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WIKI ANALYSIS
Mirant Corporation (NYSE:MIR) provides electricity to urban areas in the Mid-Atlantic, the Northeast, and California through its 12 power plants, which are capable of producing 10,076 megawatts of electricity.[1] Mirant differs from most electric utility companies in that it does not sell electricity to consumers directly, rather it sells electricity to electric utilities, cities, and large industrial companies. Mirant's core business area is the Boston, New York, and Washington D.C. area, and the utilities that provide direct service to individual customers in those cities have not sufficiently increased their own generation capacity. As a result, they are buying more electricity from third party providers like Mirant.
Mirant had to shut down two of its generating facilities in 2007 due to non-compliance with environmental laws, and the company has spent an additional $1.6 billion to comply with Maryland emissions guidelines. Other states have also passed legislation, requiring Mirant to lower its emissions, leading Mirant to increase the generation capacity while simultaneously lowering the emissions of its existing power plants in Washington, D.C., New York, Boston, and San Francisco. Mirant is also vulnerable to rising fossil fuel costs as all of their plants are powered by fossil fuels and by 2012 only 5% of their fuel supply will be paid through fixed price contracts.
In April of 2010, Mirant announced that it would merge with Reliant Energy to form GenOn Energy.[2] The newly formed company will have nearly 25,000 megawatts of electric generating capacity, making it one of the largest independent power producers in the United States. GenOn will have operations over most of the United States, with its largest generating capacity in the Mid Atlantic and California regions[3].
Company Overview
Business Financials
Mirant expects energy demand to increase the most in Washington, D.C., New York, San Francisco, and Boston from 2008 to 2011, which means Mirant will focus primarily on developing the power plants at those locations with a particular emphasis on San Francisco.
In 2009, Mirant posted total revenues of stock:Mirant_(MIR)/Data/Revenue/2009$2.31 billion, a sharp decline from the previous year's revenues of $3.19 billion in 2008. Unsurprisingly, as a result of this decrease in revenues, its net income dropped significantly as well from $1.26 billion in 2008 to just $434 million in 2009.
Business Segments
Mirant breaks its operations into four segments: i) Mid-Atlantic, ii) Northeast, iii) California, and iv) Other Operations.
Mid-Atlantic (77% of 2009 Revenue, 54% of 2009 Operating Income)
This is the largest of Mirant’s four segments; it has the most generation capacity, makes up the largest portion of revenue, and it is the second largest portion of income from continuing operations. It consists of four generating facilities located in Maryland and Virginia. Mirant has spent $1.6 billion to comply with the Maryland Healthy Air Act emissions standards. In 2009, this segment posted total revenues of $1.78 billion.[4]
Northeast (14% of 2009 Revenue, 6% of 2009 Operating Income)
There are five generating facilities located in Massachusetts and New York that make up this segment. All of the facilities are powered by either natural gas, oil, or diesel, which have volatile prices, and Mirant does not protect itself from these volatile prices by negotiating fixed price contracts. In 2009, this segment had total revenues of $318 million.[4]
California (6% of 2009 Revenue, 1% of 2009 Operating Income)
Mirant expects the largest growth to occur in this segment from 2008-2011. All of this segment’s three generating facilities are located in or near San Francisco. In 2009, this segment earned total revenues of $154 million.[4]
Other Operations (3% of 2009 Revenue, 10% of 2009 Operating Income)
The Other Operations segment is responsible for investing and managing the company’s assets, carbon trading, and negotiating futures contracts for the fossil fuels that Mirant uses at its generating facilities. In 2009, this segment earned $62 million in total revenues.[4]
Key Trends and Forces
Mirant is vulnerable to volatile fossil fuel prices
Prices for fossil fuels, Mirant’s only way of generating electricity, have been volatile since 2000. For example, prices for coal, one of the key energy inputs for Mirant’s generating facilities, tripled between 2007 to 2008. To protect against the rising cost of fossil fuels Mirant attempts to negotiate futures contracts for coal, oil, and natural gas. However, many vendors are unwilling to provide long-term, fixed-price contracts for the sale of those commodities. Mirant negotiated fixed price contracts for79% of its fuel supply in 2009, but only 31% of its fuels will be paid for through fixed price contracts in 2010 and only 5% by 2012.
