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Pure Cycle Corporation  (PCYO)
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    Sector  Utilities    Industry Water Supply
   Industry Water Supply
   Sector  Utilities
 



 

What are Pure Cycle's Business Segments?



Our Rangeview Water – We own or control a total of approximately 3,300 acre feet of tributary surface water, 20,450 acre feet of non-tributary and not non-tributary groundwater rights, and approximately 26,000 acre feet of adjudicated reservoir sites that we refer to as our "Rangeview Water Supply." This water is located in the southeast Denver metropolitan area at the "Lowry Range," which is owned by the State Board of Land Commissioners (the "Land Board") and is described below.

We acquired our Rangeview Water Supply in April 1996 pursuant to the following agreements:

(i) The 1996 Amended and Restated Lease Agreement between the Land Board and the District which was superseded by the 2014 Amended and Restated Lease Agreement, dated July 10, 2014 (the "Lease"), among the Land Board, the District, and us;
(ii) The Agreement for Sale of non-tributary and not non-tributary groundwater which we can "export" from the Lowry Range to supply water to nearby communities (this portion of the R

angeview Water Supply is referred to as our "Export Water") between us and the District (the "Export Agreement"); and
(iii) The 1996 Service Agreement between us and the District for the provision of water service to the District's customers, which was superseded by the Amended and Restated Service Agreement, dated July 11, 2014 (the "Service Agreement"), between us and the District.

Additionally, in 1997 we entered into a Wastewater Service Agreement (the "Wastewater Agreement") with the District to provide wastewater service to the District's customers.

The Lease, the Export Agreement, the Service Agreement, and the Wastewater Agreement are collectively referred to as the "Rangeview Water Agreements."

Pursuant to the Rangeview Water Agreements, we design, construct, operate and maintain the District's water and wastewater systems to allow the District to provide water and wastewater service to its customers located within the District's 24,000 acre service area at the Lowry Range. Subject to the terms and conditions of the Lease, we are the exclusive water and wastewater provider on the Lowry Range, and we operate both the water and the wastewater systems during our contract period on behalf of the District, which owns the facilities for both systems. At the expiration of our contract term in 2081, ownership of the water system facilities located on the Lowry Range used to deliver Non-Export Water to customers will revert to the Land Board, with the District retaining ownership of the wastewater facilities. Through facilities we own, we use our Export Water, and we intend to use other supplies owned by us, to provide wholesale water service and wastewater service to customers located outside of the Lowry Range, including customers of the District and other governmental entities, industrial, and commercial customers.

Of the approximately 20,450 acre feet of Lowry Range groundwater, we own 11,650 acre feet of Export Water. We also have the right to convert up to 1,650 acre feet of the Export groundwater to a similar amount of surface water for use off the Lowry Range. We hold the exclusive right to develop and deliver through the year 2081 the remaining 8,800 acre feet of groundwater and approximately 3,300 acre feet of average yield surface water to customers either on or off of the Lowry Range. The combined approximately 23,800 acre feet can serve approximately 59,400 SFEs based on the average use of 0.4 acre feet per SFE.

The Lowry Range Property – The Lowry Range is located in unincorporated Arapahoe County, about 20 miles southeast of downtown Denver. The Lowry Range is one of the largest contiguous parcels under single ownership next to a major metropolitan area in the United States. The Lowry Range is approximately 27,000 acres in size or about 40 square miles of land. Of the 27,000 acres, pursuant to our agreements with the Land Board and the District, we have the exclusive rights to provide water and wastewater services to approximately 24,000 acres of the Lowry Range.

Rangeview Metropolitan District – The District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas. The District is governed by an elected board of directors. Eligible voters and persons eligible to serve as directors of the District must own an interest in property within the boundaries of the District. We own certain rights and real property interests which encompass the current boundaries of the District. The current directors of the District are Mark W. Harding and Scott E. Lehman (both employees of Pure Cycle), and two independent board members. Pursuant to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year. Mr. Harding and Mr. Lehman have both elected to forego these payments.

