Pure Cycle Corp (PCYO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2009 Pure Cycle Corporation earnings conference call. My name is Stacy and I will be your conference moderator for today.

At this time, all participants are in listen-only mode. We will conduct a question and-answer-session towards the end of the conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mark Harding, President and CEO. Please proceed.

Thank you, Stacy, and I would like to welcome you all to our second-quarter February 28, 2009 earnings call. As with all of our earnings calls, you can access -- the Company has a brief slide presentation which you can access through our website. If you go to our website, there will be an icon there that you can click onto and follow the presentation or it is available on our website following the presentation if you want to refer to it later.

You will have to note the transitions yourself. So I will try and note each time we transition from slide to slide so that you can keep along with each individual slide.

With that, I would like to start with our first slide which is our Safe Harbor statement that says that statements made in this earnings call are not historical fact and are forward-looking statements that involve risks and uncertainties. What I would like to do is, as with most calls, is give you a brief summary of some of the significant events that have occurred in our most recent quarter and then follow on with the financial results portion of the presentation.

So with that, what I would like to do is summarize some of the significant events. What I want to do is spend just a little bit of time giving you an update to the Lowry Range in our service areas, some of the activities that are occurring in that area; an update to our fee structures and our water tap fee updates and that is kind of an indication of where the market continues to mark the value of water resources to the metropolitan area; give you a brief update as to activities in the Arkansas River asset and an update to our Tap Participation Fee valuation analysis; a little bit of an update about the Colorado employment and housing markets statistics and then an overview of the financial results.

If you transition to the next slide, the activity update. Generally speaking, we predominately operate in the southeast portion of the metropolitan area. We have a service area which includes the Lowry Range property, which is owned by the State of Colorado.

As we have highlighted in the past, the State Land Board has a vision that they have set forth in the property dating back to 2005 where they've divided the property into three segments. One segment is a development parcel which is 6 square miles, two of which are included in our relationship with the State Land Board, 4 of which are not and the State Land Board did not own those sections at the time that they entered into the overall water relationship with the State Land Board assets.

Then there's the conservation parcel where the State Land Board is looking at some very active conservation proposals where they can entertain opportunities to set aside approximately 17,000 acres of that property; and then the water resource parcel, where we have a significant amount of very valuable storage assets that we develop not only in conjunction with revenue participation with the State Land Board, but also part of our overall water utility operations.

Also illustrated on this map is some of the other opportunities that we have. We are currently providing water and wastewater service to a number of connections with both on and off the Lowry Range.

We provide water and wastewater services to the Department of Human Services, which is our largest customer. And that is located on the Lowry Range. We provide water service to Arapaho County Fairgrounds, where we deliver water service to the Arapahoe County Fairs and they host a facility out there for a number of meeting venues and facilities that the Arapaho County sponsors.

This also illustrates Sky Ranch. As many of you know, we have a water service relationship with Sky Ranch which is a master plan community that involves approximately 4800 single-family commitments.

Sky Ranch development project is one of the victims of the weakening of the housing market. The developer of the Sky Ranch project filed for Chapter 11 bankruptcy protection back in 2007 and so that is still winding its way through the process.

The Company is still obligated to provide water and serve that particular project. So as that winds its way through and has a replacement with a developer, then that will probably be a market based opportunity. As the overall housing market recovers, then that will become more a more certain project. At this time, we don't have any more additional information other than that continues to wind its way through the bankruptcy proceedings.

As many of you know, the developer for the State Land Board's Lowery Range project withdrew in early January of this year. So the State Land Board is evaluating how they would like to move forward with their overall vision for the project which includes the development of the six sections, conservation of the 17,000 sections and continuing to move forward with the monetization of their water assets. And we continue to work closely with the Land Board on that activity.

Transitioning to the next slide, talk a little bit about tap fees. Tap fees, as you all know, are one of the mechanisms that allow us to continue to update our investors about water, water availability and the cost of water and the value of water to the Denver market.

As you have seen in recent years, we have had fairly significant increase in tap fees. This year, we will have a relatively modest increase. Even in a down year, we will see an increase in our tap fees of about 5%.

