Pure Cycle Corp (PCYO) 2007Q3電話會議重點和逐字稿

Mark Harding - President, CFO

Thank you, Camie. I would like to welcome everybody to our third quarter financial results presentation.

As with all our calls, you can access some slides, I have some slides prepared to go through, that you can access through our Web site at purecyclewater.com, and you will have to transition the slides yourself, so I will try and note the transition areas as I progress through the presentation.

As I mentioned, this is our nine-month ended May 31, 2007 earnings call.

The first slide is Safe Harbor statement, which is -- which I am sure you are all familiar with that this presentation will contain forward-looking statements and actual results may differ materially from forward-looking statements.

Let me start by talking about what's some of the significant events for both the three months and the nine months period ending. The significant events during the period are that the Denver region experienced a more average precipitation level in 2007, which has provided some recovery against several years of drought.

And what we are seeing this year is a more typical year in terms of precipitation and so, you will see some of the results of that through waters delivered and then also revenues for the quarter end, and I will talk a little bit about that more in the financial section.

Also, the Company, as we introduced last quarter, has made some investments into new technologies for water development in the Denver Basin Aquifer.

What we are looking to do is enhance wells into the Denver Basin Aquifer through use of some new and innovative technologies by pairing some of the activity in the work that we do in the water industry together with some of the work that has been done historically in the oil and gas industry to be able to bring a new type of technology into this arena and offer an opportunity, not only for the Company to enhance its production of its wells, but also the opportunity to work with other area water providers in enhancing some of their wells and some of their production.

And so, we are finalizing the development of that technology and looking to roll that out and have an opportunity to use some of that technology in production with one of our neighboring water providers later this summer. So, we are excited about that as well.

Also, I want to update you on activities with the Land Board relative to the Development and Conservation proposals for the Lowry Range. I will speak specifically about that with some slides later in the presentation.

I want to talk with you a little bit about our net loss for the period ending.

As we introduced in our last period ending, due to the accounting of the Arkansas acquisition, one of the things that you will see reported going forward is some interest expense accruals that we have relative to that acquisition.

And so, I want to talk a little bit about what our net loss is and break that down a little bit so everybody understands what that net loss is, not only for this reporting period but also for reporting periods going forward.

Also some of the other activities, the Company, as many of you know, have filed a Form S-3 registration statement to register about 2.4 million shares of selling stockholders shares together with $15 million opportunity for Company shelf registration.

And then, as part of that, one of the things that we have done recently, subsequent to our quarter end, subsequent to our filing of our second quarter on Tuesday, we also filed our second amendment to our Form 10-K, and that amendment was really a clarification of some language in Item 9 relating to our material weakness section and the reasons for, not only the second amendment, but also the reason for the first quarter amendment, which specifically related to the Arkansas acquisition in 2006.

So, with that, I want to transition to the next slide, where we will talk a little bit about some of the net loss and some of the accounting issues in that net loss computation.

As we discussed last quarter and moving forward period over period, the Company will impute interest expense to unpaid Tap Participation Fees.

If you all remember, a component of the acquisition, the Arkansas River acquisition, was that the Company had some equity as well as a instrument that we would pay the sellers a percentage of taps that get added to our system.

And while that's a -- similar to a royalty override, in consultations with the SEC, one of the things that the SEC was looking for was for us to account for that based on a fair value accounting principle.

And what they wanted us to do was find a methodology where we could value that, discount that value back over a period of time and then, period over period, accrue some interest expense associated with that. It's a non-cash interest expense to the Company, but yet it is an interest expense which rolls through the P&L.

And period over period through the nine months ended, that's where you see the bulk of our net loss occurring is in that $3.5 million interest expense accrual number.

Also, as a component of the acquisition, one of the things that we are doing is depreciating certain assets that we acquired as a component of our Arkansas River acquisition and that accounted for about $265,000 of the period ending net loss number, as well as about $225,000 worth of stock compensation expense through the FAS 123(R) calculation.

So, roughly around $4 million of that net loss figure is a non-cash expense accrual running through our P&L.

The Company does have some additional expenses as it relates to the Arkansas acquisition, which is around $188,000, which is in line with our expectations in our budgeted cost for expense for water assessment charges due to the Fort Lyon Canal Company.

And then, we also incurred some unanticipated costs over the last nine months and that really related to legal and accounting expenses incurred relating to some SEC concurrence reviews, as well as our S-3 review process that we currently have ongoing with the SEC.

