Pure Cycle Corporation
Q4 2008 Earnings Call Transcript

Published: 18 Nov 2008

[Operator:]

Good afternoon ladies and gentlemen, and welcome to the fourth quarter 2008 Pure Cycle Corp. earnings conference call. (Operator Instructions) I will now like to turn the presentation over to your host for today's call, Mr. Mark Harding. You may proceed, sir.

[Mark Harding:]

Thank you, [Erica], and I'd like to welcome you all to our fiscal 2008 year-end financial results. The slides are available for this webcast on our website at purecyclewater.com. If you follow the links from that webcast, that will get you over to each individual slide, and then I will try and note the transition of the slides as we move through the presentation. For today's call I'd like to spend some time over viewing some of the key activities our company's working on, and then proceed to the financial overview later in the presentation. With that I'll get started, and the first slide if we can advance it, that's our Safe Harbor Statement, that statements that are not historical facts contained in this presentation are forward-looking statements, and involve risk and uncertainties that cause actual results to differ from projected results. You can read the balance of the Safe Harbor Statement, but it's a fairly standard Safe Harbor Statement concerning the information that we're communicating in this call. What I'd like to do today, if you'll advance to the next slide, is really summarize some of the significant advance, including updates, to our service area and the Lowry Range activities. I'd like to give you an update on the well enhancement, which is the company's development of a tool and a process for stimulating well production here in the Denver area. Talk a little bit about our tap participation fee, which is our balance sheet impact as a result of the acquisition of the Arkansas River assets. Talk a little bit about the remaining obligations under our CAA, as well as an overview of where our water tap fees are. A brief update about the Colorado housing market; I'm sure you have enough information about some of the national markets, but give you a little bit of a picture, or snapshot, of what the Colorado market looks like, and then we'll proceed to the financial overview. If you advance to the next slide, this illustrates where the company's primary activities are focused. We are focusing primarily in the Denver Metropolitan area, and even more specifically, in the southeast portion of the Denver Metropolitan area, so this kind of highlights not only the target service area that the company is working with developers and landowners in that area and additional municipalities, as well as the State Land Board's Lowry Range property. This also highlights where the company's water service contract for the Sky Ranch property is, and just a brief update on the Sky Ranch property. It is still working its way through the bankruptcy of the developer. Its status has remained unchanged. We were hopeful that we might have a new property owner on that one by the end of the year, but that as yet has not happened. We own a portion of the water that's beneath the Sky Ranch property with the rights to purchase the balance of the property together with water service to that property, and as that property works its way through the bankruptcy then we'll have clarity on some of those issues, including the addition of the rest of the water beneath that particular property. Just a couple of highlights on this particular slide – it shows the development parcel of the State Land Board. There's approximately 3,900 acres, which are the State Land Board's development portion of the parcel. Two of those sections, as we've discussed in the past, are sections which are covered under our existing agreement with the State of Colorado and four of those sections are not. If you'll advance to the next slide, that talks a little bit more about the Lowry vision, the State Land Board's Lowry Range vision, and it really divided the project up into three parcels. One is the development parcel, which is what you see there in the pinkish color, the 4,000 acres which we have two sections that are governed under our agreement, and then the balance of the property in the water resource parcel, as well as the conservation parcel, are all part of our agreement with the State Land Board. We've had a very busy year surrounding our negotiations at Lowry, and so what I'd like to do is summarize some of those highlights continuing with management and our Board's philosophy to inform our shareholders of what we know when we know it. If you can advance to the next slide I'll give you a bit of a chronology of events that have taken place this year. In early March of this year we filed an 8-K, which was really a disclosure issue relating to a Water Court filing made by Lend Lease in which Lend Lease was seeking to intervene in a water issue that was filed by the city of Aurora. The city of Aurora is our most closest proximity city municipality water provider to the Lowry Range, and the water issue is an Aurora Water Court application that dated back to 2003, which is part of the city's broader Prairie Waters project which seeks to develop a project to take and deliver water from north of the Denver area down to the city's system. Specifically what this particular application was, was that Lend Lease was seeking to support the city's filing for reconsideration to have the Water Court allow Aurora to include some reservoir sites that were component reservoir sites on the Lowry Range in their Water Court filing. Not only were they seeking to do that, to support Aurora's Water Court application, but one of the other issues that was contained in Lend Lease's brief was that they made additional statements that they may not be obligated to get water and wastewater service from us under the two sections which were governed under the lease. Advancing to the next slide; in April of this year the Colorado Water Court rejected the