Mark Harding – President and Chief Executive Officer.

Bill Smith – William Smith and Co. Bill Cunningham – Private Investor.

Good day, ladies and gentlemen. And welcome to the Pure Cycle's Fourth Quarter 2017 Earnings Call. All lines have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation [Operator Instructions].

At this time, it is my pleasure to turn the floor over to your hosts, President and CEO of Pure Cycle Corporation, Mark Harding. Sir, the floor is yours..

Thank you, thank you very much, and I’d like to extend a welcome good morning to you all, and welcome you to our fourth quarter and fiscal year end 2017 earnings presentation.

For all of you who have not been able to get over to our website, the presentation that our deck is going to be on our website, on the new website that we have, you can see that on the homepage. If you can click on that, open up that presentation, I'll try and note the transition of the slides as I work through the presentation.

So we will begin by our favorite slide, our Safe Harbor statement. Noting that presence that are not historical facts contained or incorporated by reference in this presentation are forward looking statements then the meaning with that from Private Securities Litigation Reform Act of 1995.

So with that, what I'd like to do is just for a quick intro, for those of you who are new to the company, give you an overview of the company itself. We are a wholesale water and wastewater provider.

We generate revenue through providing wholesale water and wastewater services to a number of different type of customers, extending the gamut from residential customers to retail customers, commercial customers and industrial customers. We supply a large amount of water to the oil and gas industry for frac water.

We provide – we own land, where we own about 930 acres of master planned, fully-entitled property along the Interstate 70 corridor and I'll detail that a little bit more in my presentation.

And then we also own some royalty revenues, some oil and gas royalty mineral interest, and we get royalty revenue from developed – wells that are developed into our royalty mineral estate. So the next slide, Slide 4 here, we are a vertically-integrated water and wastewater company. We own a large portfolio of water.

We own about 27,000-acre feet of water. We obtain revenue from our water utility business through two types of revenues. We had taken them through tap fees, which are onetime connection fees, paid upfront typically by homebuilders.

And then usage fees, which are homeowners and residents or commercial businesses within our service area that we provide water to. Within our portfolio, we have the ability to provide about 60,000 connections worth of water. Our tap fees are currently at $26,000 for our water tap, $4,600 for a sewer tap.

And then annually, our usage revenues typically translate into about $1,500 per connection per year. Moving to the next slide, Slide 5. I want to talk a little bit about Sky Ranch project. We announced this morning that we have completed our due diligence with our homebuilders, so we're very excited to be moving forward with the Sky Ranch project.

We have 930 acres, which is ideally located, it's on the Interstate 70 corridor, it's about 60 miles east of downtown, it's directly south of the Denver International Airport and really, ENB, largest component or largest area of growth within the Denver Metropolitan area.

If you take a look at the Sky Ranch project itself, and we look at this both in terms of how the land development will play out for the company, water utility side of this is, that we will, to the number of connections that are zoned and planned to be built here.

We have about 4,400 homes, which will be a mix of types of homes, between detached single-family homes and attached multifamily homes, and about 1.3 million square feet of commercial retail property, which is really going to be the frontage along the interstate. So that represents close to 5,000 combined single-family equivalents.

And based on our current tap fees that represents about $130 million in tap fee revenue and about $24 million in tap fee revenue, and then once you have this built out, then this represents about $7.5 million year-over-year revenue for us.

Moving to the next slide, gives you a bit of introduction as to where this is geographically, we are located along the interstate corridor, we have an interchange right at the beginning of our property. We're about four miles directly south of the airport.

But the important note of this is, sort of our proximity to a lot of what's occurring in the Denver metropolitan area. We're really located next to a lot of the employment centers in the area. The airport employs probably close to 30,000 employees.

We have the Gaylord Hotel, which is being built, which is a very large new hotel for us, it's open – it's scheduled for opening later this year and that should employ about 4,000 employees. And we have new Amazon fulfillment center, which is really just about two miles from our interchange.

