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SME members - including city of Great Falls - face nail-biting year Power co-op's bankruptcy case may be entering final year

One utility has offered $30 million for the Highwood Generating Station, an official said last month. / TRIBUNE FILE PHOTO/LARRY BECKNER

Written by Richard Ecke Tribune Staff Writer

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Editor’s note: This is the second in a two-part series on the Southern Montana Electric Generation and Transmission Cooperative bankruptcy case.

A foggy situation is getting clearer as the Chapter 11 bankruptcy case for the Billings-based Southern Montana Electric Generation and Transmission Cooperative enters what may be the case’s final year.

Southern Montana’s six members include the city of Great Falls, which has already lost $7 million on its ill-fated venture, Electric City Power.

In the federal case, creditors including Prudential financial and PPL EnergyPlus want to retain as much money as they can from contracts with Southern Montana, while Southern’s members would prefer not to throw more money into the disastrous venture, which included construction of a little-used Highwood Generating Station natural-gas fired power plant eight miles east of Great Falls.

Building the power plant was a big mistake, said Arleen Boyd, trustee of Red Lodge-based Beartooth Electric, one of the group’s six members.

“I think it’s pretty clear, Southern went in way over its head,” she said Thursday. Southern Montana borrowed $75 million from Prudential and $10 million from Modern Woodmen of America, two secured creditors in the bankruptcy. As secured creditors, they are in the best position of the parties and can expect to at least be awarded the power plant, said John Crist, attorney for Yellowstone Valley Electric, Southern Montana’s biggest member.

“That probably is the minimum they get back,” Crist said Monday. There is also a matter of the six all-requirements power contracts Southern Montana’s members signed, but there are “serious legal questions” surrounding those pacts, Crist said.

Meanwhile, there is a big group of unsecured creditors, including PPL EnergyPlus, which filed one claim for around $300 million for power lost after Southern Montana’s appointed trustee, Lee Freeman, exercised his power to invalidate PPL’s power supply contract with Southern Montana last year.

Unsecured creditors are lower down on the totem pole for repayment.

“It’s usually the unsecured creditors that end up getting a fraction of what they’re owed,” Crist said.

Montana Public Service Commission Chairman Travis Kavulla from Great Falls has argued the secured creditors, too, should take a “haircut” for making a risky loan to the controversial venture. Kavulla said if the bankruptcy system is “fair and just,” Prudential should simply be given the power plant and be required to suffer losses as well. A full discussion on that issue has yet to take place in federal bankruptcy court.

Great Falls and the five other Southern members have a limited amount of clout in the Chapter 11 reorganization. Freeman has produced a general plan to keep Southern Montana going for up to 10 years to repay its creditors. Freeman’s plan would need approval from specific groups, including secured creditors such as Prudential and Modern Woodmen, and unsecured creditors such as PPL EnergyPlus. But the plan does not require approval by Southern Montana’s members, although they can protest a plan they don’t like.

Feisty membership

Even so, the little guys are maintaining an aggressive posture.

City Commissioner Bob Jones, for example, volunteered that the city of Great Falls does have a plan.

“Our plan is ‘get out’ — that’s our plan,” Jones said in an interview. Doug James, a private Billings attorney for the city of Great Falls, reiterated that goal last week.

“We intend to aggressively pursue the city’s litigation against Southern,” James said in a statement. “The city is not a proper member of Southern, and the wholesale power supply contract with Southern violates Montana law and should be declared void.”

James also said that removing Great Falls from the case “would simplify the bankruptcy case, eliminate uncertainty and reduce costs for both Southern and the city.”

Electric City Power at one time claimed nearly 20 major power customers, including government agencies, nonprofit groups, Great Falls-area businesses and a talc mine in Dillon. Most Great Falls residents never bought electricity from Electric City Power; most of the city’s commercial customers have fled.

Great Falls still faces some sticking points, including the contract it signed to buy power from Southern Montana through 2048, and claims by Freeman that the city owes Southern up to $60 million in stranded costs for power the city’s former customers would have purchased. City commissioners at past public meetings said the city rejected offers to settle the stranded cost issue at $60 million and $30 million. Jones won’t say what numbers were bandied about at a more recent mediation session.

In the middle of the conflict is Freeman. For much of 2012, Freeman bought power for as little as $10.28 per megawatt-hour, charged members around $70 per megawatt-hour, and then banked the difference.

Freeman said that has enabled Southern to reduce the principal on two power-plant loans by between $7 million and $10 million already. That would bring the total owed Prudential and Woodmen down from $85 to less than $80 million.

“You’re never going to make everybody satisfied,” the trustee continued. “There are a lot of balls in the air right now.”

Freeman’s general plan — he has until Feb. 15 to fill in the blanks — calls for locking in a favorable power rate for up to 10 years, and using the difference between the wholesale rates and the rates charged members to help pay off creditors. The big asset for Southern Montana is the power plant, for which Basin Electric has offered $30 million.

Crist said the Freeman plan poses a variety of dangers to Southern Montana members, even if secured creditors may favor it. For example, members could spend 10 years paying off its power plant debt, and end up with a power plant worth very little or nothing.

In addition, although electricity is relatively cheap now, power costs are expected to be much higher in 10 years, Crist said.

“There’s no advantage to any of the cooperatives to go forward with a reorganized Southern,” Crist said.

Boyd said Beartooth members are already paying rates of more than $70 per megawatt-hour, which she said are among the highest in the nation, in the 98th percentile.

“Our rates are about as high as our members can bear,” Boyd said.

Boyd said the co-op has looked into the option of Beartooth Electric filing for bankruptcy if it were overwhelmed by additional charges created by the bankruptcy case. Officials have said the city of Great Falls is not interested in going the bankruptcy route.

Some of the sharp differences among parties in the bankruptcy will need to be sorted out by Bankruptcy Judge Ralph B. Kirscher, who will have the final word in the case.

“The judge ultimately decides whether a reorganization is going to work,” Great Falls City Commissioner Bill Bronson said.

Reach Tribune reporter Richard Ecke at 406-791-1467 or email him at recke@greatfalls Follow him on Twitter at @GFTrib_REcke.