Transitioning to the next slide, talking a little bit more and drilling down on some of the activity in the Arkansas River asset, what we took a look at was disposition of some of the non-strategic assets relating from that acquisition, and then in the second quarter, we sold a type of water.

We not only got the Fort Lyon Canal water, but also some other water that was associated with the transaction, which is non-strategic to our operations and our ability to take a look at converting some of those agricultural-based water shares over to municipal-based shares.

So, we took a look at that, disposed off a portion of that asset, which is -- which translated into a value of about $850,000 pursuant to our agreement with the sellers on the Arkansas River, a 100% of these proceeds were to be applied to the Tap Participation Fees, and so we did do that. We were receiving credits for that.

And in total, we now have, instead of our original application as we had in the acquisition of about 40,000 taps, we now have reduced that down to about 38,965 taps.

We still have a few of this type of water left, about 45 of these LAWMA shares left and we value those at about $78,000 and we do intend to sell those as soon as practical. Again, those are sort of non-strategic assets that we were -- acquired within the Arkansas River acquisition.

I want to discuss briefly some development activity, some of the things that are coming online and some of the activity that we have with the various projects that we have under contract.

So, if you transition to the next side, I want to talk a little bit about Sky Ranch. There has not been any significant change of the position relating to our Sky Ranch project.

The developer of that project continues to evaluate its options. They have some acquisition issues that they have with other markets that they serve in -- throughout the country. And I think they are taking a look at some of their options with this particular project and their activities here in Colorado. And some of those activities may include partnering or even selling the project.

The project is available for all options currently on the market. There hasn't been any real activity on the property, although there is -- there continues to be activity along the borders of the property in the neighboring city of Aurora, but there is really no change of status to that.

We continue to have our performance obligations under the agreement to provide service there, where we are purchasing a portion of the ground water that's also beneath that property. We continue to make those payments to the owners of the property and they are still in default of some of their payments due to us for maintaining our water service agreement with them.

And so, we continue to work with the developer and their partners on that to get an update on their project timelines and some of the activities that they have. And really, we will continue to monitor that and report that to you as we have additional information.

If you transition to the next slide, I want to talk a little bit about some of the more active areas that we have been engaged with over the past several months, regarding the State Land Board's Lowry Range project, and there is really three principal areas of activity that's occurring on the State Land Board property.

Early this year, or late last year, the State Land Board selected an Australian based developer, Lend Lease Corporation, to enter into exclusive negotiations with a portion of the development side of the property. And then, they really broke the property down into three components.

One area that they were looking for a development together with Lend Lease, an area that they were looking for a water resource development options on, and then an area where they were going to target strictly conservation proposals. And so they have entered into negotiations with the conservation group.

On the conservation proposals, late in June, I think late June, almost the last week of June, the Land Board did finalize their agreement with Lend Lease and executed Lend Lease to be their development partner on the development portion.

So, we are very delighted to be working with the Land Board and Lend Lease on this project. And then, they are still working together with us, Lend Lease and some neighboring water providers on the water resource area and some interesting opportunities on the water resource area.

The three areas of activity really relate to our involvement of -- it's going to be master planning water and wastewater services, not only to that area that we have under our agreement with the State Land Board, but also in an opportunity to provide water service to those areas that are new to the area, where we do not have service obligations for, but would like to provide service to Lend Lease and the State Land Board in that area.

Another area is discussions with the neighboring water provider on joint water opportunities. There is tremendous opportunity for us together with neighboring water providers to develop joint water related assets out there.

And we are looking at how we might configure that, how we might be able to allow a portion of our water storage opportunities out at the Lowry Range to work collectively not only to serve our purposes but also services for the neighboring municipality in the region at large, and then taking a look at discussions with the State Land Board and Lend Lease on the additional four sections that were not covered under our original agreement and trying to define how we might be able to provide service to those sections as well.

Some of the key issues that we are negotiating and discussing with the parties are how and when we would develop water to the site.

We have existing facilities that are located on the site with existing excess capacity that we could extend services not only to those areas that we have under our relationship, but also other areas.

We can incrementally expand our service. So, we have an opportunity to provide incrementally service based on the number of connections that they would like or however they want to phase the development, which I think they are still evaluating.

And then, we want to make sure that our rates and charges are market-based, and one of the things that we have with the state of Colorado in our relationship is to make sure that our rates and charges are going to be the average of the three surrounding water providers.

