Global Water Resources, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results; amounts below are in millions unless noted.
Business context
Global Water owns and operates 29 water, wastewater, and recycled-water systems, principally in metropolitan Phoenix and Tucson, Arizona. It reported one operating segment. Active service connections rose 8.0% year over year to 60,291, reflecting the Farmers acquisition and organic growth.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $13.0 | $11.7 | $26.1 | $21.7 |
| Operating income | $3.0 | $2.5 | $6.8 | $3.8 |
| Net income | $1.7 | $2.1 | $4.2 | $3.0 |
| Diluted EPS | $0.07 | $0.09 | $0.17 | $0.13 |
| Operating margin | 23.2% | 21.0% | 26.0% | 17.6% |
Q2 revenue increased 11.0%; water revenue rose 15.4% and wastewater/recycled-water revenue rose 7.0%. Six-month revenue increased 20.2%, including $2.3 million of ICFA revenue recognized in 2023 versus none in the prior period. Q2 net income declined despite higher operating income, principally because the 2022 quarter included a $0.7 million tax benefit from a regulatory-liability reversal; 2023 recorded $0.7 million of tax expense. For the first half, net income increased 40.4%.
Operating expenses were $10.0 million in Q2 and $19.3 million for the first half. Increases reflected acquisition-related and other personnel costs, higher depreciation on expanded plant assets, and operating costs associated with more connections. Q2 interest expense was $1.3 million; first-half interest expense was $2.4 million. Dividends declared were $0.07 per share for Q2 and $0.15 per share for the first half.
Cash flow, debt, and liquidity
- First-half operating cash flow was $12.7 million, compared with $11.9 million in 2022.
- Investing cash outflow was $19.9 million, including $13.7 million of capital expenditures and $6.2 million paid for the Farmers acquisition.
- Financing cash inflow was $4.1 million, including $6.8 million of net revolving-credit borrowings and approximately $2.7 million of stock-offering proceeds; dividends paid were $3.6 million.
- Cash and cash equivalents were $2.0 million and restricted cash was $2.3 million at June 30, 2023. Total debt carrying value was approximately $107.1 million, including $6.8 million drawn on a $15 million revolver. The revolver maturity was extended to July 1, 2025.
- The company reported compliance with debt covenants and stated it expects available cash, revolver capacity, and operating cash flow to support operations and its capital plan for the next 12 months and beyond. The next scheduled senior-note principal payment was $1.9 million in December 2023.
Material changes, outlook, and risks
- Farmers Water Company was acquired February 1 for consideration of approximately $7.6 million, including estimated contingent growth-premium consideration. It added about 3,300 connections and 21.5 square miles of service area.
- Seven of 13 regulated utilities filed water-rate applications with the Arizona Corporation Commission in June 2023, covering about 3% of active connections. Requested increases and rate consolidation remain subject to approval, timing, and possible changes by the regulator.
- Prior rate decision No. 78644 authorized a phased collective annual revenue-requirement increase of approximately $2.2 million, with the final phase scheduled for January 2024. Actual revenue impact depends partly on connection growth and customer usage.
- The Southwest Plant’s water-processing facility and part of its wastewater facility were placed in service on or after July 1, 2023. The company applied to defer related depreciation and carrying costs as a regulatory asset; approval is uncertain.
- Management described connection growth as moderate and cited housing-market slowdown, inflation, and higher interest rates, while noting available lots, existing infrastructure, and multifamily development as growth opportunities. No quantified full-year earnings or revenue guidance is provided in the filing.
- Key risks include ACC decisions and regulatory lag, seasonality and weather, water-supply constraints, potentially higher treatment and compliance costs (including proposed PFAS rules), infrastructure spending needs, and cybersecurity and insurance risks. Management believes water supply is adequate for current demand and foreseeable growth.
- The filing states there were no material changes to previously disclosed risk factors, no material legal proceeding known to management, and no off-balance-sheet arrangements.
Most important facts for investors to verify
- How much first-half revenue and earnings depended on the $2.3 million ICFA recognition, and when remaining deferred ICFA revenue may be recognized; timing is not estimable in the filing.
- Progress, requested terms, and timing of the seven pending rate cases and the Southwest Plant regulatory-asset application.
- Whether connection growth and usage support anticipated rate-case revenue, given the housing slowdown and seasonal/weather sensitivity.
- Capital-expenditure needs, free-cash-flow implications, revolver usage and cost, and capacity to sustain dividends while meeting debt covenants.
- Potential capital and operating costs from PFAS or other water-quality requirements, and whether those costs can be recovered through rates without material regulatory lag.