The Greed Factor: Why Montana’s People Will Not Get the Power

By Nate Schweber, 7-15-05

By the miracle of the internet I sat in front of a computer in New York City on Thursday and saw the annual stockholder meeting in Sioux Falls, South Dakota.

The meeting was the top of the 9th inning for Montana Public Power Inc., a non-profit company made up of five of the biggest cities in the state. Having fallen behind in the game to buy NorthWestern’s operations for 310,000 electricity customers and 166,000 natural gas customers in Missoula, Bozeman, Butte-Silver Bow, Great Falls and Helena, MPPI’s last hope is that the stockholders will lobby the utility’s board of directors to re-start sale negotiations. The board already unanimously said no for the second time in a year to MPPI’s unsolicited offers to buy the company.

MPPI’s reason for wanting to buy NorthWestern is populist: the people should own the infrastructure that brings them their power. NorthWestern’s reasons for not selling – suspicion that the deal won’t go through and rumblings that MPPI isn’t offering enough money – are puzzling. MPPI is offering 17 percent more per share than NorthWestern was worth on April 28th, the day before the sale offer was made public. In addition MPPI’s financing is guaranteed by the behemoth company Citigroup. And the five MT cities are offering to pay nearly $2 billion – almost $1 billion more than last year.

The figures don’t add up until a fuzzy mathematical formula is applied. It’s called The Greed Factor.

To understand The Greed Factor, you need to know a little more about NorthWestern and the sluggers who will bat in the bottom of the ninth.

Leading off, meet Gary G. Drook, former CEO of NorthWestern Corp. Before he retired earlier this year, NorthWestern paid nearly half a million dollars each year to fly Drook from his home in Naples, Fla. to NorthWestern’s headquarters in Sioux Falls. Each of Drook’s 26 annual $17,307 flights was necessary because there is no direct plane service from Naples to Sioux Falls, a company spokesman told USA Today in 2003. NorthWestern even paid for the flight’s taxes in addition to Drook’s $565,000 salary, $600,000 signing bonus and $423,000 in incentives. Today Drook is NorthWestern’s second largest direct shareholder with more than 84,000 shares.

In the on-deck circle, meet Michael J. Hanson, who replaced Drook in May. Hanson earns $583,000 each year and is the company’s third largest direct shareholder with 29,211 shares. In addition to his duties as CEO, Hanson is also one of six members of NorthWestern’s board of directors. Hanson said again at Thursday’s meeting that he won’t consider MPPI’s offer unless the five Montana cities guarantee NorthWestern money whether the deal goes through or not. Before joining NorthWestern in 1998, Hanson worked for more than 20 years at Northern States Power.

Meet the marquee hitter, E. Linn Draper, Jr. He’s chair of NorthWestern’s board. While CEO of the American Electric Power Company in Columbus, Ohio, the company triggered inquiries by the Securities and Exchange Commission and was sued by the Commodities Futures Trading Commission because some of its natural gas traders filed false information with industry trade publications. In 2003, the year Draper retired, he earned $1.1 million, plus a $980,031 bonus and $63,429 in other compensation.

Batting cleanup, meet Wayne Brunetti who in 2000 became CEO of Hanson’s old company, Northern States Power, when it merged with a Colorado-based utility company and became Xcel. Under Brunetti’s watch a wholesale power-producing subsidy of Xcel’s called NRG went bankrupt and cost the company $2.5 billion. When Brunetti retired this year he pocketed millions, including $5.1 million in cash and stock nabbed in 2004 alone. Several of Brunetti’s underlings are now officers at NorthWestern.

The leaders of NorthWestern are interested in The Big Money, and the company’s history in the past decade is storied with its follies in slavishly flogging The Greed Factor.

In the 1990s NorthWestern got wild and added $1 billion in debt investing in a propane business, an air-conditioning business and the “it� business of the day: telecommunications. All three businesses tanked, but NorthWestern hid the losses from its shareholders with the help of crafty accounting by Arthur Anderson, the firm responsible for the crafty auditing that brought us Enron.

In 2001 NorthWestern bought Montana’s power system from Montana Power Co. for $1.1 billion, beating out Missoula, Bozeman, Helena, Great Falls and Butte-Silver Bow in their first bid to literally give the power to the people. Months later news leaked out that NorthWestern was $2.2 billion in debt. Shareholders sued, saying that NorthWestern’s share prices were artificially inflated and the company knowingly withheld financial information. In 2002 the company missed the deadline for paying its property taxes. Shareholders took a bath. In 2003 NorthWestern filed for bankruptcy.

(Picture CEO Drook jetting through clear, blue skies between Florida and South Dakota in the middle of all this).

