Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in the 2020 Annual Report, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition and should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in the 2020 Annual Report.
Our Business
We are a diversified water resource and land development company. At our core, we are an innovative and vertically integrated wholesale water and wastewater service provider which also develops land we own into master planned communities, to which we will continue to provide water and wastewater services as well as operate long-term build-to-rent properties. We have accumulated valuable water and land interests over the past 30 years and have developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial and industrial customers in the Denver metropolitan region. Our primary land asset, Sky Ranch, is located in one of the most active development areas in the Denver metropolitan region along the quickly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses.
Although we currently report our results of operations in two segments, 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. We will separately present the Build-to-Rent segment once material.
Water and Wastewater
Water resources throughout the western United States and more prominently in Colorado are a scarce and valuable resource. Our portfolio of 29,500 acre-feet is comprised of groundwater and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, multiple water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services.
We provide wholesale water and wastewater service to local governments, including the Rangeview Metropolitan District (the “Rangeview District”), Arapahoe County, the Sky Ranch Community Authority Board (the “Sky Ranch CAB”), and the Elbert and Highway 86 Commercial Metropolitan District (the “Elbert 86 District”). Our mission is to provide sustainable, reliable, high quality water to our customers and collect, treat, and reuse wastewater using advance water treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we proactively manage our valuable water rights in the water-scarce Denver, Colorado region. We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate on behalf of governmental entities. We also design, permit, construct, operate and maintain retail distribution and collection systems that we own or operate on behalf of our governmental customers. Additionally, we handle administrative functions, including meter reading, billing and collection of monthly water and wastewater revenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to the Colorado Department of Public Health and Environment.
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Land Development
Our Land Development segment is primarily focused on actively developing the Sky Ranch Master Planned Community located along the booming I-70 corridor to provide residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,400 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is zoned to include over two million square feet of retail, commercial and light industrial space, which is the equivalent of 1,600 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units. Our land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver “ready to build” finished lots to home builders and commercial customers. Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots. Additionally, pursuant to certain agreements with the Sky Ranch metropolitan districts, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which costs are reimbursed to us by the Sky Ranch CAB, through funds generated by the Sky Ranch districts through taxes, fees or the issuance of municipal bonds.
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.
In June 2017, we entered into separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we agreed to sell 506 total single-family, detached residential lots at the Sky Ranch property. We are obligated, pursuant to these contracts, to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities).
As of May 31, 2021, we have incurred $35.3 million of the total estimated $35.8 million in costs related to the development of the first phase of Sky Ranch. We anticipate the majority of the remaining $0.5 million, of which $0.4 million is estimated to be reimbursable, will be incurred during our remaining fiscal 2021. These amounts include estimated reimbursable costs of $32.2 million, for which we received a partial reimbursement of $10.5 million through proceeds from municipal bonds and an additional payment of $0.4 million of unencumbered funds resulting from a budget surplus in 2020. We believe the outstanding $21.3 million of remaining reimbursables from the Sky Ranch CAB will be paid from future fees, taxes, and municipal bonds as the project continues to grow its assessed value and tax base. As homes at Sky Ranch have sold faster than anticipated (as of May 31, 2021 there are approximately 330 homes sold and occupied in the first development phase) and assessed values have exceeded early estimates, the Sky Ranch CAB has developed an established tax basis and has the intent and ability to issue municipal bonds. As such, the collectability of these reimbursables is deemed probable. The Company recognized an increase of $0.3 million to the Note receivable – related party with the offsetting entry recorded to Project management revenue and other income during the three months ended May 31, 2021, for a note receivable balance of $21.3 million. As of May 31, 2021, we have recognized $36.3 million of the sales price contracted for with the home builders and the remaining $0.5 million is expected to be recognized as revenue in our remaining fiscal 2021. In addition, from the start of development at Sky Ranch through May 31, 2021, the Sky Ranch development produced $13.3 million of water and wastewater tap fees, and we expect that an additional $1.5 million of tap fees will be received during calendar 2021.
