Liquidity and Capital Resources

    Historically, we have obtained cash from operations, borrowings under credit facilities and borrowings and capital contributions from Mirant. These funds have been used to finance operations, service debt obligations, fund the acquisition, development and construction of generating facilities, finance capital expenditures and meet other cash and liquidity needs. Some of the cash flows associated with our businesses have been distributed to Mirant from time to time, and Mirant has provided funds to cover our disbursements from time to time.

    The net proceeds that we received from the offering of the existing notes were approximately $1,745 million. We used the proceeds to repay loans of $1,700 million. These loans are comprised of the following credit facilities:

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•

Facility A, $1,150 million, matures on October 20, 2002, interest rate was approximately 7.8% at December 31, 2000;



•

Facility B, $250 million, matures on October 20, 2004, interest rate was approximately 7.6% at December 31, 2000;



•

Facility C, $50 million, matures on October 20, 2004, interest rate was approximately 7.6% at December 31, 2000;



•

Acquisition Facility, repay $175 million of $870 million, matures on September 12, 2001, interest rate was approximately 7.6% at December 31, 2000; and



•

Working Capital Facility, $75 million, matures on September 12, 2001, interest rate was approximately 7.6% at December 31, 2000.

    Facilities B and C and the Working Capital Facility will remain available following the repayment. For Facilities A, B and C, an affiliate of Lehman Brothers acts as agent for a group of banks. Credit Suisse First Boston acts as agent for the Acquisition Facility and Working Capital Facility. Affiliates of certain of the initial purchasers are lenders under these credit facilities. The borrowings under Facilities A, B and C were used to repay intercompany debt to Mirant relating to the acquisitions of Mirant New England, Mirant California and Mirant New York as well as to finance construction of Mirant Wisconsin and Mirant Texas. The borrowings under the Acquisition and Working Capital Facilities were used to finance a portion of the PEPCO acquisition. We used the remaining proceeds for transactions costs and general corporate purposes, including settlement of interest rate hedges entered into in connection with this offering.

    We expect our cash and financing needs over the next several years to be met through a combination of cash flows from operations and debt financings. Our current facilities along with operating cash flows are expected to provide sufficient liquidity for new investments, working capital and capital expenditure needs for the next 12 months.

Quarterly Comparison

    During the three months ended March 31, 2001, we generated net cash from operations of approximately $123 million compared to $10 million for the same period in 2000. This increase is primarily due to growth in earnings as well as changes in working capital totaling $169 million, partially offset by increased income tax payments.

    During the three months ended March 31, 2001, we used $114 million for investing activities compared to $46 million for the same period in 2000. Both periods activities was primarily attributable to capital expenditures. During the three months ended March 31, 2001, we made $15 million in loans to an affiliate.

    During the three months ended March 31, 2001, our financing activities used $16 million in cash as compared to providing $34 million in cash during the same period in 2000. During the three months ended March 31, 2001 our financing activities included $21 million in dividends to Mirant Americas and capital contributions of $5 million from Mirant Americas. During the three months ended March 31, 2000, our financing activities included $29 million of proceeds from the issuance of debt and $6 million of capital contributions from Mirant Americas. These inflows were partially offset by $1 million of dividends paid to Mirant Americas.

Annual Comparison

    For 2000, we generated net cash from operations of approximately $268 million compared to net uses of approximately $102 million for 1999. This increase is primarily due to growth in earnings as well as changes in working capital totaling $51 million.

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    For the year ended December 31, 1999, we used net cash from operations of approximately $102 million compared to generating net cash of approximately $26 million for the year ended December 31, 1998. Cash used by operating activities in 1999 resulted primarily from an increase in net current assets resulting from growth of our business.

    During 2000, we used $1,395 million for investing activities compared to $1,575 million in 1999. The 2000 activity was primarily attributable to the December 2000 acquisition of the PEPCO assets. We have used cash flows provided by financing activities primarily to fund investments in our subsidiaries. From inception through December 31, 2000, we have used approximately $3,661 million of cash for our investing activities. During this period, our investments through significant acquisitions totaled $2,854 million, including $917 million for the acquisition the PEPCO assets, $840 million for the acquisition of the Mirant California assets, $536 million for the acquisition of Mirant New England generating facilities, $493 million for the acquisition of Mirant New York generating facilities and, $68 million for the acquisition of the State Line Energy generating facility. In addition, we invested $537 million in capital expenditures and $271 million in loans to affiliates for acquisition and construction costs.

