Global Water Resources, Inc. — Q1 2018 Form 10-Q
Business context and period: The company owns and operates water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. This unaudited report covers the three months ended March 31, 2018; results are seasonal and management cautions that the quarter is not necessarily indicative of the full year.
Financial highlights
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $7.425 million | $6.791 million | +9.3% |
| Operating income | $1.364 million | $1.101 million | +23.9% |
| Operating margin | 18.4% | 16.2% | +2.2 percentage points |
| Net income | $320,000 | $189,000 | +$131,000 |
| Net margin | 4.3% | 2.8% | +1.5 percentage points |
| Diluted EPS | $0.02 | $0.01 | Increased |
| Cash from operations | $3.987 million | $2.099 million | +$1.888 million |
| Capital expenditures | $1.101 million | $6.505 million | Down $5.404 million |
| Cash and cash equivalents | $6.915 million | $5.248 million at Dec. 31, 2017 | +$1.667 million |
| Current assets / current liabilities | $11.215 million / $10.818 million | $9.665 million / $8.976 million at Dec. 31, 2017 | Current ratio: 1.04 |
Reported long-term debt and capital leases, including the current portion, were approximately $114.5 million net of debt issuance costs; outstanding debt principal was approximately $115.1 million. The notes carry a blended fixed rate of 4.55%. The company reported compliance with debt covenants. Total assets were $239.4 million and shareholders’ equity was $13.9 million at March 31, 2018.
Revenue growth reflected a 4.9% increase in active service connections and rate increases under the ACC’s 2014 rate decision. Active connections totaled 39,542; water consumption increased 16.5%, and recycled-water deliveries increased 42.3%. Operating expenses rose 6.5%, including higher G&A and depreciation. Other expense increased to $903,000, partly due to a year-over-year reversal from FATHOM-related equity-method income to a loss.
Cash from operations improved in part because of changes in accounts payable and other current liabilities; investing cash use fell chiefly because capital spending was much lower than in Q1 2017. The company paid $1.391 million in dividends during the quarter and declared $0.07 per share. Its stated monthly dividend rate was $0.023625 per share, subject to board discretion and debt covenant restrictions.
Material changes, outlook and risks
- Management said the accelerated capital improvement program tied to the IRS ruling on the Valencia condemnation was substantially completed in 2017, with remaining work expected in the first half of 2018. It expected capital spending to decline in 2018 and beyond. The remaining related deferred tax liability was approximately $6.8 million; the company planned to seek another IRS extension to defer the gain through 2019.
- The company expected to recognize ICFA revenue during 2018 as planned capacity is added. The amount and timing are not specified.
- No specific earnings or revenue guidance was provided. Management cited growth prospects in the Phoenix area and reported annual active-connection growth of 4.9%.
- The ACC’s treatment of the Tax Cuts and Jobs Act, including its effects on CIAC and AIAC and customer rates, remained uncertain. The company filed a proposed tax expense adjustor mechanism in April 2018; the ACC’s final action was not known.
- Risks include ACC rate-setting and regulatory lag, development and connection growth, local weather and seasonality, groundwater availability and quality, drought or usage restrictions, and volatility in power and chemical costs. Management said legal proceedings were not expected to have a material effect; it reported no material risk-factor changes from its 2017 Form 10-K.
- Subsequent events: the company entered into an $8.0 million revolving credit facility on April 20, 2018, at LIBOR plus 2.25%, for acquisitions and general corporate purposes. On April 25, it agreed to acquire Turner Ranches Water and Sanitation Company for $2.8 million, subject to regulatory approval and other closing conditions.
- The company corrected an immaterial prior-period stock-compensation error in the comparative 2017 financial statements. The correction increased Q1 2017 net income from $50,000 as previously reported to $189,000; the reported comparative figures in this summary are the corrected amounts.
Important facts for investors to verify
- Track ACC decisions on TCJA-related rate treatment and the company’s proposed tax expense adjustor mechanism.
- Verify capital spending, completion of remaining IRS-qualified improvements, and any further IRS extension or tax effects.
- Monitor connection growth, water usage, service-area development and seasonal results against management’s outlook.
- Review debt service coverage and dividend capacity under existing and new credit-facility covenants.
- Confirm the timing, regulatory approval and financing of the Turner acquisition, and assess the company’s FATHOM-related losses and related-party service costs.