MIRANT CORP - 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 QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

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MIRANT CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 001-16107 58-2056305
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification No.)

1155 PERIMETER CENTER WEST, SUITE 100, 30338
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)

(678) 579-5000 WWW.MIRANT.COM
(Registrant's Telephone Number, (Web Page)
Including Area Code)

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). [X] Yes [ ] No

The number of shares outstanding of the Registrant's Common Stock, par
value $0.01 per share, at August 27, 2003 was 405,468,084.
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TABLE OF CONTENTS

DEFINITIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The information presented in this Form 10-Q includes forward-looking
statements in addition to historical information. These statements involve known
and unknown risks and relate to future events, our future financial performance
or our projected business results. In some cases, you can identify forward-
looking statements 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:

GENERAL FACTORS

- legislative and regulatory initiatives regarding deregulation, regulation
or restructuring of the electric utility industry; changes in state,
federal and other regulations (including rate and other regulations);
changes in, or application of, environmental and other laws and
regulations to which we and our subsidiaries and affiliates are subject;

- the failure of our assets to perform as expected;

- our pursuit of potential business strategies, including the disposition
of assets, termination of construction of certain projects or internal
restructuring;

- changes in market conditions, including developments in energy and
commodity supply, demand, volume and pricing or the extent and timing of
the entry of additional competition in the markets of our subsidiaries
and affiliates;

- weather and other natural phenomena;

- war, terrorist activities or the occurrence of a catastrophic loss;

- deterioration in the financial condition of our counterparties and the
resulting failure to pay amounts owed to us or perform obligations or
services due to us; and

- the disposition of the pending litigation described in this Form 10-Q as
well as the Company's Form 10-K filed on April 30, 2003;

BANKRUPTCY-RELATED FACTORS

- the actions and decisions of creditors of Mirant and of other third
parties with interests in the voluntary petitions for reorganization
filed on July 14, 2003 by Mirant Corporation and substantially all of its
wholly-owned U.S. subsidiaries under Chapter 11 of the Bankruptcy Code;

1

- the ability of Mirant to reach agreements with lenders, creditors and
other stakeholders regarding a comprehensive restructuring and to
continue as a going concern;

- the effects of the Chapter 11 filings on our liquidity and results of
operations;

- the instructions, orders and decisions of the bankruptcy court and other
effects of legal and administrative proceedings, settlements,
investigations and claims;

- the ability of Mirant to reach final agreement and close on the committed
debtor-in-possession financing, then operate pursuant to the terms
thereof;

- the ability of Mirant to obtain and maintain normal terms with vendors
and service providers and to maintain contracts that are critical to our
operations; and

- the direct or indirect effects on our business of a lowering of our
credit rating or that of Mirant Americas Generation, Mirant Mid-Atlantic
or Mirant Americas Energy Marketing (or actions taken by us or our
affiliates in response to changing credit ratings criteria), including,
increased collateral requirements to execute our business plan, demands
for increased collateral by our current counterparties, curtailment of
certain business operations in order to reduce the amount of required
collateral, refusal by our current or potential counterparties or
customers to enter into transactions with us and our inability to obtain
credit or capital in amounts needed or on terms favorable to us.

The ultimate results of the forward looking statements and the terms of any
reorganization plan ultimately confirmed, can affect the value of our various
pre-petition liabilities, common stock and/or other securities. No assurance can
be given as to what values, if any, will be ascribed in the bankruptcy
proceedings to each of these constituencies. A plan of reorganization could
result in holders of the liabilities and/or securities of the Company, Mirant
Americas Generation and Mirant Mid-Atlantic receiving no value for their
interests. Because of such possibilities, the value of these liabilities and/or
securities is highly speculative. Accordingly, we urge that caution be exercised
with respect to existing and future investments in any of these liabilities
and/or securities.

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.

2

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated
financial statements.
3

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated
statements.
4

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated
statements.
5

MIRANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated
statements.
6

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002

A. DESCRIPTION OF CHAPTER 11 PROCEEDINGS AND BUSINESS

PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

On July 14 and July 15, 2003 ("Petition Date"), Mirant Corporation and
substantially all of its wholly-owned subsidiaries in the United States
(collectively, the "Mirant Debtors") filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern
District of Texas, Fort Worth Division ("Bankruptcy Court"). The Chapter 11
cases are being jointly administered for procedural purposes only under case
caption In re Mirant Corporation et al., Case No. 03-46590 (DML). Additionally,
certain of Mirant Corporation's Canadian subsidiaries have filed an application
for creditor protection under the Companies Creditors' Arrangement Act in
Canada, which, like Chapter 11, allows for reorganization under the protection
of the court system. Mirant Canada Energy Marketing, Ltd., Mirant Canada
Marketing Investments, Inc., and Mirant Canada Energy Trading Partnership are
included in the application. Mirant Corporation and its subsidiaries'
(collectively, "Mirant" or the "Company") operations in the Philippines and the
Caribbean were not included in the Chapter 11 filings.

The Mirant Debtors are continuing to operate their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure, applicable court orders, as well as other
applicable laws and rules. In general, a debtor-in-possession is authorized
under the Bankruptcy Code to continue to operate as an ongoing business, but may
not engage in transactions outside the ordinary course of business without the
prior approval of the Bankruptcy Court.

In connection with the Chapter 11 filings, the Mirant Debtors secured a
commitment, subject to approval of the Bankruptcy Court, final documentation and
closing conditions, for $500 million in debtor-in-possession financing. This
commitment expires on September 5, 2003. The Company is currently working with
the lender to finalize the facility, however, there can be no assurance that
Mirant will be able to close this facility by the expiration date. As of August
15, 2003, Mirant had approximately $1.29 billion in total cash, approximately
$351 million of which was legally restricted and $125 million of which was held
for operating, working capital or other purposes at various subsidiaries.

Subject to certain exceptions in the Bankruptcy Code, the Chapter 11
filings automatically stayed the initiation or continuation of most actions
against the Mirant Debtors, including most actions to collect pre-petition
indebtedness or to exercise control over the property of the bankruptcy estates.
As a result, absent an order of the Bankruptcy Court, creditors are precluded
from collecting pre-petition debts and substantially all pre-petition
liabilities are subject to compromise under the plan of reorganization.

Under the Bankruptcy Code, Mirant also has the right to assume, assume and
assign, or reject certain executory contracts and unexpired leases, subject to
the approval of the Bankruptcy Court and certain other conditions. Generally,
the assumption of an executory contract or unexpired lease requires a debtor to
cure certain existing defaults under the contract, including the payment of
accrued but unpaid pre-petition liabilities. Rejection of an executory contract
or unexpired lease is typically treated as a breach of the contract or lease, as
of the moment immediately preceding the Chapter 11 filing. Subject to certain
exceptions, this rejection relieves the debtor of performing its future
obligations under that contract but entitles the other party to the contract to
assert a pre-petition general unsecured claim for damages. Parties to executory
contracts or unexpired leases rejected by the debtor may file proofs of claim
against the estate for damages. Due to the uncertain nature of many of the
potential claims for damages, Mirant is unable to project the magnitude of these
claims at this time.

On the Petition Date, the Bankruptcy Court granted the Company permission
to implement a Counterparty Assurance Program. Historically, Mirant Americas
Energy Marketing, one of Mirant's U.S.

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsidiaries that has filed a voluntary petition for reorganization under
Chapter 11, has engaged in trading and marketing activities including
proprietary trading activities for its own account and trading activities to
economically hedge Mirant's generation assets, from which Mirant has derived
value. Mirant currently contemplates risk management services for the
procurement of fuel and energy and the continued generation of revenue from
Mirant Americas Energy Marketing's prospective proprietary trading and asset
hedging activities as well as the recognition of value from Mirant Americas
Energy Marketing's existing trading positions. Mirant Americas Energy Marketing
conducts a substantial portion of its business through the use of derivative
contracts that may fall within the "safe-harbor" protections set forth in
Sections 556 and 560 as well as other sections of the Bankruptcy Code. The safe
harbor provisions permit non-debtor parties to, among other things, exercise
certain contractual termination rights and remedies notwithstanding the
commencement of a Chapter 11 case. Although case law surrounding the scope of
the Bankruptcy Code's safe harbor provisions remains unsettled, if a contract
qualifies for safe harbor protection, a non-debtor party may be permitted to
terminate or liquidate the contract upon a commencement of a bankruptcy
proceeding. In addition, in certain circumstances, commencement of a bankruptcy
proceeding may cause automatic termination or liquidation of the contract in
accordance with the contractual terms. The Counterparty Assurance Program
approved by the Bankruptcy Court supports the Company's ability to continue
activities designed to maximize the value of its assets without interruption.
The Bankruptcy Court order authorized immediate relief to honor any and all
obligations under existing and future trading and marketing contracts (i.e.,
safe harbor contracts) that support Mirant's asset base.

Pursuant to the general terms of Mirant Americas Energy Marketing's
derivative trading contracts, upon early termination, settlement payments are
determined by the non-defaulting counterparty using mark-to-market valuation
methodologies. Given the inherent uncertainties in mark-to-market valuation,
Mirant may not be able to realize the net current value of any existing
derivative trading contracts that are terminated early as a result of the
Chapter 11 filings or other event of default due to a potential increase in
mark-to-market liabilities and a potential decrease in mark-to-market assets
upon settlement. A number of counterparties have exercised early termination
rights which will result in a loss of value to Mirant. The ultimate impact of
these early terminations is not known at this time. In addition, although the
terms of most of Mirant Americas Energy Marketing's derivative contracts do not
relieve the non-defaulting party of the obligation to pay settlement amounts
owing, some of Mirant Americas Energy Marketing's counterparties owing
settlement payments may refuse to make such payments absent litigation, further
reducing the value of Mirant Americas Energy Marketing's existing trading
positions.

On July 24, 2003, the Bankruptcy Court approved an interim procedure
requiring certain holders of claims, preferred securities, and common stock to
provide at least ten days advance notice of their intent to buy or sell claims
against the Mirant Debtors or shares in Mirant Corporation. The notice procedure
is limited to only those transactions with a person or entity owning (or,
because of the transaction, resulting in ownership of) an aggregate amount of
claims equal to or in excess of $250 million and, with respect to shares, only
those persons or entities owning or acquiring 4.75% or more of any class of
outstanding shares. In addition, each entity or person that owns at least $250
million of claims or certain preferred securities must, within fifteen days of
the entry of the order, provide the Mirant Debtors with notice of ownership
information. The Court's order also provides for expedited procedures to impose
sanctions for a violation of its order, including monetary damages and the
avoidance of any such transactions that violate the order.

The emergency relief was sought to prevent potential trades of claims of
stock that could negatively impact the Mirant Debtors' United States net
operating losses carryforward and other tax attributes. The U.S. net operating
losses are currently approximately $1 billion and could reach $2.5 billion by
the end of 2003. The emergency relief provides immediate assistance in
preserving the U.S. net operating losses and other tax attributes until parties
in interest can appear and be heard regarding the notice procedure requested by
Mirant. Even with the emergency relief that has been granted, Mirant cannot
guarantee that it will be able to realize any portion, or all, of the U.S. net
operating losses and other tax carryforwards.
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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At this time, it is not possible to accurately predict the effect of the
Chapter 11 reorganization process on the Company's business or if and when the
Company may emerge from Chapter 11. The Company's future results depend on the
timely and successful confirmation and implementation of a plan of
reorganization. There can be no assurance that a successful reorganization plan
will be proposed by the Company or confirmed by the Bankruptcy Court, or that
any such plan will be consummated. The rights and claims of various creditors
and security holders will be determined by the plan as well. Under the priority
scheme established by the Bankruptcy Code, certain post-petition and
pre-petition liabilities need to be satisfied before security holders are
entitled to any distributions. The ultimate recovery to creditors and security
holders, if any, will not be determined until confirmation of a plan or plans of
reorganization. No assurance can be given as to what values, if any, will be
ascribed in the bankruptcy proceedings to the interests of each of these
constituencies, and it is possible that the Company's equity or other securities
will be restructured in a manner that will reduce substantially or eliminate any
remaining value. If no plan of reorganization is approved, it is possible that
Mirant's assets may be liquidated.

The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company's unaudited condensed consolidated financial statements
do not reflect adjustments that might be required if the Company is unable to
continue as a going concern.

OVERVIEW

Mirant (formerly Southern Energy, Inc.) and its subsidiaries is an
international energy company, incorporated in Delaware on April 20, 1993. Prior
to April 2, 2001, Mirant was a subsidiary of Southern Company ("Southern").

Mirant's revenues are generated through the production of electricity in
the United States, the Philippines and the Caribbean. In addition, in North
America Mirant trades and markets commodities to optimize the financial
performance of its power generation business and to take proprietary commodity
trading positions, primarily in regions where it owns generating facilities or
other physical assets. In the Philippines, over 80% of the Company's generation
output is sold under long-term contracts. The Company's operations in the
Caribbean include fully integrated electric utilities, which generate power sold
to residential, commercial and industrial customers. As of March 31, 2003,
Mirant owned or controlled through lease or operating agreements more than
21,000 MW of electric generating capacity. In North America, the Company also
had rights to approximately 2.4 billion cubic feet per day of natural gas
production, more than 1.8 billion cubic feet per day of natural gas
transportation and approximately 12.7 billion cubic feet of natural gas storage
as of March 31, 2003.

Mirant manages its business through two principal operating segments. The
Company's North America segment consists of power generation and commodity
trading operations managed as an integrated business. The International segment
includes power generation businesses in the Philippines, Curacao and Trinidad,
and integrated utilities in the Bahamas and Jamaica.

B. ACCOUNTING AND REPORTING POLICIES

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements (unaudited) of
Mirant Corporation and its wholly owned subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and with the instructions for
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 2002.

The financial statements include the accounts of Mirant and its wholly
owned as well as controlled majority owned subsidiaries and have been prepared
from records maintained by Mirant and its subsidiaries in their respective
countries of operation. All significant intercompany accounts and transactions
have been eliminated in consolidation. Investments in companies in which Mirant
exercises significant influence over operating and financial policies are
accounted for using the equity method. Majority or jointly owned affiliates,
which Mirant does not control, are also accounted for using the equity method of
accounting.

Certain prior period amounts have been reclassified to conform to the
current year financial statement presentation. The results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the results
to be expected for the full year.

ACCOUNTING FOR REORGANIZATION

The Company has not made any adjustments or reclassifications that may be
required in future filings related to the American Institute of Certified Public
Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code." Under SOP 90-7, the
Company will report separately pre-petition liabilities that are subject to
compromise, pre-petition liabilities that are not subject to compromise, and
post-petition liabilities. In addition, the Chapter 11 filings represent a
triggering event that will require an evaluation of long-lived assets, goodwill,
intangibles and other assets that may be impaired in a post-petition operating
environment. Asset and liability carrying amounts do not purport to represent
realizable or settlement values as contemplated by the Bankruptcy Code.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"). The Company adopted this
statement effective January 1, 2003. SFAS No. 143 provides accounting
requirements for costs associated with legal obligations to retire tangible,
long-lived assets. Under SFAS No. 143, the asset retirement obligation is
recorded at fair value in the period in which it is incurred by increasing the
carrying amount of the related long-lived asset. In each subsequent period, the
liability is accreted to its fair value and the capitalized costs are
depreciated over the useful life of the related asset. In the three months ended
March 31, 2003, Mirant recorded a charge as a cumulative effect of change in
accounting principle of approximately $3 million, net of taxes, related to its
adoption of SFAS No. 143. Mirant also recorded property, plant and equipment of
$6 million and noncurrent asset retirement obligations of $9 million as of
January 1, 2003. Mirant's asset retirement obligations are associated primarily
with the proper closure or removal of its fuel oil storage tanks, removal of
generation facilities and the capping of its ash landfills. The net asset
retirement liability as of January 1, 2003 and March 31, 2003, which is reported
in other noncurrent liabilities in the Company's condensed consolidated balance

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sheet, and the changes in the net liability for the three months ended March 31,
2003 were as follows (in millions):

Liability at January 1, 2003................................ $ 9
Liability settled in 2003................................... --
Accretion expense in 2003................................... *
---
NET LIABILITY AT MARCH 31, 2003............................. $ 9
===

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* Less than $1 million.