In November 2020 and February 2021, we entered into separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company) and Challenger Homes to sell 789 single-family attached and detached residential lots at the Sky Ranch property. This next development phase of Sky Ranch will incorporate approximately 250 acres and is planned to be completed in four sub-phases. Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an approximate 30% increase in our lot price from $75,000 for a 50’ lot in phase one to $97,000 for the same 50’ lot in the first subphase of the second phase. The timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries. In February 2021, we began construction on the second development phase at Sky Ranch, which is expected to include nearly 900 residential lots. We expect delivery of platted lots to begin in the fourth quarter of fiscal 2021 and continue steadily over the next several years. The 100+ lots not currently under contract to home builders are being retained for use as build-to-rent long-term rental properties, as described below.
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Build-to-Rent
As announced in March 2021, we launched a new line of business which will be referred to as our Build-to-Rent (“BTR”) line of business. During our initial development phase of Sky Ranch, we retained ownership of three residential lots, on which we have begun building three single family homes which we will own, maintain and rent to qualified renters. We have contracted for the construction of the homes with a reputable construction company and we expect these three homes to be completed and ready for renters in the fall of 2021. Foundations and framing of the homes are complete and construction is progressing, on schedule and on budget.
After the successful completion of the three houses in the first phase, we intend to expand this BTR line in our second development phase of Sky Ranch by building and renting homes on the 100+ lots we did not sell to our home builder partners. Grading on the second phase of Sky Ranch has begun, and once complete we will look to partner with certain builders to construct our BTR units as the second development phase of Sky Ranch is completed.
Recent Developments
As the coronavirus (“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 been 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 also took 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 in 2020. However, they are also reporting material increases in orders since the stay-at-home orders have been reduced. We had been expecting to accelerate deliveries of the remaining finished lots at Sky Ranch into fiscal 2020; however, because of the COVID-19 precautionary measures and stay-at-home orders, we delivered the remaining lots during the first quarter of fiscal 2021. These deliveries were still ahead of the original delivery dates set forth in our contracts with the home builders by nearly two years. The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring governmental agencies due to expansive work restrictions imposed on their operations. We expect COVID-19 to continue to play a role in potential delays related to the second filing at Sky Ranch due to rapidly changing governmental orders, city and country shutdowns, and public health concerns. Mainly, we have experienced delays in the permitting process through the county which has delayed the revenue recognition of the Phase two of the Sky Ranch development.
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Results of Operations
Executive Summary
The results of our operations for the three and nine months ended May 31, 2021 and 2020 are as follows:
Consolidated Results of Operations
Three Months Ended
$ Change
May 31,
May 31,
Increase/
2021
2020
(Decrease)
% Change
(In thousands, except for water and lot deliveries and taps sold)
Water and wastewater resource development revenue
$
2,198
$
1,154
$
1,044
90
%
Land development revenue
468
696
(228)
(33)
%
Total revenue
2,666
1,850
816
44
%
Water and wastewater development cost of revenue
(841)
(550)
291
53
%
Land development cost of revenue
(99)
(556)
(457)
(82)
%
Total cost of revenue
(940)
(1,106)
(166)
(15)
%
General and administrative expense
(1,398)
(887)
511
58
%
Other income, net
454
179
275
154
%
Income taxes
(158)
(9)
149
1,656
%
Net income
$
624
$
27
$
597
2,211
%
Basic EPS
$
0.03
$
—
$
0.03
—
%
Diluted EPS
$
0.03
$
—
$
0.03
—
%
Water delivered (thousands of gallons)
16,541
12,205
4,336
36
%
Water and wastewater taps sold
59
36
23
64
%
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Nine Months Ended
$ Change
May 31,
May 31,
Increase/
2021
2020
(Decrease)
% Change
(In thousands, except for water and lot deliveries and taps sold)
