Heading off contentious state opposition, South Dakota-based utility holding company NorthWestern Corp. Friday reached a preliminary agreement with Montana regulators and consumer officials on the company’s proposed bankruptcy reorganization. As part of the deal, the Montana Public Service Commission and state Consumer Counsel agreed to settle the PSC’s investigation of the company’s utility transmission/distribution operations in the state. NorthWestern had accused the state regulators of trying to stifle its emergence from bankruptcy.

NorthWestern said it will make “appropriate modifications to its proposed plan of reorganization and disclosure statement” to reflect the final agreement with the PSC and consumer unit for submittal to the bankruptcy court. A hearing on the disclosure statement is set for Monday.

In the same bankruptcy proceeding, five of Montana’s largest cities last Wednesday submitted a collective bid of $1.26 billion to buy NorthWestern’s electric and natural gas systems in the state and take them into the public sector. The cities of Bozeman, Butte-Silver Bow, Great Falls, Helena and Missoula formed a nonprofit corporation last week, Montana Public Power Inc., to make the play as part of NorthWestern’s Chapter 11 proceedings.

As part of the preliminary agreement, the regulators and utility holding company agreed to a number of specific steps: so-called “ring-fencing” of NorthWestern’s utility assets in the state; a more complete filing of information by the company similar to “minimum rate case filing standards”; an independent consulting firm will assess the utility infrastructure; advance notice of any “material transfer” of utility assets will be given; NorthWestern will refrain from giving any financial support to its nonutility operations until its equity ratio reaches at least 40%; and the company will maintain separate accounting records for each subsidiary and the utilities.

In addition, NorthWestern pledged to have a “new, independent board of directors,” no less than $75 million in cash before the bankruptcy court confirms its Chapter 11 plan and to pay the fees of the regulatory commission and consumer staff engaged in the bankruptcy case.

Last August, the Montana consumer counsel asked the state regulatory commission to investigate NorthWestern’s finances, and a PSC hearing on the issue is set for June 16. Last September, NorthWestern filed for bankruptcy in a federal court in Delaware, citing $2.2 billion in debts, a little more than a year after the company had purchased Montana Power Co.’s electricity and natural gas transmission/distribution systems for $1.2 billion.

PSC Chairman Bob Rowe was quoted in the Billings Gazette as saying he is “troubled that a South Dakota corporation with two-thirds of its business in Montana is trying to use a federal court in Delaware to limit Montana’s ability to achieve appropriate results for Montana customers. Rowe told news media that “more uncertainty will be created” if the investigation is put off until after the Chapter 11 proceedings are finished.

The five cities’ bid on the utilities was characterized as “preliminary” until consultants for the nonprofit can more thoroughly analyze and perform due diligence on NorthWestern’s finances. The cities propose to buy the utilities on a fast track and have them run as municipal power and gas operations by some time in the first quarter next year, according to local news media reports.

NorthWestern officials told local news media they don’t think the cities’ proposal is in the best interests of shareholders, customers, employees or the communities served by the utilities. Missoula May Mike Kadas, who chairs the Montana Public Power board, disagreed in a report in the Billings Gazette:

“My general overall sense is they (NorthWestern) feel threatened by our proposal and feel the need to trash it publicly.”

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