Global Water Resources, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018. The company owns and operates water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Management cautions that results are seasonal and Q1 is not necessarily indicative of the full year.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $7.723 million | $7.425 million |
| Operating income | $1.199 million | $1.364 million |
| Net income | $0.649 million | $0.320 million |
| Diluted EPS | $0.03 | $0.02 |
| Operating cash flow | $3.784 million | $3.987 million |
| Capital expenditures | $1.798 million | $1.101 million |
- Revenue rose 4.0%, while operating expenses increased 7.6%; operating margin declined to approximately 15.5% from 18.4%. Net margin increased to approximately 8.4% from 4.3%, aided by lower total other expense.
- Water-services revenue was up 0.7%; wastewater and recycled-water revenue increased 6.3%. Active connections grew 11.7% year over year to 44,152, including connections added through the Turner and Red Rock acquisitions. Higher precipitation and cooler temperatures reduced some water consumption and recycled-water deliveries.
- Cash and cash equivalents were $13.303 million at March 31, 2019, with another $0.442 million of restricted cash. Current assets were $17.810 million and current liabilities $9.938 million.
- Long-term debt and capital leases totaled $114.669 million on the balance sheet, including $0.075 million current and $114.594 million noncurrent. The senior secured notes have a blended 4.55% rate. The company reported covenant compliance and no borrowings on its $8 million revolver.
- Q1 cash increased by $0.548 million, including restricted cash. Dividends paid were $1.537 million; dividends declared were $0.07 per share.
Material changes and unusual items
- Revenue growth reflected higher connections, acquisitions and phased rate increases, partly offset by approximately $0.2 million of revenue reductions under the ACC’s TCJA-related rate decision.
- Operating income fell $0.165 million as operating costs increased, including depreciation and operations and maintenance expenses. Total other expense improved by $0.695 million year over year.
- Q1 2019 other income included the final approximately $1.0 million payment for the Loop 303 contract sale. This nonrecurring receipt materially contributed to the increase in pretax and net income. Interest expense also increased approximately $0.1 million.
- Operating cash flow decreased $0.203 million year over year, primarily due to less favorable changes in accounts payable and other current liabilities; investing cash use increased with capital expenditures.
- The company adopted ASC 606 on January 1, 2019 using the modified retrospective method. It reported no significant effect on revenue-recognition timing and 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 anticipates requesting a moderate rate increase and does not expect new rates before the second half of 2021; approval and the eventual rate outcome are uncertain.
- Management expects 2019 capital expenditures to exceed 2018 levels to meet reinvestment requirements associated with the Valencia condemnation gain. Approximately $2.0 million of related tax liability remained at March 31, 2019; the filing does not provide a clear capital-expenditure forecast.
- Management believes cash, operating cash generation and the undrawn revolver are sufficient for operating needs and planned capital expenditures for at least the next 12 months. The revolving credit facility maturity was extended in April 2019 to April 30, 2022.
- Key risks include ACC rate-setting and regulatory lag, seasonal and weather-driven demand, local water supply and drought constraints, rising power and chemical costs, real-estate development cycles, and environmental or water-quality requirements. Cost recovery may lag increases in expenses.
- The company reported no known legal proceedings expected to have a material effect and no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- How much of the earnings improvement is attributable to the one-time $1.0 million Loop 303 receipt, and how results trend excluding it.
- Whether connection growth and acquired utilities translate into sustained organic revenue and operating-income growth, given lower consumption in the quarter.
- The company’s planned 2019 capital spending, remaining Valencia-related tax exposure and progress toward satisfying the reinvestment requirements.
- The ACC rate-case schedule, proposed tariff changes and eventual impact of the TCJA-related rate reductions.
- Debt-service coverage, dividend capacity and liquidity as capital spending and regulatory requirements evolve.