Had Mirant adopted SFAS No. 143 as of January 1, 2002, its noncurrent asset
retirement liabilities would have been approximately $7 million, and its income
from continuing operations and net income for the three months ended March 31,
2002 would have been lower by less than $1 million.

In October 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 02-03, "Issues Related to Accounting for Contracts
Involved in Energy Trading and Risk Management Activities," to rescind EITF
Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." Accordingly, energy-related contracts that are not
accounted for pursuant to SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," such as transportation contracts, storage contracts and
tolling agreements, are required to be accounted for as executory contracts
using the accrual method of accounting and not at fair value. Energy-related
contracts that meet the definition of a derivative pursuant to SFAS No. 133
continue to be carried at fair value. In addition, the Task Force observed that
accounting for energy-related inventory at fair value by analogy to the
consensus on EITF Issue 98-10 is not appropriate and that inventory is not to be
recognized at fair value. As a result of the consensus on EITF Issue 02-03, all
non-derivative energy trading contracts on the Consolidated Balance Sheet as of
January 1, 2003 that existed on October 25, 2002 and inventories that were
recorded at fair value have been adjusted to historical cost resulting in a
cumulative effect adjustment of $25 million, net of taxes, that reduced first
quarter 2003 earnings.

NEW ACCOUNTING STANDARDS

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 clarifies (1) under what circumstances a contract with an initial net
investment meets the characteristics of a derivative, (2) when a derivative
contains a financing component that should be reflected as a financing on the
balance sheet and the statement of cash flows and (3) the definition of the term
underlying in SFAS No. 133 to conform to language used in FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." In addition, SFAS No.
149 also incorporates certain Derivative Implementation Group Implementation
Issues. The provisions of SFAS No. 149 are effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The guidance is applied to hedging relationships on a prospective
basis.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses issues regarding the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that were previously accounted
for pursuant to the guidance in EITF Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Mirant adopted SFAS No. 146 on January 1, 2003 with no financial statement
impact.
11

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

Mirant recognizes generation revenue from the sale of energy and integrated
utilities and distribution revenue from the sale and distribution of energy when
earned and collection is probable. The Company recognizes revenue when electric
power is delivered to a customer pursuant to contractual commitments that
specify volume, price and delivery requirements. When a long-term electric power
agreement conveys the right to use the generating capacity of Mirant's plant to
the buyer of the electric power, that agreement is evaluated to determine if it
is a lease of the generating facility rather than a sale of electric power.

COMMODITY TRADING ACTIVITIES

Commodity trading activities are accounted for under the mark-to-market
method of accounting. Under the mark-to-market method of accounting, energy
trading contracts are recorded at fair value in the accompanying unaudited
condensed consolidated balance sheets. The determination of fair value considers
various factors, including closing exchange or OTC market price quotations, time
value and volatility factors underlying options and contractual commitments,
price activity for equivalent or synthetic instruments in markets located in
different time zones and counterparty credit quality. The net realized gain or
loss and net unrealized gain or loss resulting from the change in the fair value
of energy trading contracts are reported as "net trading revenues." Prior to the
effective date of EITF Issue 02-03, all energy trading contracts including
transportation and storage contracts and inventory held for trading purposes
were marked-to-market under the provisions of EITF Issue 98-10.

Subsequent to the rescission of EITF Issue 98-10 the mark-to-market method
is used to account for energy trading contracts entered into after October 25,
2002 that meet the criteria of derivative financial instruments pursuant to SFAS
No. 133. These criteria require such contracts to be related to future periods,
to contain one or more underlyings and one or more notional amounts, require
little or no initial net investment and to have terms that require or permit net
settlement of the contract in cash or its equivalent. As such transactions may
be settled in cash, the fair value of the assets and liabilities associated with
these transactions is reported at estimated settlement value based on current
prices and rates as of each balance sheet date. The net unrealized gains or
losses resulting from the revaluation of such contracts during the period are
recognized currently in net trading revenues in the accompanying unaudited
condensed consolidated statements of operations. Assets and liabilities
associated with energy trading activities are reflected in Mirant's unaudited
condensed consolidated balance sheet as price risk management assets and
liabilities, classified as short-term (i.e., current) or long-term based on the
term, or tenor, of the contracts.

DERIVATIVE FINANCIAL INSTRUMENTS

SFAS No. 133 requires that derivative financial instruments be recorded in
the balance sheet at fair value as either assets or liabilities, and that
changes in fair value be recognized currently in earnings, unless specific hedge
accounting criteria are met. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized currently in earnings. If the
derivative is designated as a cash flow hedge, the changes in the fair value of
the derivative are recorded in other comprehensive income ("OCI") and the
realized gains and losses related to these derivatives are recognized in
earnings in the same period as the settlement of the underlying hedged
transaction. Any ineffectiveness relating to cash flow hedges is recognized
currently in earnings. The assets and liabilities related to derivative
instruments for which hedge accounting criteria are met are reflected within
other current and non-current assets and liabilities in the accompanying
unaudited condensed consolidated balance sheets. The assets and liabilities
related to derivative instruments that do not qualify for hedge accounting
treatment are included in price risk management

12

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assets and liabilities. The assets and liabilities related to derivative
instruments that are associated with assets and liabilities held for sale are
presented net within those captions on our accompanying unaudited condensed
consolidated balance sheets. Many of Mirant's power sales and fuel supply
agreements that otherwise would be required to follow derivative accounting
qualify as normal purchases and normal sales under SFAS No. 133 and are
therefore exempt from fair value accounting treatment. The majority of the
Company's commodity derivative financial instruments do not qualify for hedge
accounting and therefore changes in such instruments' fair value are recognized
currently in earnings.

STOCK-BASED COMPENSATION

Mirant accounts for its stock-based employee compensation plans under the
intrinsic-value method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Under this method, compensation expense for employee stock
options is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation" established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income (loss) if the fair-
value-based method had been applied to all outstanding and unvested awards in
each period (in millions, except per share data). See also Note 12 to Mirant's
Form 10-K for the year ended December 31, 2002 for further information regarding
its stock-based compensation plans and the assumptions used to compute pro forma
amounts.

C. RESTATEMENT AND RECLASSIFICATIONS

The unaudited condensed consolidated financial statements of the Company as
of March 31, 2002 and for the three months ended March 31, 2002 have been
restated to correct certain accounting errors made in preparing those financial
statements as well as other reclassifications and adjustments.

13

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DISCONTINUED OPERATIONS

The financial statements for prior periods have been restated to report the
revenues and expenses of the components of the Company that were disposed of
separately as discontinued operations. Income (loss) from discontinued
operations for the three months ended March 31, 2003 and 2002 includes the
following components of the Company that have been disposed of: Mirant Americas
Energy Capital, LP ("Mirant Americas Energy Capital"), Mirant Canada Energy
Capital, Ltd. ("Mirant Canada Energy Capital"), Mirant Europe B.V., the Neenah
generating facility in Wisconsin and the Tanguisson power plant in Guam. Income
(loss) from discontinued operations for the three months ended March 31, 2002
also includes the operations of Mirant Americas Production Company in Louisiana,
MAP Fuels Limited in Queensland, Australia and the State Line generating
facility in Indiana.

A summary of the operating results for these discontinued operations for
the three months ended March 31, 2003 and 2002 follows (in millions):

The table below presents the components of the balance sheet accounts
classified as current assets and liabilities held for sale as of March 31, 2003
and December 31, 2002 (in millions):

Total current liabilities related to assets held for sale are included in
other current liabilities in the condensed consolidated balance sheets.

14

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

In addition to the changes to the Company's previously issued financial
statements required by the adoption of SFAS No. 144, management has identified
certain errors which necessitated a restatement of the Company's first quarter
2002 consolidated financial statements. The reclassifications also include the
net presentation of revenues and expenses associated with energy trading
activities required by EITF Issue 02-03. The following tables and discussion
highlight the effects of the restatement adjustments and reclassifications on
the previously reported unaudited condensed consolidated statements of
operations for the three months ended March 31, 2002 (in millions).

CONSOLIDATED STATEMENTS OF OPERATIONS

15

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Operating revenue for the three months ended March 31, 2002 was adjusted by
$246 million primarily as a result of the following restatement adjustments:

- a decrease due to the reclassification of $230 million to properly
eliminate intercompany revenues;

- an increase of $15 million for certain power purchase agreements
previously accounted for as executory contracts that are now reflected at
fair value under SFAS No. 133;

- a decrease of $2 million of mark-to-market gains on energy loans held by
Mirant's Energy Capital business, which were previously accounted for at
fair value;

- a decrease of $30 million to record a full requirements contract in Texas
at fair value;

- an increase of $5 million to reflect the fair value of certain commodity
financial instruments previously accounted for as cash flow hedges under
SFAS No. 133;

- a decrease to reclassify liquidation damages by $20 million related to
Enron; and

- an increase of $16 million as a result of mark-to-market adjustments in
Mirant's natural gas trading business.

Cost of fuel, electricity and other products, excluding depreciation, for
the three months ended March 31, 2002 was adjusted by $238 million primarily as
a result of the reclassification of $230 million of trading expenses to
intercompany trading expenses and the liquidation damages of $20 million related
to Enron, offset by the reversal of $17 million of power purchase agreement
contra-expense amortization

16

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during the three months ended March 31, 2002 due to the change in the accounting
for these power purchase agreements to fair value accounting.

Gain on sale of investments, net was adjusted by $41 million, as a result
of changes in the calculation of the gain recognized from the Company's sale of
its Bewag investment in the first quarter of 2002.

The provision for income tax for the three months ended March 31, 2002 was
adjusted primarily as a result of $22 million due to the reduction of the gain
recognized from the sale of the Company's investment in Bewag in the first
quarter of 2002 and as a result of the tax effect of the other restatement
adjustments described above.

CONSOLIDATED STATEMENTS OF CASH FLOWS

17

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

* Classification of certain amounts has changed in the current year.

Operating cash flows in the three months ended March 31, 2002 increased by
$26 million primarily as a result of the restatement of our cash balances at
both December 31, 2001 and March 31, 2002, and the reclassification of certain
expenditures relating to capital items from operating activities to investing
activities.

D. PRICE RISK MANAGEMENT ASSETS AND LIABILITIES

As of March 31, 2003, the fair value, net of credit reserves, of Mirant's
price risk management portfolio is presented in the table below. Excluding
certain long-term power purchase agreements included in price risk management
liabilities, the volumetric weighted average maturity, or weighted average
tenor, of the North American portfolio at March 31, 2003 was 1.1 years. The net
notional amount, or net long

18

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(short) position, of the price risk management assets and liabilities at March
31, 2003 was approximately 7 million equivalent MWh.

Power sales agreements and contracts that are used to mitigate exposure to
commodity prices but do not meet the definition of a derivative or are excluded
from fair value accounting under certain exceptions in SFAS No. 133 are
accounted for as executory contracts.

The tenor of the long-term power purchase agreements excluded from the
North American portfolio, as discussed above, at March 31, 2003 is presented
below.

E. DISPOSITIONS AND ACQUISITIONS

DISPOSITIONS

Neenah: In January 2003, Mirant completed the sale of its Neenah
generating facility for approximately $109 million resulting in a gain of
approximately $4 million.

Mirant Americas Energy Capital: In March 2003, Mirant completed the sale
of the majority of the investments held by Mirant Americas Energy Capital for
approximately $160 million. In the first quarter of 2003, the Company recorded
additional losses of $26 million, primarily related to warrants and royalty
payments receivable, foregone as a result of the investment sales. These charges
are reflected as a component of loss from discontinued operations in the
accompanying condensed consolidated statement of operations.

Navotas 1: In March 2003, the energy conversion agreement ("ECA") for
Navotas 1 expired, and the plant was transferred to National Power Corporation
pursuant to the terms of the ECA.

The following events occurred subsequent to March 31, 2003:

Tanguisson: In April 2003, Mirant completed the sale of its Tanguisson
power plant in Guam for approximately $16 million, which approximated book
value.

Mirant Americas Energy Capital: In May and August 2003, Mirant completed
the sale of the two remaining investments held by Mirant Americas Energy Capital
for approximately $41 million and $3 million, respectively, which approximated
book value.

Mirant Canada operations: In May 2003, Mirant announced that it had
entered into agreements to sell its Canadian natural gas aggregator services
contracts, a significant portion of its natural gas transportation contracts and
a portion of its storage contracts. The contracts included in the sale represent

19

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

380 million cubic feet per day of natural gas transportation assets and
approximately 1.3 billion cubic feet of natural gas storage, as well as Mirant's
"netback pool." The netback pool represents natural gas marketing contracts that
aggregate and market the supply of natural gas from over 500 Canadian natural
gas producers associated with the former TransCanada pool business. The sale
closed in July 2003.

Birchwood: In May 2003, Mirant announced that it had entered an agreement
to sell all but one half of one percent of its 50% ownership interest in the
Birchwood generating plant located near Fredricksburg, Virginia for
approximately $71 million resulting in an estimated after-tax gain of
approximately $41 million. Due to the uncertainty of when this sale will close,
the gain may be adjusted upon close of the sale. The sale, which is subject to
bankruptcy court approval, is expected to close during 2003.

Perryville Tolling Agreement: In May 2003, Mirant entered into an
agreement (the "Termination Agreement") to terminate the tolling agreement with
Perryville Energy Partners, LLC ("Perryville"), provided the sale of the
Perryville Power Station facility to Entergy Services, Inc. ("Entergy") closes.
The Termination Agreement, by its terms, automatically expired on August 15,
2003 in the event Perryville and Entergy had not executed a binding purchase and
sale agreement for the facility by that date. Perryville and Entergy have not
executed a binding purchase and sale agreement. Mirant and Perryville have
extended the expiration date to August 27, 2003. Because of the Mirant Chapter
11 filing, Perryville and Entergy may not execute a binding purchase and sale
agreement by the August 27, 2003 and further extensions of the expiration date
of the Termination Agreement may not occur. If the termination of the tolling
agreement occurs pursuant to the terms of the Termination Agreement, Mirant
agreed it will pay Perryville approximately $35 million and forgive a $99
million subordinated loan made to Perryville. In the second quarter of 2003,
Mirant posted a letter of credit of $35 million with Perryville to secure its
obligations under the Termination Agreement. Mirant estimates that it will
recognize a pre-tax loss of approximately $131 million related to this
transaction. If the Termination Agreement expires, the $35 million letter of
credit will be returned to Mirant and Mirant will continue to be obligated to
perform under the tolling agreement.

The financial statements for current and prior years have been reclassified
to report the revenues and expenses separately as discontinued operations for
the asset sales of Neenah, Mirant Americas Energy Capital and Tanguisson. (See
Note C.)

JOINT VENTURE ACTIVITY

Toledo and Panay: In June 2003, Mirant Toledo Holdings Corporation
("MTHC"), a wholly owned subsidiary of Mirant (Philippines) Corporation ("MPC"),
entered into an agreement with the First Metro Investment Corporation Group
("the FMIC Group") to pursue business opportunities in power generation in the
Visayas region of the Philippines. The FMIC Group agreed to acquire the entire
equity interest in Panay Power Corporation, a 72 MW power generation company on
the island of Panay and a 22.8 MW generation asset of the Sunrise Power Company
located in the island of Luzon. The total acquisition cost of these two projects
is approximately $64 million in addition to the assumption of the project debt
at Panay Power Corporation of $35.8 million. Also, a new project debt of
approximately $2.9 million is to be raised for the 22.8 MW generation asset on
the island of Panay. The transaction is expected to close during 2003. The FMIC
Group has agreed to contribute its equity interest in Panay Power Corporation
and the 22.8 MW generation asset to MTHC in exchange for a 50% ownership
interest in MTHC. MTHC will become a 50/50 joint venture company between the
FMIC Group and MPC after completion of the transaction. The Company's investment
in MTHC at March 31, 2003, aggregated $21.7 million. The FMIC Group and MPC have
agreed not to transfer all or any of their shares in MTHC for a period of three
years.

20

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACQUISITION

Pagbilao: In March 2003, Mirant Asia-Pacific Limited's subsidiary paid
approximately $30 million to acquire a 4.26% ownership interest in the Pagbilao
project. Subsequent to March 31, 2003, Mirant Asia-Pacific Limited's subsidiary
paid approximately $30 million to acquire a further 4.26% ownership interest in
the Pagbilao project. The remaining minority interest of the Pagbilao project
subject to the put agreement is 4.26%.

