PURE CYCLE CORPORATION In Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A), "we," "us," "our" and "Pure Cycle" refer to
We are a diversified water resource and land development company. At our core, we are a wholesale water and wastewater service provider, and we develop land we own into master planned communities. Our newest business is the development of single-family homes held for rental purposes. Both the land development and single-family home rental lines of business generate customers and usage fees for our water and wastewater resource development business.
Our Business Strategy
Over the past 30+ years, we have accumulated a large portfolio of valuable water
rights and land interests in
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have launched a single-family rental business where we are renting homes in
Although we currently report our results of operations through our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable, and value-added business enterprise.
Water and Wastewater
Water resources throughout the western
We provide wholesale water and wastewater service to local governments for both
residential and commercial customers. The local governments we service include
the
Revenues for our water operations are dependent on us growing the number of
customers we serve. If we are unable to add customers to our systems and sell
taps to builders, our revenues could be negatively impacted. We currently are
the developer of the
Our
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Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments efficiently and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments.
We have been developing the Sky Ranch community since 2017. We are developing it
in phases, which is anticipated to take approximately eight to ten more years
until it is fully built out. In 2017, we began the initial development phase of
Sky Ranch when we entered separate contracts with
During our fiscal 2021, we began construction on the second development phase at
Sky Ranch. For this phase we entered into separate contracts with KB Home,
In
Payments for lot sales and the related revenue for Phases 2B, 2C, and 2D will occur as construction of those phases occurs. We believe construction of Phase 2B will begin in the fall of 2022. We further believe it will take approximately three years to complete construction and sell the finished lots in all four subphases depending on the market conditions and permitting process.
In addition to the lot sales and reimbursable costs described above, from the
start of development at Sky Ranch through
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per water tap are dependent on lot sizes and average water usage across a broad
range of housing product types including duplexes and townhomes. For Phase 2A we
estimate water and wastewater tap fees will exceed
During the nine months ended
Single-Family Rentals
During our fiscal 2021, we launched a new line of business we are referring to
as our single-family rental business. During our initial development phase of
Sky Ranch, we retained ownership of four residential lots for use in this
business. As of
We capitalize the costs of the homes and when applicable amortize the costs over
periods not exceeding thirty-years. Lease income is recorded monthly as earned.
We began recognizing monthly lease income for the first three rental units on
On
Impacts of COVID-19 and the resulting economic conditions
The ongoing COVID-19 pandemic has impacted global economies, the rate of inflation, supply chains, distribution networks and consumer behavior around the world. These issues, including the inflationary environment, has worsened during the first nine months of fiscal year 2022 resulting in higher prices which have impacted our operations, but not materially. Like many other businesses, our contractors have experienced delays in receiving materials and parts, but we have been able to adjust our purchases and operations enough to reduce the impact this has had on our construction and other activities. The severity and duration of the COVID-19 pandemic, as well as the current inflationary environment, remain uncertain and it is difficult for us to estimate the extent to which these conditions will impact our financial results and operations in future periods.
As the COVID-19 pandemic continues, we have continued to enforce many safety
measures enacted to protect the health and well-being of our employees,
customers, business partners, and their families. While state and local mandates
have eased, we continue to encourage voluntary vaccinations and healthy
practices such as hand washing, disinfecting, social distancing, and face
coverings when necessary. We have been able to maintain our level of efficiency
with the use of video conferencing and electronic data sharing platforms. We
were informed that our builder customers continue to use precautionary measures
to ensure the safety of their employees, customers, business partners, and their
families. These measures varied by builder. As a result, some of our builder
customers reported material net housing order declines early in the pandemic;
however, they are also reporting material increases in orders since the
stay-at-home orders have been reduced. The most dramatic impact on our
operations has been the delay in inspections, the permit process and other
activities requiring the involvement of governmental agencies due to
pandemic-related restrictions imposed on their operations. We expect COVID-19 to
continue to play a role in potential delays related to the second development
phase at Sky Ranch due to rapidly changing governmental orders, city and country
shutdowns, and public health concerns. All our operations are located in
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Results of Operations
Consolidated Results of Operations - Three Months Ended
Executive Summary
For the three months ended
Three Months Ended
(In thousands, except for water
deliveries and taps sold) May 31, 2022 May 31, 2021 $ Change % Change
Water and wastewater resource
development revenue $ 2,011 $ 2,198 $ (187) (9) %
Land development revenue:
Lot sales 1,070 445 625 140 %
Project management fees 81 23 58 252 %
Single-family rental 25 - 25 - %
Total revenue 3,187 2,666 521 20 %
Water and wastewater development
cost of revenue 1,097 841 256 30 %
Land development cost of revenue 288 99 189 191 %
Single-family rental cost of
revenue 9 - 9 - %
Total cost of revenue 1,394 940 454 48 %
General and administrative expense
and depreciation 1,169 1,398 (229) (16) %
Operating income 624 328 296 90 %
Other income, net 459 454 5 1 %
Income taxes (246) (158) 88 56 %
Net income $ 837 $ 624 $ 213 34 %
Basic EPS $ 0.03 $ 0.03 $ - - %
Diluted EPS $ 0.03 $ 0.03 $ - - %
Water delivered (thousands of
gallons) 59,826 16,541 43,285 262 %
Water and wastewater taps sold 45 59 (14) (24) %
Total revenue increased in the third quarter of fiscal 2022 as compared to 2021, primarily due to increased lot sale revenue recognize using the percentage of completion method in 2022 as Phase 2A is progressing and rental income from our first three rental homes.
