Global Water Resources, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Global Water owns and operates regulated water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Revenue | $6.791 million | $6.816 million; down 0.4% |
| Operating income | $879,000; 12.9% operating margin | $1.061 million; 15.6% margin |
| Net income (loss) | $50,000; $0.00 per diluted share | $(314,000); $(0.02) per diluted share |
| Cash from operations | $2.099 million | $2.436 million |
| Capital expenditures | $6.505 million | $1.371 million |
| Cash and cash equivalents | $14.807 million | $20.498 million at Dec. 31, 2016 |
| Total debt, including capital leases | $114.287 million | $114.342 million at Dec. 31, 2016 |
| Total assets / shareholders’ equity | $240.045 million / $14.237 million | $238.819 million / $15.191 million at Dec. 31, 2016 |
Current assets were $19.006 million and current liabilities $12.922 million at quarter-end. The company reported a $5.691 million decrease in cash during the quarter, reflecting investment spending and dividends. Dividends paid were $1.322 million; $0.07 per share was declared for the quarter.
Changes versus the prior comparable period
- Revenue was nearly flat overall. Revenue from continuing utilities rose about $201,000, offset by the absence of $226,000 of Willow Valley revenue following its 2016 sale.
- Wastewater and recycled-water service revenue increased 4.8%; water-service revenue fell 6.8%. Management cited lower water consumption, including a 5.5% decline at remaining utilities after adjusting for Willow Valley, partly offset by approved rate increases and connection growth.
- Operating expenses rose $157,000. General and administrative expense increased $378,000, including $265,000 of stock-option expense; lower operations and maintenance costs partly offset the increase.
- Interest expense declined $510,000, primarily following the 2016 refinancing. Other expense improved by $855,000 overall. The company moved from a net loss to net income, with results also benefiting from a $243,000 FATHOM investment revaluation gain and other income that included Valencia-area meter-installation royalties.
- Operating cash flow decreased $337,000, mainly due to timing of accounts payable and accrued-liability settlements. Capital expenditures increased $5.134 million.
Outlook, risks, and notable items
- Management said it expects sufficient cash and operating cash flow to fund operations and its capital plan and remain within debt covenants for at least the next 12 months. It provided no specific earnings or revenue guidance and cautioned that Q1 results are not necessarily indicative of full-year results because of seasonality.
- Management expects 2017 capital expenditures to be higher than in recent years, with reductions anticipated in 2018–2020. Planned investments were accelerated in connection with the tax deferral period for the approximately $19.4 million Valencia condemnation gain. The IRS extension request, filed April 18, 2017, had not been approved; the related deferred tax liability was approximately $15.0 million at March 31.
- The $115.0 million senior secured notes carry fixed rates of 4.38% and 4.58%. The company reported compliance with its financial and dividend covenants at March 31. Debt agreements restrict dividends if specified debt-service coverage thresholds are not met.
- Key business exposures include ACC rate regulation and regulatory lag, water availability and quality, drought and weather, customer consumption, development activity, operating-cost inflation, and the concentration of operations in Arizona. The company said it relies predominantly on groundwater and recycled water.
- On May 10, 2017, the company announced an increase in its monthly dividend to $0.02306 per share, or $0.27672 annualized. Future declarations remain at the board’s discretion and subject to legal, financial, and debt-agreement constraints.
- The filing reported no material changes to risk factors, no material litigation known to management, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether reduced water consumption persists and how connection growth and approved rate increases affect revenue.
- The actual 2017 capital-spending schedule, including accelerated projects, funding needs, and the status of the IRS extension request.
- Debt-service coverage and dividend-covenant headroom, particularly as dividends and capital spending increase.
- The nature and repeatability of Q1’s FATHOM revaluation gain and Valencia-area meter-installation royalties, and the impact of related-party service arrangements.
- The status of water-supply, environmental, and ACC regulatory matters, as well as the effects of seasonal demand and local weather.