Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

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Fair Value Measurements
 9 Months Ended
May 31, 2013
Fair Value Measurements  
Fair Value Measurements
NOTE 2 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value.

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. The Company had none of these instruments at May 31, 2013.
 
Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company had no Level 2 assets or liabilities at May 31, 2013.
 
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The Company had one Level 3 liability at May 31, 2013, the Tap Participation Fee liability, which is described in greater detail in Note 4 – Long-Term Obligations and Operating Lease below.

The Company maintains policies and procedures to value instruments using the best and most relevant data available.

The Company’s non-financial assets measured at fair value on a non-recurring basis consist entirely of its investments in water and water systems and other long-lived assets. See Note 3 – Investment in Water, Water Systems, Land and Improvements below.

Level 3 Liability – Tap Participation Fee. The Company’s Tap Participation Fee liability is the Company’s only financial liability measured on a non-recurring basis. As further described in Note 4 – Long-Term Obligations and Operating Lease, the Tap Participation Fee liability is valued by projecting new home development in the Company’s targeted service area over an estimated development period.

The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of May 31, 2013:

 
                Fair Value Measurement Using        
         
Cost / Other
    
Quoted Prices in Active Markets for Identical Assets
    
Significant Other Observable Inputs
    
Significant Unobservable Inputs
    
Total Unrealized
  
   
Fair Value
    
Value
    
(Level 1)
    
(Level 2)
    
(Level 3)
    
Gain
  
Tap Participation Fee liability
   $ 70,685,800     $ 70,685,800     $ —     $ —     $ 70,685,800     $ —  

Although not required, the Company deems the following table, which presents the changes in the Tap Participation Fee for the nine months ended May 31, 2013, to be helpful to the users of its consolidated financial statements:
 
   
Fair Value Measurement using Significant Unobservable Inputs (Level 3)
  
   
Gross Estimated Tap Participation Fee Liability
    
Tap Participation Fee Reported Liability
    
Discount - to be imputed as interest expense in future periods
  
Balance at August 31, 2012
   $ 112,958,000     $ 68,269,200     $ 44,688,800  
Total gains and losses (realized and unrealized):
     —       —       —  
Imputed interest recorded as “Other Expense”
     —       2,416,600       (2,416,600 )
Transfers in and/or out of Level 3
     —       —       —  
Balance at May 31, 2013
   $ 112,958,000     $ 70,685,800     $ 42,272,200