That is in two part. One is that there is a relatively concerted effort to be cautious with tap fee increases in a down market because the housing market is sensitive to those tap fee analyses.

Then it is also a function of one of our rate base districts had a fairly significant rate increase that was effective in January that they subsequently rescinded that rate increase in favor of taking a look at a rate study amongst that whole district. So they overall left their rates the same for this particular year and will take a more comprehensive look through a rate study through this year.

So this really is an illustration of two of our rate base districts as one of those districts did not increase their rates. So we will see about a $1000 increase in tap fees which typically take effect in July of each year.

If you advance to the next slide, the Arkansas water acquisitions. We continue to work very closely with local interest in the Arkansas Valley, most recently working with a newly created entity, the lower Arkansas Valley Super Ditch.

The lower Arkansas Valley Super Ditch is an accumulation of six major ditch systems in the Arkansas Valley who have sought to find an alternate way of having municipal to agricultural water transfers and taking a look at being able to implement advanced philosophies and ideas for water transfers, whether that's through rotational fallowing or crop management or other aspects of that. So we're working very closely with the Super Ditch who is evaluating a number of potential opportunities for water transactions with municipal customers.

So we're strong advocates of rotational fallowing. We are a strong advocate of working with local interest in developing this asset and continue to look forward to that partnership.

That particular asset, as you all know, has a liability associated with the Company called the Tap Participation Fee. Tap Participation Fee is one of those elements that the Company continues to look at and monitor in terms of its overall aggregate reporting requirements.

A couple of things happen on that. As pursuant to our agreement with the sellers of that, the High Plains A&M Group, there were a number of acres and assets that were acquired in conjunction with the water and farm interests out there.

Some of those were surplus interest that both parties identified to be surplus interest and would be available for disposition in a due course. There were some remaining non-irrigated land interests that we disposed of in the last quarter, about 200 acres of that, which generated around $37,500 in proceeds.

And pursuant to our agreement, those proceeds are to be paid to High Plains A&M. But those payments also are credited against the obligation that we have with them on the Tap Participation Fee and that translated into us reducing that overall liability by another 18 water taps.

What we do on a quarterly basis and an as-needed basis if it is more recent than quarterly is really take a look at what that Tap Participation Fee liability is. In light of the weak new home construction market, one of the things we took a look at is updating that valuation model.

That valuation model is a very integrated model that takes a look at tap fee projections, takes a look at overall housing starts in the Denver area, housing starts in our particular subarea and gives us an opportunity to make certain forecasts about the timing of how those taps would be coming in and then get an assessment of what that overall liability is. So as a result of taking a look at that liability, one of the things that we did do in the second quarter is increase the overall liability of the future estimated tap fees by approximately $4.6 million and that is really a function of taking a look at the time line of when the absorption of all of these connections would be over a period of time.

So our aggregate outside liability increased from approximately $108 million to about $113 million. This has an impact of decreasing the imputed effective interest rate some and then it also decreases the imputed interest expense associated with that. So we have decreased the associated interest expense by about $346,000. As you annualize that, that results in a decrease of about $1.1 million in that Tap Participation Fee imputed interest expense.

Moving onto the next slide, talk a little bit about some of the activities the Company has going on some research and development fronts. One of the things we have been doing is taking a look at developing some proprietary technologies to enhance the stimulation of water-bearing wells that we have in the Denver formation.

We have a tremendous amount of water that we develop for groundwater purposes. And what we are looking to do is stimulate these aquifers in a way using some of the technologies that were developed in the oilfield industry.

So what we have done is we have developed a specific tool that is a downhole tool together with a process with some of the oilfield service technicians and really have had some favorable results from that. We've had two preliminary tests of that and have had some very good results from that, increasing -- almost doubling the stimulation capacity of each of those wells.

During the recent quarter, we have received notification that some of our process patent work on that was approved by the patent office and so what we're trying to do is protect the Company's investments in those technologies and our ability to be able to export that. Not only use that for developing our own resources, but also use that in developing resources for other municipalities in helping stimulate activity of increasing the production of these wells.

