on April 9, 2002, and April 15, 2002. Mirant has
filed a motion seeking dismissal of the claims.

On March 20, 2002, the California Attorney General filed a complaint with
the FERC against certain power marketers and their affiliates, including Mirant
and several of its wholly owned subsidiaries (including Mirant Americas
Generation entities), alleging that market-based sales of energy made by such
generators were in violation of the Federal Power Act because such transactions
were not appropriately filed with the FERC. The complaint requests, among other
things, refunds for any prior short-term sales of energy that are found to not
be just and reasonable along with interest on any such refunded amounts.

The FERC has dismissed the California Attorney General's complaint and
denied the California Attorney General's request for rehearing. The California
Attorney General has appealed that dismissal to the United States Court of
Appeals for the Ninth Circuit.

On April 9, 2002, the California Attorney General filed a second civil suit
against Mirant and several of its wholly owned subsidiaries (including Mirant
Americas Generation entities). The lawsuit alleges that the companies violated
the California Unfair Competition Act by failing to properly file their rates,
prices, and charges with the FERC as required by the Federal Power Act, and by
charging unjust and unreasonable prices in violation of the Federal Power Act.
The complaint seeks unspecified penalties, costs and attorney fees. Mirant
removed this suit from the state court in which it was originally filed to the
United States District Court for the Northern District of California. This suit
has been consolidated for joint administration with the

22

California Attorney General suits filed on March 11, 2002 and April 15, 2002.
Mirant has filed a motion seeking dismissal of the claims.

On April 15, 2002, the California Attorney General filed a third civil
lawsuit against Mirant and several of its wholly owned subsidiaries (including
Mirant Americas Generation entities) in the United States District Court for the
Northern District of California. The lawsuit alleges that the acquisition and
possession of the Potrero and Delta power plants owned by subsidiaries of Mirant
Americas Generation has substantially lessened, and will continue to
substantially lessen, competition in violation of the Clayton Act and the
California Unfair Competition Act. The lawsuit seeks equitable remedies in the
form of divestiture of the plants and injunctive relief, as well as monetary
damages in unspecified amounts to include disgorgement of profits, restitution,
treble damages, statutory civil penalties and attorney fees. This suit has been
consolidated for joint administration with the California Attorney General suits
filed on March 11, 2002 and April 9, 2002. Mirant has filed a motion seeking
dismissal of the claims.

Defaults by SCE and Pacific Gas and Electric, and the Bankruptcies of Pacific
Gas and Electric and the PX: On January 16, 2001, SCE suspended indefinitely
certain payment obligations to the PX and to the CAISO. Pacific Gas and Electric
similarly suspended payments. The failure of SCE and Pacific Gas and Electric to
make these payments prevented the PX and CAISO from making payments to Mirant
Americas Generation. As of June 30, 2002, the total amount owed to Mirant
Americas Generation by the CAISO and the PX as a result of these defaults was
$302 million. During 2000 and 2001, Mirant Americas Generation took provisions
in relation to these and other uncertainties arising from the California power
markets (discussed elsewhere in this Note) of $229 million pre-tax.

On March 9, 2001, as a result of the nonpayments of SCE and Pacific Gas and
Electric, the PX ceased operation and filed for bankruptcy protection. The PX's
ability to repay its debt is directly dependent on the extent to which it
receives payment from Pacific Gas and Electric and SCE and on the outcome of its
litigation with the California State government.

On April 6, 2001, Pacific Gas and Electric filed a voluntary petition under
Chapter 11 of the Bankruptcy Code. It is not known at this time what effect the
bankruptcy filing will have on the ultimate recovery of amounts owed to Mirant
Americas Generation. Pacific Gas and Electric and the CPUC have each filed
proposed plans of reorganization for Pacific Gas and Electric, and each of these
competing proposed plans contemplates payment of one hundred percent of all
approved claims. Mirant Americas Generation does not expect any payment to be
made to it for power sold by it into the PX or CAISO markets and repurchased by
Pacific Gas and Electric until the FERC issues a final ruling in the Western
Power Markets Price Mitigation and Refund Proceedings.

On March 1, 2002, SCE paid approximately $870 million to the PX in
satisfaction of all claims of or through the PX and the CAISO through
approximately January 18, 2001. The PX is not expected to make any payment to
Mirant Americas Generation until the bankruptcy judge so orders, and the judge
is not expected to rule until after the FERC issues a final ruling in the refund
proceeding. Mirant Americas Generation cannot now determine the timing of such
payment or the extent to which such payment would satisfy its claims.

Reliability-Must-Run Agreements: Mirant Americas Generation's subsidiaries
acquired generation assets from Pacific Gas and Electric in April 1999, subject
to reliability-must-run ("RMR") agreements. These agreements allow the CAISO,
under certain conditions, to require certain of Mirant Americas Generation's
subsidiaries to run the acquired generation assets in order to support the
reliability of the California electric transmission system. Under the RMR
agreements, Mirant Americas Generation recovers a portion of the annual fixed
revenue requirement (the "Annual Requirement") of the generation assets through
fixed charges to the CAISO, and Mirant Americas Generation depends on revenues
from sales of the output of the units at market prices to recover the remainder.
The portion of the Annual Requirement that can be recovered through fixed
charges to the CAISO is subject to the FERC's review and approval both as to the
percentage and the amount of the Annual Requirement to which the percentage is
applied.

23

Mirant Americas Generation assumed the RMR agreements from Pacific Gas and
Electric prior to the outcome of a FERC proceeding initiated in October 1997
(the "Fixed Portion Proceeding"). The Fixed Portion Proceeding will determine
the percentage to be paid to Mirant Americas Generation by the CAISO under the
RMR agreements of a $159 million Annual Requirement that was in effect through
December 31, 2001, as well as any future Annual Requirement in effect through
the final disposition of the Fixed Portion Proceeding. This $159 million Annual
Requirement was negotiated as part of a prior settlement of a FERC rate
proceeding. In the Fixed Portion Proceeding, Mirant Americas Generation
contended that the amount paid by the CAISO should reflect an allocation based
on the CAISO's right to call on the units (as defined by the RMR agreements) and
the CAISO's actual calls, which would have resulted in the CAISO paying
approximately $120 million, or 75% of the settled Annual Requirement in effect
through December 31, 2001. Mirant Americas Generation currently collects 50% of
the Annual Requirement from the CAISO, which charges are subject to refund once
the FERC determines the percentage of the Annual Requirement that should be
recovered by Mirant Americas Generation from the CAISO. The decision in the
Fixed Portion Proceeding will affect the amount the CAISO will pay to Mirant
Americas Generation for the period from June 1, 1999 through the final
disposition of the Fixed Portion Proceeding, including any appeals. On June 7,
2000, the administrative law judge ("ALJ") in the Fixed Portion Proceeding
issued an initial decision providing for the CAISO to pay approximately 3% of
the Annual Requirement to Mirant Americas Generation. On July 7, 2000, Mirant
Americas Generation appealed the ALJ's decision and the matter is pending at the
FERC.

In the Fall of 2001, Mirant Americas Generation filed with the FERC to
increase the Annual Requirement for the generating assets subject to the RMR
agreements from the $159 million amount that had been in effect to $199 million.
That increase took effect January 1, 2002, subject to refund of any amount that
the FERC may determine in a proceeding (the "Annual Requirement Proceeding")
separate from the Fixed Portion Proceeding to be in excess of just and
reasonable rates. The CAISO and Pacific Gas and Electric, which buys from the
CAISO the electricity sold to the CAISO by Mirant Americas Generation under the
RMR agreements, have contested the increase in the Annual Requirement at the
FERC. On November 22, 2002, the parties filed with the FERC for its approval a
settlement agreement regarding the increase in the Annual Requirement that would
set the Annual Requirement through 2004. If approved by the FERC, the settlement
agreement will result in refunds being made by Mirant Americas Generation of a
portion of the Annual Requirement currently being collected by Mirant Americas
Generation for 2002. Mirant Americas Generation expects that the amount of such
refunds would not materially exceed the amounts currently being reserved by
Mirant Americas Generation with respect to the Annual Requirement issue. The
percentage that ultimately results from the Fixed Portion Proceeding, discussed
above, will be applied to the Annual Requirement for 2002 in the Annual
Requirement Proceeding.

Mirant Americas Generation has also exercised its right under the RMR
agreements to recover 100% of the Annual Requirement specific to the Potrero
plant through fixed charges to the CAISO beginning January 1, 2002. The Annual
Requirement of the Potrero plant constitutes $35 million of the total $199
million Annual Requirement currently in effect for 2002, subject to refund as
subsequently determined in the Annual Requirement Proceeding. As part of their
challenge to the increase in the Annual Requirement in the Annual Requirement
Proceeding, discussed above, the CAISO and Pacific Gas and Electric have
contested the increase in the Annual Requirement for the Potrero plant. This
issue is also part of the settlement agreement that was filed on November 22,
2002 with the FERC for its approval. By exercising this right under the RMR
agreement, Mirant Americas Generating has limited its potential refund liability
resulting from the Fixed Portion Proceeding related to the Potrero plant, if
any, to the period June 1, 1999 through December 31, 2001.

