Global Water Resources, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results; the company operates regulated water, wastewater, and recycled-water utilities, primarily in metropolitan Phoenix, Arizona. Management cautions that quarterly results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $9.26 million | $8.23 million | Up 12.5% |
| Operating income | $1.04 million | $1.80 million | Down $0.75 million |
| Operating margin | 11.3% | 21.8% | Down 10.5 percentage points |
| Net income (loss) | ($0.22 million) | $0.35 million | Decline of $0.57 million |
| Basic and diluted EPS | ($0.01) | $0.02 | Lower |
| Cash from operations | $4.80 million | $3.17 million | Up $1.63 million |
| Capital expenditures | $3.27 million | $3.53 million | Down $0.26 million |
Revenue grew with an 8.5% increase in active connections, higher water consumption, and rate increases under the prior ACC rate decision. Water-services revenue rose 17.7% to $3.99 million; wastewater and recycled-water revenue rose 8.7% to $5.24 million. Active connections totaled 50,162 at quarter-end, up from 46,227 a year earlier.
Operating expenses increased 27.7% to $8.22 million. General and administrative expense rose 67.1% to $3.49 million, with management attributing much of the increase to higher share-based and other deferred-compensation expense associated with the share-price increase and awards issued after Q1 2020. Operations and maintenance increased 12.0% to $2.50 million; depreciation and amortization increased 5.3% to $2.23 million. These costs more than offset revenue growth and reduced operating margin.
Cash, debt, and liquidity
- Cash and cash equivalents were $18.21 million at March 31, 2021, versus $18.03 million at December 31, 2020; restricted cash was $3.93 million. Combined cash, cash equivalents, and restricted cash were $22.14 million.
- Operating cash flow of $4.80 million less capital expenditures of $3.27 million left approximately $1.53 million before financing activities. The filing attributes higher operating cash flow principally to movements in receivables, payables, and other liabilities.
- Total debt and capital-lease carrying value was $114.67 million, including $2.03 million current and $112.64 million noncurrent. Senior secured notes had $115.0 million principal outstanding, at fixed rates of 4.38% and 4.58%; estimated fair value of long-term debt was $123.3 million.
- The company had no borrowings on its $10.0 million revolving credit facility at March 31, 2021 and reported compliance with debt covenants. On April 30, 2021, after quarter-end, the revolver maturity was extended from April 2022 to April 2024, with a wholly owned subsidiary added as a guarantor.
- The company declared dividends of $0.07 per share for the quarter. Debt agreements include coverage tests and restrictions that may limit dividends.
Outlook, risks, and notable items
- Management said it expects sufficient cash on hand, operating cash generation, and revolver capacity to fund operations and planned capital expenditures and remain covenant-compliant for at least the next 12 months. It identified COVID-19 as a potential source of near-term cash-flow pressure.
- In August 2020, 12 of 16 regulated utilities filed an ACC rate case seeking a collective $4.6 million revenue-requirement increase against expected 2021 revenues, based on a 2019 test year. Some requested phased increases beginning in 2022 and consolidation of certain rates. Approval, amount, and timing are uncertain; the ACC could also take other action or reduce future rates.
- Management reported no material COVID-19 impact on Q1 2021 operations or financial position, but said it could not predict the ultimate impact. Customer disconnections resumed February 9, 2021 after a temporary suspension; management cautioned that some billed revenue may not be collected.
- Key business risks include ACC rate-setting and regulatory lag, seasonal and weather-sensitive usage, dependence on growth and real-estate development in a concentrated Arizona service area, groundwater availability and quality, and volatile power and chemical costs. Cost recovery through rates may be delayed.
- The company’s regulated utilities face the final phase of rate reductions associated with the 2017 federal tax law in 2021. The filing estimates aggregate annual reductions of approximately $1.1 million across the affected utilities.
- No material legal proceedings or material changes to the risk factors in the 2020 Form 10-K were reported. Adoption of lease accounting and cloud-computing implementation-cost guidance in January 2021 had no material financial-statement impact.
- After quarter-end, the company entered new employment agreements with its CEO, CFO, and Chief Strategy Officer. The agreements provide base salaries, potential cash and equity incentives, and specified termination and change-of-control payments.
Important facts for investors to verify
- ACC rate-case progress, potential approval and implementation dates, and whether the requested $4.6 million increase or rate consolidations are granted.
- Whether connection growth and usage remain strong, and how seasonality, weather, development activity, and water-supply constraints affect revenue.
- Whether the sharp increase in general and administrative expense, particularly share-based and deferred compensation, persists or moderates.
- Cash-flow quality and capital requirements, including the extent to which quarterly operating cash flow benefited from working-capital movements.
- Debt covenant headroom, dividend capacity, and liquidity needs as principal payments on Series B notes begin in December 2021.
- COVID-19-related customer collection trends and the effect of resumed disconnections on receivables and cash flows.