The Montana Power Company Business Information, Profile, and History

Company Perspectives:

The Montana Power Company is a changing enterprise. We are continuing to move quickly to transform ourselves from a diversified electric and gas utility into a national, high-speed, technologically advanced, broadband fiber-optic products and services transport company under the name Touch America. When this process is complete The Montana Power Company will continue to provide electric and gas services under a new owner, while Touch America will become a publicly-traded telecommunications company.

History of The Montana Power Company

The Montana Power Company is one of the largest utility companies in the Northern Rockies region of the United States. Montana Power also operates properties in non-utility businesses such as coal mining, gas and oil exploration, development and marketing, and technology, including electronic controls and telecommunications. By the early 1990s, the utility's sales had surpassed $1 billion, and its expansion had carried it into four countries, making Montana's only company listed on the New York Stock Exchange a recognizable and formidable force in the U.S. utility industry. With the arrival of utilities deregulation in the 1990s, Montana Power shifted its focus toward its telecommunications business, and by 2001 the company was divesting its utility and energy holdings in order to focus on spinning off its telecommunications interests as Touch America Inc. When the reorganization was complete, Montana Power would be operating as an autonomous subsidiary of the NorthWestern Corporation, while proceeds from the sale would be used to launch Touch America as a publicly-traded telecommunications company.

The Electrification of Montana: 1880-1920

To the sparsely populated area once known as Montana Territory, electricity arrived before statehood, preceding the region's admittance as the 41st state by eight years, when the pioneering denizens of the small silver mining town of Walkerville first received electricity in 1880. The illumination of its famous neighbor, Butte, marked the beginning of the electrification of Montana and spawned a new breed of business competitors; power companies intent on linking major industrial and manufacturing activities to hydroelectric generation on the Missouri and Madison rivers with electrical transmission lines. During the three decades following Butte's historic entrance into the electrical age, 40 small power companies serving sundry small towns gradually joined together to form four regional electric utilities: Butte Electric & Power Co., Madison River Power Co., Billings Eastern Montana Power Co., and Missouri River Electric & Power Co. When these four power companies consolidated in late 1912, the consortium that emerged represented Montana's newest and largest utility, the Montana Power Company.

Chiefly responsible for the merger of the four power companies was John D. Ryan, a prominent Montana businessman with considerable holdings in the region's copper industry. In 1905, he was elected president of Anaconda Copper Mining Company, rising from the position of managing director, a post he had held in several subsidiary companies owned by Anaconda's parent company, Amalgamated Copper Company. Several years later, Ryan would become president of Amalgamated Copper itself, then gain national notoriety by railing against the implementation of anti-trust legislation in the copper industry. However, before doing so, his most notable achievement was the formation of Montana Power, the primary source of the copper industry's power. In the years leading up to Montana Power's formation, Ryan and several business partners purchased power sites along the Missouri river, and then Ryan orchestrated the consolidation of the four hydroelectric utilities. Four days after Montana Power was incorporated, with capital stock amounting to $7.7 million, Ryan was selected as the company's president, on December 12, 1912.

Copper mining at Butte's "Richest Hill on Earth" and processing operations at Anaconda and Great Falls were a major source of Montana Power's early business. Railroad companies were another, with the newly formed utility company providing the power to fuel the electric locomotives that transported people and supplies to and from Montana. To carry current to the railroads and to other customers, dams had to be constructed, generating stations needed to be built, and transmission wire needed to be strung, some of which had been accomplished before Montana Power's formation, when small electric utilities populated the state. However, a majority of the construction work would take place after the utility's creation, and much of it under Montana Power's purview. In 1915, Montana Power spent $3.4 million on extending its service area, particularly to include the Chicago, Milwaukee & St. Paul Railroad. The utility registered $4.3 million in revenue that year, up more than 15 percent from 1914's total, and served 32,000 customers.

By extending its service area to accommodate the utility's industrial customers and leasing electric washers and ranges to its residential customers, Montana Power grew, serving 70 towns and cities in Montana by 1922. Two additional dams were brought on line during the 1920s, one at the decade's beginning and the other at its conclusion, giving Montana Power a total of 12 dams from which the utility derived power to generate electricity. Half of these dams were constructed before Montana Power's formation, beginning with Black Eagle Dam in 1890 and ending with the reconstruction of Hauser Dam in 1911. Several of these pre-existing dams were products of Ryan's early power site purchases along the Missouri River, before he coordinated the merger of the four utilities that would form Montana Power, while the six dams constructed after the utility's creation were built under Montana Power's supervision. The first of these dams built by Montana Power was Thompson Falls Dam, which was completed in July 1915. Two more dams were completed that year, the Ryan Dam the following month, and Hebgen Dam two months later in October. The sixth and last dam completed during the decade, Holter Dam, was brought on line in 1918.

