Washington, D. C. 20549
☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
□ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No
□
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ☑ No □
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large
accelerated filer," "accelerated filer" , "smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
□ Large accelerated filer ☑ Accelerated filer □ Non-accelerated filer
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. □
As of May 5, 2020, the Registrant had 34,796,106 shares of common stock, par value $0.01 per share, outstanding.
Cadiz Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
Cadiz Inc.
Condensed Consolidated Balance Sheets (Unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
Cadiz Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
Cadiz Inc.
Condensed Consolidated Statements of Stockholders' Deficit (Unaudited)
($ in thousands, except share data)
Cadiz Inc.
Condensed
Consolidated Statements of Stockholders' Deficit (Unaudited)
($ in thousands, except share data)
See accompanying notes to the unaudited condensed consolidated financial statements.
Cadiz Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 1 – BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements and notes have been prepared by Cadiz Inc., also referred to as “Cadiz” or “the Company”, without audit and should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The foregoing Condensed Consolidated Financial Statements include the accounts of the Company and contain all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair
statement of the Company’s financial position, the results of its operations and its cash flows for the periods presented and have been prepared in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results
for the entire fiscal year ending December 31, 2020.
Liquidity
The Condensed Consolidated Financial Statements of the Company have been prepared using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal
course of business. The Company incurred losses of $20.5 million for the three months ended March 31, 2020, compared to $7.3 million for the three months ended March 31, 2019. $12.4 million of this higher first quarter loss was a one-time non-cash
charge, reflecting the excess of the fair value of the new preferred stock issued over the historical book value of the related convertible debt retired pursuant to Conversion and Exchange Agreements (see Note 2 – “Long-Term Debt”). The Company had
working capital of $6.7 million at March 31, 2020 and used cash in its operations of $4.4 million for the three months ended March 31, 2020.
Cash requirements during the three months ended March 31, 2020 primarily reflect certain administrative costs related to the Company’s water project development efforts. Currently, the Company’s sole focus is the
development of its land and water assets.
In November 2018, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $25 million from time
to time in an “at-the-market” offering (the “November 2018 ATM Offering”). The Company completed the offering during March 2020, having issued a total of 2,369,170 shares of common stock in the November 2018 ATM Offering for gross proceeds of $25
million and aggregate net proceeds of approximately $24.2 million.
In May 2017, the Company entered into a new $60 million credit agreement (“Credit Agreement”) with funds affiliated with Apollo Global Management, LLC (“Apollo”) that replaced and refinanced its then existing $45 million
senior secured mortgage debt (“Prior Senior Secured Debt”) and provided $15 million of new senior debt to fund immediate construction related expenditures (“Senior Secured Debt”). The Company’s Senior Secured Debt and its convertible notes contain
representations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit the Company’s ability to incur additional indebtedness, incur liens, pay dividends or make restricted payments, dispose of
assets, make investments and merge or consolidate with another person. However, while there are affirmative covenants, there are no financial maintenance covenants and no restrictions on the Company’s ability to issue additional common stock to fund
future working capital needs. The debt covenants associated with the Senior Secured Debt were negotiated by the parties with a view towards the Company’s operating and financial condition as it existed at the time the agreements were executed. At
March 31, 2020, the Company was in compliance with its debt covenants. Additionally, the Company entered into an agreement with Apollo that allows the Company to extend the maturity of the Apollo debt for an additional year from its current
contractual maturity of May 2021 to May 2022 at the Company’s option. (see Note 2 – “Long-Term Debt”).
On March 5, 2020, the Company entered into Conversion and Exchange Agreements (the “Exchange Agreements”) with certain holders (the “Holders”) of the Company’s 7% Convertible Senior Notes due 2020 (the “Convertible
Notes”) having an aggregate original principal amount of $27.4 million. Pursuant to the terms of the Exchange Agreements, the Holders exchanged an aggregate amount payable of $27.3 million under the Convertible Notes for an aggregate of 10,000
shares of Series 1 Preferred Stock and the Holders converted the remaining aggregate amount payable of $17.5 million of Convertible Notes into 2.6 million shares of common stock in accordance with the terms of the existing Indenture. Following the
transactions, all of the Convertible Notes held by the Holders, as well as all the remaining Convertible Notes held by others that were converted in accordance with the existing Indenture at maturity have been satisfied in full and cancelled.
