Buying Power 

What does Babcock and Brown's $2.2 billion offer for NorthWestern Energy mean to Montana?

Watching Montana’s turbulent power scene develop over the last decade has felt, to the captive consumer audience, not wholly unlike sitting in a dark theater watching some foreign horror flick roll on the screen. Rife with undiscernable language and saddled with an unlikely plot, our utility drama has been marked by brief spurts of terror and unending agony. We’ve sat, anxiously nibbling our fingertips and waiting for the drama to end, while our power bills, once among the lowest in the country, have crept higher all the while.

The latest twist arrived last month, when an unexpected character stepped out of the shadows and onto the local power landscape. On April 27, NorthWestern Energy announced that Babcock and Brown Infrastructure (BBI), a division of Australia’s second-largest investment bank, was offering to buy the utility for $2.2 billion—exactly double what NorthWestern paid for the company only four years ago.

Though the Australian connection shocked many, it came as no surprise that NorthWestern had finally picked a suitor. In 2005, Montana Public Power Inc., a five-city, publicly funded coalition of Missoula, Kalispell, Helena, Bozeman and Great Falls, began aggressively courting NorthWestern Energy with the aim of assuming local control of the utility that serves 300,000-plus Montana customers, but is headquartered in South Dakota. After fending off the cities’ $2 billion offer for months, and irking restless shareholders who insisted the utility consider offers, in December NorthWestern Energy contacted 23 global companies—including MPPI—to invite bids. Ten signed confidentiality agreements and began preliminary negotiations and six submitted final bids, says NorthWestern spokeswoman Claudia Rapkoch, though further details remain cloaked by secrecy agreements. BBI’s offer of $37 per share, substantially higher than the $32.50 per share of MPPI’s disclosed offer and a solid 15 percent premium on the $32 at which NWE shares had been recently trading, was apparently irresistible.

The Aussies’ entry onto Montana’s power stage is far from a done deal, though. The Montana Public Service Commission, not to mention equivalent bodies in both South Dakota and Nebraska, as well as the Federal Energy Regulatory Commission (FERC), now retains the power to approve, deny or place conditions on the sale—an involved process that began May 19 and will unfold over the next year. PSC commissioners, along with the general public and other stakeholders, are just beginning to explore BBI’s background and its plans for NorthWestern. How Montana customers could be helped or harmed and whether the move would mark a positive step toward our utility future are the questions now looming. The stakes, according to those who’ve closely watched the issue over the years, are high for Montana consumers, who are being summoned into the brave new world of global utility management. Our application of what we’ve learned from a decade of mistakes and betrayal will ultimately determine whether the next chapter in Montana’s utility history brings more misery or a new optimism.

On Friday, May 19, the PSC met for the first of many times with NorthWestern and BBI to discuss the offer that had thus far been hashed out only in the press.

After hearing glowing descriptions of the deal and NorthWestern’s future prospects from corporate executives, the five commissioners cut to the chase.

“Montana really is a pretty hospitable place, and it’s gotten us into a lot of trouble. A lot of people would say we’re gullible rubes or easy marks and I think the results have been pretty dismal,” PSC Commissioner Tom Schneider said. “So if things seem a little chilly here, they are.”

PSC Chairman Greg Jergeson explained that the lengthy approval process will begin once NorthWestern and BBI file their application, which Mike Garland, director of BBI’s U.S. operations, says is currently being written. The PSC and its staff, as well as other parties like the Montana Consumer Counsel, will be involved. It’s also conceivable that disappointed suitors like MPPI could be engaged in the process, though MPPI’s Alec Hansen says the group has not yet met to decide whether to seek a role in the process. Bozeman Mayor Jeff Krauss, upon learning of the deal, said that his city will publicly oppose it. All aspects of the agreement and what it portends, including why offers like MPPI’s were rejected and where BBI might lead the company in years to come, will be carefully inspected, Jergeson said at the meet and greet. Also under the microscope will be BBI’s plans to transform NorthWestern from a publicly traded to a privately held company, which impacts the information and filings available to the public through the Securities and Exchange Commission.

“This is a major event in the life and history of the state of Montana,” Jergeson said.

Though the purchase of NorthWestern is obviously a big deal to Montana, it’s also important to BBI, since the deal would mark that company’s most significant investment in the United States to date.

