Cottonwood Mutual Water Company
Shareholder Meeting
An Assessment of Alternatives
Drew Somerville
16 August 2011
Background
• Wilkinson Water Company acquired by Gardner
Development and transformed into the CMWC
• Company converted to a non-profit exempt from PSC
jurisdiction
• Events have resulted in dispute with Wilkinson family
on four primary points:
– Outstanding loan balance on storage tank construction
loan made from Wilkinsons’ to the water company
– Ownership of 50 acre-feet water right
– Ownership of various infrastructure, including excess
storage tank capacity
– Class C shares (control of company)
Background
• Resolution of issues is complicated:
– No clear and definitive documentation trail exists
on many of the disputed issues
– Origin of some issues go back many years
transitioning through water company ownership,
regulation and organizational changes
– Some issues involve agreements between Gardner
Development and the Wilkinsons, some of which
are the subject of ongoing litigation
Status
• At the July Water Board meeting the Wilkinsons
presented a settlement offer to the Board that was
accepted by the voting board members contingent
upon approval by the Class A shareholders
• Rejection by the Class A shareholders will result in
approval by the Water Board to pursue resolution
of the disputed issues through litigation
Cutting Through the Knot
• Objective #1: Ownership and control of the
water company
– Supply reliable, high quality and affordable
water
– Protect property values
• Objective #2: Achieve objective #1 at
minimum cost and liability
– Requires control by members with a vested
interest
– Avoidance of unproductive liabilities
• Because of the poor documentation and
uncertainty the proposed settlement should
be considered as a package
• The Value of the Class C shares must be
considered in assessing the merits of the
proposal
Proposed Wilkinson Agreement
July 12, 2011
1. Cottonwood Mutual Water Company will pay to the Wilkinson Family LLC $116,000.00
2. WFLLC will retain 86 thousand gallons of storage water.
3. Wilkinson Family will expect a contract from the Water Company stating that they will
supply Will Serve Letters for the build-out of the rest of the farm.
4. The Water Company will not pursue the supposed $54K payback
5. The Water Company will not charge the Wilkinson Family (questionable) $35 K legal fees or
any other past legal fees.
6. The Wilkinson Family will retain the ‘fifty acre feet’.
7. There will be a binding contract between WFF and CMWC stating that neither party will
pursue legal (or otherwise) action concerning these matters after there is an agreement
and settlement.
8. A document stating that the C shares held in Escrow will be signed by Rulon Gardner and
the Wilkinson’s releasing said shares to the Wilkinson’s so they can then be turned over to
the Cottonwood Mutual Water Company thereby giving control of the Company to the rest
of the share holders.
9. In return the Water Company will receive:
1.
2.
3.
4.
All remaining Wilkinson C shares
Ground that 500K water tank is on valued at 100 thousand.
All infrastructure-tanks-pipelines-fire hydrants-easements-reservoir, etc.
The reservoir (Silver Lake)
Evaluation of Settlement
Provision
Result
Payment of $116K Loan
Likely increase in monthly fees on the order of $1-$2.
Transfer of 86,000 gal. water storage
No impact. Current water storage meets
requirements.
C shares held in Escrow will be turned over to the Cottonwood
Mutual Water Company thereby giving control of the Company to
the rest of the share holders.
Class A shareholders will gain complete control and
ownership of the Water Company
Wilkinson Family will expect a contract from the Water Company
stating that they will supply Will Serve Letters for the build-out of
the rest of the farm
No Impact. Wilkinson’s to be meet the same
requirements as other developers.
The Water Company will not pursue the supposed $54K payback
Unknown: Water Company would have to succeed in
litigation to collect $54k at cost of litigation
The Water Company will not charge the Wilkinson Family
(questionable) $35 K legal fees or any other past legal fees
Unknown: The Water Company would have to
succeed in litigation to collect the $35k at cost of
litigation
The WFF will retain the ‘fifty acre feet’ water right
Unknown: Disposition of the water right is subject to
litigation between Gardner Development and WFF
Neither WFF or CMWC will pursue legal action concerning these
matters after there is an agreement and settlement
Will result in saving more than $60k estimated legal
fees
WFF will deed ground that 500K water tank is on, all
infrastructure-tanks-pipelines-fire hydrants-easements, etc. and
the reservoir (Silver Lake) to CMWC
CMWC and Class A shareholders will have complete
ownership of the Water Company assets and real
property
CMWC Proposed Litigation Summary
1. Loan on storage tank asserted to have been paid in full as of January 1, 2008 and require
reimbursement of the overpayment totaling $5,785.48.