Diversification Between the Wars

The 1920s represented a less prodigious period of dam construction, but the decade brought Montana Power into contact with a coal mining operation located at Colstrip, Montana, that would later become an integral contributor to the utility's revenue volume. Montana Power's first association with the coal mines at Colstrip occurred during the construction of Mystic Dam, a dam built to supply electricity to the coal mine's owner and operator at the time, Northern Pacific Railway. Completed in 1927, Mystic Dam enabled Montana Power to supply Northern Pacific with energy to run the railroad company's electrically operated coal mine, which was used to produce boiler fuel. Although it would be roughly 30 years until Montana Power assumed control of the rich Colstrip mines, the contract to supply Northern Pacific with electricity helped accelerate the utility's growth. Two years after the completion of Mystic Dam, Montana Power earned a profit of $666,390, nearly three times as much as it earned the year before, an increase that was largely attributable to the utility's electricity contracts with large operations in the mining and smelting industries.

Growth continued throughout the 1920s, with annual revenues eclipsing $10 million by 1928, up substantially from the $3 million recorded in 1922. In 1930, another dam was brought on line, the Morony Dam, but the decade would be remembered less for hydroelectric expansion and more for the arrival of a new type of fuel to the region, natural gas. In 1931 Montana Power signed contracts with Anaconda, the copper mining company, that entailed the expenditure of between $10 and $12 million for the construction of natural gas pipelines over the course of the coming year. Constructed chiefly to serve Butte and Anaconda and their industries with natural gas, the pipeline also brought natural gas to other areas included within Montana Power's service area. In July 1931, two months after pipeline construction began, natural gas arrived in Bozeman, Montana, from a separate line origination in south central Montana. A larger, southbound line originating from northern Montana natural gas fields wound through several other Montana towns, arriving in Helena, the state's capital, by the beginning of September and in Butte two weeks later. As it had with electricity, Montana Power offered gas appliances at low costs and initially for free to customers who signed up for gas service, then supported its natural gas service with a fleet of cars and salespeople. By 1932, Montana Power had 9,623 natural gas customers and considerably more electricity customers, giving the utility two foundations from which to further diversify.

The construction of dams did not stop in the 1930s, but progress was slowed appreciably by the debilitative economic conditions characterizing the decade. Construction of Kerr Dam was started in 1930, then halted the following year, resumed in 1936, and finally completed in 1938, as the utility fitfully proceeded through the decade. The 1940s brought few changes to the utility beyond meeting the increasing wartime needs of its residential and industrial customers. The 1950s, however, were replete with significant and sweeping changes that included Montana Power's diversification into non-utility businesses, its adoption of a different form of power generation, and the expansion of its burgeoning natural gas business.

New Forms of Power Generation after World War II

Three signal events occurred early in the decade that dramatically altered Montana Power's future. In 1951, the utility completed construction of the Frank W. Bird plant located on the banks of the Yellowstone River in Billings, Montana. Fueled either by natural gas or oil, the Bird plant represented Montana Power's first fossil-fueled plant and augured the utility's strategic shift away from hydroelectric power to power generation from other fuels. Dwindling opportunities for hydroelectric development--the utility's last Missouri River dam, Cochrane, was completed during the decade--and the mounting energy needs of Montana's residents and businesses compelled Montana Power to begin exploring for alternative energy sources, a decision manifested in the construction of the Bird plant and one that induced the utility to form Western Energy Company in 1951. Years later in the 1960s, Western Energy would spearhead the utility's movement into coal mining and processing, a fuel Montana Power would rely on heavily to fuel its power generation plants. In 1952, Montana Power began receiving natural gas from Canada, which, in addition to broadening the scope of the utility's natural gas business, led to its diversification into oil and gas exploration in Canada, a venture conducted through Altana Exploration Company, a Canadian subsidiary formed in 1957.

Perhaps the most defining development, however, occurred at the decade's conclusion, when Montana Power secured much of its future fuel supply by purchasing the rights to the Rosebud Coal Mine and other mines located at Colstrip. The Colstrip reserves were vast--the Rosebud mine was regarded as one of the eight largest coal mines in the United States during the 1990s--and Montana Power spent much of the next decade incorporating its new fuel source into the utility's system. By 1968, the utility's first coal-fired generation plant was completed, located 100 miles west of Colstrip in Billings, where the Frank Bird plant was erected.

