Pure Cycle Corporation (PCYO) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Pure Cycle Corporation Q1 2015 Earnings Call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder today's call maybe recorded. I would now like to introduce your host for today's conference Mark Harding, President and CEO. Sir, you may begin.

Thank you. Thank you very much. I'd like to welcome you all to Pure Cycle Corporation's first quarter November 30 2014 first quarter fiscal 2015 earnings call. Before we get started, we do have slide deck for this presentation which can be found on our website, you have to go to the website and then right there on the front page at the bottom of the screen it will talk about the presentation, click on that, that will bring up the presentation and then you can follow along with me and I'll try and note the transition of the slides as we move through each of the slide. Also before we get started, I want to say that we're all, here in Denver still morning over our performance of the AFC West divisional playoff first night. We had a hopeful opportunity for advancing and being now here this year, but unfortunately we of course had different play book in mind. With that said, let me talk about Pure Cycle, there is number of exciting things that we want to highlight and also give you guys an update as to what our expectations are for the year and some of the moving parts that have been occurring relative to oil and gas and some of the company's operations. So our first slide here is our Safe Harbor statement which identifies that statements are not historical facts, that are not historical facts contained in here by reference by this presentation are forward-looking statements within that meaning of the SEC Reform Act of 1995. With that said, let me talk to slide three, talk a little bit about the milestone achievements for our first quarter 2015. We had three real areas of emphasis we want to talk about and really drill down on some color on. One is the oil and gas activities at Sky Ranch. We've had two wells drilled on the Sky Ranch property which hold all 648 acres of our mineral lease by production. And they are – the first well was completed in late October. The second well was completed in late November. And they are – the first well was fracked I think in December and then the second one is set schedule for frac sometime later this week. Second component was the completion of some contingencies in our WISE project. This was a project that you've heard me speak about often over the last few years. It’s a project which is a regional project, water project where it involves some infrastructure and some water supply. I want to talk a little bit about that, that we're excited about this acquisition and the availability of additional infrastructure for our operations, as well as additional water. And then thirdly, I want to talk a little bit more about the foreclosure process and elimination of more the Tap Participation Fee that we have relative to the High Plains default that we've been processing over the last couple of years. So if you move to the next slide. First quarter fiscal 2015, we have again, each area of operations our increased revenues from our first quarter of 2014 and continuing our trend towards profitability as we saw in Q4. This is Q1 2015, it shows profitability, each element whether that’s delivering water through fracking water services, our municipal revenues, as well as agriculture leasing portfolio all saw increases in that total revenues of about 834,000 for the quarter end. Moving to our next slide, talk a little bit about the industrial water sales. This is probably one where I think everybody would like a little color on. But we saw water sales Q-over-Q between 2014 and 2015 increase about 56%, demonstrating our system expansion capacities from 2014. We will likely see compatible results of this for the first half of the year. However, as I am sure this will be news to, this won't be news to anybody, there is been precipitated decline in oil. And I want to talk little bit about what that means to the company and what that really means to the company as that there is likely to be fewer oil wells drilled within our service area this year. We do not have much guidance from our operators [ph] as to what additional well activity would occur. But we can say that they have laid down, the rigs that they had operating in this area and they have deferred additional rigs that were scheduled for the field until further notice. So, while we do have an understanding is that the field has very good permits [ph]. The results that had been published on the field have been very positive. We know the operators continue to invest in well permits. They are lining up as many well permits and pad sites as possible to be able to continue to proceed developing the field. They are working on product pipelines, whether that’s oil and gas pipelines. It got rights of ways that they are working and we are working in conjunction with them on some of that stuff to be able to co-locate some water lines at some point in the future and be able to take a look at how we continue to expand operations and service to this field. The field itself and I think this probably is pretty indicative of most of the shale oil plays. But the field itself I think is been fairly well defined. Operators have pretty good understanding of how they would go about it. The well drill time has significantly compressed with the last few wells just because they've understood most of the science and mechanics of the field. So they have fairly good understanding of how they like to continue developing the field, but I think its going to be function of the price of oil. What we really don’t have a good feel for is that what price of oil would thus change the dynamics for additional wells that they would drill into the field. We will continue to update you with that stuff as we become – be aware of that from our operators that are working in this field. But for the time being, we have very good results, very good operating margins, very good delivery of additional capacity from our system expansion and continue to meet the expectations of our operators in this field. Moving to the next slide. This kinds of gives you an overview and a snapshot of the field area. I think as I discussed in our year end call, little bit ago, there is some – there is number of wells that are in this area that are very nice wells. They are – what they call gas driven wells, they are producing just with the gas drive on that. I think the operators drilled – the field itself has seen about 40 wells, this I think, so it’s about 35, but I think they are up to about to 40 wells in this particular area. And some of what this shows is some of the infrastructure that is located in this area, you have existing gas collection lines that are taking the gas product to market, some of that is still under construction, some of that still yet to be defined. We've got some right-of-ways that extend up to our property at Sky