F. GOODWILL

Following is a summary of the changes in goodwill for the three months
ended March 31, 2003 (in millions):

Upon the adoption of SFAS No. 141, Mirant reclassified its intangible
assets relating to trading rights resulting from business combinations, to
goodwill effective January 1, 2002. The reclassification increased goodwill by
$149 million, net of accumulated amortization of $13 million and decreased
intangible assets by a corresponding amount. During the three months ended March
31, 2003, no event or circumstance indicated that it is more likely than not
that an impairment loss has been incurred. Therefore, the Company did not
perform a reassessment of the carrying value of its goodwill during the three
months ended March 31, 2003. During the three months ended March 31, 2003,
Mirant finalized its purchase accounting adjustments for West Georgia and
TransCanada, resulting in reclassifications among deferred taxes, prepaid assets
and goodwill.

OTHER INTANGIBLE ASSETS

Following is a summary of intangible assets as of March 31, 2003 and
December 31, 2002 (in millions):

Substantially all of Mirant's other intangible assets are subject to
amortization and are being amortized on a straight-line basis over their
estimated useful lives, ranging up to 40 years. Amortization expense for each of
the three months ended March 31, 2003 and 2002 was approximately $4 million.
Assuming no future acquisitions, dispositions or impairments of intangible
assets, amortization expense is estimated to be $19 million for each of the
following five years.

The trading rights represent intangible assets recognized in connection
with asset purchases that represent the Company's ability to generate additional
cash flows by incorporating Mirant's trading activities with the acquired
generating facilities. Development rights represent the right to expand capacity
at certain acquired generating facilities. The existing infrastructure,
including storage facilities, transmission interconnections, and fuel delivery
systems, and contractual rights acquired by Mirant provide the

21

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

opportunity to expand or repower certain generation facilities. This ability to
repower or expand is expected to be at significant cost savings compared to
greenfield construction.

G. RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES

Mirant adopted a plan in March 2002 to restructure its operations by
exiting certain activities (including its European trading and marketing
business), canceling and suspending planned power plant developments, closing
business development offices, and severing employees in an effort to better
position the Company to operate in the current business environment. During the
three months ended March 31, 2003, Mirant recorded additional restructuring
charges of $7 million. Additional impairment losses of approximately $5 million
for the three months ended March 31, 2003 were incurred as a result of Mirant's
restructuring efforts to reduce costs and sell non-strategic assets. Components
of the restructuring charges for the three months ending March 31, 2003 and 2002
are as follows (in millions):

During the three months ended March 31, 2003, Mirant terminated
approximately 77 employees as part of its restructuring. For the three months
ended March 31, 2003, Mirant paid $4 million related to restructuring charges
recorded in that period. As of March 31, 2003, Mirant had approximately $3
million accrued for restructuring, as follows (in millions):

H. DEBT

The following developments have occurred in the Company's debt structure
since December 31, 2002.

MIRANT CORPORATION AND MIRANT AMERICAS GENERATION, LLC

Due to the proceedings under Chapter 11, Mirant Corporation and Mirant
Americas Generation are in default under approximately $3.9 billion and $2.8
billion of currently outstanding debt, respectively.

22

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mirant Corporation is also in default on obligations to cash collateralize
outstanding letters of credit of $991 million. Subject to certain exceptions in
the Bankruptcy Code, the Chapter 11 filings automatically stayed the
continuation of most actions against Mirant and Mirant Americas Generation,
including most actions to collect pre-petition indebtedness or to exercise
control over the property of the bankruptcy estate. As a result, absent an order
of the Bankruptcy Court, creditors are precluded from collecting pre-petition
debts and substantially all pre-petition liabilities are subject to compromise
under a plan of reorganization. Therefore, the amounts of outstanding debt shown
above may not reflect actual cash outlays in the future period.

WEST GEORGIA GENERATING COMPANY, LLC -- CREDIT FACILITY

Due the proceedings under Chapter 11, West Georgia Generating Company, LLC
is in default under its $140 million secured credit facility. As noted earlier,
the Chapter 11 filings automatically stayed the continuation of most actions
against Mirant and its subsidiaries that filed for protection under Chapter 11,
including West Georgia Generating Company, LLC, including any action to collect
pre-petition indebtedness or to exercise control over the property of the
bankruptcy estate.

MIRANT AMERICAS DEVELOPMENT CAPITAL, LLC -- DOMESTIC TURBINE LEASE FACILITY

On May 29, 2003, the commitment to fund the "true-funding" tranche of $500
million was reduced to $231 million. The amount outstanding under the Series A1
Notes, the Series B1 Notes and the Series C1 certificates was $214 million at
July 31, 2003, of which approximately $192 million was recourse to Mirant
Corporation pursuant to its guarantee of certain obligations of Mirant Americas
Development Capital. As noted above, the Chapter 11 filings automatically stayed
the continuation of most actions against Mirant and its subsidiaries that filed
for protection under Chapter 11, including Mirant Americas Development Capital,
including any action to collect pre-petition indebtedness or to exercise control
over the property of the bankruptcy estate.

MIRANT ASSET DEVELOPMENT AND PROCUREMENT B.V. -- EUROPE POWER ISLAND LEASE

In February 2003, Mirant Asset Development and Procurement B.V. repaid and
terminated its Power Island Acquisition Facility.

MIRANT AMERICAS ENERGY CAPITAL -- THREE YEAR CREDIT FACILITY

In March 2003, Mirant Americas Energy Capital terminated and repaid the
outstanding $50 million under its credit facility.

MIRANT CURACAO INVESTMENTS II -- CREDIT FACILITY

In October 2002, Mirant Curacao entered into a $20 million five-year
partial amortizing credit facility with RBTT Merchant Bank Limited, Trinidad.
The loan is guaranteed by Mirant Corporation and secured by the shares of the
issuer and the assets of Mirant Curacao Investments. Although Mirant Curacao is
not subject to the Chapter 11 proceedings, the filing by Mirant
Corporation -- the guarantor under the credit facility -- triggered a default
under the credit facility. Subsequent to the Chapter 11 filing, Mirant Curacao
was able to secure a waiver of the default and a release of the Mirant
Corporation guarantee.

JAMAICA PUBLIC SERVICE COMPANY -- CREDIT FACILITIES

In March 2003, Jamaica Public Service Company ("JPSCO"), in which Mirant
has an 80% ownership interest, entered into a $30 million 7 year amortizing
credit facility with RBTT Merchant Bank Limited, Trinidad. In May 2003, JPSCO
entered into a $45 million 11.5 year amortizing credit facility

23

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with International Finance Corporation. Principal payments for this facility
begin in 2007. The $30 million 7 year amortizing credit facility refinanced an
existing short-term loan that was used to finance the Bogue construction
facility. The $45 million 11.5 million amortizing credit facility was used to
finance the Bogue construction project. Both loans are non-recourse to Mirant.

I. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes: unrealized gains and losses on
certain derivatives that qualify as cash flow hedges, hedges of net investments,
and available for sale securities; the translation effects of foreign net
investments; adjustments for additional minimum pension liabilities; and the
Company's proportionate share of other comprehensive income or loss of
affiliates. The following table sets forth the comprehensive income (loss) for
the three months ended March 31, 2003 and 2002 (in millions):

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

BALANCE, DECEMBER 31, 2002.................................. $(102)
Other comprehensive income (loss) for the period:
Net change in fair value of derivative hedging
instruments, net of tax effect of less than $1
million................................................ (1)
Reclassification of derivative net gains to earnings, net
of tax effect of $(1).................................. 6
Cumulative translation adjustment......................... (14)
Unrealized gains on TIERS investments..................... 1
Other..................................................... (4)
-----
Other comprehensive (loss).................................. (12)
-----
BALANCE, MARCH 31, 2003..................................... $(114)
=====

The $114 million balance of accumulated other comprehensive loss as of
March 31, 2003 includes the impact of a $11 million loss related to interest
rate hedges, a $53 million loss related to deferred interest rate swap hedging
losses, $37 million of foreign currency translation losses, $7 million
representing Mirant's share of accumulated other comprehensive losses of
unconsolidated affiliates, $2 million of minimum pension liability and $4
million of other losses, offset by $1 million of gains related to its "available
for sale" securities described below.

During the three months ending March 31, 2003, Mirant purchased $51 million
of TIERS Fixed Rate Certificates that are secured by other underlying Mirant
bond instruments. Mirant may sell TIERS Certificates or extinguish the
underlying Mirant debt. Mirant treats the TIERS Certificates as "available for
sale" securities under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Consequently, Mirant marks the TIERS Certificates to
market and records gains or losses in OCI. For balance sheet presentation
purposes, the Company's investment in TIERS certificates is netted against its
long-term debt in the condensed consolidated balance sheets.

24

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mirant expects that as a result of the Chapter 11 filings, interest
payments will cease and the remaining interest rate hedging losses included in
OCI will be reclassified from OCI into earnings in the third quarter of 2003.

J. LITIGATION AND OTHER CONTINGENCIES

The Company is involved in a number of significant legal proceedings. In
certain cases, plaintiffs seek to recover large and sometimes unspecified
damages, and some matters may be unresolved for several years. The Company
cannot currently determine the outcome of the proceedings described below or the
ultimate amount of potential losses. Pursuant to SFAS No. 5, "Accounting for
Contingencies," management provides for estimated losses to the extent
information becomes available indicating that losses are probable and that the
amounts are reasonably estimable. Additional losses resulting from these legal
proceedings could have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.

EFFECT OF CHAPTER 11 FILINGS

As discussed above under Note A -- Proceedings under Chapter 11 of the
Bankruptcy Code, on the Petition Date, the Mirant Debtors filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code. Additionally,
certain of the Company's Canadian subsidiaries have filed an application for
creditor protection under the Companies Creditors' Arrangement Act in Canada,
which, like Chapter 11, allows for reorganization. The Company's businesses in
the Philippines and the Caribbean were not included in the Chapter 11 filings.

As a debtor-in-possession, Mirant is authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court. As of the Petition Date, most pending litigation (including
some of the actions described below) is stayed, and absent further order of the
Bankruptcy Court, no party, subject to certain exceptions, may take any action,
again subject to certain exceptions, to recover on pre-petition claims against
the Company. One exception to this stay of litigation is actions or proceedings
by a governmental agency to enforce its police or regulatory power. The claims
asserted in litigation and proceedings to which the stay applies may be fully
and finally resolved in connection with the administration of the bankruptcy
proceedings and, to the extent not resolved, will need to be addressed in the
context of any plan or plans of reorganization. At this time, it is not possible
to predict the outcome of the Chapter 11 filings or their effect on the
Company's business or outstanding legal proceedings.

CALIFORNIA AND WESTERN POWER MARKETS

The Company is subject to litigation related to its activities in
California and the western power markets and the high prices for wholesale
electricity experienced in the western markets during 2000 and 2001. Various
lawsuits and complaints have been filed by the California Attorney General, the
California Public Utility Commission ("CPUC"), the California Electricity
Oversight Board ("EOB") and various states' rate payers in state and federal
courts and with the Federal Energy Regulatory Commission (the "FERC"). Most of
the plaintiffs in the rate payer suits seek to represent a state-wide class of
retail rate payers. In addition, civil and criminal investigations have been
initiated by the Department of Justice, the General Accounting Office, the FERC
and various states' attorneys general. These matters involve claims that the
Company engaged in unlawful business practices and generally seek unspecified
amounts of restitution and penalties, although the damages alleged to have been
incurred in some of the suits are in the billions of dollars. One of the suits
brought by the California Attorney General seeks an order requiring the Company
to divest its California plants.

25

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, the Company is subject to the proceedings described below in
California Receivables, FERC Show Cause Proceedings Relating to Trading
Practices, FERC Investigation Related to Bidding, and DWR Power Purchases,
relating to its operations in California and the western power markets. The
Company has reserved approximately $295 million for losses related to the
Company's operations in California and the western power markets during 2000 and
2001. Resolution of these matters is subject to resolution of the ongoing
litigation for the matters pending in courts and for those matters pending at
the FERC to the issuance of final decisions by the FERC.

In an order issued July 25, 2001, the FERC initiated a proceeding to
determine whether there had been unjust and unreasonable charges for spot market
bilateral sales in the Pacific Northwest from December 25, 2000 through June 20,
2001. In an order issued June 25, 2003, the FERC ruled that no refunds were owed
and terminated the proceeding. Certain parties to the proceeding have filed a
request for rehearing by the FERC.

On May 19, 2003, the United States District Court for the Southern District
of California denied motions filed by the plaintiffs seeking to have the
Pastorino, RDJ Farms, Century Theatres, El Super Burrito, Leo's Day and Night
Pharmacy, J&M Karsant, and Bronco Don Holdings suits filed between April 23,
2002 and May 24, 2002 remanded to the California state courts in which they were
originally filed and from which they had been removed by the defendants. The
Mirant entities and the other defendants have filed motions to dismiss in those
cases.

On July 8, 2003, the Superior Court for the County of Los Angeles dismissed
the Bustamante v. The McGraw-Hill Companies, Inc., et al. suit that had been
filed November 20, 2002, finding that the plaintiffs had failed to allege facts
sufficient to warrant relief. The court did grant the plaintiffs leave to file
an amended complaint. On August 13, 2003, the plaintiff filed an amended
complaint asserting claims under California's Unfair Competition Act and state
antitrust statute against gas distribution or marketing companies, owners of
electric generation facilities in California and energy marketers, including the
Company and various of its subsidiaries. The amended complaint alleges that the
defendants engaged in a scheme to report false gas prices and volumes to
companies that published index prices for natural gas in order to manipulate the
price indices to benefit themselves. This conduct, the plaintiff asserts,
violated California Penal Code section 395 and caused the prices paid by
Californians for natural gas to be artificially inflated. The suit is brought as
a representative action on behalf of all similarly situated persons, the general
public and all taxpayers. The suit seeks, among other things, disgorgement of
profits, restitution, treble damages and injunctive relief.

On May 5, 2003, the United States District Court for the District of Oregon
granted a motion filed by the plaintiff seeking to dismiss the Lodewick suit
without prejudice. On June 2, 2003, the United States District Court for the
Western District of Washington granted a motion filed by the plaintiff seeking
to dismiss without prejudice the Symonds suit.

On April 28, 2003, a purported class action suit, Egger et al. v. Dynegy,
Inc. et al., was filed in the Superior Court for the County of San Diego,
California, against various owners of electric generation facilities in
California and marketers of electricity and natural gas, including Mirant and
various of its subsidiaries, on behalf of all persons who purchased electricity
in Oregon, Washington, Utah, Nevada, Idaho, New Mexico, Arizona and Montana from
January 1, 1999. The plaintiffs allege that defendants engaged in unlawful,
unfair, and deceptive practices in the California and western wholesale
electricity markets. The plaintiffs contend that the defendants conspired among
themselves and with subsidiaries of Enron Corporation to withhold electricity
from the California Power Exchange Corporation ("PX") and the California
Independent System Operator ("CAISO") markets and to manipulate the price of
electricity sold at wholesale in the California and western markets. The
plaintiffs assert that the defendants' alleged wrongful conduct has caused
damages in excess of one billion dollars and seek treble damages, injunctive
relief, restitution, and an accounting of the wholesale energy transactions
entered into
26

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

by the defendants from 1998. The defendants have removed the suit to the United
States District Court for the Southern District of California.

On June 30, 2003, the Montana Attorney General and Flathead Electric
Cooperative, Inc. filed a suit in the First Judicial District of Montana, County
of Lewis and Clark, against various owners of generating facilities and
marketers of electricity and natural gas in western states, including Mirant,
alleging that the defendants had engaged in unlawful and unfair business
practices in 2000 and 2001 involving the sale of wholesale electricity and
natural gas and had manipulated the markets for wholesale electricity and
natural gas. The plaintiffs allege, among other things, that the defendants
fixed prices and restricted supply into the markets operated by the PX and
CAISO, gamed the power market, provided false information to trade publications
to inflate natural gas price indices published by such publications, and engaged
in other manipulative practices, including withholding generation, selling
generation at inflated prices, submitting false load schedules in order to
increase electricity scarcity, creating fictitious congestion and counterflows,
and double-selling the same generation to the CAISO. The plaintiffs contend the
defendants conspired with each other and acted in concert with each other in
engaging in the conduct alleged. The plaintiffs assert claims for violation of
Montana's Unfair Trade Practices and Consumer Protection Act and fraud. They
seek treble damages, injunctive relief, and attorneys' fees. This suit has been
removed to the United States District Court for the District of Montana on July
23, 2003, and the plaintiffs have filed a motion seeking to have the cases
remanded to the Montana state court.

