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Southern, Yellowstone Valley Electric Co-op strike a deal

The Yellowstone Valley Electric Cooperative and its bankrupt power provider, Southern Montana Electric Generation and Transmission Cooperative, have reached a deal to settle a long and bitter dispute.

If the proposed settlement is approved by the bankruptcy judge, YVEC will be free to leave Southern, something it has been trying to do since 2008 when it sued the Billings-based wholesaler to end its contract.

The agreement is outlined in a motion filed in the bankruptcy case late Friday afternoon by Denver attorney John Parks, who represents Trustee Lee Freeman of Livingston.

Parks could not be reached for comment.

YVEC’s attorney, John Crist of Billings, said the settlement would resolve all claims between the two organizations.

“It’s huge. We think it’s a very fair and equitable settlement between the parties,” he said Friday.

The settlement calls for YVEC to pay Southern $2.5 million and for Southern to transfer to YVEC 9 megawatts of power from its portfolio of about 20 megawatts that it receives in low-cost power from the Western Area Power Administration, Crist said.

YVEC intends to take out a long-term loan to pay the $2.5 million settlement, court records said.

Other parties in Southern’s bankruptcy have a right to object to the agreement. The judge is expected to conduct a hearing to determine whether the settlement is fair and equitable, Crist said. The deal could be final by April 30, he said.

“At this point, I don’t anticipate any objections,” Crist said.

Once free of Southern, YVEC plans to return to its former supplier, Central Montana Electric Power Cooperative, based in Great Falls, Crist said. Central serves about 40,000 Montanans with power it receives through contracts with Western Area Power Administration, Bonneville Power Administration and Basin Electric Power Cooperative.

A settlement would end years of litigation that began in state court and was just weeks away from trial when Southern abruptly filed for bankruptcy in October 2011, effectively halting the battle. Bankruptcy Judge Ralph Kirscher denied YVEC’s efforts to resume the lawsuit, prompting the co-op to appeal in U.S. District Court.

Parks outlined reasons for settling with YVEC in his motion.

The outcome of all of the claims is “in significant doubt,” Parks said. The disputes also involve “extremely complex, and in some cases, novel issues of law,” he said.

The ongoing legal battle also is expensive. So far, YVEC and Southern both have spent at least $750,000 on the state litigation. If the case resumes, Southern would rack up another $500,000 legal fees in addition to $100,000 it has incurred since the bankruptcy, Parks said.

The state court dispute also “detracts from the reorganization process,” Parks said.

YVEC alleged that Southern had breached its contract and was being mismanaged. The co-op also said Southern was conducting business in secret and disputed a series of wholesale rate increases Southern enacted on its members.

Southern formed in 2004 to provide electricity for its members, which include five rural co-ops and the city of Great Falls. In addition to YVEC, the other co-op members are Beartooth, Fergus, Mid-Yellowstone and Tongue River.

Southern contracted for power with PPL, WAPA and BPA. The BPA contract eventually expired.

Southern also borrowed $85 million from Prudential to build the Highwood Generating Station, a 40-megawatt natural gas plant near Great Falls.

The relationship between Southern and YVEC soured over the Highwood project. Southern initially planned to build a larger, coal-fired plant then switched gears after hitting financing and environmental problems.

YVEC wrote off $2.4 million when Southern switched to a gas plant and wanted nothing to do with building Highwood. Because YVEC objected to the Highwood plant, its contract with Southern was not pledged as collateral for the $85 million loan from Prudential.

Prudential is Southern’s largest secured creditor. PPL is the largest unsecured creditor in the bankruptcy.

YVEC also filed an unsecured claim for $7.2 million, while Southern maintained that the co-op owes $1.1 million from an earlier terminated agreement with a contractor.

Southern filed for bankruptcy because of debts from having contracted to buy more power than it needed at expensive rates. Southern also was trying to borrow another $215 million to enlarge the Highwood plant when it went broke.

The effect of a settlement on Southern’s bankruptcy and future remains to be seen. YVEC represents the largest share of Southern’s power demand, at 38.5 percent. The co-op serves over 14,000 members in Yellowstone, Carbon, Big Horn, Musselshell, Stillwater and Treasure counties.

The trustee has until Feb. 15 to file a reorganization plan for Southern. The judge has said he would like to close the case by May.

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