On October 1, 2002, the CAISO notified Mirant Americas Generation that it
was electing to receive service under the RMR agreements during 2003 from Contra
Costa Units 4-7, Pittsburg Units 5-7, and Potrero Units 3- 6. On November 26,
2002, Mirant Americas Generating exercised its right under the RMR agreements to
recover 100% of the Annual Requirement specific to all of its plants and units
subject to RMR agreements, except for the Pittsburg Unit 5, through fixed
charges to the CAISO, beginning January 1, 2003. The result of this election is
that any refund amounts that might be owed by Mirant upon resolution of the
Fixed Portion

24

Proceeding would be limited to the period June 1, 1999 through December 31, 2002
for the units subject to the RMR agreements other than Pittsburg Unit 5 and the
Potrero plant, as discussed above.

If Mirant Americas Generation is unsuccessful in its appeal of the ALJ's
decision in the Fixed Portion Proceeding, it will be required to refund certain
amounts of the Annual Requirement paid by the CAISO for the period from June 1,
1999. For the Potrero plant the period for which such refunds would be owed
would run through December 31, 2001, for Mirant Americas Generation's other
California plants except Pittsburg Unit 5 the refund period would run through
December 31, 2002, and for Pittsburg Unit 5 the refund period would run through
the final disposition of the appeal. Mirant Americas Generation estimates that
the amount of such refunds, together with the refunds potentially resulting from
resolution of the Annual Requirement Proceeding described above, as of June 30,
2002, would have been approximately $267 million. This amount does not include
interest that may be payable in the event of a refund. If resolution of the
Fixed Portion Proceeding and the Annual Requirement Proceeding results in
refunds of that magnitude, no effect on net income for the periods under review
would result as adequate reserves have been recorded.

Western Power Markets Price Mitigation and Refund Proceedings: On June 19, 2001,
the FERC issued an order that provides for price mitigation in all hours in
which power reserves fall below 7%. During these emergency hours, the FERC will
use a formula based on the marginal costs of the highest cost generator called
on to run to determine the overall market clearing price. This price mitigation
includes all spot market sales in markets throughout the Western System
Coordinating Council. This price mitigation was implemented on June 20, 2001 and
was in effect until July 11, 2002, at which time the formula was replaced by a
hard cap of $91.87/MWh, which was in place until October 30, 2002. The FERC
requires that all public and non-public utilities which own or control
non-hydroelectric generation in California must offer power in the CAISO's spot
markets, to the extent the output is not scheduled for delivery in the hour.

On July 25, 2001, the FERC issued an order requiring hearings to determine
the amount of any refunds and amounts owed for sales made to the CAISO or PX
from October 2, 2000 through June 20, 2001. Parties have appealed the FERC's
June 19, 2001 and July 25, 2001 orders to the United States Court of Appeals for
the Ninth Circuit, seeking review of various issues, including expanding the
potential refund date to include periods prior to October 2, 2000. Any such
expansion of the refund period could significantly increase Mirant's (including
Mirant Americas Generation's) refund exposure in this proceeding. In response to
an order by the Ninth Circuit allowing the California parties to include
additional evidence in the record regarding purported market manipulation, on
September 6, 2002, the California parties filed a motion for additional
discovery in the refund case on the issue of purported market manipulation. On
November 20, 2002, the FERC issued an order permitting additional discovery in
this proceeding commencing on the date of the order and continuing through
February 28, 2003. Following that period for additional discovery, the parties
to the proceeding will be allowed to introduce additional evidence for the
FERC's consideration in determining the refund issues.

In the July 25, 2001 order, the FERC also ordered that a preliminary
evidentiary proceeding be held to develop a factual record on whether there have
been unjust and unreasonable charges for spot market bilateral sales in the
Pacific Northwest from December 25, 2000 through June 20, 2001. In the
proceeding, the DWR filed to recover certain refunds from parties, including one
of Mirant's subsidiaries, for bilateral sales of electricity to the DWR at the
California/Oregon border, claiming that such sales took place in the Pacific
Northwest. The refunds sought from a subsidiary of Mirant totaled approximately
$90 million. A FERC ALJ concluded a preliminary evidentiary hearing related to
possible refunds for power sales in the Pacific Northwest. In a preliminary
ruling issued September 24, 2001, the ALJ indicated that she would order no
refunds because the complainants had failed to prove any exercise of market
power or that any prices were unjust or unreasonable. The FERC may accept or
reject this preliminary ruling and the FERC's decision may itself be appealed.
On May 13, 2002 and May 24, 2002, the City of Tacoma, Washington and the City of
Seattle, Washington, respectively, filed to reopen the evidentiary record in
this proceeding as a result of the contents of three internal Enron Power
Marketing, Inc. memoranda that had been obtained and publicly released by the
FERC as part of its continuing investigation. On December 19, 2002, the FERC
granted in part the motion to reopen the record, allowing parties the
opportunity to conduct additional discovery through February 28, 2003 on claims
of purported market manipulation. Upon the completion of that period for
additional discovery, parties can submit directly to the FERC any additional
evidence and proposed findings of fact that they wish the FERC to consider in
evaluating the ALJ's initial decision. The Company cannot predict the outcome of
these proceedings. If the Mirant subsidiary was required to refund such amounts,
the Company would be required to

25

refund amounts previously received pursuant to sales made on the behalf of
Mirant Americas Generation entities during the refund periods. In addition, the
Company would be owed amounts for purchases made on the behalf of Mirant
Americas Generation entities from other sellers in the Pacific Northwest.

On August 13, 2002, the FERC in the California refund proceeding requested
comments from parties on whether the gas indices in the existing formula for
calculating refunds should be replaced with different gas indices (plus
transportation costs) as recommended by the FERC Staff in its report (as
described in Western Power Markets Investigations above). If the FERC adopts the
staff's recommended gas formula for purposes of calculating refunds, it would
increase Mirant Americas Generation's refund exposure in the California refund
case.

On December 12, 2002, the ALJ in the California refund proceeding issued an
initial decision providing for a method to implement the FERC's mitigated market
clearing price methodology set forth in its July 25, 2001 order and a
preliminary determination of what refunds are owed under that methodology. In
addition, the ALJ determined the preliminary amounts currently owed to each
supplier in the proceeding. The ALJ determined that the initial amounts owed to
Mirant and its subsidiaries (including Mirant Americas Generation entities) from
the CAISO and the PX totaled approximately $292 million and that Mirant and its
subsidiaries (including Mirant Americas Generation entities) owed the CAISO and
the PX refunds totaling approximately $170 million. Mirant Americas Generation
cannot at this time determine what portion of these amounts pertains to
subsidiaries of Mirant that are not Mirant Americas Generation entities. The ALJ
recommended that any refunds owed by a supplier to the CAISO and the PX should
be offset against any outstanding amounts owed to that supplier by the CAISO and
the PX. Under this approach, Mirant and its subsidiaries (including Mirant
Americas Generation entities) would be owed net amounts totaling approximately
$122 million from the CAISO and the PX. The ALJ stressed that the monetary
amounts are not final since they do not reflect the final mitigated market
clearing prices, interest that would be applied under the FERC's regulations,
offsets for emission costs or the effect of certain findings made by the ALJ in
the initial decision. Mirant Americas Generation believes that the amount
identified by the ALJ as being owed to Mirant (including Mirant Americas
Generation entities) by the PX fails to reflect an adjustment for January 2001
that the ALJ concluded elsewhere in his initial decision should be applied. If
that adjustment is applied, the amount owed Mirant (including Mirant Americas
Generation entities) by the PX, and the net amount owed Mirant (including Mirant
Americas Generation entities) by the CAISO and the PX after taking into account
the proposed refunds, would increase by approximately $36 million. The amount
owed to Mirant and its subsidiaries (including Mirant Americas Generation
entities) from either the CAISO or the PX or any refund that Mirant and its
subsidiaries (including Mirant Americas Generation entities) might be determined
to owe to the CAISO or the PX may also be affected materially by the FERC's
resolution of the issues described above related to which gas indices should be
used in calculating the mitigated market clearing prices, allegations of market
manipulation, and whether the refund period should include periods prior to
October 2, 2000. Mirant and its subsidiaries (including Mirant Americas
Generation entities) have until January 13, 2003 to appeal the ALJ's initial
decision to the FERC, at which time the FERC may accept, reject or modify any
and all parts of that decision.

On July 17, 2002, the FERC issued an order adopting new market design rules
("Market Design 2002") applicable to the California wholesale power markets as
well as price caps and other requirements that are applicable to all West-wide
wholesale power markets. Key elements of the Market Design 2002 that were
supposed to be in place on October 1, 2002 included an increase in the amount
sellers of electricity at wholesale may bid to the CAISO from $91.87/MWh to
$250/MWh on bids into the California real-time energy and ancillary services
markets, and a FERC imposed maximum price of $250/MWh for all spot market sales
in the western markets. The FERC delayed implementation of the increase in the
price cap until October 30, 2002. Sellers are still required to offer all
available uncommitted capacity for sale in the region. The FERC also put in
place, effective October 31, 2002, procedures in the CAISO market that will
mitigate prices whenever a supplier bids greater than established thresholds.

