Global Water Resources, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; standalone Q4 financial results are not clearly provided in the filing.
Business context
Global Water owns and operates regulated water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Its “Total Water Management” model combines potable and recycled-water services, conservation, technology, and regional planning. At year-end, it operated 16 utilities, had 48,899 active connections, and served more than 66,000 people. Approximately 92.8% of active connections were in its Santa Cruz and Palo Verde utilities.
Financial and operating results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $38.6 million | $35.5 million | +8.9% |
| Operating income | $7.3 million | $7.0 million | +5.4% |
| Operating margin | 19.0% | 19.6% | Down 0.6 percentage points |
| Net income | $1.1 million | $2.2 million | -50.3% |
| Basic and diluted EPS | $0.05 | $0.10 | Down $0.05 |
| Net cash from operations | $14.6 million | $11.6 million | +26.0% |
| Capital expenditures | $9.1 million | $11.2 million | Down $2.1 million |
Revenue growth was driven by higher water consumption and connection growth. Water-services revenue rose 11.9% to $18.1 million; wastewater and recycled-water revenue rose 5.9% to $20.4 million. Active connections increased 6.7%. Water consumption rose 15.3% to 3.3 billion gallons, and recycled-water deliveries increased 20.3% to 768 million gallons.
Operating expenses increased 9.8% to $31.3 million. Operations and maintenance rose 31.8%, partly reflecting the shift of billing and customer-service operations in-house after the FATHOM service transition. Other expense was $5.5 million, versus $3.6 million in 2019; the prior year included the final $1.0 million Loop 303 contract payment, while 2020 included a $0.6 million loss on asset disposals. Net margin was approximately 2.9%, compared with 6.3% in 2019.
Cash and cash equivalents were $18.0 million at year-end, plus $3.3 million of restricted cash. Current assets were $23.5 million and current liabilities $12.4 million. Total assets were $283.4 million, total liabilities $251.3 million, and shareholders’ equity $32.2 million. Cash from operations less capital expenditures was approximately $5.4 million.
Debt was approximately $115.0 million, primarily senior secured notes with a blended interest rate of 4.55%; the balance-sheet carrying amount also reflects debt issuance costs and capital leases. The company had no borrowings on its $10.0 million revolving credit line at year-end and reported compliance with debt covenants. A $1.9 million principal payment was due in December 2021. Dividends paid were $6.5 million; the company stated an intention to continue monthly dividends, subject to board discretion, debt covenants, and other restrictions.
Material changes and unusual items
- In January 2020, the company issued shares for approximately $11.5 million in net proceeds. It completed four small utility acquisitions adding 262 connections.
- The company replaced its former revolving facility with a $10.0 million Northern Trust line, maturing April 2022.
- Billing and customer-service operations were brought in-house following the cessation of FATHOM services in December 2019. Related-party operating costs ended, but contract-service and personnel expenses increased; FATHOM royalty income also ceased.
- The company completed qualifying reinvestments by year-end 2020 to defer the remaining tax liability associated with the approximately $19.4 million gain on the 2015 condemnation of Valencia’s assets.
- Four utilities acquired during 2020 contributed 262 connections; acquisition effects were described as immaterial.
Outlook, commentary, and risks
Management cited continued Phoenix-area housing and population growth, available lots, and existing infrastructure as opportunities for connection growth, but provided no quantified company revenue or earnings guidance. The company expects to continue targeted capital investment and maintenance spending. It said COVID-19 did not materially affect 2020 results, but warned that customer collections, revenue, earnings, and cash flows could be affected in 2021. Disconnections and late fees, suspended during 2020, resumed February 9, 2021.
Twelve of 16 regulated utilities filed rate applications in August 2020 seeking a collective $4.6 million revenue-requirement increase relative to expected 2021 revenues, and requested certain rate consolidations. Some increases were proposed to phase in beginning in 2022. ACC approval, amount, and timing were uncertain; the regulator could approve less, take other action, or reduce rates. The applications also sought consolidation affecting utilities representing approximately 97% of active connections.
Key risks include reliance on groundwater in water-scarce Arizona, drought and climate-related supply constraints, regulatory and rate-recovery delays, dependence on development and customer growth, concentration in Arizona and the Maricopa area, seasonal weather effects, and potential operational, environmental, cyber, and COVID-related disruptions. Management said liquidity was sufficient for at least the next 12 months, including access to the undrawn revolver, while noting pandemic-related uncertainty.
Important facts for investors to verify
- Progress and outcome of the pending ACC rate cases, including any approved increases, consolidation, and effective dates.
- Water-supply availability and regulatory approvals needed to support projected service-area growth.
- Whether the higher operating costs following the FATHOM transition stabilize and how the in-house model affects service and margins.
- Cash collection trends after the COVID-era suspension of disconnections and late fees ended.
- Debt-service coverage, the 2021 principal payment, dividend restrictions, and continued compliance with covenants.
- Connection growth and consumption trends, including exposure to local development and weather conditions.
The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not required to attest to internal-control effectiveness.