    During 2000, our financing activities provided approximately $1,179 million in cash. Financing activities included $1,105 million of proceeds from the issuance of debt. Our financing activities also included $255 million in capital contributions from Mirant Americas and $181 million in dividends to Mirant Americas.

    Our financing activities provided approximately $1,708 million in cash during 1999. Financing activities for 1999 included $1,290 million of proceeds from the issuance of debt and $750 million of capital contributions from Mirant Americas. These inflows were partially offset by $290 million in repayment of intercompany debt and $42 million of dividends paid to Mirant Americas.

    In October 1999, we completed a $1,450 million bank financing consisting of three senior unsecured credit facilities, Facility A, Facility B and Facility C. Facility A is a $1,150 million, 364-day term loan with a two-year term-out option. In August 2000, we exercised the term-out option under Facility A and extended the maturity of the $1,150 million balance until October 2002. Facility B is a $250 million, five-year revolver, to be used for capital expenditures and general corporate purposes, and Facility C is a $50 million, five-year revolver, to be used for working capital. The majority of the proceeds from Facility A were used by us to repay intercompany debt to Mirant relating to the acquisitions of the Mirant New England, Mirant California and Mirant New York generating facilities. At December 31, 2000, we had $1,150 million outstanding under Facility A, $250 million outstanding under Facility B and $50 million outstanding under Facility C.

    In September 2000, we entered into a 364-day bank facility (the 2000 Facility) in connection with financing the acquisition by Mirant Mid-Atlantic of the PEPCO assets. The 2000 Facility includes both the $870 million Acquisition Facility and the $150 million revolving, Working Capital Facility referred to above. The 2000 Facility provides a one-year term out option. At December 31, 2000, we had $945 million outstanding under the 2000 Facility.

    Under each of the senior unsecured bank facilities referred to above, we may elect to borrow at a base rate or at LIBOR plus an applicable margin based on our credit rating. As of December 31, 2000, the interest rate under Facility A was LIBOR plus 112.5 basis points (including 12.5 basis points for the October term-out), the interest rate under each of Facility B and Facility C was LIBOR plus 82.5 basis points and the interest rate under the 2000 Facility was LIBOR plus 105 basis points. Under each of Facility B and Facility C, an additional 12.5 basis points is added to the LIBOR interest rate during any period in which 33 ¹ / 3 % or more of the commitments under such facility are drawn. In addition, under the 2000 Facility an additional 12.5 basis points will be added to the LIBOR interest rate in the event it is termed out.

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    The credit agreements for the senior unsecured facilities referred to above contain business and financial covenants, including: (i) maintenance of a specified ratio of cash available for corporate debt service to corporate interest; (ii) maintenance of a specified ratio of recourse debt to recourse capital; (iii) limitations on the incurrence of recourse debt; (iv) limitations on the payment of dividends, the redemption or repurchase of capital stock and payments on affiliate indebtedness; (v) restrictions on the ability of certain of our existing subsidiaries to incur additional debt and enter into sale leaseback transactions; and (vi) a requirement to use proceeds from sales of certain assets to repay debt unless the proceeds are reinvested in similar or related lines of business.

    Currently, we are in compliance with our covenants in our credit agreements, and we believe that these covenants do not constitute a significant limitation on our liquidity for new investment, working capital and capital expenditure needs for the next 12 months.

    In addition to the above-described credit facilities, in December 2000, Mirant Mid-Atlantic entered into leveraged lease transactions with respect to the Dickerson and Morgantown baseload generating units that are treated as operating leases for accounting purposes. Mirant Mid-Atlantic leases the Dickerson and Morgantown units from owner-lessors owned by institutional investors. The owner-lessors issued three series of lessor notes in the aggregate amount of $1,224 million purchased by three pass-through trusts that issued pass-through certificates in the same amount.

