Missoula mayor to seek $50M water company buyout

2014-01-28T08:00:00Z 2014-10-19T08:12:13Z Missoula mayor to seek $50M water company buyout missoulian.com

Missoula Mayor John Engen anticipates moving to condemn Mountain Water Co. as one step toward public ownership.

On Monday in a unanimous vote, the Missoula City Council authorized Engen to make a $50 million offer to purchase Mountain Water from the Carlyle Group, a global hedge fund.

However, in a memo about the offer, the mayor said Carlyle has suggested a $120 million price and has rejected the city’s “informal overtures” to acquire the company that provides most Missoula residents with their drinking water.

“I expect this offer will be rejected as well, at which point we will begin condemnation proceedings in district court,” Engen said, reading from his prepared memo. “My fervent hope is that Carlyle will then come to the table to begin serious negotiations.

“And if they don’t, our legal team continues to believe we will prevail in court and own our own water company at a fair price.”

In 1984, the city of Missoula filed a request for condemnation in court, and eventually, the Montana Supreme Court determined it was not in the public’s interest for the city to own the water company. However, Engen has said the legal landscape is different today.

In 2011, the Carlyle Group made a successful $102 million bid to buy Mountain Water and its parent company in California. Engen backed the sale to Carlyle, arguing it was the most direct path to public ownership.

Carlyle repeatedly has said the system is not for sale, but in his statement to the council Monday, Engen disagreed. Estimates for the purchase have ranged from $50 million to $80 million.

“If someone tells you Mountain Water is not for sale, it’s simply not true,” Engen said. “It was for sale the day Carlyle bought it.”

The global investment firm is moving away from public utilities to energy, he said. He said he believes Carlyle intends to sell Mountain Water and its sister and parent companies in California “in the very near future” to another enterprise “with no stake in our community.”

In a draft letter to Carlyle managing director Robert Dove, Engen sets a deadline of 5 p.m. Eastern time on Thursday, Feb. 4. “Failure to submit an acceptance by that date will constitute a rejection of the City’s offer for purposes of Montana law governing condemnation proceedings,” the draft letter says.

Last year, the council authorized the mayor to enter into negotiations with Carlyle to purchase the utility or, as a last resort, start an eminent domain takeover. On Monday, the council gave Engen approval with little discussion.

Councilman Bryan Von Lossberg wanted to be sure the council would have the opportunity to consider condemnation, should the acquisition go that route. Engen confirmed that was the case.

“Condemnation is serious business, and I’m not leading us down this path lightly,” Engen said in his statement.

***

Should the offer be rejected, Engen said he would bring his team of advisers to a public council committee meeting shortly thereafter to review the condemnation process in detail and the places “we might have critical decision points.”

The mayor formed a high-powered team of lawyers and financiers to put the deal together. In his memo, he said the offer reflects a price the attorneys and financial advisors “deem reasonable for an asset purchase.”

The team estimates that Carlyle Group purchased Mountain Water for some $50 million. However, Engen said the deal was part of a larger transaction and a final price remains undisclosed.

“If this were a negotiated stock purchase … the city of Missoula believes we could make a reasonable offer on the order of $60 million or more, but because Carlyle has not come to the table, we’re left to offer the investment fund about what it paid,” Engen said.

According to the memo, Carlyle has suggested the price for Mountain Water is $120 million, “more than double what they paid for it in 2011.”

“It is a price that we can’t pay, and it is unjustifiable by any commonly accepted method of valuation,” Engen wrote.

With water and its distribution on the table, the mayor said he believes the public’s interest is at stake. “We have one goal, which is to deliver clean, safe water to our citizens in the most effective and inexpensive way possible.”

Missoula is the only major city in Montana that does not own its own water utility. The system is notoriously leaky, but the city of Missoula has been trying to acquire it since 1979, when Montana Power Co. sold its utility to Park Water in California.

A draft letter from Mayor Engen to Carlyle managing director Robert Dove notes the following details of the offer:

• “The assets purchased will include all real property and improvements … together with all tangible personal property used to support the System and any and all water rights and any other associated rights.”

• “The city would assume none of the (Mountain Water’s) liabilities.”

• “The city and (Mountain) will mutually agree upon appropriate roles for management and the city will provide at-will employment offers.”

• “(Mountain Water) will facilitate customary due diligence investigations by the city with respect to (Mountain’s) assets, liabilities, finances and operations, including providing the City and its representatives with reasonable access to the Company’s personnel, vendors and customers.”

