In re MIRANT CORP., et al., Debtors, 334 B.R. 800

MEMORANDUM OPINION DENNIS MICHAEL LYNN, Bankruptcy Judge. In this opinion the court addresses principally the issue of how to determine the total enterprise value of the entities that make up Mirant Group. The court addresses that question, pursuant to Fed. R. Civ. P. 42(a) (applicable pursuant to Fed. R. Bankr. P. 7042 and 9014), for purposes of confirmation of a plan of reorganization for Debtors. This matter is subject to the court’s core jurisdiction. 28 U.S.C. §§ 1334(

a) and 157(b)(2)(L). This Memorandum Opinion constitutes the court’s findings of fact and conclusions of law with respect to the matter discussed below. Fed. R. Bankr. P. 7052 and 9014. I. Background A. Facts Mirant Group is engaged in the business of producing and marketing electric power. Mirant Group conducts business not only in the United States but also in the Caribbean and the Philippines. Domestic operations are throughout the United States, but Mirant Group’s principal geographic presences are in the New England, New York (outside of New York City and Long Island) and PJM markets.

Mirant Group owns or leases electric generation facilities capable of producing approximately 14,000 megawatts of electric power in the United States, 2,200 megawatts in the Philippines and over 2,000 megawatts in the Caribbean. Through Mirant Americas Energy Marketing, L.P. (“MAEM”), Mirant Group buys and sells fuel, electricity and other commodities. Certain emissions (sulphur dioxide and nitrous oxide, commonly referred to as “SOX” and “NOX” respectively) which are subject to regulation are dealt with (and monetized) through a market exchange.

Besides revenues generated through transactions in commodities (a relatively small amount), Mirant Group’s principal business is in the merchant energy business. Thus, aside from a small income generated through the sale of electricity to consumers by Mirant’s partly-owned subsidiaries in Jamaica and Grand Bahama Island, Mirant Group’s revenue is derived from long-term contract sales of power to utilities (most notably in the Philippines) and from sales of power and capacity in the wholesale energy market.

Actual sales of electric power occur when power from a facility is “dispatched.” Whether any power is dispatched depends on whether the power is offered at or below a price established at regular (usually hourly) intervals. Each facility may bid to sell power for a price at which, for it, generation and dispatch are profitable. Payments for capacity are made on the basis of capacity made available by the generating facility.

In other words, the energy merchant, in a classic case of the aphorism “they also serve who sit and wait,” is paid, even if the power it can produce is not used, in exchange for making power available should the market require it. The price paid for (unused) capacity is determined based on supply, demand and the needs of the market for availability of power. The last of these factors is addressed by tying capacity payments to the cost of building and operating a benchmark gas turbine generating facility.

Thus, in theory, if capacity falls below a certain point (required peak Load capacity plus a margin) the price paid for capacity will stimulate construction of new generation facilities. Mirant began its life as a subsidiary of The Southern Company (“TSC”). Through a public offering in November of 2000 and a stock dividend to its shareholders the following April, TSC divested itself of Mirant and its subsidiaries. Many, but not all, of Mirant Group’s generation facilities were acquired and placed in operation while Mirant Group was controlled by TSC.

Following overbuilding of generation facilities and a downturn in the energy market in 2001 and 2002, Mirant Group was in a troubled financial condition. After failing to accomplish an out-of-court workout with their creditors, Debtors sought relief under

chapter ll. During their

chapter 11 cases Debtors have continued to operate their business. Two official committees of unsecured creditors have been appointed by the United States Trustee (the “U.S. Trustee”) pursuant to Bankruptcy Code § 1102 (the “Code”) to represent the creditors of Mirant (the “Corp. Committee”) and the creditors of Mirant’s second tier subsidiary, Mirant Americas Generation LLC (“MAG” and the “MAG Committee”), and a committee has been appointed to represent Mirant’s stockholders (the “Equity Committee” and, together with the Corp. Committee and the MAG Committee, the “Committees”).

The court directed appointment of an examiner (Code § 1104(c)) by order dated April 7, 2004, and William Snyder (the “Examiner”) was selected by the U.S. Trustee and approved by the court to perform that role.

Although the Plan as originally filed was a “waterfall” plan, meaning it was designed to deliver value until creditors are satisfied in full, and, if value remained, provide a return to stockholders, Debtors formulated and proposed the Plan initially based on the assumption that unsecured creditors of Mirant (the last creditor constituency before subordinated debt held for the benefit of, inter alia, Phoenix Partners LP, Phoenix Partners II LP and Phaeton International (BVI) Ltd. (collectively “Phoenix”)) would not receive full satisfaction from the enterprise value of Mirant Group.

Thus, the Plan provided for Mir-ant’s creditors, other then Phoenix, to receive 90% of Mirant’s equity post-confirmation. The 3/25 Plan originally provided (and the 9/22 Plan still provides) for creation of a trust (the “Plan Trust”) to hold certain assets not necessary to the ongoing business of Mirant Group, including litigation. Plan §§ 9.1-9.2.

Besides warrants and any New Mirant common stock remaining after unsecured creditors were paid in full in accordance with the 3/25 Plan, stockholders of Mirant were to receive under the 3/25 Plan only the potential right to receive distributions from the Plan Trust, after complete satisfaction (i.e., return having a value equal to the allowed claims with interest) of Mirant creditors and full satisfaction of Phoenix (and other beneficiaries of subordinated debt). 3/25 Plan § 5.1(f).

Contending, inter alia, that Debtors undervalued Mirant Group in the Plan, the Equity Committee, on November 22, 2004, filed a motion and a complaint asking the court to direct Mirant to call a meeting of stockholders. It was in response to the motion and complaint of the Equity Committee that the court called a status conference (see Code § 105(d)) to discuss with the principal parties the wisdom of conducting a hearing to determine the total enterprise value of Mirant Group.

The court considered this alternative preferable to a change in the direction of these cases through a change in management at the instance of shareholders, who might or might not ultimately be determined to have an economic entitlement to share in Mirant Group’s value. B. The Valuation Motion Given that a basic dispute existed concerning value and the parties entitled to participate under a plan of reorganization, the court determined it would address the issue of Mirant Group’s enterprise value (as well as other issues pertinent to confirmation ) before proceeding to solicitation of votes.

As a result of conferences presided over by the Examiner, Debtors filed their Motion for Order Determining Valuation and for Entry of a Scheduling Order in Connection Therewith (the “Motion”). The Examiner, working with the principal parties, developed a scheduling order (the “Scheduling Order”) for consideration of the Motion, and general notice of the Motion and the scheduled valuation hearing (the “Valuation Hearing”) was given to interested parties.

Pursuant to the Scheduling Order, parties intending to participate actively in the Valuation Hearing were required to give notice of their intent to participate by February 18, 2005. As of that date, the following entities had given notice of their intent to participate: the Equity Committee, the Corp. Committee, the MAG Committee, Debtors, Phoenix, the Mirma Landlords, Edison Mission Energy, the Ad-Hoc Committee of Bondholders of MAG, U.S.

Bank National Association as Lease Indenture Trustee and Pass Through Trustee, Law Debenture Trust Company of New York as Indenture Trustee and Property Trustee, Pepeo, Kinder Morgan Power Company, and Deutsche Bank AG. Thereafter on March 15, 2005, L. Matt Wilson, Esq., a shareholder of Mirant, filed a notice on behalf of himself and other shareholders (collectively “Wilson”) of intent to participate in the Valuation Hearing. The Scheduling Order established times for submission of initial expert reports and rebuttal expert reports. As of the deadlines set by the Scheduling Order, Debtors, the Corp.

Committee, the MAG Committee, the Equity Committee and Phoenix (collectively the “Valuation Parties”) submitted expert reports and, subsequently, rebuttal reports. Also in accordance with the Scheduling Order, the Valuation Parties conducted extensive discovery. Prior to commencement of the Valuation Hearing, Wilson filed several motions. The court summarily overruled these motions at the commencement of the Valuation Hearing. C. The Valuation Hearing The Valuation Hearing commenced on April 18, 2005 and continued for 27 days over the following 11 weeks.

During the Valuation Hearing the court heard testimony from Curtis Morgan (“Morgan”), Mirant’s Executive Vice President and Chief Operating Officer; Kumar Krishnan (“Krishnan”), Director of Market Evaluation at Mirant; John William Holden, III (“Holden”), Mirant’s Senior Vice President and Treasurer; Dr. Richard D. Tabors (“Tabors”), a principal at Charles River Associates (“CRA”) and one of Debtors’ experts; Timothy R. Coleman (“Coleman”), a principal of The Blackstone Group (“Blackstone”), and Debtors’ other expert; Todd W.

