Global Water Resources, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Global Water owns and operates 29 water, wastewater, and recycled-water systems, principally in Arizona. Financial figures below are in U.S. dollars; amounts are rounded to millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $14.5m | $11.9m | $40.7m | $33.6m |
| Operating income | $3.8m | $2.8m | $10.6m | $6.6m |
| Net income | $2.6m | $1.7m | $6.8m | $4.7m |
| Diluted EPS | $0.11 | $0.07 | $0.28 | $0.20 |
| Operating margin | 26.4% | 23.3% | 26.1% | 19.6% |
| Net margin | 18.1% | 14.2% | 16.8% | 13.9% |
Q3 revenue rose 22.2%; nine-month revenue rose 20.9%. Growth reflected higher water consumption amid hotter, drier weather, rate increases, Farmers Water Company connections, organic growth, and ICFA revenue. For nine months, regulated water revenue was $18.9m and wastewater/recycled-water revenue was $19.0m; unregulated revenue was $2.8m, primarily ICFA-related. Q3 and nine-month dividends declared were $0.07 and $0.22 per share, respectively.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was $22.7m, versus $19.7m; capital expenditures were $18.6m, versus $25.3m. Operating cash flow less capital expenditures was approximately $4.1m, before acquisitions and financing.
- Investing cash use was $24.8m, including $6.2m paid for the Farmers acquisition. Financing provided $2.3m, including $8.4m of construction advances, $5.4m of dividends paid, and $2.7m of stock-sale proceeds.
- At September 30, cash and cash equivalents were $5.3m and restricted cash was $2.4m. Current assets were $14.0m and current liabilities $16.4m; the resulting current ratio was approximately 0.86.
- Long-term debt, including current maturities, was approximately $107.1m; the company also reported $15,000 outstanding on its $15m revolving facility. Total liabilities were $309.4m and shareholders’ equity $49.1m. Debt covenants were met at quarter-end.
- After quarter-end, the company agreed to issue $20m of 6.91% senior secured notes due January 2034, subject to closing conditions, to refinance debt, fund growth investment, and for general corporate purposes. The revolving facility maturity was extended to July 2025.
Material changes and unusual items
- Farmers Water was acquired on February 1 for total consideration of approximately $7.6m, including $6.2m cash and estimated contingent growth consideration. It added about 3,300 connections; the company reported approximately 5,956 of acquisition goodwill (in thousands).
- ICFA revenue was $0.5m in Q3 and $2.8m for nine months, compared with none in the prior-year periods. Deferred ICFA revenue was $19.7m at September 30; recognition timing is uncertain.
- In July, $27.5m of the Southwest Plant was placed in service. The company sought ACC approval to defer related depreciation and carrying costs as a regulatory asset; approval is not assured.
- Seven utilities, representing about 3% of active connections, filed rate applications in June 2023. The company also requested consolidation of certain water rates. Approval, amount, and timing remain uncertain. Prior ACC-approved rate increases are being phased in, with a final stated step scheduled for January 2024.
- The IRS issued a September 2023 private letter ruling on deferred taxes related to condemned assets. ACC review remained pending; the company requested no further action, but the outcome was not final.
Outlook, commentary, and risks
Management reported moderate connection growth and expects to benefit from Phoenix-area growth, available lots and infrastructure, and multifamily development activity, while noting a housing slowdown associated with inflation and higher interest rates. Active service connections increased 8.7% year over year to 61,036, partly due to Farmers. Management believes available liquidity and operating cash flows can support operations and planned capital expenditures for the next 12 months and beyond; it provided no quantified earnings or revenue guidance.
Results are seasonal, with water demand generally strongest in Q2 and Q3, and are sensitive to local weather. Key risks include ACC rate decisions and regulatory lag, water availability and drought, volatile power and chemical costs, and potential future treatment requirements. The company said proposed PFAS rules could require additional capital and operating expenditure. It believes current water supply is adequate for foreseeable demand in its service areas. No material legal proceeding or material change in previously disclosed risk factors was reported. Disclosure controls were deemed effective.
Investor verification priorities
- Track ACC decisions and timing on the pending rate cases, rate consolidation, and Southwest Plant accounting request.
- Verify closing and use of proceeds for the $20m notes, and the resulting interest burden, refinancing and covenant headroom.
- Assess whether weather-driven consumption and connection growth persist, and separate organic growth from acquisition effects.
- Monitor capital spending, construction advances, liquidity, and dividend capacity under debt covenants.
- Follow ICFA revenue recognition and deferred-revenue timing, as well as potential PFAS compliance costs.