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Crews from Knife River Construction and Mountain Water Co. replace a 65-year-old water main that runs from Pine to Alder streets in downtown Missoula in March 2010.

Along with 321 miles of water main, Mountain Water Co. maintains 1,380 fire hydrants, 18,684 meters and 37 wells on 34 different sites spread across Missoula County, tended to via a fleet of 30 service trucks.

The water company’s 42 employees work with specialized, expensive hardware and software systems to make sure the intricate and extensive system does all it’s supposed to 24 hours a day, 365 days a year.

In case of a severe water emergency that compromises the system or Missoula’s aquifer, the company owns 45 acres in the upper Rattlesnake Valley that are home to a 30-million-gallon settling pond and dam built decades ago when laborers made $1 a day.

“I don’t know what 45 acres cost in the Rattlesnake today,” said John Kappes, president of Mountain Water.

Kappes detailed for the Missoulian an extensive list of Mountain Water Co. holdings and assets that made it clear the company that delivers water to thousands of customers across the Missoula Valley is a whole lot more than pipes and wells.

Last Monday’s Missoula City Council vote giving Mayor John Engen approval to move forward and negotiate with the Carlyle Group to purchase Mountain Water was the easy part.

Coming to an agreement on a fair price for the company will be a complicated, contentious and time-consuming process.

Carlyle bought Mountain Water’s parent company, Park Water Co., in 2011, a deal that continued a long history of private ownership of Missoula’s water system. That history, though, concerned both residents and city leaders.

Engen eventually backed the deal in exchange for the inclusion of a letter in the sale agreement granting the city first chance to bid on the system should Carlyle put it up for sale.

Carlyle has maintained the system is not for sale.

But in September, Engen announced he would ask the City Council for permission to negotiate a purchase deal with Carlyle. If a deal can’t be reached, Engen has said he will pursue a condemnation process to force the ownership change.

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The deal envisioned by Engen would be a “stock sale,” a full transfer of Mountain Water’s assets to the city, making it a publicly owned and operated enterprise.

“There will be an inventory, but what we’ll end up with is a clear title,” Engen said.

But first, Carlyle and the city must agree on an estimated fair market value of the diverse list of equipment and land holdings that make up the company.

Public records filed with the Montana Public Service Commission show Mountain Water’s assets and holdings make up a $38 million “rate base,” which is a complicated calculation used by the Public Service Commission to regulate privately held utilities.

The $38 million is calculated based on the original cost of assets less depreciation.

It isn’t the fair market price.

Take the extensive set of water rights obtained at no cost by the first owners of the system, which were transferred to and are now held by Mountain Water.

Although the cost of water rights isn’t figured into the $38 million rate base, the fair market value of that asset will add to the price tag of any offer made to Carlyle by the city of Missoula.

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Early estimates of the system’s fair market cost – including assets like water rights – have ranged from $50 million to $80 million.

Carlyle’s purchase price was not made public when it bought Park Water two years ago.

But at a recent City Council meeting, a member of the mayor’s advisory team estimated Carlyle paid $156 million for the three Park Water systems included in the deal. An expert witness at the PSC hearing to vet the sale to Carlyle estimated Mountain Water made up roughly 1/3 of the purchase price.

While Carlyle most likely completed an analysis of the fair market value of Mountain Water’s holdings, Kappes said Mountain Water itself does not perform an analysis beyond what applies to the rate base, which figures only original cost of assets.

The city has not yet asked Mountain Water to provide any asset or holding information.

“But it’s all public record,” Kappes said.

Engen has contracted an advisory group of experts who will comb through the assets to determine the fair market value of Mountain Water.

All of the holdings are under the large umbrella of “due diligence” that the team will perform as the process moves forward, Engen said.

“I think between lawyers, accountants and engineers we’ll have it covered,” he said.

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If ownership is transferred to the city, it’s possible that down the road land owned by Mountain Water could be converted into open space, Engen said.

For example, one asset is a 1 million gallon domed Mountain Water reservoir that sits on 19.46 acres abutting the popular Waterworks Hill trail system on Missoula’s north side.

Currently, a barbed wire and chain link fence surrounds the reservoir, booster pump and generator. The site also includes a computer system and a host of security features.

While the quest to buy Mountain Water is fundamentally about ownership of the distribution system, the addition of pieces of property like that “could be a bonus for the city,” Engen said.

In all, Mountain Water owns 32 acres of land inside the city limits.

“Some of it is in easement, if it’s city property that goes away, it’s become trails and open land,” Engen said.

It isn’t likely Carlyle would retain any Mountain Water assets, even ones that aren’t included in the $38 million rate base.

For example, Mountain Water has $492,0000 worth of assets, including 4.5 acres of land, that are not in use by the system and can’t be counted toward the rate base.

These assets are being held for well sites and reservoirs in anticipation of expansion.

In the event of an ownership change, it would most likely be included, “because really this is what it takes to serve the community,” Kappes said.

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Should a sale go through, the city would also inherit 42 local Mountain Water Co. employees.

Engen said last week he counts those employees as assets.

“I’m very comfortable making the committment we’ll continue to employ the folks at Mountain Water,” Engen said. “If they want to be there, rates support that today.”

The expertise and institutional knowledge current employees possess is valuable, Engen said.

However, “we’ll have to see how pay for a frontline person at the wastewater treatment plant shores up” with pay at Mountain Water, Engen said.

Facing a host of unknowns as the process moves forward, Kappes said his message to employees remains the same as it was when the company was sold to Carlyle two years ago.

“The sale certainly has employees concerned about the future. We’ll certainly be focused on the issues, so we can make sure we’re treated fairly,” Kappes said.

But most important, he said, “we’re focused on providing service to the community.”

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Reporter Jenna Cederberg can be reached at 523-5241 or at jenna.cederberg@missoulian.com.

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