• “The city will engage an engineering firm to advise it on infrastructure conditions and capital requirements, and (Mountain) will cooperate with the reasonable requests of such engineers for access to … property, facilities, records and personnel.”

***

In other business, the council:

• Voted 9-2 to grant a conditional use permit for an accessory dwelling unit at 206 W. Central Ave. Councilors Annelise Hedahl and Jon Wilkins opposed it; Councilor Adam Hertz was absent.

• Unanimously approved new regulations for emergency homeless shelters and meal centers. The city code previously did not address those uses. The distance precludes the Union Gospel Mission from moving its meal center and operations to the Sweetheart Bakery on West Broadway, as it announced plans to do last year.

• Heard a request from the Missoula Senior Center for financial support from the city. According to center spokespeople, the organization is in financial trouble, and other cities in Montana help their respective senior centers with funding.

Reach Keila Szpaller at @keilaszpaller, at keila.szpaller@missoulian.com or at (406) 523-5262.

Copyright 2015 missoulian.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

(24) Comments

  1. Cato
    Report Abuse
    Cato - January 28, 2014 9:24 pm
    The idea that John Engen and the Missoula City Council are to the far Left of Fidel Castro is one of the interesting aspects of living in Missoula, Montana in the 21st Century.
  2. Cato
    Report Abuse
    Cato - January 28, 2014 5:55 pm
    Missoula would be bucking the recent trend; even in Socialist countries, toward privatization of water supply systems. Indeed, even Cuba would be more "free market" than Missoula in this regard after privatization there began in 2000 because of failures of the government run system.

    Imagine that. Even Cuba figured it out.

    Brookings Institution did a study of comparable companies in the United States.

    Abstract:

    Whether water systems should be owned and operated by governments or private firms is intensely controversial, and little empirical research sheds light on the issue. In this paper we use a panel dataset that includes every community water system in the U.S. from 1997-2003 to test the effects of ownership and benchmark competition on regulatory compliance and household water expenditures. We find that when controlling for water source, location fixed effects, county income, urbanization, and year, there is little difference between public and private systems. Public systems are somewhat more likely to violate the maximum levels of health-based contaminants allowed under the Safe Drinking Water Act (SDWA), while private systems are somewhat more likely to violate monitoring and reporting regulations. The results are reversed for systems that serve more than 100,000 people. Household expenditures on water at the county level decrease slightly as the share of private ownership increases, contradicting fears that private ownership brings higher prices. While direct competition among piped water systems is practically nonexistent, we find that benchmark competition among water systems within counties is associated with fewer SDWA violations and, when combined with private ownership, lower household expenditures. Overall, the results suggest that absent competition, whether water systems are owned by private firms or governments may, on average, simply not matter much.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=707131

    So, why is Missoula so gung-ho to do something that "may not matter much" and may even raise rates to consumers while also increasing the risk of "health-based contaminants"?

    It is Missoula. It isn't about cost and it isn't about health.
  3. independent
    Report Abuse
    independent - January 28, 2014 3:00 pm
    "And if they don’t, our legal team continues to believe we will prevail in court and own our own water company at a fair price. This statement shows how out gunned our City Attorney's office is or maybe they've bought of a judge or two. To get a favorable ruling Engen is going to have to PROVE Mountain Water has operated in a manner that is detrimental to the public welfare. That's just not the case.
    Who in their right mind would give Engen an enterprise with absolutely no accountability or oversight? We are much better off with Carlyle at least they have several entities with legal oversight. Heck if Engen gets his hands on the water company we don't even have a consumer protection group looking out for us, as we do now.
    In some circles Engen's and the City Councils actions would be described as "nationalizing". One has to ask, after this what is the next company Engen wants to run? He's already made a play for the ambulance service, but was stopped because Engen hadn't yet packed the Council with mindless rubber stamps..
  4. getmoremoney1st
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    getmoremoney1st - January 28, 2014 2:21 pm
    Oh, I'm sorry it sold for way more!!!

    $102 Million!

    http://missoulian.com/news/state-and-regional/m-sale-of-mountain-water-parent-company-of-high-interest/article_457ae9b2-e658-11e0-addc-001cc4c03286.html

  5. getmoremoney1st
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    getmoremoney1st - January 28, 2014 2:11 pm
    This is crazy!

    Running Missoula's water system is far, far more complex then anyone in our city government can even imagine (although they're quite imaginative). I wonder if any of our local banks will loan the $50m for the project? Maybe they'll do the deal with out contracts.
    Let us get it done with a handshake or a cocktail napkin contract like some other city owned projects!

