Global Water Resources, Inc. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; filed March 6, 2024. This is an annual report, not a standalone fourth-quarter report. Global Water owns and operates water, wastewater and recycled-water utilities, principally in Arizona, with 61,791 active connections across 29 systems. Approximately 94.7% of 2023 revenue came from regulated utilities.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $53.0 million | $44.7 million | +18.6% |
| Operating income | $12.3 million | $7.8 million | +57.1% |
| Operating margin | 23.2% | 17.5% | +5.7 percentage points |
| Net income | $8.0 million | $5.5 million | +45.0% |
| Diluted EPS | $0.33 | $0.24 | +$0.09 |
| Cash from operations | $25.4 million | $23.3 million | +$2.1 million |
| Capital expenditures | $22.3 million | $34.0 million | -$11.7 million |
Water-services revenue grew 19.0% to $24.9 million; wastewater and recycled-water revenue rose 6.5% to $25.4 million. The company also recognized $2.8 million of unregulated ICFA revenue, compared with none in 2022. Operating expenses increased 10.4% to $40.7 million; depreciation and amortization rose 15.6% to $11.4 million. Net margin was 15.1%, versus 12.3% in 2022. Cash from operations less capital expenditures was approximately $3.1 million, compared with negative $10.6 million in 2022.
At year-end, cash and cash equivalents were $3.1 million and current assets were $11.7 million, against current liabilities of $14.2 million. Debt and the revolving credit line totaled approximately $107.5 million on the balance sheet, including $2.3 million drawn on a $15 million revolver. The company reported compliance with debt covenants. Separately, it issued $20 million of 6.91% senior secured notes on January 3, 2024; these were not outstanding at the December 31, 2023 balance-sheet date. Dividends declared were $0.30 per share for 2023.
Material changes and operating drivers
- Active connections increased 9.8% to 61,791, primarily reflecting organic growth and the February 2023 Farmers Water Co. acquisition. Farmers added about 3,300 connections at acquisition and contributed approximately $1.1 million of 2023 revenue.
- Revenue growth reflected higher water consumption during hotter, drier peak months, rate increases under the 2022 ACC decision, connection growth, the Farmers acquisition and ICFA revenue recognition. Water consumption rose 14.8% to 4.0 billion gallons.
- Cash used in investing declined to $28.6 million from $34.2 million, principally because capital expenditures were lower, partly offset by $6.2 million paid for Farmers.
- Income tax expense increased to $2.9 million from $0.9 million; the 2022 comparison included a tax benefit related to a regulatory-liability reversal.
Outlook, risks and unusual items
Management described connection growth as moderate in the first half of 2023 and faster in the second half. It sees potential benefit from Phoenix-area growth, existing infrastructure and multifamily development, while noting housing-market weakness and higher interest rates. The filing provides no specific company revenue or earnings guidance. Management believes available cash and revolver capacity are sufficient for operating needs and the capital plan over the next twelve months and beyond.
- Southwest Plant and rate-base matter: In January 2024, the company identified approximately $7.8 million of Southwest Plant construction costs that had been prematurely included in plant in service for ratemaking purposes and reflected in prior rate decisions. The company notified the ACC on March 1, 2024. The ACC could require lower rates or take other unfavorable action; the outcome and potential impact are not estimable and could be material. A separate request to defer certain Southwest Plant depreciation and carrying costs is also pending.
- Rate proceedings: A settlement with ACC staff for seven smaller utilities recommends an annual revenue increase of about $351,000, but requires approval by an administrative law judge and the ACC. The company said it intended to file a Farmers rate case in 2024 and Santa Cruz/Palo Verde cases in 2025. The 2022 rate decision provided for phased annual revenue increases totaling approximately $2.2 million, with the final phase beginning in January 2024.
- Water supply and regulation: Operations depend predominantly on groundwater, with recycled water used for non-potable purposes; water availability, groundwater restrictions, drought and growth-related supply approvals are significant risks. The company expects proposed PFAS drinking-water rules, if finalized, to require additional monitoring, treatment investment and operating costs.
- Concentration and execution risks: Operations are confined to Arizona, and 85.6% of active connections are in the City of Maricopa. Results are exposed to local development, weather, customer usage, regulatory decisions and infrastructure costs. The company also highlights cybersecurity, environmental compliance, and construction and acquisition risks.
- Dividend and financing: Management intends to continue a monthly dividend of $0.02508 per share, but payment is discretionary and subject to debt covenants and other conditions. The new 6.91% notes increase financing costs and carry restrictive covenants.
The independent auditor issued an unqualified opinion on the financial statements and identified rate-regulation accounting as a critical audit matter. The auditor did not attest to internal-control effectiveness; management concluded controls were effective as of year-end.
Most important facts for investors to verify
- ACC response and potential financial consequences of the $7.8 million Southwest Plant rate-base disclosure.
- Final ACC disposition and timing of the settlement recommending a $351,000 annual revenue increase, and subsequent rate-case outcomes.
- Groundwater availability, assured-water-supply approvals and the cost and timing of any PFAS-related compliance requirements.
- Cash generation relative to capital spending, debt service, dividend payments and the terms and covenant headroom following the January 2024 note issuance.
- Whether customer and housing growth in the concentrated Arizona service territory supports the company’s expected organic growth and ICFA revenue recognition.