VIDLER WATER RESOURCES, INC. INTRODUCTION
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our Company. The MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes, presented later in this Annual Report on Form 10-K. The MD&A includes the following sections:
•Company Summary, Recent Developments, and Future Outlook - a brief description
of our operations, the critical factors affecting them, and their future
prospects;
•Critical Accounting Policies, Estimates, and Judgments - a discussion of
accounting policies which require critical judgments and estimates. Our
significant accounting policies, including the critical accounting policies
discussed in this section, are summarized in the notes to the consolidated
financial statements;
•Results of Operations - an analysis of our consolidated results of operations
for the past two years, presented in our consolidated financial statements; and
•Liquidity and Capital Resources - an analysis of cash flows, sources and uses
of cash, contractual obligations and a discussion of factors affecting our
future cash flow.
COMPANY SUMMARY, RECENT DEVELOPMENTS, AND FUTURE OUTLOOK
Recent Developments:
The majority of our water resource assets are located in northern
The economic development in the greater
According to a report by the
The economic growth in the region has led to strong demand for housing.
According to
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The Economic Development Authority of Western Nevada ("EDAWN"), comprised ofReno ,Sparks , and Tahoe areas, released an updated forecast (RCG Economics, Technical Memorandum datedJanuary 29, 2019 ) to its previous forecasts that includes the latest historical data and a new five-year forecast from 2019 through 2023. This five-year forecast project a cumulative addition of 51,585 new jobs in the region which represents a 12.7% increase in employment. This job growth leads to population growth. The report also projects the region's population to grow to 686,737 residents by the end of 2023, an increase of 54,470 residents (8.6%) in that five-year period. We believe that this increased employment and population growth will create demand for new residential, commercial and industrial development in the greaterReno area and inLyon County . . Current economic conditions have fostered new business openings, lower apartment vacancies, and greater absorption of existing housing inventory. This activity has resulted in multiple new housing projects entering the approval process with local governments inReno ,Sparks ,Carson City ,Lyon County andFernley . Residential housing projects must demonstrate sustainable water supply to obtain final map approval, and many projects in the North Valleys ofNevada are currently in the process of seeking or have obtained master plan amendment/zone change approvals. The next step for these developers is to obtain tentative map and then final map approvals. Within theReno -Sparks andWashoe County area ofNevada , according to EDAWN, in 2021 there were over 4,800 new housing permits issued. EDAWN's goal is for at least 6,000 new housing permits to meet the projected demand for housing. We believe the disparity in the issuance of building permits is due to an interruption of the permitting process due to the effects of the COVID-19 pandemic and the administrative process involved in approving new developments. We expect the building permit activity to increase in 2021, once the permit process is initiated on newly approved subdivisions. We believe this increase in activity will lead to demand for our water resources, as developers pursue their projects to provide housing for the population growth in the region. However, the increased activity has strained governmental agencies and has caused delays in processing permits as well as new projects' planning approval process. The timing of future monetization of our water resources in northernNevada is directly correlated to the time it takes residential developers to pursue their projects in the areas where our FSR and Carson/Lyon assets are located, and the time it takes for those developers to get the requisite planning approvals prior to obtaining final map approval or, in the case of commercial development projects, final regulatory approvals.
In 1998,
The
A developer in the
In 2019 Lincoln/Vidler submitted a Plan of Development to the BLM. The Plan of Development, which has yet to be approved, is necessary to gain the approval to begin construction of the infrastructure needed to deliver groundwater from the Tule Desert to the Lincoln County Land Act.
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Several market catalysts continue to emerge with respect to our Arizona LTSCs,
including the on-going "mega-drought" in the south-western
A shortage on the
A Tier 1 shortage was declared on
It has been determined that the
Currently the Pinal AMA, a largely agricultural area located in between the
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CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
This section describes the most important accounting policies affecting our assets and liabilities, and the results of our operations. Since the estimates, assumptions, and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, we consider these to be our critical accounting policies:
•how we determine the fair value and carrying value of our tangible and intangible water assets, and real estate; •how and when we recognize revenue when we sell water assets and real estate; and •how we determine our income tax provision, deferred tax assets and liabilities, and reserves for unrecognized tax benefits, as well as the need for valuation allowances on our deferred tax assets.
We believe that an understanding of these accounting policies will help the reader to analyze and interpret our financial statements.
