Mark Harding - CEO, President and CFO.

Brent Rystrom - Feltl Robert Kirkpatrick - Cardinal Capital.

Good day, ladies and gentlemen, and welcome to the Pure Cycle Corporation Fiscal Year End 2015 Earnings Call. Later, there will be a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, today’s call is being recorded.

I’d now like to turn the conference over to your host, Mark Harding, President and CEO. Sir, you may begin..

Thank you, and I’d like to welcome you all to our fiscal year-ending 2015 financial results earning call. Couple of housekeeping items. We do have a slide deck for this call.

It is on our website, if you go to our website at purecyclewater.com, it’s right there on the first page kind of the middle bottom toolbar there and so slides to keep track and follow along with the presentation.

Format for the call today will be, I'll provide a brief overview of the company, our operations and highlight some of the financial results and then I’ll take a few questions towards the end.

So with that, I’d like to begin the call, our first slide is our Safe Harbor slide that highlights the fact that statements that are not historical facts contained or incorporated by reference in this presentation, our forward-looking statement and are expressly qualified by the cautionary statements under the Safe Harbor rules.

Those of you who are familiar with the company know we are water resource, water utility generate revenues from providing wholesale water and waste water service through several different avenues, we generate agricultural revenues from an agricultural portfolio that I’ll talk more specifically about, we generate revenues from industrial water sales, to oil and gas companies, we generate revenues from our water utility enterprise itself, we have some oil and gas royalty revenues that are new to us this year and then also we owned developable land that is right in the Denver metropolitan area that will be kind of the focus of some of the activity for us in coming fiscal years.

So, our next slide, slide four, what I really want to highlight is 2015 really has been a transformative year for our company. As we result all outstanding litigation activities in the early part of the year in January of this year and eliminated a number of certain contingent liabilities which really did help to clean up the balance sheet.

As part of our annual review each year, the company’s management as well as the Board of Directors review our performing assets and we take a look at the strategic direction of the company and this year, we made a syndicate [ph] sell our agricultural portfolio which closed in August of this year, which really provided the company a substantial liquidity position.

Really the intent of that was that we were looking at investing either investing further into the agriculture portfolio to increase the return on that portfolio or be able to redirect some of those proceeds into the Denver portfolio both our land and our water assets in the Denver portfolio and as we evaluated that the opportunities that we saw that presented ourselves for growing the company’s water utility franchises, we’re really more specifically geared towards the Denver assets.

So, we did decide to sell that asset and it was a very attractive sale for us, we had gross proceeds of about 46 million, we had some debt attributable to that, so paying off that debt to company has a very strong balance sheet with nearly $40 million in cash today.

Going on to the next slide, slide five really will highlight these slides and quickly run through them, they do for those of you who are new to the company, this really does outline what it is the company does.

We are a wholesale water and waste water utility company, we provide cradle to grave water and waste water utility service where we own the water rights on the front end, we develop the wells, the diversion facilities that diverse that water, we treat that, we distribute that to our customers, we collect that back as our collection system as waste water and then we treat it from our waste water treatment facility.

Advancing to the next slide, we have two primary fee sources from our services, we get a upfront capital fee, a tap fee which is a large connection fee, we get both the water and waste water tap fee of about combined $30,000 per connection and then we get usage revenues which are metered water usage revenues both for monthly water and waste water service.

And each connection typically generates about $1,500 per connection per year.

Advancing to the next slide, slide seven kind of gives us capacity of what our portfolio is, given our portfolio we have about 25,000 acre fee to water in our portfolio and that build out given today’s rates and charges on the capital side that generates a total revenue capacity at build out of about $1.8 billion and top-line revenue for our water utility, tap fee rates and then operating revenue about $90 million a year, so it kind of gives you a feel for how we grow into that portfolio.

Next slide, slide eight really gives you a feel for where our target service areas are. We are the exclusive water provider for about 40 square miles of the State Land Board's Lowry Range located in Southeast Denver metropolitan area as well as some service areas just a little bit north of that.

We have our Master Planned Community, the Sky Ranch project that the company owns directly north of that and that gives you kind of a feel for some of the activity along the I-70 corridor that we believe will be the high growth area for the Denver metropolitan area. Next slide kind of highlights our municipal wholesale water and waste water service.