Water and wastewater resource revenue
$
7,386
$
4,326
$
3,060
71
%
Land development revenue
4,887
11,503
(6,616)
(58)
%
Total revenue
12,273
15,829
(3,556)
(22)
%
Water and wastewater resource cost of revenue
(2,862)
(1,704)
1,158
68
%
Land development cost of revenue
(2,087)
(10,436)
(8,349)
(80)
%
Total cost of revenue
(4,949)
(12,140)
(7,191)
(59)
%
General and administrative expense
(3,986)
(2,905)
1,081
37
%
Other income, net
20,844
7,255
13,589
187
%
Income taxes
(5,906)
(1,975)
3,931
199
%
Net income
$
18,276
$
6,064
$
12,212
201
%
Basic EPS
$
0.77
$
0.25
$
0.52
208
%
Diluted EPS
$
0.76
$
0.25
$
0.51
204
%
Water delivered (thousands of gallons)
126,253
32,394
93,859
290
%
Water and wastewater taps sold
146
139
7
5
%
Lots delivered
22
136
(114)
(84)
%
Three months ended May 31, 2021 vs. Three months ended May 31, 2020
Revenue – Total revenue increased in 2021 as compared to 2020, primarily due to increased water and wastewater tap sales, increased municipal water usage, and a special facility construction project for WISE. These increases were partially offset by decreased land development sales due to phase one being nearly complete almost two years ahead of schedule and phase two not yet recognizing revenue until platted lots are delivered, which is expected in the fourth fiscal quarter of 2021.
Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily due to decreases in land development costs due to phase one being nearly complete. Phase two costs are currently being capitalized as inventories until revenue recognition begins. These decreases were partially offset by increased water and wastewater service costs primarily due to additional WISE water purchases.
General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily due to increased head count of five full time employees in 2020 and increased legal and professional fees due to the second development phase at Sky Ranch.
Other income, net – Other income, net increased in 2021 as compared to 2020, primarily due to interest income recognized on the outstanding note receivable related to reimbursable costs.
Income tax expense – Income tax expense increased in 2021 as compared to 2020, primarily due to the recognition of reimbursable costs due from the Sky Ranch CAB.
Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased Export water usage, related to increased irrigation water usage, new Sky Ranch and Wild Pointe customers and increased landscaping and irrigation water usage in these neighborhoods.
Water and wastewater tap sales – Water and wastewater tap sales increased in 2021 as compared to 2020 due to timing of closings at Sky Ranch. Tap sales are driven by home closings and are not contractually established with the builders.
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Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020
Revenue – Revenue decreased in 2021 as compared to 2020, primarily due to decreased land development sales due to phase one being nearly complete and phase two not yet recognizing revenue until platted lots are delivered, which is expected in the fourth fiscal quarter. This decrease is partially offset by increased metered water usage from oil and gas operations, recognition of project management revenue from the first phase at Sky Ranch, recognition of a forfeited water reserve agreement, and a special facility construction project for WISE.
Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily due to a decrease in land development costs due to phase one being nearly complete and phase two costs are currently being capitalized until revenue recognition begins. The decreases were partially offset by costs attributable to the special facility construction project for WISE and increased water usage related to oil and gas operations.
General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily due to increased head count in 2021 as operations and development continue to expand.
Other income, net – Other income, net increased in 2021 as compared to 2020, primarily due to the recognition of outstanding reimbursable costs.
Income tax expense – Income tax expense increased in 2021 as compared to 2020, primarily due to the recognition of reimbursable costs due from the Sky Ranch CAB.
Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage.
Water and wastewater tap sales – Water and wastewater tap sales increased in 2021 as compared to 2020 due to the timing of closings at Sky Ranch. Tap sales are driven by building permits and are not contractually established with the builders.
Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of fiscal 2021. We have broken ground on the second phase and expect lot deliveries to begin this fall.
