Southern Montana Electric Generation and Transmission, a Billings-based wholesale power seller, filed for bankruptcy late Friday afternoon, saying it was having an "acute cash-flow crisis."
The filing came hours after half of Southern's board members walked out of a meeting Friday morning to protest the board's refusal to seat a new representative from the Beartooth Electric Cooperative, based in Red Lodge.
After the walkout, Southern's three remaining board members approved a 20 percent rate increase, effective immediately, to its members. The increase is the fourth since December — and by far the biggest in a series of controversial hikes to try to stem losses. The previous three increases totaled 13.2 percent.
The members who protested said Saturday that they had no idea Southern intended to file for bankruptcy and questioned the legality of its actions.
"We had no clue this bankruptcy thing was coming. We should have been alerted to it," said Dave Kelsey, Southern's board member from the Yellowstone Valley Electric Cooperative in Huntley.
"It's unconscionable. It really is a travesty of cooperative governance," which is based on democratic principles, said Terry Holzer, Yellowstone Valley's general manager.
Southern is composed of five rural co-ops in central and southeastern Montana and the city of Great Falls. The wholesaler supplies power to its members and built the $85 million Highwood Generating Station, a 40-megawatt natural gas plant outside of Great Falls. Highwood began operations last month.
Southern serves about 25,100 rural co-op members and customers of Electric City Power, which is the utility arm of Great Falls. Electric City Power has lost customers in recent months to other suppliers, including to another company that buys power from Southern.
Power sales by Yellowstone Valley, Beartooth and Electric City Power represent about 60 percent of Southern's revenue stream.
The bankruptcy effectively stops two lawsuits filed against Southern by two of its members — Yellowstone Valley and Great Falls. Each is suing to end its contract with Southern.
Filed in 2008, the Yellowstone Valley case was set for trial Nov. 9. Southern owes $276,207 to the Edwards, Frickle & Culver law firm, which is representing it in the Yellowstone Valley case, the filing said.
The filing also raises questions about Southern's ability to borrow up to $300 million to increase the Highwood plant to 120 megawatts.
The bankruptcy filing and resolution was signed by Southern's general manager, Tim Gregori; secretary Joe Dirkson, a Southern trustee from the Fergus Elecrtic Cooperative in Lewistown; and Southern's attorney, Jon Doak of Billings.
On Saturday, Doak said he had no comment on Friday's filing. Gregori did not return a call seeking comment.
Southern's president, Bill FitzGerald, of the Mid-Yellowstone Cooperative in Hysham; Gerhard Helm, from the Tongue River Cooperative in Ashland; and Dirkson also did not return calls seeking comment.
FitzGerald, Dirkson and Helm are the three board members who refused to seat Arleen Boyd, from Beartooth, and who voted for the bankruptcy filing and rate hike. When the board refused to seat Boyd, Kelsey from Yellowstone Valley and Great Falls board member Bob Jones walked out in support of Beartooth.
In seeking to reorganize under Chapter 11 bankruptcy codes, Southern's filing said its troubles are caused "by issues with power supply obligation, issues with payment and adjustment of its rates opposed by some of its members, litigation in multiple forums, and material loss of electricity supply load previously recast by some members."
Southern estimated its assets and liabilities at between $100 million and $500 million. The filing lists 20 creditors with unsecured claims totaling about $19.5 million. Many of the listed creditors include companies that provided services for the Highwood plant and are power suppliers.
The filing says a majority of board members voted in Southern's meeting to proceed with the bankruptcy.
In a statement dated Friday and emailed to board members, Southern said it acted "to stabilize the financial position of Southern Montana" and that a quorum voted for an immediate 20 percent rate increase and to proceed with a bankruptcy filing.
Southern's trustees, the statement said, felt "compelled to act to stem the financial harm caused by certain member systems and protect the best interest of all the member systems of Southern Montana."
Southern said it was forced take the action in response to "the defiant failure of certain members to pay their monthly bill for services in full, and decisions to ignore contractual obligations to Southern Montana and exit the electricity supply business, stranding Southern Montana with power purchase obligations in the many millions of dollars."
Southern also said it planned to "address its financial situation aggressively" and to emerge from restructuring to work in the best interests of all its members and to satisfy its obligations to creditors.
Southern's Beartooth, Yellowstone Valley and Great Falls board members all expressed surprise at the bankruptcy filing, and some fired back that Southern's management was to blame for the mess.
"You'd think something of this magnitude, they would have called a special meeting. It wasn't on the agenda. Everything is secretive. Everything is a big secret in there. These guys are just unbelievable," said Jones, a Great Falls city commissioner.
"We don't think they had a quorum," Jones said.
After Friday's walkout, Doak advised the remaining three members that they had a quorum because the meeting had started with five members. Boyd was told she could not vote because she had not been approved for the board. The board then voted 3-2 not to seat her.
Holzer, Yellowstone Valley's general manager, said Gregori should be fired. Southern, he said, was trying to blame the Yellowstone Valley co-op to divert attention from irresponsible management and trustee decisions.
Gregori bought more power from PPL than its members could use and then had to sell the excess into the market at a significant loss, Holzer said. From April through August, Southern has run a $9 million deficit in operating revenues by buying more power than it was selling, he said.
"That put the member systems at great risk," Holzer said.
Yellowstone Valley's refusal earlier this year to pay a 4.2 percent rate hike amounts to about $134,000 for July and August, Holzer said. "It's insignificant. It's just scapegoating."
Holzer also accused Southern of orchestrating the bankruptcy filing and rate increase. By not seating Boyd, Southern kept a majority vote with FitzGerald, Dirkson and Helm, who have supported past rate hikes and the Highwood project, he said.
The Beartooth board chose Boyd as its new representative for Southern after its membership last month voted out three incumbent trustees who had supported increasing financing for Highwood's expansion. The Beartooth board also instructed its Southern representative to vote against spending or committing funds to Highwood until a due diligence analysis had been completed.
Boyd said Saturday that in preparing for Friday's Southern meeting, she had reviewed its financial information.
"It was extremely clear there was critical financial trouble. And it was broader than just the issues with Great Falls or Highwood," she said. "I was fully expecting I would go in there and hear what they had planned to turn things around."
By not seating her, Boyd said, the three Southern members who have consistently supported Southern's positions would be the majority.
"We were denied a seat," Boyd said. "Yet we are subject to the decisions made by the remaining three board members, and subject to the rate increases and what ever falls out of reorganization under bankruptcy. We do know only three (Southern) board members made that decision for all six of us."