Lend Lease's motions and upheld their November ruling, which really required the city to remove the three reservoir sites from their filing. And then after that in May of this year, Aurora did obtain a decree which excluded the three reservoir sites which were disputed. Since then, Aurora has appealed the ruling to the Colorado Supreme Court and that will be pending probably some time mid next year. Most recently in October, Lend Lease announced that it may withdraw from the Lowry Range if it cannot resolve the water related issues at Lowry. Following Lend Lease's announcement, we issued a more broadly disseminated press release just to continue to update our shareholders about that process, and that was the very next business day in October regarding the Lend Lease announcement. With some of the actions that have been taken by Lend Lease, I can think it's important for us to overview the status of our water supplies at Lowry, as well as how we provide service to the Lowry Range. If you go to the next slide, what we were trying to do is kind of highlight some of the specifics. While the company owns a portion of the Lowry Range portfolio that we can export, that means we can take that off the property and serve other surrounding property owners or developers or municipalities, the state retained ownership to that portion of the asset which was specifically reserved to serve the Lowry Range. And of that detailing out what those water supplies are, approximately 3,300 acre-feet of that supply comes from a renewable water supply in the two streams which transect that property in Coal Creek and Box Elder Creek. Over 15,000, closer to 16,000 acre-feet of that water supply is from drought-proof ground water supplies which totaled together to be nearly 19,000 acre-feet of water, together with another 25,000 acre-feet of storage capacity. And you can stress that against Lend Lease's developments water demand. The six sections that Lend Lease is looking to build on, if you'd just focus on the two sections that we have that are subject to our agreement with the State Land Board, those two sections and the development on those two sections would require about a 1,000 acre-feet of water, and then broadening that out to the other four sections, all six sections, the development plan would require approximately 3,000 acre-feet of water. So they kind of gives you a relative balance of the water supplies that the state owns and controls that are specifically reserved to serve the Lowry Range, and then also Lend Lease's development water demands. In addition to the water supplies that are governed under the lease, the agreement with the state provides a pricing mechanism for us to provide service to the Lowry Range to which our rates and charges are governed under a market-based pricing structure. Our rates and charges are, as we've discussed in the past, going to be the average of three surrounding water providers to the region, and it was an attempt by the Land Board to balance royalties that they were to receive from service out there together with making sure that the developer, or that the property pays a fair market rate for water service out there. If you advance to the next slide, maybe what we could do is highlight a little bit about which reservoir sites that Aurora may have an interest in, and really what the proximity and what the importance of these sites are. Clearly, they are very attractive sites. They have good topography out at the Lowry Range. They're sites that work very well for our system, as well as works well for regional-based systems. One of the reasons that this is attractive for Aurora is that their location is adjacent to their existing reservoirs. You can see the area in red; that’s a reservoir that’s currently built, it’s being operated by the City of Aurora, and then more importantly is where additional infrastructure is being developed for the city. The city’s Prairie Waters project is bringing water from north of Denver into the city system. Here you’ll see on the very left hand edge there, that’s the pipeline alignment that takes the water into Aurora’s newly under construction water treatment plant. So a good portion of the investment that Aurora is making in their water system and the expansion of the water system is being really pivoted out of this region. That said, these are not the only reservoir sites that are available to Aurora. They have other sites that are available to them that may hold some advantages and these sites hold some advantages. So Aurora is looking at a number of variables in whether or not these sites are attractive or more attractive than other potential sites that they have. What we are doing for our part is we remain dedicated to our longstanding relationship with the Land Board, and will continue to engage in negotiations not only with the State Land Board and with the City of Aurora and Lend Lease to find a suitable relationship for all parties in this agreement so that we find a balance between our interests, the State Land Board's interest the city’s interest and possibly how Lend Lease would like to move the project forward. Those discussions are ongoing and active. I’d like to be able to be more specific about that, but until we have some clarity into that I’ll reserve comment on that for certainty as to how that pulls itself together. If you advance to the next slide, I want to talk briefly about a process and a tool that the company is developing in conjunction with two other partners. One is an individual investor and one of them is the area’s leading developer of ground water wells. One of the things that we were looking at is seeing if we couldn’t have a tool and a process that sought to marry some proven oil fill technology together with water well technology to increase the productivity of ground water wells to the region. And to that extent what we are doing is working with Hydro Resources which is one of the area’s most leading water well drillers, together with BJ Services, who is