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Mirant Corp. and its creditors filed a $2 billion lawsuit late Thursday against its former parent for alleged fraudulent transfers before its 2001 spinoff. In the 25-page suit, the Atlanta utility alleges that Southern Co. induced it to breach its fiduciary duty to creditors and should thus be required to assume full liability for those creditors’ claims. The complaint was filed by Mirant and its official creditors’ committee in its Chapter 11 case being heard before Judge D. Thomas Lynn in U.S. Bankruptcy Court for the District of Texas in Fort Worth. The suit alleges that Atlanta-based Southern caused Mirant to overextend by making more than $6 billion in acquisitions of power plants during 1997-1999 at grossly inflated prices. Mirant was then unable to attract adequate financing for those deals and verged toward bankruptcy when it couldn’t sell the output of the plants at prices needed to justify the purchase prices. “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,” Thomas Lauria, debtor counsel at White & Case, said in a statement. “That happened 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.” Southern, which is the largest electricity generator in the Southeast, countered that Mirant was financially healthy at the time of the early 2001 IPO and April 2, 2001, spinoff. The Securities and Exchange Commission and the Federal Energy Regulatory Commission also reviewed and approved the spinoff, said Todd Terrell, a Southern spokesman. “Three major credit ratings agencies rated Mirant investment grade and some of the largest commercial banks in the world loaned it money prior to the spinoff,” he said. “We know that Mirant was financially healthy at the point of the IPO and the spinoff and will vigorously fight the lawsuit,” Terrell promised. The suit claims that Southern forced Mirant to make more than $1.9 billion in fraudulent transfers between 1999 and 2001. The utility is asking the court to reverse the conversion of nearly $1 billion in equity investments that Southern made in Mirant into debt that it then had to repay with interest. The suit also seeks to sustain Mirant’s objections to all of Southern’s estimated $70 million in claims and then equitably subordinate all those claims. That subordination would put Southern behind all other creditors waiting in line for payouts. Mirant’s board formed a special committee in early 2004 to investigate potential claims and litigation against Southern in connection with the IPO and the spinoff. “The investigation revealed that Southern had been advised as early as 1997 that its fledgling merchant energy company was undercapitalized and that was creating potential regulatory issues for the utility giant,” Lauria said. Southern also devised a strategy to capitalize on the highly profitable merchant energy sector by raising billions in financing that mainly flowed from Mirant to its parent, he said. Southern then spun off Mirant before its problems could be detected, he charged. After the 2001 spinoff, Mirant immediately began to face a cash flow problem that caused the utility to liquidate valuable assets and terminate expensive debt incurred under Southern ownership, the suit alleges. Mirant was then downgraded to below investment grade by Moody’s Investors Service in December 2001, just seven months after the spinoff, according to the suit. Mirant restated in earnings for 2000 and 2001 and this forced its energy trading business to start posting 100 percent collateral on all its energy transactions, the suit said. That led to a greater cash crunch and that soon led to its bankruptcy petition, court papers said. Mirant spokesman David Thompson said he expects the “very complicated suit” to be heard by the bankruptcy court before Labor Day. Mirant hopes to finish up on weeks of valuation hearings in about two weeks and would then move on to a hearing on its disclosure statement, Thompson said. Mirant is seeking to lock in a $2.35 billion exit loan from a lending group led by J.P. Morgan Chase & Co., Deutsche Bank Securities Inc. and Goldman Sachs Credit Partners LP. The utility filed for Chapter 11 on July 14, 2003, in the Fort Worth court. Besides Lauria, Charles Kline is Miami debtor counsel at White & Case while Robin Phelan is Dallas co-counsel at Haynes and Boone. John Lee and Robin Russell are Houston counsel to the creditors committee at Andrews Kurth. Copyright �2005 TDD, LLC. All rights reserved.

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