Mirant (MIR)

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By selling some of its foreign and domestic power plants in 2006, Mirant was able to earn positive net income for the first time since 2001. However, Mirant had to shut down two of its generating facilities in 2007 due to non-compliance with environmental laws, and the company plans to spend an additional $1.6 billion to comply with Maryland emissions guidelines.^[2] 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.^[3] 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.^[4]

[edit] Company Overview

[edit] Business Strategy

Mirant’s new CEO, Edward Muller, stated in his 2007 annual letter to shareholders that Mirant’s business strategy is to expand the generation capacity of its existing plants and improve their efficiency.^[5] 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.

Mirant is divided into four operating segments: Mid-Atlantic, Northeast, California and Other Operations. Over 78% of Mirant’s net income in 2007 came from the sale of its foreign operations and favorable litigation leftover from the bankruptcy proceedings, which was recorded as income from discontinued operations.^[6] The other 22% of Mirant’s net income came from its operating segments, which was recorded as income from continuing operations.

Mirant has had a strong recovery since 2005, with net income and profit margin rising in 2006 and 2007 despite slowing sales.^[7]

• Mid-Atlantic (56% of revenue, 32% of income from continuing operations): 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. In 2007, Mirant began appealing a law passed by the Virginia State Air Pollution Control Board that forced Mirant to shut down two of its operating plants. Mirant is also spending $1.6 billion to comply with the Maryland Healthy Air Act emissions standards.

• Northeast (33% of revenue, 0% of income from continuing operations): There are five generating facilities located in Massachusetts and New York that make up this segment. While the Northeast segment accounts for a large part of Mirant’s revenue, it ended up losing money in 2007 because of the high operating costs associated with powering the plants. 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.

• California (9% of revenue, 11% of income from continuing operations): Mirant expects the largest growth to occur in this segment from 2008-2011.^[8] All of this segment’s three generating facilities are located in or near San Francisco.

• Other Operations (2% of revenue, 57% of income from continuing operations): 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.^[9]

Even though two of Mirant's generating facilities in the Mid-Atlantic segment were shut down in 2007, it still earned more than the other segments.^[10]

[edit] Financial Performance

Mirant’s revenue in 2007 was lower than its 2005 and 2006 levels, because the Virginia State Air Pollution Board forced Mirant to shut down two of its generating facilities. However, Mirant’s net income in 2007 was ahead of its 2006 and 2005 levels. The company had a negative net income in 2005 since it was still in bankruptcy. The company’s net income rose in 2006, though, because it sold six of its domestic generating facilities and some of its foreign operations. Mirant's net income grew in 2007 because it finalized the sale of its foreign operations. Mirant also managed to settle litigation in a bankruptcy court that forced Pepco, an electric utility company, to repay Mirant approximately $650 million. Q1 2008 net income was -$152 million, due to the rise in fossil fuel prices.^[11]

[edit] Key Trends and Forces

[edit] Environmental regulations adversely affect Mirant

Due to increasing environmental activism and environmental awareness, many states are now passing legislation designed combat global climate change. In 2007 the Virginia State Air Pollution Control Board passed legislation, which Mirant is currently appealing, that forced Mirant to shut down two of its five generating facilities. Mirant is also spending $1.6 billion to comply with the Maryland Healthy Air Act emissions standards. In addition, California and New York have passed legislation that puts a cap on the emissions levels of generating facilities.^[12] Mirant’s CEO, Edward Muller, also stated in his 2008 annual letter to shareholders that he did not believe renewable energy was a viable option and the company is not directing any resources towards developing alternative energy generating facilities.^[13] More environmental legislation will only hurt Mirant’s financial performance and environmental awareness is becoming more of an issue in 2008.^[14]

[edit] Mirant is vulnerable to volatile fossil fuel prices

Prices for fossil fuels, Mirant’s only way of generating electricity, have been volatile from 2000 to 2007. For example, prices for coal, one of the key energy inputs for Mirant’s generating facilities, tripled from 2007 to 2008.^[15] Mirant stated in a Q1 2008 Earnings Call that the price of electricity has not risen enough to match the rising cost of fossil fuels, which contributed to a -$152 million net income loss in Q1 2008.^[16] 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 has negotiated fixed price contracts for 95% of its fuel supply in 2008 and 79% 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.

[edit] 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.

[edit] 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.^[17] 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.^[18] 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.^[19] 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.

[edit] 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.

[edit] References

1. ↑ MIR 2007 10-K. pg 5.
2. ↑ MIR 2007 10-K. pg 5.
3. ↑ MIR 2007 10-K. pg 5.
4. ↑ MIR 2007 10-K. pg 38.
5. ↑ “Annual Letter to Shareholders.” Edward Muller. February 2, 2008.
6. ↑ MIR 2007 10-K. pg 39.
7. ↑ MIR 2007 10-K. pg 26.
8. ↑ “Annual Letter to Shareholders.” Edward Muller. February 2, 2008.
9. ↑ MIR 2007 10-K. pg 66.
10. ↑ MIR 2007 10-K. pg 26.
11. ↑ “Mirant Corp., Q1 2008 Earnings Call Transcript.” Seeking Alpha. May 8, 2008.
12. ↑ MIR 2007 10-K. pg 26.
13. ↑ “Annual Letter to Shareholders.” Edward Muller. February 2, 2008.
14. ↑ “Campaign to raise awareness.” Doyle Rice. USA Today. March 1, 2008.
15. ↑ “Coal price seen rising.” Fayden Wong. Reuters Business News. March 7, 2008.
16. ↑ “Mirant Corp., Q1 2008 Earnings Call Transcript.” Seeking Alpha. May 8, 2008.
17. ↑ MIR 2007 10-K. pg 66.
18. ↑ MIR 2007 10-K. pg 66.
19. ↑ MIR 2007 10-K. pg 5.
20. ↑ CEG's 2007 10-k (Pg 29)
21. ↑ MIR 2007 10-K. pg 26.
22. ↑ Annual Income Statement, NRG Energy, Yahoo Finance
23. ↑ RRI 2007 10-K. pg. 18
24. ↑ CEG Generation
25. ↑ MIR 2007 10-K. pg 5.
26. ↑ NRG 2007 10-K pg 35
27. ↑ RRI 2007 10-K pg 4
28. ↑ CEG's 2007 10-k (Pg 29)
29. ↑ MIR 2007 10-K. pg 26.
30. ↑ Annual Income Statement, NRG Energy, Yahoo Finance
31. ↑ RRI 2007 10-K pg 18