Greetings and welcome to the Pure Cycle Corporation 2018 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Harding, President and Chief Executive Officer for Pure Cycle Corporation. Thank you, Mr. Harding, you may begin.

Thank you very much. I’d like to welcome you all to our 2018 annual earnings call. We do have a slide deck with this call. If those of you want to follow along with the slide deck, you can find that on our website at purecyclewater.com. If you click on the Investor tab there, you’ll see the first big box there will be the slide deck for this particular call. And so what I’ll do is I’ll try and note the transition of the slides as we progress through the presentation and it will allow you to keep track with the audio and the visual portion of this. So with that, I’d like to welcome all of our veterans and thank you for your service, if you’re listening on the line and happy Veterans Day to you all. You will see our 10-K will be filed tomorrow morning before opening of the market tomorrow, but wanted to get this earnings call out to you as well as our press release of our financial results. So first slide is our Slide 2, which will be our safe harbor slide, which basically talks about these are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. You’re all familiar with the safe harbor statement. Our first slide and what I’m going to do is kind of give you a very quick, very brief overview of the company as I think most of you are familiar with the company. So our first slide really defines where our revenues are driven from. At our DNA level, we are a wholesale water and wastewater utility providing – wholesale water, wastewater provider operating in the state of Colorado and primarily in the Denver metropolitan area. This year we broke ground on developing lots…

[Operator Instructions] Our first question comes from the line of Bill Miller with Hartwell. Please proceed with your question

Good morning. In all the different endeavors, fracking, metro and homebuilding, where do you get the highest price for your water? And where do you have the most pricing flexibility as you look into the future? First question. The second question is as you look out one or two years, you’re going to be generating a lot of cash. So what do you expect to be doing with that cash at some point? And when do you think that point will arrive? I mean, I’m sure there are multiple things you can do, but let’s just go through those and tell us which looks like the most attractive way to use your cash?

Okay. Thanks for that, Bill. So on the first question, we – when we’re selling water to the oil and gas segment, I would say we get our highest price in the price per 1,000 gallons that we sell to them principally because they’re not paying a tap fee. So they are not paying all – their ratable share of all of that infrastructure that goes behind delivering that. And if they’re not paying that capital, so this is sort of an on-available charge, then they paid what is – what we classify as our hydrate. So we collect about $0.55 per barrel in 2018. I think that bumps up to a little bit in 2019, but that’s going to be the highest price per 1,000 gallon. And the reason for that is they’re not paying that tap fee. When you look at our residential customers, our residential customers pay plus or two and it’s a tiered pricing schedule. So their first tier, which will be a low amount of water that if it’s just a retired couple that live at a house and they don’t have a very big lawn, they may be a base fee. I think our base fee is around $35, $38 per month, and then a consumption charge, which will be around that $4 per 1,000 gallons. And if you equate that to what the oil and gas guys are paying, the oil and gas guys are paying somewhere around $13 per 1,000 gallons. So substantial difference in that. Now if the individual resident uses more water on a monthly basis, then they move up in those tiers. And so the top tier maybe as much as $8 per 1,000 gallons as they use more water, but – so we try and keep that rate relatively modest for just the internal home needs. And then as they irrigate more lawn or they irrigate more times during the year, then those numbers increase. So that’s kind of the analysis on the difference between what we charge the oil and gas companies compared to what we charge to residential customers and the methodology of doing that because of the capital allocation from the tap fees.

[Indiscernible]

Sorry, say that again.

If you go on, where do you have the most pricing flexibility?

