City of Missoula on verge of Mountain Water purchase

By Martin Kidston/Missoula Current

Missoula will no longer be the only city in the state not to own its drinking water system if the City Council approves the purchase of Mountain Water Co. later this month and issues the notes to cover the cost.

On Wednesday, both decisions won unanimous approval from the Committee of the Whole, including a two-part financing package to fund the $105.7 million purchase of what will become Missoula Water.

“If anyone here is under the impression that this deal has not been thoroughly vetted, you are under a shockingly mistaken impression,” Mayor John Engen said. “Our team has been on the phone almost daily for the last six months, and a long time before that, talking about this deal, understanding what it means, and how it will work.”

Under the financing plan, the city will issue – and Barclays will purchase – two series of bond anticipation notes. The Series A notes will cover acquisition and a portion of capital improvements needed to bring the utility up to industry standards.

The first series of notes come with a three-year maturity, and while the city could prepay them at any time, doing it early could incur certain fees. After 18 months, however, that fee would be waived.

The Series B notes would be issued as a reserve for any outstanding legal obligations. While most of the Mountain Water proceedings have been litigated and resolved, several decisions still linger in District Court, including who will repay developers roughly $23 million for extending the system.

Those legal uncertainties led the city's financial advisers to recommend starting with a short-term note at a variable rate before switching over to a long-term note at a fixed rate.

“There's a number of pieces of litigation that are still outstanding, and they're measured in the tens of millions of dollars,” said David MacGillivray, a financial analyst with Springsted. “You don't know if those costs are really going to be incurred and at what levels. The short-term financing gives us that time.”

Interest rates are currently low on the short-term market – another advantage to the city, according to the advisers. The current rate is 2.65 percent and will reset weekly under the deal.

MacGillivray said the low rates will serve to lower the city's initial debt payments, enabling it to accumulate cash through operating the water system. It will also enable the city to build up reserves and fund capital improvements.

Long-term financing would become an option 18 to 36 months later, MacGillivray said.

“By that time, you'll have developed a history of operating the utility and some of those unknowns will become known,” he said. “There may be other financial options. The state has a low-interest loan program, and you may have a portion of this being able to be financed that way.”

As the city gears up to operate the system, it has also devised two possible models, including an “expected” scenario and a “conservative” scenario.

Dale Bickell, the city's chief administrative officer, said the scenarios were based off current Mountain Water data on file with the Montana Public Service Commission.

Under the expected scenario, the city would provide for all current water system employees at their current salary and benefits. It would also provide for $29.5 million in capital improvements over the first five years.

“Under the expected scenario, we have the legal issues resolved in the city's favor within 18 months, we blend the short-term and long-term interest rates, and we assume the city is not required to make payments on the developer extension agreements,” said Bickell. “Under our expected scenario, we don't see a rate increase for the first three years. We're showing there could be 2 percent increase in 2021.”

The conservative scenario, however, assumes the opposite outcome. That could see a rate increase of 5 percent in 2018, followed by a 3 percent increase each year after.

“While we expect this is highly unlikely to happen, it does show that even in the worst case, the rate increases that are in here are reasonable and consistent with other municipal operations,” Bickell said.

The $105.7 million figure includes the $88.6 million purchase price and $5.4 million to cover legal fees incurred by Mountain Water and its parent owners. Roughly $3.2 million includes improvements made to the water system after the 2015 valuation proceedings, and $8.6 million to cover the city's legal fees.

The motion won the unanimous approval of the committee. The council will vote on the issue one final time at its regular City Council meeting on Feb. 27.

“It's been a very thorough approach,” said Ward 3 council member Gwen Jones. “It's probably one of the most important things this council will do. I'm glad it's finally getting to us. I think we're in a very solid place.”

Contact reporter Martin Kidston at info@missoulacurrent.com