Montana’s power failure – High-tech meltdown meant doom for Touch America

A tempest has rolled across Big Sky Country, shattering Montana’s only Fortune 500 company and raining resentment and regret among those stranded in its aftermath.The storm took the form of one of the most surprising corporate collapses in the Rocky Mountain West – yet one that few outside of Montana know about.Amid its fury, hundreds of jobs were lost, history and wealth wasted, greed decried.

By Kris Hudson, Denver Post Business Writer

Ensconced below the Continental Divide in Butte, Mont., executives of Montana Power Co. dismantled and sold the 90-year-old company piecemeal to devote all its money and their attention to their promising but risky telecommunications division, Touch America.

It was a disastrous bet. With $2.1 billion from the sale of Montana Power squandered, Touch America careened toward bankruptcy this year. Some momentum came from Denver, where Baby Bell Qwest sought to savage and then salvage its smaller rival.

"The rock of the community was always the utility company," said Jim Smitham, a 52-year-old Montana Power retiree who watched his stock, converted to Touch America shares, spiral from $500,000 to $50. "And now our rock is a bunch of pebbles, and some of the pebbles have washed downstream."

Towering above Butte are 14 gallows frames, massive steel structures that once lowered miners thousands of feet into the honeycombed interior of "the richest hill on Earth."

Today, they linger as ghosts of Butte’s glory days.

Even mining – the industry that ballooned Butte’s population to above 100,000 in the early 1900s and spurred officials to name the city’s streets after gold, iron, silver and platinum – has abandoned Butte.

The 130-year-old copper mine in Butte went on indefinite suspension in 2000 as energy prices soared and copper prices sank. The mine’s closure left Montana Power Co. as Butte’s only significant employer. It has proved to be a perilous reliance.

"We’ve had about five years of total economic uncertainty in this community around Montana Power Co.," said Evan Barrett, executive director of the Butte Local Development Corp. "And that uncertainty has economic impacts."

By Barrett’s count, Montana Power’s closures and divestitures have cost Butte 548 well-paying jobs in the past 10 years. Add unrelated mine closures, and Butte-Silver Bow County’s 34,000 residents have lost 1,414 primary jobs and an estimated 2,475 secondary support jobs, Barrett said.

Any job loss hurts Butte, where the median per-capita income registered $24,197 in 2001, compared with $41,222 in Denver. Many storefronts in the city’s uptown core stand empty. More people leave the city than move to it.

City officials say Butte can persevere, as it did during past mining strikes.

"Our folks are tough, and they can bounce back," county Chief Executive Judy Jacobson said.

Yet even rugged folk raised in this rugged land take pause at the dismantling of Montana Power.

Founded in 1912 to feed power to ravenous mining companies, Montana Power was the state’s only enterprise listed on the New York Stock Exchange, its only Fortune 500 company. Now that centerpiece is gone.

"It was like watching an unbelievably bad dream unfold," Barrett said. "Every possible worst-case scenario seemed to come to fruition. We’re emerging from the shell-shock right now, grappling with a changed future."

Harbinger of disaster

The winds that signaled Montana Power’s transformation and eventual demise arrived in the 1990s as the company’s executives predicted an impending deregulation of the power industry across the western United States.

Years earlier, the federal government deregulated the industry’s wholesale-supply business, meaning power distributors could choose their suppliers.

A regional-planning panel recommended that Western states plan for power industry deregulation.

Few in 1997 sensed deregulation as a harbinger of disaster. But David Ewer did.

The Democratic state representative from Helena already bore political scars from his failed effort earlier in 1997 to oppose the state’s video-poker lobby. But, as a self-described liberal raised in Massachusetts, Ewer sometimes found himself at odds with corporate interests.

Ewer became the staunchest opponent of Montana Power’s bid to drive a deregulation bill through the Montana legislature in 1997. He tried to attach dozens of amendments to the bill to torpedo it. He called for two special sessions to slow the deregulation effort.

He failed.

"The reasons laid out for (deregulation) were not very compelling," Ewer said. "What I found compelling was the status quo. Montanans had the sixth-cheapest power in the United States."

As in other states, Montana regulators set the prices at which electricity and gas were sold in the state. In return, Montana Power, which served roughly 65 percent of Montana’s 900,000 residents, and Montana Dakota Utilities, which served the rest, received monopoly status.

But Montana power executives, led by chief executive Robert Gannon, considered deregulation inevitable.

Enron and Duke Energy already had begun trying to lure away Montana Power’s big customers, Gannon said. To compete, Montana Power needed the leeway to set its own prices and cut the costs it incurred for state-mandated programs.

