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

Overview

We are a competitive energy company that produces and sells electricity in the United States. We own or lease 10,112 MW of net electric generating capacity in the Mid-Atlantic and Northeast regions and in California. We also operate an integrated asset management and energy marketing organization based in Atlanta, Georgia.

California Development Activities

Mirant Marsh Landing

On September 2, 2009, Mirant Marsh Landing entered into a ten-year PPA with PG&E for 760 MW of natural gas-fired peaking generation to be constructed at our Contra Costa facility near Antioch, California. Construction of the Marsh Landing facility is scheduled to begin in late 2010 and is expected to be completed by May 2013.

During the ten-year term of the PPA, Mirant Marsh Landing will receive fixed monthly capacity payments and variable operating payments. The contract provides PG&E with the entire output of the 760 MW facility which will be capable of producing 719 MW during peak July conditions. The Mirant Marsh Landing PPA is subject to approval by the CPUC.

Contra Costa Toll Extension

On September 2, 2009, Mirant Delta entered into an extension of its existing PPA with PG&E for Contra Costa units 6 and 7 from November 2011 through April 2013. At the end of the extension, and subject to any necessary regulatory approval, Mirant Delta has agreed to retire Contra Costa units 6 and 7, which began operations in 1964, in furtherance of state and federal policies to retire aging power plants that utilize once-through cooling technology. The Mirant Delta PPA extension is subject to approval by the CPUC.

Hedging Activities

We hedge economically a substantial portion of our Mid-Atlantic coal-fired baseload generation and certain of our Mid-Atlantic and Northeast gas and oil-fired generation through OTC transactions. However, we generally do not hedge our intermediate and peaking units for tenors greater than 12 months. A significant portion of our hedges are financial swap transactions between Mirant Mid-Atlantic and financial counterparties that are senior unsecured obligations of such parties and do not require either party to post cash collateral either for initial margin or for securing exposure as a result of changes in power or natural gas prices. At October 13, 2009, our aggregate hedge levels based on expected generation for each period were as follows:

Aggregate Hedge Levels Based on Expected Generation

                  2010            2011            2012            2013        2014
         Power        86 %            52 %            48 %            30 %      22 %
         Fuel         78 %            61 %            32 %             9 %       - %

Legislation has been proposed in Congress to increase the regulation of transactions involving OTC derivatives. The proposed legislation provides that standardized swap transactions between

dealers and large market participants would have to be cleared and must be traded on an exchange or electronic platform. Although the proposed legislation provides exclusions from the clearing and certain other requirements for market participants, such as Mirant, utilizing OTC derivatives to hedge commercial risks, such exclusions are the focus of debate and may not ultimately be part of any final legislation. Greater regulation of OTC derivatives could materially affect our ability to hedge economically our generation by reducing liquidity in the energy and commodity markets and, if we are required to clear such transactions on exchanges, by significantly increasing the collateral costs associated with such activities.

Capital Expenditures and Capital Resources

For the nine months ended September 30, 2009, we paid $473 million for capital expenditures, excluding capitalized interest, of which $336 million related to compliance with the Maryland Healthy Air Act. As of September 30, 2009, we have paid approximately $1.333 billion for capital expenditures related to compliance with the Maryland Healthy Air Act. Including amounts already spent to date, we expect to incur total capital expenditures of $1.674 billion to comply with the limitations on SO2, NOx and mercury emissions imposed by the Maryland Healthy Air Act.

The following table details the expected timing of payments for our estimated capital expenditures, excluding capitalized interest, for the remainder of 2009 and for 2010 (in millions):

                                                  2009    2010
                       Maryland Healthy Air Act   $ 136   $ 205
                       Other environmental           12      20
                       Maintenance                   58     116
                       Construction1                  8      79
                       Other                         11      21

                       Total                      $ 225   $ 441

1 Construction includes our projected capital expenditures for Mirant Marsh Landing.

The 2010 estimated capital expenditures for compliance with the Maryland Healthy Air Act include amounts that are withheld from progress payments under construction contracts and that will be paid after final completion of the project. As of September 30, 2009, we have a contract retention liability related to our compliance with the Maryland Healthy Air Act of $105 million, which is included in current accounts payable and accrued liabilities in our unaudited condensed consolidated balance sheet.

We expect that available cash and future cash flows from operations will be sufficient to fund these capital expenditures.

