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Beartooth Electric Cooperative can continue its legal fight to cut ties with its bankrupt wholesale supplier, a judge has ruled.

In a Dec. 20 order, U.S. Bankruptcy Judge Ralph Kirscher said the facts presented by Beartooth on two of its claims against Southern Montana Electric Generation and Transmission Cooperative were sufficient to proceed. He dismissed three other claims while allowing Beartooth to reassert them later.

Kirscher’s ruling allows the Red Lodge-based rural co-op to pursue its claim that its contract with Southern is invalid because the Wyoming Public Service Commission did not approve it as required and because Southern failed to get a valuation of Beartooth’s contract before pledging it as security.

Beartooth is seeking to end its 2008 amended contract with Southern because of the risk to the co-op’s financial security, say its board members. The contract runs until 2048.

Beartooth also has told Southern’s bankruptcy trustee that being a member of Southern and an owner of the Highwood Generating Station, a gas-fired power plant near Great Falls, is not in its members’ best interests.

“Indeed, our members are wide awake and closely following our due diligence. They will understand and almost certainly reject any plan that will tie (Beartooth) to HGS and a reorganized Southern responsible for owning or operating an ill conceived, overpriced, inadequately engineered plant,” Beartooth told Southern’s trustee in a letter in November.

“The 2008 contract would keep us buying power from Southern until 2048. Southern used the contract to secure financing for HGS, which we oppose,” said Roxie Melton, Beartooth’s chairwoman.

In 2010, Southern, a Billings-based wholesaler whose members include Beartooth, four other rural co-ops and the city of Great Falls, borrowed $85 million to build the Highwood plant. Highwood is a 40-megawatt plant limited to operating only in times of peak power demand.

As security for the loan, Southern pledged its property along with Beartooth’s contract and contracts with member co-ops Fergus, Tongue River, Mid-Yellowstone and with Great Falls. Southern’s contract with member Yellowstone Valley Electric Cooperative was not part of the loan agreement.

Southern then filed for bankruptcy in October 2011 because of debts stemming from having contracted to buy more power for its members than it needed at expensive rates. Southern also was trying to borrow another $215 million to enlarge Highwood when it went broke.

Southern did not comply with Montana law or its own bylaws, including getting a valuation of the amended contract, prior to executing loan documents, Kirscher’s order said.

Beartooth also contends that Southern never sought or received required approval of the 2008 amended contract from the Wyoming PSC. Beartooth serves some customers in Wyoming.

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While not regulated by the Montana Public Service Commission, Beartooth is regulated by the Wyoming PSC for everything except rates.

Under Wyoming law, Beartooth may guarantee securities payable at periods longer than 18 months only when approved by the Wyoming PSC. Any guarantee of a security payable for longer than 18 months without approval of the Wyoming PSC is void, Kirscher’s ruling said.

Southern’s trustee, Lee Freeman, argued in court records that Beartooth’s claims should be dismissed as premature, not valid or that they could be resolved in the reorganization process.

Freeman recently filed an outline of a reorganization plan in which Southern would remain whole and retain ownership of Highwood while contracting for cheaper, longer-term power to pay off its debts.

During a recent bankruptcy hearing, Freeman testified that efforts to seek proposals for Southern resulted in seven responses and that only one, Basin Electric Power Cooperative, expressed interest in Highwood. Basin offered $30 million for the plant, which is less than half of what it cost to build.

Highwood is not economical to run because power on the open market is cheaper, Freeman said.

Beartooth supported Southern and the Highwood plant until shortly before Southern’s bankruptcy, when members unhappy about the direction of Beartooth voted in new board members. Two other board members who had supported Southern and were targeted for a recall vote later resigned. Beartooth’s former general manager also left in the wake of the bankruptcy.

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Federal Court, Yellowtone County Reporter

Federal court and county reporter for The Billings Gazette.