Cadiz Inc. (CDZI) Earnings Call Transcript & Summary

Good day, and welcome to the iAccess Alpha Virtual Best Ideas Winter Conference 2024. The next presenting company is Cadiz Inc. [Operator Instructions] I'd now like to turn the floor over to today's host, Susan Kennedy, Chairman and Chief Executive Officer of Cadiz Inc. Ma'am, the floor is yours.

Thank you so much. Hello, everyone. As said, my name is Susan Kennedy. I'm the Chairman and CEO of Cadiz. I've been with the company for 3 -- a little over 3 years. I joined as Chairman 3 years ago and became CEO earlier this year. For those of you who are new to Cadiz, we are -- change my slide here, we are a water solutions company with uniquely valuable resources, including land with water rights, groundwater storage capacity, treatment technology and hundreds of miles of pipeline assets. This combination of assets makes Cadiz what I believe is the most valuable water resource in the Western United States. I'm going to tell you a little bit about our assets. I'm going to explain the company's evolution and our business model and our unique position and a massive opportunity for private sector in the water industry. We start with a little bit of the history of how -- what our assets are and how they came about. So about 40 years ago, the founders of the company identified these water assets in the Eastern Mojave Desert as part of San Bernardino, California, where they used NASA satellite imaging to identify the patterns of the water on the surface of the desert, and they could tell that there was a massive water resource in this aquifer system. And it took them almost 15 years to identify the land parcels, to buy up the parcels, to do swaps with the BLM and the railroad in order to put -- create this contiguous land holdings right in this area called Fenner Gap where these water resources could be accessed. And they spent the better part of the 2000s and the 2010s perfecting the water rights, building the largest agriculture operation in San Bernardino County, building out the well field and the assets. In the late teens and 2020s, we began identifying the physical assets to be able to monetize the water in the aquifer system and be able to provide water supply to surrounding communities. So we bought pipeline assets, including a 43-mile right-of-way along California, Arizona railroad to build a new pipeline to reach the Colorado River. They acquired a 220-mile pipeline from El Paso Natural Gas that was an idle gas pipeline that is capable of delivering water supply once converted to deliver water supply to the north of our project that connects with a number of other water network pipelines and conveyance systems in California -- in Southern California. We acquired a filtration company called ATEC Water Systems that allows us to treat water, taking arsenic, nitrates, chromium-6 and other contaminants out of the water to be able to expand the types of water products and services we can provide. And the -- we started in 2023, 2024, we started signing up water agencies through Southern California to provide firm contracts for water supply to water agencies in Southern California. So we have 85% of the Northern pipeline under contract, which is really the go sign for us to be able to begin project development and put together the project financing. When this project is operational, which should begin delivering water in 2026 and 2027 on various parts of the pipelines, this will be the largest operating groundwater bank in the Southwestern United States. And let me give you an idea on the amount of water, the size of the asset. So this is a very large aquifer. It's a 2,000 square mile watershed system in the Eastern Mojave, and it's in a unique spot because it's not in what's called the rain shadow of the Sierra. So this -- you wouldn't think there's a hell of a lot of water in the Mojave desert, but in fact, it is a prolific -- there is a prolific amount of water in this particular portion of the Mojave and it's all captured in this watershed system that is 2,000 square miles and funnels the water down to -- it's a closed basin, so it funnels the water down through one spot, and that's Fenner Gap. That's exactly where the company's founders built up the land holdings. There's 30 million to 50 million acre-feet of groundwater in storage in the aquifer. There's a natural recharge rate from snow and precipitation in the upper elevation desert mountains that is constantly recharging the aquifer at 40,000 to 50,000 acre-feet per year from the surrounding mountains. It's a closed basin. So it doesn't connect to any rivers. All of the water in this watershed exits through Fenner Gap and evaporates at the dry lakes just below our property. So that makes it the only new water supply in the entire Colorado River Basin. We have permits, water rights to withdraw 2.5 million acre-feet of water over a 50-year period for beneficial uses to surrounding communities. We're also permitted to import 1 million acre-feet of surface water, for example, from the Colorado River and store it in the aquifer as opposed to you would store it in a surface reservoir such as Lake Mead. So that would make it one of the largest new groundwater banks in the Southwest. We've got the Southern pipeline access to -- along the Arizona, California railroad, and we've got the 220-mile pipeline that goes north. These are extremely valuable and unique pipeline assets. You couldn't build a 220-mile pipeline in California if you're life dependent on it today. These are very, very unique assets. Our project schedule is to build out the Northern pipeline first. That's faster because the pipeline is already in the ground, and we have to do pumping stations and other pertinent facilities. We hope to be delivering water in construction in 2025, delivering water by the end of 2026 with initial water delivery in 2027 on the Southern pipeline be fully operational. We are putting together now a finance structure to do the project finance through an LLC structure that includes a majority of investors being native American tribes and nonprofit public entities. That's a key development this year because with having tribes as our majority equity investors in this, makes this a very valuable project in terms of being able to attract a lot of the grant funding and other tax credits that are only available to public entities and also with a priority for serving historically disadvantaged communities. So it puts us in a very good position for raising project finance. This will be the first major infrastructure project off reservation in U.S. history that is majority owned by Native American tribes. To give you an idea of the size of the water asset here, Lake Mead is the largest reservoir in the United States. It's 250 miles, 160,000 acres, and the design capacity