The Modesto Irrigation District, hoping to borrow $94 million on Thursday, understandably is putting on its best possible face for potential investors.
Bond documents suggest the public utility is a pretty safe investment. Consider that MID leaders have increased reserves 62 percent in the past five years, boosting savings to $195 million, and at the same time reduced debt 11 percent, from $892 million to $802 million.
A few days ago, Fitch Ratings bumped up MID’s credit rating on three outstanding bonds from A to A+, citing “MID’s improved and stabilized financial metrics” leading to “improved margins,” thanks to “rate increases, improved sales and low natural gas prices” for generating electricity.
Though A+ is fifth best on the rating scale – the highest is AAA – the MID grade still is “a solid rating,” said Matthew Reilly, primary analyst on the MID report in Fitch’s San Francisco office. “And an upgrade is positive, in our view.”
A close look at bond documents by those following MID issues, however, could raise important questions.
For example, a trust agreement says MID enjoyed a $106 million profit from selling electricity in 2014, representing net power revenue minus expenses (up from $87 million in 2013). That could catch someone’s eye because the district’s audited financial statements – the premier data source if you’re following MID’s financial health – does not cleanly separate power and water revenues, making it difficult to judge how much the former subsidizes the latter.
MID leaders have acknowledged for at least two decades that electricity customers are paying more so that farmers might pay less for water, but attempts to make things more fair have gone in fits and starts. For example, the MID board has raised water rates twice in as many years, but has left alone power rates for three years.
In November, MID staff proposed upping electricity bills 3.5 percent even before considering whether to change irrigation water prices in January. At the time, The Modesto Bee asked for a true accounting of power profit. The Stanislaus Taxpayers Association, similarly frustrated by lack of clarity in MID’s audited financials, suggested segregating power and water line items listed in MID’s operating revenue and expense summaries. That computation would show electric profit of $122 million in 2013.
MID officials rigorously rejected that reckoning because it doesn’t contemplate costs shared by “both sides of the house,” meaning power and water. Both services, for example, rely on the district’s human resources, attorneys, general manager’s office, public relations and information technology workers. Those costs can be substantial, but the district has never identified how much of employees’ time might be attributed to the power side as opposed to the water side.
In light of staff’s November proposal to raise power prices – and the MID board’s repeated claims of transparency – The Bee asked for a profit estimate, and Jimi Netniss, the district’s assistant treasurer and pricing manager, complied. He noted that some costs are impossible to assign to one side or the other, but provided numbers that for the first time represented actual estimates from MID.
They suggested that the district in the previous four years had charged electricity customers an average of $44 million more per year than it cost MID to provide that power. It’s well known that the district uses excess to pay down debt, build savings and subsidize farmers, and The Bee has repeated the profit estimate in numerous reports over the past seven months, along with irrigation deficits of more than $11 million per year.
23 The percentage of MID’s total energy used by its 10 largest customers
16 The percentage of MID’s total energy revenue coming from its 10 largest customers
But Netniss’ $44 million electricity profit estimate for 2013 amounts to only about half of the $87 million figure cited in recent bond documents.
Why the difference?
“We keep audited books for the entity as a whole,” said Scott Van Vuren, assistant general manager in charge of finance. “We have separate revenue accounts for electricity and water,” but costs for both are rolled into one, he said.
Asked for a demonstration showing how Netniss computed his profit estimate, using updated numbers, Van Vuren said it might not be possible, “but we can get close.”
A few days later, Netniss declined. He said that in November, he was trying to be helpful without considering journalistic intent.
“We can’t take the same logic and apply it. The data don’t exist at that level. It would be inaccurate and incomplete,” Netniss said, because “it’s a unified business.”
Asked to show how he computed his profit estimate in November, Netniss again refused, saying he had used unaudited financial records that are unavailable to the public.
“I wasn’t sure (in November) what the info would be used for,” Netniss said. “Now that we’re understanding the context, that’s not a complete portrayal of operations by business unit. ... We don’t operate that way.”