In the waning weeks of the 1997 legislative session, Montana Power executives drafted a bill with input from rural cooperatives, industrial customers and numerous others. It garnered support from Gov. Marc Racicot, a Republican now leading President Bush’s re-election campaign, and state Senate Majority Leader John Harp, also a Republican. The Montana Public Service Commission voted 3-2 to support deregulation.

"I think Montana Power has always had disproportionate political influence in this state," said Bob Rowe, a Montana utilities commissioner who voted against deregulation. "It very badly wanted this and was able to line up people to support it."

The bill became law on May 2, 1997.

"When you saw how little effort legislators made to understand the bill and to ask hard questions, that to me is the tragedy," Ewer said. "I doubt that more than 20 people out of 100 (in the House) read that bill. The stakes were enormous."

Soon, another aspect of deregulation surfaced: The newly unbound businesses were easier to sell.

Before 1997 closed, Montana Power announced it would sell its electric power generating plants – part of which the state had just deregulated – for $757.6 million to Allentown, Pa.-based Pennsylvania Power & Light.

"Deregulation was a massive failure of the elected leadership," Ewer said. "You can blame the company, (but) in a democratic society, it is up to the leaders to decide what’s important and how the public commonwealth evolves."

What Montanans could not foresee at the time was a rapid succession of divestitures that would dismantle Montana Power.

The Butte offices of Touch America at Main and Granite streets. Montana Power Co. announced a plan in March 2000 to sell all of its energy properties and use the proceeds to finance Touch America as the surviving entity. But it didn’t survive long.
The lure of glass strands

While power deregulation was a stormy issue, the idea of getting into telecom seemed much calmer.

Montana Power’s telecom division originated in the 1980s when the company launched Telecommunications Resources Inc., or TRI, to extend communications lines to its far-flung field offices. Years later, TRI bought Touch America, a tiny Montana phone company, and surged into the industry under that name.

By the late ’90s, telecom was a hot market, and Touch America was burying fiber-optic cables across several states. Its goal: a 26,000-mile fiber-optic network that could profit from the predicted Internet boom.

Those were the days to deal in light waves and glass strands.

Wall Street doted on upstart telecom network builders Qwest, Level 3 Communications and Williams Communications, among others.

Other utility companies, such as Florida Power & Light and El Paso Energy, were jumping into the fiber-optic race. Celebrity CEOs such as Cisco Systems’ John Chambers heralded a historic revolution of commerce enabled by those networks.

Touch America brought telecom market momentum to its parent, Montana Power. Montana Power’s stock, which traded between $10 and $14 for years, began climbing as the Internet boom hit full steam in 1998 and 1999. When 2000 arrived, it broke $40.

Yet Touch America needed customers to put on its growing network. So in 2000, the company struck a deal that later would haunt it.

Touch America paid $206 million for 250,000 long-distance customers of Qwest, which was required by federal regulators to divest those customers as a condition of its US West acquisition.

Loaded with new customers, Touch America continued building fiber-optic routes, even as concerns arose in 2000 and 2001 that Internet traffic might fail to meet the rosy predictions and that the supply of fiber-optic lines far exceeded demand.

"On the Touch America network today, there’s not one segment you could point to where we’re not adding capacity," chief operating officer Mike Meldahl said during a 2001 visit to Denver, where the company had a 170-employee office. "We wouldn’t be doing that if there was a glut."

As Touch America soared, its executives profited, although their pay was high only by Montana business standards. Gannon’s salary climbed from $297,500 in 1997, when he was promoted to CEO, to $500,000 in 2001. Bonuses did not exceed annual salaries, as they did at other telecom upstarts. And most Touch America execs lost money on their trades of the company’s stock.

The big payday, and the rage it inspired, would come later.

With Touch America surging, Montana Power executives began pondering ways to free the high-flying telecom unit from the stodgy power company.

"It became fairly apparent to most observers, including ourselves, that we had to separate the businesses," Gannon said. "They were like oil and vinegar."

CEO and lightning rod

As the storm prepared to descend on Butte, a lightning rod emerged: CEO Bob Gannon.

These days, he is a pariah in his hometown.

Banners hanging outside of a laid-off employee’s home, just blocks from Touch America’s headquarters, label Gannon a "rat bastard" and a "weasel." Even the marquee at a local Burger King curses the Butte native.

An army of foes, including the family of a CEO predecessor, is at his throat. Persistent rumors he must refute include being refused service at restaurants, heckled in the streets and forced to flee Butte.

