Capital Markets

Mirant Sues Southern over Bankruptcy

The bankrupt independent power company seeks to recover $2 billion, claiming Southern Co. forced it to incur "a mountain of debt."
Stephen TaubJune 20, 2005

Mirant Corp. and its creditors’ committee have filed a lawsuit against its former parent, Southern Co., asserting that the Atlanta-based holding company played a role in its bankruptcy.

The plaintiffs are seeking at least $2 billion in connection to transfers made to Southern before the large electric-utility company spun off Mirant in April 2001. The lawsuit also charges that during 1997, 1998, and 1999, Southern caused Mirant to make more than $6 billion in acquisitions, for which Mirant was unable to obtain significant project financing because it grossly overpaid for most of them.

The lawsuit was filed in the U.S. Bankruptcy Court for the Northern District of Texas, in Fort Worth, where Mirant’s Chapter 11 reorganization case is being heard. Southern “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 spin-off, 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,” says Thomas Lauria, the lead attorney for White & Case in Mirant’s Chapter 11 case.

Lauria asserts that a special committee, set up by Mirant’s board, 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 flowed upstream to Southern prior to the spin-off of the debt-burdened subsidiary, says Lauria, and “before its latent problems could come home to roost.”

Southern spokesman Todd Terrell told Reuters that company officials do not believe that there is any merit to Mirant’s lawsuit. He said that credit agencies, commercial banks, and regulators had all looked closely at Mirant’s finances at the time of the spin-off without seeing any red flags. “We know they were financially healthy at the time of the spin-off, so we will defend ourselves vigorously,” he told the wire service.

Terrell added that Southern management believed “a perfect storm of unfortunate events” — including a U.S. economic recession; the events of September 11, 2001; and Enron’s collapse — helped to drive Mirant into bankruptcy.

The lawsuit asks the bankruptcy court to issue orders that would avoid fraudulent payments, dividends, and other transfers that Southern forced Mirant to make from 1999 to 2001, which totaled more than $1.9 billion; reverse Southern’s conversion of nearly $1 billion of equity investments it made in Mirant into debt; and declare Mirant to be the alter ego of Southern, so that Southern is liable for all of Mirant’s obligations to creditors.

In November 2002, Mirant management said it would restate earnings by $41 million from January 1, 1999, through June 30, 2002, as a result of accounting errors. At the time, officials claimed the overstatement was the result of net income being understated by $10 million in the first six months of 2002 and overstated by $51 million from 1999 through 2001.

In July 2002, Mirant said it would restate several balance-sheet items from its 2001 financial statements. Those items included an $85 million overstatement of a gas-inventory asset, a $100 million overstatement of an accounts-payable liability, and a potential $68 million overstatement of an accounts-receivable asset. In November 2002, Mirant’s management also asked its independent auditors to reaudit the company’s 2000 and 2001 financial statements.