Costs of revenue increased in the third quarter of fiscal 2022 as compared to
2021 primarily due to increased costs related to the sale of water to oil and
gas operators for drilling purposes as well as increased lot construction costs
as Phase 2A progresses. As detailed further below (in the
General and administrative expense decreased in the third quarter of fiscal 2022
as compared to 2021 primarily due to us receiving a tax credit of
Water deliveries increased substantially in the third quarter of fiscal 2022 as compared to 2021 primarily due to increased water sales to oil and gas operators for drilling purposes.
Water and wastewater tap sales declined in the third quarter of fiscal 2022 as
compared to 2021 due to timing of closings at Sky Ranch. Tap sales are driven by
builders obtaining building permits in anticipation of home closings. As of
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Phase 2A were limited to model homes and two of the three builders are sold out in the first development phase. As construction nears completion on Phase 2A and builders start taking contracts for homes, we anticipate tap sales to increase.
Consolidated Results of Operations - Nine months Ended
Executive Summary
For the nine months ended
Nine Months Ended
(In thousands, except for water
deliveries and taps sold) May 31, 2022 May 31, 2021 $ Change % Change
Water and wastewater resource
revenue $ 5,891 $ 7,386 $ (1,495) (20) %
Land development revenue
Lot sales 5,644 3,316 2,328 70 %
Project management fees 529 1,571 (1,042) (66) %
Single-family rental 59 - 59 - %
Total revenue 12,123 12,273 (150) (1) %
Water and wastewater resource cost
of revenue 3,109 2,862 247 9 %
Land development cost of revenue 1,160 2,087 (927) (44) %
Single-family rental cost of
revenue 16 - 16 - %
Total cost of revenue 4,285 4,949 (664) (13) %
General and administrative expense
and depreciation 4,227 3,986 241 6 %
Operating income 3,611 3,338 273 8 %
Other income, net 1,657 20,844 (19,187) (92) %
Income taxes (1,224) (5,906) (4,682) (79) %
Net income $ 4,044 $ 18,276 $ (14,232) (78) %
Basic EPS $ 0.17 $ 0.77 $ (0.60) (78) %
Diluted EPS $ 0.17 $ 0.76 $ (0.59) (78) %
Water delivered (thousands of
gallons) 274,978 126,253 148,725 118 %
Water and wastewater taps sold 81 146 (65) (45) %
Despite an increase in water sales to oil and gas operators, for the nine months
ended
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For the nine months ended
For the nine months ended
For the nine months ended
For the nine months ended
For the nine months ended
Water and Wastewater Resource Development Results of Operations
Three Months Ended
(In thousands, except for
water deliveries) May 31, 2022 May 31, 2021 $ Change % Change
Metered water usage from:
Municipal water usage $ 94 $ 63 $ 31 49 %
Commercial water usage 549 147 402 273 %
Wastewater treatment fees 66 51 15 29 %
Water and wastewater tap fees 1,273 1,856 (583) (31) %
Other revenue 29 81 (52) (64) %
Total segment revenue 2,011 2,198 (187) (9) %
Water service costs 560 316 244 77 %
Wastewater service costs 109 102 7 7 %
Depreciation 349 358 (9) (3) %
Other 79 65 14 22 %
Total expenses 1,097 841 256 30 %
Segment operating income $ 914 $ 1,357 $ (443) (33) %
Water deliveries (thousands
of gallons)
On Site 175 475 (300) (63) %
Export - Commercial 2,636 4,827 (2,191) (45) %
Sky Ranch 10,318 7,389 2,929 40 %
Wild Pointe 5,668 3,850 1,818 47 %
O&G operations 41,029 - 41,029 - %
Total water deliveries 59,826 16,541 43,285 262 %
Municipal water usage revenue increased in the third quarter of fiscal 2022 as compared to 2021 primarily due to new customers being added at Sky Ranch as homes continue to sell. Commercial water usage increased in the third quarter of fiscal 2022 as compared to 2021 due to increased water sales to oil and gas operators for drilling as well as the additional public parks and open areas at Sky Ranch.
Wastewater treatment fees increased in the third quarter of fiscal 2022 as compared to 2021 primarily due to new Sky Ranch customers in our water and wastewater resource development segment.
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Water and wastewater tap sales declined in the third quarter of fiscal 2022 as
compared to 2021 due to timing of closings at Sky Ranch. Tap sales are driven by
building permit applications and are not contractually established with the
builders. As of
Water service costs increased during the third quarter of fiscal 2022 as compared to 2021 primarily due to the increased water needed for oil and gas operations.
