Global Water Resources, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company owns and operates regulated water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $11.7m | $10.9m | $21.7m | $20.2m |
| Operating income | $2.5m | $2.3m | $3.8m | $3.4m |
| Net income | $2.1m | $2.0m | $3.0m | $1.8m |
| Diluted EPS | $0.09 | $0.09 | $0.13 | $0.08 |
| Operating margin | 21.0% | 21.4% | 17.6% | 16.7% |
Revenue increased 7.0% in Q2 and 7.6% for the first half, mainly from connection growth and higher water consumption. Active service connections rose 8.8% year over year to 55,814. Operating expenses grew 7.4% in Q2 and 6.5% for the first half; Q2 operations and maintenance costs rose 18.6%. First-half net income increased 69.7%, supported by higher operating income, lower other expense, and lower income tax expense.
Q2 income tax benefit was $0.15m, compared with $0.64m tax expense in Q2 2021; the filing attributes much of the change to a roughly $0.7m reversal of a regulatory liability following the rate decision. First-half tax expense was $0.19m versus $0.60m a year earlier.
Cash flow, debt and liquidity
- First-half operating cash flow was $11.9m, up from $7.4m. Management attributed the increase principally to changes in developer-related and other liabilities, including contributions in aid of construction.
- Capital expenditures were $14.6m, compared with $6.4m in the prior-year period. Investing cash outflow was $14.8m; financing cash outflow was $3.8m, including $1.9m of bond principal repayment and $3.3m of dividends paid.
- Cash and cash equivalents were $4.8m at June 30, 2022, down from $12.6m at year-end 2021; restricted cash was $1.9m. Current assets of $11.9m were below current liabilities of $15.9m.
- Reported debt and capital lease liabilities totaled $111.0m, including $4.0m current and $107.0m noncurrent. The senior secured notes carry fixed rates of 4.38% and 4.58%. No revolving-credit borrowings were outstanding at quarter-end, and the company reported compliance with debt covenants.
- On July 26, 2022, the revolving facility was amended to increase capacity from $10m to $15m, extend maturity to July 1, 2024, and replace LIBOR provisions with SOFR-based terms. Management said cash, operating cash flow, and available credit were expected to support operations and planned capital spending for at least the next 12 months.
Material changes, outlook and notable items
- Rate decision: On July 27, 2022, the Arizona Corporation Commission approved a collective annual revenue-requirement increase of approximately $2.2m, phased in from August 2022 through January 2024. The decision also approved rate consolidation, annual tax and property-tax adjustors, and a sustainable-water surcharge. Realized revenue may differ with connection growth and customer usage.
- Rate-case accounting: The company reclassified about $0.8m of acquisition premiums from goodwill to regulatory assets, reversed about $0.8m of a TCJA-related regulatory liability, and wrote off about $0.3m of capitalized rate-case costs. The liability reversal reduced Q2 income tax expense by about $0.7m and interest expense by about $0.1m.
- Unusual comparison: Q2 2021 included income from the sale of a wireless communications tower; its absence contributed to the year-over-year decline in other income. Buckeye growth-premium income was higher in 2022: $1.6m for the first half versus $0.2m in the prior-year period.
- Growth and acquisitions: Rincon Water and Twin Hawks added 91 connections combined in January 2022. A definitive agreement to acquire Farmers Water Company remained subject to customary conditions and ACC approval; the proposed deal was expected to add approximately 3,300 active connections and $1.5m in annual revenue.
- Post-quarter equity offering: On August 1, 2022, the company completed an offering of 1.15m shares at $13.50 per share, generating approximately $15.5m gross proceeds before fees. Directors and/or affiliates purchased 652,000 shares.
- Risks and contingencies: Management identified regulatory lag, changing operating and infrastructure costs, seasonal demand, drought and water-supply constraints, local real-estate conditions, and cybersecurity threats as relevant risks. The ACC process may include further action following a contemplated IRS private-letter-ruling request; its outcome and potential effects are uncertain. Management reported no known legal proceeding expected to materially affect the company.
The company reported no material COVID-19 impact on Q2 operations or financial condition, but said future effects remain uncertain. It also stated that risk factors were unchanged from its 2021 Form 10-K and that disclosure controls were effective as of June 30, 2022.
Investor verification priorities
- Track implementation of the ACC-approved rate increases and whether connection growth and usage support the expected revenue benefit.
- Verify the status, ACC approval, purchase terms, and eventual contribution of the Farmers Water acquisition.
- Assess capital spending relative to operating cash generation, cash balances, developer contributions, and the company’s dividend commitments.
- Monitor debt-service covenant headroom, scheduled principal payments, and the terms and availability of the amended $15m credit facility.
- Confirm the net proceeds and use of funds from the August 2022 share offering, including dilution and related-party participation.
- Follow the IRS ruling request and any subsequent ACC action concerning deferred taxes and potential financial effects.