Southern Montana Electric noteholders add third competing plan to mix

By Caroline Salls

Pittsburgh, Dec. 17 - Several Southern Montana Electric Generation and Transmission Cooperative, Inc. noteholders filed a plan of reorganization and related disclosure statement for the company's Chapter 11 case Tuesday with the U.S. Bankruptcy Court for the District of Montana.

The plan proponents are The Prudential Insurance Co. of America, Universal Prudential Arizona Reinsurance Co., Prudential Investment Management, Inc. as successor in interest to Forethought Life Insurance Co., and Modern Woodmen of America.

According to the disclosure statement, the plan calls for the continued operation of Southern Montana Electric.

The proposed plan also incorporates a settlement reached by the noteholders with all of the construction lienholders that recorded mechanic liens against property of the estate and a settlement reached by the noteholders with Southern Montana Electric's official committee of unsecured creditors.

The noteholders said their plan also retains for the benefit of the estate and improves upon the terms of a negotiated settlement between the noteholders and the company's trustee, which resolves the issue of the value of the noteholders' collateral and under which the noteholders' current claim for a $46 million "make-whole amount" is waived.

The noteholders said this settlement will result in a significant reduction of their debt, interest rate relief for Southern Montana Electric and a shorter period of time before the noteholders' restructured debt is repaid.

In addition to the settlements, the noteholders said one of the other key elements of the plan is a 10-year, all-requirements power supply agreement between reorganized Southern Montana Electric and Morgan Stanley Capital Group, Inc. under which all of the company's power and energy needs will be met with under market-based prices that are, in real dollars, at historical lows.

The noteholders said the agreement will save the company more than $100 million compared to what it would have had to pay through the Dec. 31, 2019 expiration date of its current contract.

Creditor treatment

Treatment of creditors under the plan would include the following:

• Priority non-tax claims will be paid in full;

• The Prudential secured claim will bear interest at the rate of 6%, a 200 basis point reduction from the pre-bankruptcy 8% rate, and will be paid over the 12-year term;

• The Modern Woodmen secured claim will bear interest at the rate of 5¼%, a 200 basis point reduction from the pre-bankruptcy 7¼% rate, and will be paid over the 10-year term;

• The holder of First Interstate Bank claims and CFC secured loan claims will be granted relief from stay to exercise all of their state law rights and remedies against their secured loan collateral.

These claims will be deemed satisfied in full on the effective date, and First Interstate and CFC will have a deficiency claim for any amounts outstanding;

• Construction lien claims will be satisfied by payment of $825,000 on the plan effective date and a total of $2.5 million in annual installments over four years with no interest;

• Holders of general unsecured claims will receive a share of $2 million from unencumbered cash, provided that they will have no interest in and will receive no distribution from an operating cash reserve.

These creditors will also receive any remaining cash proceeds from specified avoidance actions and any fees or costs disgorged as a result of disallowed professional fee claims;

• Holders of convenience claims will receive cash equal to 50% of their claims on the later of the plan effective date and the date the claim is allowed;

• Through rates charged by reorganized Southern Montana to members during the first eight years after the effective date, member reserve accounts will be restored to their pre-bankruptcy amounts and held in trust by the reorganized company to ensure prompt payment of the members' power bills;

• Member capital claims and member interests will be retained; and

• PPL EnergyPlus, LLC will be treated as a general unsecured creditor unless its claim is disallowed, in which case it will receive no distribution.

Member cooperative plan

As previously reported, specific creditor treatment under a plan filed by Southern Montana's member cooperatives would include the following:

• Priority non-tax claims would be paid in full;

• Holders of Prudential and Modern Woodmen claims would be satisfied in full through the surrender of collateral, subject to previous settlements entered in the bankruptcy case, resolution of any disputes as to whether cash is encumbered or unencumbered, any avoidance actions and any and all previous liens or mortgages.

The balance of these claims would be treated as general unsecured claims;

• The holder of First Interstate Bank claims would be granted relief from stay to exercise all of its state law rights and remedies against its secured loan collateral. The company would make no further payment on the secured loan claim.

The real property owned by Southern Montana Electric would be sold and net sale proceeds applied first to satisfy the First Interstate claim.

If there are surplus proceeds after the sale, First Interstate would deliver the excess proceeds to the company to apply as additional payment on general unsecured claims. If there is a deficiency remaining after application of the sale proceeds, the company's property would be sold and net proceeds applied to satisfy any deficiency;

• The holder of CFC claims would be granted relief from stay on its loan collateral, and the amount of the CFC collateral will be applied in full to payment of CFC's secured claim.

The balance of the claim would be treated as a general unsecured claim. In addition, CFC would be entitled to exercise any applicable non-bankruptcy remedies in collection of the balance of its claim;

• Holders of construction lien claims would be granted relief from stay to exercise all of their state law rights and remedies against Highwood Generating Station. The construction lien claimants would retain their liens securing their claims against the generating station and any proceeds of its sale following the station's surrender to Prudential and Modern Woodmen;

• Holders of general unsecured claims would receive a share of the remaining surplus of unencumbered cash in the estate and the liquidating operating fund upon completion of the liquidation period;

• Holders of convenience claims would receive cash equal to 50% of their claims on the later of the plan effective date and the date the claim is allowed;

• Members would waive and release any member claims and receive nothing from liquidation of the company; and

• Upon liquidation of all of the assets, the members would waive, release, surrender and disclaim their interests and certificates and receive nothing from the liquidation of the company.

Trustee plan terms

Under a plan previously filed by Southern Montana's trustee:

• Priority non-tax claims would be paid in full;

• Holders of Prudential Series 2010(A) notes would be paid in unequal monthly installments based on a 12-year amortization, with the claim to be paid in cash, provided that the payment may be in-kind until the first anniversary of the effective date as necessary to maintain the reorganized company's rates to its members at the same level as on the bankruptcy filing date for one full year after the effective date;

• Holders of Modern Woodmen Series 2010(B) notes would be paid in unequal monthly installments based on a 10-year amortization, with the claim to be paid in cash, provided that the payment may be in-kind until the first anniversary of the effective date as necessary to maintain the reorganized company's rates to its members at the same level as on the bankruptcy filing date for one full year after the effective date;

• Holders of CFC and First Interstate Bank claims would be paid in full over seven years;

• Holders of construction lien claims would be paid over seven years in an amount equal to the amount owed on the petition date, an agreed amount or an amount determined by the bankruptcy court.

To the extent that these are not valid, properly perfected and enforceable construction lien claims, any allowed amount would be treated as a general unsecured claim;

• Holders of general unsecured claims would receive a share of the unencumbered cash in the estate;

• Holders of convenience claims would receive cash equal to 50% of their claims on the later of the plan effective date and the date the claim is allowed;

• Holders of member patronage capital and similar claims would retain their allowed claims; and

• Member interests and member certificates would be retained by the members.

Southern Montana filed for bankruptcy on Oct. 21, 2011. The Billings, Mont.-based cooperative's Chapter 11 case number is 11-62031.

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