Ranch. We're looking at co-locating within that right-of-way for some water transmission facilities which will improve our operational aspects of delivering water at a – and more cost effective rate then being able to do this all by transmission lines on the ground and be able to maintain higher service flow capacities from that type of line. So we continue to work on expanding our operations in this area. We're very cautious about doing that, I don’t want to be over extended in this area. The system expansion that we had in 2014 I think was very – a very even expansion, where we were able to expand our system with reserves that the company had without over extending ourselves, all at the same time making adequate investments, so that we increase the production capacity for the operators in this field. So I think we struck the right balance between increasing the system capacity without over extending that, based on whatever we are hearing on continued development, continued expansion for field operations. Moving to the next slide, talk a little bit about our oil and gas royalty revenue. As you know we have a 20% gross royalty interest on 640 acres that we have. There is actually two wells that will be drilled into our formation. If you move to the next slide, slide eight, we show you a sort of photo of where these two wells are going be there, located on the very east edge of the property. The Sky Ranch well is actually on our property. The Property Reserve well is actually not on our property. That’s on property that the company does not own. There is half section there that we do not own. But it pools mineral estate, these are 10,000 foot laterals, so they pool two square miles, 1280 acre poolings on each of these. So these two wells are very close proximity to each other. And so they were drilled at different intervals, but they were sort of fracked simultaneously and they really are fracking these things sequentially because you can't put one line, one well online with them being as closest they are, then you diffract these two sort of in sequence and then be able of complete them and bring them online. So the second property reserve one is schedule for frac starting later this week. The fracs on these continue to be inline with the same amount of water usage as we've seen historically on that, some where around the 9, 10 million gallons of water fracs. So they go through some where between 45, and 50 stages of fracs on those and really complete that after they've got those done. So, company should have a better indication of what these wells will produce probably some time in the spring. They will complete them. Then we'll probably bring these online. They will have some level of production beginning in February, March timeframe and then we'll have the better idea what that’s going to look like. Let me talk a little bit about the next slide, our agricultural operations. So revenues for our agriculture operations are up a bit. We continue to work on this portfolio, continue to look at how we're optimizing our rents, both our cash rents, as well as our crop share rents. Our rents are still predominantly cash lease rents. We had a more typical agriculture year in the Arkansas Valley in 2014 then we did in previous years due to the drought. But I think our leasing policies still has a little bit of leverage room and we're going to continue to look at opportunities for us to be able to improve and return of this asset, whether that’s taking a look at working with the farmers on a crop share basis or making improvements into the farm lands for higher efficiency irrigation practices, like sprinkle systems and others. Next slide, I want to talk a little bit about the default, the High Plains A&M defaults. I think we've really talked about this over the last four or five quarters and really nothing new other than we have processed couple more farms through that. We have one remaining foreclosure. So we've cleared titled to nearly all of the farms that we were looking to bring to the foreclosure and really eliminated almost all of the TAP Participation Fee. We've got about $1.7 million remaining on the TAP Participation Fee. We had one lawsuit that was dismissed in September with the cooperation of High Plains. We have couple of lawsuits that are really nearing their completion. We have trial schedule for those in late February. So I think most of the – most of the prefatory work on those have been done, I think the depositions and all that are complete and the real activity [ph] straightforward trials looking at interpretations of the contract, our remedies, as we view those remedies compared to what High Plains view those remedies. But we think that this will certainly have a positive impact for us to resolve any remaining litigation that we have and we've had a little bit of that with the State Land Board and with High Plains over the last couple of years. Moving over to our next slide, talk a little bit about our utility operations. Our municipal water & wastewater services still are very marginal components in terms of contribution to revenue and earnings for the company, but those are still up a little bit. Moving to the next slide, talk a little bit about the acquisition that we've made relative to the segment. We – our wholesale water and wastewater provider and we really focused most of our acquisitions on that activity. And as we've been talking about over the last several quarters, we've been working with the South Metro Water Supply Authority and the South Metro WISE authority to be able to bring online a very innovative, very cooperative project where we have something called WISE project and can have a government project without having accruement [ph] in that, but if the water infrastructure sharing efficiency project and this is really is an outstanding project because what it does is it ties 13 different water providers, water systems together and allows you to maneuver water to and from the entities within that. In addition to having some water as a part of this equation, it has some infrastructure component and that’s one of the things that attracted us to the project is the infrastructure that allows water from Lowry to be able to be accessible and provide water into and get water from this system. And so there is about 11 or 12 miles of infrastructure that already existing, that we're buying from an existing water provider and then that acquisition gets tied into an inter connected among the various members of that. The key components of it are we're – that our participation in the water side is, we're getting an additional 500 acre feet of water pursuant to this project and that water is coming from the south plat from city of Aurora and the city of Denver’s water supplies. As they have those available, we're getting about 3 mgd of pipeline capacity within the system and it’s a phased purchase. So we have an incremental purchase over a period of 5 years. I think our projections are that we have about $1 million to $1.2 million a year that will be invested