Global Water Resources, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The company owns and operates water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $8.18 million | $8.14 million | $22.59 million | $24.85 million |
| Operating income | $2.67 million | $2.06 million | $4.55 million | $5.11 million |
| Net income (loss) | $1.15 million | $21.91 million | $(2.76) million | $21.39 million |
| Adjusted EBITDA | $4.98 million | $4.43 million | $10.92 million | $12.32 million |
| Operating cash flow | Not separately provided | Not separately provided | $2.17 million | $5.24 million |
- Q3 operating margin was approximately 32.6%, versus 25.3% a year earlier; nine-month operating margin was approximately 20.2%, versus 20.6%. Nine-month adjusted EBITDA declined about 11%.
- At September 30, cash and cash equivalents were $26.28 million, compared with $11.51 million at year-end 2015. Current assets were $31.13 million and current liabilities $12.40 million. Total assets were $241.11 million and shareholders’ equity $15.89 million.
- Debt and capital leases totaled $114.60 million on the balance sheet, including $115.0 million principal of new senior secured notes, net of debt issuance costs, and $0.35 million of capital lease obligations. The notes carry a 4.55% blended rate. The company reported compliance with debt covenants.
- Capital expenditures were $4.51 million for the nine-month period. Cash increased by $14.77 million, supported by financing cash flow of $14.73 million; operating cash flow was $2.17 million.
Material changes versus comparable periods
- Q3 revenue was nearly flat overall, but revenue from continuing utilities increased 8.2%, according to management, supported by rates, connections and consumption. For nine months, total revenue fell 9.1%; management attributed the decrease principally to the Valencia condemnation and Willow Valley sale. Continuing-utility revenue increased 6.1% before the decline in unregulated revenue.
- Q3 net income was far below 2015 because the prior-year quarter included a $43.1 million gain on the Valencia condemnation. Nine-month results likewise compare against that prior-year gain, net of related tax expense.
- The June 2016 refinancing issued $115.0 million of senior secured notes and used proceeds primarily to redeem $106.7 million of tax-exempt bonds. The refinancing triggered a $3.2 million prepayment penalty and a $2.2 million write-off of old debt fees, contributing to nine-month interest expense of $10.60 million, up from $6.50 million. Management says underlying interest costs fell after refinancing, excluding those charges.
- G&A rose 20.7% for the nine months, to $7.11 million, including higher deferred and board compensation, public-company costs, insurance and City of Maricopa fees. These increases were partly offset by lower operating and maintenance and depreciation expenses.
Outlook, commentary and risks
- Management expects capital spending to rise in 2016 and 2017, with reductions in 2018 and later, as it accelerates planned investments eligible to defer the Valencia condemnation gain under Internal Revenue Code Section 1033. The replacement-investment period extends through year-end 2017. The filing gives no quantified full-year earnings or revenue guidance.
- Management believed cash and expected operating cash flows would cover operating needs and the capital plan for at least 12 months, and expected to remain compliant with debt covenants. It identified an estimated $1.7 million tax liability related to the GWRC merger as a notable near-term cash obligation.
- The company reported 37,009 active service connections. Adjusted for divested utilities, active connections increased 2.5% year over year; management cited Phoenix-area growth, higher rates and consumption as potential drivers. The business is seasonal, with generally higher water-service revenue in the second and third quarters.
- Key risks include dependence on Arizona and concentrated service areas, water availability and drought, weather and conservation effects on demand, regulatory delays or limits on rate increases, development-cycle exposure, infrastructure and compliance costs, and reliance on FATHOM systems and services. The company noted that Santa Cruz and Palo Verde, serving about 98.8% of active connections, could not file another rate increase before May 31, 2017.
- The board announced a monthly dividend increase on November 14, 2016, from $0.022 to $0.0225 per share. Dividends remain discretionary and subject to legal, financial and debt-covenant restrictions. The reported per-share figures reflect the April 2016 100.68-for-1 stock split.
- Management reported no known legal proceeding expected to have a material effect, no off-balance-sheet arrangements, and effective disclosure controls.
Investor verification points
- Reconcile the reported operating and adjusted EBITDA trends with GAAP earnings, especially the prior-year Valencia gain and 2016 refinancing charges.
- Review the timing, amount and funding of accelerated 2016–2017 capital investments and the Section 1033 tax-deferral requirements.
- Track debt covenant headroom, dividend restrictions, and cash needs including the merger-related tax liability.
- Assess whether continuing-utility growth in active connections, consumption and rates can offset divestitures, unregulated-revenue declines and seasonal variability.
- Monitor ACC rate-case timing, water-supply and drought conditions, and concentration in Arizona and the two principal utilities.