Q. I know that Crestview water has spent hundreds of thousands of dollars on legal fees in order to begin construction on the new wells.  I believe the number must be near or past $600,000 at this time. With only 600 homes being served, this equates to $1000 per home and the legal battle is still costing more funds.  Would it be more financially prudent to just purchase water from some other source than to continue this battle?

 

A. To date, Crestview has spent $98,000 in legal fees in support of Well #7. That amount equates to an average increase of $13.61 per month per house over the past 12-months. 

If you assume that Well #6 would continue to operate and supply all water to the lower zone (50% of Crestview’s shareholders year round), with Calleguas imports replacing the lost production from Well #4, and we do not go forward with Well #7 in the future, then Calleguas imports would have to increase. This would add $477,883.50 in new costs to the budget, or $66 per month or $800 per year to the average Crestview shareholder. Over the minimum expected life of Well #7 of 50-years (without adding 5% annual cost increase by Calleguas), the total increase cost to Crestview would be $23.9 million and to the average Crestview shareholder $40,000.

Q. Has the Board considered having a complete audit performed instead of just a review?  What are the cost considerations? (With a review the CPA has no understanding of the Company's internal controls; no assessment of fraud risk; no testing of records; no verification and substantiation of procedures, among other things.)

A. California Corporation Code section 14306(b) requires that the Crestview Board contract with a certified public accountant to conduct an annual review of the financial records and reports, subject to generally accepted accounting standards.  Crestview complies with this requirement and the Board thinks this review is appropriate and consistent with its statutory obligation.  Periodically, accounting entries are tested from origination through execution.  Internal controls separate authorization and payment of all funds, bank statements are reconciled by the Board Treasurer, and all payments require 2 authorized approvals.  Crestview will consider this proposal and its costs and benefits to all shareholders.

Q. Why are the water rights not considered an asset on the Statement of Financial Position?

A. The water rights belong to the specific shareholder as an overlying water right of their specific property rights.  The water rights are not assets of Crestview.  Crestview provides water to its shareholders with a system of water wells drawing water from the basin in which the shareholders collectively own water rights. It does so on behalf of the shareholders as a non-profit mutual water company.

 

Q. The debt ration is very high.  The proportion of the Company's assets which are financed through debt means the Company is highly leveraged and this lowers financial flexibility.  Please explain why the Company did not get the previously proposed loan from the State Water Resources Control Board.  Please provide the underlying documents including the application submitted by Crestview and response to such application from the State.

A. Loans that are provided by the SWRCB “State Revolving Loan Fund” (SRF) have many components that impact the overall cost of the loan.While the interest rate for a SRF loan is very attractive at 1.75% at the time, the requirement to pay prevailing wages adds approximately 25% - 30% to a project cost. Also, the requirement that financing terms are a minimum of 20-years with no option for early payment adds to the overall cost of the loan. Lastly, the “Technical, Managerial, & Financial” analysis adds approximately $30,000 in studies that provide no benefit to the company. All of these items were factored and compared to the 5.5% fixed, 10-year, no prepayment penalty loan; the loan from direct lender became a better option.   

 

Q. Where is shareholder equity presented?  There should be schedules reflecting capital stock authorized: number of shares authorized vs. issued, and I do not see a Statement of Shareholders Equity, reflecting contributed capital broken down by assessments for operations vs. assessments for capital.

A:  Per the Articles of Incorporation, dated March 3, 1950, Finding Five on Page 3 the total authorized shares of the Corporation is 7,500. The total shares currently issued are 2,498.77. There is no record of the Company calling for an assessment to cover operations. The last Assessment was in August 1993 to fund the Capital Construction of the Treatment Plant, Well #5 and the Well #4 transfermain.  All receivables associated with that assessment were collected before August 2004 and were used to pay the loan associated with the project.   

 

Q. Why is accounts payable so high in 2019 as compared to 2018 and 2017? Between the increase in accounts payable and current portion of notes payable the Current Liabilities has more than doubled. I would appreciate the details of this increase.

A. In 2017, A/P as of November 30 was $102,817, of that approximately $84,000 was owed to Calleguas for Water Purchases in October 2017.

In 2018, A/P as of November 30 was $65,153, of that approximately $28,000 was owed to Calleguas for Water Purchases in October 2017. The lower overall outstanding amount is a result approximately $37,200 in A/P being paid before November 30.

 

In 2019, A/P as of November 30 was $117,607, of that, approximately $17,000 is owed to Musick, Peeler and an additional $9,300 is owed to Calleguas for Water Purchases in October 2019.