It's the next interchange towards the west of our property, and that'll have about another 1,000 employees. So we really have a high concentration of activity going on in this area. And the focal point, not only of commercial development but really, where a lot of interest lies for some of the residential opportunities.

Moving to the next slide, you'll take a good look at really, what this first phase of what it is that we're doing. Our first phase will be a little bit south of the interchange. So the depiction really to the right of that, highlights that area that this is a per space, we have three home builders. We have Richmond, KB and Taylor Morrison.

The total number of lots is about 506 lots with this particular project. And really, we'll have all three builders working concurrently to deliver lots for their customers in the area. Taking a look at how this first phase will break ground.

We will – moving through this next Slide 8, the dark brown area really is going to be that first number of lots that we're going to develop, and what this really is trying to illustrate is some of the infrastructure improvements that we're going to make.

There's going to be an entry road, which will come down from the interstate to this particular project. It is right along a section alignment, it's called Monaghan Road, and some estimated construction cost, what we have for that. The drainage area, which is going to be the green area, we will have both water and wastewater facilities.

Our wastewater facilities will be located in that orange area there, which will be the master plan site for the entire development that we have. So we're actually being able to build that concurrently with our first lots. Some water storage facilities, overlock grading, roads, curves and gutters.

So when we look at this delivery of the first 200 lots, we have about some investment, which will be about $18 million. One of the things to note about that is, sort to have a cash flows will work on this. So cash flows will include certain builders' remitting progress payments to us as we complete some of this infrastructure.

So we have some milestones to be able to deliver, and then start to begin some of those cash flows so we can continue to use some of those cash flows together with the company's resources and cash proceeds to be able to make those investments and be able to deliver finished lots.

The milestones are really when we have finished plats, to be able to deliver, then they take deeded title to a finished plat. And then also once we've completed the installation of the wet utilities, which will include the collection and distribution systems for water and sewer systems. And then ultimately, the delivery of finished lots.

Moving to the next page, while we're not counting our chickens before they hatch, we are taking a look at the second phase of this project now. We've got builders within the first phase. We've got a high level of demand for lots found in this area.

So we want to take a look at, while we're – our focus is going to continue to maintain delivery of lots on our first phase. We want to begin some of the entitlements and some of the design planning work for our second phase. So this is kind of illustrating what that next phase is going to be, and this is really in two segments.

This particular slide, Slide 9, really illustrates a schematic of what some of the residential opportunities are going to look like. And this is another mix of multifamily, detached single-family, some attached single-family, some commercial, some retail, some school sites, additional open-space and parks and things like that.

So this phase, together with the commercial phase, may include as many as 3,000 single-family equivalents, where our first phase was really strictly just detached, single-family, had a little bit more concentration of drainage and open-space and some of the larger facilities being our water, wastewater facilities in that first phase as well.

Next slide, 10, really is an illustration of some of the commercial components, so that component's going to be right up along the interstate. There's a tremendous opportunity for us here because this is one of the very few areas that isn't – that the commercial area isn't controlled by some of the large commercial developers.

So we have the opportunity to provide a number of build-to-suit options for developers that are interested in owning their own product and be able to develop that on the pad side of their owning and improvements. So we look to see a lot of different types of developments here.

Some retail, box type stores, some fast food type stores, we'll have groceries, opportunities here, also some light industrial space where we can capitalize on really, multiple types of users, create some employment opportunities for some of those residents that are going to be living on our community as well.

Next, I want to talk a little bit about oil and gas activity. We're pleased that we have robust oil and gas activity this year. We've had more than a dozen wells drilled this year, among three different operators. So this year has seen a little bit more competition for leasehold interests in the area.

So we have three separate operators in this area, water usage for each of these wells continues to expand. So dating back to 2013, some of the demand for water was about five million gallons per well that they were drilling, that grew to about 10 million gallons per well, that then grew to 20 million gallons per well.

