8-K: Cadiz Inc. Secures Water Supply Agreement with Cucamonga Valley Water District

Cadiz Inc. has entered into a water supply agreement with Cucamonga Valley Water District for the delivery of 5,000 acre-feet of water per year from the Cadiz Water Conservation, Supply and Storage project.

Summary

• Cadiz Inc., along with its subsidiary Cadiz Real Estate, LLC, and Fenner Gap Mutual Water Company, have signed a water supply agreement with Cucamonga Valley Water District (CVWD).
• The agreement stipulates that CVWD will purchase 5,000 acre-feet of water per year from the Cadiz Water Conservation, Supply and Storage project.
• The water will be delivered through Cadiz's Northern Pipeline, a 220-mile existing steel pipeline, via an exchange with California State Water Project contractors.
• The price for the water will be a maximum of the lesser of $1,650 per acre-foot or the prevailing cost of recycled water recharge from the Inland Empire Utilities Agency minus 15%.
• Cadiz expects to receive net revenue of $850 per acre-foot in 2024 dollars, or $170 million over 40 years, subject to annual inflation adjustments.
• The agreement is subject to certain conditions precedent, including securing necessary permits and agreements, and obtaining sufficient funding.
• The term of the agreement is 30 years, with options for 10-year extensions, and may be extended if the full delivery obligation is not met.

Sentiment

Score: 7

Explanation: The document is positive overall, highlighting a significant agreement that secures a revenue stream for the company. However, there are risks and uncertainties associated with the project, which temper the overall sentiment.

Positives

• The agreement secures a significant customer for Cadiz's water project, utilizing 20% of the Northern Pipeline's capacity.
• The agreement provides a predictable revenue stream for Cadiz over the next 30 years, with potential for extensions.
• The pricing structure includes a maximum price, protecting CVWD from excessive costs, while also providing a minimum revenue for Cadiz.
• The agreement includes provisions for pursuing grant funding to reduce capital costs, potentially increasing profitability.
• The agreement allows for annual price adjustments based on an agreed upon index, protecting Cadiz from inflation.

Negatives

• The agreement is subject to several conditions precedent, including obtaining permits and funding, which could delay or prevent the project from moving forward.
• The price of water is capped, which could limit Cadiz's potential revenue if market prices increase significantly.
• The agreement includes a target price of $1,000 per acre-foot, which may be difficult to achieve.
• CVWD has the right to terminate the agreement under certain conditions, including if the conditions precedent are not met or if they are not satisfied with the delivery method.
• The agreement requires Cadiz to work with other parties to facilitate water exchanges, which could add complexity and potential delays.

Risks

• There are risks associated with obtaining the necessary permits and approvals for the project.
• Delays in the supply chain for materials could impact the construction timeline.
• The parties may not be successful in obtaining the contemplated grant funding.
• There is a risk that the actual costs of delivering water could exceed the target price.
• CVWD has the right to terminate the agreement if the conditions precedent are not met or if they are not satisfied with the delivery method.
• The agreement is subject to potential litigation that could challenge the authorization of the Water Project.

Future Outlook

The company expects to benefit from the CVWD agreement and other agreements, but the realization of these benefits is subject to risks and uncertainties, including the ability to fulfill contractual conditions and complete construction. The company does not undertake any obligation to update forward-looking statements.

Management Comments

• The company believes that the expectations reflected in our forward-looking statements are reasonable, but it can give no assurance that such expectations will prove to be correct.

Industry Context

This agreement reflects a growing trend of water agencies seeking reliable and cost-effective water supplies, particularly in drought-prone regions like California. It also highlights the increasing importance of water infrastructure and the potential for public-private partnerships in addressing water scarcity.

Comparison to Industry Standards

• The agreement is similar to other long-term water supply contracts in California, where water agencies are increasingly looking for diverse and reliable sources.
• The price of $1,650 per acre-foot is within the range of other water supply agreements in the region, but the target price of $1,000 per acre-foot is more competitive.
• The use of the Northern Pipeline for water delivery is a unique aspect of this agreement, leveraging existing infrastructure to reduce costs and environmental impact.
• The agreement's focus on grant funding to offset capital costs is a common practice in the water industry, as it helps to make projects more financially viable.
• The 30-year term is typical for long-term water supply agreements, providing stability for both the supplier and the customer.

Stakeholder Impact

• Shareholders will benefit from the potential revenue stream and increased value of the company.
• Employees may benefit from the job creation associated with the project.
• Customers of CVWD will benefit from a more reliable and cost-effective water supply.
• Suppliers of materials and services will benefit from the construction and operation of the project.
• Creditors may benefit from the increased financial stability of the company.

Next Steps

• Cadiz, FGMWC, and CVWD will work to satisfy the conditions precedent outlined in the agreement.
• The parties will pursue grant funding to offset capital costs.
• Cadiz will work with FGMWC and FVWA to develop the Conveyance Facilities.
• The parties will negotiate water exchange agreements with State Water Project contractors.
• The parties will develop a Capital Infrastructure and Finance Plan.

Key Dates

Keywords

water supply agreement, water conservation, pipeline, water delivery, Cucamonga Valley Water District, Cadiz Inc., Northern Pipeline, water rights, water project, groundwater