Efforts to market coal to other utilities were first successful in 1969 and 1970 and provided encouraging results. However, the utility's mainstay continued to be its involvement in supplying electricity, from which Montana Power derived 65 percent of its slightly more than $80 million in annual revenues recorded at the beginning of the 1970s. The balance was derived primarily from the utility's natural gas business, including both the provision and exploration of the fuel. Prospects for the immediate future brightened when one of the utility's major customers, Anaconda, announced plans for a multi-million dollar expansion program to increase its production volume, which for Montana Power meant a heightened need for power. An energy crises during the early and mid-1970s, however, tempered any hopes of widespread industrial expansion in the state and spawned a movement toward energy conservation. Montana Power's management accelerated its natural gas exploration efforts. In 1977, another Canadian subsidiary, Roan Resources Limited, was formed. Roan Resources, Altana (the other Canadian subsidiary created 20 years earlier), and a U.S.-based company named North American Resources, organized in 1980, made up Montana Power's oil division.

The 1970s also saw the beginning of development of the four Colstrip plants. Units 1 and 2 were 330 megawatt plants owned equally by Montana Power and Puget Sound Power and Light, and Units 3 and 4, at 700 megawatts each, were owned 30 percent by Montana Power, 25 percent by Puget Sound Power and Light, 15 percent by Washington Water Power, 20 percent by Portland General Electric, and 10 percent by PacifiCorp. These four plants represented the second largest coal-fired electric generating complex west of the Mississippi River.

New Ventures: The 1970s and 1980s

After a decade filled with energy construction and conservation measures and widespread federal reform of the utility industry through the promulgation of the 1978 Public Utility Regulatory Act, Montana Power entered the 1980s intending to reposition itself for the future and increase its stake in non-utility ventures. Most of the changes initiated by the utility were organizational in nature and stemmed from developments during the 1970s, as well as from earlier decisions that had steered Montana Power into non-utility businesses. It was the reorganization of these various non-utility businesses that Montana Power began to carry out once power plant construction began winding down in 1983. The following year, the utility formed a new subsidiary named Entech, Inc., which absorbed Western Energy, the company that operated Montana Power's coal properties, as well as the utility's oil exploration businesses, Altana Exploration, Roan Resources, and North American Resources Co. Entech, which essentially became an organizational umbrella under which Montana Power's non-utility interests were grouped, also absorbed two new businesses, Telecommunications Resources, Inc. and Tetragenics Company. Formed in 1982, Tetragenics sold electronic controls, while Telecommunications Resources, organized the following year, was involved, as its name suggested, in telecommunications.

An additional non-utility business, Special Resources Management, was formed in 1985, marking Montana Power's entrance into toxic waste handling and management. Special Resources Management was later sold in 1993. In 1988, the Montana Power completed another organizational move by creating the Independent Power Group (IPG) to manage Montana Power's long-term contracts for the sale of coal produced at Colstrip and to invest in non-utility electric generating plants.

Reshaped during the 1980s, the utility entered the 1990s supported by its three primary business units, Entech, IPG, and its utility division, the heart of Montana Power and the largest contributor to its annual sales volume. The utility registered $823 million in revenues in 1990, more than half of which was generated by its electric and natural gas service. By 1993, revenues had eclipsed the $1 billion plateau, and Montana Power's two newest business units, Entech and IPG, had extended the utility's geographic presence considerably beyond Montana's borders. Entech by this time held an investment interest in a gold mine in Brazil, while IPG maintained a stake in the world's largest co-generation plant in Teesside, England, assumed operational responsibility for a plant in Argentina, and was involved in the development of a coal-fired project in China. In reaching its $1.07 billion in revenues for the year, Montana Power garnered $410.4 million from Entech's various business lines and $120.3 million from IPG's wholesale electricity sales, non-utility electric generation facility operation, and engineering and plant maintenance services.

In 1986, with the completion of the Colstrip Unit 4 and in light of an earlier decision by the Anaconda Company to exit the copper mining and refining business in Montana, Montana Power sold its 30 percent ownership in Colstrip Unit 4, leasing back the power that it has sold outside of Montana on long-term contracts.

As Montana Power charted its future in an industry governed by strict regulatory policies, cause for optimism existed in its enviable and considerable interests in non-utility and, therefore, non-regulated businesses. The coal division operating within Entech stood as one of the 12 largest coal producers in the nation during the mid-1990s, providing sufficient coal to fuel Montana Power's five enormous jointly owned coal-fired electric generating plants while still permitting the sale of coal to other utilities.