The Company’s acquisition of a 124-mile extension of its Northern Pipeline will require a $19 million payment within 180 days upon completion of certain conditions precedent under the purchase agreement with El Paso
Natural Gas Company (“EPNG”). If the acquisition of the 124-mile segment is not completed, then the Company’s Northern Pipeline opportunities will be limited to the 96-mile segment it already owns.
The Company may meet its debt and working capital requirements through a variety of means, including extension, refinancing, equity placements, the sale or other disposition of assets, or reductions in operating costs.
Limitations on the Company’s liquidity and ability to raise capital may adversely affect it. Sufficient liquidity is critical to meet the Company’s resource development activities. Although the Company currently
expects its sources of capital to be sufficient to meet its near-term liquidity needs, there can be no assurance that its liquidity requirements will continue to be satisfied. If the Company cannot raise needed funds, it might be forced to make
substantial reductions in its operating expenses, which could adversely affect its ability to implement its current business plan and ultimately its viability as a company.
Supplemental Cash Flow Information
Under the terms of the Senior Secured Debt, the Company is required to pay 25% of all future quarterly interest payments in cash. During the three months ended March 31, 2020, approximately $355 thousand in interest
payments on the corporate secured debt was paid in cash. No other principal payments are due on the Senior Secured Debt or the Company’s convertible notes prior to their maturities.
During the three months ended March 31, 2020, approximately $38.9 million in convertible notes were converted into common stock by certain of the Company’s lenders. As a result, 5,766,337 shares of common stock were
issued to the lenders. This conversion activity represents a non-cash financing activity. Pursuant to the terms of Conversion and Exchange Agreements, as discussed above, approximately $27.3 million of Convertible Notes were exchanged for an
aggregate of 10,000 shares of Series 1 Preferred Stock.
At March 31, 2020, accruals for purchases of PP&E received was $516 thousand, and are expected to be paid in the second fiscal quarter of 2020.
The balance of cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows is comprised of the following:
The restricted cash amounts included in Other Assets primarily represent a deposit from a water project participant related to a cost-sharing agreement.
Recent Accounting Pronouncements
Accounting Guidance Not Yet Adopted
In December 2019, FASB issued an accounting standards update which reduces complexity in accounting standards by removing certain exceptions to the general principles in Topic 740. This update is effective for fiscal
years beginning after December 15, 2021, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the
consolidated financial statements.
In June 2016, FASB issued an accounting standards update which introduces new guidance for the accounting for credit losses on certain financial instruments. This update is effective for fiscal years beginning after
December 15, 2023, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial
statements.
Accounting Guidance Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which modifies the disclosure requirements for fair value measurements. This update is effective for fiscal years
beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance on January 1, 2020. The adoption of this update modified our disclosures, but had no impact on
the Company’s condensed consolidated financial statements (see Note 7 – “Fair Value Measurements”).
In August 2018, the FASB issued an accounting standards update on a customer’s accounting for implementation costs incurred in a cloud computing arrangement. This update is effective for fiscal years beginning after
December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance on January 1, 2020, and the new standard had no impact on the Company’s condensed consolidated financial
statements.
NOTE 2 – LONG-TERM DEBT
The carrying value of the Company’s Senior Secured Debt approximates fair value. The fair value of the Company’s Senior Secured Debt (Level 2) is determined based on an estimation of discounted future cash flows of the
debt at rates currently quoted or offered to the Company by its lenders for similar debt instruments of comparable maturities by its lenders.
