Global Water Resources, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited results compared with the same period in 2019. The company owns and operates water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Results are seasonal and Q1 performance is not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $8.23 million | $7.72 million |
| Operating income | $1.80 million | $1.20 million |
| Operating margin | 21.8% | 15.5% |
| Income before tax | $0.56 million | $0.99 million |
| Net income | $0.35 million | $0.65 million |
| Diluted earnings per share | $0.02 | $0.03 |
| Operating cash flow | $3.17 million | $3.78 million |
| Capital expenditures | $3.53 million | $1.80 million |
Revenue grew 6.6%, led by water services (+8.0%) and wastewater and recycled-water services (+5.6%). Active connections rose 4.7% year over year to 46,227; water consumption increased 11.8%. Operating expenses declined slightly overall, but operating and maintenance costs rose 29.5% to $2.23 million as the company brought billing and customer-service operations in-house after FATHOM ceased operations. General and administrative expense fell to $2.09 million, partly because of lower equity-award compensation.
Net income declined despite higher operating income, mainly because Q1 2019 included $1.0 million of proceeds from the final payment for the Loop 303 contracts. That unusual prior-year item increased other income. Q1 2020 also had no FATHOM royalty income, which had contributed about $0.1 million in Q1 2019. The filing attributes the overall decrease in other income/expense primarily to the Loop 303 comparison.
Cash, debt, and liquidity
- At March 31, 2020, cash and cash equivalents were $17.14 million; restricted cash was $1.72 million. Current assets were $21.97 million and current liabilities $9.74 million.
- Long-term debt and capital leases totaled $114.75 million, including $0.12 million current. The senior secured notes have a 4.55% blended interest rate; the company reported compliance with debt covenants and no borrowings on its revolving credit line at quarter-end.
- Operating cash flow was below capital expenditures, producing $0.36 million of cash use before financing. Net financing cash flow was $10.13 million, principally reflecting $11.5 million of net proceeds from a January stock offering of 1.0 million shares.
- Cash, cash equivalents, and restricted cash increased by $9.77 million to $18.86 million. Dividends paid were $1.63 million. The company declared $0.07 per share for the quarter.
- After quarter-end, the company replaced its MidFirst facility with a two-year revolving credit line of up to $10 million from Northern Trust, at LIBOR plus 2.00%, maturing April 30, 2022.
Outlook, risks, and notable matters
- COVID-19: Management said the pandemic had no material effect on Q1 operations or financial results, but warned the effects could worsen. The company continued essential services and voluntarily suspended customer disconnections and late fees for pandemic-related hardship. Management cited potential slower development and connection growth, increased uncollectible accounts, reduced commercial demand, supply disruptions and higher costs, and possible impacts on liquidity and financing.
- Rate case: The Arizona Corporation Commission extended the required filing deadline to August 28, 2020, using 2019 as the test year. Management anticipated seeking a moderate rate increase, but approval is uncertain and rates could instead be reduced.
- Capital and growth: The company may reduce capital expenditures if development slows, while continuing maintenance and necessary service projects. Management stated it expected sufficient resources for operations and planned investment for at least 12 months, while noting COVID-19 could affect near-term cash flow.
- Regulatory and operating risks: Rate recovery can lag cost increases; chemical and power costs may fluctuate. The business is geographically concentrated and exposed to seasonality, weather, drought, groundwater availability, water-quality requirements, and development cycles.
- Tax and contingencies: The company reported fully deferring the remaining tax liability associated with the Valencia condemnation gain during Q1 under the applicable tax provisions. Management reported no legal proceeding expected to have a material effect and no material change in previously disclosed risk factors other than COVID-19.
Investor verification points
- Track customer collections, bad-debt allowances, and cash-flow effects of the voluntary suspension of disconnections and late fees.
- Verify the timing, requested rate changes, and eventual ACC decision for the rate case, including treatment of tax-related regulatory balances.
- Monitor capital spending against operating cash flow, dividend payments, and debt covenants; confirm terms and availability of the replacement $10 million revolver.
- Assess whether connection growth and water usage persist, and whether COVID-19, weather, or regional water-supply limits alter demand or development.
- Reconcile reported earnings with unusual items and compensation volatility, particularly the 2019 Loop 303 proceeds and Q1 2020 equity-award compensation effects.