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Water and Wastewater Resource Development Results of Operations
Three Months Ended
$ Change
May 31,
May 31,
Increase/
2021
2020
(Decrease)
% Change
(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage
$
188
$
98
$
90
92
%
Oil and gas operations usage
22
15
7
47
%
Wastewater treatment fees
51
22
29
132
%
Water and wastewater tap fees
1,856
1,005
851
85
%
Other revenue
81
14
67
479
%
Total segment revenue
2,198
1,154
1,044
90
%
Water service costs
(316)
(95)
221
233
%
Wastewater service costs
(102)
(62)
40
65
%
Depreciation
(358)
(386)
(28)
(7)
%
Other
(65)
(7)
58
829
%
Total expenses
(841)
(550)
291
53
%
Segment operating income
$
1,357
$
604
$
753
125
%
Water deliveries (thousands of gallons)
On Site
475
1,702
(1,227)
(72)
%
Export - Commercial
4,827
583
4,244
728
%
Sky Ranch
7,389
5,549
1,840
33
%
Wild Pointe
3,850
4,371
(521)
(12)
%
O&G operations
—
—
—
—
%
Total water deliveries
16,541
12,205
4,336
36
%
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Nine Months Ended
$ Change
May 31,
May 31,
Increase/
2021
2020
(Decrease)
% Change
(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage
$
429
$
238
$
191
80
%
Oil and gas operations usage
1,804
72
1,732
2,406
%
Wastewater treatment fees
144
62
82
132
%
Water and wastewater tap fees
4,522
3,850
672
17
%
Other revenue
487
104
383
368
%
Total segment revenue
7,386
4,326
3,060
71
%
Water service costs
(1,074)
(556)
518
93
%
Wastewater service costs
(258)
(126)
132
105
%
Depreciation
(1,077)
(988)
89
9
%
Other
(453)
(34)
419
1,232
%
Total expenses
(2,862)
(1,704)
1,158
68
%
Segment operating income
$
4,524
$
2,622
$
1,902
73
%
Water deliveries (thousands of gallons)
On Site
3,715
8,416
(4,701)
(56)
%
Export - Commercial
7,276
2,619
4,657
178
%
Sky Ranch
22,044
6,271
15,773
252
%
Wild Pointe
13,052
14,160
(1,108)
(8)
%
O&G operations
80,166
928
79,238
8,539
%
Total water deliveries
126,253
32,394
93,859
290
%
Three months ended May 31, 2021 vs. Three months ended May 31, 2020
Municipal water usage – Municipal water usage increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment as well as increased water usage due to landscaping and irrigation usage.
Wastewater treatment fees – Wastewater treatment fees increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment.
Water and wastewater tap fees – Water and wastewater tap fees increased in 2021 as compared to 2020, primarily due to increased taps sold and increased prices, on average, of water and wastewater taps. During the three months ended May 31, 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the three months ended May 31, 2020. During the third quarter of fiscal 2021, we sold 59 water and wastewater taps. During the third quarter of fiscal 2020, we sold 36 water and wastewater taps.
Other revenue – Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, which is recognizing revenue on a percent of completion basis and increased consulting revenues.
Water service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to the purchase of additional WISE water.
Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to the new Sky Ranch water reclamation facility being online for the entire quarter and requiring more staff to run.
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Other costs of revenue – Other costs of revenue increased in 2021 as compared to 2020, primarily due to costs to construct a special facility for WISE.
Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased Export water usage, related to increased irrigation water usage, new Sky Ranch and Wild Pointe customers and increased landscaping and irrigation water usage in these neighborhoods.
Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020
Municipal water usage – Municipal water usage increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment as well as increased water usage due to landscaping and irrigation usage.
Oil and gas operations – Oil and gas operations increased in 2021 as compared to 2020, primarily due to increased oil and gas prices and new fracking permits obtained by our oil and gas customers and recognition of a forfeited water reserve agreement totaling $0.4 million.
Wastewater treatment fees – Wastewater treatment fees increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment.