in this acquisition. Our 2015 expenditures have been budgeted within the company, so we have the liquidity for all of those expenditures. And we do believe this is going to be a very unique opportunity for the company to be able to expand our systems, and provide additional water supplies and also be able to add to additional supplies, should those needs arise from continuing operations either through oil and gas or through the development of our Sky Ranch supplies. The other thing that this does, is it does have an integration for the potential use and development of our reservoirs at Lowry, whether we work in conjunction with the South Metro Authority or with the neighboring city of Aurora. We have a number of opportunities on being able to take a look at how those reservoirs and those assets become available for use and become an opportunity for the company to monetize those and then also incorporate those into additional project. So from the utility model side of the company, we're very excited about this adding to our portfolio. We think it’s a great acquisition. We think it’s a great opportunity for us and for all of the participant in the project. Moving to the next slide, talk a little bit about Sky Ranch. As many of you know we have about 1000 acre parts of property right along the I-70 corridor and really this is going to be continuing the focus of our energies and our efforts over the coming year. The Denver real estate market continues to be a very active and probably one of the better, major metropolitan markets in the United States. We continue to see increased house prices. We can see constricting or timing of available lot supply in the market. So you see all of the metrics that we track are all favorable over the last several years and they continue to demonstrate a very robust, a very strong market. We've got a lot of interest in Sky Ranch. It’s a complex project because you have – you have a big thousand acres. It’s about 4400 single family homes, zone for it. You have a large component of commercial square feet, commercial retail square feet that also zone right along the front edge, along the interstate, a lot of opportunities for us in this. And so what we're looking for is to be able to identify how the company would like proceed. The board continues to evaluate all sorts of different opportunities, whether that’s joint venturing with somebody, being able to sell this to a developer with some certainty on timing of developments and being able to help partner with them with some of the resources that the company has. So I don’t have too much more specificity to that, other than we are – that continues to be main focus for what the company is looking at and the market continues to demonstrate a very healthy climate for our opportunities in this area. So with that as some of the color on some of the achievements, I also want to kind of highlight the financial performance, because you always highlight when you're in the black [ph] on your quarter. So we really, our water deliveries are up, as well as our water revenues. So water revenues are up about 53% and again about, most of that due to increased water deliveries for fracking water sales. Moving to the next slide, the general and administrative expenses. G&A is in line maybe just a slight increase over where we were in 2014 and really that’s – that should start to decline. We've processed all of our foreclosures through the process, so we don’t have any additional cost associated with that and we are nearing completion with our litigation cost and the set up for those litigation. As you know, as anybody who is been involved with litigation, much of the prefatory work is high cost on that. So we look for G&A expenses to level out or even decline as we see year end results year-over-year for the company. Moving to the next slide , we love to show a slide that shows positive revenue results, so continuing trend of profitability from Q4 into Q1 of 2015. One of the tangible results of the foreclosure process is really the elimination of the impudicus [ph] interest expense from that High Plains royalty obligation. And while that was really never direct range on liquidity for the company, it did have skewing of the effects of the P&L. So we're delighted that that’s going to have a more readable presentation for investors as they as they continue to screen the company and be able to look at our operations, where our revenue drivers are, where our liquidity needs are and where the overall results of the operation. So that’s going to be a delight to be able to show those on a more tangible basis, rather than showing at imputed interest expense. Moving over to current assets, we are due in a very healthy liquidity position. The larger drop here as we display this for our current assets is really attributable to the reclassification of the default receivable moneys from High Plains and we move those from our current asset to a long-term asset. So you know the company has good liquidity. We have good cash and cash equivalence to be able to continue through our operations, as well as the acquisition of the WISE project. Total assets in line, so we really have no change in the total assets. We'll see a bit of reclassification, some of the investments that we're making from the WISE project and then ultimately the equity section increased significantly Q1 2014 over Q1 2015 predominantly as a result of processing all of the High Plains in and foreclosures. So we've got summary of our balance sheet information, as well as our statement of operations. And then lastly, I do want to note that we do have an address change. We have moved our addresses out, actually closer to where our operation, field operations are. So we are actually working, operating as off Quincy which is directly across the street from the Lowry Range, some of you that have been [indiscernible] facility, this was where the Conoco headquarters are and there is a number of other commercial buildings here that are owned for – by our project group that we lease some space on. So we're delighted to be a little closer to our operations to make our overall operating systems and facilities much more tangible, much easier for our operating personal staff. So with that, what I'd like to do is hand this over to Q&A and see if I can drill down any more specifics on some of the color on these things. But what I do want to really emphasize is, the company is in terrific shape. We have excellent liquidity. Our water utility model continues go grow. We continue to make investments and expand our water and wastewater systems and our water infrastructure capacities to continue to deliver to grow that model. The real estate market continues to strengthen and continues to show a great opportunity for us on the lands that we own within the Sky Ranch property and we look forward to really monetizing that property, as well as additional opportunities relative to the WISE project. So with that I'll hand it over and see if anybody is getting any specific questions.