And this month actually, we will see a new record for water deliveries to a single well, which is going to be about 575,000 barrels or nearly 25 million gallons for a particular well. And I think that has to do with a lot of the improvements that are being made in the technology for optimizing how well stimulation is occurring.

What type of frac design these operators are using. And so you have a lot of increased water demands, and it's good and very interesting for us to see how that has been occurring amongst the various different operators as well.

But certainly, a tremendous amount of activity for us and I think we have some pretty good guidance that we're going to see at least that and maybe even a bit more of that opportunity carrying forward into 2018. Mostly, these operators are still in the process of setting their budgets for year-end, for their 2018.

So as we get a little bit more guidance on that, we'd be delighted to share that with you soon as we get that. But oil and gas continues to be a very attractive opportunity for us. And in the next slide, 12, really kind of illustrates the dynamics of why.

There's about 200 square miles that have been leased up in this area, with a number of different possible formations that they can access per square mile, with a number of different operators now.

So we are now exceeding our top end of the range on frac water deliveries because of the amount of water deliveries that each of the operators are experimenting with in their new stimulation designs. Moving on to the next slide, I want to highlight one of our recent acquisitions.

So we've almost had a full year of operations for our Wild Pointe acquisition, that's going ahead of our expectations, exceeding our expectations. So 2017 revenues, we collected about 218,000 in tap fees and about 160,000 in usage fees. So it's modeling a little bit ahead of what we had estimated it to be.

Very good acquisition, good system, a nice system for us to continue to operate and maintain, and we are looking for other opportunities, similar to Wild Pointe, we have our nets out for acquisition opportunities that meet the company's return criterias and where we can provide enhanced value.

Some of these opportunities where we're looking is an opportunity for us to combine our water resources, together with an existing water provider that might be water short, and then be able to leverage not only making improvements to their system but bringing new water supply to them as well, which will be a significant opportunity for them as well.

Moving on to the next slide, I want to talk a little bit about our WISE project. So we have completed our interconnect to the WISE system, and are taking water deliveries.

So this year begins initiation of water deliveries and really, being able to monetize the investments that we had made into that project over the last three years, where we're able to take water deliveries, deliver that our customers.

And then be able to capitalize on that investment, not only for the ability to exchange and transfer and supply water to and among the various water providers that are partners within the WISE project, but also to be able to have additional water deliveries and defer some of the capital that we would have otherwise had to expand our water facilities for additional assets to deliver water to our customers.

Moving on to Slide 15, really just some of the highlights of income for the year. So fiscal year is about $1.2 million, and you can kind of highlight that into the various areas.

We have about $478,000 in water frac, water revenues, and that's really only a couple of wells, so you're going to see some pretty robust revenue for Q1 because of the number of wells that we fracked since our fiscal year-end. Talking a little bit about our municipal revenues.

We have year-over-year revenues illustrated for our wholesale water and wastewater services. So we're up about 50% on that side, that's primary attributable to the Wild Pointe acquisition.

And then for the first time in a very – a number of years, we have tap fee revenue, which is also attributable to the Wild Pointe, but we also expect to see the tap fee revenue increase as it relates to beginning development at Sky Ranch and some of our other connections and some of our other customers. Oil and gas royalties.

We're not showing, I apologize, I have a blank in there for a number, for 2017 royalties. I think those are mixed, our 2017 royalties are $343,000 – no, I can't – that's incorrect there.

We had a slight decrease in our royalties from 2016, and that was primarily attributable to our operator taking the wells down, doing some periodic maintenance on the wells so there was a couple of months that we didn't have those deliveries. I apologize for that slide.

We'll update that slide, put that back on the website, but it's going to be about the $250,000 range. And then there's the balance sheet and the income statement. So you all can disseminate the balance sheet in the income statement at a more detailed level.

So what I'd like to do is really open it up to the floor for some questions, and see if I can't provide additional color as to some of the progress that we've made.

Certainly, it's been an exciting year for us, and we look forward to beginning development and starting construction on our Sky Ranch project, and being able to deliver lots and really, bring on water and wastewater facilities to serve that community as well.

