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Mirant Admits To Accounting Mistakes Over 3 Years

Nov 7, 2002 | Wall Street Journal

Mirant Corp. (MIR) said it overstated earnings from Jan. 1, 1999 through June 30, 2002 by $41 million because of accounting errors.

The merchant-energy company said Thursday that total income for the period was about $1 billion, and that a review of the accounting errors found no fraud.

Mirant said that because of the errors, the company understated profits for the first half of 2002 by $10 million and overstated profits from 1999 to 2001 by $51 million.

The company asked its auditors to reaudit the company's 2000 and 2001 financial statements.

Mirant said the accounting errors don't affect its liquidity, which stood at about $1.5 billion as of Nov. 1.

As a result of the errors, the company restated its first-quarter loss to $6 million rather than the loss of $42 million it previously reported.

For the second quarter, the company's revised loss totaled $220 million, which was wider than the $152 million loss previously reported. The wider loss includes a $42 million write-down on the $235 million sale in September of its interest and shared management control of Western Power Distribution Holdings Ltd. and WPD Investment Holdings to PPL Corp. (PPL).

As part of the restatement, Mirant filed a 10-Q with the Securities and Exchange Commission for the second quarter and a revised 10-Q for the first quarter.

Mirant had delayed making the second-quarter filing to give its auditor, KPMG LLP, time to review the financial statements. Mirant dismissed Arthur Andersen LLP in mid-May.

Mirant plans to work with KPMG during the reaudit to determine the quarters in which the errors occurred. Mirant expects to restate its full-year results for 2000 and 2001 and possibly quarterly results for those years. However, Mirant said it doesn't believe the reaudit can be completed until it files its 2002 10-K. The company also doesn't expect to file its third-quarter 10-Q until early December because of the reaudit process.

Mirant said it has taken steps to strengthen its internal accounting controls following recommendations that address a material control weakness identified by its independent auditors.

Mirant disclosed the auditor's findings and its actions to correct the deficiencies in regulatory filings released Thursday by the SEC.

According to those filings, Mirant's auditor found that the internal controls of its North American energy marketing and risk management operations provided inadequate actualization analysis, documentation and internal communication.

The auditor also said the company's internal controls provided inadequate reconciliation of the risk report and the general ledger, inadequate systems integration and data reconciliation and untimely balance sheet discrepancy resolution.

The auditor reported to Mirant in October that the deficiencies represented a "material weakness" to the company's internal controls.

Mirant said it has implemented corrective actions to mitigate the risk that these deficiencies could lead to material misstatements in its current financial statements.

Those actions include additional training and replacement of some individuals, greater oversight by management, and the monthly submission of reports to the company's top officers certifying that the balance sheet reconciliation has been completed, the filing said.

Mirant also said it expects a new information technology trading system for its gas trading and marketing activities in North America will improve reporting of realized and unrealized income related to power transactions.

The company said it is evaluating the feasibility of automated interaction between its various systems, including risk management, scheduling and general ledger.

Mirant is also reevaluating the role and resources for its internal auditing so as to assure compliance with accounting requirements.

The company said the expected significant reduction in its physical gas volumes and long-term, structured transactions will help reduce the impact of the control weaknesses that have been identified.

Mirant said it believes the accounting errors reported Thursday resulted in no defaults under its credit facilities, nor did they cause any breach of a covenant. However, it warned that if it is found to be in default, lenders could accelerate the company's obligations under its credit facilities.

"Any such acceleration would trigger cross-acceleration provisions in a substantial portion of the company's other consolidated indebtedness," the filing said. The company said it would be forced under those circumstances to seek waivers or other relief from its creditors.

"Absent such relief, approximately $4.5 billion of the company's consolidated debt would be classified as short-term debt and could be accelerated," the company said. Mirant said in that event, it would likely seek bankruptcy court protection "or other protection" from its creditors.

Mirant said it hasn't determined the impact of ending its use of mark-to-market accounting for nonderivative energy trading contracts and energy-related inventory held for trading purposes.

Mirant said it also has storage and transportation agreements accounted for under mark-to-market accounting, and it will stop using that method for those agreements. Mirant said it didn't use mark-to-market accounting for long-term tolling agreements.

To reduce reliance on external financing, Mirant said its board had authorized the expenditure of up to $500 million to repurchase of debt securities "as the company's liquidity permits through 2003."

Elsewhere in the regulatory filings released Thursday, Mirant said the Internal Revenue Service has proposed adjustments to its previous tax returns that could cost the company as much as $100 million.

After June 30, the IRS issued notices of proposed adjustments for several Mirant tax return filing positions affecting taxable income during the period of 1996 through 1999, the filings said.

The agency completed its audit of Mirant for all tax years through 1995 and is now auditing the tax years 1996 through 1999.

"While Mirant believes it has substantial authority for the positions it has taken, it continues to review this situation. The negative liquidity impact of these adjustments, if accepted by Mirant, could be as much as $100 million," the filings said.

Management hasn't determined the income statement impact of these potential adjustments.

Mirant also said that in July, it fully drew on the commitments under its $1.125 billion, 364-day credit facility and converted all revolving credit advances outstanding into a term loan maturing in July 2003.

Because of that decision, the company said it will have to reclassify the debt as short-term debt, potentially causing it to have a negative working capital balance in the third quarter.

Mirant said it is weighing different ways to repay or refinance the debt "in order to mitigate concerns about a negative working capital balance."

The company said because of market conditions and uncertainties surrounding its pending re-audit of its historical financial statements, it couldn't provide assurance that it will be able to get a new credit facility.

"If Mirant is successful in entering into a new credit facility, it expects the facility will likely be smaller and will have higher pricing and more restrictive terms than the current facility," Mirant said in its filing.

Mirant said that in addition to an informal investigation into its trades and accounting by the SEC, the Justice Department and the Commodity Futures Trading Commission are also looking into the company's activities.

Mirant said the SEC is seeking documents concerning accounting for various matters, including transactions involving special purpose entities. It also wants information related to "round trip trades" and shareholder litigation.

Mirant said the Justice Department has requested the same documents, adding that it plans to cooperate with the SEC and the Justice Department.

Mirant said that in August, the CFTC asked for information about "a small number of buy and sell transactions" that took place during 2001.

The company said it provided the information on the trades, "none of which it considers to be wash trades," and the CFTC made a request for additional information, "including information about all trades conducted on the same day with the same counterparty that were potentially offsetting during the period from January 1, 1999 through June 17, 2002."

Mirant didn't indicate how it responded to the CFTC's second request.

Mirant amended its report for the first quarter 2002 to raise the possibility that it could seek bankruptcy protection if its unable to refinance a substantial portion of its debt.

Company officials weren't immediately available to comment on the issue.

Over the next several years, Mirant said it will be required to repay significant bank credit agreement and capital market obligations.

Because of general deteriorating conditions in the industry and because Mirant's credit ratings have been lowered, it doesn't expect to be able to refinance those obligations in the same amounts or on terms as favorable as its existing borrowings, the filing said.

The company said it expects to meet liquidity needs through a combination of refinancing transactions, use of its existing cash balances and asset sales, the filing said.

Also, planned contractions in the level of its trading and marketing activity are expected to reduce the need for collateral posted through letters of credit and cash, the filing said.

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