Filsinger (“Filsinger”), a principal of PA Consulting Group (“PA”), an expert retained by the Corp. Committee; David Y. Ying (‘Ting”), a principal of Miller Buckfire Ying & Co. (“MBY”), also retained as an expert by the Corp. Committee; Dr. Benjamin Schlesinger (“Schlesinger”), principal of Benjamin Schlesinger and Associates, Inc. (“BSA”), retained as an expert by the Equity Committee; Kenneth J. Slater (“Slater”), principal of Slater Energy Consultants, Inc. (“Slater Consulting”), also retained by the Equity Committee as an expert; Anders John Maxwell (“Maxwell”), a principal of Peter J.

Solomon Company (“PJSC”), the Equity Committee’s third expert; and Dr. Israel Shaked (“Shaked”), a principal of The Michel-Shaked Group (“MSG”), an expert retained by Phoenix. Morgan, Krishnan and Holden gave testimony regarding the formulation and reliability of the business plan for Mirant Group (the “Business Plan”) which furnished the data on which Coleman based his opinions of value. Tabors provided testimony in support of the Business Plan and Coleman’s valuation and in criticism of, inter alia, the reports of BSA, Slater Consulting and PJSC.

Filsinger gave testimony respecting development by his firm of cash flows used by Ying in his valuation of Mirant Group. Coleman and Ying testified as to their valuations; Ying was also called (by the Corp. Committee) along with Morgan (called by Debtors) as rebuttal witnesses to respond to testimony by experts called by the Equity Committee and Phoenix. Schlesinger’s testimony principally concerned future gas prices which, as discussed below, are a key factor in the business of Mirant Group. Slater used Schlesinger’s gas price forecasts (as well as other input) to develop his own cash flows for Mirant Group.

From these cash flows Maxwell developed his valuation of Mirant Group. Shaked critiqued the valuation testimony of other experts— principally Coleman and Ying. Including expert reports from Coleman, Tabors, Filsinger, Ying, Schlesinger, Slater, Maxwell and Shaked, and the Business Plan, the parties placed in evidence a total of 454 exhibits. The court also received into evidence, by agreement of the parties, the deposition and expert report of William H. Hardie, III (“Har-die”) of Houlihan Lokey Howard & Zukin (“Houlihan”), the expert retained by the MAG Committee.

The parties also designated for the court’s consideration portions of transcripts of depositions taken of A.W. Dahlberg (“Dahlberg”), the chairman of Mirant’s board of directors; Robert A. Hayes (“Hayes”), Mirant’s Vice President of Corporate Planning, Strategy and Business Development; Seth G. Parker (“Parker”), a principal of Levitan & Associates, Inc., another expert retained by the Equity Committee; and Slater. During the Valuation Hearing, Wilson filed a motion (and, later, a renewed motion) (both the “Till Motion”) asking that the court determine, based on Till v.

SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004), that the enterprise value of Mirant Group must, as a matter of law, exceed the total debt of Mirant Group. At the court’s invitation, other parties (Debtors, the Corp. Committee, the MAG Committee, the Equity Committee and Michael Sammons, a shareholder) filed briefs addressing the Till Motion. D. The Court’s Ruling Following completion of the Valuation Hearing, the court issued its preliminary ruling in letter form on June 30, 2005.

On July 26, 2005, the court, by a second letter (together with the June 30 letter, the “Letter Ruling”), responded to inquiries transmitted by the Examiner and modified its prior ruling. By the Letter Ruling the court directed that, under Morgan and Coleman’s supervision and the general supervision of the Examiner, the value of Mirant Group be recalculated to effect changes required by the court and discussed below. In the Letter Ruling the court indicated it would explain and substantiate its ruling in this memorandum opinion. E.

Subsequent Events Following issuance of the Letter Ruling, the Committee, Debtors, Phoenix and certain ad hoc committees entered into negotiations respecting a consensual plan. On September 8, at the request of those parties, the court held an in-chambers status conference at which the parties announced that they had reached agreement on a consensual plan of reorganization for Debtors that would allow for participation of Phoenix and existing shareholders.

The parties also requested that the court direct that the recalculation of value of Mirant Group not be completed and that the court not at that time issue this memorandum opinion. One of the goals of Congress in fashioning the Bankruptcy Code was to encourage parties in a distress situation to work out a deal among themselves. See Marandas v. Bishop (In re Sassalos), 160 B.R. 646, 653 (D.Or.1993) (“compromises are favored in bankruptcy”); see also 10 Collier on Bankruptcy ¶ 9019.01 (15th ed. rev.2005).

Mindful of the likely effect on the commitments of the parties to the consensual plan of completion of recalculation of value, the court agreed to the parties’ request and directed that the recalculation of value be halted, at least temporarily. The court also deferred issuance of this memorandum opinion until confirmation. The Plan, as modified to reflect the deal of the parities, has now been considered at a confirmation hearing.

Because this memorandum opinion is pertinent to a number of confirmation issues (including the tests of Code § 1129(a)(7) and (11)), because it addresses the Till Motion, because at least one party (Wilson) has indicated an intent to appeal confirmation and the court believes an appellate court should have the benefit of the reasoning underlying the Letter Ruling, and because some objections to confirmation of the Plan concerned the failure to complete the valuation process, the court concluded it would be appropriate and beneficial to the parties to issue this memorandum opinion in connection with confirmation of the Plan.

II. Evidentiary Objections Debtors and the Corp. Committee objected to consideration of the expert testimony and reports of Schlesinger, Slater and Maxwell on the basis of Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). In Daubert the Court provided a non-exelu-sive list of factors a trial court should apply in assessing whether expert evidence should be admitted. The gist of the complaint of Debtors and the Corp.

Committee is that Schlesinger, Slater and, by extension, Maxwell did not use recognized, tested scientific method in determinations of value and the data underlying the value. The court took these Daubert objections under advisement. There are two issues the court must address in order to rule on these objections. First, the court must determine whether Schlesinger, Slater and Maxwell meet the test to provide expert testimony. The court concludes they do.

F.R.E. 702 states that “a witness [may be] qualified as an expert by knowledge, skill, experience, training or education.” It is clear that each of Schlesinger, Slater and Maxwell meets this test. Each has experience and education necessary to understand and apply accepted methodologies for forecasting within his field. Schlesinger received his undergraduate degrees from Dartmouth College and earned a master’s degree and Ph.D. from Stanford University in industrial engineering. Schlesinger has 34 years of working experience in the energy field and has served in the following positions: (

i) Project Engineer for the Environmental Services Department of Bechtel Corp., (ii) Chief Environmental Engineer for the Office of Commercialization of the Energy Research and Development Administration, (iii) Vice President, Policy Evaluation and Analysis for the American Gas Association, (iv) Principal of Booz, Allen & Hamilton, Inc. and (

v) President of BSA. Schlesinger has also lectured on the natural gas industry at Stanford University, Columbia University, the University of Pennsylvania and the University of Maryland and has spoken at more than 100 executive seminars dealing with energy matters worldwide. Schlesinger, by education and experience, is well qualified to offer expert testimony concerning gas pricing. Slater received his undergraduate degrees from the University of Sydney, Australia and earned a master’s degree in management sciences from the University of Waterloo in Ontario, Canada. Slater has worked in the electric, gas and utility industry since 1957 and has served in the following positions: (

i) Professional Engineer of the Electricity Commission of New South Wales, the largest electric utility in Australia, (ii) Senior Engineer of the Production Development

Section of Ontario Hydro’s Operating Department, (iii) Manager of Engineering at the Ontario Energy Board, (iv) consultant to the Royal Commission on Electric Power Planning, (

v) Senior Vice President and Chief Engineer of Energy Management Associates, Inc. and (vi) President of Slater Consulting. Slater was responsible for the development of PROMOD, a utility planning and reliability software program that is widely used in the energy industry, and was a major contributor to the development of later versions of PROMOD. Slater has also published a number of writings in the energy field. Slater’s education and experience are sufficient to qualify him as an expert in the generation and dispatch of power and in operations in the electric power industry.