California Receivables: In 2001, Southern California Edison ("SCE") and
Pacific Gas and Electric ("PG&E") suspended payments to the PX and the CAISO for
certain power purchases, including purchases from Mirant. Both the PX and PG&E
filed for bankruptcy protection in 2001. As of March 31, 2003, the Company has
outstanding receivables for power sales made in California totaling $369
million. The Company does not expect any payments to be received for these sales
until the FERC issues final rulings in the proceeding it initiated in July 2001
to determine the amount of any refunds and amounts owed for sales made to the
CAISO or the PX from October 2, 2000 through June 20, 2001.

FERC Show Cause Proceeding Relating to Trading Practices: On June 25,
2003, the FERC issued a show cause order (the "Trading Practices Order") to more
than fifty parties, including Mirant entities, that a FERC Staff report issued
on March 26, 2003 indicated may have engaged in one or more trading strategies
of the type employed by Enron Corporation and its affiliates ("Enron") and
portrayed in the Enron memos released by the FERC in May 2002. The Trading
Practices Order identifies certain specific trading practices that the FERC
indicates could constitute gaming or anomalous market behavior in violation of
the CAISO and PX tariffs. The order requires the CAISO to identify those
transactions engaged in by the parties that are the subject of the order between
January 1, 2000 and June 20, 2001 that potentially fall within the specified
practices. Those parties, including the Mirant entities, will then have to
demonstrate why those transactions were not violations of the PX and CAISO
tariffs. The FERC also stated that the parties could try to settle these issues
with the FERC Trial Staff. If the FERC finds that the Mirant entities engaged in
transactions that violated the PX or CAISO tariffs between January 1, 2000
through June 20, 2001 or the issue is resolved pursuant to settlement, the FERC
could require the disgorgement of profits made on those transactions and could
impose other non-monetary penalties.

FERC Investigation Relating to Bidding: The FERC on June 25, 2003 issued
an order (the "Bidding Order") initiating an investigation by its staff into
bidding practices in the PX and CAISO markets between May 1, 2000 and October 1,
2000 of more than fifty parties, including Mirant entities. These entities were
previously identified in the report issued by the FERC Staff on March 26, 2003
as having bid generation resources to the PX and CAISO at prices unrelated to
costs. The Bidding Order requires those entities, including the Mirant entities,
to demonstrate why bids in the PX and CAISO markets from May 1, 2000 through
October 1, 2000 that were in excess of $250 per MWh did not constitute a
violation of the CAISO and PX tariffs. If the FERC finds that the Mirant
entities engaged in bidding practices that

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

violated the PX or CAISO tariffs between May 1, 2000 through October 1, 2000,
the FERC could require the disgorgement of profits made as a result of those
bids and could impose other non-monetary penalties. While the Company believes
its bidding practices were legitimate and that it did not violate the
appropriate tariffs, the standards by which the FERC will ultimately judge the
Company's bidding practices are unclear. Depending on the standards applied by
the FERC and if Mirant entities are found by the FERC to have violated the PX or
CAISO tariffs, the amount of any disgorgement of profits required or other
remedy imposed by the FERC could have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

DWR Power Purchases: On May 22, 2001, Mirant entered into a 19-month
agreement with the DWR to provide the State of California with approximately 500
MW of electricity during peak hours through December 31, 2002. On February 25,
2002, the CPUC and the EOB filed separate complaints at the FERC against Mirant
and other sellers of energy under long-term agreements with the DWR, 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. The complaints alleged that the prices the DWR was forced to pay
pursuant to these long-term contracts were unreasonable due to dysfunctions in
the California market and the alleged market power of the sellers. On June 26,
2003, the FERC issued an order dismissing the complaints filed by the CPUC and
the EOB against Mirant alleging that the terms of the 19-month agreement Mirant
entered into with the DWR in May 2001 to provide the State of California with
approximately 500 MW of electricity during peak hours through December 31, 2002
were unjust and unreasonable. The CPUC and the EOB have filed a motion seeking
reconsideration by the FERC of this decision and have stated that, if
reconsideration is denied, they will appeal the FERC's decision to the United
States Court of Appeals.

MIRANT AMERICAS GENERATION BONDHOLDER SUIT

On June 10, 2003, certain holders of senior Mirant Americas Generation
notes maturing after 2006 filed a complaint in the Court of Chancery of the
State of Delaware, California Public Employees' Retirement System, et al. v.
Mirant Corporation, et. al., that named as defendants Mirant, Mirant Americas,
Inc., Mirant Americas Generation, certain past and present Mirant directors, and
certain past and present Mirant Americas Generation managers. Among other
claims, the plaintiffs assert that the restructuring plan pursued by the Company
prior to its filing a petition for reorganization under Chapter 11 of the
Bankruptcy Code was in breach of fiduciary duties allegedly owed to them by
Mirant, Mirant Americas and Mirant Americas Generation managers. In addition,
plaintiffs challenge certain dividends and distributions allegedly made by
Mirant Americas Generation. Plaintiffs seek damages in excess of one billion
dollars.

SHAREHOLDER LITIGATION

Twenty lawsuits have been filed since May 2002 against Mirant and four of
its officers alleging, among other things, that defendants violated federal
securities laws by making material misrepresentations and omissions to the
investing public regarding Mirant's business operations and future prospects.
The complaints seek unspecified damages, including compensatory damages and the
recovery of reasonable attorneys' fees and costs. These suits have been
consolidated into a single action.

In November 2002, the plaintiffs files an amended complaint that added as
defendants Southern Company, the directors of Mirant immediately prior to its
initial public offering of stock, and various firms that were underwriters for
the initial public offering by the Company. In addition to the claims set out in
the original complaint, the amended complaint asserts claims under Securities
Act of 1933 alleging that the registration statement and prospectus for the
initial public offering of Mirant's stock misrepresented and omitted material
facts.

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under its separation agreement with Southern Company, Mirant indemnified
Southern Company against losses arising from acts or omissions by Mirant in the
conduct of its business. Under various underwriting agreements, Mirant has also
indemnified certain underwriters named in these lawsuits for losses arising from
acts or omissions by Mirant in the conduct of its business.

On July 14, 2003, the United States District Court for the Northern
District of Georgia issued an order ruling upon the motions to dismiss for
failure to state a claim filed by Mirant and the other defendants in the
consolidated securities class action suits initiated in May 2002. The court
dismissed the claims asserted by the plaintiffs based on the Company's
California business activities but allowed the case to proceed on the
plaintiffs' other claims. The plaintiffs have indicated that they intend to file
an amended complaint to include additional allegations and claims as a result of
Mirant's restatement of its financial statements for 2001 and 2000, some of
which could be related to the Company's issuance of common stock in its initial
public offering.

MIRANT AMERICAS GENERATION SECURITIES CLASS ACTION

On June 25, 2003, Mirant received notice that on June 11, 2003, a purported
class action lawsuit alleging violations of Sections 11 and 15 of the Securities
Act of 1933 was filed in the Superior Court of Fulton County, Georgia entitled
Wisniak v. Mirant Americas Generation, LLC, et al. The lawsuit names as
defendants Mirant Americas Generation and certain current and former officers
and managers of Mirant Americas Generation. The plaintiff seeks to represent a
putative class of all persons who purchased debt securities of Mirant Americas
Generation pursuant to or traceable to an exchange offer completed by Mirant
Americas Generation in May 2002 in which $750 million of bonds registered under
the Securities Act were exchanged for $750 million of previously issued senior
notes of Mirant Americas Generation. The plaintiff alleges, among other things,
that Mirant Americas Generation's recent restatement of prior financial
statements rendered the registration statement filed for the May 2002 exchange
offer materially false. The complaint seeks damages, interest and attorneys'
fees. The defendants have removed the suit to the United States District Court
for the Northern District of Georgia.

ERISA LITIGATION

On April 17, 2003, a purported class action lawsuit alleging violations of
ERISA was filed in the United States District Court for the Northern District of
Georgia entitled James Brown v. Mirant Corporation, et al., (the "ERISA
Litigation"). The ERISA Litigation names as defendants Mirant Corporation,
certain of its current and former officers and directors, and Southern Company.
The plaintiff, who seeks to represent a putative class of participants and
beneficiaries of Mirant's 401(k) plans (the "Plans"), alleges that defendants
breached their duties under ERISA by, among other things, (1) concealing
information from the Plans' participants and beneficiaries; (2) failing to
ensure that the Plans' assets were invested prudently; (3) failing to monitor
the Plans' fiduciaries; and (4) failing to engage independent fiduciaries to
make judgments about the Plans' investments. The plaintiff seeks unspecified
damages, injunctive relief, attorneys' fees and costs. The factual allegations
underlying this lawsuit are substantially similar to those described above in
California and Western Power Markets, and Shareholder Litigation.

On June 3, 2003, a second purported class action lawsuit alleging
violations of ERISA was filed in the United States District Court for the
Northern District of Georgia entitled Greg Waller, Sr. v. Mirant Corporation, et
al. The Waller suit names as defendants Mirant Corporation, certain of its
current and former officers and directors, and Southern Company. The Waller suit
is substantially similar to the previously filed Brown suit with respect to the
claims asserted, the factual allegations made, and the relief sought.

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITED STATES GOVERNMENT INQUIRIES

In August 2002, Mirant received a notice from the Division of Enforcement
of the Securities and Exchange Commission ("SEC") that it was conducting an
investigation of Mirant. The Division of Enforcement has asked for information
and documents relating to various topics such as accounting issues (including
the issues announced on July 30, 2002 and August 14, 2002), energy trading
matters (including round trip trades), Mirant's accounting for transactions
involving special purpose entities, and information related to shareholder
litigation. In late June 2003, the Division of Enforcement advised Mirant that
its investigation of Mirant had become a formal investigation in February 2003.
Mirant intends to continue to cooperate fully with the Securities and Exchange
Commission.

In addition, the Company has been contacted by the United States Department
of Justice regarding the Company's disclosure of accounting issues, energy
trading matters and allegations contained in the amended complaint discussed
above in Shareholder Litigation that Mirant improperly destroyed certain
electronic records related to its activities in California. The Company has been
asked to provide copies of the same documents requested by the SEC in their
informal inquiry, and the Company intends to continue to cooperate fully.

In August 2002, the Commodity Futures Trading Commission ("CFTC") asked the
Company for information about certain buy and sell transactions occurring during
2001. The Company provided information regarding such trades to the CFTC, none
of which it considers to be wash trades. The CFTC subsequently requested
additional information, including information about all trades conducted on the
same day with the same counterparty that were potentially offsetting during the
period from January 1, 1999 through June 17, 2002, which information the Company
provided. In March 2003, the Company received a subpoena from the CFTC
requesting a variety of documents and information related to the Company's
trading of electricity and natural gas and its reporting of transactional
information to energy industry publications that prepare price indices for
electricity and natural gas in the period from January 1, 1999 through the date
of the subpoena. Among the documents requested were any documents previously
produced to the FERC, the SEC, the Department of Justice, any state's Attorney
General, and any federal or state grand jury. The Company has continued to
receive additional requests for information from the CFTC, and it intends to
continue to cooperate fully with the CFTC. In a submission to the United States
District Court for the Southern District of Texas on July 16, 2003 in a
proceeding not involving the Company, the CFTC identified Mirant as one of
nineteen parties being investigated for potential inaccurate gas price reporting
in violation of the Commodity Exchange Act. The filing made by the CFTC
indicated that it had uncovered evidence showing that eighteen of the nineteen
companies may have inaccurately reported gas prices to the trade publications.
Mirant understands that it is one of those eighteen companies. During reviews in
connection with the CFTC investigation, Mirant has become aware that some of its
employees reported information to energy industry publications that may have
been inaccurate. Mirant, however, is not aware that any of its employees
participated in manipulation or attempted manipulation of energy price indices.
Because this investigation is ongoing and the data is voluminous, Mirant cannot
predict what the outcome will be.

PANDA-BRANDYWINE POWER PURCHASE AGREEMENT

In connection with Mirant's acquisition of the Mirant Mid-Atlantic assets
from Potomac Electric Power Company ("PEPCO") in 2000, PEPCO granted Mirant
certain rights to purchase from PEPCO all power it received under a long term
power purchase agreement (the "Panda PPA") between it and Panda-Brandywine L.P.
("Panda") that expires in 2021. Mirant and PEPCO entered into a contractual
arrangement (the "Back-to-Back Agreement") with respect to the Panda PPA under
which (1) PEPCO agreed to resell to Mirant all "capacity, energy, ancillary
services and other benefits" to which it is entitled from Panda under the Panda
PPA; (2) Mirant agreed to pay PEPCO each month all amounts due from

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PEPCO to Panda for the immediately preceding month associated with such
capacity, energy, ancillary services and other benefits; and (3) PEPCO
irrevocably and unconditionally appointed Mirant to deal directly with Panda
with respect to all matters arising under the Panda PPA. Mirant also entered
into an agreement with PEPCO that provided that the price paid by Mirant for its
December 2000 acquisition of PEPCO assets would be adjusted if by March 19, 2005
a binding court order has been entered finding that the Back-to-Back Agreement
violates the Panda PPA as a prohibited assignment, transfer or delegation of the
Panda PPA or because it effects a prohibited delegation or transfer of rights,
duties or obligations under the Panda PPA that is not severable from the rest of
the Back-to-Back Agreement. If a court order is entered that triggers the
purchase price adjustment, the amount of the adjustment is to be negotiated in
good faith by the parties or determined by binding arbitration so as to
compensate PEPCO for the termination of the benefit of the Back-to-Back
Agreement while also holding Mirant economically indifferent from such court
order. Panda initiated legal proceedings in 2000 asserting that the Back-to-
Back Agreement violated provisions in the Panda PPA prohibiting PEPCO from
assigning the Panda PPA or delegating its duties under the Panda PPA to a third
party without Panda's prior written consent. On June 10, 2003, the Maryland
Court of Appeals, Maryland's highest court, ruled that the assignment of certain
rights and delegation of certain duties by PEPCO to Mirant did violate the
non-assignment provision of the Panda PPA and was unenforceable. The court,
however, left open the issues whether the provisions found to violate the Panda
PPA could be severed and the rest of the Back-to-Back Agreement enforced and
whether Panda's refusal to consent to the assignment of the Panda PPA by PEPCO
to Mirant was unreasonable and violated the Panda PPA. If the June 10, 2003
decision by the Maryland Court of Appeals or a subsequent decision addressing
the Back-to-Back Agreement is determined to have triggered the adjustment to the
purchase price paid by Mirant to PEPCO, such adjustment would not be expected to
have a material adverse effect on the Company's financial position or results of
operations.

EDISON MISSION ENERGY LITIGATION

In March 2002, two subsidiaries of Edison International (collectively
"EME") filed suit alleging Mirant breached its agreement to purchase EME's 50%
interest in EcoElectrica Holdings Ltd., the owner of a 540 MW cogeneration
facility in Puerto Rico. On April 29, 2003, EME amended its complaint to assert
additional claims for fraudulent misrepresentation and concealment, conspiracy
to defraud, and negligent misrepresentation. EME seeks compensatory damages in
excess of $50 million, punitive and exemplary damages of an unspecified amount,
interest and attorneys' fees. The Company believes it did not breach its
agreement with EME. At the same time Mirant and its subsidiaries entered into
the contract with EME, they entered into a separate agreement with a subsidiary
of Enron Corporation to purchase an additional 47.5% ownership interest in
EcoElectrica. That purchase also was not completed.

