4. LONG-TERM OBLIGATIONS AND OPERATING LEASE
|9 Months Ended
May. 31, 2015
|Long-Term Obligations And Operating Lease
|LONG-TERM OBLIGATIONS AND OPERATING LEASE
The Participating Interests in Export Water Supply is and prior to the Companys settlement, the TPF payable to HP A&M was an obligation of the Company that had no scheduled maturity date. Therefore, these liabilities are not disclosed in tabular format, but they are described below.
Participating Interests in Export Water Supply
The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash the Company received from the participating interest holders that was used to purchase the Companys Export Water (described in greater detail in Note 4 Water and Land Assets to the 2014 Annual Report). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investment. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Companys balance sheet because the obligation to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.
The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. If the Company does not sell the Export Water, the holders of the Series B Preferred Stock are also not entitled to payment of any dividend and have no contractual recourse against the Company.
As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating Interests in Export Water Supply liability account) with the balance of the payment being charged to the contingent obligation portion. Because the original recorded liability, which was $11.1 million, was 35% of the original total liability of $31.8 million, approximately 35% of each payment remitted to the CAA holders is allocated to the recorded liability account. The remaining portion of each payment, or approximately 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.
From time to time the Company repurchased various portions of the CAA obligations retaining their original priority. In July 2014, the Land Board relinquished its approximately $2.4 million of CAA interests to the Company as part of the settlement of the 2011 lawsuit filed by the Company and the District against the Land Board. As a result, during the fourth quarter of the fiscal year ended August 31, 2014, the Company recorded a gain on the extinguishment of participating interests of the CAA of approximately $832,100. The Company did not make any CAA acquisitions during the nine months ended May 31, 2015 or 2014.
As a result of the acquisitions, the relinquishment by the Land Board, and the sale of Export Water, as detailed in the table below, the remaining potential third party obligation at May 31, 2015, is approximately $1 million, and the Company has the right to approximately $29.8 million:
* The Arapahoe County tap fees are net of $34,522 in royalties paid to the Land Board.
The CAA includes contractually established priorities that call for payments to CAA holders in order of their priority. This means the first payees receive their full payment before the next priority level receives any payment and so on until full repayment. The Company will receive approximately $6 million of the first priority payout (the remaining entire first priority payout totals approximately $6.8 million as of May 31, 2015).
Arkansas River Agreement Obligations
As discussed in Note 9 Litigation Loss Contingencies, as a result of the settlement of litigation with HP A&M, the TPF liability was eliminated on the date of settlement, January 29, 2015.
Initially the obligation was to pay 10% of the Companys gross proceeds, or the equivalent thereof, from the sale of 40,000 water taps sold after the date of the Arkansas River Agreement. The 40,000 water taps were eliminated as a result of (i) sales of Arkansas River Valley land in 2006 and 2009; (ii) the sale of unutilized water rights owned by the Company in the Arkansas River Valley in 2007; (iii) the election made by HP A&M, effective September 1, 2011, pursuant to the Arkansas River Agreement, to increase the TPF percentage from 10% to 20%, and to take a corresponding 50% reduction in the number of taps subject to the TPF; (iv) the allocation of 26.9% of the Net Revenues (defined as all lease and related income received from the farms less employee expenses, direct expenses for managing the leases and a reasonable overhead allocation) received by HP A&M from management of the farm leasing operations from September 1, 2011 to August 3, 2012 prior to termination of the Property Management Agreement; (v) the reduction of 19,044 taps as the result of foreclosures on certain farms pursuant to the remedies outlined in the Arkansas River Agreement (2,233 in fiscal year 2013, 15,010 in fiscal year 2014, and 1,801 in fiscal year 2015); and (vi) the settlement reached with HP A&M in January 2015.
The fair value of the TPF liability through the date of the settlement was an estimate prepared by management of the Company. The fair value of the liability was based on discounted estimated cash flows subject to the TPF calculated by projecting future annual water tap sales for the number of taps subject to the TPF at the date of valuation. Future cash flows from water tap sales were estimated by utilizing the following historical information, where available:
Utilizing this historical information, the Company projected an estimated new home development pattern in its targeted service area sufficient to cover the sale of the water taps subject to the TPF at the date of the revaluation, August 31, 2014. The estimated proceeds generated from the sale of those water taps resulted in estimated payments to HP A&M over the life of the projected development period of $2 million. The estimated payments to HP A&M were then discounted to the current valuation date, and the difference between the amount reflected on the Companys balance sheet at the valuation date and the total estimated payments were imputed as interest expense over the estimated development time using the effective interest method. The implied interest rate for the most recent valuation was 3.4%.