Maxwell received an undergraduate degree from the University of California and earned a master’s degree from the University of Pennsylvania in business. Maxwell has extensive experience in the areas of restructuring and valuation and has served in the following positions: (

i) Vice President and Manager of Leveraged Lease and Power Project Financing at General Electric Co. and GECC, (ii) Managing Director, Lease and Project Finance, at Dean Witter Reynolds, (iii) employee of Kidder Peabody, Smith Barney and La-zard Freres, (iv) Managing Director, Restructuring Advisory Practice, at Benedet-to Gartland & Co., (

v) Vice President and General Manager of Equity Capital Group at GE Capital, (vi) Director, High Yield Structured Products at Salomon Smith Barney and (vii) Managing Director of PJSC. By experience and education, Maxwell qualifies as an expert in valuation. Though the court finds them qualified to testify as experts, the reports submitted by Schlesinger, Slater and Maxwell are another matter.

As Maxwell’s report is dependent on Slater’s, and Slater’s, in turn, depends on Schlesinger’s, the accuracy of the latter is a necessary prerequisite to the validity of the opinions expressed in the reports of Slater and Maxwell. Maxwell himself admitted that inaccuracies in Slater’s Business Plan adjustments would render his valuation incorrect. Transcript of Proceedings, testimony of Maxwell at page 3968, line 20 to line 24. In fact, Schlesigner’s report contains several material errors.

During cross-examination, Schlesinger admitted that his figures for delivered gas costs to a number of Debtors’ facilities contained mathematical errors. TR (Schlesinger) at pp. 2862:5-2865:17. On redirect, Schlesinger stated that the inconsistencies were not in fact errors, but were due to the addition of certain taxes on delivered gas prices to Debtors’ plants and that such taxes were included in his calculations, but not separately identified as line items in his report. TR (Schlesinger) at pp. 2882:20-2883:13.

However, on recross, Schlesinger conceded that his report did contain errors regarding delivered gas costs for certain of Debtors’ plants and that he was incorrect in attributing the discrepancies to taxes. TR (Schlesinger) at pp. 2913:12-2914:22 and 2916:18-2917:1. Besides incorporating errors in the BSA Report, Slater’s report contains several additional mistakes.

Slater admitted that his projections for capacity revenues for the New York ISO market were overstated because his mathematical modeling failed to take into account that generation capacity in the New York ISO region is not derived solely from plants within the boundaries of the region, but is imported from outlying regions as well. TR (Slater) at pp. 3217:22-3222:4. Slater also admitted to making mathematical errors in calculating capacity revenues in the PJM market for the year 2005 and to excluding certain necessary market adjustments to his projections for that market. TR (Slater) at pp. 2928:17-2929:10.

Finally, Slater was unable to explain how he had made proper allowance for capacity available to the classic PJM Market by reason of expansion of the PJM Market to the South and West. TR (Slater) at pp. 3175:2-3183:1 and 3479:21-3486:10. Because the errors in the underlying reports are automatically carried over into Maxwell’s report, it, too, is not reliable. For these reasons the court has decided to disregard the expert reports of Schlesinger, Slater and Maxwell. As the court does not rely on these reports, it is unnecessary to reach the Daubert issue. III.

Motives of the Experts During the Valuation Hearing parties raised questions about the motives of the various expert witnesses. Most significantly, Shaked and the experts retained by the Equity Committee have been attacked by Debtors and the Corp. Committee as being advocates rather than disinterested experts. The evidence offers support for this accusation. In addition to PJSC’s monthly fee, PJSC negotiated an incentive based fee arrangement with the Equity Committee whereby, subject to court approval, PJSC may receive an additional $1 million plus 0.4% of any recovery by shareholders in excess of $400 million.

TR (Maxwell) at pp. 3964:3-3965:3. Presentation materials submitted by PJSC to the Equity Committee identify PJSC as not simply a disinterested neutral, but as an advocate for the Equity Committee. TR (Maxwell) at pp. 3965:9-3968:3; Debtors’ Exhibit No. 173. MSG circulates brochures nationwide advertising the firm’s services of providing expert witnesses. TR (Shaked) at p. 5228:7-25. Shaked, in a number of articles he has published, has advertised MSG’s expert witness services.

TR (Shaked) at pp. 5224:7-5226:24; see, e.g., Allen Michel & Israel Shaked, Solvency Analysis: A Primer on Applying Discounted Cash Flow, 22-JAN Am. Bankr.Inst. J. 54, 55 n. 1 (2004). One of Shaked’s articles, written for the American Bankruptcy Institute, is titled “Managing your Expert for a Successful Outcome: The 10 Commandments.” TR (Shaked) at p. 5241:4-21; Allen Michel & Israel Shaked, Managing your Expert for a Successful Outcome: The 10 Commandments, 20-MAY Am. Bankr.Inst. J. 28 (2001).

That experts may be anxious to serve the interests of the parties retaining them is neither startling nor enough reason to disregard their testimony. First, if the Equity Committee’s experts and Shaked are more blatant in their willingness to adopt a bias toward their employers, it is likely that the other experts in the case were also influenced to some extent by the needs of their underwriters. Each of Har-die and Ying effectively admitted to taking an approach to total enterprise value consistent with the strategy of his committee. Coleman has served as an advisor to Debtors since before commencement of these

chapter 11 cases. It is reasonable to infer that Coleman would have some commitment to a strategy (and its factual underpinnings) that he helped devise. This is not to say that an expert influenced by his retainer’s needs acts improperly, as other courts have concluded. See, e.g., In re Coram Healthcare Corp., 315 B.R. 321, 339 (Bankr.D.Del.2004) (“[W]e recognize each side’s incentives to ... overvalue or undervalue the Debtors.”); In re Exide Techs., 303 B.R. 48, 61 (Bankr. D.Del.2003); In re Beker Indus. Corp., 58 B.R. 725, 739 (Bankr.S.D.N.Y.1986) (the evidence used for valuation is “highly judgmental”).

Should Mirant Group be overvalued, harm to the creditors represented by the Corp. Committee would result. Thus, experts retained by the Corp. Committee should be cautious, even conservative, in valuing Mirant Group — certainly such experts would avoid being too optimistic about the enterprise’s future. Experts for the Equity Committee and Phoenix may be expected to take an opposite view. This does not totally taint the testimony of either.

It simply means the court must be cautious itself, avoiding undue optimism while at the same time ensuring that assumptions and data used for valuing Mirant Group give full value to the business as rehabilitated through

chapter 11. IV. Valuation Methodology The Valuation Parties generally agree that there are four methods for valuing an energy merchant like Mirant Group. First, one may determine a value by multiplying Mirant Group’s free cash flow by a factor based on comparable companies (the “Comparable Method”). Second, one may discount Mirant Group’s projected cash flows to a present value (the “DCF Method”). Third, one might arrive at a value based upon transactions involving comparable assets (the “Transactions Method”).

Finally, one may value an energy merchant based upon a calculation of a value per megawatt of capacity (the “Capacity Method”). Although the experts retained by the parties each valued the Mirant Group using the DCF Method and the Comparable Method, it was generally agreed that the Transactions Method and the Capacity Method were not suitable. Regarding the former, there is inadequate data (i.e., a dearth of comparable transactions).

The Capacity Method was regarded by most of the experts as unsatisfactory because valuation of capacity should vary depending on the type of plant, the location of the plant and other factors. The court has found in numerous opinions support for valuation of a

chapter 11 debtor through the use of the DCF Method and the Comparable Method. See In re Bush Indus., Inc., 315 B.R. 292, 299-302 (Bankr.W.D.N.Y.2004); In re Exidle Techs., 303 B.R. at 65; In re Cellular Info. Sys., Inc., 171 B.R. 926, 930 (Bankr. S.D.N.Y.1994); In re Pullman Constr. Indus. Inc., 107 B.R. 909 (Bankr.N.D.Ill. 1989). The court finds these methods of valuation the most likely to ensure that Mirant Group is valued based on the worth of its future ability to produce income. See Protective Comm. v.

Anderson, 390 U.S. 414, 442, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968) (“[T]he commercial value of property consists in the expectation of income from it.”) (quoting Consol. Rock Prods. Co. v. Du Bois, 312 U.S. 510, 526, 61 S.Ct. 675, 85 L.Ed. 982 (1941)). The Comparable Method requires identification of public companies similar to the subject being valued. For each comparable company, a total enterprise value (“TEV”) is calculated by multiplying the number of shares of the company’s common stock by the closing price of the stock on a given day and adding that product to the company’s outstanding debt.