Our consolidated financial statements, and the accompanying notes, are prepared in accordance with GAAP, which requires us to make estimates, using available data and our judgment, for things such as valuing assets, accruing liabilities, recognizing revenues, and estimating expenses. Due to the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. We base our estimates on historical experience, and various other assumptions, which we believe to be reasonable under the circumstances.
The following are the significant subjective estimates used in preparing our financial statements:
1. Fair value and carrying value of our tangible and intangible water assets and real estate
Our primary long-lived assets include tangible and intangible water assets and
real estate. At
Tangible water assets and real estate
We review our long-lived tangible water assets and real estate as circumstances change, or if there are indications of impairment present, to ensure that the estimated undiscounted future cash flows, excluding interest charges, from the use and eventual disposition of these assets will at least recover their carrying value. Cash flow forecasts are prepared for each discrete asset. We engage in a rigorous process to prepare and review the cash flow models which utilize the most recent information available to us. However, the process inevitably involves the use of significant estimates and assumptions, especially the estimated current and future demand for these assets, the estimated future market values of our assets, the timing of the disposition of these assets, the ongoing cost of maintenance and improvement of the assets, and the current and projected income earned and other uncertain future events. As a result, our estimates are likely to change from period to period. In addition, our estimates may change as unanticipated events transpire which would cause us to reconsider the current and future use of the assets. If we use different assumptions, if our plans change, or if the conditions in future periods differ from our forecasts, our financial condition and results of operations could be materially impacted.
There were no material impairment losses recorded on our tangible water assets
or real estate during the years ended
Intangible water assets
Our intangible water assets are accounted for as indefinite-lived intangible assets. Accordingly, until an asset is sold, it is not amortized, that is, its value is not charged as an expense in our consolidated statement of operations over time, but the asset is carried at cost and reviewed for impairment, at least annually during the fourth quarter, and more frequently if a specific event occurs or there are changes in circumstances which suggest that the asset may be impaired. Such events or changes may include lawsuits, court decisions, regulatory mandates, and economic conditions, including interest rates, demand for residential and commercial real estate, changes in population, and increases or decreases in prices of similar assets. If the carrying value of an asset exceeds the fair value, an impairment loss is recognized equal to the difference. Once an asset is sold, the value is charged to cost of real estate and water assets sold in our consolidated statement of operations and comprehensive income or loss.
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We calculate the fair value of intangible water assets, using a discounted cash flow model, under which the future net cash flows from the asset are forecasted and then discounted back to their present value, using a weighted average cost of capital approach to determine the appropriate discount rate. Preparing these cash flow models requires us to make significant assumptions about revenues and expenses as well as the specific risks inherent in the assets. We conduct extensive reviews utilizing the most recent information available to us; however, the review process inevitably involves the use of significant estimates and assumptions, especially the estimated current asset pricing, potential price escalation, income tax rates, discount rates, absorption rates and timing, and demand for these assets. These models are sensitive to minor changes in any of the input variables.
In summary, the cash flow models used for our most significant indefinite-lived intangible assets forecast initial sales to begin within approximately one year, and then increase until the assets are mostly sold over the next four decades. We have assumed sale proceeds for the assets that are based on our estimates of the likely future sales price per acre-foot. These per-unit sale prices are estimated based on the demand and supply fundamentals in the markets which these assets serve. If we use different assumptions, if our plans change, or if the conditions in future periods differ from our forecasts, our financial condition and results of operations could be materially impacted.
There were no material impairment losses recorded on our intangible water assets
during the years ended
2. Revenue recognition
Sale of real estate and water assets
We recognize revenue when there is a legally binding sale contract, the profit is determinable (the collectability of the sales price is reasonably assured, or any amount that will not be collectible can be estimated), the earnings process is virtually complete (we are not obliged to perform significant activities after the sale to earn the profit, meaning we have transferred all risks and rewards to the buyer), and the buyer's initial and continuing investment is adequate to demonstrate a commitment to pay for the property.
Unless all of these conditions are met, we use the deposit method of accounting. Under the deposit method of accounting, until the conditions to fully recognize a sale are met, payments received from the buyer are recorded as a liability on our balance sheet, and no gain is recognized.
3. Income taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. We are subject to federal and various state income taxes. We have multiple state filing groups with different income tax generating abilities. Significant judgments and estimates are required in determining the consolidated income tax expense.
