CHICAGO — Even with a water rate increase expected to boost revenues, the Xenia Rural Water District still faces possible insolvency as its revenues can’t keep up with repayment of its $140 million of debt, according to a new Iowa state auditor’s report.
Auditor David Vaudt’s office concluded the district is grappling with conditions that raise doubt over its ability to continue as a financially viable business.
“There are significant uncertainties regarding the district’s ability to continue its operations and to satisfy its creditors on a timely basis. In addition, the district has been unable to renegotiate its borrowings from its lenders,” the district-commissioned audit of its fiscal 2009 financial statements found. The audit is at auditor.iowa.gov/reports/0933-0037-B000.pdf.
The report offered little good news for the district, which defaulted on a June debt-service payment owed on $83 million of 2006 revenue bonds. The district drained its debt-service reserve to make all but $69,000 of the $1.88 million interest payment. A request to cover the shortfall has been submitted to CIFG Assurance NA, which insured the bonds. After the default,
Standard & Poor’s downgraded to D the district’s already junk rating of BB. The district has drawn on the reserve to cover debt-service payments since December 2008. Standard & Poor’s stripped the credit of investment-grade status last summer when it lowered it to BB from BBB.
The district has proposed a workout plan that relies on a rate increase and $45 million of debt relief leading to a sale of its assets for $110.5 million to the Des Moines Water Works. The district approved a 22% rate increase in March but Xenia has yet to win the debt relief from the U.S. Department of Agriculture’s Rural Development Agency and the bond insurer.
Assured Guaranty Corp. is acting as CIFG’s agent under a reinsurance agreement executed early last year. While Assured continues to work as CIFG’s agent, CIFG is on the hook for the June shortfall as Assured has rejected the Xenia reinsurance policy.
A USDA spokesman said the agency continues to review the debt relief request, and Assured said it continues to work with the parties of the transaction to resolve the situation as administrator of the policy.
The district’s net assets fell by 34 %, or $4.3 million, in 2009 and 2.9%, or $403,000, in 2008 due to operations, according to the audit. The district’s liabilities as of Dec. 31, 2009, exceeded assets by $9.4 million.
The district saw a 21% increase in operating revenue in 2009 due to a rate increase last year but operating expenses shot up by 36% due mostly to increased interest and depreciation expenses. The auditor’s report noted that the review was conducted on 2009 financial statements and that the district will see increased revenue from the March rate increase. Still, revenues are expected to fall short of the district’s debt service requirements.
The agency fell into arrears on payments owed to the USDA on $45 million worth of loans last September, and it remains in violation of monthly deposit requirements tied to its USDA loans and the 2006 bond resolution requiring it to replenish its reserve and to meet an applicable debt service coverage test.
Xenia, which has 9,000 members, took on its debts to fund a rapid expansion of its water delivery capacity north to the Minnesota border and waste treatment facilities beginning in 2002 to serve customers that have been slow in joining the district, contributing to operating deficits. The district also experienced cost overruns on a connection line to an ethanol plant, according to published reports. It serves customers in 11 counties to the north and west of Des Moines.
The district’s customer base has grown steadily, at an average annual rate of 5.3%, increasing to about 9,300 at fiscal year-end 2008 from 7,550 at fiscal year-end 2005, according to Standard & Poor’s.