ENVIRONMENTAL LIABILITIES

In 2000, the State of New York issued a notice of violation to the previous
owner of Mirant New York's Lovett facility concerning the air permitting and air
emission control implications under the Environmental Protection Agency's new
source review regulations promulgated under the Clean Air Act ("NSR") of the
operation of that plant prior to its acquisition by Mirant New York. On June 11,
2003, Mirant New York and the State of New York entered into, and filed for
approval with the United States District Court for the Southern District of New
York, a consent decree that releases Mirant New York from all potential
liability for matters addressed in the notice of violation previously issued by
the state to Orange and Rockland Utilities and for any other potential violation
of NSR or related New York air laws prior to and through the date of entry of
the consent decree by the court. The consent decree is subject to review and
final approval by the court. Under the decree, Mirant New York commits to
install on Lovett's two coal-fired units by 2007 to 2008 emission control
technology consisting of selective catalytic reduction technology to reduce
nitrogen oxide emissions, alkaline in-duct injection technology to reduce sulfur

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

dioxide emissions, and a baghouse. The cost of the emission controls prescribed
by the consent decree could approach $100 million over the approximately five
year period covered by the consent decree. Such costs would generally be
capitalized and amortized as a component of property, plant and equipment. The
consent decree allows Mirant New York to shut down a unit rather than install
the prescribed emission controls on the unit. For one of the units, Mirant New
York also has the option to convert the unit to operate exclusively as a
gas-fired boiler and limit the hours of operation rather than install the
prescribed emission controls. Mirant New York also agreed, beginning 2009, to
retire annually 1,954 tons of sulfur dioxide emission allowances allocated to
the Lovett facility under the Clean Air Act Acid Rain Program, which allowances
will no longer be needed by Mirant New York for compliance as a result of the
sulfur dioxide emission reductions caused by the other actions required by the
consent decree. Mirant New York did not admit to any liability, and the consent
decree does not impose any penalty on Mirant New York for alleged past
violations. The Company intends to seek bankruptcy court approval of the terms
of the consent decree prior to its becoming effective.

ENRON CANADA CLAIM

In June 2000, Mirant provided a guarantee of the obligations of Mirant
Americas Energy Marketing Canada, Ltd. ("Mirant Canada") to Enron Canada Corp.
up to a maximum amount of $30 million (Canadian). In May 2002, Enron Canada
filed a claim against Mirant Canada in the Court of Queen's Bench of Alberta
seeking $45 million (Canadian) related to Mirant Canada's termination of
transactions for the purchase and sale of natural gas with Enron Canada in
December 2001. Mirant Canada has denied liability to Enron Canada. By letter
dated March 31, 2003, Enron Canada has demanded payment from Mirant under its
guarantee. Because Mirant Canada has denied liability to Enron Canada, Mirant
has not honored Enron Canada's demand.

TEXAS COMMERCIAL ENERGY SUIT

On July 7, 2003, Texas Commercial Energy announced that it had filed a
lawsuit in the United States District Court for the Southern District of Texas
against various parties that own generation or sell electricity at wholesale in
the Electric Reliability Council of Texas ("ERCOT"), including Mirant and
various of its subsidiaries. The suit, which is entitled Texas Commercial Energy
v. TXU Energy, Inc. et al., alleges that the defendants acting individually and
in concert with each other engaged in anti-competitive activities in the ERCOT
market in order to fraudulently inflate the price at which they could sell
electricity at wholesale and to drive the plaintiff out of the Texas retail
market. The wrongful conduct alleged includes such activities as economic
withholding of generation, physical withholding of generation and manipulative
bidding. The complaint asserts claims for, among other things, violation of
federal and Texas antitrust laws, fraud, price fixing, and negligent
misrepresentation. The plaintiff alleges it suffered damages in excess of $500
million and seeks treble damages and attorneys' fees. On August 6, 2003, the
plaintiff filed an amended complaint that continued to allege wrongful conduct
by Mirant Corporation and certain of its subsidiaries but did not name them as
defendants in the action.

OTHER LEGAL MATTERS

In addition to the legal matters discussed above, the Company is involved
in various other claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.

32

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

K. COMMITMENTS AND CONTINGENCIES

CONTRACTUAL OBLIGATIONS

Turbine Purchases, Long-Term Service Agreements and Other Construction-Related
Commitments

Mirant has entered into commitments to purchase turbine equipment, both
directly from the vendor and through two equipment procurement facilities. The
remaining aggregate commitments relating to turbine purchase commitments at
March 31, 2003 was $12 million. The cost to terminate the four domestic lease
turbines at March 31, 2003 was $68 million.

As of March 31, 2003, the total estimated commitments for long-term service
agreements associated with turbines installed or in storage were approximately
$729 million. These commitments are payable over the term of the respective
agreements, which range from ten to twenty years. Some of these agreements have
terms that allow for cancellation of the contract at mid-term. If the Company
were to cancel these contracts at mid-term, the estimated commitments for the
remaining long-term service agreements would be reduced to approximately $582
million. Estimates for future commitments for the 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 during the first quarter of 2003,
the long-term service agreements associated with the canceled turbines have been
or will be canceled. Generally, if the associated turbine is cancelled prior to
delivery, then these agreements may be terminated at little or no cost.

The Company has other construction-related commitments related to
developments at its various generation facility sites. At March 31, 2003, these
construction-related commitments totaled approximately $317 million. Although
the Company intends to complete these construction-related activities, generally
these commitments may be terminated by the Company. At March 31, 2003, the
estimated cost to terminate these commitments was approximately $46 million.

Operating Leases

In connection with the purchase of the PEPCO assets, Mirant Mid-Atlantic
leased the Morgantown and the Dickerson base load units and associated property
for terms of 33.75 and 28.5 years, respectively. As of March 31, 2003, the total
notional minimum lease payments for the remaining life of the leases was
approximately $2.7 billion. Rent expenses associated with the Morgantown and
Dickerson operating leases totaled approximately $24 million for each of the
three months ended March 31, 2003 and 2002.

Although Mirant Mid-Atlantic has historically accounted for these leases as
operating leases, due to the Chapter 11 filings, the appropriate
characterization of Mirant Mid-Atlantic's obligations thereunder is subject to a
determination by the Bankruptcy Court. The Company cannot currently determine
the effect of a recharacterization of these obligations by the Bankruptcy Court.

Mirant has commitments under other operating leases with various terms and
expiration dates. Minimum lease payments under non-cancelable operating leases
approximate $436 million as of March 31, 2003. Expenses associated with these
commitments totaled approximately $10 million and $7 million during the three
months ended March 31, 2003 and 2002, respectively.

Fuel Commitments

Mirant had a contract with BP whereby BP was obligated to deliver fixed
quantities of natural gas at identified delivery points. The negotiated purchase
price of delivered gas was generally equal to the monthly spot rate then
prevailing at each delivery point. Because this contract was based on the
monthly spot price at the time of delivery, Mirant had the ability to sell the
gas at the same spot price, thereby
33

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

offsetting the full amount of its commitment related to this contract. Based on
current contract volumes, the estimated minimum commitment for the term of this
agreement based on current spot prices was $3.9 billion as of March 31, 2003.
Effective July 1, 2003, this contact was terminated. Related to the termination,
Mirant paid $2 million to BP.

In April 2002, Mirant Mid-Atlantic entered into a long-term fuel purchase
agreement. The fuel supplier converts 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 varies with the
delivered cost of the coal feedstock. Based on current coal prices, it is
expected that as of March 31, 2003, total estimated minimum commitments under
this agreement were $484 million.

In addition to the coal commitment described above, Mirant has fixed
volumetric purchase commitments under fuel purchase and transportation
agreements, which are in effect through 2012, totaling $409 million at March 31,
2003. Approximately $291 million of these commitments relates to an arrangement
between Mirant Americas Energy Marketing and the synthetic fuel supplier whereby
the synthetic fuel supplier is required to purchase coal directly from the coal
supplier. Mirant Americas Energy Marketing's minimum coal purchase commitments
are reduced to the extent that the synthetic fuel supplier purchases coal under
this arrangement. Since the inception of this arrangement, the synthetic fuel
supplier has purchased 100% of Mirant Americas Energy Marketing's minimum coal
purchase commitment thereby reducing the amount of coal required to be purchased
under the contracts with the coal supplier.

Minority Shareholder Put Option

In March 2003, Mirant Asia-Pacific Limited's subsidiary paid approximately
$30 million to acquire a 4.26% ownership interest in the Pagbilao project.
Subsequent to March 31, 2003, Mirant Asia-Pacific Limited's subsidiary paid
approximately $30 million to acquire a further 4.26% ownership interest in the
Pagbilao project. The remaining minority interest of the Pagbilao project
subject to the put agreement is 4.26%.

Labor Union Agreements

In June 2003, Mirant and International Brotherhood of Electrical Workers
Union 503 in New York entered into a new labor agreement that is effective from
June 1, 2003 until June 1, 2008.

In August 2003, Mirant unilaterally implemented the "Terms and Conditions
of Employment" that reflect a final proposed labor agreement with power plant
employees represented by Local Union 1900, I.B.E.W. at its Mirant Mid-Atlantic
plants in Washington D.C., Maryland, and Virginia. There is a risk that there
will be a strike or some other form of adverse collective action by the union.
If a strike does occur, there is a risk that such action could disrupt the
ability of these plants to produce energy.

L. POWER PURCHASE AGREEMENTS AND OBLIGATIONS UNDER ENERGY DELIVERY AND PURCHASE
COMMITMENTS

Under the asset purchase and sale agreement for the PEPCO generating
assets, Mirant assumed and recorded net obligations of approximately $2.4
billion representing the estimated fair value (at the date of acquisition) of
out-of-market energy delivery and power purchase agreements ("PPAs"), which
consist of five PPAs and two transition power agreements ("TPAs"). The estimated
fair value of the contracts was derived using forward prices obtained from
brokers and other external sources in the market place including brokers and
trading platforms/exchanges such as NYMEX and estimated load information.

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MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The PPAs, which are with parties unrelated to PEPCO, are for a total
capacity of 735 MW and expire over periods through 2021. Upon adoption of SFAS
No. 133 on January 1, 2001, each PPA contract was evaluated to determine whether
it met the definition of a derivative contract under the standard. PPAs
determined to be derivative instruments are recorded on the balance sheet at
fair value, with changes in fair value recorded currently in earnings. The
Company recognized $90 million and $15 million of unrealized gains during the
three months ended March 31, 2003 and 2002, respectively, in connection with the
PPAs. At March 31, 2003, the estimated commitments under the PPA agreements were
$1.4 billion based on the total remaining MW commitment at contractual prices.
As of March 31, 2003, the fair value of the PPAs recorded in price risk
management liabilities in the unaudited condensed consolidated balance sheet
totaled $799 million, of which $102 million is classified as current.

The TPAs state that Mirant will sell a quantity of MWhs over the life of
the contracts based on PEPCO's load requirements. The TPA related to load in
Maryland expires in June 2004, while the TPA related to load in the District of
Columbia expires in January 2005. The proportion of MWhs supplied under the two
agreements is currently 66% and 34%, respectively. As actual MWhs are purchased
or sold under these agreements, Mirant amortizes a ratable portion of the
obligation as an increase in revenues. The Company recorded as an adjustment of
revenues, amortization of the TPA obligation of approximately $124 million and
$96 million during the three months ended March 31, 2003 and 2002, respectively.
The remaining TPA obligation will be amortized as an increase in revenue through
January 2005. As of March 31, 2003, the remaining obligations for the TPAs
recorded in obligations under energy delivery and purchase commitments totaled
$758 million, of which $526 million is classified as current.

Other obligations of approximately $126 million related to other
out-of-market contracts are also recorded in obligations under energy delivery
and purchase commitments in the unaudited condensed consolidated balance sheet
at March 31, 2003.

M. EARNINGS (LOSS) PER SHARE

Mirant calculates basic earnings (loss) per share by dividing the income
(loss) available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings (loss) per share gives effect to dilutive
potential common shares, including stock options, convertible notes and
debentures and convertible trust preferred securities. The following table shows
the computation of basic and diluted earnings (loss) per share for the three
months ended March 31, 2003 and 2002 (in millions, except per share data). Due
to the fact that in the quarter ended March 31, 2003 income from continuing
operations was positive, the dilutive equivalents used to calculate income from
continuing operations per share are also used to calculate the diluted loss from
discontinued operations, from the cumulative effect of change in accounting
principle and from the net loss. This antidilutive result is prescribed by
paragraph 15 of SFAS 128, "Earnings per Share."

35

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following potential common shares were excluded from the earnings per
share calculations (in millions):

N. SEGMENT REPORTING

The Company has two reportable segments: North America and International.
The North America segment consists of the Company's interrelated power
generation and commodity trading operations in the United States and Canada. The
International segment includes power generation in the Philippines and
generation, transmission and distribution operations in the Caribbean, including
Jamaica, the Bahamas, Curacao and Trinidad. The Company's reportable segments
are strategic businesses that are geographically separated and managed
separately. Certain corporate costs, including corporate overhead and interest,
are not allocated to a reporting segment.

36

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FINANCIAL DATA BY SEGMENT

37

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

38

MIRANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

39

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The following discussion should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the notes thereto,
which are included elsewhere in this report.

CHAPTER 11 PROCEEDINGS

On July 14, 2003, Mirant Corporation and substantially all of its
wholly-owned subsidiaries in the United States filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code. For further information
regarding these petitions, see Note A to the unaudited condensed consolidated
financial statements entitled "Proceedings under Chapter 11 of the Bankruptcy
Code."

Under Chapter 11, we are continuing to operate our business without
interruption during the restructuring process as a debtor-in-possession under
the jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure,
applicable court orders, as well as other applicable laws and rules. In general,
debtor-in-possession is authorized under Chapter 11 to continue to operate as an
ongoing business, but may not engage in transactions outside the ordinary course
of business without the prior approval of the Bankruptcy Court.

At this time, it is not possible to accurately predict the effect of the
Chapter 11 reorganization process on our business or the timing of our potential
emergence from Chapter 11. In addition, since a plan of reorganization has not
been prepared, historical results may not be indicative of our future results of
operations. If no plan of reorganization is approved, it is possible that our
assets may be liquidated. Because of these possibilities, an investment in
Mirant common stock and other Mirant securities is highly speculative.
Accordingly, the Company urges that appropriate caution be exercised with
respect to existing and future investments in any of these securities and
liabilities.

On July 15, 2003, the New York Stock Exchange ("NYSE") announced that it
had suspended trading in Mirant's common stock, which traded under the ticker
symbol MIR, and Mirant's 6.25% Convertible Trust Preferred Securities -- Series
A, which traded under the ticker symbol MIRPA. The NYSE took this action
following the announcement that Mirant Corporation had filed voluntary petitions
for reorganization under Chapter 11 of the Bankruptcy Code and because price
indications reflected an abnormally low selling price for Mirant's common stock.
The NYSE also indicated that an application to the Securities and Exchange
Commission to delist these securities is pending the completion of applicable
procedures. Since Mirant's common stock and trust preferred securities are no
longer listed on a securities exchange, there can be no assurance that a liquid
trading market for those securities will continue. On July 16, 2003, Mirant's
common stock and Mirant Trust I 6.25% Convertible Trust Preferred Securities --
Series A began trading over the counter and are quoted on pink sheets. The new
stock symbols are MIRKQ for the common stock and MIRPQ for the 6.25% Convertible
Trust Preferred Securities -- Series A.

OVERVIEW AND BACKGROUND

Our financial performance in 2003 and 2002 has been adversely impacted by a
number of industry factors such as lower spark spreads, milder weather, reduced
credit and diminished liquidity in the marketplace due to the reduced number of
competitors. Comparatively, our losses increased by $18 million for the three
months ended March 31, 2003 compared to the same period in 2002.

Following is a summary of significant factors affecting the Company in
2003:

- Although we cannot currently estimate the impact of the Chapter 11
filings on our financial statements, we have determined that we will be
required to re-examine certain assumptions used in determining the fair
values of our long-lived assets, goodwill and other intangibles, as well
as the realizability of our accounts receivable and price risk management
assets among other items.

40

- Operating cash flow was significantly lower than in 2002, which is
largely due to the Company's deteriorating credit standing and has
required $286 million of additional cash to be used to support various
commodity positions as of March 31, 2003. Our available cash and unused
credit facilities has declined due to unfavorable working capital swings
related to accelerated payments to vendors while receiving cash from
customers under normal credit terms. Since March 31, 2003, through August
15, 2003, our total available cash and unused credit facilities have
declined by an additional $258 million. We used cash subsequent to March
31, 2003 for construction, turbine cancellation fees and working capital
purposes.

- Reduced profitability from our California operations due primarily to the
expiration of our power sales agreement with the California Department of
Water Resources ("DWR") in December 2002. In 2003, the Company converted
some of the units (approximately 1,700 out of 2,000 MW) that were
contracted under the California DWR agreement to Reliability-Must-Run
("RMR") condition 2 units. Our revenues under the power sales agreement
with DWR were based on the market prices at the time we entered into the
agreement. These prices were approximately $150/MWh. Under the RMR
condition 2 contracts, revenues are based on a fixed rate of return and
the units' operating costs. As a result, revenues are lower than the
previous DWR contract.

