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Southern bankruptcy moving into final stages

BY CLAIR JOHNSON

After nearly two years in U.S. Bankruptcy Court, Southern Montana Electric Generation and Transmission Cooperative is entering a critical phase that ultimately will decide whether it can reorganize and continue supplying wholesale power to its four remaining rural co-op members or liquidate and cut loose the co-ops to find their own power.

The outcome is far from certain, and millions of dollars are at stake.

A reorganization plan proposed by Southern’s trustee, Lee Freeman, has drawn heavy fire from the four co-ops — Beartooth, Fergus, Mid-Yellowstone and Tongue River — and objections by the unsecured creditors. Both groups want to liquidate Southern.

Only Southern’s secured creditors, noteholders who loaned it $85 million to build the Highwood Generating Station, a 46-megawatt gas-fired power plant near Great Falls, support the plan. They would be repaid $60 million at reduced interest rates over 10 years.

Bankruptcy Judge Ralph Kirscher initially set a Nov. 12 hearing in Billings to consider approving the plan but on Wednesday agreed to reschedule after the parties said far more time than an afternoon was needed to present evidence and witnesses.

Kirscher directed the parties to let him know how much time they need and whether they want mediation, said John Parks, a Denver attorney who represents the trustee.

“We had talked about mediation before. Some parties were more keen to do it than others,” Parks said.

The trustee had asked for a five-day hearing, saying he expected the plan to be contested.

A recent ruling by Kirscher to approve the trustee’s “disclosure statement” has set the stage for a confirmation hearing on the contentious plan.

The statement is a required report intended to give parties enough information about the debtor to make a decision about a reorganization plan.

Approving the plan won’t be easy, the judge noted.

“The court agrees that the road to confirmation in this case is not nicely paved, and the Trustee has significant hurdles to overcome,” Kirscher said.

The next step will be for Freeman to send the parties additional plan information along with ballots for voting on it.

The plan also classifies the claims of creditors and specifies how each class will be treated.

Creditors whose claims are treated as “impaired” get to vote. Impaired creditors are those whose contractual rights will be modified or who will be paid less than their full claim under the plan. The co-ops are not considered impaired and do not get to vote.

In general, after ballots are tallied, the court will hold a confirmation hearing to decide whether to approve the plan. Parties also can object to the plan.

Bankruptcy lawyer Doug James of Billings said there are two ways a reorganization plan can be confirmed. James represents Great Falls and negotiated its exit from Southern, but he is no longer directly involved in the case.

One way for a plan to be approved is that the creditors like and vote for the plan and the court confirms it. That rarely happens, James said.

The other way is for one class of creditors to vote in favor of the plan even if other classes object to it, he said.

The judge then analyzes the plan to determine if it is fair and equitable, James said. If the judge decides it is, he can confirm the plan, he said.

If nobody votes in favor of the plan, the judge cannot confirm it, he said.

In Southern’s case, James said he thought it was almost certain the noteholders would vote for the plan because they’re the biggest beneficiary.

Most cases get settled before a confirmation hearing, James said.

James said all parties in a bankruptcy have something at risk going into a confirmation hearing. That risk, he said, gives parties “an incentive to negotiate something they can live with.”

Disputes in Southern’s case are deep and Missoula attorney Harold Dye, who represents unsecured creditors, urged mediation. The committee doesn’t believe the disputes can be resolved consenually without it, he said in court records.

Freeman’s proposal keeps Southern together with a smaller, restructured debt and imposes what he says are reasonable rates for the co-ops to pay down the noteholders’ debt. A reorganized Southern would buy power from Morgan Stanley Capital Group, Inc., and keep the Highwood plant.

Southern’s secured creditors, the noteholders, are the only parties that back the plan. Prudential Insurance Co. of America and Modern Woodman of America have reached a proposed settlement with the trustee and call the plan a good deal for the co-ops.

The co-ops oppose the plan, saying the rates for paying back the noteholders are unaffordable.

The four co-ops represent about 13,000 member customers in central and southeastern Montana.

The unsecured creditors also prefer liquidation. The plan would pay them 47 cents on the dollar, they say. Unsecured claims total $392 million.

PPL is Southern’s biggest unsecured creditor, claiming it is owed $374 million. Numerous other unsecured creditors include NorthWestern Energy, consulting, construction and engineering companies, law firms and others that did business with Southern.

Southern filed for bankruptcy on Oct. 21, 2011, after getting into financial trouble when it contracted with PPL Energy Plus to buy more power than it needed at increasingly higher rates. Southern lost money when it had to dump excess power into a market depressed by a power glut and during an economic recession.

Serious in-fighting also led to two former members — the city of Great Falls and the Yellowstone Valley Electric Cooperative — to each sue Southern to end their contracts. They eventually settled claims with the trustee and left, with Great Falls paying Southern $3.25 million and Yellowstone Valley paying $2.5 million.

See the Billings Gazette article here.

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