We’re really just starting out on the utility side of the business. We do operate in domestic water and waste water system servicing about 260 water accounts and about 160 waste water accounts. Moving on to the next slide, slide 10.

This is really where a large part of our emphasis will be in 2016, having the ability to participate with the developments of our Sky Ranch property. Sky Ranch is about 930 acres located adjacent to the interstate we have, an existing interchange freight at our property with about half a mile of frontage along with the interstate.

It is zoned for 4400 units together with about 1.3 million square feet of commercial and retail space which really translates into nearly 5,000 single family connections.

If you look at that and apply that to our rates and charges that generates about a 120 million in water tap fee revenue, about 25 million in sewer tap revenues will combine about 144 million in tap fee revenues and then that build out about $7.5 million year-over-year revenue.

It kind of gives you an illustration, we’re about a half a mile from a very active master plan community where you have DR Horton, Lennar and Richmond currently building homes in the area, so you really have a very attractive well-positioned property interest as well as a well-positioned wholesale utility franchise opportunity.

The next slide, another significant investment for the company in recent years is the investment in the WISE project, where we together with the Rangeview District are participant together with 13 other area water providers developing infrastructure to interconnect all of the water utility systems amongst the water providers and be able to move water to and from each of the individual water systems.

2015 started to see construction in this particular project where we’re building infrastructure not only to be able to manage water deliveries but also to make sure that each of these systems are interconnected amongst each other.

We're in discussions - one of the things that this project also does enhance opportunities for us to have capacity in the system, I think we have 3 mgd of pipeline capacity to be able to move water to us.

We get about 500 acre feet of water from Aurora Water, Denver Water from the South Platte system and it also enhances opportunities that we have with some storage reservoirs that we have on Lowry to be able to integrate these storage reservoirs either in this project or with some of the water providers that are participants of this project.

Moving on to the next slide, slide 11. Really talking about some of our industrial water activity. As many of you know, really the drilling activity has declined, the drilling activity in oil and gas has declined significantly in 2015 as a result of some of the weakness in the oil prices.

Our industrial revenues in this segment for water sales to the oil and gas companies are off about half from where we were last year and unfortunately we don’t have a lot of guidance for 2016 as it still remains subject to a lot of the price of oil in the international market such to give you a sense of really how this is a potential service opportunity for us.

The next slide, slide 13 really defines a footprint, we have a sizeable acreage covering approximately 200 square miles where we can deliver water to oil and gas activity to oil and gas wells. We have couple of different operators in this area, we have about 40 wells that have been drilled to-date.

What we do is we transfer water through infrastructure that the company has to its local connection points and then other service providers will take that through delivery of pipeline on the ground to each individual well site for delivery to that, it’s a very efficient, a very easy access for us to be able to deliver water to that footprint area.

The next slide kind of defines really what has provided a lot of the enthusiasm for this particular play, it's what they call stacked oil and gas play where there has many as five different formations in this footprint area.

If you take a look at the typical spacing they have about a 48 acre pad spacing up to these wells so you can see as many as 16 wells per formation per square mile with the possibility of 5 formation. So you have a very significant number of high density wells that would be developed in this area.

Typically we generate about $100,000 in water sales for each well that is drilled in this area, so this becomes an opportunity for the company for a very long period of time. This really represents maybe as much as a 50 year inventory of commercial industrial water sales activity as they continue to develop the field out.

Next, I want to highlight a little bit about, we also generate royalty revenue from our mineral interest that we owned. We currently have two producing wells which were completed earlier this year and they both came online first quarter of this year.

The oil and gas infrastructure has been extended to both of these wells, so we're collecting both oil and gas opportunity.

If you move to slide 16, really what this is allowing us to do, we have two wells that have mineral interest that are pooled with other lands in these areas and during 2015 from about really I would say from about March on, we've generated a little over $400,000 in royalty revenue from this particular mineral interests.

These wells have been very high producing wells I think their sales in the play to-date. There were some of the last wells that were drilled in this as well and I think that they had refined the technology and the completion techniques on them. So they've been very good wells.