2. The family received from the water company $1,000.00 from each connection fee for Cottonwoods at
Rose Hill, phase I; totaling $54,000. The water company requires a written explanation as to what
infrastructure these payments were specifically applied. If a written explanation cannot be provided
the water company requires the family return these funds to the water company. A written
explanation or payment shall be provided
3. The water company has expended $35,273.76 in legal fees in perfecting water rights which the
Wilkinson family was responsible. The water company requires these funds be reimbursed to the
water company
4. The Wilkinson family has left the water company short of water rights. The water company requires
reimbursement of the Weber Basin lease fees paid in 2010 totaling $12,266.00. This amount
reflects a lease fee of $245.32 per acre foot on a 50 acre foot shortage. The water company
requires these funds to be reimbursed by 12:00pm (noon) on August 1, 2011. In addition this
amount will be required of the Wilkinson family by December 31st of each calendar year until such
time as the family has assigned water right 35-5791 to the water company.
5. The Wilkinson family must assign water right 35- 5791 totaling 50 acre feet to the water company.
6. No future will-serves will be issued to the Wilkinson family for properties they own until items 1
through 5 are resolved and satisfied to water board and Class A shareholder satisfaction
7. In as much as the Wilkinson family in good faith bring the 50 acre feet and formally relinquish all
interest in the water company, excluding any Class A shares they may own, the water company will
recognize items 1 through 4 resolved, totaling $107,325.24.
Evaluation of Litigation of Issues
Provision
Result
Loan on storage tank asserted to have been paid in full as of
January 1, 2008 and require reimbursement of the overpayment
totaling $5,785.48.
If successful in obtaining judgment for full amount
then a net savings/gain of 121785 would be realized.
However, legal fees would negate much of the gain.
Written explanation for use of connection fees or pay
reimbursement of $54k
Failure to provide explanation would require litigation
by CMWC to collect $54k and expenditure of legal
fees.
Re-imbursement of legal expenses of $35,273.76 for perfection of
water rights.
If successful in obtaining a judgment of full amount
then a gain of $35,273 reduced by legal expenses.
Reimbursement of the Weber Basin lease fees paid in 2010
totaling $12,266.00. This amount reflects a lease fee of $245.32
per acre foot on a 50 acre foot shortage. Continued payments of
lease fees until water right 35-5791 assigned to the CMWC
If successful in obtaining a judgment of the full
amount then a gain of $12,266 per year since 2010
offset by legal costs
The Wilkinson family must assign water right 35- 5791 totaling 50
acre feet to the water company
Irrelevant. Disposition of water right subject ongoing
litigation between Gardner Development and
Wilkinsons
No future will-serves will be issued to the Wilkinson family for
properties they own until items 1 through 5 are resolved and
satisfied to water board and Class A shareholder satisfaction
No impact.
In as much as the Wilkinson family in good faith bring the 50 acre
feet and formally relinquish all interest in the water company,
excluding any Class A shares they may own, the water company
will recognize items 1 through 4 resolved, totaling $107,325.24.
Potential cost of $107,325.
Summary
• Acceptance of Settlement Offer: Will result in control and
ownership of the Water Company for Class A Shareholders at
a cost of $116,000
• Rejection of Settlement and Proceeding to Litigation: Will
result in a failure to obtain control and ownership of the
Water Company for Class A Shareholders because Class C
shares are not subject to litigation by CMWC. If successful
litigation could potentially gain approximately $60k in net
reimbursement plus future water lease expenses.
Summary for Settlement
Summary for Litigation
Cost to Water Company to settle
per the proposed agreement will
be $116,000 equating to monthly
water fee impacts of $1.00-$1.50
per month per user for 15 years
Costs of litigation estimated to be in the range
of $60k to 120k; If 100% successful requested
payments received could range from to $65,590
to $119,590. Given range of legal costs this
could result in a range loss to the Water
Company of $54,410 to a gain of $59,590 plus
future re-imbursement of legal expenses.
Settlement will provide complete
control and ownership of the
Water Company to the Class A
Shareholders
Costs of litigation estimated to be in the range
of $60k to 120k; If 100% successful requested
payments received could range from to $65,590
to $119,590 resulting in a net range of a loss of
$54k to a gain of $59,590 plus future reimbursement of legal expenses.
Settlement will defer a decision on Probability of 100% success in litigation is
50 AF water right to the Gardner- extremely low due to the clouded
Wilkinson Litigation
documentation and numerous other issues.
Best Case Scenario: Gain control
and ownership of the Water
Company for Class A Shareholders
at a cost of $116,000
Best Case Scenario: Gain approx $60k plus water
lease expenses but fail to gain control and
ownership of the Water Company for Class A
Shareholders