Water and wastewater tap fees – Water and wastewater tap fees increased in 2021 as compared to 2020, primarily due to an increase in the number of taps sold and increased price, on average, of water and wastewater taps. During the nine months ended May 31, 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the nine months ended May 31, 2020. During the nine months ended May 31, 2021, we sold 146 water and wastewater taps. During the same nine months ended May 31, 2020, we sold 139 water and wastewater taps.
Other revenue – Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, for which $0.4 million of revenue was recognized. The project is recognizing revenue on a percent of completion basis.
Water service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to increased water usage associated with our oil and gas customers and additional purchases of WISE water.
Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to the new Sky Ranch water reclamation facility being online for the entire fiscal year to date and requiring more staff to run.
Other costs of revenue – Other costs of revenue increased in 2021 as compared to 2020, primarily due to costs to construct a special facility for WISE.
Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage.
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Land Development Results of Operations
Three Months Ended
$ Change
May 31,
May 31,
Increase/
2021
2020
(Decrease)
% Change
(In thousands, except for lots delivered)
Lot sales
$
445
$
696
$
(251)
(36)
%
Project management revenue
23
—
23
—
Total revenue
468
696
(228)
(33)
%
Land development construction
(97)
(506)
(409)
(81)
%
Sky Ranch property tax
(2)
(50)
(48)
(96)
%
Total costs of revenue
(99)
(556)
(457)
(82)
%
Segment operating income
$
369
$
140
$
229
164
%
Lots delivered
—
—
—
—
%
Nine Months Ended
$ Change
May 31,
May 31,
Increase/
2021
2020
(Decrease)
% Change
(In thousands, except for lots delivered)
Lot sales
$
3,316
$
11,503
$
(8,187)
(71)
%
Project management revenue
1,571
—
1,571
—
Total revenue
4,887
11,503
(6,616)
(58)
%
Land development construction
(2,074)
(10,190)
(8,116)
(80)
%
Sky Ranch property tax
(13)
(246)
(233)
(95)
%
Total costs of revenue
(2,087)
(10,436)
(8,349)
(80)
%
Segment operating income
$
2,800
$
1,067
$
1,733
162
%
Lots delivered
22
136
(114)
(84)
%
Three months ended May 31, 2021 vs. Three months ended May 31, 2020
Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates due to the timing of revenue recognition as lots are delivered over time. Revenues recognized in the third quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase. The second development phase will not begin recognizing revenue until platted lots are delivered to the home builders, which is expected to begin in the fourth fiscal quarter of 2021.
Project management revenues – Project management revenues increased in 2021 as compared to 2020 due to the determination that reimbursable costs due from the Sky Ranch CAB are deemed collectable based on Sky Ranch having a sufficient tax base.
Land development construction costs – Land development construction costs decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. Phase two costs are currently being capitalized as inventories until revenue recognition begins.
Sky Ranch property taxes – Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily due to the improved lots being sold to the homebuilders. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use. All 506 of the initial lots have been sold to home builders.
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Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020
Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. We will not begin recognizing revenue on phase two until platted lots are delivered to the home builders, which is expected to begin in the fourth fiscal quarter of 2021. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates due to the timing of revenue recognition as lots are delivered over time. Revenues recognized in the third quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase.
Project management revenues – Project management revenues increased in 2021 as compared to 2020 due to the determination that reimbursable costs due from the Sky Ranch CAB are deemed collectable based on Sky Ranch having a sufficient tax base.
Land development construction costs – Land development construction costs decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. Phase two costs are currently being capitalized until revenue recognition begins.
Sky Ranch property taxes – Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily due to the improved lots being sold to the homebuilders. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use.
Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of fiscal 2021. We have broken ground on the second phase and expect lot deliveries to begin this fall.
Liquidity, Capital Resources and Financial Position
As of May 31, 2021, our working capital, defined as current assets less current liabilities, was $16.5 million, which included $19.8 million in cash and cash equivalents, of which, $0.3 million is restricted. We believe that as of May 31, 2021 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next twelve months. Our expected obligations of $22.6 million for the next twelve months are described below.