Utilities Deregulation at the End of the Twentieth Century

The shift toward electricity deregulation in the mid-1990s forced Montana Power to reexamine its role in the changing utilities industry. While the company had long enjoyed its status as a major regional utility, it became clear that deregulation would attract competition from much larger utilities from other parts of the United States. In response to a notice of inquiry on utility restructuring issued by the Montana Public Service Commission in late 1995, which established guidelines for the transition to a competitive electricity supply market, Montana Power initiated a major corporate realignment program. The plan, which split Montana Power into two primary business units--Energy Supply, and Energy Services and Communications--was designed to streamline the company's power business, while accelerating the development of its non-utility holdings. The Energy Supply Unit maintained the company's traditional focus on electric generation and oil, gas, and coal production, while Energy Services and Communications assumed responsibility for the company's transmission and distribution systems. More significantly, Energy Services and Communications gave Entech's telecommunications operations a more prominent position in Montana Power's overall corporate strategy, making it responsible for advancing the company's position in the communications technology sector.

At the heart of the Energy Services and Communications Unit was a subsidiary of Montana Power called Touch America. A product of the disintegration of AT&T in the early 1980s, Touch America was originally founded in 1983 as a long-distance service provider and supplier business telephone equipment. The company was purchased by Montana Power in 1990, at which point it began developing fiber optic technologies as part of the Entech division. One of Touch America's first projects after the realignment was the creation of a fiber optic network between Billings and Denver. The network, which cost $62 million to complete, became operational in 1997, and expanded the market for the company's telecom business from one to twelve million customers. In September, 1997 Touch America entered into a joint-venture with Enron and the Williams Communications Group to create a major fiber optic network between Portland, Oregon, and Los Angeles, with Touch America providing the construction management for the project. The network was the first to join the two cities using an inland route, extended over 1,600 miles, and linked several other rapidly growing cities in the western United States, including Boise, Salt Lake City, and Las Vegas. With its completion, Touch America total network expanded to 4,600 miles.

Meanwhile, Montana Power's Energy Supply Unit was preparing for deregulation. In July 1996 the company reached a memorandum of understanding with six other Northwest electric companies to create an independent grid operator--IndeGO--which would safeguard the utilities' access to transmission facilities in a competitive market. The time frame for the restructuring of the utilities industry was established in April of the following year, when the Montana State Legislature mandated that electric supply choice be available to all customers by July 1, 2002. A week after this decision, in a move that suggested that the company's interests might be shifting away from electricity generation, Montana Power acquired the oil and gas assets of Vessels Energy, Inc. for $85 million, the largest purchase in the history of the company. In December 1997, a month after Southern California Edison's well-publicized sale of ten generating plants for three times market value, Montana Power announced its intention to sell off its electric supply business. The company's generating operations, comprised of 13 dams and four coal-fired plants, were worth $600 million, and accounted for 25 percent of the company's total assets. A deal was closed in December 1999, when PP&L Global, Inc. of Virginia purchased 13 of Montana Power's generating plants for $1.59 billion.

During this period Touch America continued to expand its network. In February 2000 the company reached an agreement with PF.Net that gave it an additional 5,900 route miles and extended its reach to the Southwest, Texas, Florida, and the East Coast. By 2001 the total length of the company's fiber optic lines exceeded 20,000 miles. The sale of Montana Power's power generation and utility holdings also provided the growing telecommunications business with some much needed investment capital. PanCanadian Petroleum Ltd. purchased the company's oil and gas interests for $475 million in August 2000; in September the company's coal business was purchased by Westmoreland Coal for $138 million, and in October NorthWestern Corporation purchased the power distribution and transmission operations for $1.1 billion. NorthWestern Corporation intended to retain the Montana Power Company name for its energy transmission and distribution services in the state of Montana, while also promising to retain all existing contractual relationships and the work force. The remaining telecommunications business, Touch America, would be debt-free, with over $1 billion to reinvest, and in a position to become a major player in the telecommunications industry.

Principal Competitors: AT&T Corporation; Edison International; Electric Lightwave, Inc.

Chronology

• Key Dates:
• 1912: Montana Power Company is formed.
• 1915: Construction of Thompson Falls Dam is completed.
• 1927: Mystic Dam is completed.
• 1931: Montana Power and Anaconda Copper Mining Company form joint-venture to construct natural gas pipelines.
• 1951: Frank W. Bird power plant becomes operational.
• 1957: Altana Exploration Company is formed.
• 1977: Roan Resources Limited is formed.
• 1980: North American Resources is formed.
• 1990: Montana Power acquires Touch America.
• 1999: Montana Power agrees to sell its electric generation holdings to PP & L Global, Inc.
• 2000: Montana Power announces intention to sell all utility holdings and to create an independent telecommunications called Touch America.