San Francisco investors Jim Babcock and George Brown founded Babcock and Brown in 1977 as an American company chasing after the global market and relocated in 2004 to Sydney, drawn by Australia’s cheaper capital. Now Australia’s second-largest investment bank, Babcock and Brown operates five divisions through 21 offices around the world. In essence, Babcock and Brown is a massive holding company with a business strategy revolving largely around structured finance: The company purchases assets and bundles them into funds, then Babcock and Brown makes millions from management and performance fees while distributing dividends to the funds’ investors.

Babcock and Brown Infrastructure, whose purchase of NorthWestern would increase its assets to $9.6 billion, is just one of eight worldwide companies started by Babcock and Brown, and has stepped onto the world scene both rapidly and recently. All of the company’s assets have been acquired since 2002, according to Garland, a speedy ascent that speaks to BBI’s fast-track approach. With existing assets including Australia’s second-largest utility distribution company and its largest coal terminal, a major British ports company, a natural gas company in Portugal and wind farms across Europe, BBI is now interested in expanding into the United States, according to BBI spokesman Tristan Peniston-Bird. It began its foray into the U.S. market earlier this year by purchasing New England’s Cross Sound Cable, a utility transmission connecting New York to Connecticut. Buying NorthWestern would boost BBI’s investments in the United States from 3 percent to nearly 40 percent of its holdings, with its remaining assets spread more or less evenly throughout Australia, New Zealand and Europe.

BBI sees NorthWestern, which would technically be owned by subsidiary BBI U.S. Holdings II, as a centerpiece for the company’s quickly evolving North American strategy and portfolio, according to Peniston-Bird.

“NorthWestern provides a base from which to pursue complementing opportunities in other states or farther afield,” he says, quickly adding that future U.S. investments wouldn’t necessarily be tied into NorthWestern. “It could just be that what NorthWestern provides BBI is an opportunity to really deepen its involvement in the U.S. market, and that can lead to bigger and better things.”

BBI has outlined plans to maintain the existing name, management and corporate structure of NorthWestern, so, essentially, the company would simply trade one set of shareholders for another. NorthWestern would continue to operate day-to-day affairs under orders from extant managers headquartered in Sioux Falls, S.D., with BBI’s involvement manifesting through its role on NorthWestern’s board of directors.

NorthWestern fits in with the BBI model of purchasing stable, regulated assets that can be relied upon and owned for the long term, BBI says, and its main priority would be to maintain a concentration on NorthWestern’s core business.

BBI’s pitch to maintain the status quo—and that prospect’s appeal to Montanans—is one of the first issues Montana consumers on up to Gov. Brian Schweitzer are exploring. If recent history has taught us anything, it’s that we’ve been entirely too trusting of corporate intentions.

“Since deregulation started, we’ve constantly acted like we’ve just fallen off the pumpkin truck and we’re naive as hell about corporations,” says Gary Buchanan, who served as state commerce director in the ’80s under Gov. Ted Schwinden. Buchanan says he’s nervous that Montana won’t adequately investigate whether the sale to BBI makes both long-term and short-term sense for consumers.

Buchanan’s fear is based all too firmly in reality.

The Legislature’s 1997 passage of deregulation, heavily pushed by the stable, vertically integrated Montana Power Company, marked the beginning of a steady downward spiral for management of Montana’s utility. Within months of deregulation’s passage, Montana Power announced it was selling off its hydroelectric dams and coal-fired power plants to Pennsylvania Power and Light, the global giant that still owns them. Then, in 2000, Montana Power announced it wanted out of the energy business altogether so it could dedicate itself to broadband offshoot Touch America (which perished in an ugly bankruptcy proceeding in 2003). NorthWestern Corp. offered $1.1 billion for the remaining transmission and distribution system, and the PSC approved the sale in 2002. One year later, NorthWestern Corp., too, filed for bankruptcy, citing $2.2 billion in debt. It reemerged in 2004 as NorthWestern Energy and has since been subject to stricter PSC oversight while it tries to regain its footing. Meanwhile, customer costs have risen sharply.

Deregulation and NorthWestern Corp.’s subsequent purchase of Montana Power came with promises of lower bills and increased stability. Both left Montanans stranded with handfuls of worthless stock and a shifting ground where the state’s century-old energy supplier had once stood.

Montana ratepayers have roundly and rightly mourned the replacement of our dependable, state-controlled utility managers with feckless owners who promptly crashed our utility into the ground, and many now fret how a massive, international owner would impact our utility future negatively.

It’s instructive, though, to look beyond the limited context of Montana’s utility history to see what’s happening to utilities on the regional, national and global scale.

Ken Toole, a state legislator and Democratic candidate for the PSC, says it’s important for people to realize that Montana is being swept up in a much larger pattern of globalization that’s actively changing utilities around the world, with implications far beyond Montana state lines.