    The lease obligations of Mirant Mid-Atlantic are its senior unsecured obligations. The operative documents include covenants that, among other things, limit the ability of Mirant Mid-Atlantic to make restricted payments, to sell, transfer or otherwise dispose of assets, to merge or consolidate, to change its legal form, to create liens or to assign, transfer or sublease its interest in the leased facilities.

    For all derivative financial instruments, we are exposed to losses in the event of nonperformance by counterparties to these derivative financial instruments. Through Mirant Americas Energy Marketing, we have established controls to determine and monitor the creditworthiness of counterparties to mitigate our exposure to counterparty credit risk. Concentrations of credit risk from financial instruments, including contractual commitments, exist when groups of counterparties have similar business characteristics or are engaged in like activities that would cause their ability to meet their contractual commitments to be adversely affected, in a similar manner, by changes in the economy or other market conditions. Mirant Americas Energy Marketing monitors credit risk for us on both an individual basis and a group counterparty basis. Our overall exposure to credit risk may be impacted, either positively or negatively, because our counterparties may be similarly affected by changes in economic, regulatory or other conditions.

Certain Contingencies

    As discussed in more detail in the "Legal Proceedings" section of this prospectus, on June 7, 2000, in a FERC rate proceeding relating to the allocation of responsibility for payment of revenue requirements for reliability-must-run agreements assumed by Mirant California in April 1999 from Pacific Gas and Electric Company, the presiding administrative law judge issued an initial decision which, if upheld on appeal, would require Mirant California to refund certain amounts of the revenue requirement. The amount of this refund as of March 31, 2001 would have been approximately $156 million, which is reflected as a current liability on our balance sheet for March 31, 2001. This amount does not include interest that may be payable in the event of a refund. If paid, the refund would have no effect on net income because the amounts subject to refund have not been recognized as revenues. The outcome of this appeal cannot now be determined. If Mirant California is unsuccessful in its appeal, it may pursue other options available under the reliability-must-run agreements to mitigate the impact of the administrative law judge's decision upon its future operations.

    As discussed in more detail in the "Business" section of this prospectus, on March 9, March 16 and April 16, 2001, the FERC issued orders holding that certain transactions into the CAISO and

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California Power Exchange markets have not been shown to be just and reasonable. The order determined that potential refunds would be appropriate for certain transactions in these markets during a CAISO-declared Stage 3 Emergency, absent additional price or cost justification by jurisdictional sellers. The FERC identified the total potential refund exposure for Mirant California, Mirant Delta and Mirant Potrero for sales made in January, February, March and April 2001 as approximately $3 million.

    We have, through our subsidiaries, approximately 3,000 MW of generating capacity in California. These include facilities that operate during periods of intermediate load and peak demand levels. Mirant California's subsidiaries generated an amount equivalent to about 4% of the total California energy consumption in 2000. The total amount owed to us from both the California Power Exchange and the CAISO as of March 31, 2001 was approximately $312 million, net of settlements due to the California Power Exchange. There are other sources of collateral and revenues that could potentially provide additional offset to these amounts. While the ultimate collectibility of this amount cannot be readily determined, we have taken a provision that we believe adequately covered our exposure as of March 31, 2001 related to the increased credit and payment risks associated with the California power situation. In the first quarter of 2001, we provided for $178 million in relation to uncertainties in the California power market. The total amount of provisions made during 2000 and the first quarter of 2001 in relation to these uncertainties was $228 million. Additionally, we continue to monitor the situation in California. The CAISO and the California Power Exchange are owed past due payments from California utilities, including Pacific Gas and Electric Company, which filed for bankruptcy protection on April 6, 2001.

Quantitative and Qualitative Disclosures about Market Risk

    Market risk is the potential loss that we may incur as a result of changes in the fair value of a particular instrument or commodity. All financial and commodities-related instruments, including derivatives, are subject to market risk. We are exposed to market risks, including changes in interest rates. Through various hedging mechanisms, including contractual arrangements with Mirant Americas Energy Marketing, we attempt to mitigate some of the impact of changes in energy prices, fuel costs and interest rates on our results of operations.