On March 5, 2020, the Company entered into Conversion and Exchange Agreements (the “Exchange Agreements”) with certain holders (the “Holders”) of the Company’s 7% Convertible Senior Notes due 2020 (the “Convertible
Notes”) having an aggregate original principal amount of $27.4 million. Pursuant to the terms of the Exchange Agreements, the Holders exchanged an aggregate amount payable of $27.3 million under the Convertible Notes for an aggregate of 10,000
shares of Series 1 Preferred Stock and the Holders converted the remaining aggregate amount payable of $17.5 million of Convertible Notes into 2.6 million shares of common stock in accordance with the terms of the existing Indenture. Each preferred
share is convertible at any time at the option of the Holder into 405.05 shares of Common Stock. Following the transactions, all of the Convertible Notes held by the Holders, as well as all the remaining Convertible Notes held by others that were
converted in accordance with the existing Indenture at maturity have been satisfied in full and cancelled. Pursuant to applicable guidance, the Series 1 Preferred Stock was recorded in Stockholders’ Equity at fair value, which was determined using
an option pricing model. A loss of $12.4 million was recorded in the Condensed Consolidated Statement of Operations and Comprehensive Income, representing the excess of the fair value of the Series 1 Preferred Stock over the historical book value of
the related Convertible Notes.
On March 5, 2020, the Company entered into an agreement with its senior lender, Apollo Global Management LLC (“Apollo”), in which the Company acquired the option to extend the current May 2021 maturity date of its loan
to May 2022 (“Extension Option”). The fee to acquire the Extension Option included the repricing of 362,500 warrants held by Apollo to $6.75 and the extension of their expiration date by 36 months (“Warrant Modification”), together with an increase
in the applicable prepayment premium of up to 7% of the accreted value of the loan. Additionally, if the Company exercises the Extension Option, the exercise price of the warrants automatically decreases to $0.01 per share and the expiration date of
the warrants will automatically be extended by an additional 12 months.
At the time of the Warrant Modification, the Company recorded a warrant liability in the amount of $2.0 million, which was the carrying value of the warrant prior to modification in the amount of $0.9 million combined
with the increase in fair value of the warrant in the amount of $1.1 million. This increase in fair value of the warrant at the time of the Warrant Modification was recorded to debt issuance costs and will be amortized over the remaining life of the
Senior Secured Debt. The fair value of the warrant liability is remeasured each reporting period using an option pricing model, and the change in fair value is recorded as an adjustment to the warrant liability with the unrealized gains or losses
reflect in interest expense.
Total unrealized losses of $561 thousand for warrant liabilities accounted for as derivatives have been recorded in interest expense in the three months ended March 31, 2020.
NOTE 3 – STOCK-BASED COMPENSATION PLANS
The Company has outstanding options and stock awards pursuant to its 2009 Equity Incentive Plan, 2014 Equity Incentive Plan and 2019 Equity Incentive Plan.
Stock Options to Directors, Officers and Consultants
In total, options to purchase 115,000 shares were unexercised and outstanding on March 31, 2020 under these equity incentive plans. The Company recognized no stock option related compensation costs in each of the three
months ended March 31, 2020 and 2019. Additionally, no options were exercised during the three months ended March 31, 2020.
Stock Awards to Directors, Officers, and Consultants
The Company has granted stock awards pursuant to its 2014 Equity Incentive Plan and 2019 Equity Incentive Plan.
Of the total 675,000 shares reserved under the 2014 Equity Incentive Plan, 674,987 shares have been awarded to the Company’s directors, consultants and employees. Of the 674,987 shares awarded, 15,312 shares were
awarded for service during the plan year ended June 30, 2019. These shares became effective on that date and vested on January 31, 2020. Upon approval of the 2019 Equity Incentive Plan in July 2019, 13 shares remaining available for award under the
2014 Equity Incentive Plan were cancelled.
Of the total 1,200,000 shares reserved under the 2019 Equity Incentive Plan, 237,120 shares have been awarded to the Company directors and consultants as of March 31, 2020.
