Cities submit $1.26 billion bid on NorthWestern grid – NW raises concerns about bid

A nonprofit corporation made up of five Montana cities on Wednesday submitted a $1.26 billion bid to buy bankrupt NorthWestern Corp.’s utility electricity and natural gas transmission and distribution systems in the state.

By CHARLES S. JOHNSON of the Missoulian State Bureau

http://missoulian.com/articles/2004/05/13/news/top/news01.txt

The board of directors of Montana Public Power Inc. voted unanimously to approve the bid, which included offering $900 million in cash and taking over $358 million of debt and other financial liabilities. It would be financed through 30-year bonds paid back by revenues generated by the public utility.

The nonprofit corporation, formed last week, comprises the communities of Missoula, Bozeman, Butte-Silver Bow, Great Falls and Helena.

This bid is preliminary at this point until consultants for the nonprofit group can more thoroughly analyze or perform "due diligence" on NorthWestern’s finances. Montana Public Power officials estimated if everything goes well and they buy the Montana portion of NorthWestern, they could be running the utility by February or March of 2005.

The preliminary offer was sent Wednesday to NorthWestern and its creditors’ committee. NorthWestern criticized the bid as based on too many risks and uncertainties, preferring its own plan to emerge from Chapter 11 bankruptcy during the fourth quarter of 2004.

Said NorthWestern spokesman Roger Schrum: "Because of these uncertainties and concerns, we do not believe the MPP proposal would be in the best interest of the company’s creditors, customers, employees or communities served by NorthWestern."

Missoula Mayor Mike Kadas, chairman of Montana Public Power, disagreed, saying: "My general overall sense is they feel threatened by our proposal and feel the need to trash it publicly."

The New York attorney for the creditors’ committee didn’t return a phone call.

The creditors’ committee and U.S. Bankruptcy Court ultimately will decide the fate of the bid or any others that might be submitted, although NorthWestern can offer its opinions.

Kadas said the bid was the best the nonprofit group could come up with to meet its goal of pledging not to raise electric transmission and distribution rates for at least three years. These make up about half of a consumer’s electric bill.

When told NorthWestern had pledged not to raise the transmission and distribution portion of electricity bills for five years under its reorganization proposal, Kadas said Montana Public Power may be willing to extend the freeze.

The pledge doesn’t apply to the other half of the bill, the cost of purchasing power, which is subject to market prices, he said.

Kadas said Montana Public Power went ahead and bid for the Montana portion of the company formerly owned by Montana Power Co. for several reasons.

"It revolves around the fact that we have reliable and cost-effective electricity for the residents and businesses of the state," he said.

If the nonprofit group succeeds in its bid, it would gain "a phenomenal asset in the employees of this company," Kadas said, calling it critical to preserve their expertise and dedication.

"We believe the gas and electric utility is one of the fundamental cornerstones of the Montana economy, and we’ve seen that cornerstone eroded over the last several years," Kadas said. He said public ownership of the utility "offers a level of stability for us as a state."

"We’re putting together a bid that provides a higher value than what NorthWestern believes the company is worth today," but not significantly higher, Kadas said, "and we’re not using any accounting terms such as ‘blue sky’ or ‘good will’ to come up with that number. We’re using cash."

The public power group would have a better ability to buy energy resources than NorthWestern does, Kadas said, and "if necessary, construct resources of our own." NorthWestern owns none of its own power generating assets.

If the bid is successful, Kadas said Montana Public Power could continue to pay the property taxes now paid by NorthWestern, although it wouldn’t pay corporate income taxes as a nonprofit group.

NorthWestern has about 300,000 electricity and 160,000 natural gas customers in Montana.

Last week, NorthWestern rejected as insufficient an as-yet-undisclosed bid from MDU Resources Group, Basin Electric Power Cooperative and some rural electric power cooperatives that sought to buy portions of the company.

For most of a century, the Montana Power Co. owned the utility that provided electricity and natural gas to much of the state and its residents and businesses. It owned not only the dams and power plants and natural gas supply, but also the power transmission and distribution system and natural gas pipeline system.

That historic connection was broken after the 1997 Legislature passed laws that partially deregulated electricity and natural gas for Montana Power. In December 1997, Montana Power shocked the state by announcing it was selling its electricity generation system, which was bought by a Pennsylvania Power and Light subsidiary two years later for $767 million.

In 2002, Montana Power sold off its gas and electricity transmission and distribution systems to NorthWestern Corp., based in Sioux Falls, S.D., for $1.2 billion, including about $800 million in cash and the rest in debt assumption..

Although NorthWestern’s regulated utility business was solvent, its nonregulated affiliated performed poorly. Saddled with $2.2 billion in debts, NorthWestern Corp. filed for Chapter 11 bankruptcy on Sept. 14, 2003. Since then it has been working on dumping some of its money-losing companies.