Thank you. [Operator Instructions] We do have a question from Brent Rystrom with Feltl. Your line is now open.

Hi. Good afternoon, Mark. Just a couple of quick ones. When you listed the options for Sky Ranch the development of it, are you looking at all at any self development options or just the ones that you kind of identified in your prepared comments?

Yes. We continue to look at that. One of the things that we want to try and look at is, the best structure and then also the best way to develop it. So, if somebody ways the magic wand and says okay, here is $10 million to invest in the project, how would you put that to years, and that give us an understanding of how to best fees it, how to best look at the start of where those money's would be best spend. And so we've spent sometime working with partners and developers to understand those types of questions and then see about how that partnering would work and if it’s not a partnering you know how the company would look at it. There are opportunities where we may find an opportunity to make some investments along those lines. We're very, as you know, we're very cautious of invested capital, very cautious of our equity capita. So those things play very heavily [indiscernible] just as well as our board’s analysis. But there are phase opportunities for us to take a look at there. So we tried to take a way the issue of cost of capital and really look at it as use of the capital and make sure that we understand the project and its fundamentals on each element of that and more and more re-address the areas of cost to capital, because we certainly appreciate a start of that project has tremendous opportunities for us, within how we develop the utility franchise. And so, there maybe opportunities for us to leverage each of those to make this an opportunity in how we move this thing forward with our partners.

