Mark Harding - CEO

Good day, ladies and gentlemen. And welcome to the Pure Cycle's Second 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 host, Mark Harding, CEO. Sir, the floor is yours.

Thank you very much. I would like to welcome you all to our mid-year earnings call. What we'd like to do today is highlight our results of operations for the first six months of the year. As with most of our calls, we do have a slide deck for this call that can be accessed on our Web site, so it will be on the front page of our Web site, lower middle highlight bar where you can click on that. It will pull up the presentation and I will note the transition of the slides as I progress through the presentation. So with that, I go ahead and get started. My first slide, it is the Safe Harbor statement. So statements that are not historical facts contained or incorporated or referenced by this presentation, are forward-looking statements pursuant to the Securities and Exchange Act of 1933. I think you all are familiar with the Safe Harbor statement. Just very quickly and I'll just quickly do this and for those that are new to the Company and new to the story here. Pure Cycle added to DNA is a water utility company. We have about 27,000 acre feet of water resources in the water short Denver metropolitan area that we use to generate revenue, both in terms of the water utility segment, as well as some of the other segments that we have, which I'll highlight in our presentation. Some of those areas are that we provide water to single-family communities and then in addition to providing the utility franchise we also happen to own some land that we’re developing, that I'll highlight a little bit more. We provide water service to the industrial community through oil and gas users to provide water for fracking purposes in the metropolitan area,…

Thank you. The floor is now open for questions [Operator Instructions]. And our first question comes from Aaron Steele. Please state your question.

Just looking at the Wild Pointe acquisitions, when did that officially close?

So we closed that in December. And so we're just starting to recognize revenue attributable to that. And in fact the nice thing and I should have pointed this out in the text of the call is we're going to start to see tap fee start coming in. So we've already receded tap fees from new connections out there, some tap fees from commercial connections and then also additional residential units. So quarter-over-quarter, our third quarter, you're going to see tap fee revenue coming in and then expansion to our customer base and usage revenues coming in attributable to that acquisition.

Then are those tap fees similar to the tap fees you will be planning on receiving at Sky Ranch?

The system that we picked up is a fully developed system, what you're likely to see is really the margin component of those tap fees. So where we look at our tap fees are around $30,000 per connection, combined water and sewer and it's about a 50% margin over the CapEx on that. You're going to see that $15,000 margin component because there's not that amount that's going to go to the CapEx. So that's going to be coming in, they’ll do15,000 but we don't have any additional CapEx attributable to it.

And then maybe just on the outlook for the frac water supply for some of the wells. How many wells were in the Company supply line for the first half of the year?

Just the one. So for the first six months, we had the one which was our sort of the 20 million gallon frac, so that was about a 200,000 little more than 200,000. So some operators have brought new designs to that that are increasing the water call on that. Some operators may keep with the same frac design. So we’ll wait and see how each operator forecast that end. What we're planning on is just kind of that 10 to 12 well limit for the reminder of the year, and the experience that we have at that 10 million gallon $100,000 per frac opportunity.

Then on the royalty interest, you thought that the decline curve, you know it's kind of been flattening out a little bit here, continuing to see that maybe 2.5 to 3 year. At any point, are those wells likely to be refraced?

They will, so typically they -- what I've seen from other wells in the Niabara formation is that's a five year cycle. So we're about two and a half, we're about half way through that five year cycle. They come in and I do know that they are reworking our well right now. So I'm not sure what they do when they rework that well. But we'll probably pay close attention to see what the production is off of our rework. It's not a refrac, but it is a rework where they'll go in, they’ve got some equipment there that they're doing some stuff down whole on, and then we'll see what that does to stimulate additional performance out of the well and then watch very closely how they start to refrac some of these wells. Now, that's our particular well. We'll start to see some of those refracs that are a little bit older because our well was the last well drilled; so some of those first wells that are going to be drilling might be within a year of net schedule five year rotation and fracking. So in addition to having some of the drilling activity go-on, you might start to see that start to ramp up from a rework of some of the existing wells that are in the formation. They drilled about 40 wells, so we got 40 operating wells that we supply the water to currently in the formation. So why we like this space is; not only is it a very efficient way for us to deliver water through the infrastructure that we’ve got invested; and I think that partners very well with our oil and gas operatives; because it's very efficient for them to take those deliveries; but it also allows us a significant opportunity for the capacity that we built over the years. So we looked at serve that capacity for our residential customers. But we have about 1.5 million gallon a day capacity, and that's enough capacity to serve a couple of thousand homes. So we're very still very long on our production capacity compared to what likely absorption is going to look like from our residential development.

Then on the Sky Ranch side, what is the timeframe on that first phase? And then have you gotten a sense of maybe that appetite for the builder lot take down kind of what those would be on a quarterly basis?

I do. I have a lot of specifics on that, but I probably can't give you too much of that in advance of having those things, those agreements finalized. We are working with multiple builders. So I'll tell you we've got three builders that we're working with, all are demonstrating significant interest. They want to put a lot of sales force out there, because this is one of their few places where they can get entry level product. Each of them have product that they're very specific about that they're not going to overlap each other, they're not going to cannibalize each other. But yet they can serve very distinct market segments on that. So we're happy with the group that we're working with. And what I hope to do is probably have some clarity to that within that 60 to 90 day window. And frankly what I'd like to do is probably get another call out there, so I can really detail out the specifics of that for you all at that time. So, let me reserve some of that details and I'll save some of that powder for that particular call.