The accompanying consolidated statements of operations and comprehensive loss include approximately $1,250,000 and $122,000 of stock-based compensation expense related to stock awards in the three months ended March 31,
2020 and 2019, respectively.
NOTE 4 – INCOME TAXES
As of March 31, 2020, the Company had net operating loss (“NOL”) carryforwards of approximately $329 million for federal income tax purposes and $220 million for California state income tax purposes. Such carryforwards
expire in varying amounts through the year 2040. For federal losses arising in tax years ending after December 31, 2017, the NOL carryforwards are allowed indefinitely. Use of the carryforward amounts is subject to an annual limitation as a result
of ownership changes.
As of March 31, 2020, the Company possessed unrecognized tax benefits totaling approximately $1.5 million. None of these, if recognized, would affect the Company's effective tax rate because the Company has recorded a
full valuation allowance against these assets.
Because it is more likely than not that the Company will not realize its net deferred tax assets, it has recorded a full valuation allowance against these assets. Accordingly, no deferred tax asset has been reflected in
the accompanying condensed consolidated balance sheet.
NOTE 5 – NET LOSS PER COMMON SHARE
Basic net loss per share is computed by dividing the net loss by the weighted-average common shares outstanding. Options, deferred stock units, convertible debt, convertible preferred shares and warrants were not
considered in the computation of net loss per share because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 1,679,000 and
11,707,000 for the three months ended March 31, 2020 and 2019, respectively.
NOTE 6 – LEASES
The Company has operating leases for corporate offices, vehicles and office equipment. The Company’s leases have remaining lease terms of 5 months to 17 months as of March 31, 2020, some of which include options to
extend or terminate the lease. However, the Company is not reasonably certain to exercise options to renew or terminate, and therefore renewal and termination options are not considered in the lease term or the right-of-use asset and lease liability
balances. The Company's current lease arrangements expire from 2020 through 2021. The Company does not have any finance leases.
Lease balances. Amounts recognized in the accompanying consolidated balance sheet as of March 31, 2020 and December 31, 2019 are as follows (in thousands):
Lease cost. The Company’s operating lease cost for the three months ended March 31, 2020 was $11,625.
Lease commitments. The table below summarizes the Company’s scheduled future minimum lease payments under operating, recorded on the balance sheet as of March
31, 2020 (in thousands):
The table below presents additional information related to our leases as of March 31, 2020:
From a lessor standpoint, in February 2016, the Company entered into a lease agreement with Fenner Valley Farms LLC (“FVF”) (the “lessee”), a subsidiary of Water Asset Management LLC, a related party, pursuant to which
FVF is leasing, for a 99-year term, 2,100 acres owned by Cadiz in San Bernardino County, California, to be used to plant, grow and harvest agricultural crops (“FVF Lease Agreement”). As consideration for the lease, FVF paid the Company a one-time
payment of $12.0 million upon closing. The Company expects to receive rental income of $420 thousand annually over the next five years related to the FVF Lease Agreement.
On July 31, 2019, the JV entered into a lease agreement (the
“Lease Agreement”) with the Company whereby the JV will cultivate industrial hemp on up to 9,600 acres at the Company’s agricultural property in eastern San Bernardino County, California (“Cadiz Ranch”). Under the terms of the Agreement, the JV
initially leased 1,280 acres at the Cadiz Ranch and holds options to lease up to 8,320 additional acres by 2022. The Lease Agreement was amended in March 2020 to reduce the initially leased acreage to 242 and extend the options to lease the
remaining acreage until 2023. The Agreement has an initial term of five years and the JV has the option to extend the term for three successive periods of five years each. In consideration for the lease arrangement, the JV will provide the Company
an annual rental payment equal to $500 per acre of leased property, subject to periodic CPI adjustment. The lease commenced on March 1, 2020 when the Company completed certain activities to bring the property to the specification required by the
JV. Assuming no further options are exercised, the Company expects to receive rental income of approximately $121 thousand annually over the next five years related to the JV Lease Agreement.
