Mark W. Harding – President, Chief Executive Officer, Chief Financial Officer & Director
Harrison H. Augur – Chairman of the Board
Mark D. Campbell – Director
Arthur G. Epker, III – Director
Richard L. Guido – Director
Peter C. Howell – Director
Mark D. Middlemas – Director
Scott E. Lehman – Corporate Secretary & Engineer
Pure Cycle Corporation (PCYO) F1Q08 Earnings Call January 15, 2008 4:00 PM ET
Good day ladies and gentlemen and welcome to the first quarter 2008 financial release and 2008 annual stockholders’ meeting conference call. My name is Jahida and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this 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. Please proceed.
Mark W. Harding
Good afternoon everyone. I’d like to welcome you to Pure Cycle Corporations 2008 annual stockholder meeting and first quarter ended November 30, 2007 earnings release. My name is Mark Harding and I’m the president of Pure Cycle and I will act as chairman for this meeting. I’d like to welcome the other members of the board of directors. If you could just raise your hand I’d like to welcome our chairman, Mr. Harry Augar, Mr. Mark Campbell, Mr. Art Epker, Mr. Dick Guido, Mr. Peter Howell and Mr. George Middlemas.
In order to conduct this meeting in an orderly fashion we’ve adopted the order of business as noted in the agenda provided to everyone attending the meeting and on the presentation which you can access through our website at www.PureCycleWater.com on page 3 of the slide show. We ask you in all fairness to the stockholders and investors joining us, everyone please adhere to this agenda.
Mr. Scott Lehman the secretary of the company will act as secretary of the meeting and I hereby appoint Mr. Patrick Hayes of Computer Share Trust Company, our transfer agent, as the inspector of elections for the meeting and I ask that he subscribe his oath of office and file it with the secretary if he’s not already done so.
As I mentioned we will have a brief presentation that will outline our first quarter financial results. You can tag along with the presentation through the slide show. You’ll have to advance those slides yourself as you access that through our website. I’ll try and note the transition of the slides as we move through the presentation.
The board of directors has fixed December 6, 2007 as the record date for determination of stockholders entitled to notice of and to vote at this annual meeting or any postponement or adjournment there of. Mr. Lehman, secretary of the meeting please report on the notice of this meeting the presence of the forum and the affidavit of mailing.
Scott E. Lehman
Mr. Chairman, I present to the meeting the following: a certified list of holders of common stock of the company as of the close of business on December 6, 2007, our record date for determining stock holders entitled to notice of and to vote at this meeting. This list has been prepared by Computer Share Trust Company, the company’s transfer agent and has been on file by the company’s office and open to inspection by any stockholder for 10 days prior to this meeting. The list is available and subject to inspection by any stock holder during the meeting.
According to such list, on December 6, 2007 there were outstanding an entitled to vote at this meeting 20,206,568 shares of the company’s common stock; each entitled to one vote. Stockholders who hold a total of over 17,469,059 are present in person or represented by proxy. This represents approximately 86.45% of the outstanding shares entitled to vote at this meeting. On the basis of that report and the provisions of the company’s bylaws and certificate of incorporation which state that a quorum shall consist of the majority of the shares entitled to vote, I declare that a quorum is present.
I also present an affidavit of Daniel O’Connel, a customer service represented for Bound Marketing Business Communications as to the mailing on or about December 18, 2007 of: one, the notice of this meeting; two, a proxy statement dated December 14, 2007; and three, a proxy card for all holders of record of common stock of the company for which we had a current address as of the close of business on December 6, 2007. Copies of these materials are attached as exhibits to the affidavit.
Mark W. Harding
Thank you Mr. Secretary. Please file these materials with the minutes of this meeting. Having a quorum we will proceed with the business of the meeting and the first quarter earnings release. A press release has been distributed and the company’s Form 10Q has been filed with the Securities & Exchange Commission on January 9, 2008. The press release as well as the Form 10Q is available at the company’s website.
If we turn to the first Slide, the first Slide is a Safe Harbor statement that says that investors are cautioned that statements are not historical facts, are forward-leaning statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. As I think most of you are familiar with forward-leaning statements – as we move on we’ve kind of gone over the agenda.
I’d like to highlight some of the significant events for the first quarter. Really two areas standout in terms of highlights. The most active one will be the repurchase of an additional $4.7 million of CAA interest. In October, 2007 the company issued 211,000 shares of restricted stock to the owners of those interests. From an accounting journal entry standpoint to further – if that’s affected, no good dead goes unpunished. It did result in the company taking a loss of $273,000 and that’s a function of how we account for what the balance was booked for, what we retired that out for from the value of the stock that was given in consideration.
