Mirant’s liquidity position improved last week after it completed the sale of a one-third stake in the Shajiao C power plant in China to China Resources Power Holding Co. Ltd. for $300 million. Proceeds from the sale increased its liquidity to $1.4 billion and allowed Mirant to eliminate a $254 million loan at its Asian holding company.

“The sale of Shajiao C allows Mirant to maintain a solid level of liquidity as we end the year,” said Rick Kuester, senior vice president at Mirant. “Eliminating the debt of our Asian holding company allows Mirant to remove the Asian dividend block, a significant development considering the size and profitability of our operations in the Philippines.”

Shajiao C is a 1,960 MW power plant located near Hong Kong and is the largest coal-fired plant in Guangdong Province. Mirant originally purchased a 32% economic interest in Shajiao C as part of the company’s acquisition of Consolidated Electric Power Asia in 1997. Mirant purchased an additional 1% interest in 2001 when it acquired Laito Company Limited, a minority shareholder in the project.

Following the sale of Mirant’s interest in Shajiao C, the company has seven power plants in the Philippines and one power plant remaining on Guam. The company has lined up numerous asset sales in order to strengthen its balance sheet and obtain much needed cash to fund its other operations and projects.

The Shajiao C sale and the sale of its domestic exploration and production business were reported over the holidays in a particularly troubling financial statement, in which it also disclosed multiple accounting errors in previous financial statements and a subpoena from the U.S. attorney for the Northern District of California asking for details about possibly reporting inaccurate gas and power price information to the trade press.

Mirant said it received a subpoena in November requesting information about its activities and those of its subsidiaries since Jan. 1, 1998. “The subpoena requests information related to the California energy markets and other topics, including the reporting of inaccurate information to the trade press that publish natural gas or electricity spot price data. The subpoena was issued as part of a grand jury investigation. Mirant intends to cooperate fully with the United States Attorney’s office in this investigation,” the company said.

Mirant also disclosed that it expects an ongoing reaudit to result in the “restatement of its statement of income for either or both of 2000 and 2001 and potentially for interim periods in 2001 and 2002.” The company reported last summer that it had identified several accounting errors related to its risk management and marketing operations. Subsequent to the announcement, it determined that there was no $100 million overstatement of an account payable. It also reconciled a potential $68 million overstatement of an accounts receivable asset. The resolution of the $68 million item did, however, indicate that earnings for the first quarter of 2002 were understated by $16 million, and previously reported second quarter 2002 earnings were overstated by $16 million, Mirant said.

The company also determined the cumulative impact of the previously disclosed $85 million overstatement of a natural gas asset and recorded after-tax charges totaling $42 million in its Dec. 31, 2001 retained earnings balance. The specific periods within previous years to which the $42 million relates have not been determined at this time but will be determined by the ongoing audit by KPMG, Mirant said. So far the company has determined that corrections to taxes, asset values, accrued power revenues and other items have resulted in a $51 million income reduction in 2001.

In addition to the accounting errors and ongoing reaudit, Mirant reported a net quarterly loss of $1 million ($0/share) and third quarter adjusted earnings of $149 million, or 33 cents/share. Adjusted earnings per share were below the 47 cents/share average of analysts’ expectations, and the company lowered its earnings guidance for the full year 2002 to $1-1.05 compared to the $1.39 average analysts’ expectations.

Mirant said its 3Q adjusted earnings excluded the following:

The net after-tax impact of the charges was $150 million, or 33 cents per diluted share. The company also reported a year-to-date net loss of $227 million. Adjusting for operational restructuring and asset-sale related charges taken during the nine-month period, year-to-date adjusted earnings were $412 million or 98 cents per diluted share. The company reported $330 million in net cash from operating activities during the third quarter for a total of $683 million through the nine-months ended Sept. 30.

The company also adopted FASB Emerging Issues Task Force Issue 02-03, which impacts revenues and expenses on energy trading contracts. The adoption reduced both revenues and the cost of fuel, electricity and other products by $7 billion for the third quarter, and by $17 billion through the nine-months ended Sept. 30. However, Mirant said it did not change its gross margin or results from operations.

North American operations reported net income of $123 million, and adjusted earnings of $191 million in the third quarter. They earned gross margins of $578 million from assets and $77 million from energy marketing and risk management activities.

The sale of Mirant’s producing assets in December included 39 MMcf/d of gas production, 18 natural gas and oil producing fields and 206,000 acres of mineral rights in South Louisiana. Castex Energy Inc. bought back from Mirant the assets it had sold to the company a year earlier for $162 million, a Mirant spokeswoman said. Castex, a privately held Houston-based oil and gas producer, had retained an interest in the properties and continued to operate them.

International operations showed a net quarterly loss of $72 million, and adjusted earnings of $13 million. The company ceased international greenfield power plant development projects in Italy, Norway and Korea.

“We had a solid quarter despite poor market conditions and made excellent progress in further strengthening Mirant,” said CEO Marce Fuller. “We brought more than 1,100 MW of generation on-line, moved aggressively to preserve liquidity, reduced trading and marketing activity, and eliminated rating triggers during the quarter. Since then, we negotiated a bilateral agreement with the Philippine government that affirmed our existing power contracts, and we resolved insurance requirements associated with our Philippines businesses. These actions continue to position us well for the future.”

Credit ratings downgrades to below the junk level have forced Mirant to post $850 million in collateral to support its trading and marketing activity. Mirant expects to continue reducing its collateral position during 2003 by further scaling back its gas marketing activities.

The company’s new full-year guidance of adjusted earnings of $1-1.05 per diluted share assumes fourth quarter adjusted earnings per share of 5-10 cents compared to analysts expectations of 25 cents, according to Thomson First Call.

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