Butte-based Montana Power made the not-so-difficult decisionthis week to give its stock a chance to trade among thetelecommunications and technology giants rather than the 500-poundutility weaklings. Late Tuesday the company announced a bold planto divest $1.5 billion in regulated and unregulated energy assetsin order to focus on Touch America, its thriving telecommunicationsbusiness. Of the 2,500 Montana Power employees, only 200 willremain with the company.

Included among the assets to be sold are Montana Power’sregulated utilities, which serve 288,000 electric customers and151,000 gas customers in the western two-thirds of Montana. It’sthe biggest energy utility in the state with $1 billion (bookvalue) in regulated assets and 1,000 employees.

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

In comparison, Touch America, which will become the survivingcompany with its shares held directly by Montana Powershareholders, currently has a 12,000-mile fiber-optic network thatwill grow to 18,000 miles by year-end and is expected to reach26,000 miles by 2001. The network facilitates long-haul voice, dataand video needs as a carrier’s carrier, while offering its ownlast-mile, wireless services, metropolitan fiber offerings, andlong-distance and Internet applications.

“By divesting our energy businesses, we will sharpen our focuson our fast-growing telecommunications activities, while enablingour energy companies to grow, thrive and add value under newownership,” said Robert P. Gannon, CEO. “We believe this separationwill provide all corporate entities with the best opportunity forfuture growth.

“This strategic decision to divest was selected as the bestcourse of action after extensive discussion at the board level andamong senior policy officers. Expert outside business and financialadvisors helped us with the analysis,” Gannon said, addingseparation provides the best balance and best outcome forrepositioning Montana Power’s businesses.

“We actually said in a First Call note three weeks ago wethought they would do this,” said BT Alex. Brown energy analyst EdTirello. “It’s the only way they can get any real value into theprice of their stock. The utility and all the other stuff they have[were] dragging them down. The growth rate on the phone company isover 30%, but the other stuff is only a couple of percent. In factthis decision probably should have been made a year ago.”

The company’s stock closed up 4% ($2.62) yesterday to$62.50/share. Tirello said his new target for MTP is $75/share thisyear. “The story changes completely in another year when theybecome a telecom company with an unbelievable amount of capital,”he said. “You figure they are selling this stuff with a book valueof $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 thedivestiture was why Montana Power decided not to go the route ofThe Williams Companies by holding an initial public offering forits communications arm. “Look what happened,” said Tirello.”Williams did an IPO and everybody sold the parent and bought thesubsidiary and now the value of the parent is equal to the 80% ofthe sub they own and the pipeline comes with a value of zero in themarket cap of the company. There’s $6 billion of market value thatshould be in the value of that company that isn’t.

“Okay, so that didn’t work. Obviously the better answer is selleverything, get the money and then be a phone company with a hugegrowth record, plus you’ve got plenty of cash to do anything youdamn please. They still have about $600 million left over from thepower generation divestitures and I think they’ll get well over $2billion in this sale, probably closer to $2.5 billion.” LastDecember, Montana Power completed the sale of its 13 regulatedelectric generating assets (2,600 MW) in Montana to PP&LMontana.

The company recently bought Qwest Communications InternationalInc.’s long-distance and other assets in a 14-state area served byUS West Inc., which is merging with Qwest, for $200 million. It’salso on a short list of companies to buy other telecom assets inthe Northeast, according to Tirello. “I’m sure they’ll be outprowling the hinterlands. They were telling me they have morecities that want to be hooked up than they have the ability to hookup so I would imagine they would step it up even further,” saidTirello.

Gannon said the capital received from the divestiture would bere-deployed to take advantage of Touch America’s multipletelecommunications opportunities. Shareholder and regulatoryapprovals are required for the sale and reorganization.

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