STROM NOTICE

In 1985, International Paper Realty Corporation of South Carolina (“IP”) and The Melrose Group Limited Partnership (“Melrose”), owned or had control over approximately 1,800 acres on Daufuskie Island, Beaufort County, South Carolina. While each developer was establishing separate water and wastewater utility systems in contemplation of developing their respective properties, they recognized the benefit of constructing a consolidated wastewater treatment plant and the desire of the Department of Health Environmental Control (“DHEC”) to centralize treatment facilities where feasible. Accordingly, in addition to IP establishing the Haig Point Utility Company, Inc. (“HPUC”) and Melrose establishing the Melrose Utility Company (“MUC”), they also entered into a joint venture establishing the Haig Point/Melrose Wastewater Treatment Company, Inc. (“HPMWWTP”). The HPMWWTP constructed a wastewater treatment facility on a 5.85 acre site with a capacity of 640,000 gallon per day, for which it was agreed that the construction and operating costs would be shared 60% by IP and 40% by MUC.

In 1994, the Bloody Point Group Limited Partnership (“BP”), the developer of certain property in an area known as Bloody Point on Daufuskie Island provided certain easements and rights to MUC for its agreement to provide water and sewer service to Bloody Point.

In 2005, Haig Point, Inc. (“Haig Point”), formerly International Paper Realty Corporation of South Carolina, assigned all easement rights to construct, operate, maintain and replace the water and wastewater utility systems throughout the Haig Point development area, as contained in the Haig Point General Covenants and the Haig Point Community Association, Inc. Declaration of Covenants and Restrictions.
In 2008, the Public Service Commission (“PSC”) approved the sale of HPUC”S stock, assets and operating authority from Haig Point to CK Materials, LLC (“CKM”). HPUC and CKM entered into an agreement with G2 Utility Management, LLC, currently Guastella Associates, LLC (“GA”) to manage HPUC upon its acquisition. As a condition of the acquisition, the name of the utility was changed to Daufuskie Island Utility Company, Inc. (“DIUC”). Soon after the acquisition by CKM, GA found that MUC was delinquent in paying its 40% share of the cost of the Haig Point wastewater treatment plant and remained delinquent despite many attempts to obtain payment. The resultant loss of about 25% of DIUC’s revenue, in addition to the need for a general rate increase, created a severe cash flow problem and hampering operations. In response to DIUC’s request, in 2009 the PSC opened an investigation of the MUC delinquency matter. Before it was adjudicated, however, MUC filed for bankruptcy and also essentially abandoned its operation of MUC. In order to avoid a failure of MUC’s systems and long-term interruption of water and wastewater service to its customer, DIUC undertook the operation and maintenance of MUC’s systems, without compensation.

In 2010, CKM acquired MUC and its merger with DIUC was approved by the PSC on March 1, 2010. Because MUC had no financial records, it would have to be operated for about a year in order to develop the level of its cost of operations in sufficient detail to be used to support a rate analysis. During this transitional period, extensive but unsuccessful efforts were made to obtain short term financing to help with the cash flow problem and to finance the legal and consulting costs that would be incurred for a rate case. In 2011, an outside law firm and GA prepared a rate increase petition, accepting that they would not be paid for their services until after DIUC could attract capital. DIUC petitioned the PSC for a rate increase and, after approval of a settlement, an increase became effective in August, 2012. Although the settlement anticipated a $3.0 million financing, part of which included the establishment of a capital reserve in the amount of $700,000 dedicated to needed improvements to the utility systems, three banks declined to provide financing. It was not until the end of 2013 that a $3.25 million loan was obtained from SunTrust Bank, and a capital reserve of $750,000 was established in a separate account, as well as a $500,000 line of credit also for capital improvements. The additional financing was sought because in 2012 the lagoon liner at the Haig Point wastewater treatment plant failed, adding at least $300,000 to the then anticipated capital improvements. In order to obtain the financing from SunTrust, CKM’s ownership of DIUC had to be transferred to a new parent company, Daufuskie Island Holding Company, LLC.

As of the end of 2013, the only water and wastewater utility on Daufuskie Island is DIUC which owns or controls all of the assets of water and wastewater operations.