a leading oil fill services company, to really develop a technology where we can come in and simulate production through directional hydro-fracs at target intervals at the variation formations in the Denver Basin to increase the overall capacity and the overall productivity of these wells. We’ve had two tests of this well for a neighboring water provider to develop the technology and use this tool in wells that they are drilling and have had the preliminary results indicate very favorable results. These two wells nearly increased their capacity 80% and 83% so we continue to believe very strongly in this process. It has had some very good initial impacts and we continue to look at ways where we can offer this service to other municipalities as well as developing our own individual water supplies that the company owns or that the State Land Board owns for service to Lowry. Let me move you to the next slide and talk a little bit about an update to our Arkansas River assets. As we identified when we first purchased this we incurred a portion of the consideration that we paid to the sellers of that asset is a tap participation fee component, which is participation in rights to taps that get added by the company. This resulted from periodically from year-to-year and quarter-over-quarter the company assesses this valuation and makes a determination as if the estimated future payments are approximately what we think they’re going to be. And we did an analysis of that in first quarter of last year and concluded that we wanted to increase the total estimated future payments from $104 million to $108 million and this has to do with the forecast of when tap fees come in and the price of tap fees and the present value of those tap fees. As a result of doing that, because of the effective interest method, the imputed interest expense associated with that, decreased by approximately $700,000 from the previous year’s valuation. So from physical ’08 over physical ’07 we recognized $4.4 million as compared to $4.7 million of imputed interest related to the tap participation fee. During fiscal ’08 and ’07 we expensed approximately $330,000 and $255,000 in Fort Lyon Canal Company assessments and these are attributable to assessments that they have annually to shareholders of the canal. We own about 23% of the outstanding shares of the canal there’s about $93,000 shares outstanding on the canal and so this is the operation budget yearly for operating the canal. Also this year there in the valley there’s a number of interests the company participated to together with other ditch systems. There’s as many as six or seven different ditch systems that are collectively looked to explore how they might more appropriately handle transfer of agricultural rights to municipal rights. And they’ve created an Arkansas Valley, Arkansas River Valley Super Ditch system entity to evaluate some of those. That entity continues to explore engineering and legal cases relative to water core change cases about making agricultural water transfers through a rotational fallowing structure or a form of leasing relationship on water to municipal uses. So the company continues to participate, continues to monitor the progress of that. The transfer of the Arkansas asset still many years into the future and will rely on some of these things such as the physical development of infrastructure as well as the transfer from agriculture to municipal uses for those water supplies. Advancing to the next slide, talked a little bit about, we’ve reviewed this in the past, the CAA activity which we reported in first quarter of last year. The company acquired about $4.7 million almost $5 million of CAA interest in October of 2007 in exchange for approximately 211,000 shares of restricted common stock. This resulted in a net loss of approximately $273,000. At August 31st 2008 the remaining CAA interest held by third parties was around $3.5 million and again these are payable as the company sells export water. Currently the company delivers export water to the Arapahoe County Fairgrounds. If we can advance to the next slide, one of the most objective measures of value for the company’s water rights to the region continues to be marked or identified through area tap fees. And tap fees generally are the fees, the onetime fee that amortizes the cost of water supply together with the wholesale infrastructure to develop those supplies. And as we report usually quarterly, these rate based districts, the districts that we present here, are the districts that we mark our tap fees to and water service fees. So as they modify their fees which they typically do at the end of each year the company evaluates those at the beginning of the year and then our rates become effective mid-year in July. But water tap fees continue to increase in value. We are slightly less than the average, just marginally less than the average about 21,500. And we’ll continue to mark these for you all as well as the development at the Lowry Range to make an assessment so that our customers know exactly where these tap fees are and the water usage fees. The next slide really is kind of, what we try and keep tabs of throughout the metropolitan area as to how our tap fees relate to area water providers. This is a subset of some of the area water providers. There’s as many as 50 different water providers in the metropolitan area and so this is a subset of some of those. As you can see there’s really a difference between some of the interior, some of the more urbanized areas compared to the more suburban areas; in the suburban areas tap fees range from somewhere between $20,000 to $25,000 per tap. So they continue to increase based on the continued cost of water and the development costs of getting that new water supply to the metropolitan area. The next slide continues to show on a relative basis year-over-year how these water supplies are continuing to increase in value. And so we’ve had roughly a doubling of our tap fees over the last six years. What