is 28 million acre feet of water storage. It's never more than 40% or 50% full in a good year these days. Cadiz is a 2,000 square mile watershed system, 1.2 million acres total, and it is 30 million to 50 million acre-feet of water in storage. It's 2x -- and that's water that's already in the aquifer. It takes 1,000 years for water that fell as precipitation in the upper elevation mountains to percolate down through the ground all the way down to Fenner Gap. So there's 1,000 years of water supply, uninterruptible water supply already in the aquifer in storage. When we're fully operational, where we're located, when we build that Southern pipeline to the Colorado River, and we have the Northern pipeline crossing these other pipeline systems to the north, we will be the largest operating groundwater bank in the Southwestern United States perfectly situated between the major metropolitan areas of Las Vegas, Phoenix, Los Angeles, the Colorado River system and the State Water project system. To give you an idea of the business model around water. This is -- water is usually typically a utility industry. And so it's very hard to really understand how the business model works. But to give you an idea of the value of water today, firm water supply is very hard to come by. And the average -- the Cadiz -- the contracts that we've signed are the annual payment for those from the water agencies purchasing these long-term contracts is approximately $1,600 per acre-foot per year for the life of a 30-, 40- or 50-year contract. If you compare that to desalination, which is very expensive, it's anywhere from $2,200 up to $3,000 an acre-foot to purchase for purchasing that water supply. The recycling plant, which is a massive project in Southern California in the L.A. area, they're looking at $1,800 at least an acre-foot of water for recycled water. And in some cases, that and upwards of $3,000 an acre-foot for recycled water because it's the infrastructure that costs so much for that water supply. To compare the business case for storage, what these agencies usually do is they'll go pick a place, they'll invest the funds to build out or purchase a place to a physical space to store their Colorado River or their surface water, and it's purchased like you would purchase a condo in a condo unit. So -- and the market price is roughly about $1,500 per acre-foot of storage. So for 1 million acre-feet of storage capacity at the Cadiz aquifer, $1,500 per acre-foot, the storage value of that is approximately $1.5 billion for that, just for reserving space for importing water. The wholesale price of water, when it's raining and you're in the middle of atmospheric rivers, water is free. And as long as you have this place to store it, you grab as much as you can and you put it away for a dry day. I was going to say a rainy day, but that would be inappropriate. But the price of water for -- when the agencies have to purchase it has gone up very consistently and very steadily over the course of the last 50 years, roughly 4.5%, roughly 4%, 5% on a steady uptick over the last 50 or so years. And if you look at that Metropolitan Water District is the largest wholesaler in Southern California, and our water would be somewhat similar to the $1,000 or $1,100 per acre foot that they would be charging for, not including the transportation and some of the energy costs, but the raw water cost is more than $1,000 an acre-foot today. To give you -- so 2024 is a huge pivotal year for us. Number one, what happened 3 years ago with the drought on the Colorado River and the massive 1,200-year drought in the Southwest, it changed everything about the politics of water, and it changed everything about the agencies scramble to build the infrastructure to be able to adapt to this new hydrological circumstance we have where we've got massive to intense droughts and then followed by intense, intense rain. So there's a huge push to build the infrastructure to adapt to the hydrology. And in 2024, I took over as CEO in January. We signed -- our 85% of the Northern Pipeline is now under contract. We have -- we've seen very rapid growth of our ATEC filtration system, a company -- an asset we bought for $2 million about 3 years ago. And we're expecting about $15 million in gross revenues this year. So that has been an extremely valuable asset for us, and we expect it to grow double digits. We recently signed a lease for -- to build the largest hydrogen production facility in California at Cadiz Ranch, utilizing some of our 45,000 acres of land to put solar and hydrogen production facility there. And then we also very recently announced that we were -- we purchased an option to purchase 180 miles of steel from the Keystone XL in order to use that steel to build the Southern pipeline. So we'll be converting that steel to carry water and at a fraction of the price, it would cost us to purchase steel -- newly built steel. Lastly, what we just recently announced is we have the first -- a couple of weeks ago, we announced our anchor investor is a nonprofit investment fund that's focused on climate change for -- to come in as an equity investor in the Mojave Groundwater Bank at $150 million. We filed an 8-K on that. And then a week or so ago, we filed -- we announced that we have our first -- our anchor tribal investor, the Lytton Rancheria of California as the lead investor from a tribal side coming in at up to $50 million. We have 2 or 3 other -- we have line of sight to 2 or 3 other equity investors, and we have approximately $250 million out of $400 million identified towards our equity investment goal of $401 million. I'm going to give you the -- a snapshot on the business case for Cadiz. So if you look at our assets, we have land assets where we have agricultural operations. We have the land leases like hydrogen and solar that I mentioned. We have the segment revenues from the ATEC filtration systems, which we have not only the products of the filters themselves, which right now, we're serving. We've got about 450 systems around the world, mostly concentrated in the Western -- in the U.S. -- I mean, I'm sorry, Western U.S. And then we also have treatment and services that we can take the filters and actually bolt on the treatment with water supply and other water products. So we expect that to be a very robust and growing segment of revenues for us. The water supply that we have under permit today will be provided by contracts through a mutual water company known as Fenner Gap Mutual Water Company, and that is 100% of the water supply commodity price for the water supply, plus 49% of the groundwater banking storage -- banking and storage revenue stream will come through Fenner Gap Mutual Water Company. And then this LLC that we're forming in partnership with the tribes will be -- we will form a NewCo