So with that, I'm going to turn it back over to the operator and see if we can open it up to some questions..

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And our first question comes from Bill Smith from William Smith and Co. Sir, please state your question..

Thank you, Mark, congratulations on all of your accomplishments there, they are very good..

Thanks, Bill..

Can you talk a little bit about some of the other builders surrounding Sky Ranch like Horton and Lowry, on your, I think it was Slide 4 or 5.

How many homes they’re selling on a, on say, on a monthly basis or yearly basis, in terms of what the demand looks like in that same area?.

That’s a great question. And so, to give you kind of some penetration, and there is that slide on Slide 5, that kind of illustrates some of the neighboring areas. I guess, I can give you the – a broad outline of Richmond, because they have given us, really some anecdotal numbers on that and they’ve been doing very well in that community.

I think that they’ve been doing something close to 12 to 15 homes a month in that area. Some of that stuff is going to be seasonal.

So they see a little bit more demand over maybe, some from April through October timeframe, but they are starting to run out of inventory of lots there, which I think is going to bode well for when we start to deliver lots, so that they can continue the penetration to what they’ve seen. They’re very accustomed to this particular submarket.

So I think they’re excited that we have existing inventory in this area as well. There is some other activity that’s going to be occurring in the Sidonia part where I think we have another homebuilder that’s just broken ground in that area.

They have, I’m not sure what the total number of lots that they have, but I think they have a couple of years’ worth of lots in that area. But this seems to be one of the fastest-growing submarkets in the Metropolitan area, and I think it has a lot to do with the lot availability, the price points.

I think these lots are being delivered in the City of Aurora, which will be a little bit higher price point than ours, just because of some of the cost structure developing in the City of Aurora compared to our particular jurisdictions Arrapo County, so we’re excited about being able to do that type of activity, similar sized product and hopefully, be very competitive in terms of not only the delivery of lots but then home prices for the builders themselves..

Right.

And so Richmond, are they the largest participant in this – of the three partners that you have for the first 500 homes?.

Yes, yes. They have about close to 200 lots. And I think then Taylor Morrison and KB split fairly closely the balance of the remaining lots..

Great.

And just to remind me again, what’s the price of the lots? And what do you think the price is going to be?.

So on average, we can model this out at about $70,000 a lot. It varies depending on the size of a lot, the frontage of – the front footage of lot, some of the lots are 45 feet, some of the lots are 50 feet. So some are between $65,000 and $75,000, depending on the size of the individual lot..

Okay. And just one other thing.

On the Aurora Reservoir, any update there on the discussions on the possible sale of your reservoir to Aurora?.

No, do not. It’s a transaction where we’re looking for opportunities to monetize additional assets that we have on the Lowry Range. City has expressed some interest to do that, as have others.

So we are working with a number of different groups that have expressed interest on that, and seeing what that might look like for opportunities for us, either just to sell it outright, sell it and participate, jointly develop it, or any number of combination of structures..

Right.

And then, other acquisitions like Wild Pointe, what does the pipeline look like for other possible acquisitions?.

So there are – we probably have three different groups that we’re talking to right now. There’s a subset, I think, oftentimes, I kind of reference there maybe as many as 80 to 90 different water providers in the Metropolitan area, and really, the 95% of them serve less than 5,000 connections.

So these are all fractionated, small world or just a small water utilities that are either small municipally owned, small districts or even still continue to be owned by developers. And so those are kind of the targets that we’re looking for.

We have some areas of influence where they’re more attractive to us than other areas, so we want to kind of concentrate on some of the acquisition surrounding systems to the Wilde Point system.

And then some that are in the I-70 corridor as well, and see if there’s an opportunity for us to leverage our water resources and bring additional resources and operating expertise to these small districts. So can’t get too detailed about those, but to we are – we certainly do have our nets out for opportunities..

Okay. Thanks, Mark..

You got it..

Thank you. And our next question comes from Bill Cunningham [Private Investor]. Sir, please state your question..

