By Martin Kidston
City leaders are expected to ask the Missoula City Council to select a two-tiered financing model to purchase Mountain Water Co., saying the approach would offer the city time and flexibility as it brings the utility under municipal operation.
The cost of doing so is likely to range from $105 million to $140 million, depending on the outcome of several rulings still pending in Missoula District Court.
On Wednesday, Dale Bickell, the city’s chief administrative officer, and David MacGillivray, a financial officer with Springsted Public Sector Advisors, said the city will consider securing a short-term bond anticipation note to cover the first 18 to 36 months of utility ownership.
During that time, the city will likely switch to a long-term bond at a fixed rate.
“First we do a short-term bond anticipation note to acquire the system,” Bickell told the City Council. “Then we’d refinance at a later date to a proposed 30-year long-term takeout. The recommended placement for that short-term bond anticipation note is a private placement with our bank, Barclays.”
Bickell said the blend of bonds and notes would cover the $88.6 million fair-market acquisition of Mountain Water, along with $5.8 million in infrastructure improvements planned over the first three years of municipal operation. Other cash investments could also be made in the system.
It would also cover an estimated $8.5 million in city legal fees and an estimated $5.4 million in legal fees incurred by the system’s current owners.
But the legal fees remain in flux and have not been finalized, as several issues remain outstanding with the court. Among them, the court must decide whether the city or Mountain Water will pay an estimated $22 million to local developers, who fronted money to expand the system under Mountain Water’s ownership.
Bickell said the city doesn’t anticipate losing that case, though it’s planning for the “worst-case scenario” as it moves to take possession of Mountain Water.
“We already have a ruling saying the city doesn’t owe anything, but if that gets appealed and overturned, we’d have to get more financing to do that,” Bickell said. “We want to make sure we’re covering all our bases to look at that. That may require a rate increase.”
Under most scenarios, Bickell said, rates paid by current Mountain Water customers would remain unchanged under city ownership. However, Mayor John Engen said a rate increase is likely in the coming years.
“We will raise rates – it’s inevitable,” Engen said. “Our expenses for operating the system will rise. In the meantime, we believe that based on rates today, we have the ability to run the system, pay the bills, pay the employees, pay municipal improvements and pay debt services, all without raising rates in the near term.”
MacGillivray, a financial advisor based in Minneapolis, said the acquisition of Mountain Water constitutes a business startup. The funding sought by the city is a large amount – likely “the biggest amount of borrowing the city has ever done.”
To reach a starting point, MacGillivray said, the city must decide between a short- or long-term bonding approach. While fixed rates on long-term rates are at historic lows, he said, starting with a short-term bond could work better for the city as it learns to operate the utility.
“When you issue long-term debt, it will be locked in for 10 to 30 years, and your ratepayers will have to live with that, and it will drive your user rates,” he said. “There’s a lot we still need to find out about the system once you take possession. There’s still numbers in play. Rather than lock something in and setting the base for 30 years, this allows you some time to set the best long-term financing.”
MacGillivray said short-term rates also remain low at roughly 2.2 percent, less any add-on fees. Because the utility represents a startup business model, the city must secure cash for the system and build its capacity to fund improvements, along with cash reserves.
The city would be committed to the short-term rate for at least 18 months before it could switch to a long-term rate, he added.
“You’ve got 18-36 months to figure out the things you don’t know now – the things on the physical side, the things on the capital side and the financial side, and how best to structure a long-term transaction,” he said. “It also allows you the possibility to explore other options that may or may not be available now but could be later on.”
When pressed by members of the City Council, MacGillivray said switching to a long-term model would likely add $2 million in issuance costs, on top of the $2 million needed to initiate the short-term note. While some members of the council want to explore financing from local banks, MacGillivrary said private placement through Barclays is the recommended approach.
But that aspect is expected to remain a source of contention as the discussion evolves over the next few weeks. Several council members also wanted to see the options presented side by side, though that’s not likely to happen.
The Office of the Mayor is expected to present the council with its recommendation. The council vote up or down on the issue.
“We’re intending to bring you the option of a short-term with a long-term takeout in the future,” Bickell said. “We’ll bring you the bond anticipation note agreement.”
Contact reporter Martin Kidston at firstname.lastname@example.org