CHICAGO — The Xenia Rural Water District’s financial position worsened in 2010, moving it closer to insolvency and increasing the pressure on the Iowa agency and its creditors to come to some agreement that likely includes debt forgiveness, according to a state audit.

The district’s current liabilities exceed assets by $12.2 million, according to state auditor David Vaudt’s recently released report. Xenia closed its books on last year with $10.5 million of revenue, less than 1% over what it collected the previous year, with water sales accounting for $9.5 million. At the same time, it had $19.8 million in expenses, a 54.4% increase over the previous year, including $6 million for interest costs.

The district ended 2010 with $140.1 million of liabilities, including $83 million of water revenue bonds. Water revenues have fallen short of the amount needed to cover recent debt-service payments and reserves are depleted, but insurance has covered the difference.

The audit is available at http://auditor.iowa.gov/reports/1033-0037-B000.pdf.

District officials did not return a call to comment by press time.

“The district is working on a proposal to restructure its debt. However, 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,” read the audit that warned the district’s fiscal position raises “substantial doubt” over its “ability to continue as a going concern.”

The district in March unveiled a five-year restructuring to restore it to fiscal solvency, but it hinges on the willingness of some creditors to forgive portions of their debt holdings. The proposal is far from final and must win approval from all creditors. District officials have said most of the creditors are onboard though they have not formally committed to the plan in writing, but there are holdouts.

Bondholders would continue to receive their principal and interest as scheduled. District revenues fell short of meeting the June and December 2010 debt service payments owed on its 2006 water revenue bonds but CIFG Assurance North America Inc. covered the shortfalls. The district anticipates another shortage in the upcoming June payment, leaving the trustee to seek full payment from CIFG.

The plan asks CIFG to forgo any effort to recoup the $1.33 million it provided to fully meet the scheduled payments. The workout proposal also asks Assured Guaranty, which is acting as CIFG’s agent under a 2009 reinsurance agreement, to forgive $650,000 in legal fees.

Xenia also wants the U.S. Department of Agriculture’s Rural Development Agency to refinance its existing loans at a lower rate of 2.875%. The district has defaulted on its USDA loans, which total $45.6 million. The loans are on parity with the 2006 bonds and all remaining debts are subordinate.

The plan asks the Iowa Finance Authority to reamortize existing loans of $1.4 million and requests that Bank of America accept $1.6 million, which represents $19.73 cents on the dollar, for $8.1 million of notes. Bank of America last September filed a lawsuit against the district demanding repayment and a trial date is set for the summer.

The water district would raise water rates and sell off a series of assets to raise funds for the restructuring, replenish reserves and fund necessary capital projects. Customers already saw a 22% increase last year and a 6% increase in 2009. If all parties agree to the workout plan, the proposed rate increase this year would be limited to 5%. The district fears it would lose customers if too high a rate increase is needed.

The board has pressed for state legislation that would allow it to declare bankruptcy, but that effort has faltered. Such authority would give the district more bargaining power with creditors, district officials have said. The district also is looking for a new executive director following the resignation of interim executive director Marc DeLong, who had agreed last year to take the post temporarily and helped craft the workout proposal.

Standard & Poor’s rates the credit D. 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. The district serves 9.400 customers.

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