The resulting number is then divided by the company’s annual cash flow to arrive at a “multiple”. The number most often used as annual cash flow is the company’s projected EBITDA, though the company’s projected EBIT (or, alternatively, EBIT-DA plus rent, abbreviated EBITDAR) arguably could be used. In calculating cash flow based on EBITDA, non-recurring items (e.g., a litigation settlement) and non-operating revenues (e.g., income from investments) and cash are also deducted (with comparable adjustments to the TEV). Depreciation and amortization are added back.

Using a range of multiples from the comparable companies, the average (generally the median average) multiple is then applied to the valuation subject’s projected EBITDA (adjusted as with the comparables) to arrive at a TEV for the subject. The DCF Method bases valuation on the subject’s projections of EBITDA for a period of years. The projected EBITDA is then discounted back to present value, using a weighted average cost of capital (the “WACC”).

The WACC is determined by, first, calculating the subject’s cost of debt (i.e., the interest rate the subject must pay to borrow funds reduced by the subject’s effective tax rate). Next, the cost of the subject’s equity (i.e., the return required for equity) is determined by using a risk-free rate (typically a long term treasury yield) and adding an equity risk premium calculated by multiplying a standard equity risk premium of 7.2% by a factor (the “Beta”) reflecting industry stock performance in comparison to the market generally.

The resulting percentage may then be augmented by an additional risk premium, as discussed in greater detail below. Finally, the capital structure of the subject is reviewed to determine the relative portions of debt and equity with which it is to be capitalized. The WACC is then calculated by adding (

a) the product of the cost of debt multiplied by a range of percentages of debt consistent with the proposed capital structure to (

b) the cost of equity multiplied by a comparable range of percentages representing equity’s share of capitalization. Having discounted the subject’s cash flows to present value, a terminal value must be determined. This is done by taking the company’s TEV as of the end of the cash flow projections, determined by multiplying the last year’s EBITDA by a multiple (which may be similar to that developed in the Comparable Method) and discounting that TEV to present value.

Alternatively, terminal value may be determined by applying a growth rate to the last year’s free cash flow and discounting the result to present value. The court at this juncture must comment briefly on the questionable reliability of these valuation methods. As one court has stated, [Deciding] going concern value is hardly elementary. It involves consideration of what Shelley in “A Defense of Poetry” called “the gigantic shadows which futurity casts upon the present.” Those who would prepare future cash flow analyses and discount them to present values are not oracles.

The opinion evidence they present ... should be taken as a set of assumptions that are factored into a model and critical analysis then employed to test those assumptions. The evidence in the exercise is hardly clear, is highly judgmental and consists largely of inferences. In re Beker Indus. Corp, 58 B.R. at 739. See, similarly Protective Comm., 390 U.S. at 442, 88 S.Ct. 1157 (“Since ... application [of the criterion of earning capacity] requires a prediction as to what will occur in the future, an estimate, as distinguished from mathematical certitude, is all that can be made.”) (quoting Consol. Rock Prods.

Co. v. Du Bois, 312 U.S. 510, 526, 61 S.Ct. 675, 85 L.Ed. 982 (1941)); Muskegon Motor Stockholders Protective Comm. v. Davis (In re Muskegon Motor Specialties), 366 F.2d 522, 530 (6th Cir.1966) (“The valuation of a business remains an art based on the use of informed, careful judgment (including that of the court), and it cannot be expected to yield mathematically precise results.”); In re Coram Healthcare Corp., 315 B.R. at 339 (“Simply put, when it comes to valuation issues, reasonable minds can and often do disagree.

This is because the output of financial valuation models are driven by their inputs, many of which are subjective in nature.”) (quoting Peltz v. Hatten, 279 B.R. 710, 736-37 (D.Del.2002)). The variables generally presented in a valuation — estimates of future cash flow, choice of comparable companies, choice of a perpetual growth rate — are all present in the case at bar. There are additional variables added because valuation here is not intended to establish a value for acquisition of Mirant Group, but rather in the context of confirmation proceedings.

There are also a number of uncertainties peculiar to Mirant Group’s industry that will affect the accuracy of any determination of value. While a number of these are addressed below in connection with the court’s ruling, it is important to acknowledge others as well. Besides giving Mirant Group a “fresh start,” Debtors’

chapter 11 cases are likely to bring about other changes. The Plan proposes a dramatically altered corporate and business structure, in which, for example, Mirant Group’s debt will be concentrated at the MAG level and MAEM’s functions will be reallocated and modified. Mirant’s board of directors will be changed under the Plan, and the court must consider what effect on value a change in control — and a more or less aggressive approach to the conduct of Mirant Group’s business — should have.

Finally, the use of any value determined is as of an effective date for the Plan that will occur long after the generation of the data used for valuation. Yet the data used to determine value quickly grows stale. Changes in the comparable companies’ stock prices, varying raw material prices and changes in interest rates all have multiple impacts on a value determined as of one date which will be dispositive of creditors’ and interest holders’ rights as of a date in the future. Even more troubling are the peculiar problems faced by a valuation in Mirant Group’s industry.

It is, according to the testimony, a “cyclical” industry. Yet the industry has never yet gone through a full cycle. If the merchant energy industry is cyclical, the experts agree that it is on the upswing, at least until “equilibrium” is reached. Equilibrium is the point at which capacity supply is approximately equal to market demand — or, put another way, if economic theory is correct, the point at which new capacity is attracted to the market place. After reaching equilibrium, economic theory assumes that supply and demand will remain in rough balance, with no overbuilding of new facilities, indefinitely.

Not only are these economic theories untested; they may be affected by many unforeseen happenings. Added capacity through new technology — e.g., windmills— or import from other regions (as discussed above for the New York and PJM markets) may invalidate many economic assumptions. Terrorist acts, changes in local economies, events around the world (from greater instability in the Philippines to new wars or revolts in the Middle East) all may so affect the future of Mirant Group and the merchant energy industry that “economic theory” will prove wrong.

Moreover, some of the methodology employed in valuation practice troubles the court. Stock prices of comparables for just one day are used in calculating multiples. Cash flows are not updated regularly (at least in the case at bar) to reflect broken assumptions. Comparable companies are all treated as equal indicators of value and are treated as sharing an industrial typicality with Mirant Group. These and other issues are dealt with to some extent below.

That the court has misgivings about the accuracy of any valuation of so complex an enterprise as Mirant Group, let alone a valuation subject to inherent methodological weaknesses and assumptions unsupported by history, does not mean the existing tools are not to be used to gauge value. These are the tools available to the court in its task.

The necessary result, however, from dealing with evidence best described as “soft,” is that the court must exercise caution in establishing a range of values for Mirant Group that will necessarily include or exclude equity participation under the Plan and effectively limit its role in the confirmation process. Thus, in the Letter Ruling, the court provided that full equity participation going forward was dependent upon the range of values for Mirant Group exceeding $11 billion. V.

The Till Motion The parties fundamentally disagree about the significance to the determination of the value of Mirant Group of the Supreme Court’s decision in Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004). On the one hand, Debtors, the Corp. Committee and the MAG Committee argue that Till has no application to the case at bar.

They contend that Till, which determined the proper interest rate a consumer must pay under Code § 1325(a)(5)(B)(ii) in cramming down a creditor secured by a motor vehicle, provides no guidance for determining the going-concern value of a multi-billion dollar business. Relying heavily on note 14 to the Till plurality opinion (541 U.S. at 477, 124 S.Ct. 1951), they contend that Till recognizes that, in a

chapter 11 case, it is appropriate to look to the market in determining a cram down interest rate and, hence, in valuing a business for cram down purposes. Wilson, on the other hand, cautiously supported by the Equity Committee and Phoenix, takes the position that Till is dispositive of the valuation issue. These parties argue that Till established a sliding scale of return payable to creditors to satisfy cram down requirements, from prime interest rate to prime plus three.

Wilson argues that a plan could be proposed that would leave all Mirant Group creditors with debt bearing interest at rates of prime to prime-plus-three, Mirant Group’s cash flow being, Wilson claims, more than sufficient to service all of the debt. Both sides are wrong. For reasons discussed below, Debtors and the creditors’ committees are mistaken in their reliance on note 14. More importantly, they fail to appreciate the guidance available to this court in Till and its usefulness in deciding the valuation issue.

