Mirant, creditors committee sues former parent Southern Co.

By Caroline Salls

Pittsburgh, June 17 - Mirant Corp. and its official committee of unsecured creditors filed a lawsuit against Mirant's former parent company, Southern Co., seeking recovery of at least $2 billion in connection with transfers made to Southern prior to its spinoff of Mirant in April 2001, according to a company news release.

The lawsuit was filed in the U.S. Bankruptcy Court for the Northern District of Texas, where Mirant's Chapter 11 reorganization case is being heard.

"As detailed in the complaint, Southern Co. caused Mirant to incur a mountain of debt and then stripped out approximately $2 billion in payments and transfers in anticipation of Mirant's April 2001 spinoff, even though Southern knew or should have known that Mirant had been left with inadequate resources to meet the obligations that its former parent had caused it to incur," lead attorney Thomas E. Lauria said in the release.

"The special committee's investigation revealed that Southern had been advised as early as 1997 that its fledgling merchant energy subsidiary was undercapitalized and was creating potential regulatory issues for the utility giant.

"Without informing Mirant's management, Southern developed a strategy to capitalize on the then white-hot merchant energy sector to raise billions of dollars of financing, much of which Southern caused Mirant to flow upstream, only to then spin off the debt-burdened subsidiary before its latent problems could come home to roost."

The lawsuit asks the bankruptcy court to issue orders that would:

*Avoid more than $1.9 billion in fraudulent payments, dividends and other transfers that Southern forced Mirant to make during 1999 to 2001;

*Reverse Southern's conversion of nearly $1 billion of equity investments it made in Mirant into debt (which it then caused Mirant to repay with interest), entitling Mirant to recover all amounts paid;

*Declare Mirant to be the alter ego of Southern, so that Southern is liable to Mirant's creditors for the full extent of Mirant's obligations to creditors;

*Declare that Southern induced Mirant to breach its duty of loyalty to creditors and initial public offering investors;

*Sustain Mirant's objections to all claims made by Southern against the Mirant estate in the Chapter 11 proceeding, which total about $70 million; and

*Equitably subordinate all Southern claims in the Chapter 11 proceeding to the claims of all other creditors (thus putting Southern's claims "last in line" for payment, behind all other creditors).

According to the release, the lawsuit states that Southern made cash advances to Mirant to fund early investments in power generation projects, and that any differences between project financings and the purchase price were characterized in Southern's financial statements through the end of 1996 as equity contributions to Mirant.

However, Southern later re-characterized all subsequent equity contributions to Mirant as cash advances or loans in order, the company and creditors claim, to strip Mirant of much-needed cash prior to the IPO and spinoff of Mirant. Southern also required Mirant not only to repay the principal amount of the advances, but also required Mirant to pay interest on those advances.

The lawsuit further alleges that during 1997, 1998 and 1999, Southern caused Mirant to make or commit to make acquisitions totaling more than $6 billion, for which Mirant was unable to obtain significant project financing because it grossly overpaid for most of the acquisitions in that time frame.

The lawsuit also asserts that Southern caused Mirant to borrow $700 million in July 1999, of which $192.5 million was used to reduce advances and $97 million was used to pay interest on the advances.

Between December 1999 and May 2000, Southern caused Mirant to pay dividends to Southern totaling more than $668 million, even though Mirant had to borrow all the funds needed to pay those dividends, the lawsuit states.

Then, in preparation for the planned spinoff, Southern caused Mirant to acquire certain generating businesses from Potomac Electric Power Co. at grossly excessive prices.

According to the release, once Mirant was spun off by Southern, the company immediately began to experience cash flow and liquidity problems, which caused the company to liquidate some of its most valuable assets and terminate expensive contractual obligations incurred while Southern was in control.

These developments forced Mirant to file Chapter 11 bankruptcy when it could not repay over $1 billion of then maturing debt.

Mirant is represented in the lawsuit by the law firm of White & Case LLP, reporting directly to a special committee of the board of directors that is composed of board members who were not on the Mirant board prior to the spinoff on April 2, 2001.

Andrews Kurth LLP represents the committee.

Mirant, an Atlanta-based power company, filed for bankruptcy on July 14, 2003. Its Chapter 11 case number is 03-46590.

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