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Montana Power Plans to Unload Energy Assets, Focus on Telecom

Montana Power Plans to Unload Energy Assets, Focus on Telecom

Butte-based Montana Power made the expected decision last week to give its stock a chance to trade among the telecommunications and technology giants rather than the languishing energy utility sector. The company announced a bold plan to reinvent itself by divesting $1.5 billion in regulated and unregulated energy assets and shifting its focus on current subsidiary Touch America, its thriving telecommunications business.

Included among the assets to be sold are Montana Power's regulated utilities, which serve 288,000 electric customers and 151,000 gas customers in the western two-thirds of Montana. It's the biggest energy utility in the state with $1 billion (book value) in regulated assets and 1,000 employees.

Also on the auction block are $500 million in unregulated energy operations, including coal, gas, independent power production, trading and marketing and energy services. The unregulated divisions employ about 1,300. Its large coal division produces 20 million tons/year and its gas and oil division, with operations in the U.S. and Canada, holds 34.4 Bcfe in reserves.

In comparison, Touch America, which will become the surviving company with its shares held directly by Montana Power shareholders, currently has a 12,000-mile fiber-optic network that will grow to 18,000 miles by year-end and is expected to reach 26,000 miles by 2001. The network facilitates long-haul voice, data and video needs as a carrier's carrier, while offering its own last-mile, wireless services, metropolitan fiber offerings, and long-distance and Internet applications.

Of Montana Power's 2,500 employees, only 200 will remain with the company.

"By divesting our energy businesses, we will sharpen our focus on our fast-growing telecommunications activities, while enabling our energy companies to grow, thrive and add value under new ownership," said Robert P. Gannon, CEO. "We believe this separation will provide all corporate entities with the best opportunity for future growth.

"This strategic decision to divest was selected as the best course of action after extensive discussion at the board level and among senior policy officers. Expert outside business and financial advisors helped us with the analysis," Gannon said, adding separation provides the best balance and best outcome for repositioning Montana Power's businesses.

"We actually said in a First Call note three weeks ago we thought they would do this," said BT Alex. Brown energy analyst Ed Tirello. "It's the only way they can get any real value into the price of their stock. The utility and all the other stuff they have [were] dragging them down. The growth rate on the phone company is over 30%, but the other stuff is only a couple of percent. In fact this decision probably should have been made a year ago."

According to analysts, Touch America is the main reason Montana Power's stock price has soared from less than $10/share in 1997 to more than $60/share today. The company's stock closed up 4% ($2.62) Wednesday to $62.50/share and ended the week at $64. Tirello said his new target for MTP is $75/share this year. "The story changes completely in another year when they become a telecom company with an unbelievable amount of capital," he said. "You figure they are selling this stuff with a book value of $1.5 billion and will probably get half a million more at least. They'll be the richest non-Bell phone company in the country."

One question that didn't come up during a conference call on the divestiture was why Montana Power decided not to go the route of Williams by holding an initial public offering for its communications arm. "Look what happened," said Tirello. "Williams did an IPO and everybody sold the parent and bought the subsidiary and now the value of the parent is equal to the 80% of the sub they own and the pipeline comes with a value of zero in the market cap of the company. There's $6 billion of market value that should be in the value of that company that isn't.

"Okay, so that didn't work. Obviously the better answer is sell everything, get the money and then be a phone company with a huge growth record, plus you've got plenty of cash to do anything you damn please. They still have about $600 million left over from the power generation divestitures, and I think they'll get well over $2 billion in this sale, probably closer to $2.5 billion." Last December, Montana Power completed the sale of its 13 regulated electric generating assets (2,600 MW) in Montana to PP&L Montana.

The company recently bought Qwest Communications International Inc.'s long-distance and other assets in a 14-state area served by US West Inc. (which is merging with Qwest) for $200 million. It's also on a short list of companies to buy other telecom assets in the Northeast, according to Tirello. "I'm sure they'll be out prowling the hinterlands. They were telling me they have more cities that want to be hooked up than they have the ability to hook up, so I would imagine they would step it up even further," said Tirello.

Gannon said the capital received from the divestiture would be re-deployed to take advantage of Touch America's multiple telecommunications opportunities.

Edward Jones energy analyst Robin Diedrich said Scottish Power, which recently completed the purchase of PacifiCorp, tops her list of companies that are likely to show an interest in Montana Power's energy assets. Diedrich said she expects the assets to be snatched up quickly. "The company for whom it would be most beneficial because of a continguous service territory is Scottish Power," she said. "They are right next door and they are a big and growing company."

Shareholder and regulatory approvals are required for the sale and reorganization.

Rocco Canonica

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