As of November 30, 2007 the remaining positions held by third party to the CAA agreement resulted in approximately $3.5 million. So, that interest started out around $36 million and we boiled that down to around $3.5 million. I think that’s a favorable aspect for the company, for the shareholders and for those that converted their interest into an alternate form of interest.
The other notable feature for first quarter this year was that pursuant to the reporting methodology that we have under the acquisition of the Arkansas River assets; take a look at the contingent portion of that which is the tap participation fee payable. And, as a result of the company’s reevaluation of that tap participation fee we will have a change of an increase in the total estimated future payments of that from approximately $104 million to $108 million. Those are what the total future potential payments might be. Due to the use of the effective interest method the imputed interest expense will decrease by approximately $183,000 to $1 million for the three months ended November 30, 2007, annualizing that out to an annualized decrease that will result in a decrease of about $700,000 in interest expense to that particular component.
What the company does in that particular element is we reset that each year to determine how the likelihood of the timing and payment of those are. That’s a function of the anticipation of payment of future tap fees, what the tap fees with be and discount rate, present valuing some of those payments over a period of time. So, that will be an instrument that will constantly be reassessed by management and our auditors as we move forward and obtain additional information.
As we transition to the next Slide, what I’d like to do is give you a brief activity update. I know all of you probably listen to our annual call for fiscal year 2007 just less than 60 days ago and not a lot has transpired since that time. If I could just take a look at highlighting the area of emphasis that the company’s working on. This Slide will represent that. What this illustrates is where the company’s service area is in [inaudible] the Denver metropolitan area. This really drills down specifically into southeast Arapahoe County.
If you take a look at the yellow area, that’s the company’s service area that we have in our existing relationship with Power State Land Board. Taking a look at the Land Board’s proposal dating back to December, 2005 when they selected various criteria for a conservation proposal as well as a development proposal. Those areas are highlighted – the green is the Land Board RFP development proposal which they have entered into a development and management services agreement with an Australian based company called Lend Lease Communities. The gray shaded area is where they entered into negotiation with a conservation team. They have yet to conclude a definitive agreement on the conservation parcel. And then, the red area is the area that they’ve identified to set aside for water resource development. So, they have a three phase vision for the Lowry Range which encompasses all three distinct elements: development, conservation and water resource development.
Taking a look at the pink area, the light red colored area, is the I-74 development area. There are a number of land owners that own property in that area that have looked at opportunities for development of that property and the company is targeting that service area as an opportunity for it to expand services too. This also references the location of the Sky Ranch Project. As many of you know and, we’ve announced previously the developer for the Sky Ranch Project has filed for Chapter 11 Bankruptcy protection and the particular entity that is held within this is a component of that bankruptcy so we are awaiting repositioning of that asset in some form.
Then, there’s some [inaudible] County Fairgrounds where we’re extending services out to some of the infrastructure requirements that extend service out to those areas. As this illustrates the company has the opportunity to provide water and waste water services pursuant to our existing agreement with the State Land Board to the textured box, the stone colored texture boxed. That’s two of the six sections that’s included in the development parcel area and we are working with the parties including the State Land Board, Lend Lease, the neighboring City of Aurora, and the conservation team on discussions opportunities relative to each of the three components: the conversation proposal, the development proposal and the water resource proposal. We will keep you apprised as those conversations as they unfold.
If you transition to the next Slide. Again, this a graphic that we try and articulate to the market to give everybody a sense of the value of tap fees. Tap fees in the Colorado area are going to be probably our closest indicator of the value of water resources to serve development areas. This has not changed since our last report. We were noticing that the exchange of tap fees over the last five years has had double digit tap increases. It’s probably not safe to assume that will continue on indefinitely but, we will wait and see. Typically, our rate base districts, which we peg our rates and charges to access their rates and charges at the end of the year. We take a look at those in the first part of the year announce, typically in March, of what our rates are going to be and those rates are effective every July. So, our rate cycle is about a six months lag to a rate based district.
