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Montana Power Company: Decline and fall of an industrial icon

When the first strand of electrical wire was energized in Butte in 1880, it sparked the beginning of a utility company that would eventually emerge as one of Montana’s most powerful companies.

But the company that was illuminated more than 100 years ago is now fading.

By Dave Reese
The Daily Inter Lake

In a story of corporate drive and quest for wealth, Touch America, the last remnant of Montana Power, is now on the brink of bankruptcy, its stock trading for a mere 35 cents a share.

The downfall has brought hundreds, perhaps thousands, of stock portfolios to the ground and slashed the retirement portfolios of people like Dean Conklin.

Conklin watched from the inside as Touch America began its downward spiral. For 20 years Conklin was the corporate communications director for Montana Power before retiring to Rollins in 2000, just as the company was being taken from a public utility and energy company to a telecommunications company.

Over the years, Conklin accumulated thousands of shares of Montana Power. Fortunately, he said, he got out in time and sold a good portion in 1999, when the stock was trading at around $65. He sold most of his shares when the stock was free-falling.

Other employees haven’t been so lucky. Those who are with NorthWestern Energy, the company that bought most of Montana Power’s energy assets, face dwindling 401(k) accounts and stock that is worth pennies on the dollar.

Conklin’s calm demeanor is a sharp contrast to the anger that many former shareholders and employees hold toward Montana Power. But Conklin and thousands of shareholders like him still hold some animosity toward the company.

"In my opinion they should be in jail," he says of the company’s board of directors and executives who led the charge to divest into a telecommunications company.

When Touch America spokesman Cort Freeman resigned recently, some of Freeman’s comments touched a nerve in Conklin. Freeman said the company had performed "admirably" during the transition to Touch America.

"If seeing the stock slide from $65 to 37 cents is ‘admirable,’ that shows how out of touch they are," Conklin said.

Last July, buyout arrangements were made with four company executives: Chairman and CEO Bob Gannon, vice chairman and CFO Jerry Pederson, COO and president Mike Meldahl, and vice president of business development Mike Zimmerman.

The payments totaled $5.2 million, but could have been "significantly more" had the executives decided to execute their buyout clauses this February, Touch America spokeswoman Linda McGillen said.

The agreements, which expired in February, would have allowed the executives to walk away from their jobs without cause, McGillen explained. The board, however, recognized that it didn’t want four top company officials leaving the company at the same time, so it bought them out, McGillen said.

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CBS News recently aired a "60 Minutes" segment on the plight of Touch America and its disgruntled shareholders. McGillen said that she’s still proud to work for Touch America, but that job is sometimes difficult in a town like Butte, where the company’s stock slide has hurt so many people financially.

"It’s challenging," she said. "We’re just keeping our noses down, trying to get the job done. It’s not a lot of fun when these kinds of things continually come up.

When layoffs are completed in June, Touch America will be left with about 400 employees in Missoula, Butte, Denver, Minneapolis and six other locations.

For some 90 years, Montana Power took advantage of the state’s abundant natural resources: plentiful hydroelectric capabilities, natural gas and coal. Before stocks became common for Montanans, Montana Power stock was likely the only local stock that Montana families owned, since the company employed generations of Montanans.

Then came the heady 1990s. The Internet was coming into its own and money for startup companies came pouring in from Wall Street, venture capitalists and investment bankers.

In 1996 Montana Power restructured itself into two entities: energy supply and energy/telecommunications. In March 2000, the company announced it was divesting itself of its energy and utility businesses and would focus solely on telecommunications.

In the late 1980s, Touch America was a small, private company offering long-distance service to customers in the Missoula area. It had not yet been purchased by Montana Power.

Meanwhile, since 1984 Montana Power had been building Telecommunications Resources Inc., a statewide wireless microwave network that its utility distribution offices around the state used to communicate with each other.

TRI purchased Touch America in 1990 and began building up its fiber-optic network between Spokane and Billings. By 2000, after buying Qwest’s 14-state long-distance network for $200 million, Touch America had 250,000 long-distance customers.