- Reduced spark spreads in February 2003 as compared to February 2002 and
forced outages and transmission line problems in the Northeast in the
three months ended March 31, 2003 required us to purchase power at higher
prices to deliver power under contractual arrangements previously entered
into to economically hedge sales of power from the generation assets.

- As described in Note B to the unaudited condensed consolidated financial
statements, we recorded an after-tax loss of $25 million as a cumulative
effect of change in accounting principle on January 1, 2003 pursuant to
EITF Issue 02-03. We also adopted SFAS No. 143, effective January 1,
2003, and recognized an after-tax loss of $3 million associated with its
implementation.

RESTATEMENT OF FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements of the Company as
of March 31, 2002 and for the three months then ended have been restated to
correct certain accounting errors made in preparing those financial statements
as well as other reclassifications and adjustments. For further information
regarding these reclassifications and adjustments, see Note C to the unaudited
condensed consolidated financial statements.

The financial statements for prior periods have been restated to report the
revenues and expenses of the components of the Company that were disposed of
separately as discontinued operations. Income (loss) from discontinued
operations for the three months ended March 31, 2003 and 2002 includes the
following components of the Company that have been disposed of: Mirant Americas
Energy Capital, Mirant Canada Energy Capital, Mirant Europe B.V., the Neenah
generating facility in Wisconsin and the Tanguisson power plant in Guam. Income
(loss) from discontinued operations for the three months ended March 31, 2002
also includes the operations of Mirant Americas Production Company in Louisiana,
MAP Fuels Limited in Queensland, Australia and the State Line generating
facility in Indiana. In addition, the financial statements include
reclassifications to present revenues and expenses associated with energy
trading activities on a net basis, as required by EITF Issue 02-03.

RESULTS OF OPERATIONS

This discussion of our performance is organized by reportable operating
segment, which is consistent with the way we manage our business.

NORTH AMERICA

Our North America segment consists primarily of power generation and
commodity trading operations managed as a combined business, including
approximately 17,700 MW of generating capacity as of

41

March 31, 2003. The following table summarizes the operations of our North
American segment for the three months ended March 31, 2003 and 2002 (in
millions):

Operating Revenues. Our operating revenues increased by $519 million in
the three months ended March 31, 2003 compared to the same period in 2002. The
following factors were primarily responsible for the increase in operating
revenues:

- Our revenues increased primarily due to increased power sales volumes and
higher market prices for power in the three months ended March 31, 2003
as compared to the same period in 2002. Most significantly, revenues
related to our Mid-Atlantic operations increased by approximately $311
million, or 120%, in the three months ended March 31, 2003 as compared to
the same period in 2002. The increase in revenues from our Mid-Atlantic
operations was due primarily to an increase in sales volumes combined
with a 38% increase in average price per MWh for the three months ended
March 31, 2003 as compared to the same period in 2002. Power sales
volumes for the region increased primarily due to increased generation by
our assets and abnormally cold weather in the region. Generation volumes
of our assets in the region increased approximately 39% from 3.6 million
MWh in the three months ended March 31, 2002 to 5.0 million MWh in the
three months ended March 31, 2003. In the Northeast region, abnormally
cold weather resulted in higher power prices and volumes. Average power
prices in the Northeast were higher in the three months ended March 31,
2003 as compared to the same period in 2002. This resulted in increases
in our average price of power sold of 12% at Mirant New England and 30%
at Mirant New York. As a result of the increase in generation and prices,
revenues from our Northeast operations increased by $200 million, or
345%, to $258 million in the three months ended March 31, 2003 as
compared to the same period in 2002. The increase in revenues in the
three months ended March 31, 2003 as compared to the same period in 2002
was also partially due to our net capacity additions in Michigan,
Florida, Oregon and Nevada, which accounted for approximately $111
million of the increase in revenues.

- Revenues were further increased by higher net unrealized gains on
long-term power purchase agreements for the three months ended March 31,
2003, as compared to the same period in 2002. Net unrealized gains
increased by $75 million, to $90 million in the three months ended March
31,

42

2003 as compared to $15 million for the same period in 2002. The increases were
primarily due to higher prices in the PJM market.

- These increases were partially offset by a decrease in revenues of $19
million related to our California operations in the three months ended
March 31, 2003 as compared to the same period in 2002. This decrease
resulted from a decrease in power sales volumes in California and the
expiration of our power sales agreement with the California DWR in
December 2002. In 2003, the Company converted some of the units
(approximately 1,700 out of 2,000 MW) that were contracted under the
California DWR agreement to RMR condition 2 units, which provide revenue
based on a fixed rate of return and the units' operating costs. As a
result, revenues per MWh are lower than under the previous DWR contract.

- The increase in revenue was also offset by realized losses of
approximately $101 million related to transition power agreements in the
three months ended March 31, 2003 compared to realized gains of
approximately $10 million in the same period of 2002. Amortization
related to transition power agreements increased by $28 million for the
three months ended March 31, 2003 as compared to the same period in 2002.

- Our net trading revenues decreased by $97 million in the three months
ended March 31, 2003 compared to the same period in 2002. This decrease
was due to less price liquidity, narrower spark spreads, and fewer
counterparties participating in the market.

Cost of fuel, electricity and other products. Our cost of fuel,
electricity and other products for the three months ended March 31, 2003
increased by $583 million from the same period in 2002, primarily due to
increased generation volumes and higher prices for fuel in the three months
ended March 31, 2003 as compared to the same period in 2002. In the Northeast
region, increases in generation volumes combined with higher prices for fuel oil
and natural gas resulted in an increase of $270 million in cost of fuel,
electricity and other products in the three months ended March 31, 2003 as
compared to the same period in 2002. In the Mid-Atlantic region, the average
price of oil increased by 43%. Also contributing to our higher fuel costs was an
increase at Mirant Mid-Atlantic in the proportion of MWhs generated by the more
expensive cycling units, combined with higher oil prices for the cycling units.
This increase resulted in oil burned as a percentage of total fuel consumption
that was 21% for the three months ended March 31, 2003, as compared to 6% for
the same period in 2002. The increase in cost of fuel, electricity and other
products in the three months ended March 31, 2003 as compared to the same period
in 2002 was also partially due to our net capacity additions in Michigan,
Florida, Oregon and Nevada, which accounted for approximately $124 million of
the increase in cost.

Gross margin. Our gross margin decreased by $64 million in the three
months ended March 31, 2003 as compared to the same period in 2002. Overall,
spark spreads were narrower in the three months ended March 31, 2003 compared to
the same period in 2002. In addition, the following factors were primarily
responsible for the decrease in gross margin as a percentage of operating
revenues:

- Gross margin related to our California operations decreased by $51
million in the three months ended March 31, 2003 compared to the same
period in 2002. This decrease was primarily due to the expiration of our
power sales agreement with the DWR in December 2002 and to the conversion
of the majority of our California units to RMR condition 2. Our revenues
under the power sales agreement with DWR were based on the market prices
that were in place at the time we entered into the agreement. These
prices were approximately $150/MWh. Under the RMR condition 2 contracts,
revenues are based on a fixed rate of return and the units' operating
costs. Also contributing to this decrease is the increase in natural gas
prices in the region.

- Gross margin related to our Northeast operations decreased by $70 million
in the three months ended March 31, 2003 compared to the same period in
2002. Due to forced outages and

43

transmission line problems in the three months ended March 31, 2003, we
were required to purchase power at higher prices to cover firm sales
previously entered into to economically hedge sales of power from the
generation assets.

- Net unrealized gains on long-term power purchase agreements increased by
$75 million to $90 million in the three months ended March 31, 2003 as
compared to $15 million for the same period in 2002. The increases were
primarily due to higher prices in the PJM market.

- Our net trading revenues represent the net revenues and expenses related
to our proprietary trading activities. As such, net trading revenues also
represent gross margin related to these activities. Net trading revenues
decreased by $144 million in the three months ended March 31, 2003
compared to the same period in 2002. This decrease was due to less price
liquidity, narrower spark spreads, and fewer counterparties participating
in the market.

Operating Expenses. Our operating expenses decreased by $507 million in
the three months ended March 31, 2003 compared to the same period in 2002. The
following factors were responsible for the changes in operating expenses:

- Operations and maintenance expense decreased by $41 million in the three
months ended March 31, 2003 compared to the same period in 2002 primarily
as a result of cost cutting efforts and restructuring our business in
2002. The decrease was also due to lower planned maintenance at Mirant
Americas Generation, which represents approximately $12 million of the
decrease.

- Depreciation and amortization expense increased by $14 million in the
three months ended March 31, 2003 compared to the same period in 2002.
The increase was primarily a result of additional depreciation from
assets we acquired throughout 2002, and from the commencement of
operations at new units completed in 2002.

- The impairment losses and restructuring charges decreased by
approximately $479 million for the three months ended March 31, 2003
compared to the same period in 2002. The decrease was primarily a result
of charges for Mirant's restructuring plan which was adopted during the
first quarter of 2002. The charges included turbine cancellation
payments, costs to cancel equipment orders and service agreements and
employee severance during the first quarter of 2002.

INTERNATIONAL

Our International segment consists of power generating operations in Asia,
Curacao, and Trinidad and Tobago and our integrated utilities in Jamaica and the
Bahamas. These international operations were not

44

included in the Chapter 11 filings on July 14, 2003. The following table
summarizes the operations of our International businesses for the three months
ended March 31, 2003 and 2002 (in millions):

Operating Revenues. Our operating revenues increased by $20 million for
the three months ended March 31, 2003 compared to the same period in 2002. The
increase is due to increased distribution and integrated utility revenues of $22
million in the three months ended March 31, 2003 compared to the same period in
2002. Approximately $19 million of the increase is attributable to our Jamaican
operation, primarily as a result of higher fuel prices in 2003, which are
partially passed through to the customer, as compared to 2002, and a rate
increase of 7% that went into effect in May 2002 that is not reflected in the
first quarter 2002 results. In addition, revenues at our Bahamas operations
increased by approximately $4 million primarily as a result of higher sales to
industrial customers and as a result of a 70% increase in fuel prices.

Cost of fuel, electricity and other products. Cost of fuel, electricity
and other products increased by $23 million in the three months ended March 31,
2003 compared to the same period in 2002, primarily as a result of higher fuel
prices in the first quarter of 2003 as compared to the same period in 2002.

Operating Expenses. Our operating expenses decreased by $67 million in the
three months ended March 31, 2003 compared to the same period in 2002. The
following factors were responsible for the changes in operating expenses:

- Operations and maintenance expense decreased by $17 million in the three
months ended March 31, 2003 compared to the same period in 2002 due to
lower compensation expense as a result of our cost cutting efforts and
restructuring our business in 2002.

- Impairment losses and restructuring charges decreased by $50 million in
the three months ended March 31, 2003 compared to the same period in
2002. The decrease is primarily due to Mirant's adoption of a
restructuring plan during the first quarter of 2002.

45

CORPORATE

The following table summarizes our corporate expenses and other income and
expenses for the three months ended March 31, 2003 and 2002 (in millions):

Operations and maintenance expense for the three months ended March 31,
2003 increased by approximately $25 million as compared to the same period in
2002, primarily as a result of the costs associated with the settlement of
certain non-tax-qualified pension obligations by purchasing individual annuity
contracts in January 2003, increased insurance premiums and increased legal and
audit fees.

Interest expense for the three months ended March 31, 2003 increased by
approximately $15 million, as compared to the same period in 2002, primarily as
a result of increased interest costs due to higher drawn amounts on our credit
facilities during the first quarter of 2003 as compared to the same period in
2002.

Cumulative Effect of Change in Accounting Principle. As described in Note
B to the unaudited condensed consolidated financial statements, we reflected the
rescission of EITF Issue 98-10 effective January 1, 2003 as a cumulative effect
of change in accounting principle. The net impact was an after-tax charge of $25
million. We also adopted SFAS No. 143 effective January 1, 2003 and recognized
an after-tax charge of $3 million associated with its implementation.

Gain on sale of investments, net. The gain on sales of investments of $250
million for the three months ended March 31, 2002 resulted from the sale of our
interest in Bewag in February 2002.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

The matters described in "Liquidity and Capital Resources," to the extent
that they relate to future events or expectations, may be significantly affected
by the Chapter 11 filings. The Chapter 11 filings will involve, or may result
in, various restrictions on the Company's activities, limitations on financing,
the need to obtain Bankruptcy Court approval for various matters, and
uncertainty as to relationships with vendors, suppliers, customers and others
with whom the Company may conduct or seek to conduct business.

During the pendency of the Chapter 11 proceeding, Mirant and certain of its
subsidiaries, including Mirant Americas Generation and Mirant Mid-Atlantic, will
participate in an intercompany cash management program pursuant to which cash
balances at Mirant and the participating subsidiaries will be

46

transferred to central concentration accounts and, if necessary, lent to Mirant
or any participating subsidiary to fund working capital and other needs. Such
intercompany transfers will be recorded as intercompany loans.

Cash Flows

Operating cash flow decreased by $585 million during the three months ended
March 31, 2003 compared to the same period in 2002 due to favorable changes in
working capital in 2002. During the three months ended March 31, 2003, working
capital changes used $283 million in cash compared to $155 million of cash
provided by changes in working capital during the same period in 2002. Operating
cash flows were significantly lower in the three months ended March 31, 2003 as
compared to the same period in 2002 due to increased collateral posted with
counterparties and the return of collateral held on behalf of counterparties. In
the three months ended March 31, 2003, our net outflow related to collateral was
$286 million. In the three months ended March 31, 2002, our net inflow related
to collateral was $170 million. In addition, as a result of Pennsylvania-New
Jersey-Maryland Interconnection, or PJM, market prices that were significantly
higher during the three months ended March 31, 2003 as compared to the same
period in 2002, our realized losses under the TPAs with PEPCO were $101 million
during the three months ended March 31, 2003. In the three months ended March
31, 2002, we received $10 million under these agreements.

Cash used in investing activities was $7 million for the three months ended
March 31, 2003. This compares to $1,022 million of cash provided by investing
activities for the three months ended March 31, 2002. Cash generated from asset
sales of $1,632 million related to our Bewag investment was offset in part by
capital expenditures of $512 million. Capital expenditures for the three months
ended March 31, 2003 were $273 million, which includes $124 million related to
Europe turbines. During the three months ended March 31, 2003, we received $270
million in proceeds from the sale of our Neenah generating facility and Mirant
America Energy Capital.

We used $173 million of cash during the three months ended March 31, 2003
to reduce debt. During the three months ended March 31, 2002, financing
activities used $1,229 million in cash primarily to reduce long-term debt. In
the three months ended March 31, 2002, we repaid $2,323 million of long-term
debt by using the proceeds of $1.6 billion received from the sale of our
investment in Bewag. We also paid off approximately $550 million in debt related
to Bewag and most of our Mirant Asia-Pacific credit facility of $792 million in
the three months ended March 31, 2002.

47

Total Cash and Available Credit

The table below sets forth total cash and available credit of Mirant
Corporation and its subsidiaries as of August 15, 2003, March 31, 2003 and
December 31, 2002, respectively (in millions). In connection with the Chapter 11
filings, we have secured a commitment, subject to approval of the Bankruptcy
Court, final documentation and closing conditions, for $500 million in
debtor-in-possession financing. This commitment expires on September 5, 2003.
The Company is currently working with the lender to finalize the facility,
however, there can be no assurance that Mirant will be able to close this
facility by the expiration date. We anticipate that our available cash, together
with the debtor-in-possession financing, will be sufficient to fund our
operations during the bankruptcy proceedings.

- ---------------

(1) As of March 31, 2003, the ability of Mirant Americas Generation and Mirant
Mid-Atlantic to distribute cash to Mirant was subject to various covenants
under their debt and lease agreements. We note that Mirant Mid-Atlantic was
currently restricted from paying dividends as of March 31, 2003 and, based
on projected ratio calculations, was expected to remain restricted until at
least the date on which financial statements for the fiscal quarter ended
September 30, 2003 are delivered.