We recognize deferred income taxes for tax attributes and for differences
between the financial statement and tax basis of assets and liabilities at
enacted statutory tax rates in effect for the years in which the deferred tax
liability or asset is expected to be settled or realized. A valuation allowance
is provided to offset deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized. Future realization of deferred tax assets depends on the existence
of sufficient taxable income of the appropriate character. Sources of taxable
income considered in the evaluation of deferred tax asset realization include
future reversals of deferred tax assets and liabilities, expected future taxable
income, taxable income in prior carryback years if permitted under the tax law,
and tax planning strategies. We have recorded valuation allowances for those
deferred tax assets not expected to be realized. As we have achieved a
sufficient history of sustained profitability, including taxable income in
appropriate jurisdictions, a portion of the valuation allowance was reduced by
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions.
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The accounting guidance for income taxes provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits. The guidance also provides information on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
We recognize tax liabilities in accordance with accounting guidance on income taxes, and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. Currently, we have no material unrecognized tax benefits on any open tax years.
RESULTS OF OPERATIONS -- YEARS ENDED
Overview of Economic Conditions and Impact on Results of Operations
We believe that current trends in housing inventory, home prices, and low
interest rates, in the markets in which our major water assets are located and
serve, primarily northern
Our revenues and results of operations fluctuate from period to period. For example, we recognize revenue from the sale of water assets when specific transactions close; as a result, sales of water assets for any individual period are not necessarily indicative of revenues for future periods or the full financial year.
December 31,
2021 2020 Change
Shareholders' equity $ 208,596 $ 178,270 $ 30,326
Shareholders' equity per share $ 11.39 $ 9.59 $ 1.80 The increase in shareholders' equity during 2021 of
Total Assets and Liabilities (in thousands):
December 31,
2021 2020 Change
Total assets $ 212,658 $ 180,446 $ 32,212
Total liabilities $ 4,062 $ 2,176 $ 1,886 Total assets increased during the year ended
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Results of Operations (in thousands):
Year Ended December 31,
2021 2020 Change
Total revenue and other income (loss) $ 29,220 $ 9,612 $ 19,608
Total costs and expenses $ 14,420 $ 8,944 $ 5,476 Revenue and other income (loss)
The majority of our revenue recorded for the year ended
The majority of our revenue recorded for the year ended
Costs and Expenses
Cost of water assets and real estate sold:
During the year ended
During the year ended
General, Administrative and Other Costs:
During the years ended
Stock-Based Compensation Expense
Stock-based compensation expense is calculated based on the fair value of the
award on the grant date and is recognized over the vesting period of the awards.
As of
The stock-based compensation expense consisted primarily of the following awards
(in thousands):
Year Ended December 31,
2021 2020
RSU - Directors 87 87
RSU - Management 21 453
Total stock-based compensation expense $ 108 $ 540
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Income Taxes
For the year ended
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED
A substantial portion of our historical revenue and cash flow has, and is
expected in the future, to come from one-time sales of our assets which are
primarily long-term water resource development projects that we expect to
support economic growth in the local markets where the assets are located. The
timing and amount of sales and cash flows depend on a number of factors that are
difficult to predict and cannot be directly compared from one period to another.
However, given our cash balances at
Our Operations
The majority of our cash inflows for the year ended
The majority of our cash inflows for the year ended
We have adequate working capital reserves. At
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Cash Flow
Our cash flows from operating, investing, and financing activities were as follows (in thousands):
Year Ended December 31,
2021 2020
Cash provided by (used in):
Operating activities $ 21,462 $ 1,785
Total operating activities 21,462 1,785
Investing activities 23 (40)
Total investing activities 23 (40)
Financing activities (2,692) (10,526)
Total financing activities $ (2,692) $ (10,526)
Increase (decrease) in cash and cash equivalents $ 18,793 $ (8,781) Cash Flows From Operating Activities
During 2021, we generated cash of
During 2020, we generated cash of
Cash Flows From Investing Activities
We had no material cash flows from investing activities during the years ended
Cash Flows From Financing Activities
During the years ended
Off-Balance Sheet Arrangements
As of
Legal Developments
The Company, in the normal course of its business, frequently encounters
government or private challenges to its water rights. As previously disclosed,
the Company, through its subsidiary, Vidler, has invested substantial sums to
develop water resources in the
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Following hearings conducted by the Nevada State Engineer in late-September
early-October of 2019 to determine the boundaries of the Lower White River Flow
System (LWRFS) in
Vidler believes that the
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