DWR Power Purchases: On January 17, 2001, the Governor of California issued an
emergency proclamation giving the DWR authority to enter into arrangements to
purchase power in order to mitigate the effects of

26

electrical shortages in the state. The DWR began purchasing power under that
authority the next day. On February 1, 2001, the Governor of California signed
Assembly Bill No. 1X authorizing the DWR to purchase power in the wholesale
markets to supply retail consumers in California on a long-term basis. The Bill
became effective immediately upon its execution by the Governor. The Bill did
not, however, address the payment of amounts owed for power previously supplied
to the CAISO or PX for purchase by SCE and Pacific Gas and Electric. The CAISO
and PX have not paid the full amounts owed to Mirant Americas Generation's
subsidiaries for power delivered to the CAISO and PX in prior months and are
expected to pay less than the full amount owed on further obligations coming due
in the future for power provided to the CAISO for sales that were not arranged
by the DWR. The ability of the DWR to make future payments is subject to the DWR
having a continued source of funding, whether from legislative or other
emergency appropriations, from a bond issuance or from amounts collected from
SCE and Pacific Gas and Electric for deliveries to their customers. On May 22,
2001, Mirant Americas Energy Marketing entered into a 19-month agreement, on
behalf of Mirant Americas Generation, with the DWR to provide the State of
California with approximately 500 MW of electricity during peak hours through
December 31, 2002. Mirant Americas Generation bears the risk of nonpayment by
the CAISO, the PX or the DWR, including the May 22, 2001 agreement.

On February 25, 2002, the CPUC and the California Electricity Oversight
Board ("EOB") filed separate complaints at the FERC against certain sellers of
energy under long-term agreements with the California DWR, including the
contract entered into by Mirant Americas Energy Marketing with the DWR dated May
22, 2001, alleging that the terms of these contracts are unjust and unreasonable
and that the contracts should be abrogated or the prices under the contracts
should be reduced. In particular, the EOB claims that the contracts should be
voidable at the option of the State of California. The complaints allege that
the DWR was forced to enter into these long-term contracts due to dysfunctions
in the California market and the alleged market power of the sellers. Mirant
Americas Generation bears the risk of any abrogation of or revision to the terms
of the May 22, 2001 contract between Mirant Americas Energy Marketing and the
DWR.

Two lawsuits, the McClintock suit and the Millar suit, have also been filed
that seek relief for contracts between the California DWR and certain marketers
of electricity, including the May 22, 2001 contract between DWR and Mirant
Americas Energy Marketing, that allegedly contain unfair terms. The plaintiffs
allege that the terms of the contracts are unjust and unreasonable and that the
DWR was forced to enter into these long-term contracts due to dysfunctions in
the California market and alleged market power of the sellers. Plaintiffs seek,
among other things, a declaration that the contracts are void and unenforceable,
enjoinment of the enforcement and performance of those contracts and restitution
for funds allegedly obtained wrongfully under the contracts.

The Millar suit has been consolidated for purposes of pretrial proceedings
with the six rate payer suits described below in "California Rate Payer
Litigation." The McClintock suit has been stayed pending a resolution of a
separate action challenging the long term contracts that were entered into by
the DWR, which suit does not include Mirant Americas Generation or any of its
subsidiaries as parties.

California Rate Payer Litigation: A total of seventeen lawsuits have been filed
asserting claims under California law based on allegations that certain owners
of electric generation facilities in California and energy marketers, including
Mirant Americas Generation subsidiaries, engaged in various unlawful and
anti-competitive acts that served to manipulate wholesale power markets and
inflate wholesale electricity prices in California. One of the suits has been
voluntarily dismissed, and the other sixteen suits remain pending.

Six of those suits were filed between November 27, 2000 and May 2, 2001 in
various California Superior Courts. Three of these suits seek class action
status, while two of the suits are brought on behalf of all citizens of
California. One lawsuit alleges that, as a result of the defendants' conduct,
customers paid approximately $4 billion more for electricity than they otherwise
would have and seeks an award of treble damages as well as other injunctive and
equitable relief. One lawsuit also names certain of Mirant's officers
individually as defendants and alleges that the state had to spend more than $6
billion purchasing electricity and that if an injunction is not issued, the
state will be required to spend more than $150 million per day purchasing

27

electricity. The other suits likewise seek treble damages and equitable relief.
One such suit names Mirant Corporation itself as a defendant.

These six suits (the "Six Coordinated Suits") were coordinated for purposes
of pretrial proceedings before the Superior Court for San Diego County. In the
Spring of 2002, two of the defendants filed crossclaims against other market
participants who were not parties to the actions. Some of those crossclaim
defendants then removed the Six Coordinated Suits to the United States District
Court for the Southern District of California. The plaintiffs filed a motion
seeking to have the actions remanded to the California state court, and the
defendants filed motions seeking to have the claims dismissed. On December 13,
2002, the United States District Court for the Southern District of California
granted the plaintiff's motion seeking to have the six cases remanded to the
California state court. That decision remanding the Six Coordinated Suits to the
California state courts has been appealed to the United States Court of Appeals
for the Ninth Circuit by the defendants that filed the crossclaims. Those
defendants have requested the district court to stay its remand decision until
the Ninth Circuit can act on their appeal, but the district court has not yet
ruled upon that request. If the district court's remand order is not stayed,
then the Six Coordinated Suits will be remanded to the Superior Court for San
Diego County and will go forward before that court while the appeal is pending.

Seven additional rate payer lawsuits were filed between April 23, 2002 and
May 24, 2002 alleging that certain owners of electric generation facilities in
California, as well as certain energy marketers, including Mirant Americas
Generation entities, engaged in various unlawful and fraudulent business acts
that served to manipulate wholesale markets and inflate wholesale electricity
prices in California. The suits are related to events in the California
wholesale electricity market occurring over the last three years. Each of the
complaints alleges violation of California's Unfair Competition Act. One
complaint also alleges violation of California's anti-trust statute. Each of the
plaintiffs seeks class action status for their respective case. The actions
seek, among other things, restitution, compensatory and general damages, and to
enjoin the defendants from engaging in illegal conduct. These suits were
initially filed in California state courts by the plaintiffs and removed to
United States district courts.

These seven cases have been consolidated for purposes of pretrial
proceedings with the Six Coordinated Suits described above. Whether these cases
will remain in the United States District Court for the Southern District of
California or be remanded to the California state courts in light of the
district court's decision on December 13, 2002 to remand the Six Coordinated
Suits cannot be determined at this time.

On June 3, 2002, a lawsuit, Hansen v. Dynegy Power Marketing, et al., was
filed in the Superior Court for the County of San Francisco against various
owners of electric generation facilities in California, including Mirant
Americas Generation entities, alleging substantially similar claims to the
ratepayer actions described above. The plaintiff sought class action status for
the lawsuit and purported to represent residential ratepayers located in various
public utility districts in the State of Washington. The complaint sought, among
other things, injunctive relief, disgorgement of profits, restitution and treble
damages. This action was dismissed by the plaintiff on July 11, 2002.

On July 15, 2002, an additional rate payer lawsuit, Public Utility District
No. 1 of Snohomish Co. v. Dynegy Power Marketing, et al., was filed in the
United States District Court for the Central District of California against
various owners of electric generation facilities in California, including Mirant
Americas Generation entities, by Public Utility District No. 1 of Snohomish
County, which is a municipal corporation in the state of Washington that
provides electric and water utility service. The plaintiff public utility
district alleges that defendants violated California's antitrust statute by
conspiring to raise wholesale power prices, injuring plaintiff through higher
power purchase costs. The plaintiff also alleges that defendants acted both
unfairly and unlawfully in violation of California's Unfair Competition Act
through various unlawful and anticompetitive acts, including the purportedly
wrongful acquisition of plants, engagement in "Enron-style" trading, and
withholding power from the market. The plaintiff seeks restitution, disgorgement
of profits, injunctive relief, treble damages, and attorney's fees. The federal
judicial panel on multidistrict litigation has ordered the Snohomish suit to be
transferred to the United States District Court for the Southern District of
California and

28

consolidated for purposes of pretrial proceedings with the Six Coordinated
Suits. The defendants have filed motions seeking to have the claims dismissed.

On October 18, 2002, another rate payer lawsuit, Kurtz v. Duke Energy
Trading et al., was filed in the Superior Court for the County of Los Angeles.
The Kurtz suit alleges that certain owners of electric generation facilities in
California, as well as certain energy marketers, including Mirant Americas
Generation entities, engaged in various unlawful and fraudulent business acts
that served to manipulate wholesale markets and inflate wholesale electricity
prices in California since early 1998 in violation of California's Unfair
Competition Act. The Kurtz suit contains allegations of misconduct by the
defendants, including the Mirant Americas Generation entities, that are similar
to the allegations made in the previously filed rate payer suits, in the suits
filed by the California Attorney General on March 11, 2002, and April 15, 2002,
and in the suits filed challenging long-term agreements with the California DWR.
The plaintiff seeks to represent a class consisting of all persons and entities
that purchased energy that was sold into California by the defendants through
sales to the CAISO, the PX or the DWR. The action seeks, among other things,
restitution, compensatory and general damages, and to enjoin the defendants from
engaging in illegal conduct.

On November 20, 2002, a class action suit, Bustamante v. The McGraw-Hill
Companies, Inc., et al., was filed in the Superior Court for the County of Los
Angeles against certain publishers of index prices for natural gas, gas
distribution or marketing companies, owners of electric generation facilities in
California and energy marketers, including Mirant Americas Generation entities.
The plaintiff in the Bustamante suit alleges that the defendants violated
California Penal Code sections 182 and 395 and California's Unfair Competition
Act by reporting false information about natural gas transactions to the
defendants that published index prices for natural gas causing the prices paid
by Californians for natural gas and for electricity to be artificially inflated.
The suit seeks, among other things, disgorgement of profits, restitution, and
compensatory and punitive damages.

Enron Bankruptcy Proceedings: Since December 2, 2001, Enron and a number of its
subsidiaries have filed for bankruptcy. As of June 30, 2002, the total amount
owed to Mirant Americas Generation by Enron was approximately $55 million. Based
on a reserve for potential bad debts recorded in 2001, the Company does not
expect the outcome of the bankruptcy proceeding to have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.

