Potomac Electric Power Co. (Pepco) and Mirant Corp. have reached a proposed settlement of all litigation between the companies arising from Mirant’s 2003 bankruptcy and related matters.

Mirant noted that it emerged from a Chapter 11 reorganization in January, but unresolved elements of its case have remained pending before the bankruptcy court, including the disputes with Pepco that are resolved by the settlement.

Under the proposed settlement, which must be approved by the bankruptcy court, Mirant will pay Pepco, in cash and stock, $520 million in exchange for the right to reject certain power purchase agreements and resolve all remaining claims pending between them in connection with Mirant’s bankruptcy.

The largest claim resolved by the proposed settlement relates to Mirant’s wish to terminate an agreement under which Mirant is required to reimburse Pepco for Pepco’s obligations under a long-term power purchase agreement with Panda Brandywine L.P.

Under the settlement, Mirant will be allowed to terminate the agreement in exchange for $450 million, which Pepco will place in a special purpose account to be used solely for the purpose of paying its liabilities under its long-term contract with Panda. The $450 million will be paid in Mirant stock and cash.

If, prior to payment, Mirant’s stock declines to an agreed upon price, Mirant has the option to assume the contract, in which case it will continue to reimburse Pepco for obligations to Panda.

Under the proposed settlement, Pepco will also receive $70 million as reimbursement for claims other than those relating to the Panda contract, and for legal fees.

The proposed settlement was filed last week with the federal courts in Fort Worth, TX.

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