Wastewater service costs increased slightly during the third quarter of fiscal 2022 as compared to 2021 primarily due to an increase in the number of customers served at Sky Ranch requiring more staff and materials.
Water deliveries increased during the second quarter of fiscal 2022 as compared to 2021 primarily due to the sale of water to oil and gas operations and new Sky Ranch and Wild Pointe customers.
Nine Months Ended
(In thousands, except for
water deliveries) May 31, 2022 May 31, 2021 $ Change % Change
Metered water usage from:
Municipal water usage $ 498 $ 171 $ 327 191 %
Commercial water usage 2,462 2,062 400 19 %
Wastewater treatment fees 185 144 41 28 %
Water and wastewater tap fees 2,447 4,522 (2,075) (46) %
Other revenue 299 487 (188) (39) %
Total segment revenue 5,891 7,386 (1,495) (20) %
Water service costs 1,419 1,074 345 32 %
Wastewater service costs 337 258 79 31 %
Depreciation 1,055 1,077 (22) (2) %
Other 298 453 (155) (34) %
Total expenses 3,109 2,862 247 9 %
Segment operating income $ 2,782 $ 4,524 $ (1,742) (39) %
Water deliveries (thousands
of gallons)
On Site 24,372 3,715 20,657 556 %
Export - Commercial 11,353 7,276 4,077 56 %
Sky Ranch 31,899 22,044 9,855 45 %
Wild Pointe 15,384 13,052 2,332 18 %
O&G operations 191,970 80,166 111,804 139 %
Total water deliveries 274,978 126,253 148,725 118 %
For the nine months ended
For the nine months ended
For the nine months ended
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For the nine months ended
For the nine months ended
For the nine months ended
Land Development Results of Operations
Three Months Ended
(In thousands) May 31, 2022 May 31, 2021 $ Change % Change
Lot sales $ 1,070 $ 445 $ 625 140 %
Project management revenue 81 23 58 252
Total revenue 1,151 468 683 146 %
Land development construction and
project management costs 288 99 189 191 %
Segment operating income $ 863 $ 369 $ 494 134 %
Lot sales revenue increased in the third quarter of fiscal 2022 as compared to 2021 due to the progress made on Phase 2A at Sky Ranch. Additionally, the price per lot for delivered lots in the second development phase increased on average 40% over the first phase. Per lot revenue will remain consistent for all four subphases of the second development phase. Revenue for three of the four builder contracts in the second development phase is recognized over time with progress measured under the percent of completion method. Therefore, revenue will fluctuate due to timing of construction activities throughout the second phase.
Land development construction costs increased in the third quarter of fiscal 2022 as compared to 2021 primarily due to phase one being nearly complete in the second quarter of fiscal 2021 and Phase 2A progressing in 2022, which are offset by reimbursable public improvements being reflected as a receivable from the Sky Ranch CAB instead of as a cost of land development.
Nine Months Ended
(In thousands) May 31, 2022 May 31, 2021 $ Change % Change
Lot sales $ 5,644 $ 3,316 $ 2,328 70 %
Project management revenue 529 1,571 (1,042) (66)
Total revenue 6,173 4,887 1,286 26 %
Land development construction and
project management costs 1,160 2,087 (927) (44) %
Segment operating income $ 5,013 $ 2,800 $ 2,213 79 %
For the nine months ended
In the second quarter of fiscal 2021, we recognized
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For the nine months ended
Single-Family Rental Results of Operations
In fiscal 2021 we began construction on three homes that were completed and put
into service on
Liquidity, Capital Resources and Financial Position
As of
The first development phase at Sky Ranch is complete. We began construction of
the second phase in
ECCV Capacity Operating System
We have entered into a financing agreement that obligates us to fund the
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to receive the revenue from such service. Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and 900 acre-feet per year of water.
Construction of Public Improvements at School Site
During the nine months ended
Summary Cash Flows Table
Nine Months Ended
(In thousands) May 31, 2022 May 31, 2021 $ Change % Change
Cash (used) provided by:
Operating activities $ (11,933) $ 193 $ (12,126) (6,283) %
Investing activities (3,794) (2,253) (1,541) (68) %
Financing activities 1,033 59 974 1,651 %
Net Change in cash $ (14,694) $ (2,001) $ (12,693) (634) %
For the nine months ended
We anticipate continuing to spend cash for the construction activities at Sky Ranch for the foreseeable future.
For the nine months ended
For the nine months ended
Off-Balance Sheet Arrangements
Our only off-balance sheet arrangement consists of the contingent portion of the Comprehensive Amendment Agreement No. 1 associated with the acquisition of our Rangeview Water Supply as described in Note 5 to the 2021 Annual Report.
Critical Accounting Policies and Use of Estimates
Our critical accounting policies and estimates are described in "Critical
Accounting Policies and Estimates" within Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 of the
Notes to Consolidated Financial Statements in "Financial Statements and
Supplementary Data" included in our 2021 Annual Report. The accounting policies
and estimates used in preparing our interim consolidated financial statements
for the three months ended
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