NOTE 7 – FAIR VALUE MEASUREMENTS
The following table presents information about warrant derivative liabilities, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values
determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. We consider a security that trades at least weekly to have an active market. Fair values determined by Level 2 inputs utilize data
points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market
activity for the asset or liability.
On March 5, 2020, the Company entered into an amendment to a warrant agreement with its senior lender which, among other provisions, repriced 362,500 warrants held by the senior lender to $6.75 (the “Warrant”) (see Note
2 – “Long-Term Debt”, above). As a result, the Company reclassified the carrying value of the Warrant prior to the modification from additional paid-in capital in the amount of $865 thousand to a warrant liability, as the Warrant met the definition
of a derivative. In addition, the Company recorded debt issuance costs in the amount of $1.1 million, which was the increase in fair value of the warrant at the time of the modification. The fair value of the warrant liability is remeasured each
reporting period using an option pricing model, and the change in fair value is recorded as an adjustment to the warrant liability with the unrealized gains or losses reflect in interest expense. As of March 31, 2020, the company recognized a loss
of $561 thousand related to the remeasurement of the warrant derivative liability at fair value.
The following table presents a reconciliation of Level 3 activity for the three month period ended March 31, 2020:
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the following discussion contains trend analysis and other forward-looking statements.
Forward-looking statements can be identified by the use of words such as "intends", "anticipates", "believes", "estimates", "projects", "forecasts", "expects", "plans" and "proposes". Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. These include, among others, our ability to
maximize value from our land and water resources and our ability to obtain new financings as needed to meet our ongoing working capital needs. See additional discussion under the heading "Risk Factors” in Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2019. Our forward-looking statements are made only as of the date hereof. We assume no duty to update these forward-looking statements to reflect new, changed or unanticipated events or circumstances, other than as
may be required by law.
Overview
We are a natural resources development company dedicated to creating sustainable water and agricultural opportunities in California. We own approximately 45,000 acres of land with high-quality, naturally recharging
groundwater resources in three areas of Southern California’s Mojave Desert. These properties are located in eastern San Bernardino County situated in close proximity to major highway, rail, energy and water infrastructure, including the Colorado
River Aqueduct (“CRA”), which is the primary transportation route for water imported into Southern California from the Colorado River.
Our properties offer opportunities for a wide array of sustainable activities including water supply projects, groundwater storage, large-scale agricultural development and land conservation and stewardship programs. In
addition to our land and water assets, we also own pipeline and well infrastructure able to irrigate existing agriculture and to convey water to and from other communities and agricultural ventures that may be short of supply and/or storage.
Our main objective is to realize the highest and best use of our land, water and infrastructure assets in an environmentally responsible way. We believe that the highest and best use of our assets will be realized
through the development of a combination of water supply, water storage and agricultural projects in accordance with a holistic land management strategy. Our present activities are focused on developing our assets in ways that meet growing long-term
demand for access to sustainable water supplies and agricultural products.
Upon our founding in 1983 as Cadiz Land Company, we began an agricultural development on a portion of our primary property in Cadiz, California, which is a 34,500-acre property at the base of the Fenner and Orange
Blossom Wash watersheds in eastern San Bernardino County (the “Cadiz/Fenner Property”). These watersheds span an area of more than 1,300 square miles and have 17 to 34 million acre-feet of fresh, high-quality groundwater in storage – an amount
comparable to Lake Mead, America’s largest surface reservoir.
We have sustainably farmed portions of the Cadiz/Fenner Property since the late 1980s in accordance with permits from the County of San Bernardino, the public agency responsible for groundwater use at the Cadiz/Fenner
Property. The permits authorize the development of up to 9,600 acres of the Cadiz/Fenner Property for farming and the associated use of underlying groundwater for irrigation.
