Global Water Resources, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. The company owns and operates regulated water, wastewater and recycled-water utilities, principally in metropolitan Phoenix, Arizona. It reported 45,823 active connections and 46,197 total connections across 354 square miles; approximately 92.9% of active connections are concentrated in its Santa Cruz and Palo Verde utilities. About 99.8% of FY2019 revenue came from regulated utilities.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $35.471 million | $35.515 million |
| Operating expenses | $28.510 million | $26.246 million |
| Operating income | $6.961 million | $9.269 million |
| Net income | $2.224 million | $3.103 million |
| Diluted EPS | $0.10 | $0.15 |
| Cash from operating activities | $11.566 million | $11.307 million |
| Capital expenditures | $11.187 million | $4.787 million |
- Operating margin declined to approximately 19.6% from 26.1%; net margin declined to approximately 6.3% from 8.7%.
- Water-services revenue rose 5.2% to $16.143 million; wastewater and recycled-water revenue rose 9.1% to $19.263 million. Unregulated revenue fell to $0.065 million from $2.517 million.
- Cash used in investing activities was $10.056 million, versus $13.320 million in 2018; cash used in financing activities was $5.612 million, compared with $9.526 million provided in 2018. Dividends paid were $6.165 million.
- Year-end cash and cash equivalents were $7.513 million, with an additional $1.582 million restricted cash. Total assets were $266.113 million and shareholders’ equity was $24.672 million.
- Debt was approximately $115.0 million principal, primarily senior secured notes at 4.38% and 4.58%, with maturities in 2028 and 2036. The company had no borrowings on its $8 million revolving facility and reported compliance with debt covenants.
Material changes and unusual items
- Reported revenue was essentially flat, but excluding $2.456 million of ICFA revenue recognized in 2018, revenue increased 7.3%, driven by connection growth and the Turner and Red Rock acquisitions.
- Net income declined $0.9 million. Higher operating expenses, including depreciation, contributed; the absence of 2018 ICFA revenue was partly offset by a $1.0 million final payment from the Loop 303 contract sale in 2019.
- Active connections increased 4.9% to 45,823. Water consumption rose 8.5% to 2.8 billion gallons, largely reflecting acquired connections; recycled-water deliveries declined 6.5% to 639 million gallons.
- Capital expenditures increased substantially, partly in connection with reinvestment requirements related to the prior Valencia condemnation gain. The company expected to defer the remaining approximately $0.1 million tax liability in 2020.
- On December 20, 2019, Global Water Management (GWM) ceased substantially all billing, customer-service and support services following a breach of its services agreement. The company considered the agreement terminated and said it would no longer receive related royalty payments after that date; transition and systems risks were disclosed.
- In January 2020, the company issued 1.0 million shares for gross proceeds of approximately $12.5 million and net proceeds of approximately $11.6 million.
Outlook, risks and contingencies
- The ACC required all utilities to file a rate case by June 30, 2020 using 2019 as the test year. Management anticipated requesting a moderate increase and said new rates were not expected before the second half of 2021; approval and outcome are uncertain and rates could be reduced.
- Management cited continued Phoenix-area connection growth and available lots and infrastructure as growth opportunities. Its 2020 forecast cited approximately 26,000 single-family housing permits in the Greater Phoenix area; this is a market forecast, not company financial guidance.
- The company intends to continue monthly dividends, raised in November 2019 to $0.0241 per share ($0.2892 annually), but payment is discretionary and subject to debt covenants and other conditions.
- Key risks include dependence on groundwater and the physical and regulatory availability of water; drought and weather-driven demand; rate-case timing and cost recovery; concentration in Arizona and the Maricopa-area customer base; housing development; and substantial indebtedness. COVID-19 was identified as a potential source of supply-chain, workforce and economic disruption.
- Management reported no known legal proceeding expected to materially affect the company. Deloitte issued an unqualified opinion on the financial statements; the auditor did not attest to internal-control effectiveness. Management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Investor verification priorities
- Track the ACC rate case, including the requested rates, treatment of TCJA-related balances, and timing of any approved changes.
- Assess groundwater availability, assured-water-supply designations, and the company’s progress obtaining alternative or renewable supplies.
- Review the GWM/FATHOM service transition, replacement arrangements, customer-service performance, and loss of future royalty income.
- Reconcile earnings and cash generation against capital spending, dividends, debt service and the covenant thresholds that can restrict dividends.
- Evaluate the 2020 share issuance’s use of proceeds and dilution, alongside acquisition growth, connection trends and the high geographic concentration of customers.