Wilson, though, fails to give due weight to the difference between an obligation secured by an automobile and unsecured debt or stock. He also does not accord appropriate deference to the business judgment of Mirant Group’s management. First, Till is clearly relevant to a determination of value, not solely in a case in which an interest rate is determined. Because Till instructs what return a secured creditor is entitled to for cram down purposes, Till effectively determines what cash flow is necessary to satisfy that creditor.

Put another way, Till addresses, independently of the value of the underlying collateral, the economic characteristics of the obligation that the secured creditor is entitled to receive in a cram down context. Under the plurality opinion in Till, the value of the obligation, naturally dependent on the interest it bears, is not determined by the market. What the market would pay to purchase a debtor’s loan from creditors is not the proper measure of whether a given plan treatment meets the requirements for cram down.

Rather, value of what is offered to satisfy a claim for cram down purposes is determined through the bankruptcy court’s objective inquiry. Till, 541 U.S. at 476-77, 124 S.Ct. 1951. Because, in turn, the value of Mir-ant Group will depend, in part, on the economic characteristics of the debt and equity assumed under the DCF Method, the required return on debt and equity is a necessary element in calculating enterprise value. Till gives direction to the court in how to determine that required return. Second, Till instructs how to derive that required return.

While Till adopts a formula suitable to calculating the interest rate for secured claims in consumer cases, the formula approach remains valid in determining required return for cram down purposes on other obligations. Thus, the formula for determining the present value of unsecured debt or equity securities issued under a plan will be a risk-free rate plus an adjustment for risk; the numbers plugged into the formula and the manner of their selection will vary depending on the character (secured or unsecured, debt or equity) of the underlying obligation.

Third, Till makes clear that the market in fact does not properly measure the value of an obligation undertaken in a plan. As noted in Till, the advantages of bankruptcy, such as the requirement of a court determination of feasibility, the benefits of court supervision, disclosure requirements and limits on debt are not given sufficient recognition by the market. Till, 541 U.S. at 475, n. 12, and 480, 124 S.Ct. 1951.

Indeed, by its rejection of the forced loan approach (Till, 541 U.S. at 477, 124 S.Ct. 1951), the Supreme Court has held improper in valuation an approach that relies on the market to establish what rates a debtor must provide for debt generally and, logically, what return for equity as well. That a creditor, if given cash equal to its allowed claim, would choose other investments in preference to securities offered by the debtor, does not require that the debtor raise its return to compensate for investor distaste for dealing with a former bankrupt.

It makes perfect sense that a debt- or’s value, credit-worthiness and attractiveness as an investment be objectively assessed as of the prospective effective date of a plan. This is achieved by taking a market-accepted risk-free interest rate or rate of return and adding to that a risk premium determined by the court based on the specific risks shown by the evidence, in assessing which the court may look to the market at most as an item of evidence, not as a dispositive gauge of interest rates the debtor ought to pay or the investment return the debtor ought to provide.

While the court finds considerable assistance in Till in determining how to value Mirant Group, it does not share Wilson’s view that Till dictates a finding that Mir-ant Group is solvent. Wilson arrives at this conclusion by assuming all claims against Debtors could be satisfied in full at an interest rate limited by Till’s provisions. Even assuming Till’s range of rates of prime plus 1% — 3% is the applicable cram down rate for every secured claim, Till does not specify interest rates a debtor should pay on unsecured debt.

While the risk premium Debtors will pay on their exit financing is within the range of rates suggested in Till, and while Debtors propose a similar rate for debt obligations to be issued to creditors of MAG under the Plan, claims at the Mirant level, subject to greater risk, would have to be satisfied with obligations bearing higher interest. Moreover, Wilson would have the court second-guess Debtors’ business judgment as to the cash and debt burden Mirant Group requires to continue its business without serious risk.

While the court does criticize below the cash cushion maintained under the Business Plan, it does so in the context of the Plan, which will dramatically reduce Mirant Group’s debt load. In general, the court accepts the Debtors’ business judgment as reflected in the Business Plan and would not consider imposing on Debtors or their creditors a valuation based on premises that are seriously inconsistent with the Business Plan. Further, the court’s valuation is based on the Plan. There is, at this juncture, no other plan the court may consider. See Code § 1121.

It is not the province of the court to compare the Plan, proposed by Debtors, to another, hypothetical plan. (Cf. Code §§ 1125(a)(1) and 1129 (a) (7) (A) (ii)). Finally, if Mirant Group’s value exceeds its debt, that should be true under a balance sheet based on the Plan as well as under an alternative capital structure. As virtually all the debt Mirant Group would retain under the Plan bears interest at rates less than prime plus 3%, no claim is potentially being over-satisfied.

The equity value of Mirant Group as of the effective date of the Plan should reflect Mirant Group’s total ability to satisfy claims — its reorganization value — as well as would Wilson’s alternative capital structure (once the latter is altered to reflect properly risk factors for debt holders as well as other costs incurred through retention of more than $6 billion of additional debt).

For the foregoing reasons, the court concludes that, while Till is extremely useful in designing an approach to valuation, it does not provide, as a matter of law, a specific range of interest rates required to satisfy unsecured claims pursuant to Code § 1129(b)(2)(B)(ii). The Till Motion is' therefore DENIED. VI. The Court’s Ruling The expectation for any valuation proceeding is that a value for the subject will thereby be established.

In order for a court to assign a specific value or narrow range of values to the subject, however, it must either adopt an expert’s opinion or be able to adjust the number generated by the expert to account for changes in assumptions considered necessary by the court. In the case at bar, the court cannot accept unchanged any of the values for Mirant Group that have been placed in evidence. As discussed below, the data used by MBY and Blackstone, especially that used for future commodity prices, was stale by the time of the Valuation Hearing.

The value arrived at by PJSC, even if the court were persuaded it was otherwise correct, was flawed by reliance on the reports of BSA and Slater Consulting. Maxwell’s and Shaked’s direct examinations were designed to build on the values opined to by MBY and Blackstone. Besides their, in part, adopting errors in those valuations, the additions to value proposed by Maxwell or Shaked cannot be accepted wholesale by the court. Moreover, recalculation of cash flows (whether under the Business Plan or as produced by one of the expert advisors), is too complex an operation for the court to undertake.

Changes to commodity prices and other assumptions and data affect too many other variables (emissions cost, dispatch versus capacity, use of tax attributes, etc.) to allow estimation of overall change in value. Nor can the court in this case simply weight the opinions of the various experts to arrive at a melded value. The values opined to in the expert reports range from $7.2 billion (Houlihan) to $13.6 billion (PJSC).

In so complex a case, for the court to simply average these numbers— derived based on varying assumptions and data — would make a mockery of the valuation process and would be terribly unfair to parties whose rights are thereby disposed of. The remaining way to arrive at a number based on the record would be to patch together the best of each valuation before the court. While this might be practical for the Caribbean or Philippines operations, the number of interconnected variables otherwise prohibits such a selective melding of experts’ opinions.

Consequently, the court concludes it is necessary to recalculate the value of Mirant Group based on necessary changes in data and assumptions. In doing so, the court adopts as the basis for valuation the Business Plan and Blackstone’s 5/2 Report. A. The Business Plan In the Letter Ruling the court directed, with certain modifications, use of the Business Plan to generate data for purposes of valuation. There was substantial evidence presented to show that the Business Plan was prepared in a reasonable manner, using supportable assumptions and logically consistent computations.

The court finds and concludes that the Business Plan constitutes a fair, reasonable projection of future operations of Mirant Group. The court has rejected the alternative projections of future operations presented by the Equity Committee. Although the court does not find PA’s cash flows not credible, they suffer from many of the same deficiencies discussed below for the Business Plan, and certainly PA’s projections are no better supported by the evidence than are those in the Business Plan. The Business Plan, however, was prepared as a business tool.

Although it projects cash flows for the Mirant Group, it was intended to serve more purposes than valuation. As a result, the court required in the Letter Ruling that Debtors, using certain revised assumptions and other inputs, recalculate the valuation data provided by the Business Plan. 1. Pepeo Amounts The District Court, by rulings on March 1, 7 and 16 and April 20, 2005, has held that certain obligations running from Debtors to Pepeo must be honored by Debtors.

By its decision of December 9, 2004, the District Court determined that Debtors would not be permitted to reject the so-called Back-to-Back Agreement. Although the Business Plan includes provision for payments under the Back-to-Back Agreement (Business Plan at p. 22), Blackstone’s calculations used data from the Business Plan modified to assume eventual rejection of the Back-to-Back Agreement. Blackstone 2/25 Report at p. 20; Blackstone 5/2 Report at p. 30 n. 4.