Okay. Quick follow up to that, as you're looking at that, any headcount additions as you value with Sky Ranch that you could see coming in 2015?

I do not see that. We have – I think we have adequate staffing for that, matter of fact we have adequate staffing. We're going to be putting some water transmission lines in the ground that we've already purchased. We've got the existing staff to be able to do that. So there is some incremental investment that we are able to do where we can add service capacity to the property without having any additional staff.

Right. And final question, any particular thoughts, any sense on what the major developer, the Niobrara is telling you, as far as whole payments versus drilling, any visibility at all for that?

No, I don’t. I do know that, if I just do the back of the envelope math for myself, and take a look at some of the leases that we're familiar with, they have a substantial amount of wells that they would need to consider over the next couple of years to be able holding most of those by production. There maybe as many as 30 wells, if my numbers are correct on Lowry, and then maybe 20, 30 wells off of Lowry that hold all those leases by production. So the 40 wells that they've been drilling to date, I think give them a substantial look at what the field is and in all relations to the footprint that they have. So they have a very large, they have 200 square mile footprint that about 130, 5000 acres that I think they have a pretty good idea of what this field is going to look like over that, over and across that field. So it seems to be fairly attractive given what they've announced in their results. And so I think this is one of those domestic plays that is a good long-term play and we look for them to be a continued operator out here for very, very long time. So there maybe that will be some pull back. I know there is going to be pull back in 2015, I don’t know to what extent they'll have additional wells in 2015. But I think they still look at this field is a very attractive long-term field.

Thank you.

Our next question comes from Jeffrey Scot [indiscernible] Asset Management. Your line is now open.

Hi, Mark.

Hi, Jeffrey.

There have been three wells drilled to date, right?

On Sky Ranch is actually two wells drilled on Sky Ranch.

Okay. All right. And those are non-royalty wells?

They are royalty wells.

They are royalty wells?

Yes. So if you look at that slide, let me get to the slide number, eight, that shows you the two royalty wells that we have on Sky Ranch. I mean, there is a total of maybe 40 wells in the field.

Okay.

And our two royalty wells, we've got 120 acres of the property reserve one. That’s one quarter section where we have a royalty interest and then 480 acres of the royalty section in the Sky Ranch well. So each of those 1280 acre interest.

At least the ones that go into production in February?

Yes.

When will you know the amount of the royalty checks?

Probably when I get them. I really don’t have a feel for that process yet, just because we're still new that process. I am assuming that as they complete those and those come online, those are based on days of production that they will report and then we get a royalty computation based on what they sell that product for.

Okay. All right. The permits that are being requested, how long is a permit good for?

They are actually – I think they are good for 1 year with a 1 year extension. So call it 2 years.

So even though people are not drilling now, they are still going to the permitting process which gives them 2 years to actually stick some metal on the ground?

I think that true. I mean, what they want to do and I do know that it’s been a little – they have had a little longer lead time on some of the permitting then they have in other areas of operations. So what they want to do is get an inventory of permits available, so that they can be more aggressive and be more efficient about how they are attacking the field.

Okay. The CapEx for fiscal 2015, what is your current expectation of total CapEx?

Its $1.2 million.

Pardon?

$1.2 million.

$1.2 million in total?

Yes.

And virtually of that is for WISE project?

Correct. Yes.

There is very little other than WISE?

That’s correct. Very little other than WISE.

Okay. On the Sky Ranch development, would you expect to make a firm decision in – calendar of 2015, 2016, 2017? What kind of timeframe are we looking at?

Great question, and I wish I had some more specificity to it. Based on the conversations that we've got going, I am fairly bullish about our 2015 clarity, but I've successfully predicted that for the last 2 years. The market continues to grow well Jeff, and I think it really does given the level of interest I think there is some opportunity for us to be more specific about that, I just don’t know if I got a sense of where and how that’s all going to come together.

