Global Water Resources, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless noted. The company owns and operates water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $10.76 | $9.94 | $28.88 | $26.79 |
| Operating income | $2.89 | $2.56 | $6.42 | $6.01 |
| Operating margin | 26.9% | 25.8% | 22.2% | 22.4% |
| Net income | $1.13 | $1.05 | $1.36 | $2.47 |
| Diluted EPS | $0.05 | $0.05 | $0.06 | $0.11 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $11.70 | $11.18 |
- Revenue drivers: Nine-month water-services revenue was $13.56 million and wastewater and recycled-water revenue was $15.19 million. Total revenue rose 7.8% year over year, reflecting connection growth, increased consumption, and rate increases under the prior ACC rate decision.
- Cash flow and investment: Nine-month capital expenditures were $7.49 million, leaving approximately $4.20 million of operating cash flow after capital expenditures, before financing and other items. Dividends paid were $4.90 million.
- Balance sheet at September 30: Cash and cash equivalents were $18.06 million and restricted cash was $2.32 million. Current assets were $24.10 million versus current liabilities of $10.45 million. Long-term debt and capital leases totaled $114.71 million, including a $0.12 million current portion; the senior notes have $115 million principal outstanding. Total liabilities were $247.12 million and shareholders’ equity was $33.82 million.
- Credit availability: The company reported no borrowings on its $10 million Northern Trust revolving facility. Management said cash, access to the revolver, and expected operating cash flows should support operations and planned capital expenditures for at least 12 months. The company reported compliance with debt covenants.
Material changes versus prior periods
- For Q3, revenue increased 8.2% and operating income increased 12.9%; net income rose from $1.05 million to $1.13 million. Active connections grew 5.0% year over year to 47,594. Q3 water consumption increased 12.6%, and recycled-water deliveries increased 20.4%.
- For the first nine months, revenue increased 7.8% and operating income increased 6.8%, but net income declined 44.9% and diluted EPS fell from $0.11 to $0.06. The comparison reflects $1.0 million of Loop 303 contract proceeds recorded as other income in 2019, a $0.6 million loss on asset disposals in 2020, and the loss of FATHOM royalty income.
- Nine-month operating and maintenance costs rose 32.1% to $7.16 million. The company brought billing and customer-service functions in-house after FATHOM ceased providing services in December 2019; related-party operating costs ended, while personnel and replacement contract-service costs increased.
- Cash and cash equivalents increased from $7.51 million at year-end 2019, supported in part by $11.5 million of net proceeds from a January 2020 stock offering of one million shares.
Outlook, risks, and notable items
- Rate case: On August 28, 2020, the utilities filed applications seeking a collective $4.6 million revenue-requirement increase relative to expected 2021 revenues, along with consolidation of rates for certain utilities. Some proposed increases would be phased in beginning in 2022. ACC approval, amount, and timing are uncertain; the commission could approve a smaller increase or reduce future rates.
- COVID-19: Management reported no material effect on results through September 30, but said future impact is uncertain. The company voluntarily suspended disconnections and late fees for customers facing hardship, and reported a small increase in uncollectible accounts. Potential risks include lower collections, reduced commercial demand, supply disruption and higher costs, and financing or operating constraints.
- Water supply and regulation: Operations depend predominantly on groundwater and recycled water. Drought, water-right restrictions, environmental requirements, and local weather could constrain supply or demand. Regulatory lag may delay recovery of increased operating and capital costs.
- Dividend and financing: The company declared $0.07 per share for Q3 and announced a monthly dividend increase on November 5, 2020, to $0.02434 per share. Future declarations remain subject to board discretion, financial condition, and debt covenants. The senior notes and revolver include coverage-ratio and dividend restrictions.
- Other developments: The company said it completed qualifying reinvestment to defer the remaining tax liability associated with the Valencia condemnation gain. It submitted a certificate application for the Inland Port Project and anticipated approval before year-end. After quarter-end, it acquired Mirabell Water Co. for $80,000, adding over 60 connections.
- Management reported no known legal proceeding expected to materially affect the company and no material changes to previously disclosed risk factors other than the COVID-19 risk. No off-balance-sheet arrangements were reported.
Key facts for investors to verify
- ACC’s decision, timing, and final customer impact for the proposed rate increase and rate consolidation.
- Whether customer payment collections and uncollectible accounts worsen as COVID-19 relief measures continue or change.
- Whether operating-cost increases associated with the FATHOM transition persist and how they affect margins and cash generation.
- Capital expenditure requirements, water-supply availability, and the company’s ability to recover costs through future rates.
- Dividend affordability under cash-flow needs and debt-service covenants, including the effect of the announced increase.
- Progress and regulatory approvals for the Inland Port Project, and the financial contribution of the Mirabell acquisition.