The "perfect storm" of events, including Enron's fall and the financial crisis in energy trading, was responsible for sinking Mirant Corp. into bankruptcy, not alleged actions of its former parent, according to a legal brief filed recently by the Southern Co. in U.S. Bankruptcy Court for the Northern District of Texas.
The recent allegations in a $2 billion lawsuit against Southern Co. filed by Mirant and its Official Committee of Unsecured Creditors are an attempt "to rewrite history" and directly contradict Mirant's initial bankruptcy filing which blamed the financial crisis in the U.S. power industry, Enron's bankruptcy, and the downgrading of Mirant's credit rating for the company's fall from grace," Southern said. Mirant initially told the court the Enron bankruptcy started a chain reaction of events that significantly reduced market liquidity and function, leading to credit downgrades of Mirant and its trading partners.
"As part of this industry crisis, between January and late July 2002, the stocks of Dynegy and Williams lost 95% of their value. El Paso and Reliant lost over 70% of their equity value in that time period, and Duke over 50%." Others subsequently filed for bankruptcy and still others narrowly avoided that fate by reaching agreements with their creditors.
"Major energy traders such as Enron and Dynegy withdrew from the business, and many states resolved to retain traditional utility structures, instead of adopting restructuring similar to Texas, further shrinking the prospects for companies such as Mirant. The margin on the merchant energy business shrank, and equipment cancellation charges mounted. Nearly all industry participants rushed to sell assets in order to reduce debt and improve liquidity with the result that the market value for all assets fell substantially."
It was these market events, "not any wrongdoing by Southern," which led to Mirant's bankruptcy filing. "The transactions complained of in the Amended Complaint were lawful and had nothing to do with Mirant's bankruptcy." The activities surrounding the spin-off of Mirant from Southern all were fully disclosed and all took place in the period between 1999 and 2001 when all three major credit rating agencies ranked Mirant as having investment grade credit. These ratings were confirmed prior to the Mirant IPO and spin-off, including the pre-spin-off dividends, loan repayments and transfer of subsidiaries.
"In sum, Mirant's financial problems resulted from an industry crisis that was sparked by the unforeseen 'perfect storm' of the tragic events of September 11, 2001, a U.S. and global economic recession and the collapse of Enron." Mirant's efforts to negotiate its way out of its financial plight ended with its bankruptcy filing in July 2003.
The complainants' lawsuit is seeking recovery of at least $2 billion in connection with transfers made to Southern prior to Southern's spin-off of Mirant in April 2001 (see NGI, June 20). It was filed in the same court where Mirant's Chapter 11 reorganization case is being heard.
Mirant and its creditors claim the 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 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."
The complaint charges Southern had been advised as early as 1997 that its merchant energy subsidiary was undercapitalized. "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."
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