Cadiz Inc. (CDZI) is a California-based water solutions company committed to addressing the critical water challenges facing the Southwestern United States. With a unique portfolio of land, water, pipeline, and water filtration technology assets, Cadiz has established itself as a leading player in the quest for sustainable water management in one of the driest regions of the country.
Company Background and History
Cadiz's origins date back to 1983, when the company was founded with the vision of unlocking the potential of the Cadiz Valley's vast groundwater resources. Over the past four decades, the company has meticulously navigated the complex regulatory landscape, securing the necessary permits and approvals to develop its flagship Mojave Groundwater Banking Project. This ambitious endeavor aims to capture and store surplus water, which would otherwise be lost to evaporation, for future use by communities across the region.
Core Assets and Operations
At the heart of Cadiz's operations lies its 2.5 million acre-feet of permitted groundwater rights, a substantial resource that the company intends to responsibly manage and distribute. The company has undergone extensive environmental review and obtained the necessary permits and approvals to manage this groundwater aquifer, which has been a lengthy and complex process. In addition, the company's ownership of 220 miles of existing pipeline infrastructure, acquired from El Paso Natural Gas in 2021, and a 99-year lease for a 43-mile water conveyance pipeline provide the necessary transportation network to move water from its Cadiz Ranch to major distribution hubs. Integrating this pipeline into Cadiz's water solutions business has presented operational and logistical challenges.
In 2022, Cadiz expanded its portfolio by acquiring ATEC Water Systems, a water filtration technology subsidiary that provides innovative solutions for impaired or contaminated groundwater sources. Incorporating this new technology and business line into Cadiz's overall operations has required significant time and resources. Throughout its history, Cadiz has relied on a combination of debt and equity financing to support its working capital needs and capital expenditures, which has at times been challenging given the capital-intensive nature of its business.
Business Segments
Cadiz Inc. operates in two primary business segments: Land and Water Resources, and Water Filtration Technology.
The Land and Water Resources segment encompasses Cadiz's properties in the eastern Mojave Desert, including the pre-revenue development of the Mojave Groundwater Banking Project (also known as the Cadiz Water Conservation Storage Project or Water Project), as well as the company's agricultural operations. This segment generates the majority of Cadiz's current revenue, which has been limited primarily to sales from its alfalfa plantings and rental income from agricultural leases.
The Water Project is Cadiz's flagship initiative, which aims to develop the company's landholdings and water rights to provide a reliable, long-term water supply and storage solution for communities in Southern California. Cadiz owns vested rights to withdraw up to 2.5 million acre-feet of groundwater from the Cadiz Valley aquifer system, which is estimated to contain 30-50 million acre-feet of groundwater storage capacity. The company has completed environmental review and received the necessary permits to manage this groundwater aquifer and produce an average of 50,000 acre-feet of water per year for 50 years.
To deliver this water supply, Cadiz owns an existing 220-mile, 30-inch steel pipeline (the Northern Pipeline) that intersects several major water conveyance facilities in Southern California. The company also has a 99-year lease to construct a 43-mile pipeline (the Southern Pipeline) that would connect the Cadiz property to the Colorado River Aqueduct. The capacity of the Northern Pipeline is 25,000 acre-feet per year, while the Southern Pipeline could accommodate 75,000 to 150,000 acre-feet per year depending on the final pipeline diameter.
The Water Filtration Technology segment is operated through ATEC Water Systems LLC (ATEC). ATEC provides innovative water filtration solutions for impaired or contaminated groundwater sources, utilizing specialized filtration media to effectively remove contaminants such as iron, manganese, arsenic, chromium-6, nitrates, and other constituents of concern.
Financials and Performance
Cadiz's financial performance has been marked by periods of both challenge and progress. In the fiscal year 2023, the company reported a net loss of $31.45 million, a slight improvement from the $24.79 million net loss recorded in 2022. This was primarily due to higher operating expenses, interest costs, and one-time charges related to the refinancing of the company's senior secured debt. However, the company's revenue increased from $1.50 million in 2022 to $1.99 million in 2023, driven by the growth of its water filtration technology subsidiary, ATEC Water Systems.
In the first nine months of 2024, the company recorded a net loss of $22.52 million on revenues of $4.86 million, indicating continued investment in the development of its water solutions and the ramp-up of its ATEC business. This represents a significant improvement in revenue compared to the $1.31 million generated in the same period of 2023.
