It’s been a year and a half since the Carlyle Group took over ownership of Mountain Water Co. – and with it, Missoula’s drinking water – in a high-profile sale that drew heavy scrutiny and concern from community members.
Carlyle, one of the largest alternative asset management firms in the world, announced its intention to buy Mountain Water with its parent company, Park Water Co., in December 2010.
The Wheeler family of California owned Mountain Water for 75 years prior to the sale. The acquisition of Park was Carlyle’s first venture into the world of water.
The PSC approved the sale in December 2011 after a lengthy proceeding. Public concern about private ownership of Mountain Water prompted the board to approve the sale with several stipulations, including the condition that Carlyle give the city a chance to buy the water system if it’s sold as a single entity in the future.
But the company won’t be for sale anytime soon.
In fact, employees have settled in under new ownership and it’s business as usual for the company that serves approximately 22,000 customers around Missoula, said John Kappes, Mountain Water president and general manager.
Just as it has every two years for the past several decades, Mountain Water filed a rate increase request with the Montana Public Service Commission last July.
The five-member board that regulates private utilities in the state will hold a public hearing beginning Wednesday in Missoula to vet the request. The hearing begins at 10 a.m. Wednesday and could run into Friday if necessary.
This is the first rate increase case heard by the PSC since Mountain Water was purchased by Carlyle in 2011.
Several small changes that have occurred at Mountain Water since the sale include the retirement last year of longtime CEO Butch Hiller. That’s when one-time co-CEO Kappes became president and general manager.
Leigh Jordan, a longtime Park Water employee based in California, was named Mountain Water’s executive vice president.
On average, Mountain Water asks the PSC for a rate increase every two years. The last increase was approved in 2011 and boosted rates by roughly 8 percent.
This time, Mountain Water is requesting a 5.09 percent rate increase. An interim order approved by the commission already boosted rates by 1.54 percent.
The increase would raise the monthly flat rate for single-family homes about $2.93 and metered rates for single-family homes about $2.61 per month.
“When you look at it over two years, if we can stay around the 5 percent (increase) we feel we can do the best we can to hold costs down and at the same time provide reliable service,” Kappes said.
Mountain Water uses money from rate increases to pay bills, salaries and expenses, and improve infrastructure of its system throughout Missoula.
Recent infrastructure improvement projects include ongoing work to digitally connect the major components of Mountain Water’s system to help it communicate and run more efficiently. New diesel generators were added to several pump stations to help with system reliability, Kappes said.
Carlyle has continued to support Mountain Water’s focus on improving infrastructure, Kappes said.
“They’re allowing the dollars we bring into the community to be reinvested in the community,” Kappes said. “That’s an important aspect of the private utility; there is a return we get from our rates and that return is being returned to the community.”
A handful of other water main replacement projects are in the works, including replacement of 100-year-old mains along Madison Street with new, larger pipes, Kappes said.
Mountain Water is one of the only privately owned water companies in the state. It’s regulated by the PSC, which reviews each rate increase request. The Montana Consumer Counsel represents utility customers in these cases.
The rate increase request filed by Mountain Water doesn’t contain anything unusual, said Paul Schulz, utility rate analyst for the Consumer Counsel.
“A lot of it is largely the same as far as what you see at this level,” Schulz said.
Where Carlyle has factored in, Schulz said, is on “more global issues” like the financing of debt.
For example, MCC expert witness John Wilson argues in case documents that factors like lower interest and bond rates make the “cost of money” cheaper.
According to testimony by Wilson in documents filed in the case June 7, Carlyle “should be expected to have far lower money costs and substantially greater access to capital than the companies’ previous owners.”
“Improved capital attraction benefits for Mountain Water were heavily stressed by Carlyle and its witnesses in the acquisition approval proceeding,” Wilson said in the testimony.
If Mountain Water is paying less on debts and interest, the MCC argues, the company will need less from customers to cover those costs.
MCC is recommending a lower “return on equity” than Mountain Water asked for in its rate increase filings. MCC is suggesting the PSC approve an 8.7 percent return on equity. Mountain Water is asking for roughly 10 percent, Schulz said.
Even half a percent increase in return on equity, with Mountain Water’s rate base of approximately $36 million, can be substantial, Schulz said.
Jordan, Mountain Water’s executive vice president, said in rebuttal testimony filed in the case Feb. 25 that there were no representations during the sale proceedings in 2011 that Park would be able to acquire debt more cheaply.
“At no point did either Park or (Mountain Water) indicate that Carlyle would be able to refinance existing debt issues to lower the cost of the debt currently in place,” Jordan said in the testimony.
Ultimately, it’s up to the commission to decide, Schulz said.
The question of if or when the city might get a shot at buying Mountain Water remains unanswered.
Community members who filed comment in the PSC case or spoke at the hearing to vet the sale of Mountain Water to Carlyle overwhelmingly supported public ownership. City officials also expressed interest in transferring the company to public ownership.
But a sale to the city wasn’t on the table.
Instead, a stipulation for a potential sale to the city in the future was approved by the PSC based on a letter of agreement between Carlyle, the city of Missoula and the Clark Fork Coalition.
In return for a shot at one day purchasing Mountain Water, the city and the Clark Fork Coalition supported the sale.
Carlyle has no intention of selling Mountain Water at this time, Carlyle spokesman Chris Ullman said in an email last week.
Mayor John Engen was instrumental in the negotiations that led to the letter of agreement. He maintains the agreement puts the city in a solid position to someday own the water company.
Last week, Engen said he continues to keep in contact with Robert Dove, the head of the Carlyle infrastructure fund that bought Mountain Water.
“I have developed a relationship with the folks at Carlyle and I have a clear understanding of what I think it will take over time to acquire that company. It’s going to take time and energy and a bit of patience,” Engen said. “We’re dealing with a situation over which we may have much desire and not as much control.”
The next year could shed more light on Carlyle’s plans for Mountain Water within the fund, Engen said.
“My hope is that the dust will have settled to some degree on the investment for Carlyle. ... The infrastructure fund is relatively new and water is relatively new for them. As the economy improves, I think our capacity (to buy the company) gets better. I remain optimistic,” said Engen, who is up for re-election in November.
In the meantime, Engen said he’s happy with Mountain Water under Carlyle ownership thus far.
The city was granted intervenor status in the latest rate increase case but has not filed documents in the case.
Karen Knudsen, executive director of the Clark Fork Coalition, hasn’t been in contact with Carlyle since the sale.
But, Knudsen said, Mountain Water has been “ramping up transparency” under its new owner. She’s enthusiastic about a new community advisory board that has been set up by Mountain Water. Community outreach and education efforts have improved as well, she said.
“We’ve actually seen a switch and are please to see the renewed interest in engaging community stakeholders,” she said.
The community council includes five members representing different interests. The group has met several times and is working to define important water issues it could tackle in the future, Kappes said.
As for the future of Mountain Water, Kappes said last week talk of a sale hasn’t come up recently.
The focus locally, he said, is delivering reliable water.
“It’s a concern for the employee group whenever you have talk of change,” Kappes said. “Because there hasn’t been talk of change we haven’t had to worry about it.”