    We use interest rate swaps to hedge underlying debt obligations. These swaps hedge specific debt issuances and currently qualify for hedge accounting. Consequently, the interest rate differential associated with a swap is reflected as an adjustment to interest expense over the life of the instruments. If we sustained a 100 basis point change in interest rates for all variable rate debt, the change would affect net income by approximately $12 million, based on variable rate debt and derivatives and other interest rate sensitive instruments outstanding at both March 31, 2001, and December 31, 2000.

    We engage in commodity-related marketing and price risk management activities, through Mirant Americas Energy Marketing, in order to hedge market risk and exposure to electricity and to natural gas, coal and other fuels utilized by our generation assets. These financial instruments primarily include forwards, futures and swaps. Prior to January 1, 2001, when we adopted Statement of Financial Accounting Standards No. 133, the gains and losses related to these derivatives were recognized in the same period as the settlement of underlying physical transactions. These realized gains and losses are included in operating revenues and operating expenses in the accompanying consolidated statement of income. Subsequent to the adoption of SFAS No. 133 on January 1, 2001, these derivative instruments are recorded in the consolidated balance sheet as either assets or liabilities measured at fair value, and changes in the fair value are recognized currently in earnings, unless specific hedge accounting criteria are met. If the criteria for hedge accounting are met, changes in the fair value are recognized in other comprehensive income until such time as the underlying physical transaction is settled and the gains and losses related to these derivatives are recognized in earnings.

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    We maintain clear policies for undertaking risk-mitigating actions that may become necessary when measured risks temporarily exceed limits as a result of market conditions. To the extent an open position exists, fluctuating commodity prices can impact financial results and financial position, either favorably or unfavorably. As a result, we cannot predict with precision the impact that our risk management decisions may have on our businesses, operating results or financial position. Mirant Americas Energy Marketing manages market price risk for us through formal oversight groups, which include senior management, mechanisms that independently verify transactions and measure risk and the use of a value-at-risk methodology on a daily basis. We bear all gains and losses of the market price risk mitigation activities conducted by Mirant Americas Energy Marketing on our behalf.

    For those commodity contracts in which hedge accounting criteria are met, any changes in the fair value of these contracts reflect essentially offsets to changes in the value of the underlying physical transactions. Therefore, the Company has minimal exposure to market risk on the portion of its portfolio of commodity contracts in which it is effectively hedging the exposure of its physical assets to changes in market prices.

    For those derivative instruments in which hedge criteria are not met, we employ a systematic approach to the evaluation and management of risk associated with these commodity contracts, including Value-at-Risk (VaR). VaR is defined as the maximum loss that is not expected to be exceeded with a given degree of confidence and over a specified holding period. We use a 95% confidence interval and holding periods that vary by commodity and tenor to evaluate our VaR exposure. Based on a 95% confidence interval and employing a one-day holding period for all positions, our portfolio of positions had a VaR of $43 million at March 31, 2001. During the three months ended March 31, 2001, the actual daily change in fair value did not exceed the corresponding daily VaR calculation. We also utilize additional risk control mechanisms such as commodity position limits and stress testing of the total portfolio and its components.

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OUR BUSINESS

Introduction

    We are a Delaware corporation formed on May 12, 1999, and an indirect wholly owned subsidiary of Mirant. We are a leading national independent power provider. We own or control approximately 12,500 MW of electricity generation capacity in the United States.

    We sell most of our output from our generating portfolio in the forward and spot markets through Mirant Americas Energy Marketing and the remainder under contracts with Mirant Americas Energy Marketing and third parties. As indicated below, our generating portfolio is diversified across geographic regions, fuel types, power markets and dispatch types.

⁽¹⁾  Pie chart breakdowns are based on projected operating cash flows (2001-2005) prepared by R.W. Beck, Inc.

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    We operate 79 generating units at 21 plants serving customers located near 10 major metropolitan load centers, thereby giving us access to a wide variety of wholesale customers.

