SME reorganization plan short on facts

 

The bankruptcy of Southern Montana Electric Generation & Transmission Cooperative, or SME as the co-op is better known, has gone on for well over a year and, on Feb. 15, the bankrupt estate’s trustee at long last announced his plan for reorganization.
 
The plan is extremely disappointing in two ways. First, it is embarrassingly thin on details. Nowhere in its hundred plus pages does the plan boil down to a matter of dollars and cents, of who will pay how much to whom, and when. After many millions in legal and consulting fees, the public was owed something more definitive than what was presented by the trustee.
 
What is clear about the plan is that ratepayers will remain on the hook for SME’s mismanagement and banks’ risky lending well into the future. Under the plan, SME would limp forward, buying power at an undisclosed price for at least a decade from Morgan Stanley, the banker and occasional power marketer, and repay its creditors by marking up the purchase price of that electricity.
 
We live in a time when certain financial institutions have grown accustomed to having government cover for their failures in lending. Taking a risk is supposed to be rewarded in this country — but only when those risky bets pay off. Too often, when risky bets fail, the gamblers nevertheless get paid a reward they do not deserve. SME is becoming the pre-eminent Montana-based example of this phenomenon.
 
When SME secured financing to build its power plant, utilities like NorthWestern Energy and Basin Electric Power Cooperative were getting loans at 4 or 5 percent interest. Meanwhile, SME signed a deal with Prudential Insurance on a loan at 8 percent interest — essentially double the interest rate a steady utility would command.
 
This alone suggests that Prudential knew it was taking a substantial risk. Perhaps they had been reading the papers.
 
After all, at the time the loan was made, SME was plagued by mismanagement, buying more power than it ever would need for its customers, and racked by poor governance decisions, making sudden, bizarre decisions and excluding the city of Great Falls and members of the public from its business meetings. Yellowstone Valley Electric Co-op, SME’s largest customer, had sued it to get out of its contract, which it since has done.
 
All of this clearly was a warning sign to the lender, and that is why SME’s interest rate was sky high. Were SME to have been successful, the reward for Prudential’s taking that risk would have been interest payments of about $120 million during the life of the loan, rather than at just over $50 million that a loan at half the rate would have commanded. The bankruptcy plan absolves the lenders of their responsibility for risk. Instead, the plan treats the city of Great Falls and rural electric co-operatives like a bottomless piggybank, whose future rates paid to SME can include rate adders to fund the lenders’ risky loans.
 
Thankfully, there is a simple solution to all of this, which is to saddle the lenders with the risk that they signed up for to begin with.
 
SME’s one hard asset is the Highwood Generating Station, a power plant that cost SME nearly $100 million (according to its books), but which is actually worth less than half that, because of a variety of factors from its location on the transmission system, to its lack of efficiency, to the fact that it is priced out of the market by lower-cost sources of energy. In a bankruptcy process that would be as fair as it is simple, SME’s lenders would get the power plant — and nothing more.
 
SME’s members, meanwhile, could get on with their lives. Electric City Power, which has lost millions of dollars that otherwise could be spent on city programs that actually serve citizens of Great Falls, would finally go out of business.
 
And the rural co-ops could sign up with more responsible, well-managed co-ops to provide certainty about where they’ll get their power in the future.
 
This bankruptcy plan says very little, but if approved by the court, it’ll mean one thing: Taxpayers in Great Falls and ratepayers in rural Montana will be on the hook for years to come.