(2) The amount includes an estimated $351 million as of August 15, 2003, $554
million as of March 31, 2003 and $619 million as of December 31, 2002 at
various subsidiaries that either is required for operating, working capital
or other purposes at the respective subsidiaries, or the distribution of
which is restricted by the subsidiaries' debt agreements and therefore is
not available for immediate payment to Mirant Corporation. As of August 15,
2003, we estimate that approximately $125 million of the $351 million is not
legally restricted from being used by Mirant Corporation. Total cash is
equal to cash and cash equivalents plus funds on deposit and cash included
in assets held for sale as follows (in millions):

Credit Rating Downgrades

As a result of our Chapter 11 filings, all of our debt is rated default by
each of the three major agencies that have rated our debt. Our ratings will
remain in the default categories until the conclusion of the Chapter 11 process.

48

COMMODITY TRADING ACTIVITIES

We provide risk management services through commodity trading to our
customers in North America. These services are provided through a variety of
exchange-traded and over-the-counter ("OTC") energy and energy-related
contracts, such as forward contracts, futures contracts, option contracts and
financial swap agreements. These contractual commitments are reflected at fair
value and are presented as "price risk management assets and liabilities" in the
accompanying unaudited condensed consolidated balance sheets. The net changes in
their market values are recognized in income in the period of change.

The determination of fair value considers various factors, including
closing exchange or over-the-counter market price quotations, time value, credit
quality, liquidity and volatility factors underlying options and contractual
commitments. Certain financial instruments that Mirant uses to manage risk
exposure to energy prices for its North American generation portfolio do not
qualify for hedge accounting treatment, typically because they do not meet
strict hedge effectiveness criteria and/or hedge documentation criteria.
Therefore, the fair values of these instruments are included in "price risk
management assets and liabilities" in the accompanying unaudited condensed
consolidated balance sheets.

The volumetric weighted average maturity, or weighted average tenor of the
North American portfolio at March 31, 2003 was 1.1 years. The net notional
amount, or net long (short) position, of the price risk management assets and
liabilities at March 31, 2003 was approximately 7 million equivalent MWhs. The
weighted average tenor and net notional position exclude certain long-term power
purchase agreements included in price risk management liabilities.

The following table provides a summary of the factors impacting the change
in net fair value of the price risk management asset and liability accounts
during the three months ended March 31, 2003 (in millions).

Net fair value of portfolio at December 31, 2002............ $(613)
Gains (losses) recognized in the period, net................ 321
Contracts settled during the period, net.................... (213)
-----
Net fair value of portfolio at March 31, 2003............... $(505)
=====

The fair values of our price risk management assets and liabilities, net of
credit reserves, as of March 31, 2003 are included in the following table (in
millions).

49

The following table represents the net price risk management assets and
liabilities by tenor, excluding certain power purchase agreements that have been
determined to be derivatives under SFAS No. 133 and therefore subject to fair
value accounting (in millions):

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

As discussed above under Note A to the Company's unaudited condensed
consolidated financial statements, on July 14, 2003, Mirant Corporation and
substantially all of its wholly-owned subsidiaries in the United States filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code.
We believe our accounting policies related to commodity trading activities,
asset realization related to long-lived assets, goodwill and intangibles, and
income tax accounting are critical to obtaining an understanding of Mirant's
consolidated financial statements because their application requires significant
estimates and judgments by management in preparing these consolidated financial
statements. Because some of the estimates used in these policies are sensitive
to changes, the results of any change can have a dramatic impact in the future.
At this time, we believe the Chapter 11 filings will adversely impact each of
the areas noted above and others such as collectibility of receivables. At this
time we cannot predict the impact the Chapter 11 filings will have on our
assumptions related to growth rates, cost of capital, retained businesses,
markets served and how changes to those assumptions will impact the carrying
value of goodwill, other intangible assets, and long-lived assets.

ACCOUNTING FOR COMMODITY TRADING ACTIVITIES

Our commodity trading activities include new origination transactions and
risk management activities using contracts for energy, other energy related
commodities and related derivative contracts. We use the mark-to-market method
of accounting for our commodity trading activities. Under the mark-to-market
method of accounting, we record the fair value of commodity and derivative
contracts as price risk management assets and liabilities at the inception of
the contract with changes in fair value being recorded on a net basis in
revenues. Certain commodity trading transactions are entered into under master
netting agreements that provide us with legal right of offset in the event of
default by the counterparty and are therefore reported net in our consolidated
balance sheets. Our energy contracts that qualify as derivatives will continue
to be accounted for at fair value under SFAS No. 133.

We enter into a variety of contractual agreements, such as forward purchase
and sale agreements, and futures, swaps and option contracts. Futures and option
contracts are traded on a national exchange and swaps and forward contracts are
traded in over-the-counter financial markets. These contractual agreements have
varying terms and durations, or tenors, which range from a few days to a number
of years, depending on the instrument.

The fair value of these contracts are primarily determined using quoted
market prices, or if no active trading market exists, quantitative pricing
models. We estimate the fair value of derivative contracts using our pricing
models based on contracts with similar terms and risks. Our modeling techniques
assume market correlation and volatility such as using the prices of one
delivery point to calculate the price of the contract's delivery point in the
model. The nominal value of the transaction is also discounted using a

50

London InterBank Offered Rate ("LIBOR") based forward interest rate curve. In
addition, the fair value of our derivative contracts includes credit reserves
reflecting the risk that the counterparties to these contracts may default on
their obligations. The degree of complexity of our pricing models increases for
longer duration contracts, contracts with multiple pricing features and off hub
delivery points. The amounts recorded as revenue change as these estimates are
revised to reflect actual results and changes in market conditions or other
factors, many of which are beyond our control.

As of March 31, 2003, none of the net fair value of our price risk
management assets and liabilities was calculated using models with low price
discovery. Low price discovery includes illiquid markets with little or no
external price quotes, or where the underlying transactions constitute a large
portion of the totality of the transactions in the market. These circumstances
require management to make assumptions about forward commodity prices and
volatility, which could vary from actual future results. As a result of the
limited amount of transactions and values that are derived using these
quantitative models, our reported financial results should not be materially
effected by these estimates. However, in the future, we could enter into
additional contracts that are accounted for at fair value, which may be
difficult to measure. The Model Risk Oversight Committee maintains
responsibility to review the model assumptions and design to ensure that the
valuation methodologies are consistent and appropriate.

LONG-LIVED ASSETS

We evaluate our long-lived assets (property, plant and equipment) and
definite-lived intangibles for impairment whenever indicators of impairment
exist or when we commit to sell the asset. The accounting standards require that
if the sum of the undiscounted expected future cash flows from a long-lived
asset or definite-lived intangible is less than the carrying value of that
asset, an asset impairment charge must be recognized. The amount of the
impairment charge is calculated as the excess of the asset's carrying value over
its fair value, which generally represents the discounted future cash flows from
that asset or in the case of assets we expect to sell, at fair value less costs
to sell. We believe that the accounting estimates related to impairment testing
are critical accounting estimates because they are highly susceptible to change
from period to period because determining the forecasted future cash flows
related to the assets requires management to make assumptions about future
revenues, competition, operating costs and forward commodity prices over the
life of the assets. Our assumptions about future revenues, costs and forward
prices requires significant judgment because such factors have fluctuated
materially in the past and will continue to do so in the future.

GOODWILL AND INTANGIBLE ASSETS

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we
evaluate our goodwill and indefinite-lived intangible assets for impairment at
least annually and periodically if indicators of impairment are present. SFAS
No. 142 requires that if the fair value of a reporting unit is less than its
carrying value including goodwill (Step I), further valuation is required to
determine if the amount of recorded goodwill is impaired. The impairment charge
is calculated as the difference between the implied fair value of the reporting
unit goodwill and its carrying value (Step II).

Upon adopting SFAS No. 142, we defined our reporting units, as required by
the Statement, for purposes of testing goodwill for impairment. Our reporting
units are the Americas, the Caribbean and Asia. The geographically defined
reporting units have specific management that is held responsible for
decision-making for a group of components representing the reporting unit. These
reporting units reflect the way we manage our business. Impairment testing at
this reporting unit level reflects how acquisitions were integrated into Mirant
and how Mirant is managed overall. The components within our reporting units
serve similar types of customers, provide similar services and operate in
similar regulatory environments. The benefits of goodwill are shared by each
component.

We believe that the accounting estimates related to determining the fair
value of goodwill and any resulting impairment are critical accounting estimates
because they are highly susceptible to change from period to period because
determining the forecasted future cash flows related to the assets requires

51

management to make assumptions about future revenues, operating costs and
forward commodity prices over the life of the assets, and because of the impact
that recognizing an impairment could have on our compliance with certain debt
covenant financial ratios. Our assumptions about future sales, costs and forward
prices require significant judgment because such factors have fluctuated in the
past and will continue to do so in the future.

LITIGATION

We are currently involved in certain legal proceedings. These legal
proceedings are discussed in Part II Item 1 Legal Proceedings and Note J to our
unaudited condensed consolidated financial statements contained elsewhere in
this report. We estimate the range of liability through discussions with
applicable legal counsel and analysis of case law and legal precedents. We
record our best estimate of a loss when the loss is considered probable, or the
low end of our range if no estimate is better than another estimate within a
range of estimates. As additional information becomes available, we reassess the
potential liability related to our pending litigation and revise our estimates.
Revisions in our estimates of the potential liability could materially impact
our results of operations, and the ultimate resolution may be materially
different from the estimates that we make.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks associated with commodity prices, interest
rates and foreign currency exchange rates. We are also exposed to credit risks.

VALUE AT RISK

We continue to use Value-at-Risk ("VaR") to summarize in dollar terms the
market price risk we have and the potential loss in value of our portfolio due
to adverse market movement over a defined time horizon within a specified
confidence interval. For those transactions that were designated for cash flow
hedge accounting, we manage the market risks associated with these derivative
financial instruments in conjunction with the underlying asset positions they
are designed to hedge.

The average VaR, using various assumed holding periods and a 95% confidence
interval, was $54 million for the three months ended March 31, 2003 and the VaR
as of March 31, 2003, was $47.1 million, as compared to $30.8 million and $33.8
million, respectively, for the same period in 2002. If we assumed VaR levels
using a one-day holding period for all positions and commitments in our
portfolio based on a 95% confidence interval, our portfolio VaR was $16.5
million at March 31, 2003 and the average for the three months ended March 31,
2003 was $19 million, compared to $11.1 million and $10.2 million, respectively,
for the same period in 2002. During the three months ended March 31, 2003, the
actual daily loss on a fair value basis exceeded the corresponding one-day VaR
calculation two times, which falls within our 95% confidence interval.

The VaR data presented does not include the derivative financial
instruments that were initially designated as hedges under SFAS No. 133. We have
subsequently determined that these transactions did not qualify for hedge
accounting treatment. It is not practical to recalculate the VaR data presented
above to include the effects of these derivative financial instruments.

In addition, we subsequently determined that certain of our power purchase
agreements are considered derivative financial instruments and subject to fair
value accounting under SFAS No. 133. Previously, we believed the agreements
qualified for the "normal purchase/normal sale" exception under SFAS No. 133 and
had accounted for the agreements as executory contracts using the accrual
method. These power purchase agreements have also not been included in the VaR
data presented since it is also not practical to recalculate the data.

52

CREDIT RISK

Credit risk represents the loss that we would incur if a counterparty fails
to perform under its contractual obligations. We monitor credit concentration
risk on both an individual basis and a group counterparty basis. The table below
summarizes credit exposures by rating category as of March 31, 2003 (in
millions, except percentages).

ITEM 4. CONTROLS AND PROCEDURES

During 2002, the Company's independent auditors identified significant
internal control deficiencies which collectively constitute a material internal
control weakness, the most significant of which relate to its North American
commodity trading and risk management operations.

In addition to the above noted internal control deficiencies, the Company
and its auditors have identified certain other internal control deficiencies
which, if left uncorrected, could result in a material internal control
weakness. Such control deficiencies relate generally to account reconciliation
procedures, certain aspects of the financial accounting and reporting process,
and controls over certain complex areas of accounting for derivatives and income
taxation.

The Company has addressed these internal control deficiencies through a
combination of corrective actions and additional manual control procedures and
believes that the remedial action taken has mitigated the noted internal control
deficiencies.

Within the 90-day period immediately preceding the filing of this quarterly
report, an evaluation was carried out under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and its Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures (as defined by Rules
13a-14(c) and 15d-14(c) under the Exchange Act). Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that there
were no significant deficiencies or material weaknesses, other than those noted
above, in the Company's disclosure controls and procedures and that the design
and operation of these disclosure controls and procedures were effective, as
supplemented by the remedial action taken to mitigate identified deficiencies.

PART II

ITEM 1. LEGAL PROCEEDINGS

As discussed above, on July 14, 2003 (the "Petition Date"), the Mirant
Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy
Code. Additionally, certain of the Company's Canadian subsidiaries have filed an
application for creditor protection under the Companies Creditors' Arrangement
Act in Canada, which, like Chapter 11, allows for reorganization. The Company's
businesses in the Philippines and the Caribbean were not included in the Chapter
11 filings.

As a debtor-in-possession, Mirant is authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the

53

prior approval of the Bankruptcy Court. As of the Petition Date, most pending
litigation (including some of the actions described below) is stayed, and absent
further order of the Bankruptcy Court, no party, subject to certain exceptions,
may take any action, again subject to certain exceptions, to recover on pre-
petition claims against the Company. One exception to this stay of litigation is
actions or proceedings by a governmental agency to enforce its police or
regulatory power. The claims asserted in litigation and proceedings to which the
stay applies may be fully and finally resolved in connection with the
administration of the bankruptcy proceedings and, to the extent not resolved,
will need to be addressed in the context of any plan or plans of reorganization.
At this time, it is not possible to predict the outcome of the Chapter 11
filings or their effect on the Company's business or outstanding legal
proceedings.

Reference is made to the Company's Form 10-K for the period ended December
31, 2002, filed on April 30, 2003, for a complete description of the matters
described below that were initiated prior to April 30, 2003.

Western Power Markets Investigations: On March 26, 2003, the FERC Staff
issued its final report regarding its investigation into whether and, if so, the
extent to which California and western energy markets were manipulated during
2000 and 2001. One of the findings made by the staff was that the gas price
indices published by various trade publications were unreliable due to
widespread falsification of the transactional information reported to such trade
press. On April 30, 2003, the FERC issued an order directing eleven entities
that are significant participants in the United States electricity and gas
markets, including Mirant Americas Energy Marketing, to submit certain
information to the FERC with respect to their internal processes for reporting
trade data. Mirant Americas Energy Marketing has submitted the requested
information.

Western Power Markets Price Mitigation and Refund Proceedings: In an order
issued July 25, 2001, the FERC initiated a proceeding to determine whether there
had been unjust and unreasonable charges for spot market bilateral sales in the
Pacific Northwest from December 25, 2000 through June 20, 2001. In an order
issued June 25, 2003, the FERC ruled that no refunds were required and
terminated the proceeding. Certain parties to the proceeding have filed a
request for rehearing by the FERC.

FERC Show Cause Proceeding Relating to Trading Practices: On June 25,
2003, the FERC issued a show cause order (the "Trading Practices Order") to more
than fifty parties, including Mirant entities, that a FERC Staff report issued
on March 26, 2003 indicated may have engaged in one or more trading strategies
of the type employed by Enron Corporation and its affiliates ("Enron") and
portrayed in the Enron memos released by the FERC in May 2002. The Trading
Practices Order identifies certain specific trading practices that the FERC
indicates could constitute gaming or anomalous market behavior in violation of
the California Independent System Operator's ("CAISO") and California Power
Exchange Corporation's ("PX") tariffs. The order requires the CAISO to identify
those transactions engaged in by the parties that are the subject of the order
between January 1, 2000 and June 20, 2001 that potentially fall within the
specified practices. Those parties, including the Mirant entities, will then
have to demonstrate why those transactions were not violations of the PX and
CAISO tariffs. The FERC also stated that the parties could try to settle these
issues with the FERC Trial Staff. If the FERC finds that the Mirant entities
engaged in transactions that violated the PX or CAISO tariffs between January 1,
2000 through June 20, 2001 or the issue is resolved pursuant to settlement, the
FERC could require the disgorgement of profits made on those transactions and
could impose other non-monetary penalties.