State Line: On July 28, 1998, an explosion occurred at the Company's State Line
plant causing a fire and substantial damage to the plant. The precise cause of
the explosion and fire has not been determined. Thus far, seven personal injury
lawsuits have been filed against Mirant Americas Generation, five of which were
filed in Cook County, Illinois. Mirant Americas Generation has settled the
claims of five of these plaintiffs. The terms of the settlements involve cash
payments to the plaintiffs, with such payments being fully covered by insurance.
The outcome of these proceedings cannot now be determined and an estimated range
of loss cannot be made; however, the Company has significant insurance coverage
for losses occurring as a result of the explosion.

PEPCO Asbestos Litigation: On December 19, 2000, Mirant Americas Generation
entities, together with affiliates Mirant Potomac River and Mirant Peaker and
with lessors in a lease transaction, purchased from PEPCO four
electric generation facilities in the Washington D.C. area. As a part of the
purchase, and with certain qualifications, Mirant Americas Generation entities
agreed to indemnify PEPCO for certain liabilities arising in lawsuits filed
after December 19, 2000, even if they relate to incidents occurring prior to
that date. Since the acquisition, PEPCO has notified Mirant Americas Generation
of approximately 50 asbestos cases, distributed among three Maryland
jurisdictions (Prince George's County, Baltimore City and Baltimore County), as
to which it claims a right of indemnity. In each of these claims, the
plaintiff's allegation of liability on the part of PEPCO is primarily grounded
on the theory of premises liability. Each plaintiff seeks a multi-million dollar
award. It is expected that additional such lawsuits will be filed in the future;
however, the number of such additional lawsuits cannot now be determined. Five
suits have been set for trial in 2003, while the remainder have not yet been
scheduled for trial. The Company believes that substantial defenses to liability
exist and that, even if found liable, plaintiffs' damages claims are greatly
exaggerated. Based on information and relevant circumstances known at this time,
the Company does not believe these suits

29

will have a material adverse effect on its financial position. An unfavorable
decision, however, could have a material adverse effect on results of operations
in the particular year in which a decision is rendered.

Environmental Information Requests: Along with several other electric generators
which own facilities in New York, in October 1999 Mirant New York received an
information request from the State of New York concerning the air quality
control implications of various repairs and maintenance activities at its Lovett
facility. Mirant New York responded fully to this request and provided all of
the information requested by the State. The State of New York issued notices of
violation to some of the utilities being investigated. The State issued a notice
of violation to the previous owner of Plant Lovett, Orange and Rockland
Utilities, alleging violations associated with the operation of Plant Lovett
prior to the acquisition of the plant by Mirant New York. To date, Mirant New
York has not received a notice of violation. Mirant New York disagrees with the
allegations of violations in the notice of violation issued to the previous
owner. The notice of violation does not specify corrective actions, which the
State of New York may require. If a violation is determined to have occurred at
Plant Lovett, Mirant New York may be responsible for the cost of purchasing and
installing emission control equipment, the cost of which may be material. Under
the sales agreement with Orange and Rockland Utilities for Plant Lovett, Orange
and Rockland Utilities is responsible for fines and penalties arising from any
violation associated with historical operations, but the state or federal
government could seek fines and penalties from Mirant New York, the cost of
which may be material. Mirant New York is engaged in discussions with the State
to explore a resolution of this matter.

In January 2001, the EPA, Region 3 issued a request for information to
Mirant Mid-Atlantic concerning the air permitting implications of past repair
and maintenance activities at its Chalk Point, Dickerson and Morgantown plants
in Maryland. The requested information concerns the period of operations that
predates Mirant Mid-Atlantic's ownership of the plants. Mirant Mid-Atlantic has
responded fully to this request. If a violation is determined to have occurred
at any of the plants, Mirant Mid-Atlantic may be responsible for the cost of
purchasing and installing emission control equipment, the cost of which may be
material. Under the sales agreement with PEPCO for those plants, PEPCO is
responsible for fines and penalties arising from any violations associated with
historical operations prior to the Mirant Mid-Atlantic's acquisition of the
plants, but the state or federal government could seek fines and penalties from
Mirant Mid-Atlantic, the cost of which may be material.

The Company cannot provide assurance that lawsuits or other administrative
actions against its power plants will not be filed or taken in the future. If an
action is filed against the Company or its power plants and it is judged to not
be in compliance, this could require substantial expenditures to bring the
Company's power plants into compliance and have a material adverse effect on its
financial condition, cash flows and results of operations.

New York Property Tax: On January 29, 2002, Mirant New York won a favorable
judgement against the Town of Haverstraw, New York and the Haverstraw Stoney
Point School District with regards to the Town's and School District's failure
to perform under a previously agreed to property tax agreement. Under the terms
of the judgement, Mirant New York is entitled to receive approximately $32
million from the Town and the School District related to over assessed property
taxes. The judgement has been appealed by both the Town and the School District.
The Company believes it will ultimately prevail in this matter; however, due to
the uncertainty related to the ultimate outcome of this matter, the Company has
not recorded the potential income in the accompanying condensed consolidated
financial statements.

In addition to the matters discussed above, Mirant Americas Generation
entities are parties to legal proceedings arising in the ordinary course of
business. In the opinion of management, the disposition of these matters will
not have a material adverse impact on the Company's consolidated results of
operations, cash flows or financial position. The Company recognizes estimated
losses from contingencies when information available indicates that a loss is
probable and the amount of the loss is reasonably estimable in accordance with
SFAS No. 5, "Accounting for Contingencies."

30

FUEL SUPPLY AGREEMENTS

In April 2002, Mirant Mid-Atlantic entered into a long-term fuel purchase
agreement. The fuel supplier will convert coal feedstock received at the
Company's Morgantown facility into a synthetic fuel. Under the terms of the
agreement, Mirant Mid-Atlantic is required to purchase a minimum of 2.4 million
tons of fuel per annum through December 2007. Minimum purchase commitments
became effective upon the commencement of the synthetic fuel plant operation at
the Morgantown facility in July 2002. The purchase price of the fuel will vary
with the delivered cost of the coal feedstock. Based on current coal prices, it
is expected that the annual purchase commitment will be approximately $100
million. At July 1, 2002, total estimated minimum commitments under the
agreement were $546 million. In July 2002, Mirant Mid-Atlantic sold its coal
inventory at the Morgantown facility to the synthetic fuel supplier for
approximately $10 million.

The Company has also entered into a fuel supply agreement with an
independent third party to provide a minimum of 90% of the coal burned at one of
the New York facilities through 2007. The Company has entered into a related
transportation agreement for that coal through March of 2004.

Substantially all of the Company's fuel requirements are fulfilled through
these two agreements and its arrangements with Mirant Americas Energy Marketing
for fuel supply (Note F).

This supplier concentration could adversely affect the Company's financial
position or results of operations should these parties default under the
provisions of the agreements.

Mirant Americas Generation has total minimum commitments under the fuel
purchase and transportation agreements noted above of $657 million at June 30,
2002.

CONSTRUCTION RELATED COMMITMENTS

The Company has entered into various turbine and other construction related
commitments related to brownfield developments at its various generation
facility sites. At June 30, 2002, these construction related commitments totaled
approximately $270 million.

LONG-TERM SERVICE AGREEMENTS

The Company has entered into long-term service agreements for the
maintenance and repair by third parties of many of its combustion-turbine
generating plants. Generally, these agreements may be terminated at little or no
cost in the event that the shipment of the associated turbine is canceled. As of
June 30, 2002, the maximum termination amounts for long-term service agreements
associated with completed and shipped turbines were approximately $194 million.
As of June 30,2002, the total estimated commitments for long-term service
agreements associated with turbines already completed and shipped were
approximately $194 million. These commitments are payable over the course of
each agreement's terms. The terms are projected to range from ten to twenty
years. Estimates for future commitments for long-term service agreements are
based on the stated payment terms in the contracts at the time of execution.
These payments are subject to an annual inflationary adjustment.

As a result of the turbine cancellations as part of Mirant's restructuring,
the long-term service agreements associated with the canceled turbines will also
be canceled. However, as stated above, canceling the long-term service
agreements will result in little or no termination costs to the Company. Mirant
Americas Generation does not intend to cancel long-term service agreements
associated with turbines that have already shipped. Consequently, the Company's
restructuring should not have an impact on the long-term service agreement
commitments disclosed above.

31

OPERATING LEASES

On December 19, 2000, in conjunction with the purchase of the PEPCO assets,
the Company, through Mirant Mid-Atlantic, entered into multiple sale-leaseback
transactions totaling $1.5 billion relating to the Dickerson and the Morgantown
baseload units and associated property. The terms of each lease vary between
28.5 and 33.75 years. Mirant Mid-Atlantic is accounting for these leases as
operating leases. The Company's expenses associated with the commitments under
the Dickerson and Morgantown operating leases totaled approximately $24 million
for both the three months ended June 30, 2002 and 2001 and $48 million for both
the six months ended June 30, 2002 and 2001. As of June 30, 2002, the total
notional minimum lease payments for the remaining life of the leases was
approximately $2.9 billion. The lease agreements contain covenants that restrict
Mirant Mid-Atlantic's ability to, among other things, make dividend
distributions, incur indebtedness, or sublease the facilities.