"It becomes a self-fulfilling prophesy," Gannon said of perpetual talk and rumors.

He wasn’t always considered the bad guy.

Montana Power’s CEO is a high-profile person in the state. Anyone in the job is a household name in Butte, which counts daredevil Evel Kneivel as its most famous scion.

Gannon, now a husky, graying 59-year-old standing an inch over 6 feet, was raised in Butte less than a mile from Montana Power’s uptown headquarters. His father was a gas-measurement clerk at the company.

The younger Gannon worked in Montana’s mines during breaks from college and law school. After stints as a public prosecutor, he joined Montana Power as a staff attorney in 1974.

As CEO in the late ’90s, Gannon faced a choice. Touch America longed for Wall Street exposure outside of Montana Power’s shadow. He hired advisers Goldman, Sachs & Co. and others to chart a strategy. The board convened in early 2000 to consider it.

"Our initial plan was to spin off Touch America as an independent company, so we would still have the Montana Power Co., the mines and the gas," said Tucker Hart Adams, a Montana Power board member and US Bank economist in Colorado Springs.

"Two things happened," she said. "First, there were some serious tax implications of spinning Touch America off as a separate company. It was going to be very expensive. And, more importantly, the IPO market went to pot."

That’s IPO as in initial public stock offering. That market was dead by 2000 amid the bursting of the Internet and telecom bubbles that had been driving it.

The ultimate solution, announced March 28, 2000: Montana Power would sell all of its energy properties and use the projected $2 billion in proceeds to pay down debt, lower electricity rates and finance Touch America as the surviving entity. Ninety years of history were on the block.

"The pieces of the company were worth more than the entire company," Adams said. "We, as a board, had a responsibility to our shareholders to get that value for them."

Wall Street loved the plan – at first.

Montana Power’s shares leaped from the mid-$50s to $64 shortly after the announcement, putting the company’s market value at $6.6 billion. The stock skidded thereafter and never recovered, as the great tech meltdown unfolded.

While Wall Street voiced a short-lived cheer, Montana Power employees and retirees grew uneasy. A group of shareholders sued to oppose the breakup. Even so, 70 percent of the company’s shareholders voted for the divestiture plan at a September 2001 special meeting.

Entire divisions quickly went out the door to out-of-state buyers. A Canadian company bought the oil and gas businesses. Westmoreland Coal Co. of Colorado Springs bought the coal unit. South Dakota’s NorthWestern Corp. bid $602 million for Montana Power’s flagship energy-distribution business.

The total haul: $2.1 billion.

Montana Power was no more. Its traditional dividends of 20 cents a share were over. Its board, its shareholders and its executives moved to Touch America. Butte reeled in the storm.

Patricia Schmechel, a 78-year-old Butte resident and widow of Montana Power CEO Paul Schmechel, described a communal depression in her city.

"And I’m depressed because I know how Paul and the people who worked for him spent their whole careers building a company," she said. "And to see it all torn apart in such a callous fashion …"

Robert Gannon, the CEO who led Montana Power’s conversion into Touch America, was raised in Butte, the son of a gas-measurement clerk. Gannon has become a lightning rod for rage about the failure of Touch America.
Fallout from the telecom bust

While Montana Power was being broken up, things also were falling apart for Touch America.

The company’s revenue haul weakened as the Internet boom faded. The company’s stock, still under the Montana Power name, slid from its high of $64 in March 2000 into the $50s, then the $40s and lower. By late 2001, it had tumbled below $10.

Precipitating Touch America’s swoon were the death of the dot-coms and Wall Street’s realization that most fiber-optic cable would go unused. But it was Qwest that pummeled the Butte company the worst.

Trouble began shortly after Qwest sold 250,000 long-distance customers to Touch America.

Touch America accused Qwest of overcharging it for billing services and for understating the revenue due Touch America. The Butte company also accused Qwest of violating federal law by continuing to provide long-distance service to big customers in the US West states – a complaint Touch America eventually logged with federal regulators.

Qwest countered that Touch America owed it $100 million and was refusing to pay. The Denver company went for the kill in August 2001, retracting $100 million in annual business it did with Touch America.

The companies traded lawsuits.

By November 2001, Touch America’s plight had become dire. The company, its previous divestiture profits sunk into the fiber network, warned investors it needed another $40 million to keep operating until it could complete its final deal – the $600 million sale of its distribution unit to NorthWestern – in early 2002.

Gannon blamed Touch America’s woes on the economy, the company’s poor performance and the fight with Qwest.

