Liquidation of Southern Montana Electric looks more and more likely

A federal bankruptcy judge, now that parties in control of Southern Montana Electric Generation and Transmission Cooperative are in more agreement on certain issues, agreed Nov. 26 to remove a trustee that had been appointed by the court to run the co-op’s operations.

Southern Montana has been in Chapter 11 protection since October 2011 at the U.S. Bankruptcy Court for the District of Montana.

Southern Montana was formed in 2003. Yellowstone Valley Electric Cooperative (YVEC), Tongue River Electric Cooperative, Mid-Yellowstone Electric Cooperative, Beartooth Electric Cooperative and Fergus Electric Cooperative were its original members. In 2004, the City of Great Falls/Electric Power City requested and was accepted as a purchasing member of Southern Montana and was granted a seat on Southern Montana’s Board of Directors. These six entities were the members when Southern Montana filed its bankruptcy petition in October 2011.

In his Nov. 26 decision to terminate the trustee, Judge Ralph Kirscher noted: “From the evidence presented, it is apparent all Members of Southern Montana agreed to the appointment of a Trustee early on because Southern Montana’s Board of Trustees was deadlocked and unable to proceed forward in any meaningful fashion. Through agreements with the Trustee, YVEC and the City of Great Falls have left Southern Montana, leaving Southern Montana with four members who are in unanimous agreement that they do not want to move forward together and who are also in unanimous agreement that Southern Montana should be liquidated. The Court finds that a change in circumstances, namely that Southern Montana’s Board of Trustees is no longer deadlocked, obviates the need for the continued appointment of the Trustee.”

Carrie Boysun, an accountant employed by Southern Montana, testified she believes that without YVEC, Southern Montana will run out of cash because Southern Montana is experiencing about $100,000 of negative cash flow each month. The negative cash flow is undoubtedly in part related to the professional fees being paid to the trustee, his counsel and counsel for the holders of Southern Montana debt, called the noteholders.

“As counsel for Fergus Electric Cooperative, Inc. indirectly suggests, there is the appearance of a perverse incentive to keep this case going along under the status quo, so the Trustee, his counsel and counsel for the Noteholders can continue filing interim fee applications that are subject to a lesser standard of review,” the judge added. “Given the specific circumstances of this case, the Court does not see the need for the Trustee’s continued appointment.”

The Unsecured Creditors Committee for Southern Montana, Beartooth Electric Cooperative, Mid-Yellowstone Electric Cooperative, Corval Group, Corval Constructors, the Energy Corporation and PPL EnergyPlus LLC joined in the motion to remove the Chapter 11 trustee. The motion was opposed by the Chapter 11 trustee, EPC Services, The Prudential Insurance Co. of America, Universal Prudential Arizona Reinsurance, Prudential Investment Management and Modern Woodmen of America.

Disputes largely center on development of gas-fired power plant

The judge noted that much of the dispute between the parties relates to a gas-fired power project. In June 2008, Tongue River Electric Cooperative, Mid-Yellowstone Electric Cooperative, Beartooth Electric Cooperative and Fergus Electric Cooperative formed SME Electric Generation and Transmission Cooperative to proceed with construction of a gas-fired generating station, which is now known as the Highwood Generation Station.

In early 2010, Southern Montana and SME completed a financing package for construction of the Highwood station as a gas-fired plant. As part of the loan package, financed primarily by Prudential, the assets of SME developed in connection with Highwood were transferred to Southern Montana. A 40-MW gas-fired simple cycle facility was ultimately constructed by Southern Montana as Phase One of a 120-MW combined cycle facility. Highwood Generating Station became operational in September 2011.

An example dispute is that YVEC filed a complaint naming Southern Montana as a defendant in the Montana Thirteenth Judicial District Court for Yellowstone County, requesting termination of its membership in Southern Montana, termination of its wholesale power contract to take power from Southern Montana, and an accounting and return of all funds it contributed toward expenses of the Highwood station and all deposit and equity contributions to Southern Montana.

Up until September 2011, Beartooth had been a supporter of Southern Montana, and a proponent of the Highwood Generating Station. However, around that time, Beartooth seated two new members to its board, the judge noted. The two new members opposed further construction of the Highwood Generating Station. Also at that time, three new members were elected to Southern Montana’s board. The change in Beartooth’s board and the impact this change had on Southern Montana’s Board of Trustee’s caused things to go, according to one witness, from “bad to worse” and chaos hit because Southern Motnana now had a board that was in a 3 to 3 deadlock, with three members supporting Timothy Gregori, Southern Montana’s then general manager, and three members strongly opposing Gregori.

Following the changes, Southern Montana’s Board of Trustees met in October 2011. Scott Sweeney, the general manager of Fergus Electric for the past ten years, characterized that meeting as “horrendous.”

Electrical energy and related services for distribution supplied to Southern Montana originate from power purchase agreements with the Western Area Power Administration, Bonneville Power Administration and PPL Montana

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.