Mirant Mid-Atlantic is not permitted to make any dividend distributions
unless, at the time of such distribution, each of the following conditions is
satisfied:

o Mirant Mid-Atlantic's fixed charge coverage ratio for the most
recently ended four full fiscal quarters equals at least:

(1) 1.7 to 1.0; or

(2) 1.6 to 1.0, 1.45 to 1.0, 1.3 to 1.0 or 1.2 to 1.0 if, as of the
last day of the most recently completed fiscal quarter, Mirant Mid-Atlantic
and its designated subsidiaries have entered into power sales agreements
(meeting certain criteria, including investment grade ratings criteria)
covering, in the aggregate, at least 25%, 50%, 75% or 100%, respectively of
the projected total consolidated operating revenue for the consecutive
period of eight full fiscal quarters following that date; and

o the projected fixed charge coverage ratio (determined on a pro forma
basis after giving effect to any such dividend) for each of the two
following periods of four fiscal quarters commencing with the fiscal
quarter in which the restricted payment is proposed to be made equals
at least:

(1) 1.7 to 1.0; or

(2) 1.6 to 1.0, 1.45 to 1.0, 1.3 to 1.0 or 1.2 to 1.0, if, as of the
last day of the most recently completed fiscal quarter, Mirant Mid-Atlantic
and its designated subsidiaries have entered into power sales agreements
(meeting certain criteria, including investment grade ratings criteria)
covering, in the aggregate, at least 25%, 50%, 75% or 100%, respectively,
of the projected total consolidated operating revenue for the consecutive
period of eight full fiscal quarters following that date; and

o no significant lease default or event of default has occurred and is
continuing.

In accordance with the terms of the lease documentation, Mirant
Mid-Atlantic calculates the projected fixed charge coverage ratio based on
projections prepared in good faith based upon assumptions consistent in all
material respects with the relevant contracts and agreements, historical
operations, and Mirant Mid-Atlantic's good faith projections of future revenues
and projections of operating and maintenance expenses in light of then existing
or reasonably expected regulatory and market environments in the markets in
which the leased facilities or other assets owned by it will be operated. Mirant
Mid-Atlantic also assumes that there will be no early redemption or prepayment
of Indebtedness, and that any Indebtedness which matures within such projected
periods will be refinanced on reasonable terms. The reclassification of the
capital contribution received pursuant to of the ECSA will reduce Mirant
Mid-Atlantic's fixed charge coverage ratios calculated for purposes of
determining its ability to make dividend payments.

These leases are part of a leveraged lease transaction. Three series of
certificates were issued and sold pursuant to a Rule 144A offering by Mirant
Mid-Atlantic. These certificates are interests in pass through trusts that hold
the lessor notes issued by the owner lessors. Mirant Mid-Atlantic pays rent to
an indenture trustee, who in turn makes payments of principal and interest to
the pass through trusts and any remaining balance to

32

the owner lessors for the benefit of the owner participants. According to the
registration rights agreement dated December 18, 2000, Mirant Mid-Atlantic must
maintain its status as a reporting company under the Exchange Act. Mirant
Mid-Atlantic was also obliged to consummate an exchange offer pursuant to an
effective registration statement under the Securities Act. On July 6, 2001,
Mirant Mid-Atlantic's registration statement became effective and the exchange
offer was completed in August 2001.

Mirant Mid-Atlantic has an option to renew the lease for a period that
would cover up to 75% of the economic useful life of the facility, as measured
near the end of the lease term. However, the extended term of the lease will
always be less than 75% of the revised economic useful life of the facility.

Upon an event of default by Mirant Mid-Atlantic, the lessors are entitled
to a termination value payment as defined in the agreements which, in general,
decreases over time. At June 30, 2002, the termination value was approximately
$1.5 billion. Upon expiration of the original lease term, the termination value
will be $300 million.

The Company has additional commitments under operating leases with various
terms and expiration dates. Expenses associated with these additional operating
leases totaled approximately $1 million for both the three and six month periods
ended June 30, 2002 and 2001. The total notional minimum lease payments for the
remaining life of these leases as of June 30, 2002 was approximately $5 million.

H. DISCONTINUED OPERATIONS

STATE LINE

In February 2002, the Company announced that it had entered into an
agreement to sell its State Line generating facility for $181 million plus an
adjustment for working capital. The sale was completed in June 2002. This asset
was sold at approximately book value based on the value of the asset at the date
of sale.

Mirant Americas Generation's results of operations from State Line for the
three and six months ended June 30, 2002 and 2001 were as follows (in millions):

The table below presents the components of State Line's balance sheet
accounts, classified as current assets and liabilities held for sale as of
December 31, 2001 (in millions):

33

CURRENT ASSETS:
Accounts and notes receivable .................... $ 12
Inventory ........................................ 4
Other ............................................ 0
Property, plant and equipment .................... 175
Intangibles ...................................... 9
------
Total current assets held for sale ............ $ 200
======
CURRENT LIABILITIES:
Taxes and other payables ......................... $ 17
Deferred taxes ................................... 15
Other long-term debt ............................. 80
------
Total current liabilities held for sale ....... $ 112
======

I. SUBSEQUENT EVENTS

Sale of Neenah

In July 2002, the Company announced that it had entered into an agreement
to sell its Neenah generating facility ("Neenah") in the state of Wisconsin to
Alliant Energy Resources, Inc. for approximately $109 million. The sale of the
Company's investment in Neenah will be near book value. The sale is expected to
close in the first quarter of 2003. The table below presents the components of
Neenah's balance sheet accounts as of June 30, 2002 (in millions):

ASSETS:
Accounts receivable - customers ........ $ 2
Prepayments ............................ 2
Materials and supplies ................. 1
Property, plant and equipment .......... 100
------
Total assets ........................ $ 105
======
LIABILITIES:
Accounts payable ....................... 3
------
Total liabilities ................... $ 3
======

34

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The Board of Directors and Members
Mirant Americas Generation, LLC:

We have reviewed the accompanying condensed consolidated balance sheet of Mirant
Americas Generation, LLC (a wholly-owned indirect subsidiary of Mirant
Corporation) and subsidiaries as of June 30, 2002, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 2002, and the related statements of member's equity and cash
flows for the six-month period ended June 30, 2002. These condensed consolidated
financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquires of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modification that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.

The consolidated financial statements of the Company as of and for the year
ended December 31, 2001, were not audited by us and, accordingly, we do not
express an opinion or any form of assurance on the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2001.
Additionally, the condensed consolidated statements of income for the
three-month and six-month periods ended June 30, 2001, and the related statement
of cash flows for the six-month period ended June 30, 2001, were not reviewed or
audited by us and, accordingly, we do not express an opinion or any form of
assurance on them.

/s/ KPMG LLP
Atlanta, Georgia
December 19, 2002

35

ITEM 2.
MIRANT AMERICAS GENERATION, LLC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW

We are an indirect wholly owned subsidiary of Mirant, formed on May 12,
1999, for the purpose of financing, acquiring, owning, operating and maintaining
our electric power generating facilities and any others that we may acquire. As
of September 30, 2002, we own or control approximately 12,000 MW of electricity
generation capacity, all of which is located in the United States.

Our generating facilities were either acquired in competitive auctions or
were developed as greenfield construction projects. Our geographically
diversified portfolio of generating assets utilizes a variety of technologies,
fuel types and fuel sources and sells its output directly or through Mirant
Americas Energy Marketing. Our customers are located near key metropolitan load
centers of the United States.

In December 2002, the Company commenced operation of its expansion project
at its Kendall facility located in Cambridge, Massachusetts.

In November 2002, Mirant Americas Energy Marketing exercised its option
under the ECSA to purchase 100% of Mirant Mid-Atlantic's energy and capacity in
2003. At the time the option was exercised, the market price for energy to be
delivered in 2003 was less than the price received for revenue recorded under
the ECSA in 2002, after the reduction for the favorable pricing variance.
Accordingly, revenues recorded in 2003, after the reduction for the favorable
pricing variance, will be less than the revenue recorded in 2002. In the event
that Mirant Americas Energy Marketing exercises its option for 2004 and similar
market conditions exist at that time, revenue recorded in 2004, after the
reduction for the favorable pricing variance, will also be less than in 2002.
The cash flows received under the ECSA are unaffected by changes in market
price. However, the reclassification of the capital contribution received
pursuant to the ECSA (Note A) will reduce Mirant Mid-Atlantic's fixed charge
coverage ratios calculated for purposes of determining its ability to make
dividend payments. Because Mirant Mid-Atlantic's ability to pay dividends could
be restricted by this change, Mirant Americas Energy Marketing may not exercise
its option to renew the ECSA for future periods. To the extent that the option
to renew the ECSA is not exercised, Mirant Mid-Atlantic would likely sell its
energy at market prices in the PJM. Over the term of the ECSA, PJM market prices
have tended to be lower than the prices received from Mirant Americas Energy
Marketing under the ECSA. If current market conditions persist, the inability to
enter into contracts with margins similar to those realized in 2002 when the
ECSA expires would also be expected to adversely impact our future operating
results.

Our operating revenues and expenses are primarily driven by the operations
of our controlled subsidiaries, which are consolidated for accounting purposes.
We expect substantially all of our revenues to be derived from sales of
capacity, energy and ancillary services from our generating facilities into spot
and forward markets and fixed price agreements. The market for wholesale
electric energy and energy services in the United States is largely deregulated.
Our revenues and results of operations will depend, in part, upon prevailing
market prices for energy, capacity and ancillary services in these competitive
markets.