 

Q. The company’s operating expenses have decreased by almost $200,000, but the management and general expenses has increased $169,000 over last year, and $206,000 from the year before that. Please explain and provide the details.

 

 

A. The change in Operating Expenses is a result of Calleguas Water Purchases. In 2018, Crestview incurred $426,200 in Water Purchases, and in 2019 that amount dropped to $253,500. Management Expense increases are a direct result of increased Legal Expenses incurred, increasing from $8,400 in 2017, to $39,700 in 2018, to $196,332 in 2019.  

 

​Q. Under Water Purchase on the Statement of Functional Expenses, the amount this year has decreased by $172,700 as compared to last year. However, the 2018 amount was $233,500 higher than 2017. Please explain why water purchase was so high in 2018 ($326,181).

 

A. The amount of Water Purchases in any year is a direct result of water demands. Crestview pumps our Fox Canyon Allocation first, and any demand greater than our allocation is supplied by importing Calleguas Water. Total Water Sales in 2017 were 262 million gallons, for 2018 that amount increased to 299 million gallons and in 2019 decreased to 255 million gallons.For each of the 3-years, our Fox Canyon Allocation was 212.3 million gallons. 

 

​Q. Professional fees have increased by about $156,700 as compared to last year. Please explain and provide the details.

 

A. As noted above, Crestview is facing unprecedented legal challenges. It is a named defendant in the matter: Las Posas Valley Water Rights Coalition. et al., v, Fox Canyon Groundwater Management Agency, Case No. VENCI00509700, pending in the Superior Court of the County of Santa Barbara, in which the plaintiffs seek an adjudication of water rights, including those of each shareholder of Crestview. These claims are adverse to Crestview and its Shareholders.  Crestview also is subject to threatened litigation by parties who are objecting to Crestview’s efforts to install a well (referred to as Well#7) necessary to continue to provide a locally sourced affordable supply of water to its shareholders. These objecting parties are represented by the same law firm representing plaintiffs in the water adjudication matter and Crestview is concerned that information shared with its members will be disclosed to the law firm representing parties directly adverse to Crestview and its shareholders. 

 

Q. The notes to the financial statements do not reflect any information on Related Party Transactions. Where is the agreement with Calleguas recorded for Well 8? 

A. All contracts and agreements are stored on Crestview’s internal administrative network that is backed up to the cloud every day.

 

Q. The interest rate on the Holman Capital Corporation appears high in the current economic environment. Any thoughts to refinance? Please provide the underlying documents for this loan.

 

A. Staff has contacted our Bank to inquire about a refinancing. We have approximately 8.5 years left on our 10-year note. Staff was told that Commercial Loan rates do not track Home Loan rates and at this time, and that Commercial Loan rates have not dropped enough to warrant a refinance.

Q. Part of Note 8 reads as follows: “In connection with the Well 7 expansion, the Company is in a dispute with certain shareholders who belong to the Las Posas Hills Owners Association (HOA) who are objecting to the installation of a new well within the HOA.” In reality, the Company is in dispute with the entire HOA, as the project was denied on multiple grounds by the HOA. Accuracy in the financial statements is essential.

 

A. Crestview does not know if the entire group of shareholders who belong to the HOA oppose the Well.

 

Q, Further, Note 8 continues: “The Company is negotiating with the HOA, but may be required to file a lawsuit to proceed with the installation of the well.” Please indicate when these negotiations started, what is the status of such negotiations, and who is on the negotiating team.

 

A: Given the threatened lawsuit, this requested information is privileged. Crestview is concerned that privileged information will be provided to opposing counsel.  Crestview has appointed a committee consisting of Alma Quezada and Sol Chooljian and authorized the committee to discuss resolution with the Alliance and any other objecting parties.   To date, the Alliance opposing the Well has refused to meet with the committee to discuss a resolution.

 

Q. Please indicate what portion of the legal fees the Company has incurred are related to the adjudication of groundwater extraction rights within the Las Posas Basin, and what portion of the legal fees are related to Well 7.

A. Given the threatened lawsuit, with respect to Well 7, this information is privileged. 

​Q. Please explain and provide the details for the increased cost under Outside Services, which was $197,637 in 2017, $204,735 in 2018, and $206,330 in 2019.

A. Outside services is comprised of Landscape Services for our 5 properties, Tree Trimming for 4 locations, Robert’s Associated Water, and Engineering Services that are not capitalized. Any one of these items can cause the minor variation that is documented within any year.