“The bottom-line trend here, which is a loss of local control and the turning over of assets that are our lifeblood to a transnational corporation, is very discouraging,” Toole says.

That said, the larger trend of globalization isn’t as important—or, obviously, as controllable—as are concerns about how BBI ownership would directly impact NorthWestern and its customers now that we’re at this juncture, counters Tom Power, a University of Montana economist who’s served on advisory committees for Montana Power and then NorthWestern since the ’80s. Besides, he says, Montanans have a romanticized notion that Montana Power was loyal only to its customers. In fact, Montana Power was founded by the Anaconda Company to serve its own vast energy needs, and though Anaconda may have been centered in Montana, it was an international copper behemoth with interests stretching around the world.

“Our closeness with Anaconda was part of why we were protected from becoming part of a larger regional company long ago,” Power says. “All sorts of mergers and buyouts have been taking place in the U.S., so this was sort of inevitable.”

It’s no coincidence that the buying, selling and merging of utilities has been heating up over the last year. In 2005, Congress passed an energy policy that repealed the Public Utility Holding Company Act of 1935 (PUHCA), which had been sponsored by Montana Democratic Sen. Burton Wheeler as part of New Deal reforms designed to check unscrupulous utilities and investors. For decades, PUHCA strictly limited ownership of utilities across state lines, as well as prohibiting non-utilities (like investment banks) from buying utilities and banning risky speculations with ratepayers’ money, all of which made the act a long-standing target for the utility industry. Still, consumer and environmental interests lobbied heavily and unsuccessfully against its repeal.

Power says the scenario of NorthWestern being owned by a company not already tied into the Northwest utility scene could prove more amenable to local control than the alternative of answering to another major utility in the region like PacifiCorp, which serves 12 states, or MDU Resources Group, which serves five. However, he cautions, now is a critical time for the PSC to require that BBI establish stronger local focus and local management for NorthWestern, since the PSC now has the leverage of approving or rejecting the deal.

In 2004, the PSC defined eight factors it would consider in evaluating companies attempting to acquire NorthWestern Energy. One major consideration was demonstrable Montana focus, ideally expressed through a corporate headquarters in Montana, a longtime wish of Montanans, given that 70 percent of NorthWestern’s operations and customers are in Montana, and its headquarters and lead decision-makers are in South Dakota.

“That’s a key issue for us,” says Montana PSC Chairman Greg Jergeson.

BBI’s Peniston-Bird wouldn’t comment on the issue, since it will be part of the PSC’s approval process, beyond reiterating that BBI’s initial plan has been to keep NorthWestern CEO Mike Hanson and his South Dakota management team in place.

“We feel we already have a strong Montana focus,” says NorthWestern’s Rapkoch, who notes that half the company’s vice presidents are located in Butte. “Any time you relocate headquarters there’s an expense involved, and it’s just not necessary. Furthermore, one has to keep in mind that NorthWestern’s roots are in South Dakota, and those folks are just as committed to maintaining a presence in their state as Montanans are.”

But Power says NorthWestern’s split focus has resulted in paralysis that can be seen in the company’s inability to secure long-term energy contracts, exposing consumers to higher market prices. The future prosperity and reliability of Montana’s utility provider hinges on the PSC driving a hard bargain to ensure that Montana gets the attention it deserves, he says.

“We have to end this confusion and paralysis, and the only way I can see to do that is to get rid of the guys in Sioux Falls,” Power says. “The commission has a chance to do that, and that would solve one set of our problems.”

Besides local focus, another key to stabilizing Montana’s utility outlook that everyone—NorthWestern, the PSC and utility watchdogs—agrees upon is reestablishing the major utilities’ ability to own generation facilities, which the PSC would regulate. The PSC has drafted legislation for the January 2007 legislative session to encourage NorthWestern or its successor to get back into the generation business. Currently, NorthWestern has had to resort to buying energy on the open market, and has struggled to secure long-term contracts with PPL that can better shelter consumers from the fluctuations of a volatile energy market.

“I think most everyone’s on the same page with the recognition that the current system is broken, but how we go about fixing that is the question,” says Rapkoch. “We’re trying to get to a long-term stable source of energy supply so we don’t have to rely on the market.”

BBI, too, is interested in putting its experience and extensive capital to work for new NorthWestern power-generating projects, Garland told the PSC May 19.