The Cadiz/Fenner Property is well-suited for various permanent and seasonal crops, and we have successfully grown citrus, organic table grapes and raisins, and seasonal vegetables such as melons, squash and asparagus.
Today, we are engaged in agricultural joint ventures at the Cadiz/Fenner Property and are the largest private agricultural operation in San Bernardino County. Presently, the property has 2,100 acres leased to third parties for cultivation of citrus
and 242 acres leased to our joint venture, SoCal Hemp JV LLC, for the cultivation of industrial hemp (see “Agricultural Development”, below).
In addition to our agricultural ventures, we are presently developing the Cadiz Valley Water Conservation, Recovery and Storage Project (“Water Project” or “Project”), which is approved to capture and conserve millions
of acre-feet of native groundwater currently being lost to evaporation from the aquifer system beneath our Cadiz/Fenner Property, and provide 50,000 acre-feet of water per year, enough water for 400,000 people, to water providers throughout Southern
California (see “Water Resource Development”, below). A second phase of the Water Project would offer storage in the aquifer system for up to one million acre-feet of imported water. Following a multi-year
California Environmental Quality Act (“CEQA”) review and permitting process, the Water Project received permits that allow the capture and conservation of 2.5 million acre-feet of groundwater over 50 years in accordance with the terms of a
groundwater management plan approved by San Bernardino County. We believe that the ultimate implementation of the Cadiz Water Project would provide a significant return on our investment and future cash flow.
By making new water supply and storage available in Southern California, we believe we can be part of the solution to the State’s persistent water challenge. Available water supply in Southern California is constrained
every year by regulatory restrictions on each of the State’s three main water sources: (1) the CRA; (2) the State Water Project, which provides water supplies from Northern California to the central and southern parts of the state; and (3) the Los
Angeles Aqueduct, which delivers water from the eastern Sierra Nevada mountains to Los Angeles. Southern California’s water providers and farmers rely on imports from these systems to meet demand, but deliveries from all three into the region are
consistently below capacity, even in wet years.
Further, the availability of supplies in California differs greatly from year to year due to natural hydrological variability. Over the last decade, California experienced an historic drought featuring record-low winter
precipitation, record wet years and average years. The 2018-2019 winter was a wet year, with snowpack and rainfall well above average through the summer of 2019, however 2020 is on track to be another dry year, with snowpack at 53% of normal through
April 1st. The rapid swings between wet and dry years challenges California’s traditional supply system and supports the need for reliable storage and access to local supplies.
Given the variety of challenges and limitations presented by the State’s existing infrastructure, Southern California water providers and farmers are presently pursuing investments in storage, supply and infrastructure
to meet long-term demand and pursuing sustainable water and agriculture sources. We have a record of sustainable agricultural development and groundwater management to support our continued integration into California’s water and agriculture
portfolio.
Our current working capital requirements relate largely to the final development activities associated with the Water Project and those activities consistent with the Water Project related to further development of our
land and agricultural assets. While we continue to believe that the ultimate implementation of the Water Project will provide a significant source of future cash flow, we also believe there is substantial value in our underlying agricultural assets
and in our current agricultural ventures and lease arrangements.
We also continue to explore additional sustainable beneficial uses of our land and water resource assets, including the marketing of our approved desert tortoise land conservation bank, which is located on our properties
outside the Water Project area, and other long-term legacy uses of our properties, such as land stewardship and conservation programs.
Water Resource Development
The Water Project is designed to capture and conserve renewable native groundwater currently being lost to evaporation from the aquifer system underlying our Cadiz/Fenner Property and provide a new reliable water supply for approximately 400,000
people in Southern California. In this first phase, Phase I, the total quantity of groundwater to be recovered and conveyed to Water Project participants will not exceed a long-term annual average of 50,000 acre-feet per year for 50 years. The
Water Project also offers participants in Phase I the ability to carry-over their annual supply and store it in the groundwater basin from year to year. Up to 150,000 acre-feet can be stored as part of Phase I. A second phase of the Water Project,
Phase II, will offer up to one million acre-feet of storage capacity that can be used to hold water supplies imported to the project area.
