Global Water Resources, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results. The company owns and operates water, wastewater and recycled-water utilities, primarily in metropolitan Phoenix, Arizona.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $10.84 million | $8.15 million | $18.26 million | $14.94 million |
| Operating income | $4.10 million | $1.71 million | $5.47 million | $2.81 million |
| Net income | $2.26 million | $0.43 million | $2.58 million | $0.61 million |
| Diluted EPS | $0.11 | $0.02 | $0.13 | $0.03 |
| Operating margin | 37.9% | 21.0% | 29.9% | 18.8% |
Revenue rose 33.1% in Q2 and 22.3% for the six-month period. A major contributor was $2.4 million of infrastructure coordination and financing agreement (ICFA) revenue recognized after wastewater-plant capacity was added; this was reported as unregulated revenue. Growth in connections and rate increases also contributed. A $378,000 reduction for the expected Arizona Corporation Commission (ACC) tax-related rate reduction partly offset revenue growth.
For the six months, operating cash flow was $5.30 million, versus $3.68 million a year earlier. Investing used $5.06 million, including $2.46 million of capital expenditures and $2.62 million for the Turner acquisition. Financing used $1.71 million, including $2.79 million of dividends paid. Cash and cash equivalents were $3.78 million at June 30, down from $5.25 million at year-end 2017.
At June 30, total assets were $238.64 million, total liabilities $223.05 million and shareholders’ equity $15.59 million. Current assets of $8.79 million were below current liabilities of $9.42 million. Debt and capital leases were $114.51 million on the balance sheet; outstanding debt principal was approximately $115.1 million. The company had no borrowings on its new $8 million revolving credit facility and reported compliance with debt covenants. Its fixed-rate senior secured notes carry a blended rate of 4.55%. Dividends declared were $0.07 per share in Q2 and $0.14 per share for the first half.
Material changes and business developments
- Net income increased by $1.83 million in Q2 and $1.96 million for the first six months, with most of the operating-income improvement linked to the $2.4 million ICFA revenue recognition. The filing cautions that interim results are seasonal and not necessarily indicative of full-year results.
- Active service connections increased 7.8% year over year to 41,078, including 963 connections added through the May 30 acquisition of Turner Ranches Water and Sanitation Company for $2.8 million. Turner’s post-acquisition results were not material.
- On July 20, 2018, after quarter-end, the company issued 1.72 million shares at $9.25 per share and received approximately $14.7 million in net proceeds.
- Capital expenditures were $2.46 million, down from $12.77 million in the prior-year half, when spending was elevated by investments intended to defer tax on the Valencia condemnation gain.
Outlook, risks and contingencies
- Management cited continued connection growth and Phoenix-area development as growth drivers, and stated it expected sufficient cash and operating cash flow to meet operating needs, its capital plan and covenants for at least the next 12 months. No specific earnings or revenue guidance was provided.
- The ACC’s treatment of the Tax Cuts and Jobs Act (TCJA) remains uncertain. Following an ACC Staff recommendation issued August 3, 2018, management considered a rate reduction more likely than not and recorded a $378,000 revenue reduction for Q2 and the first half. The company estimated potential annual revenue impact of up to approximately $1.1 million based on then-current rates and connection assumptions; the final ACC decision was pending.
- Tax treatment of advances and contributions in aid of construction (AIAC/CIAC) is unresolved. Changes to tax rules or rate treatment could affect the company’s tax costs, customer contributions and future revenues.
- The company reported approximately $4.7 million of deferred tax liability relating to the Valencia condemnation gain and planned to seek another extension to defer the remaining gain to the end of 2019. Approval was not assured; taxes due if deferral is unavailable could be material.
- Key business risks include dependence on Phoenix-area development, local weather and seasonality, groundwater availability and regulation, regulatory lag in recovering costs, and volatile power and chemical costs. The company also noted insurance may not cover all losses. Management reported no known legal proceeding expected to have a material effect and no material changes to previously disclosed risk factors other than the TCJA-related risks.
Important facts for investors to verify
- How much of reported revenue and earnings growth is repeatable, given the $2.4 million ICFA capacity-related revenue item.
- The final ACC decision on TCJA-related rates, including the revenue reduction and AIAC/CIAC tax treatment.
- Whether the IRS grants the requested extension for the Valencia gain deferral and the resulting cash-tax exposure.
- Post-offering share count, use of the $14.7 million net proceeds, and the effect of the offering on per-share results and dividends.
- Liquidity and capital needs relative to debt covenants, dividend restrictions, planned investment and water-supply constraints.