Even if the court believed it probable that the District Court’s decision respecting the Back-to-Back Agreement would be reversed on appeal — and the court does not so believe — the decision of the District Court is the law of the case until it is reversed. See United States v. Becerra, 155 F.3d 740, 752 (5th Cir.1998) (“Under the ‘law of the case’ doctrine, an issue of law or fact decided on appeal may not be reexamined either by the [trial] court on remand or by the appellate court on a subsequent appeal.”) (quoting Illinois Cent. Gulf R.R. v. Int’l Paper Co., 889 F.2d 536, 539 (5th Cir.1989)); Stone v.

Thomas (In re Wright), No. SA-03-CV-932, 2004 U.S. Dist. LEXIS 4478, *16-17, 2004 WL 569517, *4 (W.D.Tex. Mar. 8, 2004) (same); In re Tex. Health Enters., Inc., 255 B.R. 181, 183 (Bankr.E.D.Tex. 2000) (“Until the appeal is decided, this Court’s findings of fact and conclusions of law on these issues remains [sic] the law of the case and is [sic] binding upon all parties.”). It would be error for the court, therefore, to accept as accurate cash flows that exclude payments to Pepeo under the Back-to-Baek Agreement.

Moreover, given the District Court’s other decisions respecting Debtors’ obligations to Pepeo, the court holds Debtors’ projections and Blackstone’s determinations of value should be based on the assumption that the agreements of Debtors with Pepeo and the obligations owed by Debtors to Pepeo will continue after confirmation of the Plan. The Letter Ruling required that obligations to Pepeo be included in cash flow projections used by Blackstone in recalculating value. 2.

Tax Attributes As was true of the Pepeo obligations, the Business Plan takes into account Mirant Group’s net operating losses (“NOL”) in its projections. Business Plan at p. 7. The NOL was backed out of cash flows, however, for purposes of Blackstone’s calculation of value. Blackstone 2/25 Report at p. 53; Blackstone 5/2 Report at p. 44. Blackstone separately valued the NOL, adding a discounted value for it to the calculated enterprise value of Mirant Group. Blackstone 2/25 Report at p. 53; Blackstone 5/2 Report at p. 44.

Blackstone justified this approach because, in the DCF Method, NOL value is determined using as a discount rate the cost of equity rather than the WACC Calculated for Mirant Group. If the WACC (a lower rate) is used to discount NOL, a higher value will result for the NOL. The effect of including the NOL in cash flows, which are then discounted by use of the WACC, is (according to Blackstone) to overvalue the NOL. The court, however, takes a different view. First, Maxwell’s testimony was sufficient to rebut Blackstone.

Second, including tax attributes in cash flows is the best way to assess their impact on value; once the NOL is included in cash flows (which dictate return available for creditors) it is not sensible to apply variable discount rates to different elements of those cash flows. Third, applicable case law suggests that projections of future earnings (cash flow) should include corrections for tax attributes. Fourth, Wilson has raised the question of the impact of

section 199 of the Internal Revenue Code on the earnings of the Mirant Group. There are also issues pertaining to other tax options including respecting the Philippines operations. The court sees no realistic way to value these other tax attributes independently of the NOL, at least under the DCF Method, and thus concludes all tax attributes must be included in cash flows. Finally, a value obtained through the DCF Method outside of bankruptcy is intended to reflect returns on both equity and debt. In the context of

chapter 11, the purpose of a valuation is to determine what returns may be produced in the future to satisfy claims and, if appropriate, equity interests. See Protective Comm,., 390 U.S. at 441, 88 S.Ct. 1157 (“Since participation by junior interests depends upon the claims of senior interests being fully satisfied, whether a plan of reorganization excluding junior interests is fair and equitable depends upon the value of the reorganized company.”); Consol.

Rock, 312 U.S. at 525-26, 61 S.Ct. 675 (a valuation of debtor based on its future earning potential was essential to determine feasibility and fairness of plan and to protect against unwarranted participation by junior interest holders); In re Bush Indus., Inc., 315 B.R. at 297-99 (where debtor’s plan of reorganization provided for no return to shareholders, debtor had to demonstrate for cram down purposes its value as a reorganized entity based upon its future earning capacity).

As such, the stream of revenues that Mirant Group will produce, including provision for taxes, is properly regarded as a single source for payment. For all of these reasons, the court concludes that the value calculated through the DCF Method will be most accurate for reorganization purposes if all tax attributes are taken into account in the cash flows used. In the Letter Ruling the court directed that, using their best business judgment, Debtors reflect tax benefits as they are projected to be used. 3. Commodity Prices A principal variable cost in the business of Mirant Group is the price of fuel.

The facilities owned by Mirant Group are, for the most part, powered by natural gas, oil or coal. Prices for electric power are typically tied to the price of natural gas, and the price of gas tends to move with the price of oil. Coal, on the other hand, though its price is sensitive to changes in the cost of other fossil fuels, is in sufficient supply that its cost does not move in lock-step with that of gas. The Business Plan was completed in October of 2004.

In preparing the Business Plan, Mirant Group predicted future gas prices for 2005 and 2006 by using forward contract prices for gas as quoted on the New York Mercantile Exchange (“NY-MEX”). Gas prices for later years were forecasted by Mirant Group using internal expertise while looking at forecasts of gas prices produced by PIRA Energy Group (“PIRA”) and the government’s Energy Information Agency (“EIA”). As discussed below, prices of natural gas, however, have not proven as low as the forecast in the Business Plan.

Because of disparity between gas prices and Mirant Group’s contract price for coal, and because Mirant Group’s facilities in the PJM market (and, to a lesser extent, elsewhere) are largely coal fired, higher gas prices generally result in a higher profit margin for Mirant Group. Indeed, the Business Plan states: “[UJnderstand-ing that natural gas prices will influence power prices and assuming other commodity prices are unchanged, the Company’s unhedged portfolio increases in value by $50 million per year on a $0.25/mmbtu higher move in forward gas prices.” Business Plan at p. 8.

While the testimony of Morgan (TR (Morgan) at pp. 5374:15-5375:23) and Krishnan (TR (Krishnan) at pp. 466:12-468:10 and 567:18-568:3) was that the incremental growth in annual revenues would actually be $25 million for each 25<t increase in gas prices, Mirant Group’s underestimation of gas prices is still potentially significant. As noted in the Business Plan, however, the increase in revenues resulting from an increase in gas prices is dependent on other prices— especially coal — remaining constant or at least rising more slowly.

TR (Morgan) at pp. 199:17-200:13 and 334:18-336:9, TR (Krishnan) at pp. 487:9-488:15, TR (Fil-singer) at pp. 2591:11-2592:5 and TR (Maxwell) at pp. 4288:22-4289:15. Morgan testified (TR (Morgan) at pp. 204:3-11, 5368:16-5370:11 and 5472:16-5473:24) that, in his judgment, changes in coal prices and other modifications to the Business Plan would largely offset the benefit to Mirant Group of prices for natural gas above those predicted in the Business Plan.

But, the court has before it no specific evidence or calculations demonstrating the actual impact a revised forecast of gas prices would have on Mirant Group’s cash flow. Further, while several experts suggested the increase in gas prices was only temporary, continued high prices strongly suggest that, as at least one service contends, they represent a long term trend and higher gas prices should therefore be factored into the valuation of Mirant Group.

Where, as here, new price forecasts for gas have been issued by several specialist organizations, it would be clear error for the court to ignore the effect on Mirant Group’s value of this change. The court might arguably adopt the measure suggested in the Business Plan as modified in testimony, to estimate the impact of higher gas prices on value. It would be inaccurate to recalculate value based solely on the change in predictions of future gas prices, though.

Rather, projections of cash flow must be altered to take account of changes in the cost of all fuels used by Mirant Group (and changes in capacity payments and the value/cost of SOX and NOX). It is incumbent upon this court in valuing Mirant Group to determine whether or not its value extends to equity to reach its decision using the best, most current information available. Protective Comm., 390 U.S. at 444, 88 S.Ct. 1157, et seq.; In re Beker Indus.

Corp., 58 B.R. at 741 (“[Adjustments to the ... estimate of going concern value must be made to reflect the lower costs of raw materials that are currently being incurred.”). The court therefore directed in the Letter Ruling that the Business Plan be updated using an average of forecasts of commodity prices by those organizations that have issued fresh (2005) forecasts for gas, oil and coal. The Letter Ruling also directed such additional modifications as necessarily flow from changes in those costs. 4.

