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Pure Cycle
Corporation is an investor owned water utility uniquely positioned to
capitalize on the skyrocketing costs for water service in Denver Colorado
through development of its large unallocated portfolio of water to the
region
Utilities
Water Utility
(PCYO-NASDAQ)
Pure Cycle Corporation
8451 Delaware Street
Thornton, CO 80260
Phone: 303-292-3456
Mark Harding
President
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
February 24, 2005
BIO:
MARK W. HARDING President and CFO joined Pure Cycle in April 1990.
Mr. Harding has been primarily responsible for the operations of the Company
including the negotiation and acquisition of the Company's principal
assets. Mr. Harding brings a background in public finance and management
consulting. From 1988 to 1990, Mr. Harding worked for Price Waterhouse,
where he assisted clients in providing public finance and other investment
banking related services. Since joining the Company, he has negotiated the
financing necessary to acquire the Company’s assets as well as the
negotiating the privatization agreement with the State and area developers.
Mr. Harding has a B.S. Degree in Computer Science and a Masters in Business
Administration from the University of Denver.
Company Profile:
Pure Cycle Corporation owns water assets located in the Denver, Colorado
metropolitan area and on the western slope of Colorado. Pure Cycle provides
water and wastewater services to customers located in the Denver
metropolitan area and provides services such as the design, construction,
operation and maintenance of water and wastewater systems. We also own
patented water recycling technologies which are capable of processing
wastewater into potable drinking water.
CEOCFOinterviews: Mr. Harding, will you give us
a little background on Pure Cycle Corporation?
Mr. Harding: “Pure Cycle is an investor owned
water utility, principally operating in the Denver, Colorado area. We own
and operate water systems that deliver water and wastewater service for
customers in the Denver area. We are different from many other water
companies, which you find in this business segment because of how water is
characterized and treated in the State of Colorado. The State of Colorado is
uniquely positioned as the head-waters of a number of major tributaries for
western states water supplies. The bulk of the state population happens to
be located on the east side of the continental divide where 80% of the
population resides in the Denver metropolitan area. The disconnect is 80% of
the water supply happens to fall west of the continental divide, which is
over 150 miles from the Denver metropolitan area.
Historically, the Denver area has met its water needs through the one
surface water feature that flows through the Denver metropolitan area, which
is the relatively modest South Platte river. In the South Platte drainage
system, we receive approximately thirteen inches of precipitation a year,
which is classified as a semi-arid region; or in simpler terms it is a
dessert. That has been one of the critical elements in the growth of the
Denver area and the development of water supply to the region. The company
was originally formed in late 1970’s to capitalize on taking advantage of a
system where we were able to process wastewater into portable drinking
water. We did that at the household level where we would put a unit behind a
single-family house and be able to provide a homeowner complete independence
from any other water or wastewater system. We expanded from that initial
effort to develop water supplies and scale the initial business model from
individual units to a community wide systems. Through that effort, the
company in the 1990’s set out to acquire a portfolio of water supplies.
Water supply in Colorado is treated as a real property asset because it has
such limited availability; and as such is a separable interest from the
surface acreage. Owners of water can take and capitalize on it using the
water in any way they choose, whether that was historically to mine mineral
claims or to farm agricultural interests. The State has a complex judiciary
system, which is set apart from the standard judiciary to handle water
related matters. It is appropriately called Water Court. Water Court grants
entitlements to water, which provides owners a vested deed that then can be
use in any manner. The company took that as its primary business model and
set out to acquire water interests with the intent to develop those
interests to provide water and wastewater services to the community.”
CEOCFOinterviews: If water is at such a premium, why are water
supplies available?
Mr. Harding: “After the State’s 125 years of
existence how is there any water available you ask? The water supply we
bought in 1996 was purchased in partnership with the State of Colorado and
that alone is why this particular asset was uniquely available. The State
Land Board as an agency of the State of Colorado; is a school trust agency,
which owns this asset. The Land Board manages its assets in perpetuity and
did not have any impetus to sell the asset, but rather sought to develop the
asset in conjunction with it’s land holdings. As the metropolitan area grew
out to the Land Board’s property, the Land Board sought to begin development
of the water interests. Finally in 1996, PureCycle entered into a
comprehensive privatization agreement with the Land Board to develop the
water which continues to this day. The agreement is divided into two
components one whereby the Company owns 11,650 acre-feet of water and can
take it anywhere we want throughout the Denver area. The balance, which is
approximately 17,500 acre-feet of water is specifically reserved to provide
water and wastewater service to the state’s property. PureCycle is
responsible for developing, operating and maintaining those water assets on
behalf of the state through a contract period until 2081.”