In a bid to break from Qwest, Touch America made a disastrous switch to its own billing system in February 2002.

Touch America could not even identify 20 percent of its own customers, eventually forcing it to forgo $10.3 million in second-quarter revenue because it didn’t know whom to bill. The company badly missed its quarterly financial goals. Investors bolted.

Meanwhile, its dispute with Qwest headed for arbitration in October 2002.

TIMELINE

Power surge: The rise and fall of Montana Power
Golden parachutes for execs

The worst fury came in August 2002, when Touch America disclosed that its board had granted $5.4 million in change-of-control payments to its four top executives after the final sale to NorthWestern.

Companies often provide for such payments in the event they are bought and the acquirer dismisses their executives. Montana Power first installed change-of-control bonuses in 1989 and revised the pacts in 1996. The company’s officers could receive a cumulative $17 million under those deals if they left several months after a buyout.

Touch America’s lawyers determined that the final sale to NorthWestern amounted to a sale of substantially all of Montana Power’s assets – thus a change of control.

The board found itself in a bind: a legal interpretation that provided an incentive for the company’s executives to leave. So the board opted to negotiate lesser payments for the execs to stay, said board member Adams.

CEO Gannon received $2.17 million; operations chief Mike Meldahl, $1.3 million; financial chief Jerrold Pederson, $1.2 million; and business development head Michael Zimmerman, $700,000.

"That is a financial reward for failure," said Gary Buchanan, an investment adviser in Billings and an outspoken critic of Montana Power’s divestiture. "There is no change in control. It was in their business plan. It is simply a payoff to the executives."

Heartland Advisors, the Milwaukee investment firm that held 5 million Touch America shares in its funds, saw the bonuses as its final reason to dump the stock in August and September 2002. "We basically said, ‘We can’t trust these guys,"’ Heartland portfolio manager Eric Miller said of the bonuses.

Rick Anderson, a Butte attorney, convinced his father, retired Montana Power executive Carl Anderson, to file a lawsuit seeking the return of the $5.4 million in bonuses to the company.

"I get pretty emotional about Gannon and his bunch because I think they were motivated by their own greed," said Carl Anderson, who retired from Montana Power in 1986 rather than lay off his employees. "They saw a golden parachute at the end of this."

Montanans decried Gannon’s salary hikes, the change-of-control bonus and his mansion at Flathead Lake in northwestern Montana. When asked if he had considered repaying some of the bonus to quell the controversy, the CEO said the court would decide.

"It’s in litigation, and it will be handled in that fashion," Gannon said, adding later: "It isn’t something that can be ignored. A contract is a contract. There are rights and obligations."

Old mining gallows outside Butte, Mont., are ghostly reminders of the city’s glory days. Butte’s 130-year-old copper mine went on indefinite suspension in 2000; Montana Power Co. was the only remaining significant employer.
Hard landings for workers

The fury finished Touch America slowly, over several months.

In December 2002, Touch America sold the remains of its deteriorating residential long-distance business – about 70,000 customers it had bought from Qwest – to telecom service provider Buyers United of Salt Lake City for nearly $7 million.

In January, Touch America cut 225 jobs, leaving it with about 450. The board and top management took a 20 percent pay cut.

In March, the fatal lightning strike came. An arbitrator ruled that Touch America owed Qwest nearly $60 million. It was far more cash than Touch America had left.

Touch America held out hope that a subsequent arbitration decision would reduce the award to Qwest. Meanwhile, Gannon and his team looked for merger and acquisition possibilities or additional sources of cash. Neither came.

The New York Stock Exchange booted Touch America’s stock for failing to meet share-price and capital requirements. On June 18, Touch America convened an all-hands conference call at midday. Gannon addressed his employees over the phone – even those in Butte – reading from a script. He told them Touch America needed to make mass layoffs.

Gannon told them that affected employees would receive e-mail notifying them of their termination. Those in Butte would be informed by their supervisors. They got no severance pay and limited health-insurance coverage.

Minutes after the call, 216 e-mails went out to all but 160 of Touch America’s employees. Even employees in Butte, who were to be told by supervisors, got the impersonal layoff messages instead.

"This is to inform you that we are eliminating your position effective immediately," Gannon wrote in the e-mail.

Monica Boehmer, a 23-year-old change- management administrator in Butte, did not expect to get the e-mail, but she did. She swept her belongings into a box, deleted her personal files and left.

Finances are now tight in the small gray house she shares with her fiance, Todd Burt, and his two sons. They cannot afford to finish renovations to their kitchen. They don’t go out to dinner. Boehmer borrowed money to buy fireworks for the boys. Meanwhile, she stews about the change-of-control bonuses.