I think the formation as a whole has been a very attractive formation for the oil and gas players. I think they are very excited about that opportunity, but again are going to be very cautious as it relates to how they develop it depending on the price of oil. We move you to slides 17, we'll round out the year as we discussed earlier.

We did sell our agricultural portfolio, but we will round out the year completing our leases to our tenant farmers through 2015. So we will continue our agricultural operations to the end of this year after which we will discontinue our agricultural activities as those will transfer over to the new owners of that.

Total revenues for fiscal 2015 are about $2.3 million which is down about 21% from 2014 and that was really attributable to the decline in our industrial water sales some of that was offset by the royalty revenue that we picked up from the oil and gas mineral interest that we have.

Municipal revenues are up about 15% and then our agricultural leasing revenues were up modestly at about another 5%. So with that, let me move into some of the specifics and highlights, some of the financial performance metrics.

If you turn to slide 19, total revenues as I mentioned were down about 21% which take a look at the actual water deliveries, our total water deliveries were down about half, about 50% from 2014 delivering about 97 million gallons as opposed to 190 million gallon.

The total water usage revenues, if you just look at water usage revenues that's down correspondingly to the water deliveries itself. Moving onto G&A expenses, G&A expenses did decreased due to lower legal cost from the resolution of our legal litigation issues.

We had active litigation in the first quarter of 2000 which was resolved shortly thereafter, so we're getting to a more normalized about $2.5 million a year should be our more normalized over full G&A expenses, SG&A expenses.

Let me move onto slide 21, and this is kind of a complicated chart, but what we were trying to show is a comparative results of our NOL both with and without the farm portfolio sale.

If you take a look at the farm sale, what we had as a part of that farm sale was an elimination of evaluation of a component of the transaction which was this tap participation fee.

That was a royalty that we were to provide the seller of that and due to the litigation, we were able to resolve the elimination of that because there were some liability that the seller has defaulted on the company had cured.

And as a result of that we had a book loss even though we had a taxable gain on the transaction and that was really just a function of the valuation of that tap participation fee.

And what we try to do is highlight for you what this would have built with and without that, so the numbers are a bit skewed because some of them are in thousands and some of them are in millions, but the goal chart really looks at what you would see in the NOL comparisons if you didn't see that capital loss from the royalty obligation.

So we're actually very improved in terms of our overall operating results. But that one-time loss attributable to just that elimination of that royalty obligation is what you see in that NOL number. The next slide, slide 22.

This is obviously going to be our favorite slide, because it demonstrates the company's well-positioned from a liquidity standpoint and opportunities to invest in our Denver land and water assets which will kind of be the focal point of what it is that we're doing.

But it shows really kind of a highly liquid position and a very strong balance sheet for the company. Moving on to slide 23, that talks a little bit about our total assets. We did have a decrease in total assets again.

This is a book basis and we decreased the basis of our farm portfolio because included within that valuation was that tap participation fee or that royalty obligation.

And then the finally that last slide will show you, we did pick up a lot of that as it rolled into shareholder equity over the last couple of years due to portion of that elimination, but then this was an offset to given back a portion of that with the remaining asset balance of that.

Next two slides are going to be sort of the balance sheet information which kind of highlight a very improved, a very clean balance sheet with no debts, very strong asset portfolio with our valuable water rights and water systems as well as a very highly liquid opportunity with our cash position from the sale of the agricultural assets and then a little bit on our income statement as well.

So it gives you a good feel for that. So before I open it up to Q&A, I do want to highlight really kind of what the focal point for the company is going to be for the coming fiscal years really with some of the activities we're really going to focus on and really it’s going to continue to focus on building utility franchise.

We are going to be looking at opportunities to invest not only in developing the asset that we have which are Sky Ranch and being able to bring in a development partner but be able to work with that development partner and be able to make certain investments not only in it but then there is also the opportunity to invest in some of the infrastructure that is a reimbursable type return, some of that goes into the roads, the curves and gutters, some of what we call the offside improvement that are tax-based to each individual real property interest and those can't get reimbursed through municipal refinancings overtime that really do present challenges for developers in being able to bring projects online.

So the company has some flexibility to be able to do that. We are looking at those opportunities and how the company’s participation in the land and the utilities really relate to how we're going to do that.