Okay. You have one main driller, how many other drillers do you talk to about their activities in the Niobrara?

So there is basically three, one main, but we have basically three lease hold interest areas within our area of influence…

Yes.

And so we have talked with two of the three in that and you know, its pretty similar story. They – it is a price per barrel function. It is necessarily taking a look at lining our permits and making sure that all the regulatory stuff that they need to get done are done and available to them. So I think a consistent story that – its not – has nothing to do with the field or the attractiveness of the field that has everything to do with the price of oil.

The latest baker [ph] used drill count shows that the activity in Niobrara is down from 58 rigs working down to 56, it doesn’t show any huge drop, is that kind of what you've been seeing?

I think that’s consistent, if we take a look at it from the northern field and what I would say most of the press coming out of the Niobrara formation has been that they will drill the same number of wells. They are not going to expand the number of wells that they are looking at year-over-year, where they may have had some expansions where they may have gone from 58 rigs to 70 rigs that’s not going to happen. I now at least our main operator has released the one rig that they have, but they also have the ability to bring that back or bring multiple rigs back to pick later in the year, or pick up in 2016. So I think its going to be, everybody is going to look at sort of a steady state of what's going on in the core Wattenberg field. We'll see what happens with our operator in sort of the Southern Wattenberg field, but nothing seems to be catastrophic now. I am learning about the oil and gas business. We're water company, but it is an important component or has been an important component for us and it’s very interesting and we've got plenty of capacity that we can provide water to this – for this particular function in a water short area. I mean, that’s – water happens to be one of the critical elements in this field to be able to secure. And so I think we have demonstrated our capacities to a very high degree of success with a great deal of success for the operators that are working in the field. So we'll see how the price of oil influences much of that CapEx We try and look at though quarter-over-quarter, but maybe you know, how does target a range in the next 3 to 5 years. And I think it looks very attractive for us and while may see some of that decline in our third and fourth quarters, we're also going to see new source of revenue being royalty revenue. So we're still very bullish about our overall profitability for 2015.

All right. For the November quarter, how many drilling wells were you supplying with water, during that three months of quarter?

We just had the one rig working, so I think there was 3 maybe 4 wells. We're running about a $100,000 a well given the water deliveries per well, that 9 to 10 million gallons of well.

Okay. And so your – but there is no drill operating as of today?

Right. And we still have about 3 more wells to frac, so our Q2 will look very similar to our Q1.

And Q3 will drop off if there is no activity initiated?

Yes. You are likely to see pick up in royalty revenue in Q3.

Yes. Okay. Thanks very much.

Yes.

Our next question comes from David [indiscernible] Your line is open.

Hey Mark, how you're doing?

I am great, David. Good to hear your voice.

Yes, I am sort of getting back in the suite of things here a little bit. I mean, you alluded to this a little bit and I know you guys have done a lot of things over the last years to kind of diversify the story a little bit. But I am still kind of interested in your view of just of sort of the 10,000 foot [ph] view, I mean, I think that the narrative for the long time and the story was really just kind of just deep water value in a really place where water was likely to become more and more scarce. And I guess I've always looked at the company from that perspective, but if go the other things you're doing there great. But is that – you still view that near to this is – as you know, largely intact I mean, that notion that you have this company that controls a great deal of water in a place where water is likely to become more and more scarce and ultimately more and more valuable, is that still, is that nearer to still apply here in spite of all the diversifications, some of the other things that you're doing?

