Global Water Resources, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results are seasonal and may not indicate full-year performance. The company owns and operates water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona.
Financial results
Amounts in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $8.145 | $7.589 | $14.936 | $14.405 |
| Operating income | $1.712 | $0.925 | $2.813 | $1.986 |
| Operating margin | 21.0% | 12.2% | 18.8% | 13.8% |
| Net income (loss) | $0.425 | $(3.532) | $0.614 | $(3.846) |
| Diluted earnings (loss) per share | $0.02 | $(0.18) | $0.03 | $(0.21) |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $3.678 | $(2.465) |
- Revenue and operations: Q2 revenue rose 7.3%; six-month revenue rose 3.7%. Growth reflected rate increases, more active connections, and higher consumption. Active connections increased 3.6% year over year to 38,135 at June 30. Wastewater and recycled-water revenue was the larger revenue category.
- Expenses and earnings: Six-month operating expenses fell 2.4% to $12.123 million, while depreciation increased 7.0% to $3.454 million. Earnings improved substantially year over year, largely because of lower interest expense after the 2016 refinancing. The 2016 comparison included $3.2 million in bond prepayment penalties and a $2.2 million write-off of deferred debt fees; Q2 2016 also included a $0.954 million gain on settling the Sonoran acquisition liability.
- Cash flow and investment: Six-month capital expenditures were $12.771 million, versus $2.634 million a year earlier. Net investing cash outflow was $12.774 million. Dividends paid were $2.655 million.
- Liquidity and balance sheet: Cash and cash equivalents were $9.125 million at June 30, down from $20.498 million at December 31, 2016. Current assets were $14.347 million and current liabilities $10.185 million. Total debt was approximately $114.4 million on the balance sheet, net of debt issuance costs; principal obligations were $115.073 million. Total liabilities were $224.513 million and shareholders’ equity $13.264 million.
- Debt and distributions: The $115 million senior secured notes carry fixed rates of 4.38% and 4.58%, with maturities in 2028 and 2036. The company reported compliance with debt and dividend covenants. In May 2017, it raised its monthly dividend to $0.02306 per share ($0.27672 annually); future declarations remain at board discretion and subject to covenant limits.
Material changes and notable items
- The 2016 refinancing reduced ongoing interest costs; six-month interest expense declined to $2.617 million from $9.280 million. The prior-year period included significant refinancing charges, making the net-income comparison unusually favorable to 2017.
- In May 2017, the company acquired Eagletail Water Company for approximately $80,000, adding about 55 active connections and six square miles of approved service area; it assumed approximately $82,000 of liabilities.
- FATHOM service fees fell after the related-party contract’s monthly rate per water account was reduced from $7.79 to $6.24 beginning in January 2017. The company also recorded a $0.243 million gain related to FATHOM’s March financing and ownership adjustment.
- The filing corrects previously reported stock-compensation errors deemed immaterial. Corrected 2016 comparative results show lower general and administrative expense and a $0.062 million improvement in Q2 net loss; the corrections did not affect cash flows.
Outlook, risks, and contingencies
- Management cited continued Phoenix-area growth and positive connection trends, and believes service-area infrastructure positions the company to benefit from development. It did not provide quantified earnings or revenue guidance.
- The company accelerated capital investments in 2017 to support a tax deferral related to the Valencia Water Company condemnation gain. An IRS ruling permits reinvestment through 2017; the requested one-year extension to 2018 had not been approved as of the filing. The company said it expects capital expenditures to decline in 2018, 2019, and beyond. The related deferred tax liability was approximately $10.6 million at June 30.
- Key disclosed exposures include ACC rate regulation and regulatory lag, weather and seasonality, water supply availability and quality, development cycles, rising operating or compliance costs, and limited geographic concentration. Cost recovery through rates may be delayed.
- Management believed available cash and operating cash flows would support operations and planned capital expenditures and covenant compliance for at least 12 months. This is a forward-looking assessment, not a guarantee.
- Management reported no known legal proceeding expected to have a material effect, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the IRS approved the requested extension and whether accelerated 2017 investment met the applicable reinvestment requirements.
- Actual capital spending, operating cash generation, and cash balances as the investment program proceeds.
- Debt-service and dividend covenant headroom, especially given the dividend and substantial long-term debt obligations.
- Whether connection growth, customer usage, and local weather sustain revenue growth after the favorable seasonal period.
- Potential rate-case timing and the effect of regulatory lag, water-supply constraints, and compliance costs on returns.
- The impact of the corrected stock-compensation accounting and ongoing FATHOM-related-party arrangements on reported expenses and cash commitments.