Global Water Resources, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. The company owns and operates regulated water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Interim results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $9.94 | $9.00 | $26.79 | $27.26 |
| Operating income | $2.56 | $2.06 | $6.01 | $7.52 |
| Operating margin | 25.8% | 22.8% | 22.4% | 27.6% |
| Net income | $1.05 | $0.63 | $2.47 | $3.21 |
| Diluted EPS | $0.05 | $0.03 | $0.11 | $0.16 |
| Operating cash flow | Not separately provided | Not separately provided | $11.18 | $10.18 |
| Capital expenditures | Not separately provided | Not separately provided | $7.79 | $3.40 |
- Q3: Revenue rose 10.5%, driven by organic connection growth, Red Rock acquisition contributions and rate increases. Operating income increased about 24.6% and net income about 65.4%; operating expenses grew more slowly than revenue.
- Nine months: Revenue declined 1.7%, operating income fell 20.2% and net income fell 22.9%. The comparison includes $2.39 million of ICFA revenue recognized in 2018, versus none in 2019. Excluding that item, management reported revenue growth of 7.7%.
- At September 30, cash and cash equivalents were $11.09 million and restricted cash was $1.05 million. Current assets were $16.30 million against current liabilities of $10.97 million.
- Debt and capital leases totaled approximately $114.68 million, including $87,000 current and $114.59 million noncurrent. Senior secured notes carry fixed rates of 4.38% and 4.58%. The $8 million revolving credit line was undrawn and extended to April 2022. The company reported compliance with debt covenants.
- Dividends declared were $0.07 per share per quarter. After quarter-end, the company announced an increase in its monthly dividend to $0.0241 per share, or $0.2892 annually; future declarations remain at the board’s discretion and subject to restrictions.
Material changes and unusual items
- Active service connections increased 9.1% year over year to 45,315, including growth from the Red Rock acquisition. Total connections rose 8.6% to 45,770.
- March 2019 receipt of the remaining $1.0 million from the Loop 303 contract sale was recorded as other income, helping reduce nine-month total other expense versus 2018.
- Nine-month capital expenditures more than doubled year over year, in part reflecting investment plans associated with deferring approximately $1.0 million of remaining tax liability from the Valencia condemnation. Management expected to use qualifying expenditures by year-end 2019 and was preparing a precautionary request for an extension through 2020.
- ASC 606 was adopted January 1, 2019 using the modified retrospective method. Management said adoption did not materially change revenue timing and required no cumulative retained-earnings adjustment.
Outlook, risks and contingencies
- The ACC requires all utilities to file a rate case by June 30, 2020, using 2019 as the test year. Management anticipated requesting a moderate rate increase and expected new rates no earlier than the second half of 2021; approval and outcome are uncertain.
- ACC tax-related rate reductions are being phased in; the filing estimates aggregate annual reductions of approximately $1.1 million in 2021. Regulatory lag may delay recovery of costs and investments.
- Management said existing cash, operating cash generation and the undrawn revolver should be sufficient for operations and planned capital spending for at least 12 months. Capital plans remain subject to revision.
- Key exposures include seasonal and weather-sensitive water demand, local economic and development conditions, water availability and quality, environmental and utility regulation, and volatile power and chemical costs. The company relies on FATHOM systems for billing and other operating functions; disruption, including cybersecurity or service-provider issues, could impair operations.
- The filing reported no known legal proceeding expected to have a material effect, no material changes to previously reported risk factors apart from the added IT-systems risk, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether underlying regulated revenue and connection growth continue to offset the absence of one-time ICFA revenue.
- Operating-cost trends and the effect of higher capital spending and depreciation on margins and cash generation.
- ACC rate-case decisions, including the timing and amount of any rate changes and treatment of tax-related balances.
- Debt covenant headroom, dividend capacity and funding needs as the company invests in infrastructure.
- Progress on the Valencia tax deferral and any additional IRS extension; the filing does not quantify the final full-year capital expenditure requirement.