"You can see a company going out of business," Boehmer said. "But when three or four people get rich off it, that’s hard to handle."

Michael McGarah, a 43-year-old service representative in Touch America’s Denver office, received one of Gannon’s e-mails, too. For three years, McGarah scrambled to keep customers from leaving Touch America. Now he’s looking for another telecom job.

"I’m trying to take the high road of saying, ‘Thank you for the experience,"’ McGarah said last month. "At least I know now how companies should not be run, how customers should not be treated."

Network technician Paul Snetzinger jumped from Qwest’s Denver offices to Touch America’s network operations center in Butte in October 2001 to be closer to his parents in Montana. He, too, received an e-mail on June 18.

Snetzinger, 31, had to cancel his July 16 wedding to fiancee Kimberly Robinson because money got tight quickly. They intend to get married by a justice of the peace and have the ceremony later, after Snetzinger finds work. Snetzberger went back to school. Meanwhile, the couple spray-paint messages on sheets they hang out of the second-floor window of their home, just blocks from Touch America’s headquarters. "Home 4 sale thanks to that rat bastard Gannon," one sign read. Another: "Butte weasel club: Gannon, Meldahl, Pederson."

A day after the layoffs, Touch America filed for Chapter 11 bankruptcy protection. The last survivor of Montana Power had succumbed.

The company claimed assets of $631.4 million and debt of $554.2 million – figures its critics dismiss as inflated. In conjunction with the filing, Touch America announced a deal for 360networks, a Vancouver, B.C.- based telecom company that itself survived bankruptcy, to buy much of Touch America’s remaining business for $28 million.

Even with Touch America legally insolvent, the last gusts of the storm continue.

Picking up the pieces

Soon after Touch America collapsed into bankruptcy court, critics assailed its proposal to sell most of its assets to 360networks.

Shareholders and plaintiffs in the lawsuits – even a U.S. trustee overseeing the case – blasted the offer and Touch America’s proposed bidding procedures as crafted to dissuade competing bids. A bankruptcy judge eventually eased the restrictions, and the auction of Touch America’s assets last week drew such bidders as Qwest, although the Baby Bell later dropped out. Meanwhile, Qwest completed its full-circle journey from friend of Touch America to foe, and back to friend. The Denver Baby Bell supplied a $10 million loan to help keep Touch America afloat while it’s in bankruptcy.

The financing was part of a larger deal that settled all disputes between the two: the FCC complaints, the lawsuits, the balances due. For Qwest, rescuing Touch America was a priority because Touch America’s network carries much of Qwest’s long-distance traffic.

Neither side will discuss the resolution, preferring to let that part of the storm dissipate.

As the storm breaks, Montanans are left to pick up what few pieces remain of the company and mourn a squandered corporate legacy.

A new storm is threatening NorthWestern, the Sioux Falls, S.D.-based company that bought Montana Power’s distribution business. NorthWestern faces the possibility of bankruptcy due partly to its pending restatements of its financial results for 2002 and an informal probe by the Securities and Exchange Commission. Meanwhile, it hiked Montana residential electricity rates by 10 percent last year and 16 percent last month.

Touch America’s stock is not worth the 3-cent value at which it trades. Trade creditors likely will receive all of the scant proceeds from the sale of the company’s assets, leaving shareholders with nothing.

Touch America executives and board members note that shareholders were not forced to ride the stock down. Shareholders were told Touch America’s stock would be speculative and value-driven as opposed to Montana Power’s steady, dividend-generating stock.

"I’m sorry for people who lost their stock, but there was a long opportunity to get out," said Adams, the Touch America board member and Colorado-based economist. Adams, who never sold a Touch America share, holds 4,500 now-worthless shares.

Gannon holds 535,895 shares and options.

Patricia Schmechel, the former CEO’s widow, holds 22,000. She’s more concerned about her pension, which transferred to struggling NorthWestern. She reserves some blame for Montana Power’s failure for the company’s board of directors.

"I thought it was just such a phony, trumped-up deal," Schmechel said. "And how the board could go along with something that shallow and dishonest. … The board just went hand-in-glove with anything they (management) wanted to do."

Gannon regards Touch America’s plight as the unfortunate result of decisions that had to be made with information available at the time. It’s not fair to judge with the advantage of hindsight, he said. There was no public apology.

"It hasn’t worked out the way we had hoped and believed was achievable," Gannon said. "There are reasons for that. That is a hard reality."

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