Industry Overview

    In the United States, in response to increasing customer demand for access to low cost electricity and enhanced services, significant portions of the electricity industry are currently being restructured. New regulatory initiatives to increase competition in the domestic power generation industry have been adopted or are being considered at the federal level and by many states.

    The FERC issued Order 636 in 1992 and Order 888 in 1996 to increase competition by easing entry into natural gas and electricity markets. These orders require owners and operators of natural gas and power transmission systems, respectively, to make transmission service available on a nondiscriminatory basis to energy suppliers such as us.

    In order to better ensure competitive access to transmission networks on a nondiscriminatory basis, the FERC issued Order 2000 in December 1999. FERC Order 2000 encouraged electric utilities with power transmission assets to voluntarily form regional transmission organizations, or RTOs, to provide regional management and control of transmission assets independent of control by firms that sell electricity. Among other things, these RTOs will have the exclusive authority to initiate rate changes for the transmission system under each organization's control, exclusive operational control over a broad transmission region and ultimate responsibility for transmission planning and expansion.

    These RTOs are also expected to facilitate inter-regional coordination. In the event the response of transmission-owning utilities to FERC Order 2000 is deemed inadequate, the FERC has announced that it will reexamine this voluntary approach, but there can be no assurance that such action will be taken.

    FERC Orders 636, 888 and 2000 are expected to facilitate access for non-utility power generators, such as us, who do not own transmission assets. The impact of these orders on our business and operations depends on the effect of these orders on the transmission operations in the markets in which we operate. Continued uncertainty over transmission pricing may discourage utilities from investing in needed transmission and cause a reduction in market opportunities, imposition of wholesale price regulation or both. We believe there is a strong trend in the United States toward competitive electric power and natural gas markets, but that our business will continue to be affected by regional and local price regulation in the near term. See "—Operations" for a discussion of the recent regulations affecting the California and New York markets.

    Due to changing regulatory environments and market dynamics in the United States, numerous utilities have divested generating assets. The deregulation process has led to industry consolidation and an increase in competition among the key players in the marketplace. Additionally, deregulation has provided a significant degree of liquidity in various wholesale power markets throughout the United States; however, this consolidation and the continued entry of new competitors may lead to potentially lower energy prices and profits. As a result of the current energy crisis in California, some states have either discontinued or delayed implementation of initiatives involving deregulation.

Strategy

    Our strategy is to continue to be a leading independent national power provider. We consistently seek to enhance the financial and operational performance of our businesses through financial management, cost controls and review and improvement of operations. We believe that Mirant's strengths in design, engineering, finance, construction management, fuel procurement, operations and

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marketing and risk management provide us with a competitive advantage essential to achieving our strategy. The key elements to implement our strategy are:

Maximize the Financial and Operational Performance of Current Investments

    We place substantial emphasis on maximizing the operational and financial performance of our assets. Accordingly, as we develop new assets or acquire new facilities, we generally select senior managers familiar with our performance culture and industry practices to manage those businesses. We also utilize a standard planning process to establish annual financial and operational goals for each business unit, and managers are compensated based on performance as measured by these goals.

Capitalize on Opportunities Generated by Significant Presence in Key Markets

    We believe that we have established a significant presence, both in terms of scale of operations and management, in most of our targeted markets. A strong presence in each market is desirable because changes in energy markets are largely driven by factors such as local economic growth, customer relationships and preferences, infrastructure constraints (such as transmission grids and gas pipelines) and local political choices. As a result, incumbent market participants often have opportunities to expand or enhance their businesses because of relationships with local partners and customers or specific information as to a particular market. A significant presence within a market is advantageous in order to achieve a scale of operations sufficient to promote efficiency, increase operational flexibility and reliability and make full use of the skills of management deployed to that market.

Minimize Risk Through a Diversified Generating Portfolio

    Our generating portfolio is large and diverse and utilizes a variety of technologies, fuel types and fuel sources serving customers located near several of the nation's most important metropolitan areas. Our portfolio consists of a variety of fuel types including coal, oil, hydro and natural gas (some with multiple fuel capabilities) that run in a full range of modes—baseload, intermediate and peaking. Our portfolio consists of plants using a variety of technology, including steam turbine, combustion turbine, hydro and diesel. Our portfolio also spans across seven distinct power markets: PJM, CAISO, New York-ISO, ISO-New England, ERCOT, ECAR and MAIN.