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NW raises concerns about bid

By CHARLES S. JOHNSON – IR State Bureau – 05/13/04

http://helenair.com/articles/2004/05/13/montana/a01051304_03.txt

HELENA — NorthWestern Corp. panned as too uncertain and risky the bid submitted Wednesday by Montana Public Power Inc. to buy the Montana portions of the company.

NorthWestern spokesman Roger Schrum raised nine concerns over the proposed bid. Nonetheless, he said the company would review the proposal, as it has all others and discuss it with the company’s creditors’ committee.

The U.S. Bankruptcy Court and creditors committee ultimately have power to decide whether to approve Montana Public Power’s preliminary offer of $1.26 billion, including $900 million in cash, for the Montana portion of NorthWestern.

‘‘Based on our initial review, it is difficult to determine the actual value associated with the MPP proposal based on the numerous contingencies and qualifications stated in the proposal,” Schrum said.

In response, Missoula Mayor Mike Kadas, chairman of Montana Public Power Inc., said NorthWestern’s criticisms are ‘‘by and large filled with a number of inaccuracies. They either misstated the truth or don’t understand what we said.”

Here are some of the concerns NorthWestern raised, with Kadas’ responses:

– The plan is a highly leveraged transaction that will be 100 percent paid for by issuing or assuming debt totaling $1.26 billion, Schrum said. He said NorthWestern’s reorganization plan calls for the company to have up to $900 million in total debt and $710 million in equity. Kadas didn’t respond on this point.

– Only five Montana communities — Bozeman, Butte-Silver Bow, Great Falls, Helena and Missoula — are participating in the MPP proposal. That equates to a debt load of $6,200 per person in those five communities, Schrum said.

Kadas replied that the debt load will fall on all NorthWestern ratepayers, not just those in the five cities.

– The Montana Public Power Inc. proposal is not supported by all Montana communities that NorthWestern serves, Schrum said, and ‘‘it is unclear if those communities are willing to participate in the significant costs associated with pursuing this proposal.” He noted that Billings and Kalispell do not support the effort.

Kadas said Billings chose not to participate but didn’t take a position opposed to public power, while Kalispell hasn’t been asked because of its size and because it gets only natural gas from NorthWestern. ‘‘If we are successful with this, we will expand the representation on the board considerably and include cities like Kalispell and Billings,” he said.

– Montana Public Power says it will try to hold energy rates steady. However, Schrum said, ‘‘there can be no assurance that rates can be maintained at existing levels, especially with a highly leveraged transaction and increasing debt service and operating costs.” NorthWestern has said it hopes to freeze transmission and distribution rates for five years. That pledge doesn’t apply to rising costs of natural gas and electricity supplies.

Kadas agreed there is no certainty, but said the public power group pledged to hold transmission and distribution rates at current levels for a minimum of three years and was receptive to a five-year freeze. ‘‘We’ve done as well as we can at this point, and certainly as well as they can,” Kadas said.

– The public power proposal doesn’t address energy supply issues. Said Schrum: ‘‘There are no assurances that MPP could purchase energy as cost effectively as the current default supply proposal before the Montana Public Service Commission.”

Kadas said Montana Public Power is committed to take over the current NorthWestern contracts and understands that it will be in the market for future energy supply. ‘‘We believe we can do that as well as they can, if not better,” he said.

‘‘They have credit limitations and have difficulty getting long-term contracts.”

– Montana Public Power has said it will pay property taxes but not income taxes. Schrum said it’s unclear whether MPP would pay future property tax increases and state income taxes.

‘‘We’re committed to paying property taxes in the future,” Kadas said. ‘‘We wouldn’t pay income taxes as a nonprofit corporation. There wouldn’t be profits.”

– Montana Public Power said it would be regulated by the PSC initially, but then have rates set by the Montana Public Power, Schrum said. The PSC would maintain regulatory oversight over NorthWestern, he said.

Kadas said Montana Public Power would later would ask the Legislature to have an elected board set its rates instead of the PSC, but this proposal would be subject to extensive public discussion first. He questioned how many elected boards should have oversight over Montana Public Power.

– The Montana Public Power proposal would take a significant amount of time to be completed, without any assurance that a deal would be successful, Schrum said. There is considerable regulatory uncertainty both at the federal and state levels, he said, questioning whether the deal could be consummated in nine months as billed. NorthWestern, on the other hand, contemplates emerging from bankruptcy in the fourth quarter of 2004, he said.

Kadas said Montana Public Power laid out a schedule that’s faster than NorthWestern’s.

– The Montana Public Power plan would split up the company’s assets, which Schrum said would reduce the value of the company.

Said Kadas: ‘‘This utility operated for nearly 100 years as a Montana-operated utility. It would be viable again.”