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Southern Bankruptcy: Millions Spent, Millions Due

By Arleen Boyd, Due Diligence Committee Chair
District 5 Trustee 
Submitted June 7, 2014

Rural Montana Magazine, July 2014 Issue


By the time you read this the Southern Montana Electric Cooperative plan of reorganization could be in effect following the U.S. Bankruptcy Court confirmation hearing scheduled for June 13. After working with its members and the secured noteholders, Southern filed the plan on May 12, 2014.  In addition to the Highwood Generating Station noteholders, most other creditors reached agreements with Southern supporting the plan. BEC cast its ballot in favor of the plan after a request for proposals produced preliminary pricing from potential power suppliers indicating that it is possible for Southern to buy power at rates that can allow it to meet the terms of the agreement without rate increases for its member co-ops.   

Terms of the plan include:
•    4-year payment to the HGS noteholders, primarily Prudential Insurance and Modern Woodmen, of  $21 million at 4.125% interest 
•    Creation of a trust to sell the Highwood Generating Station with the proceeds going to the noteholders
•    Resolution of other claims in accordance with U.S. bankruptcy code
•    Provision for a potential exit for BEC.

Exiting Southern — The plan follows more than three years of bankruptcy action which most of you have followed.  Shortly after bankruptcy was declared BEC began efforts to secure an exit from Southern through court action to challenge the BEC contract with Southern, legal demands for liquidation, and negotiations for plan provisions for terminating our membership.  The plan allows us to leave Southern without objection from the noteholders if BEC prepays its share of their notes and Southern’s other members consent.  Because BEC and Southern’s other three co-op members have not reached agreement on terms for a BEC exit, mediation is underway.  

Making it work — With no agreement on exit provisions yet in place we have focused on making the plan work.  As members of Southern our responsibility is to provide oversight and analysis to put the plan on track.   A “feasible” plan, as required by the court, is one that can work under expected circumstances if reasonable actions are in place to implement it.  Feasibility does not guarantee that those actions will be identified or taken.  

To make the plan successful Southern will need to secure power at competitive rates, manage operations carefully, reduce expenses, and exercise an unrelenting commitment to making payments to the noteholders in accordance with an amortization schedule that retires the debt in four years.  Southern will need to operate with transparency so that members of member co-ops can confidently support the actions necessary to meet its obligations and ultimately release its members. 

$36 million paid to date
Market power prices have worked strongly in Southern’s favor during the three years of the bankruptcy.  With pre-bankruptcy electricity rates set for its members, low market prices for power allowed Southern to supply power to members while collecting sufficient cash to pay bankruptcy expenses and payments to the noteholders.  Since declaring bankruptcy in October 2011 Southern has paid more than $9 million in legal fees and compensation to professionals employed by the trustee, Southern, the secured noteholders, and other creditors.  Over the same period Southern paid the noteholders approximately $26.5 million for “adequate protection” of their interests.  

For information call the co-op or a board member and plan to attend one of the scheduled member meetings posted on the website.