One of the other elements that we introduced were options for sharing our reservoir with our neighboring water provider and then how the revenue participations will work with the State Land Board and the School Trust.

So, a lot those discussions have been incurring. We have had a tremendous amount of activity in this area, a great deal of progress in some regional opportunities that might exist. And so, we will continue to keep you apprised as to how those developments mature as the weeks and months go by.

One of the things that the Company is also pursuing in addition to the development activity as you see here really in our target service area, which is not only the Sky Ranch project and the Lowry project and all of the, what we define as the I-70 corridor here, but we are also looking at opportunities to assist other water providers with water opportunities and water acquisitions and service opportunities.

A greater front range opportunity, and I will define the front range extending from the Denver Metropolitan area, south through Colorado Springs are the reach of the Company's service capabilities with its water supplies have a number of different water providers.

There is as many as 70 different water providers in that collective area. And roughly 65 of the 70 water providers are all water providers that serve less than 5,000 connections.

So, they are a compilation of a very -- a lot of very small water districts all with varying degrees of water problems, whether they have a limited portfolio that can't be extended to serve additional areas, whether they have a portfolio of a type of water that is non-renewable and therefore declining, whether that portfolio simply doesn't have the economies to be able to expand it.

And so the Company has found some very attractive opportunities where we can assist these water providers in bringing new water supplies to their service areas and bringing assistance with developing those water supplies, providing new growth areas as well as opportunity to serve their existing customers.

And so, in addition to us serving a target market and markets where we have developing areas, we are also looking at providing service to opportunities of assisting other water providers.

If you take a transition to the next slide, one of the things that is a good measure of how water is perceived here in the region is what the value of tap fees are over the past few years.

And effective July 1, as you can see, our tap fees have increased from $16,800 to $20,000.

And this is really an indication from the markets and municipalities of what the value of this water service is to the region, how water supplies are developed and delivered to individual properties and how water management principles really take into effect serving local area properties.

Transitioning to the next slide, we will talk a little bit about the local housing market. We try to keep people current with what's happening in the Denver market and really identify the concerns and opportunities in the local Denver housing market.

Some of the concerns for the Denver housing market, the Colorado housing market appears to be in line with the national trends.

We are experiencing some weakness here in 2007, late 2006 -- extending to 2007, with the opportunity of strengthening in 2008. So, we are experiencing some of the same trends that we see on a national area.

Colorado tends to make a lot of the highlight. The news highlights from foreclosures were still very high in our foreclosure rates, and the highest percentage of these foreclosures are really the entry level market, houses costing less than $200,000 here and that's really going to be defined as an entry level market here in the Denver Metropolitan area, and then greater Front Range in Colorado at large.

And one of the main reason for one of this high level of foreclosure rates is some of the creative financing mechanisms that have been used, and I don't know if they have been used more actively here in Colorado than other areas, but an opportunity where homeowners were getting into products with zero down interest only loans that are adjustable rate loans, and so that putting a lot of pressure on the foreclosure rates.

Some of the things that we also try to keep track of are some of the leading indicators of where the residential and the retail market for housing is, and some of that's going to be in what the income vacancy rates are. And what we are seeing here is a very low vacancy rate on rental home and apartment vacancies.

And as of May 31st, the rental home vacancy rates were down to 4.2%, with apartment vacancies around 7.2% and that compares to about 11% vacancy dating back to Q1 in 2003. And these are really where a lot of the new home buyers are going to be coming from in these rental markets.

So, there is a lot of pent-up demand that's occurring and I think a lot of the people are continuing to watch and see what interest rates are doing and also see how the economy is going.

Let me transition you to the next slide. One of the - the other things that we keep track of our housing starts and taking a look at some of those statistics for really three general areas -- the 11 county Front Range area, metropolitan Denver area, and then also the sub-market of Arapahoe County.

I think the Denver area experienced either a sell record, or was it a day short record for the most consecutive days with snow cover this year.

We had a tremendous amount of snow coming over the winter month, and it was great for moisture content from the water standpoint. It provided a lot of water supply from our supply standpoint. It was great for the ski industry, but it wasn't so great for housing starts. And so what you see is, you see a very significant decrease in housing starts.

Some of that is going to be attributable to the downturn in the market, some of that is going to be attributable to some seasonal variations and what was otherwise to be a very, very significant winter season.

Transitioning a little bit more definition on the local metropolitan area, we have tremendous employment growth here in the state of Colorado and the Denver area as a whole. Colorado added nearly 54,000 jobs year-over-year in May. The metropolitan area added around 26,000 jobs year-over-year in May.