If we advance to the next slide, what we will take a look at is an update to the overall housing market. The Colorado housing market again is showing some signs of weakness.

If you take a look at the housing starts in 2000 over 2007, we were down by about 50%. So you take a look at our metrics statistics there, the 11 county front range which encompasses everything from Fort Collins down through Colorado Springs, we're really just focusing in on the eight county metropolitan area.

Housing starts are down about half over what they were in 2007. We are projected to be somewhere in line with starts in 2009 compared to 2008.

So we will continue to monitor that and continue to report on that activity. Some of the key indicators in there, foreclosures are still impacting the markets. One of the things that we do keep track of is the rental income market vacancy rates.

And so at September of 2008, we had an increase in vacancies from the year prior to 2007. And that was predominantly because of a number of projects coming online.

If you advance to the next slide, taking a look at the job markets. Despite the positive job figures in 2008, Colorado is sort of in line with the rest of the nation in terms of job losses.

Taking a look at the job losses year over year from February 8 to February 9, we lost about 60,000 jobs. General economic conditions are soft, however, they seem to be faring slightly better than the national average. As you can see, Colorado's unemployment statistics, about 7.2% compared to the national average of about 8.1%.

So if you advance to the next slide, what I would like to do is kind of move into the financial highlights. There's not a lot of highlights.

I think most things are going to be in parity with what you have seen in past quarterly results. But let me run through those for you, so that you have those for your benchmark.

Taking a look at the first six months, total revenues are down slightly, down about 6%. I think that has some timing issues associated with it.

In terms of timing of water deliveries and what the overall climate conditions are over the winter. Current liabilities, we're fairly current on our liabilities and we remain debt-free. One of the key things about the Company is that we do hold all of our assets in equity and we have no debt associated with the Company.

If you advance to the next slide, take a look at the total loss for the [six-months] quarter. The statistics are important because we want to try and drill down in some specifics of those.

We have seen this type of presentation in the past. But what we try to do is illustrate where the operations losses are.

So we are in line with what we have seen in the past, about $765,000 in cash expenses. Overall losses are down about 12% at $3.113 million as compared to $3.544 million in 2008 and that is mostly due to a decrease in the imputed interest related to the relating to the Tap Participation Fees.

Advancing to the next slide, taking a look at G&A expenses and overall operations, we continue to maintain good stewardship of our operating expenses and our invested capital. We're down about 10% in our G&A.

We're forecasted to have reduced cash expenses of about that 10% on an annualized basis. Taking a look at the annualized year in terms of cash outflows and revenues, we're probably at a position of about $1.3 million in cash burn to the corporation.

Advancing to the next slide, cash position, right about 4.65. So that gives us a little more than three years in operating cash.

Moving onto total equity, total equity is about $50.21 million compared to $53 million in 2008. Again, that is relating to the cash burn.

So that is really kind of the summary of the financial statistics. And what we can do is continue to direct you to our website for more specifics on the Company's operations and this presentation as a whole.

What I would like to do is open it up to a few calls. If anybody has any questions about activities or any of the financial performance of the Company's, please feel free to chime in.

(Operator Instructions)

I know we haven't had a whole lot of new information necessarily. We continue to monitor the State's progress on their exercising their vision for the Lowry Range property.

We don't really have any new updates associated with that. We will continue to keep you apprised as that develops. Financial performance has been fairly steady, so don't hesitate if you guys have any questions. Feel free to chime in.

Robert Kirkpatrick, Cardinal Capital Management.

Could you discuss what your goals and the Company's goals are for 2009 now that we seem to have been stymied a bit on the Lowry Range? So if you could maybe outline where you think this call might be, what you might be able to talk about a year from now?

You bet, you bet. One of these things that we continue to do is really work towards monetizing these assets. There's several ways that we are looking to do that.

Not only is it that we provide water and wastewater service to new housing projects, master plan communities, that type of activity. What we see really is a softening of the market and we are really at liberty of starts and of projects occurring. That's a function of what the overall economy and the condition of housing is going to be in the Denver area. But we're not constrained to that, also.