CEOCFOinterviews: How much is an acre-foot of water?
Mr. Harding: “Literally, an acre-foot of water
is one acre covered one foot deep. It is approximately 326,000 gallons of
water. What we have are annual entitlements to withdraw approximately 30,000
acre-feet, which translates into trillions of gallons of water. That allows
us to provide water service to approximately 80,000 single-family houses
where about one half of one acre-foot of water is used per year per house.”
CEOCFOinterviews: Where is Pure Cycle today?
Mr. Harding: “The company has recently entered
into a contract to provide water service to a new master planned community
in the south eastern part of the Denver Metro area, servicing water serving
up to 4,850 homes. We will be developing infrastructure, wells, pipelines,
and treatment facilities to deliver the water to individual homes beginning
this year. The development of the Denver area is trending toward the
southeast. Construction on that project is expected to begin this summer
with model homes available late this year.”
CEOCFOinterviews: Do you bear all of the development costs in that?
Mr. Harding: “We do not bear the development
costs of real estate but we bear the development cost of the water supply.
That is usually paid for by revenues we received from hooking up to our
water system and then monthly revenues we receive from metered water
deliveries. We get two revenue incomes from our assets. First, we receive a
one-time tap fee, which is typically paid by the developer granting access
to our water and wastewater systems. Tap fees are usually amortized into the
cost of your home. Tap fees out here are relatively expensive. One tap,
which will grant a homeowner access to less than one-half of one acre-foot
of water, costs $12,500 dollars today. Tap fee revenues are used to build
the water infrastructure we need to produce, treat and deliver water to our
customers. Ongoing, the company receives monthly water and wastewater
revenues from metered deliveries to customers.”
CEOCFOinterviews: Once you have infrastructure, are delivery and
maintenance costs a major expense?
Mr. Harding: “The major component is building
the infrastructure. Ostensibly, the majority of these systems are gravity
based. The reason you always see water tanks on hilltops are because water
is pumped to an elevated storage tank and that storage site maintains
pressure for service to individual homes. Technology plays an important role
here because most of these systems have very advanced control-monitoring
devices that communicate with company operators to be able to notify us when
there is a problem or a potential problem. We then do what is necessary to
make sure that a problem doesn’t interrupt service.”
CEOCFOinterviews: Is this the first of several projects that you
would like to do?
Mr. Harding: “Yes it is. If you look at the
overall inventory of water, we have the capacity to serve 80,000
single-family connections. Our first transaction represents less than 5% of
our overall capacity. We have a lot of water that is available and we are
one of the few agencies that can meet the growth demands of the region. In
large measure, a lot of the growth that is going to occur in the Denver area
over the next few years is going to go to those areas that have available
water supplies.”
CEOCFOinterviews: Are there competitors?
Mr. Harding: “Colorado as a whole is a sales
tax driven state. That has created an incentive structure where we have a
number of different municipal governments that all compete for development.
If you look at the Denver metro area, there are over fifty different
municipalities in the Denver area and they have fifty different water
providers. As water inventories have dwindled and new water projects have
not come on line, water has become one of the more critical elements in real
estate development. While there are some other municipalities that do have
some water supplies, none of them have enough water for the future growth
that is going to occur in the Denver area over the next twenty years.”
CEOCFOinterviews: Are there other companies that have water assets,
which you are competing with, to get into the newer projects?
Mr. Harding: “There certainly are other water
interests. There are agricultural water interests for example with
tremendous pressure to convert agricultural water into municipal water.
While agriculture represent the largest use of water in the State, it is
very difficult to convert those supplies into municipal interests. The
efficiencies of converting agricultural water supplies into municipal water
supplies are very low. You lose a tremendous amount of water to the system
because all you are allowed to convert is the amount of water that was
consumed by the particular agricultural interest. The company does for the
time, enjoy a relatively unique position of having an un-allocated portfolio
where others do not.”
CEOCFOinterviews: How does technology play a role in the water
industry?