Let’s transition to the next Slide. I want to talk a little bit about housing. Housing is a direct correlation to some of the activities that we serve where we’re looking to provide water and waste water service to growth areas in the Denver area. So, housing and housing activity in the area is an important metric for us in our business model. This will really reiterate some of the conversations that we had last November, late last November – Colorado housing market continues to contract similarly to the national trends. Housing starts here, if you annualize these taking a look at what we know through the end of the third quarter, we do not have year end results because we’re just 15 days into the new year, we do not have calendar year results but, the front range looks to be a decrease of about 31%. The specific Denver metropolitan market is about a 30% decrease and then Arapahoe County is about a 28%. So, they’re all seeing really across the board about a 30% decrease over prior year levels housing starts.
Housing prices have fallen somewhat here in the Denver market about a 2% fall, on average, throughout the Denver market. Foreclosures still impacting resale and new development markets. The highest percentage of foreclosures continue to be the entry level market. And again, much like the same in the national market we have these adjustable rate mortgage which are causing the principal concern where rates have been adjusting to price entry level homebuyers out of their ability to meet their mortgage payments.
Some of the interesting things that are continuing to mature in the Denver market are the vacancy rates for rental properties are at a six and a half year low. It is continuing as people are transitioning out of either foreclosed properties or not entering into new purchase properties or staying a little bit longer in the rental market and capacity in the rental market is really tight right now. So, those typically are going to be an indicator of where you next buyers are going to come from as they continue to mature through the market.
Let me transition to the next Slide. Job growth and employment rates here again, we’re showing a stronger picture than what we see on a national basis. The Colorado market added around 43,000 jobs year-over-year from November 06 to November 07. The metro area added 21,000 of those jobs. The Denver metro unemployment rates tracking at around 3.9 compared to a national unemployment rate of somewhere around 4.7 to 5%.
If I can then move now to the financial results I’ll give you a kind of scorebook account of the first quarter performance. So, if we want to run through the first Slide the product deliveries, water deliveries for the first quarter 10.6 million gallons which is in line with prior year’s levels for first quarter delivery. So, we don’t see a real variation in the seasonality year-over-year between 06 and 07. Taking a look at total water usage fees, we’re up slightly in water usages fees primarily due to increase in rates and charges that we see taking account in mid year range.
Going to the next Slide, total revenue. Again, total revenues were up very slightly again, due to slight increases in the usage rates that we see occurring each mid year. Moving over to G&A expenses, one of the more driving and important components of the company. G&A expenses increased significantly in 2008 over 2007 primarily related to increased fees, legal fees, consulting fees relative to the Lowry Range. We’ve got a number of additional resources that we dedicated towards working with the various groups whether that’s going to be Lend Lease, the State Land Board or the neighboring City of Aurora and negotiations that we have on multiple levels and multiple playing fields for that. So, we have about $150,000 of the $200,000 increase is really relating directly to discussions we have with ongoing service opportunities in the Lowry Range opportunity. A little bit of an increase in fee in assessment from the Arkansas asset, the Fort Lyon Canal Company. Those increased about $15,000. Then, public entity costs of another $32,000, a slight increase in the public entity costs. Those are the $200,000. The bulk of that is going to be relative to the discussions we have out of Lowry Range.
Net loss for the year again, taking a look at that we’ve got about a $300,000 increase in net loss year-over-year from 2008 to 2007 if we project that out. Increases in that are attributable mostly to the nearly $300,000 imputed loss necessary to the buyout of the CAA interests, non-cash depreciation charges relative to some of the non-water related assets on the Arkansas river. Current assets approximately $7 million cash, cash equivalent. That’s about $300,000 down from fiscal year end 2007. So, online with our budgeted forecast for the year’s expenditures. Our investments in water and waste water systems in line with where we were previously, $103 million. Current assets again, in line with the close of fiscal year 2007. Current equity also in line with close of fiscal year 2007.
That will really conclude the brief update that we were going to provide on the earnings call as well as the summary of the current activities. The last Slide is really some of the specifics on how to get in touch with us, where you can get additional information. So, what I’d like to do is briefly open it up to any questions and answers. To anybody listening on the conference call if you have any questions please go ahead and go through your procedure and ask any questions.
Mark W. Harding
If there’s no questions and you think of something later, please feel free to give me a call. I’d be more than happy to answer any questions. Or, if you’re listening to this on a re-broadcast and you have any questions, please don’t hesitate to give me a call at the office. I’d be more than happy to address any questions you might have. If there are questions, you can chime in; otherwise we will move on to the proxy items.
Thank you all. We’ll conclude this call. Moderator, thank you for your participation. We look forward to our next quarterly update in March.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.