Global Water Resources, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company owns and operates regulated water, wastewater and recycled-water utilities, primarily in metropolitan Phoenix, Arizona. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $9.121 million | $10.838 million | $16.844 million | $18.263 million |
| Operating income | $2.245 million | $4.104 million | $3.444 million | $5.468 million |
| Operating margin | 24.6% | 37.9% | 20.4% | 29.9% |
| Net income | $0.778 million | $2.256 million | $1.427 million | $2.576 million |
| Diluted EPS | $0.04 | $0.11 | $0.07 | $0.13 |
Revenue mix: Q2 water services were $4.243 million and wastewater/recycled-water services $4.862 million; six-month amounts were $7.381 million and $9.431 million, respectively. Unregulated revenue was $16,000 in Q2 and $32,000 for the half year.
Cash flow and investment: For the six months, operating cash flow was $5.714 million, capital expenditures $4.858 million, and cash used in investing activities $4.856 million. Cash flow after capital expenditures was approximately $0.856 million. Cash, cash equivalents and restricted cash totaled $11.767 million at June 30, including $11.285 million of unrestricted cash.
Debt and liquidity: Current and long-term debt and capital leases totaled approximately $114.660 million on the balance sheet; senior secured notes had $115.0 million of principal before unamortized issuance costs. The notes carry fixed rates of 4.38% and 4.58%. The company had no borrowings on its $8.0 million revolving credit facility, whose maturity was extended to April 2022. It reported compliance with debt covenants. Total assets were $264.386 million, total liabilities $237.623 million, and shareholders’ equity $26.763 million.
Material changes versus prior period
- Reported revenue fell 15.8% in Q2 and 7.8% for the first half. The principal comparison item was $2.388 million of ICFA revenue recognized in 2018 after wastewater plant capacity was added; no ICFA revenue was recognized in 2019. Excluding that prior-year ICFA revenue, management reported Q2 revenue growth of 5.6% after removing a 2018 TCJA true-up, and first-half growth of 6.1%.
- Underlying regulated revenue growth reflected higher customer connections, rate changes and the Red Rock acquisition. Active connections increased 8.9% year over year to 44,715, including acquired connections.
- Operating income and net income declined despite growth in regulated services. Higher operations and maintenance and depreciation costs, and the absence of prior-year ICFA revenue, contributed to the decline. For the six months, lower other expense partly offset the operating-income decrease; this included receipt of the remaining $1.0 million from the Loop 303 contract sale in March 2019.
- Capital expenditures were $4.858 million versus $2.458 million in the prior-year half, while cash paid for acquisitions was nil versus $2.620 million. Red Rock, acquired in October 2018, added more than 1,650 connections; Turner was acquired in May 2018.
Outlook, risks and unusual items
- The ACC requires all utilities to file a rate case by June 30, 2020 using 2019 as the test year. Management anticipated seeking a moderate rate increase, but said new rates would not take effect before the second half of 2021 and the outcome—including possible rate decreases—is uncertain.
- TCJA-related rate reductions are being phased in; management reported estimated aggregate annual reductions rising to approximately $1.1 million in 2021. The company proposed deferring certain tariff and excess deferred tax matters to its next rate case.
- The company expects 2019 capital expenditures to exceed 2018 levels to reinvest under an IRS-approved extension and defer the remaining approximately $1.8 million tax liability related to the Valencia condemnation gain. The extension runs through the end of 2019.
- Management believed available cash, operating cash flow and the undrawn revolver would fund operations and planned capital expenditures for at least 12 months. This outlook is subject to regulatory lag, seasonal and weather-driven usage, development activity, water supply and quality, and potentially volatile power and chemical costs.
- Arizona water utilities face groundwater availability and regulatory risks. Management noted that cost recovery through rates can lag cost increases. The filing reported no known legal proceeding expected to materially affect the company and no material change in previously disclosed risk factors.
- After quarter-end, the board adopted a proposed 2020 Omnibus Incentive Plan, subject to shareholder approval, and the company entered into new CEO and CFO employment agreements. The proposed plan reserves 1.17 million shares; specified executive restricted-stock awards also depend on shareholder approval.
Important facts for investors to verify
- How much of future reported growth comes from organic connections and usage versus acquisitions, and how weather affects consumption.
- The timing and outcome of the ACC rate case, including treatment of TCJA-related adjustments and the potential for higher or lower rates.
- 2019 capital spending and whether the company completes the qualifying reinvestment needed for its remaining tax deferral.
- Debt-service coverage, dividend restrictions and the sustainability of dividends given cash flow and capital needs; dividends declared were $0.07 per share in Q2.
- Shareholder approval and potential dilution from the proposed incentive plan and executive awards.