Scrubber Operating Expenses

Our capital expenditures related to compliance with the Maryland Healthy Air Act include the installation of flue gas desulfurization emissions controls ("scrubbers") at our Chalk Point, Dickerson and Morgantown coal-fired units. We expect to recognize additional variable costs associated with operating the scrubbers. Examples of these costs include limestone, water and chemicals used during the removal of SO2 emissions and also include handling and marketing related to the recyclable gypsum byproduct created during the scrubbing process. In addition, we expect to recognize higher depreciation expense because the scrubbers will be placed in service and we will begin depreciating the capitalized costs associated with them over the shorter of their expected life or the remaining lease term for the leased Dickerson and Morgantown generating units.

Commodity Prices

The prices for delivered natural gas in the third quarter of 2009 reached their lowest level in more than seven years. The energy gross margin from our baseload coal units was negatively affected by this price decline in two ways. First, the price of natural gas contributed to a decrease in power prices. However, we are generally economically neutral for that portion of the generation volumes that we have hedged because our realized gross margin will reflect the contractual prices of our power and fuel contracts. Second, the decrease in natural gas prices at times made it uneconomic for certain of our baseload coal-fired units to generate.

Granted Emissions Allowances

As a result of the capital expenditures we are incurring to comply with the requirements of the Maryland Healthy Air Act, we anticipate that we will have excess SO2 and NOx emissions allowances in future periods. We plan to continue to maintain some SO2 and NOx emissions allowances above those needed for our current expected generation in case our actual generation exceeds our current forecasts for future periods and for possible future additions of generating capacity. At September 30, 2009, the estimated fair value of our anticipated excess SO2 and NOx emissions allowances was approximately $58 million.

Results of Operations

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

In the tables below, the Mid-Atlantic region includes our Chalk Point, Dickerson, Morgantown and Potomac River facilities. The Northeast region includes our Bowline, Canal, Kendall and Martha's Vineyard facilities. For the nine months ended September 30, 2008, the Northeast region also included the Lovett generating facility, which was shut down on April 19, 2008. The California region includes our Contra Costa, Pittsburg and Potrero facilities. Other Operations includes proprietary trading and fuel oil management activities. Other Operations also includes unallocated corporate overhead, interest expense on debt at Mirant Americas Generation and Mirant North America and interest income on our invested cash balances.

Three Months Ended September 30, 2009 versus Three Months Ended September 30, 2008

Consolidated Financial Performance

We reported net income of $55 million and $1.607 billion for the three months
ended September 30, 2009 and 2008, respectively. The change in net income is
detailed as follows (in millions):



                                                       Three Months
                                                           Ended
                                                       September 30,             Increase/
                                                    2009          2008           (Decrease)
Realized gross margin                              $  466        $   417        $         49
Unrealized gross margin                              (174 )        1,395              (1,569 )

Total gross margin                                    292          1,812              (1,520 )
Operating Expenses:
Operations and maintenance                            154            150                   4
Depreciation and amortization                          37             35                   2
Impairment losses                                      14             -                   14
Gain on sales of assets, net                           (3 )          (11 )                 8

Total operating expenses, net                         202            174                  28

Operating income                                       90          1,638              (1,548 )
Total other expense, net                               32             36                  (4 )

Income from continuing operations before
income taxes                                           58          1,602              (1,544 )
Provision (benefit) for income taxes                    3             (5 )                 8

Net income                                         $   55        $ 1,607        $     (1,552 )

The following discussion includes non-GAAP financial measures because we present our consolidated financial performance in terms of gross margin. Gross margin is our operating revenue less cost of fuel, electricity and other products, and excludes depreciation and amortization. We present gross margin, excluding depreciation and amortization, and realized gross margin separately from unrealized gross margin in order to be consistent with how we manage our business. Realized gross margin and unrealized gross margin are both non-GAAP financial measures. Realized gross margin represents our gross margin less unrealized gains and losses on derivative financial instruments for the periods presented. Conversely, unrealized gross margin is our unrealized gains and losses on derivative financial instruments for the periods presented. Management generally evaluates our operating results excluding the impact of unrealized gains and losses. None of our derivative financial instruments recorded at fair value are designated as hedges and changes in their fair values are therefore recognized currently in income as unrealized gains or losses. As a result, our financial results are, at times, volatile and subject to fluctuations in value primarily because of changes in forward electricity and fuel prices. Adjusting our gross margin to exclude unrealized gains and losses provides a measure of performance that eliminates the volatility created by significant shifts in market values between periods. However, our realized and unrealized gross margin may not be comparable to similarly titled non-GAAP financial measures used by other companies. We encourage our investors to review our unaudited condensed consolidated financial statements and other publicly filed reports in their entirety and not to rely on a single financial measure.

