Creditors in the Southern Montana Electric Generation and Transmission bankruptcy case are hiring attorneys as the Billings-based wholesale cooperative begins what could be a long, contentious and complicated effort to pay its bills.

The first opportunity for creditors to meet with Southern will be Nov. 17 in the federal courthouse in Billings. Southern is required to attend for questioning under oath by creditors and the trustee, if one has been appointed.

The meeting is expected to shed light on Southern's finances, which have been a major point of contention within its membership. Some co-op members have accused management and the board of conducting business in closed meetings, making decisions without consulting the full board and ramming through rate increases and borrowing authority without thorough analysis.

Five attorneys representing eight creditors, including one of Southern's own members, so far have filed notices to appear in the case. Southern on Oct. 21 sought to reorganize under Chapter 11 codes in U.S. Bankruptcy Court.

Creditors who have filed so far include PPL Energy Plus, a power supplier that Southern listed as having the largest unsecured claim at $7.6 million; the Bonneville Power Administration and the Western Area Power Administration; Electrical Consultants Inc.; EPC Services Inc.; and NorthWestern Energy.

The city of Great Falls, which is a Southern member, and the city's utility arm, Electric City Power, also filed as creditors.

Under Chapter 11, a business can continue to operate while it develops a debt payment plan that must be approved by the court and creditors. If the court appoints a trustee, the trustee takes control of the business and property.

Three members of Southern's six-member board said they were blindsided by the surprise bankruptcy filing, which came hours after a tumultuous meeting in which half of the members walked out to protest the board's refusal to seat a new trustee from a member cooperative.

The three Southern members who walked out dispute whether the bankruptcy decision and filing was legal. Southern maintains it had a quorum.

Southern is a wholesale umbrella cooperative that provides power to its co-op members and others. Southern also built the Highwood Generation Station, a new 40-megawatt gas-fired power plant near Great Falls.

Southern's members are Great Falls and five rural cooperatives in central and southeastern Montana. The rural co-ops represent about 25,000 members. The other member co-ops include Yellowstone Electric, based in Huntley; Beartooth Electric, Red Lodge; Fergus Electric, Lewistown; Mid-Yellowstone Electric, Hysham; and Tongue River Electric, Ashland.

Great Falls City Attorney James Santoro said this week the city is protecting its interests.

Southern's attorney, Jon Doak of Billings, "does not represent us," Santoro said. Great Falls has hired two lawyers with the Moulton Bellingham firm in Billings for the bankruptcy case.

Great Falls has an investment in the Highwood plant and other financial issues with Southern, Santoro said.

Southern's bankruptcy filing came as "an absolute surprise" to Great Falls, Santoro said. Great Falls, too, has concerns about Southern's authority to file for bankruptcy and whether its meeting was legal, he said.

When the board refused to seat a newly elected trustee from the Beartooth co-op, Beartooth officials walked out. Great Falls and Yellowstone Valley representatives joined in protest.

The bankruptcy filing also halted separate lawsuits filed against Southern by Yellowstone Valley and by Great Falls in state district court. Both seek to end their contracts with Southern.

Southern's petition said it sought bankruptcy protection because of an "acute cash-flow crisis."

In a statement released after the board meeting, Southern said it was forced to take action in response to "the defiant failure" of certain members to fully pay their monthly bills and to ignore other contractual obligations.

Southern has been running a significant deficit in operating revenue because of a depressed wholesale power market and by paying more for power from suppliers than it was earning in sales to customers.

Along with its bankruptcy filing, Southern approved an immediate 20 percent wholesale rate hike for its members. The increase is the fourth this year. The three previous rate hikes totaled 13.2 percent, bringing total rate increase this year to 33.2 percent.

Southern General Manager Tim Gregori has not returned calls from The Gazette seeking comment.

This week, Doak also filed a request to be approved as Southern's bankruptcy attorney.

Doak's initial bankruptcy filing was deemed incomplete on Monday by the court clerk. The notice said Southern has to file schedules and a statement of affairs within 14 days of the initial filing or its case could be dismissed. Southern also has to file a creditor mailing list.

The schedules and statement of affairs provide information about the business, its records, payments and assets and the creditors.

On Friday, the bankruptcy court sent notice of the action to 141 parties, which include creditors already identified along with other companies and individuals.

Southern has identified 20 of its largest unsecured creditors with claims totaling about $19.5 million. Many of the listed creditors include companies that provided services to the Highwood plant or are power suppliers.

Southern estimated its assets and liabilities at between $100 million and $500 million.

Contact Clair Johnson at cjohnson@billingsgazette.com or 657-1282.

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