    Mountain water sold the company for $69 million and then had millions of dollars of improvements done at Carlyle group's expense.
    Who thinks the company wouldn't fight this?
    Beyond that, who thinks its fair to the company?

    Engen is tripping up on this mess.

    Hopefully he does't set back missoula's budget 100+ years.
  6. DVanVorous
    Report Abuse
    DVanVorous - January 28, 2014 1:20 pm
    Ms. Perfect Ya cant blame a possible/probable rate increase on the mayor in this case. A rate increase is the rule rather than the exception as part of a change in ownership regardless of the city buying or private...As example the Carlye purchase from Mountain Water.
  7. 5thgenerationMT
    Report Abuse
    5thgenerationMT - January 28, 2014 12:33 pm


    Water is more sought after than oil in many parts of the world... Dont think a multinational corporation gives a hoot about little old missoula in the long run. I would rather elected officials raise my rates for "services" instead of lining some phat cats pockets. Let's see; run for profit with the money leaving the community? or run by the public at cost with the profit going to upgrades, more jobs, infrastructure, etc... Why would you go to bat for the %1 just because you hate liberals? Wake up people!!!
  8. nemo
    Report Abuse
    nemo - January 28, 2014 12:31 pm
    D***it Spock.... argument....... too..... logical. Must...... drink ........ koolaid. Ahhhh, better now. But seriously, not to change the subject but wasn't Big E in secret talks with some companies about bringing good paying jobs to Missoula back in the 2010 election cycle? Still waiting for that big reveal. More koolaid, happy place now.
  9. libertarian
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    libertarian - January 28, 2014 12:23 pm
    Butte Silver Bow is also the largest customer of it's water by 50% so citizens end up paying twice for the water. Missoula can't keep our parks maintained yet they can run a water system. This is just a bad idea for the city and taxpayers.
  10. Dubs
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    Dubs - January 28, 2014 10:08 am
    Oh sure, whats a few million here and there? We really need to spend tax dollars on something that the city has no business getting involved in. Typical, bureaucrats take a drink of water and all of the sudden they are water experts----amazing how creative and adept people in elected offices become once they get access to other peoples money.
  11. George W Hayduke
    Report Abuse
    George W Hayduke - January 28, 2014 9:42 am
    I am not an Engen supporter and love all the progressive vs. conservative banter going on here, they are the same, one prefers the front of the dollar bill the other, the back. Have any of you looked into Carlyle Group, the parent company that owns the water company? Not a company that would give to squirts of rented water about the local citizenry. Water is going to be a commodity far more valuable than gold or oil in the not too distant future. I don't feel like paying more in taxes or bills (thank you deregulation fans) but would like a little more security regarding something as important as water.
  12. Kojack
    Report Abuse
    Kojack - January 28, 2014 8:27 am
    Who wants to bet that old mayor engen will try to get a job there or one of his cronies? It should be a law of our city about conflict of interest in the sense of using taxpayers money to better ones self. No one that has served for the city during a purchase of such a asset should be allowed to work there.
  13. Cato
    Report Abuse
    Cato - January 28, 2014 8:20 am
    John wants a "legacy" project.

    Mountain Water Co.'s record is a good one. They have been responsible managers.

    If it isn't broke, don't fix it.

    "Politicizing" a water supply is always a bad idea.

    Recall, many of these advocates argue that certain services are "human rights" and should be "free." How can you charge people for "water?" And in Missoula, in particular, that will become a source of permanent political contention in a city that needs less, not more, of that.

    When Butte's system was bought out, the first thing that happened was rate increases. And then the invariable political process began as to who got charged what rates. In pleas to the City to "account" for low income and fixed income people, the push was and is for differential rates, so that some pay to subsidize others. Once politicized, and the council runs for election on "votes" to deconstruct the rate system to serve political ends, there will be no end to it and costs will rise.

    http://www.kxlf.com/news/bsb-county-to-see-potential-utility-rate-increase/
  14. Miss Perfect
    Report Abuse
    Miss Perfect - January 28, 2014 3:04 am
    Very simple Glacierdude. Engen is a progressive, no one disputes that. But....being a progressive is not cool, so they call themselves democrats, and they enact their agenda under the cloak of the DNC.

    Now......to answer your question. The mayor and most of the council want Mountian Water for the SAME REASON they shoved the big new sewer system down our throats. Once you are on the "Public Utility Plan"......you are on FOR LIFE. Yes....you cannot stop paying for a drink of water or a toilet flush until you die.

