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A federal bankruptcy judge on Tuesday denied Yellowstone Valley Electric Cooperative’s request to resume its lawsuit against its wholesale supplier in state court.

U.S. Bankruptcy Judge Ralph Kirscher ruled against YVEC on all of its claims in its battle to leave the Billings-based Southern Montana Electric Generation and Transmission Cooperative.

The judge said it was in the economic interests of both YVEC and Southern that reorganization goes forward and that the bankruptcy process “not be usurped” by YVEC’s pending state court litigation.

YVEC’s request to end its membership in Southern, Kirscher said, will interfere with the trustee’s efforts to reorganize the bankrupt wholesale provider because it “will be time-consuming, expensive and could potentially undermine the chances for a successful reorganization.”

Request can be renewed

YVEC can renew its request later if the trustee fails to come up with a reorganization plan within a reasonable amount of time or if Southern’s case is converted to a liquidation, Kirscher said.

The judge’s 19-page ruling comes after a hearing in Billings on April 24.

YVEC, based in Huntley, sued Southern in 2008 in state court, alleging it breached its wholesale power contract. Settlement talks failed, and the case was set for a jury trial last November. A few weeks before trial, Southern filed for bankruptcy, effectively halting the state case.

YVEC is one of five rural electric co-ops, along with the city of Great Falls, that are members of Southern, which has power contracts with other providers and also built the Highwood Generating Station, a 40-megawatt gas-fired power plant outside Great Falls.

Southern’s financial mess stems from having contracted for more power than it needed, primarily from PPL, at expensive rates. Southern also borrowed $85 million to build the Highwood plant and was seeking to borrow up to $215 million more to enlarge the plant when it went broke.

Great Falls also suing

Great Falls also has sued Southern to end its contract. And another member, Beartooth Electric Cooperative, based in Red Lodge, has asked Kirscher to declare its Southern contract null and void.

“We respect the judge’s ruling even though we’re disappointed. We’ll have to take this under advisement with our counsel,” said Terry Holzer, YVEC’s retired general manager and consultant.

YVEC’s attorney, John Crist of Billings, said the judge exercised his discretion to give the trustee a chance to develop and to get a plan confirmed.

“I think the ball is squarely in the trustee’s court to either get a plan together and get it filed or this case should move into a Chapter 7 liquidation,” Crist said. “We would expect that plan to be filed within the next 30 to 40 days. That would be our hope.”

Denver attorney John Parks, who represents Southern’s trustee, Lee Freeman, told the court at the April hearing that the trustee intended to file a plan within a couple of months, Crist said.

Crist questioned whether a plan is possible, given Southern’s dysfunction.

“This is a very difficult organization to reorganize. You’ve got three of the six members — Yellowstone, Beartooth and Great Falls — who have made it very clear they don’t want anything to do with Southern Montana. Whatever plan the trustee comes up with is going to have to deal with that,” Crist said.

“This case will have been in bankruptcy six months this week. It’s time for the trustee to step up and file a plan. Let’s see what he can come up with,” Crist said.

Southern’s trustee, Parks said, is “obviously pleased with the court’s decision and looks forward to continuing to work with all parties, including Yellowstone Valley, toward confirming a consensual plan of reorganization.”

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The trustee has not committed to a timetable and setting a deadline is unnecessary, Parks said.

“We’re moving forward with all possible dispatch. We don’t want to conclude the process in such a hurry that we don’t realize full value for the company’s assets,” Parks said. “We hope to complete this process before the end of the year. That’s our hope. That’s our goal,” he said.

Southern is in a stronger financial position than it was six months ago. The trustee has rejected the PPL contract and is buying wholesale power at far cheaper rates on the market while talking to other potential power suppliers and negotiating with creditors.

Last week, two interested parties toured the Highwood plant, Parks said.

Southern is building its bank account and expects to have about $5.5 million in cash by the end of October, Parks said. A monthly operating report for April showed Southern had an ending cash balance of $2.95 million.

“We’re making progress. We are making money. And we’ll continue to build up cash on a monthly basis. More cash means we have more options. This is not a sinking ship,” Parks said. “That means we can realize the full market value for this company and its assets,” he added.

Meanwhile, the trustee wants to keep negotiating with Southern’s members even though the court did not order mediation with YVEC, as the trustee suggested in the April hearing.

“We’d like to reach a negotiated resolution,” Parks said.

Southern’s smallest member, the Mid-Yellowstone Cooperative in Hysham, also welcomed Kirscher’s ruling. Gary Ryder, Mid-Yellowstone’s attorney, said he hoped the decision would bring the co-ops to the table to reach a mutual resolution.

“We simply don’t have the financial resources to litigate the issue in state court. We relied on Southern to do that,” he said.

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