Historically, we have obtained cash from operations, borrowings under
credit facilities, borrowings from issuances of senior debt and borrowings and
capital contributions from Mirant. Because our operations are conducted
primarily by our subsidiaries, our cash flows are dependent upon cash dividends,
distributions and other transfers from our subsidiaries, including Mirant
Mid-Atlantic. As noted above, the reclassification of the capital contribution
received pursuant to the ECSA will reduce the fixed charge coverage ratios
calculated for purposes of determining Mirant Mid-Atlantic's ability to make
dividend payments.

36

Most of our operating subsidiaries have entered into fuel supply, energy
services, risk management and power marketing agreements with our affiliate
Mirant Americas Energy Marketing. As part of the services and risk management
agreements, Mirant Americas Energy Marketing provides fuel and procures
emissions credits necessary for the operation of our generating facilities, the
cost of which is charged to our subsidiaries based upon actual costs incurred by
Mirant Americas Energy Marketing.

Our costs are primarily derived from the ongoing operations and maintenance
of our generating facilities and capital expenditures needed to ensure their
continued reliable, safe and environmentally compliant operation.

Our Mid-Atlantic, New York, and New England facilities are subject to the
northeast ozone transport region NOx allowance cap and trade regulatory program.
As part of that regulatory program, the various state regulations allocate NOx
emission allowances to covered facilities, and if the allocated allowances are
not sufficient to cover actual NOx emissions, facilities must purchase NOx
allowances from other facilities. We presently have to purchase additional NOx
allowances beyond our allocation to cover our emissions. We expect that the
number of allowances allocated to our plants will decrease in 2003 and that the
market price may increase significantly in 2003 and in subsequent years for NOx
allowances we need to purchase under the regulatory program.

As a result of the PEPCO acquisition, several owner lessors each own
undivided interests in the Dickerson and Morgantown generating assets. We,
through Mirant Mid-Atlantic have entered into long-term leases for each of these
undivided interests. The leases were part of the leveraged lease transactions
that raised approximately $1.5 billion, which was used by the owner lessors to
acquire the undivided interests in the lease facilities and to pay the lease
transaction expenses.

The subsidiaries of the institutional investors who hold the membership
interests in the owner lessors are called owner participants. Equity funding by
the owner participants plus transaction expenses paid by the owner participants
totals $299 million. The issuance and sale of pass through certificates raised
the remaining $1.224 billion.

Pass through certificates in the aggregate principal amount of $1.224
billion were issued on December 18, 2000. The pass through certificates are not
our, or Mirant Mid-Atlantic's, direct obligations. Each pass through certificate
represents a fractional undivided interest in one of three pass through trusts
formed pursuant to three separate pass through trust agreements between us and
State Street Bank and Trust Company of Connecticut, National Association, as
pass through trustee under each pass through trust agreement.

The property of the pass through trusts consists of lessor notes. The
lessor notes were issued in connection with eleven separate leveraged lease
transactions with respect to each lessor's undivided interest in either (i) the
Dickerson electric generating baseload units 1, 2, and 3 and related assets or
(ii) the Morgantown electric generating baseload units 1 and 2 and related
assets. The lessor notes issued by an owner lessor are secured by that owner
lessor's undivided interest in the lease facilities and its rights under the
related lease and other financing documents.

The lessor notes issued by each owner lessor were issued in three series.
Each pass through trust purchased one series of the lessor notes issued by each
owner lessor so that all of the lessor notes held in each pass through trust
have an interest rate corresponding to the interest rate of the pass through
certificates, and a final maturity on or before the final expected distribution
date applicable to the certificates issued by that pass through trust. Principal
and interest paid on the lessor notes held in each pass through trust is
distributed by each pass through trust to its certificate holders on June 30 and
December 30 of each year.

Although neither the certificates nor the lessor notes are obligations of,
or guaranteed by us or Mirant Mid-Atlantic, the amount unconditionally payable
by Mirant Mid-Atlantic under the leases of the leased facilities will be at
least sufficient to pay in full when due all payments of principal, premium, if
any, and interest on the lessor notes. The lease obligations of Mirant
Mid-Atlantic are not obligations of, or guaranteed by, us or our indirect
parent, Mirant, or any of its other affiliates. However, Mirant is currently
providing the credit support to fund the rent payment reserve required in
connection with this lease transaction.

The lease payment obligations of Mirant mid-Atlantic are senior unsecured
obligations and rank equally in right of payment with all of its other existing
and future senior unsecured obligations. Under the terms of the lease, Mirant
mid-Atlantic is responsible for the payment of rent to the indenture trustee,
which in turn makes payments of principal and interest to the pass through trust
and any remaining balance to the owner lessors for the benefit of the owner
participants.

37

CHANGES IN SENIOR MANAGEMENT

In October 2002, the Company announced that at the end of October 2002,
Randy Harrison, Senior Vice President - East Region and Manager of the Company,
would be retiring and that Gary Morsches, Senior Vice President - West Region
and Manager of the Company, would be leaving the Company.

On December 4, 2002, Mirant announced that Harvey Wagner would be joining
Mirant as its Executive Vice President and Chief Financial Officer beginning
January 1, 2003. Mr. Wagner will be replacing Mirant's current Chief Financial
Officer, Raymond Hill. Mr. Hill is a Manager of the Company and will be
leaving the Company effective December 31, 2002.

ACCOUNTING ERRORS AND REAUDIT OF HISTORICAL FINANCIAL STATEMENTS

As disclosed in a press release dated July 30, 2002, Mirant Corporation,
Mirant Americas Generation's ultimate parent company, identified several
accounting issues related to its risk management and marketing operations. These
issues related to Mirant Americas Energy Marketing, which is an affiliate of the
Company and a separate subsidiary of Mirant. Corrections have been reflected in
Mirant's amended first quarter Form 10-Q/A and Mirant's second quarter Form 10-Q
both filed on November 7, 2002. The resolution of these items did not impact the
Company's financial statements.

As a result of the identification of the initial accounting issues
described in the July 30, 2002 press release, Mirant retained the law firm of
King & Spalding with the support of a nationally recognized accounting firm to
conduct an independent review and to report to Mirant's Audit Committee. King &
Spalding has concluded that there was no fraudulent conduct on the part of any
Mirant employee or officer related to the identified accounting issues.

In the course of resolving Mirant's previously announced accounting issues
discussed above, and the concurrent review of Mirant's interim financial
statements, errors affecting the Company's historical financial statements were
identified. At March 31, 2002, revenue related to Mirant Mid-Atlantic's ECSA
with Mirant Americas Energy Marketing (an affiliate), was reduced by $11
million, accounts receivable from Mirant Americas Energy Marketing was reduced
by $5 million, and capital contribution receivable pursuant to the ECSA (a
member's equity account) was reduced by $6 million. The previously issued
financial statements did not take into account Mirant Americas Energy
Marketing's election under the ECSA in January 2002 to increase the energy
purchased from Mirant Mid-Atlantic to 100% of the capacity of its facilities
from the contractual minimum of 75%, as described in Note F. In addition, the
Company recorded an addition to member's equity, with a corresponding capital
contribution receivable pursuant to the ECSA, of $53 million, to reflect the
excess of the fixed price of the capacity and energy in the ECSA over the
projected market prices when Mirant Mid-Atlantic became committed to provide the
additional energy to Mirant Americas Energy Marketing.

The statement of cash flows for the three and six months ended June 30,
2002 has also been restated to reflect amounts received under the ECSA
attributable to the capital contribution receivable as a financing activity,
rather than an operating activity.

Errors were also identified that relate to the Company's financial
statements for the three months ended June 30, 2002 which were publicly released
but not filed with the SEC. For the three and six months ended June 30, 2002,
revenue related to the Company's ECSA with Mirant Americas Energy Marketing was
reduced by $12 million and $23 million, respectively with offsetting decreases
in the capital contribution receivable pursuant to the ECSA and accounts
receivable.

In addition, for the three months ended June 30, 2002, the Company
decreased net income by an additional approximately $5 million for net
adjustments related primarily to a decrease of revenue of approximately $2
million, an increase of restructuring charges of approximately $5 million, and a
decrease of interest expense of approximately $2 million.

38

A summary of these adjustments that affect net income is as follows (in
millions):

A summary comparison of the previously filed and restated first quarter
2002 unaudited condensed consolidated statement of income and the previously
released unaudited condensed consolidated statements of income for the three and
six month periods ended June 30, 2002 follows (in millions):

A summary comparison of the previously reported and restated first quarter
2002 unaudited condensed consolidated statement of cash flows follows (in
millions)

Mirant's independent auditors assessed Mirant's internal controls of its
North American energy marketing and risk management operations as part of the
interim review of Mirant for the second quarter. The independent auditors
provided Mirant with detailed process improvement recommendations to address
internal control deficiencies in existence at June 30, 2002. The independent
auditors have advised Mirant's Audit Committee that these internal control
deficiencies constitute reportable conditions and, collectively, a material
weakness as defined in Statement on Auditing Standards No. 60. Mirant has
assigned the highest priority to the short-term and long-term correction of
these internal control deficiencies. Mirant has discussed its proposed actions
with its Audit Committee and its independent auditors. Mirant Americas Energy
Marketing personnel prepare certain entries to the Company's accounts, however,
there has been no indication that control deficiencies present in Mirant's North
American energy marketing and risk management operations directly impact the
Company or its financial statements. Mirant has implemented corrective actions
to mitigate the risk that these deficiencies could lead to material
misstatements in Mirant's or the Company's current financial statements. In
addition, the Company has performed additional procedures to enable the
completion of the independent auditors' review of the Company's interim
financial statements despite the presence of the control weaknesses at Mirant
noted above.