Pricing flexibility. Probably in the oil and gas space. And what we tend to look at is sort of the percent of capacity that the oil and gas guys are using in our system. So as we continue to use more and more of our system and they rely more and more on that system, then we will charge that into that price that we deliver to them. So that’s a good component of that because we will continue to build up that system. And if they’re using higher and higher percentage, which I think that, that’s going to be the case that this drilling methodology and the efficiencies that they are seeing and the returns on their wells continue to advocate field development principles for this, that we’ll see higher and higher utilization of those prices for oil and gas that’s compared to the residential customers. Going to the second part of your question, which is going to be when we start to generate a bunch of revenue, how does the management look at this thing? And I’ll speak really from management perspective and then kind of turn it over to our board’s philosophy as we’ve discussed this a number of times. So we look to reinvest that into current assets that we have. Can we take that capital and reinvest that into current assets, whether that’s developing more in our water utility so we have higher capacity to deliver water to our customers, whether those are for oil and gas needs, for municipal needs, where we can trade and exchange that water out to the WISE system or directly through Sky Ranch and other connections that we provide to serve. So that’s our first course of invested capital. To the extent that we find opportunities for acquisitions, so…

What about stock buybacks?

I doubt that’ll be in that portfolio so to say. If we don’t think our shares are fairly valued and still have opportunities to do that, we would take a look at share buybacks.

Thank you.

You bet.

[Operator Instructions] Our next question comes from the line of Geoffrey Scott with Scott Asset. Please proceed with your question.

Good afternoon, Mark. How are you?

I’m great. How are you?

Very well, thank you. Sounds like everything is going according to schedule. Couple of quick questions. You said that revenue have been recognized from two out of the three builders. What is different contract with the third builder that provides a different timing on recognition of revenue?

So we have two types of structures on our builder agreements. One is with the finished lot delivery. So we get paid lump sum soon as we turn over a finished lot. And they sort of pay the higher end of our overall lot development fee. We’re priced in that within the overall lot fee, but it’s a sort of a finished lot delivery. And that doesn’t happen until we turn that over. We have plotted lot phase, wet utility phase, and then finished lot delivery if you break it down into the three segments. With the other two builders, we have something called a lot development agreement. And so what we do is we transfer title to those two builders after we have platted lots. So we had that over the summer. And so we transferred 150 platted lots and we got something roughly the first third of that money and then they escrowed the balance of it. So we got $2.5 million from transferring this 200 – or the 150 platted lots, and then they escrowed another $7.75 million. And then as we finished the next two phases, that next phase is wet utilities, and we’re nearly there on the wet utilities because we’ve been moving very well through construction on the wet utility phase of this thing. We should have that done by year-end. And then we would invoice that second component of that, which would be half of that residual amount, half of that $7.75 – $7.7775 [ph]. And then when we deliver the finished lot, that will be the second half. So we have three payments under the lot delivery agreement and one payment with the finished lot delivery with the one builder. And so as you take a look at it when we are finishing the lot and let say, we’ll finish some model home lots and we’ll get a dozen lot payments to our both, we’ll get wet utilities and call that – I want to say end of the year, but call it January when we are able to build for that next third of the purchase price on the 150 lots, and then we’ll be delivering finished lots to all three builders. So that number will be more than just that remaining component that would be in the escrow, because the finished lot delivery agreement with the third builder will come into play.

Right. All right. Okay. The timing on the commercial development and is it still going to be the case that you’re going to sell the freehold for the commercial and let somebody else develop it.

So we’re still – that’s still – we’re looking for opportunities. We’ve had a little bit of interest on the commercial side, and some of that was to help our participate where we might be able to participate some of the land value. We’re not going to go beyond delivering a platted lot for that. And that might be a pad site, that might be three-acre pad site for a finished lot delivery. So we’ll never go more than that, but we may consider opportunities where we continue to participate on the land side with somebody that would develop it. So I would say that there’s a broad range of options how we might look at that commercial piece. Some of our directors who have extensive experience with it have consistently said they always regretted selling the commercial too early. And because we have the flexibility with our liquidity that we can look at other structures with that. That might be something that we’ll look at. We don’t want to be too far afield, and I want to be a big landlord in that area. We want to be able to partner up with somebody who really would be representing our interests in that – in a development of that nature. But because we have that flexibility, we can consider something a little bit more creative and maybe something that’s a little more attractive from a return standpoint.

And When do you have to make a decision on that?

Nothing timely. So I mean, we’ll have the entry road available. And so we’ll start to see a lot of traffic in that area. And I think that commercial is going to really follow a lot of the opening of what we’ve got from the residential side.

Okay. Last question, you didn’t mention anything about a reservoir sale, so I assume nothing’s happened?