Hi, Mark. Congratulations on getting the due diligence done. That’s great news..

Yes. Thanks, Bill..

I have two questions.

One is, when do you actually expect to see physical work to start with home construction? And the second has to do with the accounting on this, will there be any revenue this quarter reported, now that you’ve got the due diligence done? Are there any deposits or anything along those lines will be happening? Or is that going to be further down the line?.

I will – so let me take the second one first, in terms of due diligence, deposits and things like that. So yes, there are additional diligence deposits. So what happens is, the builders have put up certain funds at the close of signing the agreement.

And then we had the diligence period, which just completed, and then they’re responsible for placing additional funds into escrow, so those two things have happened. So we have seen that those funds are now deposited. Then the next components are going to be once we deliver platted lots.

And so it should be maybe another 60, 75 days before we complete the platted lot deliveries and really, the platted lot deliveries include a lot of the physical infrastructure. So before you can get a platted lot, you’ve got to have every road, every easement, every sidewalk, every fence, every park, all your lot lines defined.

And so there’s a tremendous amount of engineering that goes into delivery of those final plats.

And you can imagine, when you get 506 individual lots, together with all of the drainage parcels and the parks and the open space and the common areas, that’s a ton of information that our engineers have been compiling, and then the city has been reviewing and going back and forth on comments.

And so, let’s take a look at that, maybe in that 70- to 90-day period where we’ll have finished lots on that basis. During this period of time, one of the things that we’ve also been doing is taking a look at the grading profile, the drainage profile, the improvements that need to be made and some of the earthwork.

And so what we like to do in this particular market is, we do like to have a lot of that earthwork being done over the winter, when you have challenging weather conditions here in Colorado. So some of that work can still be done thought the winter.

So we hope after we’ve gotten a couple more comments back, were processed through the county with our improvements and the grading plan and our drainage plan, that we can then be cleared to get a grading permit.

And so if that’s the case, then we hope that we can be breaking ground on this sometime in the January or February time frame, and then be working that – those lots in making the initial 200-lot pad spaces available for us to be rolling into the better weather seasons here in Colorado, into the spring and summer, so we can start to work on delivering finished lots to the homebuilders..

Okay.

And as far as collecting deposits, does any of that count as revenue or will strictly go on the books as a deposit for future services?.

Yes, it will only – actually, we would only book that at such time as that money is released to us or one of the milestone deliveries..

Okay. And actually, one more question for you. I noticed on the commercial property, there’s one parcel where you have labeled Home Depot.

Is that just an example, or do you actually have something with Home Depot for that?.

Yes, that’s clearly to be illustrative as to the type of box to our realtor – box store operator, the real – retail operator. Didn’t quite get that out..

Okay. Okay, very good. Thanks very much..

You bet. Operator [Operator Instructions] And there appear to be no further questions at this time..

Okay. So again, do want to thank you all for your continued confidence in what it is that we’re doing. Certainly, this has been a very exciting year for us, and so we look forward not only to adding to that from our successes at Sky Ranch, and then our continued opportunities for providing water for our oil and gas partners in this.

Couple of announcements. I do have a couple of conferences that we’ll be presenting at. I’m actually headed to Dallas this afternoon, presenting at the IDEAS conference down in Dallas tomorrow, and then we’ll be at the LD Micro Conference on December 5, in Los Angeles. So those are a couple of conferences.

I know typically, we have a water conference in New York City this time of year, and the NYSSA has booked 20 consecutive years of its water conference, and I think they quit while they were ahead on the 20th anniversary last year.

So I’m thrilled to have the opportunity to do to LD Micro Conference this year because it always competed with that water conference in New York. So for those of you that find yourselves in L.A.

or in Dallas, please stop by and I’d love to say hello, and see if we can’t give you a little bit more detail and answer any questions you might have about how we’re progressing and the opportunities we have before us. So with that, I will bid you all farewell, and thank you very much for your continued support..

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day..