The Company has engaged KPMG to reaudit the Company's 2000 and 2001
financial statements for two primary reasons: (i) to address accounting errors
identified during reviews of Mirant's previously disclosed accounting issues;
and (ii) to enable its independent auditors to provide an opinion on the
Company's 2000 and 2001 financial statements in accordance with the new
accounting standard SFAS No. 144. The effects, if any, of such reaudit on the
Company's financial statements cannot be determined. In addition, we are not
currently able to assess the impact on the Company of the reaudit of Mirant and
the accounting issues at Mirant Americas Energy Marketing in light of the
business relationships among the Company, Mirant Mid-Atlantic, Mirant Americas
Energy Marketing and Mirant Corporation.

39

RESULTS OF OPERATIONS

Results of operations for the three and six months ended June 30, 2002
include revenue under a power sales agreement with the California DWR and under
Mirant Mid-Atlantic's ECSA agreement with Mirant Americas Energy Marketing. Our
power sales agreement with the California DWR expires in December 2002 and is
above current market prices. In addition, revenue recognized under Mirant
Mid-Atlantic's ECSA agreement with Mirant Americas Energy Marketing was based on
forward price curves at the inception of the ECSA and at the time of Mirant
Americas Energy Marketing's election to keep its committed capacity at 100% of
the total output of the Company's facilities for 2002, which resulted in higher
revenues and margins than are currently available based on current market
prices. The revenue recognized under the ECSA is not adjusted for subsequent
changes in market prices. As a result, amounts recognized as revenue under the
ECSA do not necessarily reflect market prices at the time the energy is
delivered. Amounts recognized as revenue for capacity and energy delivered under
the ECSA exceeded the amounts based on current market prices by approximately
$60 million and $157 million for the three and six months ended June 30, 2002.

SECOND QUARTER 2002 vs. SECOND QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001

Significant income statement items appropriate for discussion include the
following:

Operating revenues. Our operating revenues for the three and six months
ended June 30, 2002 were $667 million and $1.38 billion, respectively, a
decrease of $736 million and $1.45 billion from the same periods in 2001. These
decreases were primarily due to decreased prices for power and reduced
generation particularly in the western United States during the first six months
of 2002. In addition, revenues from our Mid-Atlantic operations were lower in
2002 primarily due to decreased prices for our energy under Mirant
Mid-Atlantic's ECSA and the termination in August 2001 of fixed price contracts
with Mirant Americas Energy Marketing. This was partially offset by operating
revenues related to Mirant New England, LLC which was contributed to us by our
parent in January 2002.

Cost of fuel, electricity and other products. Our cost of fuel, electricity
and other products for the three and six months ended June 30, 2002 were $405
million and $791 million, respectively, compared to $995 million and $2.0
billion for the same periods in 2001. These decreases of $590 million and $1.22
billion were primarily attributable to decreased generation and lower prices for
natural gas particularly in the western United States during the first six
months of 2002. This was offset somewhat by costs related to Mirant New England,
LLC which was contributed to us in January 2002.

Gross Margin. Our gross margins for the three and six months ended June 30,
2002 were $262 million and $592 million, respectively, representing 39% and 43%,
respectively, of revenues, compared to $408 million and $822 million,
representing 29% and 29%, respectively, for the same periods in 2001. These
decreases of $146 million and $230 million were primarily due to decreased
prices for power and reduced generation particularly

40

in the western United States. However, these increases in gross margin as a
percent of revenues of 10% and 14%, were primarily related to Mirant
Mid-Atlantic and the termination in August 2001 of the prior contracts with
Mirant Americas Energy Marketing under which the Company received current market
prices for energy delivered and the commencement of the ECSA and decreases in
prior power purchases in the western United States.

Gross margin for the three and six months ended June 30, 2002 includes
contracts which resulted in higher margins in 2001 than are currently available
based on forward price curves. Since June 30, 2002, we have seen lower liquidity
in forward markets for both gas and electricity. If these market conditions
persist, they would put additional adverse pressure on future margins.

Other operating expenses. Our other operating expenses for the three and
six months ended June 30, 2002 were $168 million and $335 million, respectively,
compared to $336 million and $599 million for the same periods in 2001. The
following factors were responsible for the decreases in other operating
expenses:

o Maintenance expenses for the three and six months ended June 30, 2002 were
$18 million and $42 million, respectively, compared to $30 million and $50
million for the same periods in 2001. These decreases of $12 million and $8
million were primarily due to higher maintenance requirements in 2001 from
our plants in the western United States as a result of the increased demand
on those plants during those periods.

o Depreciation and amortization expenses for the three and six months ended
June 30, 2002 were $27 million and $57 million, respectively, compared to
$42 million and $81 million for the same periods in 2001. These decreases
of $15 million and $24 million were primarily a result of the elimination
of goodwill amortization from the implementation of SFAS No. 142.

o Selling, general and administrative expenses for the three and six months
ended June 30, 2002 were $41 million and $75 million, respectively,
compared to $184 million and $306 million for the same periods in 2001.
These decreases of $143 million and $231 million resulted primarily from
provisions taken in the first quarter of 2001 related to uncertainties in
the California power markets and costs incurred during the second quarter
of 2001 under the net revenue sharing arrangements with Mirant Americas
Energy Marketing.

o Taxes other than income taxes for the three and six months ended June 30,
2002 were $24 million and $47 million, respectively, compared to $30
million and $49 million for the same periods in 2001. These decreases of $6
million and $2 million were primarily due to reductions in property taxes
in New York and partially offset by increases in property taxes in
Maryland. In addition, in the second quarter of 2001, we recorded an
adjustment to reflect actual tax assessments primarily related to the
period from 1999 through June 2001.

Other Expense, net. Other expense, net for the three and six months ended
June 30, 2002 was $31 million and $75 million, respectively, compared to $36
million and $68 million for the same periods in 2001. The changes for the
six-month period were primarily due to increased interest expense due to higher
outstanding debt, higher interest rates, and amortization of interest rate swaps
and partially offset by additional interest income from our cash management
program with Mirant.

Provision for income taxes. The provision for income taxes for the three
and six months ended June 30, 2002 were $32 million and $76 million,
respectively, compared to a provision of $21 million and $69 million for the
same periods in 2001. The primary reason for these increases was the increase in
income from continuing operations which was partially offset by our change in
the form of our organization effective November 1, 2001 from a corporation to a
limited liability company. The effect of this change of organization is that
taxes are no longer paid directly by the Company, but rather, will accrue
directly to our sole owner, Mirant Americas. Furthermore, we also changed the
form of organization of one of our wholly owned subsidiaries from a corporation
to a limited liability company. Our unaudited condensed consolidated financial

41

statements will continue to reflect the accounting and reporting for income
taxes for our subsidiaries that continue to retain their corporate form of
organization for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Historically, we have obtained cash from operations, borrowings under
credit facilities, borrowings from issuances of senior debt and borrowings and
capital contributions from Mirant. These funds have been used to finance
operations, service debt obligations, fund acquisitions, develop and construct
generating facilities, finance capital expenditures and meet other cash and
liquidity needs. Some of the cash flows generated by our businesses have been
distributed to Mirant from time to time, and Mirant has provided funds to cover
our disbursements from time to time.

Because our operations are conducted primarily by our subsidiaries, our
cash flows are dependent upon cash dividends, distributions and other transfers
from our subsidiaries, including Mirant Mid-Atlantic. The reclassification of
the capital contribution received pursuant to the ECSA will reduce Mirant
Mid-Atlantic's fixed charge coverage ratios calculated for purposes of
determining its ability to make dividend payments.

Operating Activities. During the six months ended June 30, 2002, we generated
net cash from operations of approximately $404 million, compared to $490 million
for the same period in 2001. This decrease is due to the timing of payments for
interest and affiliated company receivables and payables, partially offset by
the timing of tax payments.

Investing Activities. During the six months ended June 30, 2002, we used $10
million from investing activities compared to $225 million for the same period
in 2001. During the six months ended June 30, 2002, our investing activities
were primarily attributable to net proceeds from the sale of State Line of $181
million, the issuance of notes receivable from affiliates of $484 million,
partly offset by repayments of notes receivable from affiliates of $506 million
and capital expenditures of $227 million. During the six months ended June 30,
2001, our investing activities were primarily attributed to $168 million in
capital expenditures.

Financing Activities. During the six months ended June 30, 2002, our financing
activities used $402 million in net cash as compared to $132 million during the
same period in 2001. During the six months ended June 30, 2002, our financing
activities included receipt of $200 million in proceeds from the issuance of
debt under our credit facilities, $200 million in proceeds from the issuance of
notes payable to affiliates, $64 million in capital contributions from Mirant
Americas and $53 million related to the ECSA. These inflows were offset by the
repayment of debt under our credit facilities of $200 million, repayment of
notes payable to affiliates of $132 million and payment of $587 million in
dividends to Mirant Americas. During the six months ended June 30, 2001, our
financing activities included $221 million in dividends offset by capital
contributions of $27 million from Mirant Americas.

Our cash flow from operations, asset sales, existing credit facilities,
cash position and capital contributions related to the ECSA are expected to
provide sufficient liquidity for operations, working capital, capital
expenditures and to fund our interest costs over the next 12 months. Our
liquidity could be impacted by the ability of our subsidiaries to pay dividends,
changing prices resulting from abnormal weather, excess capacity, the inability
to complete asset sales, changes in our, Mirant's or Mirant Americas Energy
Marketing's credit ratings and other factors.