For the three months ended September 30, 2009, our realized gross margin increase of $49 million was principally a result of the following:

• an increase of $175 million in realized value of hedges. In 2009, realized value of hedges was $247 million, which reflects the amount by which the settlement value of power contracts exceeded market prices for power, partially offset by the amount by which contract prices for fuel exceeded market prices for fuel. In 2008, realized value of hedges was $72 million, which reflects the amount by which market prices for fuel exceeded contract prices for fuel, offset in part by the amount by which market prices for power exceeded the settlement value of power contracts; partially offset by

• a decrease of $123 million in energy, primarily as a result of a decrease in power prices, an increase in the cost of emissions allowances, including $12 million to comply with the RGGI during the three months ended September 30, 2009, and lower generation volumes. The lower generation volumes were a result of lower demand and decreases in natural gas prices which at times made it uneconomic for certain of our coal-fired units to generate. The decreases in energy gross margin were partially offset by a decrease in the price of fuel; and

• a decrease of $3 million in contracted and capacity primarily related to a decrease in revenues from ancillary services as a result of a decrease in generation volumes and a decrease in power prices.

Our unrealized gross margin for both periods reflects the following:

• unrealized losses of $174 million in 2009, which included unrealized losses of $233 million from power and fuel contracts that settled during the period for which net unrealized gains had been recorded in prior periods, partially offset by a $59 million net increase in the value of hedges and trading contracts for future periods primarily related to decreases in forward power and natural gas prices; and

• unrealized gains of $1.395 billion in 2008, which included a $1.126 billion net increase in the value of hedge contracts for future periods primarily related to decreases in forward power and natural gas prices and unrealized gains of $269 million from power and fuel contracts that settled during the period for which net unrealized losses had been recorded in prior periods.

Our operating expense increase of $28 million was primarily a result of a $14 million impairment loss on intangible assets related to our Potrero and Contra Costa generating facilities and a decrease of $8 million in gain on sales of assets. See Note C to our unaudited condensed consolidated financial statements contained elsewhere in this report for additional information related to our impairments.

Other expense, net decreased $4 million for the three months ended September 30, 2009, and reflects lower interest expense as a result of lower outstanding debt and higher interest capitalized on projects under construction, partially offset by lower interest income as a result of lower interest rates on invested cash and lower average cash balances in 2009 compared to the same period in 2008.

Gross Margin Overview

The following tables detail realized and unrealized gross margin for the three
months ended September 30, 2009 and 2008, by operating segments (in millions):



                                                               Three Months Ended September 30, 2009
                                   Mid-                                                   Other
                                 Atlantic           Northeast          California       Operations         Eliminations       Total
Energy                          $        33        $         3        $          -     $         36        $           -     $    72
Contracted and capacity                  90                 24                  33                -                    -         147
Realized value of hedges                214                 33                   -                -                    -         247

Total realized gross margin             337                 60                  33               36                    -         466
Unrealized gross margin                (124 )              (26 )                 -              (24 )                  -        (174 )

Total gross margin              $       213        $        34        $         33     $         12        $           -     $   292


                                                               Three Months Ended September 30, 2008
                                   Mid-                                                   Other
                                 Atlantic           Northeast          California       Operations         Eliminations       Total
Energy                          $       148        $        23        $          1     $         17        $           6     $   195
Contracted and capacity                  93                 23                  34                -                    -         150
Realized value of hedges                 70                  2                   -                -                    -          72

Total realized gross margin             311                 48                  35               17                    6         417
Unrealized gross margin               1,318                  7                   -               70                    -       1,395

Total gross margin              $     1,629        $        55        $         35     $         87        $           6     $ 1,812

Energy represents gross margin from the generation of electricity, fuel sales and purchases at market prices, fuel handling, steam sales and our proprietary trading and fuel oil management activities.

Contracted and capacity represents gross margin received from capacity sold in ISO and RTO administered capacity markets, through RMR contracts, through tolling agreements and from ancillary services.

Realized value of hedges represents the actual margin upon the settlement of our power and fuel hedging contracts and the difference between market prices and contract costs for coal that we purchased under long-term agreements. Power hedging contracts include sales of both power and natural gas used to hedge power prices as well as hedges to capture the incremental value related to the geographic location of our physical assets.

Unrealized gross margin represents the net unrealized gain or loss on our derivative contracts, including the reversal of unrealized gains and losses recognized in prior periods and changes in value for future periods.