According to its 1996 annual report, Montana Power spent $62 million that year building a fiber-optics network that stretched across seven states. With reports of the Internet demand doubling every 100 days, Touch America was poised to take advantage of this gold rush that had sent stock values skyrocketing.

By Feb. 13, 2002, Montana Power stock was no longer publicly traded and the company had fully morphed into Touch America. After Montana Power had sold its hydropower, coal and power distribution assets for $1.5 billion, Touch America had little debt and was flush with cash. But that wouldn’t stop the downward pull on its stock.

It’s now spending money at the rate of $5 million to $8 million a month and is burning cash faster than it can raise it, says Jim Bellessa, senior analyst for D.A. Davidson in Great Falls.

A $23 million payment last week from Qwest helped keep the company flush. That cash could help float the company until its hoped-for rebound.

"By year end there’s a possibility they could be cash-flow positive," Bellessa said. "There’s a possibility … but there’s no great confidence in that. It’s just a hope."

The reasons?

"Touch America invested heavily into a field whose value did not materialize," Bellessa says. "For every dollar they put in the ground, it turned out it was worth only 10 cents on the dollar."

Touch America got a cash infusion of $3 million when it sold about 70,000 long-distance customers to a Utah company in January. That put its cash position at about $23 million by the end of 2002, according to Bellessa.

The company announced layoffs of about 225 employees, or 35 percent of its work force, in January. When those layoffs take effect, its cash-burn rate should slow somewhat, Bellessa says. Still he’s not optimistic about the long-term prospects of the company.

Bellessa has rated the company’s stock as a "neutral" buy, but said that rating is "highlighted in glowing lights … that this is highly speculative. There’s a reasonable likelihood of bankruptcy and only risk-takers should be entertaining the idea of owning the stock."

It’s difficult to determine what the company’s actual assets are now. "There are numerous ways to try to explain what they have, but none of them are very satisfactory," Bellessa said.

Other telecommunications companies around the country went into bankruptcy during the tech fallout, but some still operate their networks. By being in bankruptcy and having no debt, these companies drive down prices, which makes it even harder for companies like Touch America to compete, Bellessa says.

Emerging technology also has allowed telecommunications companies to make better use of their fiber lines. This technology, Bellessa explains, allows existing fiber networks to expand by sending data over different color wavelengths on the same fiber. Companies that didn’t overbuild their network capacity and took advantage of this new technology could offer lower prices and compete more effectively than Touch America.

"The same fiber cable is able to generate infinitely more messages," he says. "What was once thought to be fixed is now thought to be quite unlimited. Meanwhile the demand wasn’t quite what was expected."

Legal challenges will shape Touch America’s future, Bellessa says.

The company has yet to release its fourth-quarter earnings as it awaits a crucial decision from a San Francisco judge. The decision is worth $100 million — the amount that Touch America says Qwest owes it for misrepresenting the customer base that Touch America purchased.

McGillen said the company has been incurring costs on the new customers, but "we’ve never seen the revenue from those customers."

A final arbitration hearing was held last October and now the case is in binding arbitration in San Francisco. A decision was expected at the end of January and it could come at any time, McGillen said.

In addition to a $3 billion class-action suit against the company and its board for failing to seek shareholder approval when it sold its assets, another class-action suit filed on behalf of stockholders against Touch America is still pending.

The story of how one of Montana’s largest companies — Montana Power — came to be Touch America is a story of hopes gone bad.

And although the New York Stock Exchange could at any day delist the stock for trading at too low a price, the story is not over.

Touch America may be the final chapter in the book that started nearly 100 years ago when a single electric lamp was lit on "the richest hill in America."

But if Touch America somehow turns it around and becomes a thriving corporate player in the high-stakes world of information technology, then perhaps the last page cannot be written yet. Indeed, if Touch America survives at all, it may one day merit its own book.

Reporter Dave Reese may be reached at 758-4438 or by e-mail at [email protected]

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