Mr. Harding: “There are a tremendous amount of
technologies that are affiliated with the water industry. We actually do not
develop the technology; our bias is to own the water and then use technology
developed by others for our operations. For example, meter-reading
technology has advanced to where you no longer have to have a physical
person read a meter. We’ll have a van drive down the street and the meters
will send out a signal to the van, which will automatically read the water
usage for that particular residence, put it into software and give you an
automatic billing process. They provide tremendous efficiency rather than
have somebody walk up, uncover a meter and physically read the meter. The
company does have technology where we process wastewater into portable
drinking water. We will not reuse our water under a closed-loop system,
however we will have something commonly referred to as a ‘duel distribution
system’. You have two water pipes, one is a potable pipe for in-house use
and the second is an irrigation pipe that takes care of all of the outside
lawn irrigation demands and finally a third pipe will be the wastewater pipe
taking wastewater out of the house. We use our recycling technology to
continue to process wastewater to a standard that is certified by the state
to be able to be used for irrigation demands and thus decrease the overall
water supply demands for in-house uses.”
CEOCFOinterviews: How does Pure Cycle deal with the issue of security
today?
Mr. Harding: “We have closed systems. We are
very protective of our water assets. We have very secure storage facilities
that are monitored and allow us to monitor anyone that goes in and out of
our facilities. Our water facilities that produce ground water are very
secure wells, located below ground and locked in vaults with no access by
the public. Access to the wells themselves, are actually welded so that
there is no opportunity for anybody to have any access. Surface reservoirs
have controlled access with security fences and gates. We take security very
seriously within our operation.”
CEOCFOinterviews: Are there regulations in terms rates for water?
Mr. Harding: “Colorado is an unregulated market
for water service because it has such a limited water supply. The public
utility commission does not want to be in the position of trying to
determine what a willing buyer and a willing seller will be willing to
transact for the assets. The State of Colorado is involved in this
particular asset and they have an ownership interest in the real property as
well as a royalty interest in the water. An important feature of our
providing water service was for our rates to be market-based. Our rates and
charges are the average of similar rates and charges from three surrounding
municipal water providers."
CEOCFOinterviews: What is your financial condition?
Mr. Harding: “Excellent! The company has a very
strong balance sheet. We have a cash position of approximately six million
dollars. We have a burn rate of about $600,000 dollars a year. We have
enough cash on-hand to not only meet the operations of the company but also
to allow us to invest in infrastructure or consider acquisitions in the
coming months. Most of that infrastructure investment will come from
revenues generated from tap sales, however, where appropriate, the Company
may consider additional investment in infrastructure."
CEOCFOinterviews: Why should potential investors be interested in
Pure Cycle and what should they know that they might not realize when they
first look at the company?
Mr. Harding: “A number of things; one is we
operate in an unregulated water/utility segment, which is very unique in the
industry. About 5% of our assets have been put under contract and will
generate approximately $60 million in tap fee revenues and over $3 million
in annual revenues. The potential as a whole will generate in excess of a
billion dollars in revenues to the company. If you look at the absorption
and the growth of the Denver Metropolitan area, what we do know with
certainty is that the Denver area will grow by another 1.3 million people in
the next twenty years. That will translate into 350 thousand new
connections. The company has the capacity for eighty thousand connections.
If we capture 25% of the new growth of the Denver area we will fully build
out our assets in the next twenty years generating in excess of $2 billion
in revenues from tap fees, and in excess of $100 million dollars in annual
revenues. We have tremendous growth potential with our and have almost no
debt within the company so we are ideally positioned for substantial growth
from operations and hope to generate significant shareholder value.”
CEOCFOinterviews: Is reaching investors a focus for Pure Cycle?
Mr. Harding: “Yes! The Company has been public
since 1977. We have intentionally stayed below the radar screen because we
didn’t want to be setting expectations until we had a bit more certainty as
to the timing of water sales. As that happened, we have been much more
active about highlighting the Company assets, business model and growth
opportunities at investor and industry conferences. We will continue to
highlight our company and look forward to an exciting year."
CEOCFOinterviews: In closing, what surprised you most about the
development of Pure Cycle?
Mr. Harding: “I have been with Pure Cycle for
fifteen years and have structured most of the asset acquisitions of the
company. One of the things we always knew is we were acquiring a very
valuable asset. The difficulty was it was not so clear as to when those
assets would begin to monitize. We knew year-over-year our assets increased
in value because we knew the price of water in Denver and the State of
Colorado continued to rise. If you look at tap fees fifteen years ago, they
were ranging around $2,500.00 a tap, now they are over $12,500.00 a tap. We
have seen tremendous increases in the value of our assets and our
shareholders have benefited. The company continues to maintain a fiduciary
role in managing the investment capital. It was inevitable that these assets
would be monitized, we just didn’t’ know when and how that would happen.”
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