FERC Investigation Relating to Bidding: The FERC on June 25, 2003 issued
an order (the "Bidding Order") initiating an investigation by its staff into
bidding practices in the PX and CAISO markets between May 1, 2000 and October 1,
2000 of more than fifty parties, including Mirant entities. These entities were
previously identified in the report issued by the FERC Staff on March 26, 2003
as having bid generation resources to the PX and CAISO at prices unrelated to
costs. The Bidding Order requires those entities, including the Mirant entities,
to demonstrate why bids in the PX and CAISO markets from May 1, 2000 through
October 1, 2000 that were in excess of $250 per megawatt hour did not constitute
a violation of the CAISO and PX tariffs. If the FERC finds that the Mirant
entities engaged in bidding practices that violated the PX or CAISO tariffs
between May 1, 2000 through October 1, 2000, the FERC

54

could require the disgorgement of profits made as a result of those bids and
could impose other non-monetary penalties. While the Company believes its
bidding practices were legitimate and that it did not violate the appropriate
tariffs, the standards by which the FERC will ultimately judge the Company's
bidding practices are unclear. Depending on the standards applied by the FERC
and if Mirant entities are found by the FERC to have violated the PX or CAISO
tariffs, the amount of any disgorgement of profits required or other remedy
imposed by the FERC could have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

California Rate Payer Litigation: Various lawsuits are pending that assert
claims under California law based on allegations that certain owners of electric
generation facilities in California and energy marketers, including Mirant and
several of its subsidiaries, engaged in various unlawful and anti-competitive
acts that served to manipulate wholesale power markets and inflate wholesale
electricity prices in California. On May 19, 2003, the United States District
Court for the Southern District of California denied motions filed by the
plaintiffs seeking to have seven of those suits (the Pastorino, RDJ Farms,
Century Theatres, El Super Burrito, Leo's Day and Night Pharmacy, J&M Karsant,
and Bronco Don Holdings suits) remanded to the California state courts in which
they were originally filed and from which they had been removed by the
defendants. Mirant and the other defendants have filed motions to dismiss in
those cases.

On July 8, 2003, the Superior Court for the County of Los Angeles dismissed
the class action suit, Bustamante v. The McGraw-Hill Companies, Inc., et al.,
that had been filed November 20, 2002, finding that the plaintiffs had failed to
allege facts sufficient to warrant relief. The court did grant the plaintiffs
leave to file an amended complaint. On August 13, 2003, the plaintiff filed an
amended complaint asserting claims under California's Unfair Competition Act and
state antitrust statute against gas distribution or marketing companies, owners
of electric generation facilities in California and energy marketers, including
the Company and various of its subsidiaries. The amended complaint alleges that
the defendants engaged in a scheme to report false gas prices and volumes to
companies that published index prices for natural gas in order to manipulate the
price indices to benefit themselves. This conduct, the plaintiff asserts,
violated California Penal Code section 395 and caused the prices paid by
Californians for natural gas to be artificially inflated. The suit is brought as
a representative action on behalf of all similarly situated persons, the general
public and all taxpayers. The suit seeks, among other things, disgorgement of
profits, restitution, treble damages and injunctive relief.

Oregon Rate Payer Litigation: On May 5, 2003, the United States District
Court for the District of Oregon granted a motion filed by the plaintiff seeking
to dismiss the Lodewick suit without prejudice.

Washington Rate Payer Litigation: On June 2, 2003, the United States
District Court for the Western District of Washington granted a motion filed by
the plaintiff seeking to dismiss without prejudice the Symonds suit.

Western Rate Payer Litigation: On April 28, 2003, a purported class action
suit, Egger et al. v. Dynegy, Inc. et al., was filed in the Superior Court for
the County of San Diego, California, against various owners of electric
generation facilities in California and marketers of electricity and natural
gas, including Mirant and various of its subsidiaries, on behalf of all persons
who purchased electricity in Oregon, Washington, Utah, Nevada, Idaho, New
Mexico, Arizona and Montana from January 1, 1999. The plaintiffs allege that
defendants engaged in unlawful, unfair, and deceptive practices in the
California and western wholesale electricity markets, including withholding
energy from the market to create artificial shortages, creating artificial
congestion over transmission lines, selling electricity bought in California to
out of state affiliates to create artificial shortages and then selling the
electricity back into the state at higher prices. The plaintiffs contend that
the defendants conspired among themselves and with subsidiaries of Enron
Corporation to withhold electricity from the PX and CAISO markets and to
manipulate the price of electricity sold at wholesale in the California and
western markets. The defendants' unlawful manipulation of the wholesale energy
market, the plaintiffs allege, resulted in supply shortages and skyrocketing
energy prices in the western United States, which in turn caused drastic rate
increases for retail consumers. The plaintiffs assert claims under California's
antitrust statute and its Unfair Competition

55

Act. The plaintiffs contend that the defendants alleged wrongful conduct has
caused damages in excess of one billion dollars and seek treble damages,
injunctive relief, restitution, and an accounting of the wholesale energy
transactions entered into by the defendants from 1998. The defendants have
removed the suit to the United States District Court for the Southern District
of California.

Montana Attorney General Suit: On June 30, 2003, the Montana Attorney
General and Flathead Electric Cooperative, Inc. filed a suit in the First
Judicial District of Montana, County of Lewis and Clark, against various owners
of generating facilities and marketers of electricity and natural gas in western
states, including Mirant, alleging that the defendants had engaged in unlawful
and unfair business practices in 2000 and 2001 involving the sale of wholesale
electricity and natural gas and had manipulated the markets for wholesale
electricity and natural gas. The plaintiffs allege, among other things, that the
defendants fixed prices and restricted supply into the markets operated by the
PX and CAISO, gamed the power market, provided false information to trade
publications to inflate natural gas price indices published by such
publications, and engaged in other manipulative practices, including withholding
generation, selling generation at inflated prices, submitting false load
schedules in order to increase electricity scarcity, creating fictitious
congestion and counterflows, and double-selling the same generation to the
CAISO. The plaintiffs contend the defendants conspired with each other and acted
in concert with each other in engaging in the conduct alleged. The plaintiffs
assert claims for violation of Montana's Unfair Trade Practices and Consumer
Protection Act and fraud. They seek treble damages, injunctive relief, and
attorneys' fees. The suit has been removed to the United States District Court
for the District of Montana on July 23, 2003, and the plaintiffs have filed a
motion seeking to have the case remanded to the Montana state court.

Shareholder Litigation: On July 14, 2003, the United States District Court
for the Northern District of Georgia issued an order ruling upon the motions to
dismiss for failure to state a claim filed by Mirant and the other defendants in
the consolidated securities class action suits initiated in May 2002. The court
dismissed the claims asserted by the plaintiffs based on the Company's
California business activities but allowed the case to proceed on the
plaintiffs' other claims. The plaintiffs have indicated that they intend to file
an amended complaint to include additional allegations and claims as a result of
Mirant's restatement of its financial statements for 2001 and 2000, some of
which could be related to the Company's issuance of stock in its initial public
offering.

ERISA Litigation: On June 3, 2003, a second purported class action lawsuit
alleging violations of the Employee Retirement Income Security Act ("ERISA") was
filed in the United States District Court for the Northern District of Georgia
entitled Greg Waller, Sr. v. Mirant Corporation, et al. The Waller suit names as
defendants Mirant Corporation, certain of its current and former officers and
directors, and Southern Company. The Waller suit is substantially similar to the
previously filed Brown suit with respect to the claims asserted, the factual
allegations made, and the relief sought.

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
permitting and air emission control implications under the Environmental
Protection Agency's new source review regulations promulgated under the Clean
Air Act ("NSR") 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 the Lovett facility, Orange and Rockland
Utilities, alleging violations associated with the operation of the Lovett
facility prior to the acquisition of the plant by Mirant New York.

On June 11, 2003, Mirant New York and the State of New York entered into,
and filed for approval with the United States District Court for the Southern
District of New York, a consent decree that releases Mirant New York from all
potential liability for matters addressed in the notice of violation previously
issued by the state to Orange and Rockland Utilities and for any other potential
violation of NSR or related New York air laws prior to and through the date of
entry of the consent decree by the court. The consent decree is subject to
review and final approval by the court. Under the decree, Mirant

56

New York commits to install on Lovett's two coal-fired units by 2007 to 2008
emission control technology consisting of selective catalytic reduction
technology to reduce nitrogen oxide emissions, alkaline in-duct injection
technology to reduce sulfur dioxide emissions, and a baghouse. The cost of the
emission controls prescribed by the consent decree could approach $100 million
over the approximately five year period covered by the consent decree. Such
costs would generally be capitalized and amortized as a component of property,
plant and equipment. The consent decree allows Mirant New York to shut down a
unit rather than install the prescribed emission controls on the unit. For one
of the units, Mirant New York also has the option to convert the unit to operate
exclusively as a gas-fired boiler and limit the hours of operation rather than
install the prescribed emission controls. Mirant New York also agreed, beginning
2009, to retire annually 1,954 tons of sulfur dioxide emission allowances
allocated to the Lovett facility under the Clean Air Act Acid Rain Program,
which allowances will no longer be needed by Mirant New York for compliance as a
result of the sulfur dioxide emission reductions caused by the other actions
required by the consent decree. Mirant New York did not admit to any liability,
and the consent decree does not impose any penalty on Mirant New York for
alleged past violations. Under the sales agreement with Orange and Rockland
Utilities for the Lovett facility, Orange and Rockland Utilities is responsible
for fines and penalties arising from any violation associated with historical
operations prior to the sale of the Lovett facility to Mirant New York. The
Company intends to seek bankruptcy court approval of the terms of the consent
decree prior to its becoming effective.

United States Government Inquiries: In August 2002, Mirant received a
notice from the Division of Enforcement of the Securities and Exchange
Commission ("SEC") that it was conducting an investigation of Mirant. The
Division of Enforcement has asked for information and documents relating to
various topics such as accounting issues (including the issues announced on July
30, 2002 and August 14, 2002), energy trading matters (including round trip
trades), Mirant's accounting for transactions involving special purpose
entities, and information related to shareholder litigation. In late June 2003,
the Division of Enforcement advised Mirant that its investigation of Mirant had
become a formal investigation in February 2003. Mirant intends to continue to
cooperate fully with the Securities and Exchange Commission.

In addition, the Company has been contacted by the United States Department
of Justice regarding the Company's disclosure of accounting issues, energy
trading matters and allegations contained in the amended complaint discussed
above in Shareholder Litigation that Mirant improperly destroyed certain
electronic records related to its activities in California. The Company has been
asked to provide copies of the same documents requested by the SEC in their
informal inquiry, and the Company intends to continue to cooperate fully.

In August 2002, the Commodity Futures Trading Commission ("CFTC") asked the
Company for information about certain buy and sell transactions occurring during
2001. The Company provided information regarding such trades to the CFTC, none
of which it considers to be wash trades. The CFTC subsequently requested
additional information, including information about all trades conducted on the
same day with the same counterparty that were potentially offsetting during the
period from January 1, 1999 through June 17, 2002, which information the Company
provided. In March 2003, the Company received a subpoena from the CFTC
requesting a variety of documents and information related to the Company's
trading of electricity and natural gas and its reporting of transactional
information to energy industry publications that prepare price indices for
electricity and natural gas in the period from January 1, 1999 through the date
of the subpoena. Among the documents requested were any documents previously
produced to the FERC, the SEC, the Department of Justice, any state's Attorney
General, and any federal or state grand jury. The Company has continued to
receive additional requests for information from the CFTC, and it intends to
continue to cooperate fully with the CFTC. In a submission to the United States
District Court for the Southern District of Texas on July 16, 2003 in a
proceeding not involving the Company, the CFTC identified Mirant as one of
nineteen parties being investigated for potential inaccurate gas price reporting
in violation of the Commodity Exchange Act. The filing made by the CFTC
indicated that it had uncovered evidence showing that eighteen of the nineteen
companies may have inaccurately reported gas prices to the trade publications.
Mirant understands that it is one of those eighteen companies. During reviews in
connection with the CFTC investigation, Mirant has become aware

57

that some of its employees reported information to energy industry publications
that may have been inaccurate. Mirant, however, is not aware that any of its
employees participated in manipulation or attempted manipulation of energy price
indices. Because this investigation is ongoing and the data is voluminous,
Mirant cannot predict what the outcome will be.

Mirant Americas Generation Bondholder Suit: On June 10, 2003, certain
holders of senior Mirant Americas Generation notes maturing after 2006 filed a
complaint in the Court of Chancery of the State of Delaware, California Public
Employees' Retirement System, et al. v. Mirant Corporation, et. al., that named
as defendants Mirant, Mirant Americas, Inc., Mirant Americas Generation, certain
past and present Mirant directors, and certain past and present Mirant Americas
Generation managers. Among other claims, the plaintiffs assert that the
restructuring plan pursued by the Company prior to its filing a petition for
reorganization under Chapter 11 of the Bankruptcy Code was in breach of
fiduciary duties allegedly owed to them by Mirant, Mirant Americas and Mirant
Americas Generation managers. In addition, plaintiffs challenge certain
dividends and distributions allegedly made by Mirant Americas Generation.
Plaintiffs seek damages in excess of one billion dollars.

Mirant Americas Generation Securities Class Action: On June 25, 2003, the
Company received notice that on June 11, 2003, a purported class action lawsuit
alleging violations of Sections 11 and 15 of the Securities Act of 1933 was
filed in the Superior Court of Fulton County, Georgia entitled Wisniak v. Mirant
Americas Generation, LLC, et al. The lawsuit names as defendants Mirant Americas
Generation and certain current and former officers and managers of Mirant
Americas Generation. The plaintiff seeks to represent a putative class of all
persons who purchased debt securities of Mirant Americas Generation pursuant to
or traceable to an exchange offer completed by Mirant Americas Generation in May
2002 in which $750 million of bonds registered under the Securities Act were
exchanged for $750 million of previously issued senior notes of Mirant Americas
Generation. The plaintiff alleges, among other things, that Mirant Americas
Generation's recent restatement of prior financial statements rendered the
registration statement filed for the May 2002 exchange offer materially false.
The complaint seeks damages, interest and attorneys' fees. The defendants have
removed the suit to the United States District Court for the Northern District
of Georgia.

Texas Commercial Energy Suit: On July 7, 2003, Texas Commercial Energy
announced that it had filed a lawsuit in the United States District Court for
the Southern District of Texas against various parties that own generation or
sell electricity at wholesale in the Electric Reliability Council of Texas
("ERCOT"), including Mirant and various of its subsidiaries. The suit, which is
entitled Texas Commercial Energy v. TXU Energy, Inc. et al., alleges that the
defendants acting individually and in concert with each other engaged in
anti-competitive activities in the ERCOT market in order to fraudulently inflate
the price at which they could sell electricity at wholesale and to drive the
plaintiff out of the Texas retail market. The wrongful conduct alleged includes
such activities as economic withholding of generation, physical withholding of
generation and manipulative bidding. The complaint asserts claims for, among
other things, violation of federal and Texas antitrust laws, fraud, price
fixing, and negligent misrepresentation. The plaintiff alleges it suffered
damages in excess of $500 million and seeks treble damages and attorneys' fees.
On August 6, 2003, the plaintiff filed an amended complaint that continued to
allege wrongful conduct by Mirant Corporation and certain of its subsidiaries
but did not name them as defendants in the action.

58

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annual meeting of stockholders on May 22, 2003. The following
resolutions were voted upon at this meeting:

(1) Each nominee for director of Mirant for the term ending 2006
received the requisite plurality of votes. The vote tabulation was as
follows:

(2) Other directors whose term of office as director continued after
our annual meeting were A. W. Dahlberg, Stuart E. Eizenstat, S. Marce
Fuller, David J. Lesar, Robert McCullough, and Ray M. Robinson.

(3) Proposal to Approve the Mirant Employee Stock Purchase Plan received
a
majority of votes

(4) Stockholder Proposal to Expense Stock Options received a majority
of votes

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States
Code)
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States
Code)
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States
Code)
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States
Code)

(b) Reports on Form 8-K.

During the quarter ended March 31, 2003, the Company filed a Current Report
on Form 8-K dated February 12, 2003. The Current Report included information
under Items 5 and 7. No financial statements were filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 27th day of August, 2003.

MIRANT CORPORATION

By: /s/ DAN STREEK
------------------------------------
Dan Streek
Vice President and Controller
(Principal Accounting Officer)

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