Global Water Resources, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; amounts below are in U.S. dollars unless stated otherwise.
Business context
Global Water owns and operates regulated water, wastewater, and recycled-water utilities, principally in metropolitan Phoenix, Arizona. Revenue and results are affected by customer connections and usage, Arizona Corporation Commission (ACC) rate decisions, infrastructure investment, weather and seasonality, and water availability.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11.9 million | $11.4 million | $33.6 million | $31.6 million |
| Operating income | $2.8 million | $2.3 million | $6.6 million | $5.7 million |
| Net income | $1.7 million | $1.5 million | $4.7 million | $3.3 million |
| Diluted EPS | $0.07 | $0.07 | $0.20 | $0.14 |
| Operating margin | 23.3% | 20.1% | 19.6% | 18.0% |
Q3 revenue rose 4.3% and nine-month revenue rose 6.4%. Growth reflected more connections, higher consumption, and new rates; comparisons were partly offset by $0.7 million of prior-year ICFA revenue that did not recur. Operating expenses were $9.1 million in Q3 and $27.0 million year to date. Nine-month interest expense declined to $3.4 million from $4.0 million.
Nine-month operating cash flow was $19.7 million, versus $15.2 million. Capital expenditures were $25.3 million, versus $11.8 million, so operating cash flow less capital expenditures was negative $5.6 million, compared with positive $3.4 million in the prior-year period. Financing provided $8.8 million, including $14.9 million net proceeds from an August stock offering; dividends paid were $5.1 million. Cash and cash equivalents were $15.6 million at September 30, with an additional $1.0 million of restricted cash.
Total debt was approximately $110.7 million, including current maturities; no borrowings were outstanding on the revolving credit facility. The company reported compliance with debt covenants. Its amended facility provides up to $15 million and matures July 1, 2024. Current assets were $23.0 million and current liabilities $19.8 million. The company declared dividends of $0.07 per share for each quarter.
Material changes and notable developments
- Active service connections increased 8.0% year over year to 56,134; total connections rose 8.1% to 56,507. Water consumption increased 10.0% for the first nine months, while recycled-water deliveries rose 13.5%.
- The ACC’s July 2022 rate decision approved an approximately $2.2 million annual collective revenue-requirement increase, phased in from August 2022 through January 2024. It also approved rate consolidation, annual property- and income-tax adjustors, and a sustainable-water surcharge mechanism.
- Rate-decision accounting recorded in June included reversal of an approximately $0.8 million TCJA regulatory liability (about $0.7 million reducing income-tax expense and $0.1 million reducing interest expense), reclassification of approximately $0.8 million of acquisition premiums to regulatory assets, and a $0.3 million write-off of capitalized rate-case costs.
- The August public offering issued 1.15 million shares at $13.50 per share for approximately $14.9 million net proceeds. Directors and/or their affiliates bought 652,000 shares.
- Rincon Water and Twin Hawks were acquired in January, adding 73 and 18 connections, respectively. The Farmers Water Co. acquisition was pending at quarter-end; the ACC verbally approved it on November 9, 2022, with a signed order expected by year-end. The proposed acquisition is expected to add approximately 3,300 active connections and $1.5 million in annual revenue, subject to closing conditions.
Outlook, risks, and contingencies
Management said it believed available cash, operating cash flows, and the $15 million credit facility would be sufficient to meet operating needs, planned capital expenditures, and debt obligations for the next 12 months and beyond. The filing provides no specific earnings or revenue guidance. The company expects monthly dividends to continue, subject to board discretion, legal requirements, and debt covenants. Management noted that housing activity in metropolitan Phoenix was slowing amid inflation and higher interest rates, while expressing a belief that existing lots and infrastructure position the company to benefit from longer-term regional growth.
Key risks include regulatory lag and further ACC or IRS action related to the rate decision and contemplated private-letter ruling; uncertainty in completing acquisitions; local weather and seasonal water demand; drought, water-supply constraints and regulation; development and housing-market cyclicality; rising power, chemical, labor, and compliance costs; cybersecurity threats; and insurance limits. Management reported no material COVID-19 impact for the quarter, but said future effects remained uncertain. No known legal proceeding was expected to materially affect the company. Interim results may not indicate full-year performance because of seasonality.
Important facts for investors to verify
- How much of revenue and earnings growth reflects approved rate increases versus connection growth, customer consumption, and weather.
- Whether the ACC’s phased rate increases are realized as scheduled and whether any IRS ruling or subsequent ACC action changes the expected benefits.
- Capital spending pace and funding needs, given nine-month capital expenditures exceeded operating cash flow.
- Farmers Water acquisition closing, final terms, and expected contribution relative to the filing’s estimates.
- Debt-covenant headroom, dividend capacity, and liquidity as principal payments and infrastructure investment continue.
- Whether water resources remain adequate and housing growth, energy costs, and other operating conditions evolve as management expects.