Reilly, of Fitch Ratings, said it’s “not uncommon” for utilities to combine bookkeeping, as MID does. MID’s claims of $87 million in 2013 electricity profit, and $106 million in 2014, are not accurate, but Fitch hedges by explaining in its credit report that it’s based on analyzing consolidated reports, Reilly said.
The Fitch report also notes the MID “electric system’s financial support of the irrigation system,” without citing numbers, and notes that bonds would be repaid entirely with electric revenue.
“This helps a potential investor understand that if they try to isolate the electric system, you’ll maybe come up with different numbers,” Reilly said.
More important to a would-be investor, Van Vuren said, is MID’s debt service coverage ratio of 1.63, which divides the district’s electricity revenue by how much it’s required to repay each year. The number means MID can cover its debt payment entirely and have 63 percent left over.
Reilly said Fitch crunched its own numbers and gave MID a 1.54 rating. But the 2014 median ratio for public power utilities receiving the same A+ rating is much higher, at 2.39, he said. The Fitch report also cites MID’s “elevated debt levels” that are “much higher than comparable utilities.”
Standard & Poor’s, another ratings agency, confirmed the A+ rating, MID spokeswoman Melissa Williams said.
“This will help us sell the new 2015 electric revenue bonds and achieve the best possible interest rates,” she said.
Of the $94 million in bonding, $51 million would buy power lines, poles and other transmission equipment and $20 million is earmarked for better billing and customer information systems. The rest would refinance a bond issued in 2006, to take advantage of better interest rates.
Board member John Mensinger noted a clause in bond covenants requiring MID to raise electricity prices if profits dip too much.
The Fitch report said “a sufficient rate increase” might keep MID’s credit rating from plunging, if the district doesn’t emerge victorious in negotiations over its exit from part ownership of a coal-fired New Mexico energy plant.
According to MID’s loan repayment schedule, the district expects through 2045 to pay $431 million in interest on $613 million in loans, for a total of more than $1 billion owed.
The subsidy debate has featured scathing commentary from two retired MID administrators, a retired Modesto deputy city manager and a former utility administrator in Iowa, all asking the board to stop giving preferential treatment to 3,100 farm accounts at the expense of MID’s 116,000 electricity customers.
The MID board responded by rejecting the proposed power increase in December and restructuring water prices in March, with the average farmer paying about 40 percent more. At a public hearing set for July 14, farmers face a drought surcharge estimated at $16 per acre, compared with last year’s $11.91 per-acre surcharge.
Even after upping irrigation rates, revenue of $3.16 million this year will cover a mere 16.8 percent of MID’s true cost of delivering water. The Fitch report notes “evidence of an inability or unwillingness to raise rates to recover costs in a timely manner.”
In January, the board hosted a workshop to explore the “cost of service” idea, or charging customers of both core services about what it costs to provide them. The board, however, declared that a tall order after 92 years of mixed accounting, and backed away.
Critics note that farmers continue to control a majority of the board’s five seats. Nick Blom and Larry Byrd, both growers, are up for re-election in November.
Mensinger noted in an interview Friday that when MID really wants to, it can divide bookkeeping among the power and water sides. That’s how it works for the district’s third service, domestic water, which MID purifies in a treatment plant and delivers to the city of Modesto, which mixes it with well water for delivery to people’s taps.
Because costs must be parsed and divided between MID and the city, “we do come up with assumptions,” or estimates on who owes what, Mensinger said. “I think there is always going to be a certain lack of precision,” he added.
Why can’t MID do the same with its water and power bookkeeping?
“You want to move in that direction and get closer and closer,” said Mensinger, who represents an urban district. “But right now, there is not agreement on the board. There is agreement that irrigation rates should be raised over time. We did that this year and I think you’re going to see more in the future.”
Garth Stapley: (209) 578-2390