Yes, no new update there. I mean, we continue to work with South Metro and all the parties within that to take a look at how that integrates within the regional context, but nothing to update with that.

Okay. Thanks very much. I appreciate it.

Our next question comes from the line of William Cunningham, a Private Investor. Please proceed with your question.

Hi, Mark. I’m actually comparing one of your slides in your midyear presentation, infrastructure costs with some of the numbers in this. But the presentation is a little bit different. But if I understand it correctly, it looks like you might actually be spending considerably less than what you would budgeted for then. I’m looking, for example, the overlot grading, where you were budgeting $3 million for the first 200 lots, and you actually did the entire area more than twice that size. So I assume I could double that as a budgeted or potential budgeted number. Plus you got the storm water facility in, which I assume is the $2 million drainage number that was listed there. Is that correct?

Yes. It is…

Or is it a little bit different?

No, it’s about that.

Okay. Plus you got 90% of the wet facilities in, so – and you did that for $7.2 million. So it looks like you did that for a couple of million less than what you were originally planning if I’m reading that correctly.

Yes. And don’t lose sight of the fact that there’s some period-over-period type invoices. So this is as of August 31 and my presentation maybe a little bit more updated on percent complete on terms of all the other stuff. So I would say we’re pretty close to being on pace to our budgeted cost for each of these investments. And whether those are from a timing standpoint, how they were complete with the $7.2 million and all the percentages, there may be a little bit of timing difference there. I think we are a total – our total to date would probably be closer to $9 million on all that, that might be more consistent. And then even within how we are building those, some of that stuff carries over in terms of how we bid it. So sometimes we bid out in the aggregate and then are only just given notice to proceed for certain segments of that. So we bid out all of the grading, we did do all of the grading. We bid out all of the utility package, and then the only portion of the utility that we gave them notice to proceed on is sort of that brown 250 lots. We bid out all the rose curb and gutter, and then what we are really raising on the rose curb and gutter are we’re going to do the entry roadway and then sort of that internal loop, if you take a look at that yellow loop, and that’ll open up lots. Maybe that will open up 60 lots and then we’ll continue to expand out from there with the roadways and then incrementally deliver lots. So we’ve really try to be as close to just-in-time inventory for this so that we are not holding a bunch of inventory and the builders aren’t holding a bunch of inventory in terms of finished lot deliveries. And then our contractor can just prioritize That. They’re on site the whole time, and so it’s a big enough site where they can kind of phase in. So we – Bill, I will tell you that’s one where I think we’ve done a very good job with our team to be able to try and phase these improvements to really not get too far over our skis and really dial down our cash balance.

Great. Thank you, Mark.

Mr. Harding, there are no further questions in the queue. I’d like to turn it back to you for closing remarks.

Well, again, I’d like to thank you all for your continued support. We’re certainly delighted about the progress that we’ve made, and I think we’ve got a very good year in 2018. Our runway over the next several years is going to look fantastic with deliveries of lots with the expanded and continued development in the oil and gas sector and continue to be able to look at the new acquisitions, all of which there are exciting things that the company is working on. Some of those results you see in our year-end results here. Some of those, we hope to be able to describe a little bit more detail as those things mature, but we’re very focused on execution. We are very focused on making sure that we are investing your capital wisely and prudently. We are very hawkish on our denominator for shares outstanding, and I know Bill Miller wants us to kind of reduce that. So we’ll continue to look at opportunities where we can return value to our shareholders. So it’s been a great year. We’ve had a lot of exciting challenges here, and I think we’ve met those challenges very successfully. So we’re thrilled with our additions to our team here, and we are thrilled with our opportunities, both at Sky Ranch as well as our utility segments. So I’d like to, again, thank you all for that. We will have shareholder meeting in January. If any of your travel plans will take you through Denver, please take a look at that. I think that’s on January 16. So it’ll 2:00 on January 16. We’ll be filing our shareholder Annual report together with our shareholder letter within the next couple of weeks. So you’ll see that together with the proxy to the overall Annual Report. But again, thank you very much for your continued support. We look forward to continuing to value our assets for you.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.