INCOME TAXES

In September 2002, the Internal Revenue Service refunded overpaid income
taxes to the Company's ultimate parent, Mirant, for the tax period April 3, 2001
to December 31, 2001. Approximately $96 million of that refund related to the
Company and its subsidiaries. Approximately $52 million is attributable to
companies

42

that are no longer taxable entities, while the remaining approximately $44
million represents refunds for existing taxable entities.

CREDIT RATINGS

As of December 20, 2002, we have a credit rating of Ba3 (non-investment
grade) with a negative watch by Moody's, BB (non-investment grade) with a
negative outlook by S&P and BB (non-investment grade) with a negative outlook by
Fitch. While the foregoing indicates the ratings from the various agencies, we
note that these ratings are not a recommendation to buy, sell or hold Mirant
Americas Generation's securities, that the ratings may be subject to revision or
withdrawal at any time by the assigning rating organization and that each rating
should be evaluated independently of any other rating. There can be no assurance
that a rating will remain in effect for any given period of time or that a
rating will not be lowered or withdrawn entirely by a rating agency if, in its
judgment, circumstances in the future so warrant. Further, the Company notes
that each of the rating agencies continues to monitor the Company's credit
profile, with increased scrutiny arising from the reported financial
difficulties of other market participants, the uncertainty and turmoil in the
financial markets generally and in the energy sector specifically and our
pending reaudit. In addition, we note the risk factors related to a downgrade in
our credit ratings as disclosed in our Form 10-K filed in March 2002.

CREDIT FACILITIES

As of June 30, 2002, we had two credit facilities, each entered into in
October 1999, which consisted of a $250 million 5-year revolving credit
agreement ("Credit Facility B") for capital expenditures and general corporate
purposes and a $50 million 5-year revolving credit facility ("Credit Facility
C") for working capital needs. The commitments under Credit Facility B and
Credit Facility C remain available through October 2004. As of June 30, 2002,
the outstanding borrowings under Credit Facility B were $73 million at an
interest rate of 3.09%. As of June 30, 2002, there were no borrowings under
Credit Facility C.

In July 2002, the Company fully drew the commitments under its two credit
facilities. As of September 30, 2002, the outstanding borrowings under Credit
Facility B were $250 million at an interest rate of 3.31%, and the outstanding
borrowings under Credit Facility C were $50 million at an interest rate of
3.31%. The net proceeds from additional borrowings of approximately $227 million
were used primarily to repay $131 million in notes payable to affiliates. The
remaining amount will be used for working capital and capital expenditures.

In addition to other covenants and terms, each of our credit facilities
includes minimum debt service coverage, a maximum leverage covenant and a
minimum debt service coverage test for dividends and distributions. As of June
30, 2002, there were no events of default under such credit facilities.

MID-ATLANTIC POWER SALES AGREEMENT WITH MIRANT AMERICAS ENERGY MARKETING

Mirant Mid-Atlantic has entered into an Energy and Capacity Sales Agreement
("ECSA"), which is a fixed rate power purchase agreement with Mirant Americas
Energy Marketing. Under the terms of the ECSA, Mirant Mid-Atlantic supplies all
of its capacity and energy of its facilities to Mirant Americas Energy Marketing
for the period from August 1, 2001 through June 30, 2004, extendable through
December 31, 2004 at Mirant Americas Energy Marketing's option. For 2002 and
2003, Mirant Americas Energy Marketing has elected to keep its committed
capacity and energy purchases at 100% of the total output of Mirant
Mid-Atlantic's facilities. For 2004, Mirant Americas Energy Marketing has the
option to purchase up to 100% (in blocks of 25%) of the total output of Mirant
Mid-Atlantic's facilities, with no minimum commitment. Mirant Americas Energy
Marketing is a party to transitional power agreements with PEPCO under which
PEPCO has a similar option to purchase energy with respect to PEPCO's load
requirements.

Prior to August 1, 2001, Mirant Mid-Atlantic sold its power to Mirant
Americas Energy Marketing pursuant to a master sales agreement. Under this
agreement the price Mirant Mid-Atlantic received was based on the

43

market price for energy in the PJM market at the time the energy was delivered.
Mirant Mid-Atlantic also sold power to Mirant Americas Energy Marketing under
fixed price contracts.

Mirant Mid-Atlantic's affiliated companies, Mirant Potomac River and Mirant
Peaker, have also entered into fixed rate power purchase agreements with Mirant
Americas Energy Marketing, on the same terms and effective over the same period
as the agreement outlined above. Through the capital contribution agreement
between Mirant Mid-Atlantic and Mirant, the cash available from these affiliated
companies is paid as a dividend to Mirant, which in turn makes an indirect
capital contribution to Mirant Mid-Atlantic for the same amount.

At the inception date of the ECSA, the pricing of Mirant Americas Energy
Marketing's minimum committed capacity and energy purchases was favorable to
Mirant Mid-Atlantic and our affiliates when compared to estimated market rates
in the PJM for power to be delivered over the initial term of the agreement. The
estimated market rates were based on quoted market prices in the PJM, as
adjusted upwards by approximately 12% for what Mirant Mid-Atlantic believed, at
the time, to be temporary anomalies in such market prices based on forecasted
demand growth and other factors expected to affect demand and supply in the PJM
market through 2002. At inception, the aggregate value to us and our affiliates
relating to the favorable pricing variance was approximately $167 million. The
amount related specifically to the Mirant Mid-Atlantic owned or leased
facilities amounted to $120 million and was reflected as both an addition to
member's equity and an offsetting capital contribution receivable pursuant to
the ECSA on our consolidated balance sheet and statement of member's equity at
the inception of the agreements. At inception, Mirant Mid-Atlantic had assumed
that in 2002 Mirant Americas Energy Marketing would elect to take the contracted
minimum 75% of the capacity and output of Mirant Mid-Atlantic's facilities. In
January 2002, Mirant Americas Energy Marketing elected to keep its committed
capacity at 100% of the total output of Mirant Mid-Atlantic's facilities.
Therefore, the Company has recorded an additional equity contribution of $53
million in the first quarter of 2002 to reflect the favorable pricing terms
related to the additional 25% capacity and energy that Mirant Americas Energy
Marketing committed to take in 2002. This adjustment is reflected in the
accompanying unaudited condensed consolidated balance sheet and statement of
member's equity as both an addition to member's interest and an offsetting
capital contribution receivable pursuant to the ECSA.

The contractual amounts payable under the ECSA in excess of the amount of
revenue recognized due to the favorable pricing variances were $33 million and
$61 million for the three and six months ended June 30, 2002, respectively.
These amounts are generally received in the month following the month the
related revenue is recognized and are recorded as a reduction in the capital
contribution receivable pursuant to the ECSA when received. During the six
months ended June 30, 2002, Mirant Mid-Atlantic received $53 million under the
ECSA that was applied as a reduction to the capital contribution receivable
pursuant to the ECSA. The capital contribution receivable pursuant to the ECSA
was $91 million at June 30, 2002, of which $12 million represents amounts
received subsequent to June 30, 2002 related to the revenue recognized prior to
that date and $79 million relates to the favorable pricing variance over the
remaining six months of 2002.

The favorable pricing variance accounted for as a capital contribution
receivable is not adjusted for subsequent changes in energy prices. As a result,
amounts recognized as revenue under the ECSA do not necessarily reflect market
prices at the time the energy is delivered. Amounts recognized as revenue for
capacity and energy delivered under the ECSA exceeded the amounts based on
current market prices by approximately $60 million and $157 million for the
three and six months ended June 30, 2002, respectively.

On November 15, 2002, Mirant Americas Energy Marketing elected to keep its
committed capacity at 100% of the output of the Company's facilities for 2003.
This election will result in an adjustment of approximately $120 million to
member's equity and an offsetting capital contribution receivable pursuant to
the ECSA in the fourth quarter of 2002. However, the reclassification of the
capital contribution received pursuant to the ECSA (Note A) will reduce Mirant
Mid-Atlantic's fixed charge coverage ratios calculated for purposes of
determining Mirant Mid-Atlantic's ability to make dividend payments. Because
Mirant Mid-Atlantic's ability to pay dividends could be restricted by this
change, Mirant Americas Energy Marketing may not exercise its option to renew
the ECSA

44

for future periods. To the extent that the option to renew the ECSA is not
exercised, Mirant Mid-Atlantic would likely sell its energy at market prices in
the PJM. Over the term of the ECSA, PJM market prices have tended to be lower
than the prices received from Mirant Americas Energy Marketing under the ECSA.

NOTES PAYABLE TO AND NOTES RECEIVABLE FROM AFFILIATES

We are organized and operate as a legal entity separate and apart from
Mirant and any other affiliates of Mirant. Therefore, our facilities are not
generally available to satisfy the obligations of Mirant or any other affiliates
of Mirant. However, our unrestricted cash or other assets which are available
for distribution may, subject to applicable law and the terms of financing
arrangements, be advanced, loaned, paid as dividends or otherwise distributed or
contributed to Mirant or any of its affiliates.

Mirant Peaker and Mirant Potomac River borrowed funds from Mirant
Mid-Atlantic in order to finance their respective acquisitions of generation
assets. At both June 30, 2002 and December 31, 2001, notes receivable from these
two affiliates consisted of the following (in millions):