Mirant’s financial performance depends on unpredictable New England weather patterns
The New England segment is the second largest of Mirant’s segments, by revenue. Warm winters and cool summers decrease the energy demand of individuals, which has an adverse affect on Mirant’s revenues. The opposite is also true of colder than usual winters and hotter than usual summers. New England is notorious for having inconsistent weather (especially compared to Mirant’s California segment), which means Mirant’s New England segment is unable to guarantee high revenues from year to year.
Mirant's financial performance depends on energy usage patterns
Approximately 31% of MIR's powerplants are baseload plants, which means they operate 24/7 and are designed to provide enough electricity so that "x" amount of residential consumers can make it through the day using only necessary appliances like a fridge, light bulbs, and a computer.[5] Another 54% of MIR's plants are intermediate plants, which means when that same "x" amount of people start running their dishwashers and laundry machines, total demand increases beyond what the baseload plants are designed to provide.[6] The intermediate plants supply the demand beyond what the baseload plants are designed to provide. The final 15% of MIR's plants are peak plants, which means that when everybody starts using their air conditioners, televisions, computers, laundry machines, and dishwashers all at the same time, demand increases to the point where a third source of electricity is needed. That third source comes from peak plants.[7] If the amount of electricity that consumers need to get through the day running basic appliances increases, then Mirant benefits. If consumers start using more electricity during peak hours, then Mirant also benefits. However, Mirant will benefit more from an increase in demand for baseload electricity than an increase in demand for peak electricity because it has more baseload plants than peak plants. Thus, Mirant's sales growth depends on the way in which energy demand increases.
Competition
Although Mirant does not compete against electric utility companies that sell electricity to consumers, there are other electric utilities that sell electricity wholesale to cities, industrial customers, and other electric utilities with generating facilities in the Northeast, Mid-Atlantic, and California.
- Constellation Energy Group (CEG): Although Constellation Energy Group has the smallest generation capacity of Mirant's competitors, it has the most revenue. CEG operates in central Maryland and has 60% of its generating capacity in nuclear power and only 35% of its generating capacity comes from coal. CEG is better prepared to handle volatile fossil fuel prices than Mirant, but the costs and risks of running nuclear generating facilities are much greater than a traditional coal powered generating facility.
- NRG Energy (NRG): NRG generates more megawatts of electricity and competes with Mirant in more areas than any of Mirant's competitors. NRG has generating facilities in the Northeast and Western regions of the US, and 16% of NRG's generating capacity comes from nuclear power plants.
- Reliant Energy (RRI): Reliant operates primarily in Texas and only competes with Mirant in Maryland and California. Approximately 75% of Reliant's generating capacity comes from coal powered plants, but the company's renewable energy power plants only operate in Texas, which means Reliant is also exposed to volatile fossil fuel prices.
References
- ↑ http://www.wikinvest.com/stock/Mirant_%28MIR%29/Filing/10-K/2010/F47042189#toc17238_3 MIR 10-K 2009 Item 1 Pg. 6]
- ↑ http://dealbook.blogs.nytimes.com/2010/04/11/mirant-and-rri-agree-to-3-1-billion-merger
- ↑ http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20100411005036&newsLang=en Mirant and RRI Energy to Merge to Create GenOn Energy - April 2010
- ↑ 4.0 4.1 4.2 4.3 MIR 10-K 2009 Item 1 Pg. 8
- ↑ MIR 2007 10-K. pg 66.
- ↑ MIR 2007 10-K. pg 66.
- ↑ MIR 2007 10-K. pg 5.
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