City to invest $18.5M in water main replacements over first five years

By Martin Kidston

After fully acquiring Mountain Water Co., the city of Missoula plans to invest $18.5 million in water main replacements over the first five years of ownership before increasing its annual investment to $3.5 million, the city’s public works director said on Wednesday.

A discussion on the city’s imminent purchase of Mountain Water Co. grew testy at times as the City Council’s Committee of Whole took another step toward clarifying future capital improvement needs and the cost of running – and buying – the system.

City advisers, along with the Office of the Mayor, are likely to recommend to the City Council that it approve a two-tiered financing model to purchase the utility. That would include a short-term bond anticipation note at a variable rate to cover the first 18 to 36 months of ownership before switching to a long-term bond at a fixed rate.

Natasha Jones, an attorney representing the city in the years-long Mountain Water proceedings, said a backlog of deferred maintenance under corporate ownership has resulted in a system that leaks an estimated 4 billion gallons of water a year.

“We found that 50 percent of the underground pipes were 45 years or older, and 20 percent of the mains had exceeded their useful life,” she said. “Because of that leakage, (Mountain Water) had operational expenses that wouldn’t otherwise be necessary, such as $600,000 in electrical bills to pump water that’s leaked out of the pipes.”

Jones presented many of the same facts that helped the city win its legal case in Missoula District Court, saying the system was in poor condition and that Mountain Water and its corporate owners marked up everything it purchased to reflect higher capital expenditures.

Because of that, Jones said, the city is unlikely to incur the same expenses as Mountain Water when it begins operating the system. The money invested by the city in the system will go farther as a result.

While an independent water commission has placed the value of Mountain Water at $88.6 million, the total purchase price is expected to range from $105 million to $140 million, depending on the outcome of several rulings still pending in court.

The city is now working to arrange its financing package and set an operational strategy. An engineering analysis recommended a capital improvement plan valued at roughly $29.5 million over the first five years.

“The improvements would focus on water main replacement and that water loss,” said John Wilson, the city’s public works director. “Out of the $29.5 (million), the plan calls for $18.5 million in water main replacement.”

That figure would increase after the first five years to between $3 million and $3.8 million, Wilson said.

He added that the city would conduct studies to better understand its funding priorities and system management. He believes the $3.8 million in improvements could be sustained over the long term.

“We’ll also be looking at wells, storage tanks, wilderness dams, meters – there’s a whole host of issues,” he said. “It’ll be a big project for years to come.”

While Mountain Water has blamed the service lines that bring water from the water main to area homes for the high leakage rate, Jones said evidence suggests otherwise. Still, most agree that some service lines do leak, and under Mountain Water ownership, it’s up to a homeowner to fix it.

But the city may change that policy once it takes ownership, though that effort hasn’t been detailed. The prospect of the public replacing service lines to private homes raised concern among several council members, who asked for financial figures reflecting the added expense.

“That’s going to change the pro forma and our expenditures significantly,” said Ward 5 council member Julie Armstrong. “Can I ask staff to rework that pro forma to show us that worst case before we set this financing? If those numbers aren’t correct, it’ll affect our financing.”

Mayor John Engen said the City Council may consider making many improvements to the water system when the time comes. But he said it wasn’t up to the discretion of a single council member to demand such requests.

“Staff is not directed by individual council members,” Engen said. “That’s a function of the will of the council and the administration, and that’s another piece of this puzzle.”

While much of Wednesday’s discussion was intended to review capital expenditures, the conversation often strayed toward Mountain Water’s employees and the city’s proposed financing package to pay for the utility.

Ross Miller, the chief legal officer for Mountain Water, warned the city that it was taking the wrong approach toward financing the system. He suggested the city was unable to acquire the system under a fixed-rate, long-term financing package and, as a result, it has selected the risky route through a short-term, variable rate loan.

Miller also suggested that the city could find itself upside down in the water system, and that it had overestimated annual revenues from running the system by $500,000.

“The bottom line is, short-term financing creates numerous concerns and risks, and we highly recommend against acquiring the water system under short-term, variable rate financing like you’re being asked to do,” he said. “ If you do opt for short-term financing, we ask that you properly protect the water employees from bearing the brunt of the short-term risks.”

Contact Martin Kidston at info@missoulacurrent.com