Sky Ranch Development
The first phase at Sky Ranch is nearing completion, with approximately $0.5 million remaining to be spent. We broke ground on the second phase in February 2021. We estimate total costs to complete the second phase of Sky Ranch to be $65 million. Of this, we anticipate spending approximately $21 million in the next twelve months and we anticipate receiving approximately $22.5 million in milestone payments from the home builders over the same period. We believe future revenues from water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.
ECCV Capacity Operating System
The Rangeview District may purchase water produced from East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board system. ECCV’s Land Board system is comprised of eight wells and more than 10 miles of buried water pipeline located on the Lowry Range. In May 2012, we entered into an agreement to operate and maintain the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing of oil and gas wells. Our costs associated with the use of the ECCV system are a flat fee of eight thousand dollars per month from January 1, 2013 through December 31, 2020, and decreased to three thousand dollars per month effective January 1, 2021 through April 2032. Additionally, we pay a fee per 1,000 gallons of water produced from the ECCV’s system, which is included in the water usage fees charged to customers. The ECCV system is anticipated to continue to cost us approximately ten thousand dollars per month to maintain going forward.
South Metropolitan Water Supply Authority (“SMWSA”) and the Water Infrastructure Supply Efficiency Partnership (“WISE”)
We have entered into a financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE. We anticipate that we will be investing $1.1 million in 2021 and $7.5 million in total for the fiscal years 2022 through 2025 to fund the
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Rangeview District’s obligation to purchase water and infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding the Rangeview District’s obligations in WISE, we will have the sole right to use and reuse the Rangeview District’s 9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and 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.
Summary Cash Flows Table
Nine Months Ended
May 31, 2021
May 31, 2020
$ Change
% Change
(In thousands)
Cash (used) provided by:
Operating activities
$
193
$
15,204
$
(15,011)
(99)
%
Investing activities
$
(2,253)
$
(2,643)
$
(390)
(15)
%
Financing activities
$
59
$
36
$
23
64
%
Changes in Operating Activities – Operating activities include revenues produced by our segments less costs incurred in the delivery of those services and G&A expenses.
Cash provided by operations decreased in the nine months ended May 31, 2021 compared to 2020, primarily due to the bond payment of $10.5 million we received as partial reimbursement of public improvement expenditures from the Sky Ranch CAB in fiscal 2020 and decreased lot sales in the nine months ended May 31, 2021 as compared to May 31, 2020.
Changes in Investing Activities – During the nine months ended May 31, 2021, investing activities decreased due to decreased investments in water, water systems, and land as compared to the nine months ended May 31, 2020, partially offset by net sales of short-term investments in fiscal 2020.
Changes in Financing Activities – Cash provided by financing activities increased in 2021 from 2020, due to increased stock option exercises.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA as described in Note 7 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply to the accompanying condensed consolidated financial statements. The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of Export Water, the amounts and timing of which are not reasonably determinable.
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” included in our Annual Report on Form 10-K for the year ended August 31, 2020 and Note 2 of the Notes to Consolidated Financial Statements in “Financial Statements and Supplementary Data” included as Item 8 in our Annual Report on Form 10-K for the year ended August 31, 2020. With the exception of updates to significant accounting policies discussed in Note 1 of this Quarterly Report on Form 10-Q, the accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three and nine months ended May 31, 2021 are the same as those described in our Annual Report on Form 10-K for the year ended August 31, 2020. There have been no changes to our critical accounting policies during the quarter ended May 31, 2021. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended August 31, 2020.
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Recently Adopted and Issued Accounting Pronouncements
See Note 1 – Presentation of Interim Information to the accompanying condensed consolidated financial statements for recently adopted and issued accounting pronouncements.
Disclosure Regarding Forward-Looking Statements
Statements that are not historical facts contained in or incorporated by reference into this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Forward-Looking Statements” and “Risk Factors” in Part II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.