Great Barrington — The fair market value of the Housatonic Water Works system is $2.3 million, according to John Mastracchio from Raftelis Financial Consultants of Natick, the group hired by the town in December to appraise the company’s water system serving the village of Housatonic.
Mastracchio, the executive vice president of Raftelis, presented the company’s findings at a virtual meeting held via Zoom on Thursday, February 23. While Mastracchio presented a Powerpoint summation of the company’s results at the meeting, a much more detailed report has been posted online on the town’s website. “The appraisal assignment that we are tasked with was to value the Housatonic Water Works company as a complete business enterprise,” Mastracchio said. “We have done so regarding the definition of a fair market value. The appraisal was for 100 percent control and ownership interest in the Housatonic Water Works system, not partial ownership or minority interest.”
The definition of fair market value in state case law is “the highest price which a hypothetical willing buyer would pay a hypothetical seller in an assumed and free open market.” Mastracchio said that the company used three methods to calculate the fair market value figure: income, cost, and market approach methodologies.
Mastracchio said that, with the income approach methodology, the company estimated the value of the future income stream that the water system produces for an owner. “When we do that, the stream that we look at is income, and how that income might change over time,” Mastracchio said. “We use a direct capitalization method where we take an income stream, and we can assume or consider that the income stream is going to continue into the future at a constant growth rate. We take every year of [estimated] future income, and we convert it back to the present value and add up all of the present income streams.” He said that, under the income approach methodology, the value of the HWW systems would be $2.2 million.
Under the market approach methodology, Mastracchio said that the company compared the value of comparable water systems in other markets, along with what they sold for. “Except in the water sector, there are far fewer water utility sales transactions that are available to rely upon,” Mastracchio said. “In this case, we found a total of seven [sales] transactions that we thought were reasonably close to HWW’s system.” Mastracchio said that based on the seven transactions they reviewed, the company came up with a value of $2.5 million based on the market approach methodology.
For the asset approach methodology, Mastracchio said that Raftelis evaluated all of the different assets and components that make up HWW’s water system. “This includes the pipes that are in the ground, the treatment facility, the storage tanks, meters, and other components,” Mastracchio said. “We look at what all of those components cost, and we use either a replacement cost or reproduction cost, and then we adjust those costs for depreciation.”
When it comes to depreciation, Mastracchio said that the company takes into consideration the physical deterioration of the components, along with functional obsolescence. Mastracchio said that the company also takes into consideration how much it would cost to replace the water system, which in the case of HWW’s system has been estimated at around $35 million.
He added that “economic obsolescence” was also taken into consideration for the asset approach methodology, which Mastracchio described as “testing whether the income or the earnings of the system, supports a value equal to that reproduction cost less the depreciation estimate.” Under the asset approach method, Mastracchio said that the value of HWW’s water system would be around $3 million.
“One last factor is the consideration of marketability,” Mastracchio said. “Under that component, we looked at the potential buyers of the system if HWW puts a big ‘for sale’ sign on the side of the road. Based on our knowledge of the water sector and the region, we don’t believe that there will be a ton of buyers for the system. There won’t be a bidding war by any means. The number of potential buyers will likely be very finite, and the interest in this system is going to be pretty limited. Because of that, we included a very small discount for the lack of marketability.” The company’s discount for lack of marketability, as shown in the documents presented by Mastracchio, is $250,550.
When all three approaches are reconciled together, with 50 percent of the weighted value of the income approach, 20 percent of the weighted value of the market approach, and 30 percent of the weighted value for the asset approach, along with a discount for the “lack of marketability” of the system, the company came to its estimate of $2.3 million for the fair market value of the HWW system.
“When doing the evaluation, how much consideration was put on not only the infrastructure but also the general issues that the system is on record of having?” Selectboard member Eric Gabriel asked Mastracchio. “The [system] has a series of issues with its infrastructure, along with HAA5 (halo acetic acids) in the water, and complaints to [MassDEP]. How does that come into play in this?”
Mastracchio told Gabriel that the issues with HWW’s system did come into play when estimating its value. “There’s really very little value that we placed on the treatment system because of the manganese issues and other water quality issues,” Mastracchio said. Mastracchio said that the estimated $2.3 million fair market value also took into consideration any potential capital improvements that would be necessary to address regulatory, water quality, or any aging infrastructure issues on the system.
He added that the company’s estimate of HWW’s water system is good for one year. “There’s not a lot that tends to change over time,” Mastracchio told the Selectboard. “But, if there’s additional work that’s put into the system, that would change the value. If market conditions change, that would also change the value. Generally, they don’t change week to week, and oftentimes not month to month either. So I think a year is a good timeframe.”