We have a number of conversations with some very attractive national developers that would be good candidates for that, some of the things that the company has done obviously pay pretty close attention to, or how the project phases overtime, how the development partners want to phase into individual lots, when those lots would be made available, when our infrastructure both in terms of the utility side of the infrastructure would be made available and when they would be making available, the horizontal work in terms of making lots deliverable to homebuilders.

Other areas of interest we're going to be focusing on are may be some infrastructure where we can build some infrastructure mostly water transmission systems that we'll be able to extend to areas that are growing areas and be able to interconnect our system much like we did with the WISE system, be able to interconnect our system with other individual smaller homeowner association type water systems that can strengthen their systems all the way to existing water providers and existing municipal water systems that are in need of additional water supplies where we can be a wholesale master meter water provider for their systems as well.

And so you're going to see a real emphasis be on infrastructure to add new connections to the system and continue to build utility business as well as investments that we're going to make into Sky Ranch and the land opportunities to be able to not only build that side of the business in new connections from growth that will occur on Sky Ranch but also to be able to participate in the land opportunities.

So with that, I guess I'd like to turn it back over to the operator and open it up to questions and see if we can answer any questions..

Thank you. [Operator Instructions]. Our first question is from Doug Newman with UBS. You may begin..

Hey Mark, how are you?.

I am good.

How are you Doug?.

Good, good. Hey can you talk about Sky Ranch a little bit and what your sense of timing is on that over the next two or three years..

You bet. The Denver market continues to be among the highest performing housing markets in the country. And one of the statistics that we continue to track are sort of the lot availability we participate through handling local franchise for that is Metro study.

But they basically come out and on a quarterly basis defines specifically where to market that and where the price points are in the market. And historically, the stunning statistics that I continue to really emphasize is the Denver metropolitan area just due to the housing availability has a very constraint lot market.

And so existing lots out there going for premiums in developed areas. And as a result of that what you see is the price, the entry level price for homes and entry level here in Colorado used to be anything less than $300,000.

And the market really was that that was about 50% of all homes that got built in that market segment and I was at the third quarter briefing just last week and that metric has actually declined to less than 9% now.

So what it tells you is, there is a high demand for available affordable price lots, now that's our target market at Sky Ranch, our target market is going to be that entry level house making sure that we have a lot that we can deliver for a developer ultimately then to a builder that they can build a home that they can be in that that $300,000 price point.

So there is a high attraction for that type of market. The thing that we're looking for Doug is that we want to make sure that as we commit to partner with a developer that that developer is ready with their opportunity to develop the horizontal infrastructure.

Now that means that they're going to be grading out a number of lots and so what we're doing is defining a specific phase of that. I think we've got a very good handle on how at first phase may look. It may look like we're going to do about 160 acres on that 160 acres. There can be somewhere around 470 to 500 lots that will be made available to that.

But even in that we can drill that down and make those even smaller to say that we can build as many as 20 to 30 lots at a time and then we'd be in a position to be able to market those lots to homebuilders and then continue those additional increments in that first phase and absorb that out on a real-time basis.

So that we spend a lot of time with a couple of these developers on really defining that out, how that might look. Where specifically we might focus some of those energies, the start time on that we're still working with them to say okay is this a 2016 start time, are you looking at something early in 2016, late 2016.

We've been working on some of the engineering side of that, the engineering on the water system side that we do and know very well as well as the waste water side. So there is a lot of activity being done on that and that's going to be our continual focus for the coming fiscal year.

And as we get more detail on that I'll certainly share that with you all..

And just one other question on the WISE system.

Does that give you - is that a revenue opportunity for you or is that access to water opportunity?.

It's couple, it's both of those. What we look at it as we look at that as an opportunity originally to diversify our water portfolio in the Platte system.

We've diversified our portfolio in the Arkansas system with picking our agricultural interest in the Arkansas, but this was also a regional project that a number of providers into the market on the Platte and got us some water to do that. We did about 500 acre feet of water associated with that.

And in part, some of that success was also what influence our discussion about whether or not our Arkansas River portfolio was going to be a strategic long-term asset there. We were going to diversify our portfolio; that diversification certainly was helped by the WISE project and not only did we get a little bit of water attributable to that.

But we have the ability to expand in that. That said it also interconnects all this infrastructure and what we've done through the WISE Group and through our operating agreements are really define how we trade water back and forth amongst each of the entities.