CRA Capacity Payments The CRA 3/16 Report, at pp. 18 et seq., describes certain miscalculations of capaeity revenues for certain Mirant entities in the New York, New England, PJM, and other regional markets which, when corrected, raise Blackstone’s valuation by approximately $107 million. The court understands Blackstone to agree that these corrections are appropriate. The court finds and concludes that (consistent with the Letter Ruling) the Business Plan should be corrected accordingly. B.

The Blackstone Report The court considers the Houlihan and MBY valuations credible, though subject to, inter alia, some of the same problems addressed below. While Maxwell’s testimony was generally credible, on a par with that of Ying, Filsinger and Hardie, PJSC’s report, as discussed above, is based on erroneous data produced by Schlesigner and Slater. The Blackstone report, however, particularly fortified by the work of CRA, seems to the court the most reliable of the valuations. The court has already noted the natural bias toward conservatism of MBY, PA and Houlihan.

Each of these serves as an advisor to the Corp. Committee (MBY and PA) or the MAG Committee (Houlihan). Each has thus participated in and likely become, to some degree, committed to the strategy it helped formulate. At a minimum, each must be cautious not to overvalue Mirant Group to the detriment of the constituency it represents (similar criticisms, of course, may be made even more forcefully as to the experts retained by the Equity Committee and Phoenix).

While it is not prepared to conclude that Blackstone does not have some commitment to the Debtors’ strategy, the court does find that Debtors, Debtors’ management and Debtors’ professionals had no improper commitment to the creditors of Mirant — those at whose level, in an insolvent situation, the value of Mirant Group would run out.

Put another way, the court finds Blackstone, Debtors and Debtors’ management were not influenced in the valuation process by reason of any commitment to a creditor constituency to the detriment of equity owners; rather Debtors have properly attended to their fiduciary duties to all constituencies. Even were the court not more confident of the Blackstone Report than the valuations of the other experts, the Blackstone Report commends itself as being the most compatible with the Business Plan.

Because Blackstone has a history of several years with Mirant Group, all else being equal, its report would be preferable as a base for recalculation of value because of simpler mechanics and the familiarity of Debtors and Blackstone with each other’s methodology. Moreover, many of the differences between the Blackstone Report and the MBY valuation are the subject of changes directed in the Letter Ruling and described below. For example, calculation of Mirant Group’s cost of equity, terminal growth rate and calculation of comparable multiples, will be based upon numbers directed by the court.

As the court has concluded that the Business Plan, rather than PA’s cash flows, will be used in calculating EBITDA and annual cash flows, most of the differences between the two valuations are mooted. Having decided to use as a valuation basis the Blackstone Report, the court finds it necessary to specify some changes to the calculations employed by Blackstone (as well as the changes directed for the Business Plan) in order to value Mirant Group properly for the purpose of satisfying claims. 1.

Role of the Market The court must, first, however address at greater length the misperception that Mirant Group’s value is properly set by the market place. Blackstone deter-, mined its valuation under the DCF Method based on how the market would value Mirant Group for purposes of equity investment in or loans to it. The market is not the proper measure for the value of Mirant Group for the purpose of satisfying claims. The Corp. Committee even suggested during argument that the market value of publicly traded debt of Mirant today is an accurate reflection of the extent of value of Mirant Group.

If Mir-ant debt trades at less than face value, the Corp. Committee argues, this indicates the market considers the value of Mirant Group to be inadequate to make holders of Mirant debt whole. But, even assuming that the market is a proper gauge of the value of an entity in

chapter 11, use of preconfirmation prices of debt cannot be an accurate measure. The market price of Mirant debt precon-firmation must logically be based not only on the capital structure proposed in the Plan. It also would have to take into account the risk the Plan would not be confirmed. If the Plan were not confirmed, Mirant creditors might receive less value than proposed in the Plan.

Delays in the confirmation schedule, uncertainties as to postpetition, preconfirmation interest rates (on both Mirant and MAG debt) and the possibility of a change in treatment through compromise or valuation would have to be considered when buying Mirant debt preconfirmation. The MAG Committee stated its intention, should the opportunity arise, to propose a stand-alone plan for MAG. Filing of such a plan could follow if the Plan were not confirmed, and its consequences could include loss to Mirant creditors of considerable value.

Even if the price of Mirant debt prior to confirmation might, in other circumstances, predict accurately what an investor thought the return on such debt would be worth following completion of reorganization, the actual circumstances of these

chapter 11 cases posed too many risks (at least at the time of the Valuation Hearing) warranting a discount in the market in price of Mirant’s traded debt for the court to look to the preconfirmation market as a credible test of value of Mir-ant Group or its securities postconfirmation. The methodologies used by the experts in this case do not suffer from the problem that exists in attempting to derive from the price of a claim traded in the market the value of its anticipated satisfaction under the Plan. Rather, the DCF Method, in particular, attempts to predict the value of the subject as of a selected date of emergence from

chapter 11. As data used in the DCF Method, as well as that used in the Comparable Method, involves predictions of future conditions and events, and as those predictions may prove inaccurate even before the date of emergence from bankruptcy (e.g., the price of natural gas in the instant case), valuations reached through those methods are to some extent infirm. If the valuation of a company is to be used for present decision making — i.e., if the person commissioning the valuation intends to use it for determining the amount to bid to purchase the subject— this infirmity is less.

Even if agreement is reached to purchase the subject, events in the future that may affect the subject’s value are often contemplated in the resulting purchase and sale agreement. In valuing Mirant Group, however, the court would have to reach a conclusion to be utilized in decisions made in the less-than-proximate future. It is not sensible in such a situation to establish a value that largely relies on market conditions existing at the time of valuation which would not necessarily obtain as of the date for which the valuation was prepared.

Besides this concern with adopting today’s market views and formu-lae based on them to calculate the worth of what creditors are to receive under the Plan, the court does not accept that what the market would demand for investment in Mirant Group is equivalent to what the Code commands creditors are entitled to. The claims against Mirant that will be dealt with in the Plan are in place. No decision to invest is necessary. Mirant does not need to attract investors: they are already trapped, captive to the

chapter 11 process. Moreover, just as noted in Till, the court does not believe that the market — or the experts — adequately accounts for the benefits to Debtors of

chapter 11. Review of the 10-K reports filed by Mirant prepetition reveals a number of serious problems outstanding. Many of these problems have been resolved, at least to the point of removing uncertainties that clouded Mir-ant Group’s future, in the course of — and often as a result of — Debtors’

chapter 11 cases. Although some of the experts minimized the significance of resolving these problems, the court does not find their testimony in this respect credible. Indeed, the mere fact that any expert would fail to appreciate the benefit to Debtors not only of resolving expensive litigation on which Debtors’ cash flow is contingent, but of the claims process and the savings through contract rejection and other special powers afforded by the Code, demonstrates that the market does not fully accord Mirant Group the value enhancement achieved in the course of these cases.

See, similarly, Till, 541 U.S. at 475 and n. 12, 124 S.Ct. 1951 (listing attributes of bankruptcy process tending to decrease the risk of default by a debtor); In re Exide Techs., 303 B.R. at 66 (“[T]he ‘taint’ of bankruptcy will cause the market to undervalue the securities and future earning capacity of the Debtor.”); In re New York, New Haven & Hartford R.R. Co., 4 B.R. at 792 (“The stigma of bankruptcy alone is a factor that will seriously depress the market value of a company’s securities.”).

As to the added “risk” that would depress the value of an ex-bankrupt, while that may be an appropriate factor where a debtor’s business will suffer the public relations disadvantages of bankruptcy or where the debtor is overburdened with debt incurred in satisfaction of claims, neither of these conditions exists in the case at bar. Merchant energy companies sell into a marketplace in which either they are parties to contracts or they are effectively anonymous participants in an exchange.