Some of the real activities that we're looking to do is really develop these assets in support of other water providers whether we look to bring service to water providers as a whole from a portfolio standpoint, whether we can provide some operational assistance to existing water providers, whether we can provide water service that is not necessarily related to new growth starts, but can supplement the existing water providers' portfolio. I can give you an illustration of something like that.

There are many water providers in the metropolitan area. There's as many as 50 different water providers in the metropolitan area and they may not need new supplies for new growth because they don't have a lot of pressure right now for new growth activities.

So they may be hesitant to move forward on long-term contracts such as that. But by the same token, they may have a portfolio of water that is very costly for them to develop and deliver to them.

So we might have an opportunity where we can work with some regional interests and be able to get water into the system where we can sell them water and defer some of their high development costs in the future. There's some transactions that we're looking at with several municipalities and water providers along those lines which I think will have positive results for us.

There's opportunities where we can establish relationships with existing water providers and we're pursuing some of those and have had continuing conversations about those. Those continue to advance.

So we're optimistic about having those opportunities to talk about in more detail. And then really taking a look at the Lowry Range, and the State Land Board continue to want to move forward with this asset.

So we will work with the State Land Board on whatever their objectives are. We are responsible for service to two of those sections.

We will continue to work to earn their business on the other four sections and work through how they want to implement their vision. So we're hopeful that that process can provide some clarity because this is a very good time to be taking a look at making sure that you're planning and continuing to move forward, preparing for as housing starts to recover, you have a project that would be attractive for the market.

When do you expect the well enhancement or recovery system investment that we have made to date to begin to pay off? When does that start to generate cash back to us?

We've got a fairly modest investment. We're a third owner in that, so we think we've got about $75,000, $80,000 invested into that.

What we look to do with that is work with people who are developing wells, who are drilling these wells and be able to utilize this tool and this technology to help them enhance that well. Some of the uses that we've used it right now, they're been enormously successful. So we have continuing discussions with those users that as they develop additional wells, they are very interested to continue to use that.

There might be an opportunity to use that again with one existing client and then another opportunity with another provider. That is a function of them developing new wells and with the soft or the weakening housing market, there has not been a lot of new wells. We are looking at maybe one, two uses of that to be able to start to get a return on that particular asset with more activity coming in 2010.

Great; thank you so much, Mark.

Thank you.

Peter Trapp, Bifrost Capital.

Listen, I have a question that is a little off the specific subject here. But I had noticed that the day that you announced your earnings, there was an extraordinary activity in the stock.

And I've noticed a couple of other days where there's just been other than the 2000, 5000 or whatever, there's been kind of like hundreds of thousands of shares trading. I'm just wondering, are you aware of a program here that is going on or are you aware of -- or can you say anything about this kind of activity? It seemed kind of amazing to see on the specific day that you announced your earnings, kind of like 800,000 shares trading.

I did see that and I'm not aware of that activity or what occurred on that. I haven't been able to figure out whether that was a double count or whether that was a posted trade, whether that was a report of both the buy, the sell or whether that was a 400,000 share block or whether that was indeed an 800,000 share block.

I honestly don't know on that, Peter. We are, as you principally know, largely an institutionally held stock and sometimes those institutions reposition portfolios. So that is why sometimes you see some fairly lumpy trades in terms of blocks as it does from institution to institution.

Generally, the Company is really never involved and outside filing SEC reporting requirements, don't have any idea of buyers or sellers in that. If it was an 800,000 share trade, I would expect to see -- I think they have four days from filing either 13-D or Form 4, so they have a little bit of time left and you have to do that because that occurred on last Thursday. But we will continue to monitor that, but for the most part, I don't have any explanation as to that.

Well, for every seller there is a buyer. And so the positive side is that somebody was willing to plunk down a bunch of money for 800,000 shares.

I think it is a great investment.

Anyway, the other topic I just wanted to bring up again was can you give us more of a macro, tops down feeling as to if there is any pickup in real estate activity out in the greater Denver metropolitan area? And then the last question is, I've noticed that there is a tremendous amount of publicity going on right now about the drought and the water shortages over in California, the other side of the Continental divide. Obviously, it is hard to pump water uphill, but is there any activity that you can get involved in that is still in Colorado but that's helpful towards that kind of -- those kind of problems?