Based on the stupid decisions NorthWestern has made time and again in pursuit of the Big Money, MPPI is absolutely correct in trying to put power transmission and distribution systems into the control of Montanans who just want a guarantee that their lights and TVs will turn on. Unfortunately MPPI, which would pay for its purchase through multi-decade bonds paid back by company profits, doesn’t have the bone-cracking clout to make NorthWestern’s board knuckle under. When MPPI offered $1.26 billion for NorthWestern’s Montana operations when the company was in bankruptcy in May 2004, the board of directors balked. MPPI offered a billion more this year. The new deal involves a complicated scheme to buy all of NorthWestern’s operations in Montana, South Dakota and Nebraska, and then sell the Dakota and Nebraska operations to those two states, respectively. NorthWestern, ever opportunists, are probably curious as to how high they can get MPPI to bid.

On the eve of the shareholder meeting, which could be MPPI’s last stand, Jamie Moser, Joele Frank, Wilkinson, Brimmer & Katcher, a New York City based public relations firm that MPPI hired for $20,000, issued a press release. The release said that MPPI was “pleased� with shareholder’s responses to their proposal to buy NorthWestern. One must question how “pleased� these shareholders really are considering who they are and where they work. According to NASDAQ, after Drook and Hanson the fourth and fifth largest major direct shareholders in NorthWestern are Brian B. Bird and Roger P. Schrum. Bird is NorthWestern’s Chief Financial Officer, ranks just below Hanson, pulls down $625,000 annually, owns 18,605 shares, and used to be vice president and treasurer of Xcel. Schrum is NorthWestern’s vice president of human resources and owns 9,372 shares. Would these shareholders lobby board member Hanson to reconsider MPPI’s offer -- especially in light of MPPI chairman (and Missoula mayor) Mike Kadas’ statements about wanting to put Montanans in the company’s management?

Kadas has said that he wants to keep the bulk of NorthWestern employees exactly where they are, in the jobs where they have experience. Bill Mayben, who runs the publicly owned Nebraska Public Power District, would help run the Montana operation, Kadas said. Mayben committed to moving to Butte if the deal goes through, so we know he’s serious.

Mayben met with most of NorthWestern’s top 10 shareholders this week and was left with the impression that the company is trying to slander MPPI’s proposal.

“They were happy to hear us tell the story because it didn’t gee up with what they’d been hearing from the board members,� he said.

NorthWestern’s position is that there’s “nothing broken,� said spokeswoman Claudia Sears-Rapkoch.

“So there’s no need for MPPI to fix it,� she said.

Kadas remains optimistic because he feels MPPI put forth a “fair deal� for NorthWestern, and based on the board’s responsibility to its shareholders, he thinks they should take the offer.

“We hope to hear some kind of positive response in the next couple of weeks,� Kadas said Wednesday.

Kadas, who leaves office when his term expires, said that this would be MPPI’s last chance to buy NorthWestern.

This is bad news for Montana, based on Hanson’s speech at the board meeting in which he flogged MPPI’s proposal as being both brainless and lowball to boot.

“MPPI’s offer presents unacceptable risks for our shareholders and our company,� Hanson’s voice crackled through my computer’s puny speakers.

I, of course, would counter that with history as precedent, the company and its shareholders are in far greater risk with NorthWestern in control.

Déjà vu was palpable when Hanson babbled about how the future for NorthWestern lies in expanding the company’s transmission and distribution infrastructure to carry Montana generated power to other states. You could almost hear his predecessors saying the same thing about propane, air-conditioning and telecommunications.

But nobody piped up and challenged him. Nobody said, “You gibbering fool! Sell the company to the Montanans at this good price so we can reap our money and invest it in umbrellas and protect ourselves the next time the results of one of your ideas hits the fan!� Nobody said anything. Certainly not Michael D. Luce, Chief Operating Officer of Harbert Management Corporation, who with a whopping 7.2 million shares of NorthWestern Corp is by far the largest major direct holder.

Alas this is Marc Racicot’s legacy. By de-regulating power he gave the power to the Greed Heads and took it away from Montanans. If Mike Kadas could offer NorthWestern enough money to make its honchos rich by their standards the deal would go down. But Kadas has to play fair. He is beholden to the taxpayers, the citizens, of Montana who will have to foot the bill when they pay for their electricity. The money that the Greed Heads are used to making, even while their companies and shareholders go down in agony, can only be made through shady accounting and the type of amped-up stock prices that come when many Little Greed Heads whip themselves into a frenzy over the future worth of propane, air-conditioners, telecommunications, or more transmitters – made of wires, pipes or laws -- that carry Montana’s power on a one way circuit out of state. [End of article]