and be the managing member of that entity. And our revenues from the NewCo will be a share of the proceeds from the profits from the NewCo from the sale of storage and groundwater banking, wheeling fees and other revenue that we would generate from the conveyance system. And so we'll get about a 2% promote. We'll get revenues over a rate of return for the LLC partners. We'll share those proceeds. And -- and that is a stand-alone segment that we expect to be very profitable with. I'm going to jump now for one second before we -- maybe I'll do this. To give you an idea, the NewCo LLC sources and uses, the cost of building that project are estimated to be the total funds is approximately $851 million. The equity investors will make up approximately $401 million in equity capital. And we expect to be eligible for approximately $450 million minimum for -- in grant funding that currently exists today, mostly at the state level, but also some federal funding that we expect to survive the change in administration. So that's our base case for operations of the NewCo. The total cost of building up between the Northern and Southern pipeline are 2 different projects, the wellfield and the payment to Cadiz for the storage rights would be about $51 million upfront payment to Cadiz. So that's roughly the economics of that water storage project. I'm going to jump ahead for 1 second to explain the context of why this opportunity for the private sector investment in the water industry has never been seen before, and we're on the cutting edge of what I think is revolutionary in terms of the opportunities for private sector investment in the water industry. You've heard that the hydrological cycle is spinning completely out of control. We go from extreme, extreme drought to extreme, extreme precipitation and flooding in a matter of weeks, months, sometimes days. And the problem is not one of water scarcity. We have as much water on the planet today that we've had for 4 billion years. The problem is snow. If you haven't read this, Bloomberg piece called the End of Snow, it's the best piece I've ever, ever read on the issue here. But our entire water system, all the infrastructure was built around the snowpack and snowmelt around the world. And the problem is because of climate change, the snowpacks are declining. So in the West, you've got the Sierra Nevada Mountains and you've got the Rocky Mountains feeding California through the Colorado River. And in the northern -- in the Sierra, despite every occasional snowmageddon and this massive amount of rain and atmospheric rivers, there is a steady decline in the snowpack. And scientists are saying that by -- in the 2040s, the Sierra Nevada Mountains could be without snowpack. And the problem is that our entire infrastructure was built around storing water as snow and then capturing the snowmelt in reservoirs. And what's happening is with this layer -- with this level of extreme -- when we designed the infrastructure, it was designed around a very, very predictable hydrological pattern. And ever since about 1980, that pattern has whipsawed into a level of extremes where we do not have the infrastructure built to be able to capture snow and snowmelt. If you look -- this slide show, is available on our website. But if you look at where the snowmelt is occurring, it's now -- it's not happening in the northern Sierra, it's happening in the southern Sierra. These are the atmospheric rivers on the right with the darker -- the darker the color is where the atmospheric river, that's where all the precipitation is falling. The problem is, if you look at that next slide, all of our storage was built north of the catastrophes. So all of these reservoirs are designed to catch snowmelt and instead, all the rain is happening below where we have the reservoir storage and other types of conveyance systems built. So we have a massive, massive infrastructure problem, which is going to threaten the communities around the world very dramatically over the next 10 years or so. And we find ourselves positioned to be able to provide some of the only major storage systems in the Southwest and be able to provide banking opportunities to be able to exchange water between all the major metropolitan areas. So our assets are so much more valuable today than I think we ever -- we believe they were several years ago. And we're now able to serve multiple products over a broader region and with market opportunity that is growing. I think I will jump very quickly to a brief explanation on how cash flows work and what it means for the company. So we've got -- this is illustrative. So on the water supply cash flows, we have a contract with an agency and the cash flows would be broken down into 3 segments, right, or 3 elements. One is the commodity price, and that would be approximately $850 per-acre foot per year, and that would go directly to Cadiz through that mutual water company. The agencies that are contracting for the water, they pay their own freight when it comes to wheeling fees and operating costs and that would go to the owner of the pipeline, which will be the NewCo, and it would go to the project operator, which is the mutual water company. So they pay their own operating costs. And then on the capital cost, the water agencies that are contracting would pay their pro rata share of the capital cost to the NewCo, which is financing the construction, the infrastructure. And so that's the 3 components. The same is true on the storage side. There'll be a reservation fee, approximately $1,500 per acre-foot is about the market rate, and that would be split 51% to the NewCo, 49% of the reservation fee goes to Cadiz. And then the management fee, which would be for operating the groundwater bank would be split 51-49 between the NewCo and Cadiz. And then the proceeds would be shared above a rate of return. So what does that look like in terms of the company cash flows? We've got water supply, approximately $850 an acre foot per year plus the reservation fees. We've got the -- sorry, I need my glasses, I can barely see this. The revenue from the different segments, including the NewCo and including the treatment segments, but depending on when the cash flows come in around storage because they should start contracting over the next -- around 2026, 2027, and then it will be brought in, in different chunks over about a 14-year period is our estimation based on our current permit, that could be anywhere from $140 million to $144 million. And then we'll get -- we are expecting an initial cash payment from the NewCo of $51 million when we finish -- when we close on the project financing. The -- I think I'm going to pretty much -- I've got about 4 minutes left for questions. So I'm going to stop here, and I'm going to take questions. Courtney, are you on?