South Metropolitan Water Supply Authority and WISE – The South Metropolitan Water Supply Authority ("SMWSA") is a municipal water authority in the State of Colorado organized to pursue the acquisition and development of new water supplies on behalf of its members. SMWSA members include 14 Denver area water providers in Arapahoe and Douglas Counties. The District became a member of SMWSA in 2009 in an effort to participate with other area water providers in developing regional water supplies along the Front Range. We entered into a Participation Agreement with the District on December 16, 2009, whereby we agreed to provide funding to the District in connection with its membership in the SMWSA (the "SMWSA Participation Agreement"). of funding to the District pursuant to the SMWSA Participation Agreement. For over three years, the SMWSA members have been working with the City and County of Denver acting through its Board of Water Commissioners ("Denver Water") and the City of Aurora acting by and through its Utility Enterprise ("Aurora Water") on a cooperative water project known as the Water Infrastructure Supply Efficiency partnership ("WISE"), which seeks to develop regional infrastructure that would interconnect members' water transmission systems to be able to develop additional water supplies from the South Platte River in conjunction with Denver Water and Aurora Water. Tthe District together with nine other SMWSA members formed the South Metro WISE Authority ("SMWA") pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement (the "SM IGA") to enable its members to participle in WISE. The SM IGA specifies each member's pro rata share of WISE and the members' rights and obligations with respect to WISE. SMWA, Denver Water and Aurora Water entered into the Amended and Restated WISE Partnership – Water Delivery Agreement (the "WISE Partnership Agreement"), which provides for the purchase and construction of certain infrastructure (pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. We have entered into the Rangeview/Pure Cycle WISE Project Financing Agreement with the District, which obligates us to fund the District's cost of participating in WISE (the "WISE Financing Agreement"). We anticipate that we will be investing approximately $1.2 million per year during each of the next five years to fund the District's purchase of its share of the water transmission line and additional facilities, water and related assets for WISE. In accordance with the WISE Financing Agreement, we expect to be entitled to approximately three million gallons per day of transmission pipeline capacity and 500 acre feet per year of water.

 

Agricultural Operations and Leasing – Since September 1, 2012, we have been tracking and reporting our farm operations as a separate business segment. Based on acreage, of our farm operations were managed through cash lease arrangements with local area farmers, whereby we charge a fixed fee, billed semi-annually in March and November, to lease our land and water rights for agricultural purposes. Based on acreage, approximately 22% of our farm operations were managed through crop share leases, pursuant to which we and the tenant farmer jointly share in the gross revenues generated from the crops grown under a 75% farmer, 25% landlord participation. The majority of crops grown on our farms are alfalfa, with a number of acres also planted in corn, sorghum, and wheat. For additional information regarding this segment's revenues, gross profits and assets, see Note 13 – Segment Reporting to the accompanying financial statements.

Tap Participation Fee – As further described in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates below and Note 7 – Long-Term Debt and Operating Lease to the accompanying financial statements, we agreed to pay HP A&M 10% of the tap fees we received from the next 40,000 water taps we sold from and after the original date of the Arkansas River Agreement. This is referred to as the "Tap Participation Fee" or "TPF." The TPF was payable when we sold water taps and received funds from such water tap sales or other dispositions of property purchased in the HP A&M acquisition.

Approximately 60 of the 80 farms and the related water rights acquired from HP A&M were subject to deeds of trust to secure payment of promissory notes owed by HP A&M to third parties. Beginning in June of 2012, HP A&M began defaulting on the promissory notes owed to third parties resulting in a default under the Arkansas River Agreement and related agreements. In order to protect our assets, we began acquiring the promissory notes payable by HP A&M in exchange for a combination of cash and promissory notes. See Note 7 – Long-Term Debt and Operating Lease – Promissory Notes Payable by HP A&M in Default to the accompanying financial statements. We recorded a receivable from HP A&M for the amounts due under the defaulted notes. See Note 3 – Summary of Significant Accounting Policies – HP A&M Receivable to the accompanying financial statements.

During the past several years, we were party to numerous lawsuits with HP A&M relating to defaults by HP A&M under the Arkansas River Agreement. These lawsuits related to, among other things, our right to recover on the defaulted notes and to offset the TPF payable based on the defaults. In January 2015, we reached a settlement with HP A&M, whereby, among other things, HP A&M relinquished all claims to the TPF and we relinquished all claims to collect on the HP A&M defaulted notes. As a result, the TPF payable and the HP A&M receivable were eliminated, which is reflected on the August 31, 2015 consolidated balance sheet. See Note 12 – Litigation Loss Contingencies to the accompanying financial statements.

Mineral Interests – As part of the settlement with HP A&M, HP A&M assigned its 75% mineral interests in the Arkansas River land to us. Together with the 25% mineral interests we held prior to the settlement, we now own approximately 13,900 acres of mineral interests in the Arkansas River Valley. We have valued our mineral interests at approximately $1,425,500. The settlement is described in greater detail in Note 12 – Litigation Loss Contingencies to the accompanying financial statements.

   

Pure Cycle Tax Rate Companies within the Water Supply Industry


Business Segments Q1
Revenues
(in millions $)
Q1
Income
(in millions $)
(Nov 30 2023)
%
(Profit Margin)
Total 6.11 2.07 33.8 %

Growth rates by Segment Q1
Y/Y Revenue
%
(Nov 30 2023)
Q/Q Revenue
%
Q1
Y/Y Income
%
(Nov 30 2023)
Q/Q Income
%
Total 355.97 % 34.97 % 1198.74 % 95.55 %

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