Mirant’s stock price has plunged 60% since the beginning of December forcing the company to take drastic actions to restore investor confidence. Enron’s bankruptcy, Mirant’s credit rating downgrade by Moody’s Investor Services and questions about its accounting practices all have played a role in the collapse of its stock.

In reaction to this litany of negative news, the company has taken a long series of actions, including several new measures announced last week, that will help strengthen its balance sheet, improve its liquidity and possibly boost its share price.

“Mirant will continue to focus on strengthening its balance sheet, improving its liquidity and retaining its position as one of the major players in the competitive energy sector,” said CEO Marse Fuller. “Our prudent business plan not only addresses current market conditions faced by all players in the sector, it also clearly reflects Mirant’s ability to adapt to change and preserve its underlying value.”

So far Mirant’s restructuring plan has included issuing 60 million in shares, cutting spending in half, announcing $1.6 billion in asset sales and canceling numerous power plant construction projects. Last week several new moves were added to the list, including the sale of all or part of its European marketing and trading business, reducing its European workforce, cutting spending from $5.9 billion to $2.9 billion and reducing expenses by $75 million in 2002 and $150 million in 2003. In addition it will suspend construction on two European power plants and warehouse turbines for two other projects. It also will put in place the flexibility to cancel all remaining turbines.

This is in addition to its plans to defer or cancel about 8,300 MW of power generation in North America. Mirant has a generating capacity of 15,000 MW. Last summer it planned to triple that capacity, spending up to $3 billion on new plants in this year alone. But power prices plummeted, Enron went under and merchant energy stocks plunged. Mirant now says its capital spending will be limited to funding the completion 5,700 MW of new capacity.

Mirant has approximately 150 employees in Europe, 100 of whom are associated with the marketing and risk management operations that are up for sale. The company said the sale would save $50 million in annual operating expenses. It anticipates a significant, one-time restructuring charge from the cancellation of turbines, employee severance packages and other items, however. This charge is expected to be taken during the first quarter.

“We have always believed that it is necessary to own or control assets in Europe, as well as have a significant presence in risk management,” said Fuller. “Despite our hard work in the European market, capital constraints do not make it possible for us to create the portfolio of assets required to justify our presence in risk management.”

The company reaffirmed its liquidity last Tuesday. CFO Raymond D. Hill said Mirant has $750 million in available cash and credit lines. “This amount is available even after posting additional collateral required in our risk management business and absorbing more than originally anticipated in a loan refinanced by our Asian business unit.

“We’re seeing normal trading activity, and power and natural gas volumes, in our marketing and risk management business,” he said. “Mirant has posted the collateral required to conduct trading with all its major counterparties. Our business was designed to manage asset risk, and its performance demonstrates that Mirant has sufficient liquidity to manage that risk.”

The company also had to reassure analysts last week that its accounting practices, particularly those involving mark-to-market accounting, are sound. Mark-to-market accounting is the practice of booking results from forward transactions. The longer the term of a forward transaction, the more difficult it is to assign value to it. Market observers and others involved in the Enron investigation have said Enron and possibly many other energy companies have manipulated forward transactions to their advantage, assigning unrealistic long-term values in order to show profits on their financial statements.

Mirant officials said last week most of its forward contracts subject to mark-to-market accounting are of “very short duration,” which means they are in a very liquid market where price quotes are readily available. “We don’t have 20-year tolling arrangements,” Mike Smith, Mirant’s global risk officer, said. Additionally, the prices used are not set by the company’s traders, but as part of a uniform system by its middle office and subject to monthly internal auditing in which internal auditors “independently validate and document the curves.”

The company had to disclose a significant amount of new information about its derivative transactions in its annual and quarterly earnings reports last week. It reported a 55% drop in fourth quarter earnings and said it was cutting its earnings projections for the year. After the market closed on Wednesday, Mirant said fourth quarter earnings from operations, excluding special charges, totaled $93 million, or 27 cents per diluted share, representing a 35% increase over the fourth quarter of 2000. Net income for the quarter was down 55% to $30 million, or 9 cents per diluted share, which included $66 million in one-time charges related to Mirant’s exposure to the Enron bankruptcy and a $3 million gain from the sale of Mirant’s Chilean investment, EDELNOR. Net income in 4Q2000 was $67 million.

Mirant had record earnings from operations of $683 million, or $1.95 per diluted share for the year, which was about 87% more than in 2000, excluding special items, particularly charges resulting from the Enron bankruptcy. Net income for the year, including the special impacts of these items, was $568 million, or $1.63 per diluted share, a 58% increase from 2000.

However, the company cut its 2002 earnings estimate to a range of $1.60 to $1.70 from a range of $1.90 to $2, citing lower margins and reduced business activity in North America. Fuller said Mirant expects to report first-quarter earnings of 30 cents a share, down from 52 cents last year. The company forecasts flat earnings per share in 2003, but still expects to grow its earnings per share by 10% to 15% annually over the next five years as long as market conditions improve.

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