And our next question comes from Jasper Scott. Please state your question.

Quick question on the tap fees. How will you recognize them on your financial statements, which line item will they be in?

So, you'll see a specific line segment for tap fee revenue increase. So we've got operating revenue that come in, and that's a year-over-year operating revenue. And then you'll start to see -- it's been a number of years. And this particular tap is a new tap for us. We have some commercial taps that we recognize that were part of building our system and we amortized those over a longer period of time. This one is where we're selling residential taps; and because all of the infrastructure is built and delivered pursuant to that; we'll be able to recognize those taps, all concurrently with that, because the sales cycle of that will have been closed. But you'll start to see that as a reportable revenue segment within the income statement.

So right now, one line item is industrial water used for fracking, one is water and wastewater one is other. And there'll be a fourth item called tap fees received?

Yes.

Going to Sky Ranch, you are kinds of working with the housing developers to design product. How do you go about designing the commercial side out? First of all, what is going to be the percentage of Sky Ranch, which is going to be commercial or number of acres or whatever? And then how do you go about deciding, one supermarket, three banks, four to fast food, one dry cleaner. How do you go through that process? Are you doing this by yourself, are you working with somebody?

I am not doing this by myself. Recognizing as my wife continues to highlight my limitations in this world, I'm not that guy. So we have brought in a team to do that. So we're working with CBRE to be able to help us navigate those fields. So I've got a listing agreement with them. And really taking a look at that front corner, so call it a 160, you take that quarter section up there, probably not quite even that as the 160. But you take a look at that front corner up there and say those are really right up along the Interstate. And if you tuck yourself in that Northeast corner and that's probably pretty good activity for industrial space because it doesn't need the visibility; right on the interchange, you're probably looking at retail space because it has high visibility; high traffic flow; and then transitioning between those two; and that's about as much about commercial as I know. But then also feathering in where you've got the commercial, then you'll feather into some multi-family. So that'll be some -- maybe some multi-family mixed use apartment type product; and then maybe attached product; and then feathering down into this detached single family product. So there's a transitional area. And so really we work with, both the commercial realtor guys that work with our land planners to really segment that out, and say okay, here is what we're seeing in the market, and we've a high degree of flexibility within our zoning to really establish those pads anyway we want. So, we've got some infrastructure that we can set the whole thing up efficiently and then each individual pad and pads may range from an acre to maybe 20 acres, depending on the type of use on that. And then if you take a look at that as a percentage of the overall project, it could be 20%. We're looking at maybe 600-800 maybe even as much as a 1,000 single family connections attributable to the commercial activity up there.

What are you thinking about in terms of total value of that commercial part of it?

Good question, I think Jasper I have…

You are going to selling us off completely with no residual value other than the water service rights.

Yes, we’ll have that but there may be some areas where we’ll maintain the super pad and do that on a per square foot lease type basis, we’re evaluating that. So whereas your selling, I can sell a single family fully developed lot in somebody has a building permit on that, a 50 foot lot for $75,000. But I might be able to sell a commercial pad for $4 or $5 foot. So we bought it by the square mile and in some cases we’re going to be selling it per square foot. So that’s going to be a pretty attractive way of us to continue to monetize that. We don’t want to necessarily be in the leasing business, that’s nearly not our business model. So we’re going to favor those types of opportunities where we can sell it on a super pad basis to somebody that would like in that way. And frankly, what we’ve heard on that is because so much of this property right along the interchanges along the Interstate are owned by people who only lease it by square foot. And there is really a dearth of people out there looking to say yes, I understand that but I really like to own my own building, my own center that’s great we are that type of guy, because that really doesn’t fit with our long term goal. While we like to build our recurring model through usage revenues, we’re also cognizant of trying to stick to those things that we’re good at.

Looking out over a five year development process of the commercial side, is there a range of dollars that you could be talking about in terms of total sale proceeds?

I don’t have a good guidance for you on that.

No even $25 million range?

I don’t, if I’d be pulling something too far out of the, my rear gear to be able to you to give you a number on that. I do know that that corner is going to be priced per acre, significantly more valuable than our residential price per acre; maybe three-times, three to five times more valuable per acre than our residential components.

And there appear to be no further questions at this time.

Okay. So to the extent that anybody couldn’t get the technology to work for them, but you had a question. Certainly feel free to give me a call. And we can drill down into specific color or some of these things. Again, we have made substantial progress in all elements of this. We’re delighted to have the residential opportunities to be opening up sometime later this year. We’re delighted to have oil and gas activities return. We’re going to see multiple phases of this project going on concurrently. So while we’ll have three builders working simultaneously on this first Phase, we’re looking to have multiple builders, multiple phases and multiple categories between residential, commercial activities going on at the same time. So the Company is really excited. Our Board is excited about the progress that we’ve made, sharing the talents of all the Board members. And they’re all weighing in significantly. So our management depth is not just me out there in the marketplace, I’ve got significant strength and significant support from our Board, great management team. So we’re excited about executing on all avenues of what it is that we’re doing. So stay tuned and please don’t hesitate to reach out and give me a call with any questions. Thank you all.

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