Water Project facilities required for Phase I primarily include, among other things:
If an imported water storage component of the Project is ultimately implemented in Phase II, the following additional facilities would be required, among other things:
Phase I
Phase I has been fully reviewed and permitted in accordance with the California Environmental Quality Act (“CEQA”). The Project was also separately reviewed and approved by the County of San Bernardino in accordance
with its local ordinances regulating groundwater. The Project presently is permitted to provide an average of 50,000 acre-feet of water for 50 years at Cadiz to meet municipal and industrial (M&I) water needs in Southern California. The permits
also authorize up to 150,000 acre-feet of carry-over groundwater storage, allowing water agencies to hold conserved water in the aquifer system for future dry years.
Construction of the Water Project facilities that would allow for conservation, carry-over storage and delivery of groundwater to public water providers is expected to cost approximately $310 million and will require
capital financing that we expect will be secured by definitive Purchase and Sale Agreements with Project participants and the new facility assets.
Prior to construction, the Water Project must (1) finalize contracts with Project participating agencies, (2) finalize arrangements and secure necessary permits and approvals to transport water conserved at Cadiz via
water transportation infrastructure and into each participant’s service area, and (3) complete final design and permitting. Below is a discussion of present activities to advance these objectives.
(1) Contracts with Public Water Agencies or Private Water Utilities
We have executed Letters of Intent (“LOIs”), option agreements and purchase agreements, or contracts (collectively, “Agreements”) with public water agencies and private water utilities in California during the Project’s
development. These participating agencies serve more than one million customers in cities throughout California’s San Bernardino, Riverside, Los Angeles, Orange, Imperial and Ventura Counties. Twenty percent of Water Project supplies have been
reserved for San Bernardino County-based agencies.
Santa Margarita Water District (“SMWD”), Orange County’s second largest water provider, was the first participant to convert its option agreement and adopt resolutions approving a Water Purchase and
Sale Agreement for 5,000 acre-feet of water. The structure of the SMWD purchase agreement calls for an annually adjusted water supply payment, plus a pro rata portion of the capital recovery charge and operating and maintenance costs. The capital
recovery charge is calculated by amortizing the total capital investment by the Company over a 30-year term.
Agreements entered
into prior to the beginning of the CEQA review process provide to participants the right to acquire an annual supply of 5,000 acre-feet of water at $775 per acre-foot (2010 dollars, subject to adjustment), which is competitive with the incremental
cost of new water. In addition, these agencies received options to acquire storage rights in the Water Project to allow for the management of their Water Project supplies in complement with their own water resources. Up to 150,000 acre-feet of
carry-over storage is available for reservation by the agencies prior to construction commencement. Participants that elect to achieve year-to-year flexibility in their use of Project water by utilizing carry-over storage will reserve storage
capacity for $1,500 per acre-foot prior to construction.
LOIs that have been entered into since completion of the CEQA review process reserve supplies from the Water Project at $960 per acre-foot (2014 dollars, subject to adjustment).
These LOIs also include the option to reserve carry-over storage capacity for $1,500 per acre-foot prior to construction.
Prior to construction of the Water Project, we expect to convert existing option agreements and LOIs to purchase agreements. We will work collaboratively with the participating water agencies to allow for inclusive
participation across Southern California.