Operating Statistics

The following table summarizes Net Capacity Factor by region for the three
months ended September 30, 2009 and 2008:



                                    Three Months
                                       Ended
                                   September 30,         Increase/
                                  2009        2008       (Decrease)
                  Mid-Atlantic       32 %        37 %            (5 )%
                  Northeast           9 %        15 %            (6 )%
                  California          9 %         7 %             2 %
                  Total              21 %        25 %            (4 )%

The following table summarizes power generation volumes by region for the three months ended September 30, 2009 and 2008 (in gigawatt hours):

                                  Three Months
                                      Ended
                                  September 30,    Increase/       Increase/
                                  2009     2008    (Decrease)      (Decrease)
            Mid-Atlantic:
            Baseload              3,401    4,046         (645 )         (16)%
            Intermediate            194      168           26             15%
            Peaking                  28       46          (18 )         (39)%

            Total Mid-Atlantic    3,623    4,260         (637 )         (15)%

            Northeast:
            Baseload                378      198          180             91%
            Intermediate            111      650         (539 )         (83)%
            Peaking                   2        3           (1 )         (33)%

            Total Northeast         491      851         (360 )         (42)%

            California:
            Intermediate            457      345          112             32%
            Peaking                   1        1            -              -%

            Total California        458      346          112             32%

            Total                 4,572    5,457         (885 )         (16)%

The total decrease in power generation volumes for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, is primarily the result of the following:

Mid-Atlantic. A decrease in our Mid-Atlantic baseload generation as a result of a decrease in demand in 2009 compared to 2008, planned outages in 2009 and the decrease in natural gas prices which at times made it uneconomic for certain of our coal-fired units to generate.

Northeast. A decrease in our Northeast intermediate generation as a result of transmission upgrades in 2009 which reduced the demand for certain of our intermediate units, partially offset by an increase in our Northeast baseload generation as a result of an increase in market spark spreads.

California. All of our California facilities operate under tolling agreements or are subject to RMR arrangements. Our natural gas-fired units in service at Contra Costa and Pittsburg operate under tolling agreements with PG&E for 100% of the capacity from these units and our Potrero

units are subject to RMR arrangements. Therefore, changes in power generation volumes from those facilities, which can be caused by weather, planned outages or other factors, generally do not affect our gross margin.

Mid-Atlantic

Our Mid-Atlantic segment, which accounts for approximately 50% of our net generating capacity, includes four generating facilities with total net generating capacity of 5,230 MW.

The following table summarizes the results of operations of our Mid-Atlantic segment (in millions):

                                                       Three Months
                                                          Ended
                                                      September 30,               Increase/
                                                   2009           2008            (Decrease)
Gross Margin:
Energy                                            $   33         $   148         $       (115 )
Contracted and capacity                               90              93                   (3 )
Realized value of hedges                             214              70                  144

Total realized gross margin                          337             311                   26
Unrealized gross margin                             (124 )         1,318               (1,442 )

Total gross margin                                   213           1,629               (1,416 )

Operating Expenses:
Operations and maintenance                           104              96                    8
Depreciation and amortization                         25              23                    2
Gain on sales of assets, net                          (2 )            (7 )                  5

Total operating expenses, net                        127             112                   15

Operating income                                      86           1,517               (1,431 )
Total other expense, net                               -               1                   (1 )

Income from continuing operations before
income taxes                                      $   86         $ 1,516         $     (1,430 )

Gross Margin

The increase of $26 million in realized gross margin was principally a result of the following:

• an increase of $144 million in realized value of hedges. In 2009, realized value of hedges was $214 million, which reflects the amount by which the settlement value of power contracts exceeded market prices for power, partially offset by the amount by which contract prices for coal that we purchased under long-term agreements exceeded market prices for coal. In 2008, realized value of hedges was $70 million, which reflects the amount by which market prices for coal exceeded contract prices for coal that we purchased under long-term agreements, offset in part by the amount by which market prices for power exceeded the settlement value of power contracts; partially offset by

• a decrease of $115 million in energy, primarily as a result of a decrease in power prices and an increase in the cost of emissions allowances, including $11 million to comply with the RGGI during the three months ended September 30, 2009, and lower generation volumes. The lower generation volumes were a result of lower demand and decreases in natural gas prices which at times made it uneconomic for certain of our coal-fired units to generate. The decreases in energy gross margin were partially offset by a decrease in the price of coal; and

Our unrealized gross margin for both periods reflects the following:

• unrealized losses of $124 million in 2009, which included unrealized losses of $188 million from power and fuel contracts that settled during the period for which net unrealized gains had been recorded in prior periods, partially offset by a $64 million net increase in the value of hedge contracts for future periods primarily related to decreases in forward power and natural gas prices; and

• unrealized gains of $1.318 billion in 2008, which included an $1.077 . . .