It really does, I mean, our genealogy, the core of the company continues to be a water utility company. That we – I think we did very well on some acquisitions. We know we did very well with the Land acquisition on Sky Ranch that vertically integrated ourselves. The property is a very attractive piece of property. Its located in a great spot, has an interchange right up the interstate and we acquired that and are really for to at as time. That said, not a lot of people were buying raw land in that timeframe. So it worked well for us in terms of the opportunities that we now have on the land development side, but it really was a fundamental utility acquisition. We were protecting our utility franchise on that because anybody that was going to pick up the land was going to pick up the benefit of our utility and there was no value of that utility in the land value when it was in bankruptcy. So, while we have, you're exactly right, I mean, the company has exactly focused on some of those diversifications, whether that was diversify way from a core dependency on having another water provider, take actions, we know we still are a wholesale water provider and are working on relationships where we can provide also water service to a number of different communities, by picking up some raw land and being able to control the timing of development of that raw land more consistent with the market principles and the market went soft on us. But at the end of the day, the market is very robust in the Denver as you know and then the oil and gas opportunity was terrific for us because it was a very large customer where we were able to expand our facilities and we did so in coordinated way where we didn’t over extend ourselves, provided additional capacity to those oil and gas enterprises that were very attractive for them. They needed it to be able to explore this interest. I think they've verified it and then the price of oil went out. So that diversification still hold and will still be very attractive for us in the long run. But if you look at how we look at the world, we look at the world through water utility focus. That always been our focus. We haven’t acquired oil and gas interest, we haven’t acquired real estate interest, were the fact that those are diversification, those all had to have threads of our water utility business. And the acquisition of the WISE project is a classic example of us continuing down that path where we're getting infrastructure and not only are we have a healthy and very long portfolio of water on a ship which you alluded to, but we're increasing our opportunities for infrastructure to be able to deliver that to a number of different areas and that have pipeline capacity and all of the attractive things that we want to do to an enterprise. So as opposed to having this huge and valuable portfolio of water ownership, which continue to be the case, now we're bolting on that by being able to have ways that we can monetize that not only for our direct utility opportunities but then also commercial opportunities for industrial water sales and other areas. So it is exactly that, you've got your nail on it and I think it’s – our fundamentals continue to be exactly the utility franchise that we have.

And there is no particular reason to believe that the water issues that have plagued the eastern slope for how ever long, that those are any less acute today then they've ever been?

No. I mean, they may have been deferred for a period of time just because of the weakening in the real estate market. But there is just – at some price if you look at it, at some price if you are on a costal area, there is a water supply available. We just don’t have that options here. There is no additional new water that’s available and you have to reach further and further away where we have go on the west slope or where we have to continue to reach further and further away for agriculture water right. Those are the – there is no unallocated water in the city of Colorado. Its all spoken for year and anybody that’s looking at increasing water supplies are in the competitive market of buying existing water rights, so I think it’s going to continue to increase in value.

Perfect. Thanks a lot.

You bet. Thanks for the question.

[Operator Instructions] Our next question comes from Elliot Knight with Knight Advisors [ph]. Your line is open.

Hi, Mark.

Hi, Elliot.

Its time to drop down from 10,000 suite to ground level.

Okay.

You commented, you mentioned two names, Wattenberg and South Wattenberg and first question is in talking with people in the industry, answer was north of the drilling done so far are these two separate fields or are they, or is really just one big field?

That’s a good question, Elliot.

Well, let me tell you why I am asking. Because the follow on is if they are two separate fields then the next question is, are there any differences in the production characteristics the decline of the wells in Wattenberg versus the south Wattenberg area that’s where the question is growing?

Yes. That’s – and it’s a really spot light, my deficiencies and understanding oil and gas. In a layman's term you know, I always look at the Niobrara as a singular shale deposit and it was created by a marine deposit and so all of Colorado was a marine see floor and so I think of this as a Niobrara being uniform formation whether that’s in the Wattenberg field or the Southern Wattenberg field. That said, I do know that there are areas that are better produces than others and I don’t know why that necessarily is the case and I would even presume even within the field that we have that there are probably wells that are producing than others. I don’t know if that’s because they continue to tweak how they are drilling, how they are completing what the orientation is, what the type of water they use for frac, or what the formulae is for the frac, probably all of those are variables in completing any given well into the field that will tell you whether the decline curve is consistent with what the operators are seeing across the Niobrara deposits or otherwise. So I want to say its based on that level of my understanding and you probably have a better understanding as a recovered oil and gas analyst that it is the same type of formation, and the geography of the field is really only to orientate to as where one particular operator is versus another.