Unemployment rates remain remarkably low, the Denver unemployment rate is around 3.4% compared to a national average of about 4.5%. So we have a tremendous amount of economic activity in the metropolitan area.

And then at large, a lot of the real estate forecasting tends to really view the West, the Southwest in general and that includes the Denver metropolitan area to lead the nation in population growth through 2020, and Colorado has continued to be among the nation's fastest-growing areas and among the fastest-growing economies in the area.

And so, also taking a look at our inflation-adjusted growth rate, it was the eighth fastest in the nation.

So, the local economy appears to be very good, we are experiencing a softening and a weakening of the housing market, but the trend and forecast looks very favorable for us and for the region, which also is going to put a tremendous amount of pressure on the business that we are in, which is making sure that the region has adequate water supplies for future development to the area.

So, with that as the backdrop, what I want to try to do is walk you through some of the financial results for the period ending, and then see if we can open it up to some questions and answers.

If you will transition the next slide, we will talk about the millions of gallon of waters delivered, we have delivered roughly 26 million gallons of water compared to around 38 million gallons, and that really is attributable to the seasonal variations of the fact that we have had a very wet winter and a very wet spring.

Not necessarily a very wet, let me take that back because it is not that we have a significantly wet year, we have a more average year rather than what we have experienced more recently as then a very dry year.

Water usage fees are not down by the same amount of percentage, we have about $109,000 in prior period compared to $92,000 this year, and that is really generally reflective of the price of water creeping up into the usage rates as well as into the tap fees.

Transitioning to the next slide, total revenues were down just slightly measurably in total revenues, about $10,000 off from the same period over in 2006.

Transitioning to the next slide, in the G&A expenses -- some of our G&A expenses were significantly higher in G&A expenses, some of that is going to be attributable to expenses necessarily with the acquisition of the Fort Lyon Canal -- $188,000 of that is going to be through water assessments, and then accrual for franchise taxes will, because of the asset value, we have significantly higher franchise taxes.

And then, lastly, the professional fees associated with consultations with the SEC on review, not only of the acquisition, but also of our S-3. So, that really takes about $500,000 of the difference.

And so, that really can explain most of the difference in variations. We do expect to see the Fort Lyon Canal accruals as a continuing area.

The Company will evaluate the franchise taxes coming up at its next annual Board meeting, and then, I do not anticipate the professional fees to be recurring fees. So, we will see a reduction in a more normalization of those fees on a year-over-year expense basis.

Taking a look at the net loss, again, we talked about that a little bit in our first slide. Approximately $4 million of the net loss is sort of non-cash related. $180,000 of that is related to one time cost necessarily from the SEC review.

So, year over year results excluding out the non-cash and sort of the non-recurring expenses related to the acquisition and the review will be more normalized in our G&A expenses, which will normalize themselves right around $1.2 million a year.

Next slide, this is always an important slide for us and for our investors to make sure that the Company maintains cash adequacy. We have -- period ending, we have about $1.6 million in cash and cash equivalents and with an overhead operation of about $1.2 million.

We want to maintain the fact that we do have adequate funding for our operations for the next year or longer, but also in anticipation of that -- one of the -- that was one of the principal reasons for the Company's participation in this S-3 and also for the opportunity for the Company to access additional capital for opportunities that it might find, whether that is for general corporate purposes or for other purposes where the Company might look to invest in infrastructure relating to opportunities where we can provide or extend service to customers either through existing customers, some of the existing water providers or service areas that we have necessarily within Sky Ranch or the Lowry Range.

So, we are very conscious of the cash position and continue to maintain a very diligent and very fiduciary role with the Company's invested capital as well as the shareholders' equity.

Transitioning to the next slide, take a look at the investments in water and water systems, and those are in line with 2006, so we've had a little bit of a depreciation associated with that.

Taking a look at total assets, those are also in line with prior year, increased mainly due to -- increase from 2005 mainly due to the acquisition of the Arkansas acquisition in 2006.

And then, next slide, lastly will be total equity. The amount of equity we continue to maintain shareholder equity and that is in line with some charges necessarily due to net loss.

So, with that, what I would like to do is turn it over to some questions, if you all have some questions, we will be happy to answer any questions that you have necessarily about the financial performance or some of the operations of the Company.

Pure Cycle Corp (PCYO) 2007 Q3 法說會逐字稿

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