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Missoula, Mont., moves to wrest control of privately held water system

A move by the city of Missoula, Mont., to condemn a municipal water system owned by a global investment firm illustrates how bitter the fight can become when cities try to gain control of local utilities held by private parties.

Missoula won the right last summer to take over the system owned by a unit of giant private equity firm Carlyle Group, arguing in part that the company reneged on a promise to sell the utility to the city.

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Now a court has to determine a fair market price. Meanwhile, Carlyle has agreed to sell the system to a third party even as the condemnation process grinds on.

Missoula Mayor John Engen said the litigation wouldn't be necessary if Robert Dove, head of Carlyle's $1.2-billion infrastructure fund, had kept his promise to sell the water system to the city.

"I liked and trusted Robert Dove until the day I could no longer trust Robert Dove," Engen said recently.

A Carlyle spokesman, Christopher Ullman, said the mayor's allegation was false. He said the firm adhered to a written 2011 agreement that required only that Carlyle consider an offer from the city to acquire Mountain Water Co., a subsidiary of Carlyle's Park Water Co. in Downey.

"There is only one agreement, the one the mayor signed saying he supported Carlyle's purchase of Mountain Water," Ullman said.

Missoula has been trying to wrest control of its water system since 1984 when it sued the then-family-owned company under its power of eminent domain. That effort was rejected by the state's Supreme Court, but left a legacy of bad blood.

The family agreed to sell the company in 2011 — not to the city but to Carlyle — for $102 million and the assumption of about $116 million in debt and other liabilities. Still, Carlyle wanted the city's support for the sale before state regulators.

Engen met with Dove in February and the next day wrote an email with an account of the "frank, cordial and productive discussion." The city "will publicly support Carlyle's purchase … through its processes at the California and Montana public utilities commissions," Engen wrote, in return for a sale after a year.

"Robert confirmed that California is where Carlyle's interest lies," Engen wrote.

Missoula spokeswoman Ginny Merriam said Dove resisted any written agreement. So after much wrangling, the two sides issued a public letter in which Carlyle agreed only to consider any offer for the system in good faith.

Ullman said Engen's claim that Carlyle pledged to sell Mountain Water to the city "conveniently ignores the terms of the letter the mayor signed with Carlyle," as well as his testimony at the time before state regulators and statements in emails and other documents.

Last year, after the city sued, Carlyle agreed to sell Park Water, including the Missoula system, to Algonquin Power & Utilities Corp. of Toronto for $327 million and the assumption of $77 million in debt.

In June, a state judge granted the city the right to take the Missoula system, leaving that transaction in limbo.

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