Well, what I don’t know and what I am thinking about is what you may hear sort of as settle but from people, as anybody says hey, the wells down here are, very [indiscernible] around up in the one verdict or the better or they are not quite as good that’s really where I was going if they are not, what you say about its being one field deposits – the depositions certainly makes good sense?

Got it, and I am going to say it’s a consistent field than the results are going to be from an operators art in being able to drill and complete and that sort of stuff.

Okay. So there was no reason to expect any difference in the natural decline, it has to be pretty rapid?

Yes, I think so, and I guess we'll, the more wells you get the more information you get, so that probably will continue to define itself as we get more specificity into this location versus maybe things that are few miles north of us.

Okay. Let me just offer one observation because yes I did use to be an oil analyst. The first royalty check that comes in, there maybe a temptation to be disappointed in it because the chance was of it being less than a four months share of the production are pretty good.

Yes.

So, we just need to take that first months check with a grain of salt I think?

Yes, and ultimately of might be of how they report that, as this how many days of operation that sort of stuff, but having never participated in that, I am yet to – yet to understand how that will actually come to us.

Yes. Well, when you talk about it, if you put it on the days of production and may check through it then I think…

Yes…

Will refer to everybody…

Just because everybody has the same data points.

Yes, right.

That’s good.

Thank you, sir.

Yes.

That’s all.

Thank you.

Our next question comes from Robert Kirkpatrick with Cardinal Capital. Your line is open.

Hi, Mark.

Hi, Rob.

Could you talk about the prosper community which is located and has been I guess approved by various [indiscernible] that’s going to be located adjacent to Sky Ranch?

Yes. So that’s an assemblage, I think it’s about 5000 acres assemblage directly east of where we're at. And so what they are looking at doing is getting a land used application similar to ours as where it’s a preliminary development plan, where they are looking at having a number of different types of development, whether that’s residential, really a mixed used development. It has residential, commercial, retail all the same elements that we have. It’s about twice the size of what we're looking at Sky Ranch. They have a quite a bit more acreage but about the actual development is about twice the size of Sky Ranch. And they've been working away to the process; we look at that as a very favorable addition because it continues to drive interest. It’s for east of us. So logically speaking if the metropolitan area grows from west to east as it has historically, that continues to demonstrate demand for the market. So again is another opportunity for us, its an opportunity we certainly would like to work with them on the water issues, they still need water service and so we have been discussions with them about opportunities for water availability, they are developer, they have developed some retail space and commercial space, so if there an opportunity for us to find a relationship with them on the development side. So there is a number of joint opportunities that that particular development may per trend for us, but still very early on in the process I think I'll get there, they will get their zoning probably some time this month on that and then we'll see where they want to head with that. But that’s as much as I know about it.

Great. Thank you so much.

You bet.

I am showing no further questions. I'd like to hand the call back to Mark Harding for closing remarks. End of Q&A

Okay. I do want to thank you all. Again, really over time of the call here, as I just wanted to bring everybody current on some of the moving targets that we have, whether that was some of the activity on the oil gas side, we do look at some of the pull back on that relative to the number of wells that will be drilled in 2015, but still feel that 2015 will continue to demonstrate our trend towards profitability, so we're very excited about that. We want to continue to emphasize our water utility operations and that we will continue to grow and develop that business as one of the calls earlier, we are water utility company and that continues to be our primary focus and Denver continues to be one of the best areas to be one of those companies and have a long portfolio of water that you can put to beneficial use and really opportunities for us are in the expansion of infrastructure and so we've got a couple of very exciting opportunities that have come to fruition after couple of years of work that we're very excited about. So if you didn’t get a call, or if you didn’t get the chance to ask a question or you didn’t want to ask on the call, certainly don’t hesitate to give me a shout, happy to give you what ever insights that we have with the company and what we're doing. But thank you again for your continued support and we will continue to keep you apprised.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.