The most recent quarter (Q3 2024) showed promising growth, with revenue reaching $3.22 million and a net loss of $6.79 million. The year-over-year quarterly revenue growth was an impressive 776%, primarily due to increased sales from the ATEC water filtration technology business.
ATEC's performance has been particularly strong, generating $3.49 million in revenue for the first nine months of 2024, a substantial increase from $599,000 in the same period of 2023. This growth was largely driven by a contract to deliver 320 filtration units for the Central Utah Water Conservancy District's Vineyard Wellfield Groundwater Polishing Project. ATEC's filtration solutions provide a 31.4% gross margin.
Recent Developments and Strategic Initiatives
One of the key milestones for Cadiz in 2024 was the signing of agreements with multiple public water systems to purchase a cumulative 21,270 acre-feet per year (AFY) of water from the Mojave Groundwater Banking Project. These contracts, which represent approximately 85% of the Northern Pipeline's 25,000 AFY capacity, are a significant step forward in the commercialization of the company's water supply and storage capabilities. These take-or-pay agreements provide for 40-year water deliveries at an initial estimated price of $850 per acre-foot, subject to annual adjustments. The participating agencies are also expected to fund the costs of delivering the water from the Cadiz property to their service areas, as well as the capital costs for converting the Northern Pipeline from gas to water use.
Furthermore, Cadiz has made significant progress in establishing a new entity, Mojave Groundwater Storage Company, LLC (MGSC), to mobilize capital for the construction, ownership, and operation of the Mojave Groundwater Banking Project. In October 2024, the company entered into a letter of intent with a non-profit investment fund that is dedicated to financing sustainable infrastructure projects, outlining a prospective investment of up to $150 million in MGSC.
Cadiz's commitment to innovation extends beyond its core water business. In October 2024, the company announced a partnership with RIC Energy to build a large-scale green hydrogen production facility at the Cadiz Ranch. This facility, powered by 100% solar energy, will have the capacity to produce 50 tons of green hydrogen per day, further diversifying Cadiz's energy and sustainability portfolio.
Liquidity and Capital Resources
Throughout its history, Cadiz has relied on a combination of debt and equity financing to support its working capital needs and capital expenditures. The capital-intensive nature of its business has at times presented challenges in securing the necessary funding. However, recent developments such as the potential $150 million investment in MGSC and the commercialization of its water supply contracts suggest improving liquidity prospects for the company.
As of the most recent quarter, Cadiz has $33.39 million in net debt, with $61.22 million in total debt and $27.83 million in cash and cash equivalents. The company has a $50 million senior secured credit facility, of which $36 million was outstanding. The debt-to-equity ratio stands at 3.99, indicating a significant reliance on debt financing. The current ratio of 1.36 and quick ratio of 0.87 suggest that the company may face some challenges in meeting its short-term obligations, but it is not in immediate financial distress.
Geographic Markets
CDZI operates primarily in the United States, with a focus on water solutions and infrastructure in the Southwestern United States. As a small-cap company, its operations are concentrated in this region, particularly in Southern California where its major assets are located.
Future Outlook and Conclusion
Despite the challenges faced by Cadiz, the company's long-term vision and strategic initiatives continue to position it as a pivotal player in the water solutions landscape of the Southwestern United States. As the region grapples with the ongoing effects of drought and climate change, Cadiz's ability to responsibly manage and distribute its valuable water resources could prove increasingly crucial in the years to come.
Looking ahead, Cadiz's success will hinge on its ability to successfully execute its Mojave Groundwater Banking Project, secure additional water supply contracts, and continue the growth of its ATEC water filtration business. The company's ability to navigate the complex regulatory environment and attract the necessary capital investments will also be critical factors in determining its future trajectory.
The recent progress in signing water supply agreements and the potential $150 million investment in the Mojave Groundwater Banking Project are positive indicators for the company's future. The strong growth in the ATEC Water Systems subsidiary also provides a diversified revenue stream and demonstrates the company's ability to innovate in the water solutions sector.
In conclusion, Cadiz Inc. is a unique water solutions provider with a well-defined strategy and a strong asset base. As the company continues to navigate the challenges and opportunities of the arid Southwestern landscape, its long-term potential to contribute to the region's water security and sustainability remains a compelling investment thesis for those seeking exposure to this critical sector. The company's ability to execute on its ambitious projects and manage its financial obligations will be key factors for investors to monitor in the coming years.