Global Water Resources, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparatives are FY2021. This is an annual report, not a quarterly filing. The company operates regulated water, wastewater and recycled-water utilities, principally in metropolitan Phoenix and Tucson, Arizona. At year-end it served 56,270 active connections across 29 systems; approximately 91% of connections were in the Santa Cruz and Palo Verde utilities. Nearly all revenue came from regulated utility services.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $44.7 million | $41.9 million |
| Operating income | $7.8 million | $7.0 million |
| Operating margin | 17.5% | 16.7% |
| Net income | $5.5 million | $3.6 million |
| Net margin | 12.3% | 8.6% |
| Diluted EPS | $0.24 | $0.16 |
| Cash from operations | $23.3 million | $20.4 million |
| Capital expenditures | $34.0 million | $18.3 million |
Revenue and earnings: Revenue increased 6.7%, supported by connection growth, the Las Quintas Serenas acquisition and rate changes approved in 2022. Water-services revenue rose 10.2%; wastewater and recycled-water revenue rose 7.2%. Active connections increased 4.4% to 56,270, and water consumption increased 7.8%. Operating expenses rose 5.7%, to $36.9 million. Higher operating income and lower total other expense contributed to the increase in net income.
Cash flow and liquidity: Investing cash outflow was $34.2 million, principally reflecting capital spending. Financing provided $5.0 million, including approximately $14.9 million of net proceeds from an August 2022 stock offering, partly offset by dividends and debt repayments. Operating cash flow less capital expenditures was approximately negative $10.6 million in FY2022, versus approximately positive $2.1 million in FY2021 (calculated from reported figures). Year-end cash and cash equivalents were $6.6 million, with $1.0 million restricted; current assets were $14.2 million and current liabilities $16.2 million.
Debt: Total debt principal was $108.8 million, including $3.8 million current, with fixed-rate senior secured notes at 4.38% and 4.58%. The company had no borrowings on its revolving facility and reported covenant compliance. The facility was increased to $15.0 million and its maturity extended to July 1, 2024. Management said available cash, the revolver and expected operating cash flows should cover operating needs and its capital plan for the next twelve months and beyond.
Other financial items: FY2022 dividends declared were approximately $0.30 per share; management intended to continue monthly dividends of $0.02483 per share, subject to board discretion, covenants and other restrictions. The effective tax rate was 14.3%, compared with 24.2% in FY2021; the 2022 rate benefited in part from a roughly $0.7 million tax-related regulatory-liability reversal.
Material changes and notable events
- The Arizona Corporation Commission’s July 2022 rate decision approved an approximately $2.2 million annual collective revenue-requirement increase, phased in from August 2022 through January 2024, based on 2019 test-year connections. Actual revenue impact depends on connection growth and customer usage.
- The rate decision consolidated certain utility rates, approved specified acquisition premiums for rate-base purposes, allowed annual adjustments for certain tax and property-tax changes, and established a sustainable-water surcharge tied to verified costs of new water resources.
- Capital expenditures increased approximately $15.7 million year over year. Property, plant and equipment, net, increased to $287.7 million from $255.9 million.
- In August 2022, the company sold 1.15 million shares at $13.50 per share, raising approximately $14.9 million net. This increased paid-in capital and diluted existing shareholders.
- In February 2023, after year-end, the company acquired Farmers Water Co. for $6.2 million, adding approximately 3,300 active connections and 21.5 square miles of service area.
Outlook, risks and contingencies
Management expects continued population and connection growth in its Arizona markets and believes existing lots and infrastructure position the company to benefit. It also noted a cooling housing market: Phoenix single-family permits declined to approximately 24,600 in 2022 from 31,000 in 2021, with further decline expected in 2023 before a projected recovery in 2024. The company reported that it believes its water supply is adequate for current demand and foreseeable growth, while warning that groundwater scarcity, drought, regulatory limits and the uncertain availability of alternative supplies could constrain growth or raise costs.
- Regulatory and tax uncertainty: Rate recovery is subject to ACC approval and regulatory lag. The 2022 rate decision requires work on an IRS private-letter-ruling request concerning tax normalization and assets condemned under IRC Section 1033; possible subsequent ACC action could adversely affect results, and the outcome is uncertain.
- Water and geographic concentration: Operations are exclusively in Arizona, with about 91% of connections concentrated in the two principal utilities in one service area. Groundwater is the primary supply; the company does not have material surface-water rights.
- Development and ICFA exposure: Growth depends on residential and commercial development. Developer payments under infrastructure agreements depend on development milestones outside the company’s control, while the company may have already invested in infrastructure.
- Operating risks: Weather and seasonality affect water demand; energy, chemical, labor and construction costs may rise faster than rates. The filing also identifies cybersecurity, system failure, contamination, environmental compliance and supply-chain risks.
- Debt, dividends and financing: Debt covenants restrict dividends and additional borrowing. The ongoing dividend is not guaranteed, and future growth and infrastructure needs may require additional capital.
- Legal matters: The company reported no legal proceeding expected to have a material effect and no known contingency whose ultimate resolution management expects to materially affect financial position, results or cash flows.
The financial statements received an unqualified audit opinion. The auditor identified the accounting effects of rate regulation as a critical audit matter due to judgment involved in estimating future rate recovery and potential refunds. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company was a smaller reporting company and non-accelerated filer.
Key investor verification points
- Confirm how much of the approved rate increase is being realized, and whether connection growth and usage support the projected revenue benefit.
- Track capital spending, operating cash flow and funding needs; FY2022 capital expenditures exceeded operating cash flow.
- Review groundwater availability, assured-water-supply approvals and the costs or timing of new water resources, including any surcharge recovery.
- Monitor the IRS private-letter-ruling request and any follow-on ACC decisions concerning tax normalization and the rate case.
- Assess Farmers Water integration, purchase accounting, acquired service-area growth and the contingent growth-premium obligation.
- Verify debt covenant headroom, scheduled principal repayments, revolving-facility availability and the sustainability of monthly dividends.