I’d like to do is also give you a small picture of the Denver housing market. And while we continue to show signs of weakness our housing is faring slightly better than the national picture. If you advance to the next slide, housing starts in Colorado again decreased over prior year. We’re taking a look at two particular subsets of the market, the eleven county Front Range which is one that we track, as well as the eight county Denver metro area. Our service capabilities can go to the entire Front Range and then we focus significantly on the southeast metropolitan market. But want to take a look and keep track of those estimates. And these are projections for the Denver area. These sources come from a real estate tracking service called in the metro area called Metro Study. But we’re showing a pretty strong decrease over last year, down about 50% from last year's. Foreclosures are still impacting the market, Colorado foreclosures for the six month, compared to '06 and '07 show a 16% decrease. Although this is an increase over 2007 the percentage decrease has dropped. Advancing to the next slide, talking a little about the overall economy, from September to September in '08 to '07 wage and salary employment increased by 24,000 jobs, which is a 1% increase. It's nice to have at least an increase. Although still positive the percentage increase over the last year has declined as 2008 continues. Colorado ranks as the third best state for job growth and seasonally adjusted employment rates in Colorado rose slightly to 5.2% compared to a national average of around 6.5%. So, with that as kind of an overview of some of the key things that the company's working on, what I'd like to do is just give you a brief financial highlights as we move into some of the summary of some of the highlights of the financial areas. Total revenues for 2008 were up slightly, up about 6%. That has something to do with the timing of water deliveries and modest rate increases that we see based on the average of our three surrounding municipal providers. If you back to the next slide the amount of water delivery, total water deliveries were in line with last year, slightly less, with the revenues up that 6% and that's really due to the small increases that we had in the water rates and charges effective this year. Advancing a little bit to the next slide that shows the gross revenue up 6%; following slides we show the net operating losses were inline with what we had last year. As we talked a little bit earlier in this presentation the bulk of theses NOLs are the tap participation fee expenses, approximately 4.4 million and 4.7 million, respectively from 2008, 2007. And then some other non-cash depreciation charges of approximately $382,000 and $369,000. Advancing to the next slide some of the G&A expenses, our G&A expenses are down slightly, are down approximately 6% and those are related to decreases in compensation, decreases in professional fees due to in 2007 we had and SEC review from the Arkansas River acquisition. And then a decrease in franchise fees that as the company reincorporated from the State of Delaware to the State of Colorado. Advancing to the next slide, current assets, year-end assets we has about $5.5 million in cash. Moving to the next slide investments in water and water systems are in line with last year, $103 million and total assets of about $109 million. Total equity, a little bit decrease from 2008, that decrease is mainly due to the NOLs and an increase in 2007 related to the equity offerings that we had in 2007. So with that as kind of the brief overview with the financial picture, one of the last things I'd like to emphasize is really give you an understanding of not only the competition of our net operating losses but also kind of the cash position of the company and our operating capital. So we talked about the majority, 78% of our NOLs are in a non-cash imputed component, and that has three components to it. It has the tap participation fee interest. It has the CAA obligation and some FAS-123 compensation expense. If you take a look at the actual cash operating provisions of the company, we've decreased about 6% from $1.5 million to $1.46 and then given the revenues and the cash on hand the company has about four years of operating cash if we have no other changes to the revenue picture. The company is very well positioned for any of the efforts that are currently ongoing with the current economy and current housing situation. So with that what I'd like to do is maybe open this up to some questions, if any of you had any questions we might be able to answer. I'd certainly invite – if something comes available either through listening to this again or you had something that you thought of after the call that you certainly feel free to give me a call directly and follow up on any questions that you have. We believe that the company is very well positioned. We have a very good cash position, we continue to be very fiduciary with our invested capital and maintain a very low overhead. That said we are working very actively on investing in projects and in taking a look at various opportunities whether those exist at the Lowry Range or those exist outside the Lowry Range to be able to monetize the asset and bring the value of those water rights to our shareholders. The water picture in Colorado continues to tighten. Water supplies continue to grow in value, and the overall value of the company continues to be very strong and we have very bright prospects for our development of these assets. So just to give you another point of reference I will be in New York on December 4th presenting at the NYSSA Water Forum. So if you have any interest on following up at that and you happen to be in the area, please feel free to stop by that forum as well, and introduce yourself and I look forward to meeting you. Otherwise if you have any follow-up questions please don’t hesitate to call me.

[Operator:]

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.