As of August 31, 2014, 2,184 taps (approximately $7.9 million of the TPF) remained subject to the TPF.
HP A&M relinquished all rights to the TPF pursuant to the settlement agreement the Company reached during January 2015. As a result, the TPF was eliminated during the three months ended February 28, 2015. The Company recorded the decreases in the TPF payable as an equity transaction due to the related party nature of the original transaction of approximately $6.2 million in the three months ended November 30, 2014 and the remaining approximately $1.7 million upon final settlement. For a more detailed discussion of the valuation of the TPF, see Note 7 Long-Term Debt and Operating Lease in Part II, Item 8 of the 2014 Annual Report. For further discussion of the settlement agreement, see Note 9 Litigation and Loss Contingencies below.
Promissory Notes Payable Prior to settlement with HP A&M, approximately 60 of the 80 properties the Company originally acquired from HP A&M were subject to outstanding promissory notes payable to third parties that were secured by deeds of trust on the Companys properties and water rights, as well as mineral interests. HP A&M defaulted on all of the promissory notes. HP A&M owed approximately $9.6 million of principal and accrued interest as of September 1, 2012. These promissory notes were secured by approximately 14,000 acres of land and 16,882 FLCC shares owned by the Company.
As a result of HP A&Ms default and the Companys settlement with HP A&M, the Company has certain notes totaling approximately $5.8 million, including accrued interest of $34,100 as of May 31, 2015 attributable to its farms. The Company borrowed $4,450,000 from the First National Bank of Las Animas in exchange for a note that has a 20 year term commencing October 27, 2014, requires semi-annual payments, and carries a 5.27% per annum interest rate for the first five years. The note is secured by a total of 3,596.8 acres, and 4,369.4 FLCC shares. After the first five years, the interest rate on the note is subject to change (no more often than annually) based on the changes in the First National Bank of Las Animas Ag/Commercial Real Estate Rate. The Company may pay the note in full at any time without penalty. Additionally, the Company has 16 mortgages for an aggregate total of approximately $1,350,000, which have five-year terms, require semi-annual payments, and carry a 5% per annum interest rate. These notes are secured by a total of 3,860.9 acres, and 4,793 FLCC shares.
The amount owed on the Companys notes is approximately $5.6 million, including accrued interest of $34,100, and approximately $5 million, including accrued interest of $80,800, at May 31, 2015 and August 31, 2014, respectively.
During December 2014, the Company, through the District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership Water Delivery Agreement, dated December 31, 2013 (the WISE Partnership Agreement), among the City and County of Denver acting through its Board of Water Commissioners (Denver Water), the City of Aurora acting by and through its Utility Enterprise (Aurora Water), and the South Metro WISE Authority (SMWA). The SMWA was formed by the District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (the SM IGA), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (WISE) created by the WISE Partnership Agreement. The SM IGA specifies each members pro rata share of WISE and the members rights and obligations with respect to WISE. The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years.
By consenting to the waiver of the contingencies set forth in the WISE Partnership Agreement, pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing Agreement (the WISE Financing Agreement) between the Company and the District, the Company has an agreement to fund the Districts participation in WISE effective as of December 22, 2014. The Companys cost of funding the Districts purchase of its share of existing infrastructure and future infrastructure for WISE is projected to be approximately $7 million over the next five years, which includes funding of approximately $1.2 million annually over the next five years and funding of the Districts obligations to repay approximately $1.4 million borrowed by the District from certain SMWA members to finance the purchase of infrastructure for WISE pursuant to an agreement dated November 19, 2014 (the Rangeview Funding Agreement). The $1.4 million is repayable in equal annual installments over the next three years and accrues interest at the rate of 3% and is recorded in WISE Funding Obligation and in Investments in Water and Water Systems on the Companys consolidated balance sheet.
Effective January 2015, the Company entered into an operating lease for approximately 2,500 square feet of office and warehouse space. The lease has a one-year term with payments of $3,000 per month.