A couple of good questions. Let me address sort of the housing market first and then I will talk a little bit about sort of the water year that we expect here and then some of the more trending issues in water and climate change and variability of water in the West.

Housing, without sounding too much like a politician, the general signs of housing here in Colorado are trending favorably whether that is the commercial market, whether that is the vacancy market, whether that is more interest among builders to get their projects actively positioned.

A lot of that, you see a lot of the behinds were continuing to surface with the expectation that there is a strong sense that we are not in a recovery mode, but we're also not continuing to decline. So how long does that trough last on the bottom side or in that range is anyone's guess.

But I think at least the mood and the sentiment is more favorable and more positive. So, nothing tangible. We're certainly probably not going to see some forecasts or significant stars beyond what our forecasts are, but we continue to get the positive feedback from those that track those statistics. The housing [matrices] and then moving forward on the general sentiment to the development market.

Taking a look at the water year, if you look at Colorado; specifically yes, we have seen much of the press in California. Colorado has fared fairly well this year.

We're probably at average snowpack and that is a really good signal for water utilities and water providers. Reservoir levels are expected to get above 80% fill capacity.

So I think they feel fairly comfortable and that is really going to be evident by some of the measures that you are seeing utilities put in place in terms of their conservation requirements. There's sort of three levels of conservation -- no conservation, voluntary conservation -- well, we will call it four -- no conservation, we're doing great but be aware we live in a semi-arid state and you should always be using your resources in a conservation framework, that we are in a conservation mode but it is a voluntary conservation mode; we are in a conservation mode and it is mandatory and here's what your watering schedules are going to look like and we are in a severe schedule and you cannot water at all.

So what we are in is a voluntary schedule, where it is not as though we had an enormously wet winter and then all of our water comes in the winter. So we have a very dry cycle throughout the summer and that is where I our pique demands are, much like all of the West.

But so if we didn't get it in the winter, we aren't going to get it. So as of April, I think we've got a fairly average year and people are really initiating sort of a Tier 2 of the approach of the voluntary water restriction schedule.

There's really -- water, as we always say, is kind of a local issue. It is very difficult to take water between states.

We do have a diversified portfolio here in the Denver -- or in the state of Colorado, having water assets in the Colorado basin, Arkansas basin and the Platte basin. And because the State may have an average year in one basin and it may be a dry year in another basin, so if you take a look at each individual basin, they fare differently. But on a whole, it is been a fairly average precipitation year.

Water -- just more broad and circumspect about your overall questions about water and the continued availability, it continues to dominate issues out West. It continues to dominate issues here in the State of Colorado.

We continue to grow even modestly, but we continue to grow, forecast for the next 30 years, continue to emphasize the gap in water needs, water demands versus the water availability. And those continue to increase.

The Colorado market and the South Platte basin may look to need as much as 0.5 million acre feet more water over the next 30 years and that is going to be a continuous pressure on water providers in securing those portfolios, developing those portfolios and bringing them online. So we all look at that very carefully.

We all look at the barrier of this being a very high-cost entry in there and the Company does have something to offer here. We own it in equity.

We can provide service incrementally and it's a significant value to the marketplace, which we hope to continue to monetize. I know we're well-positioned, it is just a timing issue of how that ultimately comes to monetizing the assets and giving everyone guidance as to how that is going to occur.

Well that obviously raises the question, which I guess was inferred in the previous question about dividends and return of capital that -- how far along you are on deciding whether you want to invest further or just sell assets and return money to shareholders. I was under the impression that you were in some fairly heavy duty negotiations right now on one of your projects (multiple speakers) for that kind of liquidity.

We are. We are under -- we have some very advanced discussions on probably three different fronts. We are very optimistic and we will see how those translate over the next few months.

Okay, all right. Thanks a lot.

Thank you.

There are no further questions at this time.

Okay. Thank you all for your attendance and your participation and your continued confidence in the Company. If something comes to you later that you wish you would have asked or are listening to this on a recast, please feel free to give us a call.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.

Thank you.