Global Water Resources, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; amounts below are in U.S. dollars unless stated otherwise.
Business context
Global Water owns and operates regulated water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Active service connections rose 4.2% year over year to 46,573. Operations are seasonal, and the company noted that interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $9.9m | $9.1m | $18.1m | $16.8m |
| Operating income | $1.7m | $2.2m | $3.5m | $3.4m |
| Operating margin | 17.5% | 24.6% | 19.4% | 20.4% |
| Net income (loss) | $(0.1)m | $0.8m | $0.2m | $1.4m |
| Basic EPS | $(0.01) | $0.04 | $0.01 | $0.07 |
- Q2 revenue grew 8.4%; six-month revenue grew 7.6%, driven mainly by customer growth, higher consumption and previously approved rate increases.
- For the first half, operating cash flow was $5.1m versus $5.7m; capital expenditures were $5.4m versus $4.9m. Operating cash flow less capital expenditures was therefore approximately $(0.3)m.
- At June 30, cash and cash equivalents were $15.5m, with another $1.9m in restricted cash. Working capital was approximately $11.9m.
- Debt and capital leases totaled approximately $114.7m on the balance sheet; senior secured notes had $115.0m principal outstanding at a blended 4.55% rate. The company had no borrowings on its new $10.0m revolver and reported compliance with debt covenants.
- Capital expenditures were funded alongside operating cash flow; financing cash flow included $11.5m net proceeds from the January stock offering. Quarterly dividends declared were $0.07 per share.
Material changes versus comparable periods
- Q2 net results shifted from $0.8m profit to a $0.1m loss despite higher revenue. Operating expenses rose to $8.2m from $6.9m, and total other expense increased to $1.8m from $1.1m.
- Q2 included a $0.5m loss on asset disposals. Management also cited higher deferred compensation and personnel costs and the loss of FATHOM royalty income as factors affecting results.
- Operations and maintenance costs increased as the company brought billing and customer-service functions in-house after FATHOM ceased operations in December 2019, and engaged replacement service providers. Related-party operating costs fell to zero from $0.4m in Q2 2019.
- Six-month net income declined to $0.2m from $1.4m. The comparison was affected by the $1.0m final Loop 303 contract payment recorded as other income in March 2019, as well as the 2020 asset-disposal loss.
Outlook, risks and unusual items
- Management anticipated requesting a moderate rate increase in its ACC rate case, with certain increases proposed to phase in from 2022. It also planned to seek consolidation of rates for specified Pinal County utilities. Illustrative residential bill increases are preliminary, subject to ACC approval and timing, and could change; the ACC could deny increases or reduce future rates. The filing deadline was extended to August 28, 2020.
- Management said COVID-19 had not materially affected results through June 30, but could weaken development and connection growth, commercial demand, collections and cash flow. The company voluntarily suspended customer disconnections and late fees for pandemic-related hardship; management cautioned that some billed amounts might not be collected.
- Management expected to have sufficient cash, revolver access and operating cash flow to meet needs and planned capital spending for at least 12 months, while noting potential pandemic-related cash-flow impacts. It may reduce capital spending if growth slows but expects to continue necessary maintenance.
- The company fully deferred the remaining tax liability associated with the Valencia condemnation gain during the first half under the tax-reinvestment provision described in the filing.
- Water-supply constraints, drought, weather, environmental rules, regulatory lag and volatile power or chemical costs remain operating risks. Management reported no known legal proceeding expected to have a material effect.
Important facts for investors to verify
- ACC rate-case application, requested rate changes, consolidation proposal and eventual decision and effective dates.
- Subsequent COVID-19 effects on customer collections, bad debts, commercial usage, development and service-connection growth.
- Whether the Q2 cost increases, asset-disposal loss and lost FATHOM royalties are recurring, and the performance of the replacement billing and customer-service arrangements.
- Capital expenditure levels, cash generation, dividend affordability and compliance with debt-service and dividend covenants.
- Progress on the Inland Port certificate application and the implications of Arizona water availability and regulatory requirements for growth.