Iowa Auditor Raises Concerns over Xenia Future

CHICAGO — Xenia Rural Water District, a once insolvent utility that is currently making good on its $125 million of bonds and loans under a restructuring agreement with its chief creditors, still faces long-term challenges that could threaten its ability to remain on track, according to an Iowa state audit.

Auditor Mary Mosiman's office acknowledged the positive impact of the agreement on the district's books, but suggested the restructuring was no panacea. "Significant uncertainties remain regarding the district's ability to continue its operations and to satisfy its obligations to its creditors on a timely basis," the audit reads. "Consequently, adjustments may be required to the recorded asset amounts and the classification of liabilities."

The annual audit, which covered the district's financial results ending Dec. 31, 2012, illustrates the district's struggles prior to the restructuring struck this past spring with Assured Guaranty Corp. and the U.S. Department of Agriculture's Rural Development Agency.

The federal agency provided $45 million in loans, on which Xenia had fallen into the arrears, and Assured backs the district's remaining $80 million of debt from a 2006 bond sale. The insurer in 2010 and 2011 covered about $2.5 million in missed bond payments which are due in January and June.

After several years of negotiations, the district this spring finally won a restructuring from the federal agency and the forbearance from Assured that it believes will drive its long-term solvency.

Neither creditor is forgiving Xenia's principal, but each has agreed to ease some repayment terms that will give the agency breathing room. Assured is giving the district more time to make good on its claims related to the defaulted payments and replenish reserves, and is lowering the interest rate on its claims. The federal agency lowered the district's interest rate. The Iowa Finance Authority also agreed to restructure a $1.4 million loan.

Operating revenue fell by almost 37% to $12.2 million in 2012. Revenues included water sales of $11.4 million and system connection fees of $383,764. The decrease was primarily due to gains of from the sale of capital assets and $6.7 million from forgiveness of debt by a creditor that bolstered 2011 results. Expenses totaled $14.3 million in 2012, a 6.8% decrease from the prior year due primarily to decreased operating and interest expense.

The district closed out 2012 with $129 million in long term debt. Its net position decreased by 69%, or $2 million, in 2012 to $937,276. The big change between 2011 and 2012 was primarily the result of interest expense and a loss due to the write down of surplus land to fair market value, the audit shows.

The district "has not produced sufficient net revenues (gross revenues less on-going costs of operation and maintenance) to stay current on debt payments and to replenish its debt reserves" although it was able to make its 2012 debt service payments, the audit reads.

The district argues that the audit looks at its 2012 numbers and reaches conclusions regarding its future solvency that are unduly negative.
"I feel confident in the direction we are going," said Xenia controller Gary Andrews. "Revenues at this time are not enough to cover the debt, replenish the reserves, and set aside money for capital" expenses, but the forbearance and restructuring gives the district time to meet all its obligations. "No one currently has to make a payment on our behalf," Andrews said, referring to the need for Assured to cover past bond payments.

The district acknowledges that even with the restructuring its finances are tight and the loss of one its large commercial users could cause problems. Ongoing rate increases will be needed or an increase in its users to meet a projected picture through 2041 that was part of the restructuring agreement.

The district has seen more interest from potential users "now that Xenia has a future," Andrews said of the added benefits of the restructuring.

The auditor's office agrees that the restructuring and forbearance offer significant help to the district, but deputy auditor Andy Nielsen said "there is still some uncertainties too" that the district can meet all its obligations, and the office would be "remiss" not to note those concerns.

Nielsen said the district's hiring of LD McMullen to serve as its chief executive office and general manager was another positive, given his reputation in water management. McMullen is the retired CEO and general manager Des Moines Water Works in Iowa.

Xenia announced the restructuring agreement on $45 million of debt owed to the federal agency in April. The new interest rate will save Xenia's members about $20 million during the next 40 years.

The restructuring was needed to cement Xenia's forbearance with Assured. The insurer did not forgive any bond payments, but the terms ease repayment of Assured's claims from past debt service defaults and extend the time during which it must replenish reserves and restore its compliance with bond covenants.

Under terms of the agreement, the district will pay Assured $2.5 million to cover its missed payments and accrued interest over 17 years with interest only payments during the first nine and principal payments in the remaining eight years. The District has agreed to future water rate increases necessary to meet debt service coverage ratio requirements. It had long sought to stave off steep increases over fears it would lose customers.

Assured also agreed to waive some expenses it had been seeking reimbursement for as long as no termination events are triggered. As part of the pact, Assured dropped its lawsuit against Xenia seeking a court receiver. The interest rate on the 2006 bonds and debt service remains unchanged.

The IFA loan of $1.4 million will be repaid in a lump sum in 2032 with no interest.

Xenia serves 9,400 customers in central and north central Iowa. The district's water revenues had long fell short of what was needed to cover debt service on the 2006 bonds, although it did make its 2012 payments. It depleted reserves and began tapping insurance coverage to cover shortages in 2010.

Standard & Poor's dropped the credit to D in 2010. Some blame Xenia's rapid expansion for its fiscal crisis. It took on debt to fund expansion of its water-delivery capacity north to the Minnesota border, and beginning in 2002 to build waste-treatment facilities serving customers that have been slow to join the district, contributing to operating deficits. Under Iowa law, the district cannot file for bankruptcy.

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