Yes, I'm here. Let me raise the first one. Okay. First question is, what is next for the NewCo? When do you expect to close on all $401 million?

We're expecting to close in Q1, hopefully early in Q1. There's a lot of negotiations to be done on the -- and a lot of work to be done to stand up the different entities, but we're in heavy into diligence with the first key investors, and we expect to syndicate that as soon as we're done with that, and we expect that over the next couple of weeks. early Q1.

Great. Can you talk a little bit about the engagement with the tribe, the first one in? It's a significant development. What kind of report did you have with Lytton prior to this commitment?

Lytton is a very, very important anchor investor for us on the tribal side. They're very sophisticated. These are gaming tribes for the most part. We've got relationships with tribes that aren't gaming tribes and -- but there's a handful of very, very powerful gaming tribes that are looking to do smart investments and diversify from the gaming -- diversify their revenues. And water is a very key issue for tribes because they've had a hard time monetizing their water rights no matter where they are. And negotiations over Colorado River and water in California is going to be paramount. So they saw the value in investing in the groundwater bank very quickly. Lytton, in particular, is one of the most sophisticated and one of the most politically powerful tribes in the state. So they wanted to be the anchor investor. The key there is that they will be eligible for hundreds of millions of dollars in some of the infrastructure funding available for water projects in California. And so having this -- having Lytton be the leader of this in California is very, very valuable in terms of being able to access the grant funding for a project like this.

Great. Next question. Could you provide any updates on the remaining 15% of the Northern pipeline capacity that still needs to be acquired?

We have -- we know there's a lot of interest, and our goal was having at least 85% under contract. We -- there's some value to us in leaving the flexibility on the last 15%, but there's great interest in that capacity. And we're -- we already have a lot of interest in the Southern pipeline as well. Some of this is -- some of the contracts that we're signing are conversions of option agreements that were signed some as long as 10 years ago. So we already have more option agreements signed for the capacity, for the full capacity, all 50,000 acre-feet. So we're in a pretty good position, and I expect we'll be focusing on closing those contracts after we close the deal on the project finance because some of these tribes are going to want water.