As to a debt-heavy balance sheet, the result in some reorganization cases, the Plan proposes conversion of substantial debt to equity. Mirant’s ratio of debt to capitalization is expected to be about 0.62. The company’s capital structure is impressive enough that seven potential lenders initially competed to provide exit financing, and, although the Plan requires only $750 million in exit financing, Debtors have a commitment for up to $2.35 billion. See Debtors’ Motion Pursuant to 11 U.S.C. §§ 105(

a) and 363(

b) to Authorize Debtors to Execute a Commitment Letter and Related Documents and to Incur Obligations Thereunder in Connection with the Acquisition of up to $2.35 Billion in Aggregate Principal Amount, of Exit Financing (the “Exit Financing Motion”). From these facts, and notwithstanding the contrary testimony in the record discussed above, the court concludes the market’s formula for valuing Mirant Group is too pessimistic about the effects of bankruptcy and not sufficiently appreciative of

chapter ll’s benefits. For all these reasons, the court further concludes that it must exercise its judgment in accordance with its understanding of the record of the Valuation Hearing. Taking account of Mirant Group’s relatively clean balance sheet, of the resolution of unknowns that could have affected Mirant Group’s cash flow for years to come and the difference between the return required by a hypothetical investor and the return required to satisfy a prepetition claim requires recalculation of Mirant Group’s value.

Below the court discusses specific changes necessary to bring Blackstone’s valuation into line with other general principles of bankruptcy valuation as well as to correct for over-reliance on the marketplace and other errors. 2. Last Twelve Months (“LTM”) Valuation Although there was dispute among the experts as to whether a calculation of value under the Comparable Method should be made on an LTM basis, the court believes that such a calculation, based on historical numbers, is a useful component of valuation. Use of historical data as well as projections is sanctioned by numerous valuation decisions.

Protective Comm., 390 U.S. at 442, 88 S.Ct. 1157 (valuation of a company “must be based on an informed judgment which embraces all facts relevant to future earning capacity and hence to present worth, including ... the past earnings record, and all circumstances which indicate whether or not that record is a reliable criterion of future performance”) (quoting Consol. Rock Prods. Co. v.

Du Bois, 312 U.S. 510, 526, 61 S.Ct. 675, 85 L.Ed. 982 (1941)); In re Duplan Corp., 9 B.R. 921, 927-28 (S.D.N.Y.1980) (“Certainly past earnings provide a useful reference point from which to calculate present value and develop projections. To rely on the past exclusively, however, would be misleading.”); In re Keeshin Freight Lines, Inc., 86 F.Supp. 439, 443 (N.D.Ill.1949) (“It is proper to examine the past earnings history of a business in considering whether or not a future earnings estimate is reasonable.”); In re Barium Realty Co., 62 F.Supp. 81, 84-85 (E.D.Mich.1945) (citing Consol.

Rock for proposition that valuation must take into account earning record and stating that appraiser’s “approach is unwarranted in that he admittedly gave no consideration to past performances, relied entirely upon the current record, and was unduly optimistic of the future”); In re Fiberglass Indus., Inc., 74 B.R. 738, 745 (Bankr.

N.D.N.Y.1987) (judgments about cash flow projections “must take into account all facts relevant to future earning capacity including but not limited to ... the past earnings record and all factors which tend to support or negate reliance upon the past earnings record as an appropriate index of future performance”). In the case at bar, a value calculated based on historical results will serve as a test of the accuracy of valuations based on predictions.

Accordingly, the court directed in the Letter Ruling that the Comparable Method be used to determine a value based on the last twelve months (ending March 31, 2005) of Mirant Group’s operations. 3. Comparable Company Multiples In order to determine a value through the Comparable Method, comparable companies must be chosen and a multiple derived for each. A median average of those multiples is then applied to the subject’s EBITDA to derive a value. The court adopts the comparable companies chosen by Blackstone (AES, Reliant, NRG and Dynegy).

Phoenix and the Equity Committee urged use of Calpine as a comparable as well, and some question was raised about use of AES. The court also has some concern about the use of Dynegy, given its liquefied natural gas business (see TR (Coleman) at pp. 1089:24-1091:25 and 1092:18-1093:2, TR (Maxwell) at pp. 4610:7-4612:14 and Blackstone 2/25 Report at p. 27) and the substantial ownership interest in Dynegy of Chevron-Texaco (TR (Ying) at pp. 1991:3-1993:13).

Reliant is also not a truly close comparable operationally because of its substantial sales in the retail market (TR (Ying) at pp. 1994:14-1995:1 and 2237:13-2238:8 and Blackstone 2/25 Report at p. 27). The main reason why Blackstone, MBY and Houlihan declined to use Calpine as a comparable was its precarious financial condition. It was the view of Blackstone and MBY that the stock price of Calpine was properly characterized as an option price rather thap a true reflection of equity value. TR (Coleman) at pp. 1206:19-1209:23 and TR (Ying) at pp. 1978:10-1981:18.

As stock price is one of the principal elements in calculating total enterprise value, use of Calpine as a comparable would lead to distortion of value by according it too high an enterprise value (as the enterprise value goes up, the multiple — yielded by dividing enterprise value by EBITDA— also increases). The court has carefully considered the considerable evidence offered on the suitability of Calpine as a comparable.

Based in significant part on the testimony of Morgan, Holden and Hayes the court finds that the differences in business between Calpine and Mirant Group are sufficient, when considered together with Calpine’s relatively weak financial condition, to disqualify its use as a comparable. AES, with a total enterprise value of approximately $28 billion and an approximate EBITDA of $3 billion, is substantially larger than Mirant Group.

Moreover, though in the merchant energy business, unlike Mirant Group, the international business of which accounts for approximately 20% of EBITDA, AES’s foreign assets make up about 70% of its business. The countries in which AES operates are different — and, in many cases, arguably less prone to instability— than those in which Mirant Group has a presence. However, the court, based on the preponderance of the evidence, holds that AES is as valid a comparable to Mir-ant as is Dynegy- — possibly even Reliant.

Because the court does not think it appropriate to rely solely on NRG, unquestionably the company most comparable to Mirant, in formulating a value by the Comparable Method, it finds and concludes that AES (and Dynegy and Reliant) should be used as comparables as well as NRG. In this regard the court is compelled to note that weighting of comparable companies based on their similarity to the subject being valued would seem to have some appeal.

The experts whom the court questioned about this rejected the idea, and the court therefore will not adopt such an approach; it may be that raising the question here will prove useful in future valuations. The court next fixes as June 27, 2005, the date for which closing prices must be used to calculate equity value as a first step toward determining total enterprise value. June 27 was the date of conclusion of the Valuation Hearing. The selection of June 27 is essentially arbitrary, but avoids later argument over whether the date specified was chosen because of high or low stock prices.

The court again questioned the use of a single day’s closing price for comparable company stocks. It seems to the court that it would make better sense to factor into valuation comparable companies’ stock prices over a period of time, thus avoiding bringing into valuation metrics temporary instability in stock prices, especially considering that the value being determined is for a date in the future, at which time prices are likely to be different than on June 27. This suggestion, however, brought, at best, a tepid response except from Shaked.

The court determined to use a single day’s closing price, first, because the valuation experts all agreed that is a proper methodology (see also Shannon P. Pratt et al„ Valuing a Business 241 and 256 (4th ed.); cf. TR (Shaked) at pp. 5062:5-5064:18). Second, the evidence before the court indicates there would not be much difference if the value of Mirant Group were determined using prices over at least a short period of time. Maxwell testified as to the difference in the comparable companies’ stock prices by comparing the prices for each based on (

i) closing prices as of June 3, 2005, (

h) the one month average prior to June 3, 2005, and (iii) the three month average prior to June 3, 2005. The resulting figures demonstrated that the stock prices remained reasonably stable over time and that, using that particular three month average as opposed to a single day, the TEV of Mirant Group would decrease, but in a nonmaterial amount. TR (Maxwell) at pp. 3835:16-3838:17. The court finally concludes that, in calculating the multiple for NRG, notes receivable of approximately $832 million should be included in total enterprise value.

Maxwell testified that he had spoken with a member of NRG’s management who confirmed that payments on the notes were included in NRG’s EBITDA (TR (Maxwell) at pp. 3700:16-3701:14.). Maxwell’s testimony was consistent with apparent treatment of the notes in NRG’s filings and some analyst reports. TR (Maxwell) at pp. 3699:5-3710:10; Equity Committee Exhibit Nos. 40, 41, 252, 255 and 257. If the payments are included in the EBIT-DA, consistency requires inclusion of the notes in NRG’s enterprise value. 4. Cost of Equity The WACC is the key component for calculating a value using the DCF Method.

The WACC itself is dependent on the subject’s after-tax cost of debt and the cost attributable to equity — outside

chapter 11, a return required to attract equity investors. In the case of Mirant Group, Blackstone calculated the WACC using an after-tax cost of debt of 5%. This number is supportable using a number of s

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