Global Water Resources, Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017, not only the fourth quarter. Global Water owns and operates regulated water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix. It reported nine utilities, 38,997 active service connections, and 336 square miles of certificated service areas; approximately 98.8% of active connections were concentrated in its Santa Cruz and Palo Verde utilities. Nearly all revenue came from regulated utility operations.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $31.2 million | $29.8 million |
| Operating income | $7.3 million | $5.8 million |
| Operating margin | 23.5% | 19.5% |
| Net income (loss) | $4.6 million | $(2.5) million |
| Diluted EPS | $0.23 | $(0.13) |
| Cash from operations | $11.2 million | $1.9 million |
| Capital expenditures | $20.9 million | $8.6 million |
Revenue rose 4.7%, driven by rate increases, 4.3% growth in active connections, and higher consumption. Wastewater and recycled-water revenue increased 6.5%; recycled-water deliveries rose 9.9%. Operating expenses were nearly flat at $23.9 million. Interest expense fell to $5.1 million from $11.9 million following the 2016 refinancing, a major contributor to the return to net income. FY2017 cash from operations less capital expenditures was approximately negative $9.7 million.
At year-end, cash and cash equivalents were $5.2 million, down from $20.5 million; current assets were $9.7 million and current liabilities $9.0 million. Debt and capital leases totaled approximately $114.4 million on the balance sheet, with contractual debt obligations of $115.1 million. Total liabilities were $223.7 million and shareholders’ equity $14.9 million. The company reported compliance with its debt covenants. It paid $5.4 million in dividends and stated an intention to continue monthly dividends, subject to board discretion, legal requirements, and debt covenants.
Material changes and unusual items
- Results improved versus 2016 largely because refinancing reduced interest expense; FY2016 included refinancing costs and a $3.2 million prepayment penalty.
- Capital expenditures increased substantially, largely because the company accelerated planned reclamation-facility investments to defer tax on the 2015 Valencia condemnation gain. The company said most qualifying investments were completed in 2017, with remaining work expected in early 2018, and anticipated lower capex in 2018 and later years.
- The 2017 income-tax benefit was $0.6 million, including a $2.3 million reduction in tax expense from remeasuring deferred taxes after enactment of the Tax Cuts and Jobs Act (TCJA). Some TCJA accounting remained provisional; the company reported a $7.2 million deferred tax liability related to the Valencia condemnation at year-end.
- The company acquired Eagletail Water Company in May 2017 for approximately $80,000, adding 54 active connections at year-end and eight square miles of service area.
- Management corrected an immaterial prior-period stock-compensation error in the 2016 statements; the correction reduced reported 2016 net loss by $340,000.
Outlook, commentary, and risks
Management described regional growth prospects as positive, citing increased housing permits and expected development in its service areas. It highlighted existing infrastructure and its Total Water Management approach, including recycled-water reuse, as support for growth. The filing gives no specific company earnings or revenue guidance.
Key risks include reliance on groundwater in water-scarce Arizona and uncertainty around future assured-water-supply approvals; dependence on local housing and development; concentration of customers in one geographic area; ACC rate-setting and regulatory lag; weather and seasonal demand; and substantial capital needs and debt. The ACC opened a docket on TCJA ratemaking and ordered utilities to use regulatory accounting for its impacts; the company was evaluating its filing options, and the ultimate rate treatment was uncertain. The company also depends on FATHOM for billing and related services under a long-term agreement, creating technology and service-continuity exposure.
Investor verification priorities
- Review the ACC’s eventual TCJA-related rate and regulatory-accounting decisions and their effect on customer rates, taxes, and cash flows.
- Track groundwater availability, assured-water-supply designations, and the infrastructure needed to serve planned growth.
- Verify completion and cash cost of the accelerated capital program, and whether operating cash flow can support future capex and dividends.
- Check debt-service coverage and dividend restrictions under the senior secured notes as principal amortization begins.
- Assess whether connection growth and consumption trends are sustained, particularly given geographic concentration and weather sensitivity.
- Review FATHOM service performance, contract economics, and continuity plans for billing and customer-service systems.