Global Water Resources, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 10, 2017. The filing is an annual report, with fourth-quarter results also disclosed. The company owns and operates regulated water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Its “Total Water Management” model integrates water delivery, wastewater treatment, and reuse. At year-end, it reported 37,387 active service connections across 328 square miles; approximately 98.9% of active connections were served by Santa Cruz and Palo Verde.
Financial and operating performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $29.8 million | $32.0 million |
| Operating income | $5.3 million | $6.5 million |
| Operating margin | 17.7% | 20.4% |
| Net income (loss) | $(2.9) million | $21.4 million |
| Diluted earnings (loss) per share | $(0.15) | $1.17 |
| Cash from operations | $1.9 million | $4.2 million |
| Capital expenditures | $8.6 million | $3.4 million |
| Cash and cash equivalents, year-end | $20.5 million | $11.5 million |
| Debt and capital leases, carrying value, year-end | $114.3 million | $104.4 million |
FY 2016 revenue was 99.7% from regulated utilities. Water-service revenue was $14.0 million and wastewater/recycled-water revenue was $15.7 million. The current ratio was approximately 2.3 (current assets of $24.7 million against current liabilities of $10.9 million). The company reported $115.0 million of senior-note principal; less year-end cash, principal debt net of cash was approximately $94.5 million.
Fourth-quarter 2016 revenue was $7.2 million, operating income $0.7 million, and net loss $0.1 million. Fourth-quarter 2015 revenue was $7.1 million, operating income $1.4 million, and net loss $0.03 million.
Material changes versus prior periods
- Revenue fell 6.7% year over year, chiefly because Valencia was condemned and transferred to Buckeye in 2015 and Willow Valley was sold in May 2016. Excluding these disposed operations, revenue from remaining utilities increased 5.7%, supported by rate increases, 3.1% growth in active connections, and higher water consumption.
- Operating expenses declined 3.5% to $24.5 million, but general and administrative expense rose 28.3% to $10.2 million, including higher public-company, stock-based, and deferred-compensation costs.
- Net results swung from 2015 income to a 2016 loss. FY 2015 included a $43.0 million pretax gain on the Valencia condemnation; FY 2016 included $3.2 million of debt-prepayment penalties and a $2.2 million write-off of prior debt issuance costs following refinancing.
- Cash from operations decreased to $1.9 million, while capital expenditures increased to $8.6 million. The company ended the year with more cash, aided by its IPO and refinancing-related financing inflows.
- Active connections were down 1.1% as reported, mainly due to the sale of Willow Valley; excluding that sale, active connections increased 3.1%.
Debt, liquidity, outlook, and risks
- In June 2016, the company issued $115.0 million of senior secured notes at a 4.55% blended rate to refinance tax-exempt bonds. Series A bears 4.38% and matures in 2028; Series B bears 4.58%, is interest-only for five years, and matures in 2036. Principal payments on Series B begin in 2021. The notes are secured by the company’s interests in subsidiaries. The company reported compliance with its debt covenants at year-end and said it expected to meet operating, capital-spending, and covenant needs for at least 12 months.
- Management expects 2017 capital expenditures to rise versus recent years, with reductions in 2018 and beyond. Spending is being accelerated to support a tax-deferred reinvestment of the Valencia condemnation gain under an IRS private letter ruling; the stated reinvestment period runs through 2017. The related deferred tax liability was approximately $17.1 million at year-end.
- Management cited improving Phoenix-area housing and population trends and expects the company’s service areas to benefit from development. This outlook depends on development timing, new connections, consumption, and regulatory approvals; no specific earnings or revenue guidance was provided.
- The regular monthly dividend was raised to $0.0225 per share in December 2016, or $0.27 annualized. FY 2016 cash dividends were $5.0 million. Future payments are discretionary and subject to debt covenants, financial condition, and other constraints.
- Principal risks include reliance on groundwater in drought-prone Arizona, water-supply and assured-water availability, concentration in one region and a small number of utilities, dependence on real-estate development, weather-driven demand, regulatory rate lag, and substantial debt. The company also highlights environmental compliance, infrastructure, insurance, information-technology, and recycled-water acceptance risks.
- The company reported no legal proceeding expected to have a material effect. Its independent auditor issued an unqualified opinion on the financial statements; the auditor did not audit internal control effectiveness. Management’s disclosure controls were assessed as effective, but no management ICFR assessment or auditor attestation was included under the applicable transition relief.
Important facts for investors to verify
- Whether ongoing revenue and connection growth can offset the lost revenue from Valencia and Willow Valley, and whether reported growth persists after accounting for weather and seasonality.
- The timing, amount, and funding of planned 2017 capital expenditures, and whether qualifying reinvestment is completed within the tax-law deadline.
- Cash generation relative to capital spending, dividend payments, debt service, and the senior-note covenant thresholds.
- Groundwater availability and regulatory approvals for current and prospective service areas, including the assumptions behind long-term assured-water designations.
- The earnings impact of refinancing costs, stock-based and deferred compensation, and remaining proceeds from the Loop 303 contract sale and Valencia growth-premium arrangement.
- The comparability of per-share data: the company effected a 100.68-for-1 stock split in April 2016 and retrospectively adjusted share and per-share amounts.