Valuation battle for Missoula water system continues; lawyers, experts debate line leakage

MountainWaterCompanyIPhotograph: missoulapartnership.com

After the condemnation trial, Mountain Water Co. president John Kappes had a conversation with a Missoula City Council candidate, according to a question from the city’s lawyer.
Lawyer Harry Schneider wanted to know if Kappes recalled telling Julie Armstrong not to let the city of Missoula pay more than $70 million or $75 million for the water company because of its condition.
On the witness stand Tuesday, though, Kappes said he did not recall that portion of the conversation. Armstrong could not be reached for comment via email or phone after the proceedings.

In June, the city of Missoula won its eminent domain case against the water company and owner The Carlyle Group, giving the city the right to buy the utility.

However, the parties have been far apart on price, with the city estimating a value of some $46 million, but owners pitching $142 million as more reasonable.

Tuesday was the second day of a five-day hearing before three water commissioners who will determine the fair market value of Missoula’s drinking water system.

In this proceeding, commissioners Skip Higgins, Steve Doherty and Dick Barrett have the ability to question witnesses after testimony, and they did so in Missoula County District Court.
In District Judge Karen Townsend’s courtroom, representatives of Mountain Water Co.’s owners tried to show the system was vast, complex and improving over time.

The city’s lawyers, though, attempted to cut away at the $142 million figure by illustrating shortcomings in the calculations, and also noting Mountain Water’s planned investments were inadequate even by their own estimates.


On the stand, Kappes noted Mountain Water employees participate in a pension plan based on years of service. If the city buys the water company, the purchase will have consequences for those plans, he said.
“The plan would have to be terminated, which means that either a lump sum or an annuity would have to be purchased in the name of each employee,” Kappes said.

The cost of the annuity is more than $12 million, including an unfunded portion of some $4.6 million, he said.

After Kappes testified, Commissioner Doherty quizzed him on the annuity and ostensible obstacles to paying it. Mountain Water is part of a trio of water companies that Carlyle manages as a package, with Park Water as the umbrella.

“What would prevent Park, Carlyle or Mountain Water from contributing the $12 million to buy the annuity?” Doherty said.

Kappes said Park Water would buy it, but a portion of the total depends on future revenue, and future revenue would not exist under city ownership.
“Because the business stops, that unfunded portion needs to be paid for by somebody,” Kappes said.

But the two other companies are still in operation, Doherty said. Kappes agreed, but he said they have their own separate customers and can pay for only the costs associated with their own operations.
Doherty wanted to know if Western Water, Carlyle’s name for the trio of water companies, had funds, but Kappes said he could not speak to the structure higher up the chain.

Commissioner Higgins wanted to know how closely Mountain Water’s forecasts for capital expenditures have tracked actual spending.

Kappes said the company tends to be close over a five-year period, roughly 10 percent plus or minus.


Under cross examination by Schneider, Kappes admitted some of the numbers Mountain Water’s expert used to come up with the $142 million figure didn’t reflect reality.

For instance, the expert used an equity-to-debt ratio of 65 percent to 35 percent, the lawyer said. However, Mountain’s capital structure reflects higher debt, a ratio of 52 percent equity to 48 percent debt, according to testimony.

Under questioning, Kappes also admitted Mountain Water was forecast to receive the smallest portion of money for asset replacement among the three water companies.
Mountain Water chief engineer Logan McInnis also testified, citing improvements the company made in recent years, and stressing the responsible pace of investment. From March 2007 through November 2014, he said, the utility reduced leaks by 19 percent.
Under questioning by lawyer Kathleen DeSoto, McInnis noted the company could pour money into the system to fix all pipes more than 40 years old, but rates would increase 107 percent, and the replacement wouldn’t pay for itself.
“We don’t want to do that to our customers,” McInnis said.
Under cross examination, McInnis battled with lawyer Natasha Jones, representing the city, over the significance of a national leakage index in which Mountain Water scores poorly.

He stressed that more than half of the leaks in the Missoula system come from customer service lines, and the index doesn’t take economics into account, or appropriate rates for customers.

The leakage rate is estimated at some 46 percent to 55 percent, but McInnis disputed the higher number.

However, under questioning, he admitted the leaks are a problem, whether on Mountain Water’s pipes or on customers’ lines, and he conceded the company needs to spend more money on fixes than it has.

In court, DeSoto, of Garlington, Lohn and Robinson, objected when she believed questioning veered into whether the public taking is necessary. In instructions Monday, the judge told the parties she had already ruled the city could use its powers of eminent domain to acquire the asset, and the purpose of the proceeding was to set value.

The defendants appealed the verdict, and it’s pending before the Montana Supreme Court.

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