    This means you are now a revenue source for the progressives. They can legally steal your sweaty income through a thousand clever gimmicks....taxes, levy's, utility upgrades, new buildings, more payroll, new software, research, trips, conferences, company cars........the list is endless.

    What it means is your WATER BILLS WILL GO UP!! And believe it or not, there is a sizable crowd of socialist (Like Strohmeier) who are just fine with this. They know they can fund all kinds of progressive projects with this cash flow. You cannot make the city reduce the rates, they will justify them with the above mentioned expenses.

    There is a political element as well. AS Missoula is no longer red, nor is it purple.....it will get bluer and bluer with each step the mayor/council take. All the new employees at Mountian Water will be unionized of course..........that means 98% of them will vote democrat, no matter what stain they find on the blue dress.
  15. FPie
    Report Abuse
    FPie - January 27, 2014 11:57 pm
    people who are against this are insane. -Of Course- a city/the public/the people should own and control their own water supply [among other things], rather than pay for profits to some nebulous international corporate entity that would cease to exist if held accountable for any real world problems. if this is successful, it WILL be a huge benefit to the future generations.
  16. Run - A- Mook
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    Run - A- Mook - January 27, 2014 11:15 pm
    see sportcaster below.
  17. Run - A- Mook
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    Run - A- Mook - January 27, 2014 11:12 pm
    I think the number closer to $120,000,000.00
  18. Faxnlogicovremotnlhystria
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    Faxnlogicovremotnlhystria - January 27, 2014 9:28 pm
    This is 'progress'. Progressivism is a joke.
  19. glacierdude
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    glacierdude - January 27, 2014 9:23 pm
    So this is how progressives run their businesses. First of all......what is the "market" value of Mountain Water Co.???? Just curious. I guess I've been living in a tree too long but exactly what is it that Mountain Water has done that has the mayor and his cohorts so incredibly mad at them. They must be mad or they wouldn't be threatening to condemn, right? And the only reason they would be threatening to condemn is because Mountain Water Co. MUST be doing something totally objectionable, right? I may be way off base, here, but this deal just doesn't pass the smell test at all. Please enlighten me. I'm willing to listen.
  20. Miss Perfect
    Report Abuse
    Miss Perfect - January 27, 2014 9:15 pm
    Big John thinks he is the city's version of Emperor Obama, his idol. BJ says he will "Condemn" the Mountain Water. Ohhhhhhh.....they are soooooo scared.

    What the mayor is doing is exactly what progressives do.....the nudge, push, shove and intimidate you to go along with the program. When that does not work, they just steal it.

    So.....Here is how it will play out. Mountain Water and their clever attorney's will fight the condemnation just enough to stall the process. They will play along and pretend they do not want to sell.........and they will trick mayor McCheese and his team of morons into raising the purchase price to $80 million. Dos that number sound familiar? It should.......Big John estimated the purchase price at $50mm to $80mm. That is a huge range!!

    Question.....you economists, bankers and finance professionals........HOW do we determine the FAIR MARKET VALUE of Mountain Water? There are no comps because there are no other bidders??

    Answer: It does not matter! The mayor and his RED ARMY don't care what the price is because it is you sheeple that will have to pay off the BOND DEBT through BIG RATE increases.

    Next Question: NAME ONE economic promise Big John has delivered on.
  21. sportscaster
    Report Abuse
    sportscaster - January 27, 2014 8:23 pm
    If this is some kind of "leave a lasting legacy for yourself" move, John, please find some other way to do it that doesn't risk dragging the city into something it doesn't need or can't really handle. That would be a better legacy for anyone. - Bill Schwanke
  22. Kojack
    Report Abuse
    Kojack - January 27, 2014 8:11 pm
    wow I actually agree with you.
  23. Buzz Feedback
    Report Abuse
    Buzz Feedback - January 27, 2014 8:04 pm
    Mr. Mayor: there's a huge pothole on Linda Vista Blvd. between Mark Ct. and Scott Allen Drive. Any chance I could get you to fix that before you plonk down $50 million on a water system you don't know how to run? Thanks.
  24. montanamuralist
    Report Abuse
    montanamuralist - January 27, 2014 6:10 pm
    Such a surprise move. Of course he changed the panhandling law when threatened by the ACLU after a ruling in Boise, which may or may not have happened here, but changed that law to avoid legal fees. I guess you pick your legal fees. It would be nice to own the water company if they made it a coop or something. I have Missoula Electric and Blackfoot and they are both great. The city running it is just plain scary. We should start the drumbeat for a coop and get the city out of the mix....
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