Wind energy could well prove to be a part of this puzzle, for more than one reason. First, BBI affiliate company Babcock and Brown Wind Partners (BBW) is the third-largest owner of wind power generation facilities in the United States, and also boasts wind farms in Spain, Germany and Australia. In early May, BBW announced it would raise $120 million to fund a fresh round of wind farm acquisitions in the United States. The Great Falls Tribune reported Garland as saying that BBI is in talks with a Montana party and two South Dakota parties about “very large land acquisition” for wind farms, though Peniston-Bird wouldn’t discuss further details due to the ongoing negotiations.

Second, Montana is in the midst of its own initiation into the large-scale wind industry with the Judith Gap Wind Farm, owned by Chicago-based Invenergy, which came online in December 2005 with 90 turbines capable of generating 1.5 megawatts (MW). The PSC approved NorthWestern’s purchase of that energy and the utility has since been working to integrate the new system with its conventional resources. On average, Judith Gap feeds 30-35 MW into the NorthWestern system, Rapkoch says. Though the 20-year contract reflects the windmills’ capacity of 135-150 MW, she says, the intermittent nature of wind means only about 30 percent of capacity is typically reached. And because of wind’s unreliability, conventional energy sources have to be lined up to fill in the gaps. The price of the wind energy on its own is $31.60 per MW—lower than the cost of NorthWestern’s other options—but the total cost is actually $36 to $40 per MW due to the cost of securing backup resources. Rapkoch says NorthWestern is still evaluating the success of its wind energy contract, and has yet to conclude how favorably it compares with traditional resources.

“The cost of the actual wind from the resource is very competitive, which would seem to offset some of the other costs, but that’s part of our ongoing analysis. In the end, it still needs to be competitive with the traditional resources,” Rapkoch says.

The prospect of additional and alternative forms of power generation in the state comes at a time when Montana desperately needs them. Most pressingly, NorthWestern’s two long-term contracts with PPL, accounting for 55 percent of customers’ energy supplies, are set to expire in January 2007, and NorthWestern has thus far been unsuccessful in its attempts to replace them. Should those contracts expire without new ones in place, NorthWestern would be forced to purchase nearly all of Montana’s energy on the open market, where costs continue to rise. Even if the contracts are replaced, NorthWestern says, prices are sure to be substantially higher. PPL announced earlier this month that it was considering replacing the two NorthWestern contracts with out-of-state contracts that could bear higher pricing. The loss could be devastating for Montanans. This struggle to secure generation also comes at a time when PPL has begun selling its power at market rates, in anticipation of selling in more expensive markets. The PSC, Montana Consumer Counsel and NorthWestern have all been battling PPL over this move, arguing that PPL holds a monopoly on power in the state and should have to sell it based on its cost, not the market, but the Federal Energy Regulatory Commission dealt the theory a major blow May 18 by ruling that PPL can continue charging market rates.

And PPL isn’t the only entity looking to branch into out-of-state markets. Over the last few years, NorthWestern has begun exploring the possibility of creating a transmission system to Idaho, and after securing interest from generators, the company is in the midst of conducting engineering studies of the idea, Rapkoch says. Comments made by BBI’s Garland to the PSC May 19 indicate that the Australians, if successful in their bid, would be eager to pick up those plans where NorthWestern left off.

Power decries this as a dangerous, expensive proposition: “The more paths we open up the easier it is for whatever cheap energy we have to leave, and that’s no good…Opening up transmission puts Montana entirely at the mercy of whatever California and Oregon are willing to pay.”

Not surprisingly, Rapkoch disputes that interpretation. Asked about the temptation to ship power out of state, to where customers have higher incomes, she says, “You can also look at the new transmission as bringing more energy to Montana.”

Regardless, she says, it’s already difficult and it’s rapidly becoming impossible to protect Montana from the fluctuations of the global energy market.

“The reality is that we live in a global economy and it’s very difficult to isolate oneself from that economy, regardless of what you do,” Rapkoch says.

Given the bid from a massive international entity, and the potential for Montana consumers to become one component of BBI’s worldwide network, Rapkoch’s point is well taken.

But regardless of the outcome of the PSC’s approval process, the situation at hand will likely prove to be a watershed episode in Montana history. The possibility of changing NorthWestern’s focus is an important opportunity that wouldn’t otherwise have arisen, and the PSC has a chance to fully investigate BBI and apply conditions to protect the best interests of Montana consumers, Power says. He hopes and cautiously trusts that this time around, we’ll do just that: “After 10 years of chaos, I think we can get back into making good public policy decisions.”

jmcquillan@missoulanews.com

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