Business context and reporting period
Global Water Resources, Inc. owns and operates regulated water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; amounts below are in U.S. dollars. The company completed its U.S. IPO and merger of GWRC into the company during the period and retrospectively adjusted share data for a 100.68-for-1 stock split.
Key financial metrics
- Revenue: Q2 revenue was $7.6 million, down 16.4% year over year; first-half revenue was $14.4 million, down 13.8%. Water-services revenue fell, while wastewater and recycled-water revenue increased.
- Operating results: Q2 operating income was $0.8 million (10.9% margin), versus $2.3 million (25.1%) a year earlier. First-half operating income was $1.9 million (13.1% margin), versus $3.1 million (18.3%).
- Net income: Q2 net loss was $3.6 million, compared with $0.4 million net income in Q2 2015. First-half net loss was $3.9 million, versus a $0.5 million loss in the prior-year period. First-half diluted loss per share was $0.21, versus $0.03.
- Cash flow and liquidity: First-half operating cash flow was negative $2.5 million, compared with positive $0.8 million. Investing cash flow was negative $0.3 million; financing provided $16.8 million. Cash was $25.6 million at June 30, up from $11.5 million at year-end 2015. Management said cash and expected cash flows should cover operations and planned capital spending for at least 12 months.
- Debt: The company issued $115.0 million of senior secured notes at a blended 4.55% rate, primarily to refinance $106.7 million of tax-exempt bonds. Series A bears 4.38% interest and matures in 2028; Series B bears 4.58%, is interest-only for five years, and matures in 2036. The company reported compliance with debt covenants at quarter-end.
- Capital and dividends: The IPO generated approximately $5.5 million in net proceeds. The monthly dividend was increased from $0.02 to $0.022 per share in June, subject to board discretion and debt-covenant limits.
Material changes versus the prior comparable period
- Revenue comparisons were reduced by the 2015 condemnation sale of Valencia Water Company and the May 2016 sale of Willow Valley. Excluding those businesses, revenue at remaining utilities increased 4.5% in Q2 and 5.0% for the first half. Adjusted active connections increased 2.4% year over year at June 30.
- Debt refinancing significantly increased reported interest expense: first-half interest expense was $9.3 million versus $4.1 million. This included a $3.2 million bond prepayment penalty and a $2.2 million write-off of prior debt fees.
- General and administrative expense increased to $5.1 million for the first half from $3.9 million, driven partly by higher share-price-linked deferred compensation and board compensation. Operating and maintenance and depreciation expenses declined, in part because of the sold and condemned utilities.
- First-half cash increased substantially following note issuance, bond-reserve releases and the IPO; this financing inflow should be distinguished from cash generated by operations, which was negative.
Outlook, commentary, risks and unusual items
- Management expects capital expenditures to rise in 2016 and 2017, then decline in 2018 and later, as it accelerates planned reclamation-facility investments. An IRS private letter ruling may allow the company to defer part of the Valencia condemnation gain under IRC Section 1033 if qualifying investments are made by the end of 2017. The filing provides no quantified capital-spending forecast.
- The 2014 Arizona rate decision phases in additional revenue requirements through 2021. Santa Cruz and Palo Verde, which serve most connections, could not file another rate increase before May 31, 2017. Rate recovery may lag cost increases, and actual revenue depends on connections and customer usage.
- Management cited Arizona population and development growth as opportunities, but results are seasonal and sensitive to local weather, water consumption and real-estate development. Key risks include groundwater availability, drought and conservation, regulatory changes, concentrated operations in Arizona, and infrastructure or water-quality disruptions.
- Unusual items included the refinancing charges, a $0.954 million gain from settling the Sonoran acquisition liability, Valencia growth-premium income of $0.444 million for the first half, and a $0.054 million loss on the Willow Valley sale. Q2 non-GAAP Adjusted EBITDA was $2.7 million versus $4.7 million; first-half Adjusted EBITDA was $5.8 million versus $7.9 million. These measures are not GAAP and may not be comparable across companies.
- The company reported no legal proceedings expected to have a material effect and said disclosure controls were effective. It also disclosed a long-term FATHOM service arrangement and related-party service fees. The cover page marks “No” for having filed all required reports during the preceding 12 months; investors should understand the reason, given the company’s recent IPO and reorganization.
Important facts for investors to verify
- Confirm the drivers and expected duration of negative operating cash flow, and compare future operating cash generation with dividends and planned capital spending.
- Review the note agreements’ debt-service and dividend tests, collateral provisions, amortization schedule and the company’s capacity to comply under weaker operating conditions.
- Track execution and timing of the 2016–2017 Section 1033 investments, including the tax-deferment assumptions and later capital-spending reductions.
- Separate ongoing utility growth from the effects of the Valencia condemnation and Willow Valley sale when assessing revenue, connections and margins.
- Assess exposure to groundwater supply, drought, regulation, development activity, and reliance on FATHOM for billing and other services.
- Clarify the reporting-compliance checkbox marked “No” on the cover page and review the effect of the IPO, merger, stock split and share-based compensation on per-share comparisons.