(2) Transportation Infrastructure and Conveyance Arrangements
Prior to construction of the Water Project, and in coordination with final participation contracts described in (1) above, we must obtain approvals from government agencies for conveyance of water from our property in
Cadiz to water users via the Colorado River Aqueduct (“CRA”). These approvals include:
In October 2017, the BLM provided a letter finding that the Project’s proposed use of a portion of the ARZC right-of-way from our Cadiz Valley property to Freda, California to construct and operate the
Water Project’s water conveyance pipeline and related railroad improvements is within the scope of the original right-of-way grant and not subject to additional permitting. The buried pipeline would be constructed parallel to the railroad tracks and
be used to convey water between our Cadiz Valley property and the CRA. The letter was challenged in Los Angeles Central District Federal Court in 2018 by national environmental organizations, which claimed it violated the law. In a June 2019
procedural ruling, the Court remanded the letter back to BLM, concluding that the agency needed to explain more explicitly why it withdrew and reversed specific findings previously made in 2015 on the same issue. However, the Court did not find that
the conclusions of the 2017 evaluation were in error.
On February 7, 2020 we received a letter from the BLM that was responsive to the Court’s remand (“2020 Evaluation”). The 2020 Evaluation sets forth in detail
why the Project’s proposed use of the ARZC right-of-way for the Southern Pipeline and related railroad improvements furthers multiple and substantial railroad purposes and is therefore within the scope of the right-of-way, consistent with BLM’s
conclusion in October 2017. The 2020 Evaluation references the extensive record and sets forth the precise factual basis for its conclusions in detail while reaffirming the October 2017 BLM’s findings.
Water supplies conserved by the Project would enter the CRA at the termination of the project’s conveyance pipeline near Rice, CA. The CEQA process considered a
variety of options to enter the CRA and assumed final entry into the CRA would be determined by MWD in consultation with the Project’s participating agencies. Once arrangements are reached, the Metropolitan Board would take action as a
responsible agency under CEQA regarding the terms and conditions of the Water Project’s use of the CRA to transport water to its participating agencies.
There is no application yet before Metropolitan related to entry and transportation of Project supplies, but we expect such a formal application will be filed
by SMWD, the Project’s lead agency, when the Project’s contractual arrangements with participants are finalized. Any agreement as to the terms and conditions of the Water Project's use of the CRA will be negotiated between and entered into
by Metropolitan and the Project participating agencies, not the Company.
Water Project supplies entering the CRA will comply with Metropolitan’s published engineering, design and water quality standards and will be subject to all applicable fees and charges routinely
established by Metropolitan for the conveyance of water within its service territory. Groundwater at Cadiz presently meets all state and federal water quality requirements without treatment and total dissolved solids or salts in the Cadiz water
supply are substantially lower than the water in the CRA, offering a water quality benefit. Cadiz water also has no PFAs, a recently added constituent of concern by California water regulators, improving its
attractiveness for the service area. Some naturally occurring constituents are lower than State and Federal standards but potentially higher than the water in the CRA; however, based on extensive pilot testing, they can be lowered via treatment to
ambient levels or removed entirely. This year-long pilot testing of treatment options at the Project area confirmed the capability of cost-effective treatment technologies. We believe there are multiple benefits that can be realized by MWD and
water users throughout its service area, such as water quality improvements, upon making space reasonably available for the Cadiz water supplies and providing the region the flexibility of relying on the Water Project in both wet and dry years.
On July 31, 2019, California Governor Gavin Newsom signed into law Senate Bill 307 (“SB 307”), which added terms to the section of the California Water Code
known as the “wheeling statutes” that regulate the conveyance of water by third parties in facilities such as the CRA. Effective January 1, 2020, the wheeling statutes now include Water Code Section 1815 which requires water projects in a section
of the Mojave Desert where our Cadiz Valley property is located to apply for a review by the California State Lands Commission (“SLC”) prior to transporting water in public conveyance facilities. Upon receiving an application, this review will
determine whether such projects would have “unreasonable effects on the environment and water dependent ecosystems in the surrounding watersheds.” The review by SLC must be conducted within 15 months of any filed application, with an option
to extend an additional 9 months upon public notice and explanation. Any application to the SLC for review of the Water Project’s plans to convey water in the CRA from the Cadiz/Fenner Property will be accompanied by evidence of the Project’s
extensive record of environmental sustainability as well as data and reports that can withstand critical scrutiny.