How you can move water to one particular entity how that's priced how that's cleared through the system because there may be more demand depending on the type of weather you have. You may have shorter years from more than one water providers.

So you have a sort of market-based system where depending on each individual water provider’s portfolio and how that portfolio is delivering that given year. They can buy and trade water back and forth amongst each other, so it's an opportunity for both of those elements..

Okay. Thanks..

You bet..

Thank you. Our next question comes from Jeff Manne with Midas Advisors [ph]. You may begin..

Hey, Mark how are you?.

I am good Jeff.

How are you?.

Good. So just quickly I mean obviously you have a lot of stuff you’re thinking about investing and now that you sold the land and you have about $40 million.

I guess my question is that is it possible do you have a kind of range or budget as to how much you want to put into the Sky Ranch development, or else you want to put into the other projects you’re looking at and how much I guess because obviously with the world prices where they are and who knows if or when the rebounding that revenue hopefully will stay the same could decrease more obviously the companies should have accountable cash balance that you never want one time issues, I was curious as to whether you want to discuss that and laid out a plan if you're willing to share it or not?.

We have discussed that. We’ve earmarked some of those numbers. I hesitate to be specific to say it's not so rigid to say we’re not going to go above this number or that number what we're really looking for is opportunities for connections.

So, we have a couple of very specific opportunities to extend some infrastructure that will be at us access to new connections. Both existing connections as well as additional growth areas where we can add new connections tying into that.

And so those are the things that we’re looking at right now, we’d like to have some anchors on those where we have point of connections and then can bolt-on to those as we have additional acquisitions in there.

So what you’re going to see us pursue is sort of a roll-up type strategy on some of these independent systems that are here in the metropolitan area and be able to get existing connections as well as new connections attributable to that.

As it relate to Sky Ranch itself there is a threshold limit there and we don’t want to be - we want to be as smart about that offsite infrastructure and so what we’re looking at is just a phased component of that where we can open up that first phase of that and we have taken a look at that, that could be in the $12 million to $15 million those would obviously be reimbursable to us so that ties up some money but it doesn’t actually, that money does come back to us through refinancings through the metro districts that we have there.

That’s an opportunity for us not only to earn a rate of return on that then also to be able to participate at a greater extent on some of the lot.

So, if you look at Sky Ranch our threshold might be at that level and then you're right what this liquidity event does is it really takes out of a dilution risk, we’re very sensitive to that even more sensitive to that than we took a look at and one of the successes that we had that I didn’t mentioned that we are very proud of.

Obviously that what we also did was we decreased that denominator, we were able to acquire an additional 300,000 shares and we did retire those shares. So, our overall share count in addition to making the balance sheet much more attractive, the equity side was improved also.

But how we’re going to take a look at that in the future, we’re going to make sure that we aren't that dilution risk and we want to make sure that we do reserve some of that capital so that we have the ability to pursue these types of acquisition..

Okay, great.

And then just one follow-up on the Sky Ranch and so I guess now that you purchased that money I guess you’re speaking to developers now and they know that you’re bringing not just the lamp that cash the table I guess I am assuming you’ve gotten a lot more interest?.

True. It certainly improves their rate of return, it leverages their capacities and what they can bring to the table as well and so what we’re looking for is equal commitments on their part to invest shoulder-to-shoulder with us and make sure that we can deliver lot as quickly as the market absorbs them..

Okay, great. Mark, thank you very much. Appreciate the time..

You bet..

Thank you. [Operator Instructions] And I am showing no further questions at this time. I’d like to turn the call back over to Mark Harding for closing remarks..

Okay. Well, so I'm going to thank you all for your continued support. We’re obviously thrilled about a great year and then all the opportunities that lie ahead of us.

Just for verification purposes, I will be in New York on December 3rd, so I'll be sending out an email to lot of those of you that follow us in the New York area and see if we have an opportunity to set up some time or we can get together and drill down on some of the specifics, give you a little bit of additional color to the extent that’s available and I can decide.

And then, we will be presenting at the NYSSA Water Conference there on December 3rd. So with that, I’d like to again thank you all for your continued support and look forward to a great year. Thank you..

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day..