     Combine Mirant Americas Energy Marketing's Proven Energy Marketing and Risk Management Skills with Our Expertise in Operating Generating Assets

    We expect that the deregulation of energy markets nationwide will lead to the restructuring of energy markets. To be successful, we believe that we must be able to integrate asset ownership with the ability to market energy products and to manage market risk associated with those products. We believe we can accomplish this through our affiliate relationship with Mirant Americas Energy Marketing. The output of a substantial portion of our generating facilities is sold by Mirant Americas Energy Marketing, which utilizes liquid power pools for spot sales and forward markets for term sales. We believe marketing and risk management enhance the value of assets by assisting in optimizing capacity utilization, ensuring physical delivery, providing a real-time market interface and managing market price and fuel risks. Conversely, for Mirant Americas Energy Marketing, control of electric assets provides a physical hedge and real-time information and allows for a broader range of product offerings. We believe this integration improves our credibility as an energy provider to our customers.

Minimize Costs By Having Mirant Americas Energy Marketing Employ its Portfolio Fuel Procurement Procedures

    Our fuel management and procurement strategy is managed by Mirant Americas Energy Marketing, which coordinates fuel supply on a centralized basis. We believe this functional

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centralization increases buying power, improves negotiation of transportation arrangements and reduces administrative costs. Mirant Americas Energy Marketing has substantial expertise in fuel procurement nationwide. Our strategy concentrates on ensuring that the fuel needs of our plants are met while minimizing fuel commodity and transportation costs. Mirant Americas Energy Marketing further seeks to match the purchase of associated fuels with the sale of production in an effort to lock in margins when desirable.

    Mirant Americas Energy Marketing's natural gas procurement strategy is designed to ensure reliable and immediate delivery of natural gas to our intermediate and peaking facilities by optimizing transportation and storage options. Mirant Americas Energy Marketing addresses gas supply cost and price risk by structuring agreements to maintain access to multiple gas pools and supply basins and reduce the impact of price volatility. Although we cannot completely eliminate the effects of elevated gas prices and price volatility, this strategy is designed to lessen the effect of these market conditions on our financial results.

    Natural gas storage and transportation agreements include firm and interruptible service structured to allow our facilities operational flexibility while minimizing fixed costs for capacity. In North America, Mirant controls approximately 3.7 billion cubic feet per day of natural gas production, more than 2.1 billion cubic feet per day of natural gas transportation capacity and approximately 41 billion cubic feet of natural gas storage.

Acquire Newly Completed or Established Generating Facilities in Our Target Markets

    We intend to continue to grow through the acquisition of newly completed or established power plants in our target markets. We plan to implement this strategy through the acquisition of greenfield projects developed by Mirant Development, as well as the expansion of existing power plants through Mirant Development and third party acquisitions of existing power assets competitively positioned in our targeted markets. Capacity and energy from new generation projects will be targeted at (i) providing sufficient power to meet anticipated load growth in our target regions; (ii) serving areas with supply shortages where we would have a competitive advantage; and (iii) serving new contracts with large customers in need of dedicated generating assets.

Competitive Advantages

    We believe that our primary competitive advantages are as follows:

•

our revenues are derived from a large generating portfolio, consisting of 79 generating units, that is diversified across geographic areas, fuel types, power markets, dispatch types and generating technologies;



•

our assets are strategically located near major load centers and, in some cases, are located in markets in which electricity prices are more likely to be higher due to transmission constraints and shortages of low cost generation;



•

we have substantial experience in the management, operation and optimization of a portfolio of diverse generating assets such as ours; and



•

our affiliate, Mirant Americas Energy Marketing, markets on our behalf our output not sold under contract to third parties and procures on our behalf substantially all of our fuel. Mirant Americas Energy Marketing has expertise in optimizing fuel costs, selling output efficiently and managing price risk for commodities.

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