UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _______________ to _______________
Commission File Number: 001-37756
______________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
______________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: (480 ) 360-7775
Securities registered pursuant to Section 12(b) of the Act:
______________________________________________________________
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||||||||
| x | Smaller reporting company | |||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
As of August 7, 2024, the registrant had 24,217,410 shares of common stock, $0.01 par value per share, outstanding.
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TABLE OF CONTENTS
| PART I. | ||||||||
| Item 1. | Financial Statements (Unaudited) | |||||||
Condensed Consolidated Balance Sheets | ||||||||
Condensed Consolidated Statements of Shareholders’ Equity | ||||||||
Condensed Consolidated Statements of Cash Flows | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. | ||||||||
| Item 1. | Legal Proceedings | |||||||
| Item 1A. | ||||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| Item 3. | ||||||||
| Item 4. | Mine Safety Disclosures | |||||||
| Item 5. | Other Information | |||||||
| Item 6. | Exhibits | |||||||
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ITEM 1.FINANCIAL STATEMENTS
GLOBAL WATER RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
(Unaudited)
| June 30, 2024 | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| PROPERTY, PLANT AND EQUIPMENT: | |||||||||||
| Land | $ | $ | |||||||||
| Depreciable property, plant and equipment | |||||||||||
| Construction work-in-progress | |||||||||||
| Other | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Net property, plant and equipment | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | |||||||||||
| Accounts receivable, net | |||||||||||
| Customer payments in-transit | |||||||||||
| Unbilled revenue | |||||||||||
| Taxes, prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| OTHER ASSETS: | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Regulatory assets | |||||||||||
| Restricted cash | |||||||||||
| Right-of-use assets | |||||||||||
| Other noncurrent assets | |||||||||||
| Total other assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Customer and meter deposits | |||||||||||
| Long-term debt, current portion | |||||||||||
| Leases, current portion | |||||||||||
| Total current liabilities | |||||||||||
| NONCURRENT LIABILITIES: | |||||||||||
| Line of credit | |||||||||||
| Long-term debt | |||||||||||
| Long-term lease liabilities | |||||||||||
| Deferred revenue - ICFA | |||||||||||
| Regulatory liabilities | |||||||||||
| Advances in aid of construction | |||||||||||
| Contributions in aid of construction, net | |||||||||||
| Deferred income tax liabilities, net | |||||||||||
| Acquisition liabilities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Refer to Note 13) | |||||||||||
| SHAREHOLDERS’ EQUITY: | |||||||||||
Common stock, $ | |||||||||||
Treasury stock, | ( | ( | |||||||||
| Paid in capital | |||||||||||
| Retained earnings | |||||||||||
| Total shareholders’ equity | |||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements
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GLOBAL WATER RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||
| Water services | $ | $ | $ | $ | |||||||||||||||||||
| Wastewater and recycled water services | |||||||||||||||||||||||
| Unregulated revenues | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||
| Operations and maintenance | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| OPERATING INCOME | |||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Allowance for equity funds used during construction | |||||||||||||||||||||||
| Other, net | |||||||||||||||||||||||
| Total other expense | ( | ( | ( | ( | |||||||||||||||||||
| INCOME BEFORE INCOME TAXES | |||||||||||||||||||||||
| INCOME TAX EXPENSE | ( | ( | ( | ( | |||||||||||||||||||
| NET INCOME | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Dividends declared per common share | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of common shares used in the determination of: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements
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GLOBAL WATER RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
| Common Stock Shares | Common Stock | Treasury Stock Shares | Treasury Stock | Paid-in Capital | Retained Earnings | Total Equity | |||||||||||||||||||||||||||||||||||
| BALANCE - December 31, 2022 | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Dividend declared $ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| BALANCE - March 31, 2023 | ( | ( | |||||||||||||||||||||||||||||||||||||||
Dividend declared $ | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock option exercise | — | ( | — | — | |||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| BALANCE - June 30, 2023 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| BALANCE - December 31, 2023 | ( | ( | |||||||||||||||||||||||||||||||||||||||
Dividend declared $ | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Stock option exercise | — | ( | — | — | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| BALANCE - March 31, 2024 | ( | ( | |||||||||||||||||||||||||||||||||||||||
Dividend declared $ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Stock compensation | — | ( | — | — | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| BALANCE - June 30, 2024 | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements
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GLOBAL WATER RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred compensation | |||||||||||
| Deferred income tax expense | |||||||||||
| Allowance for equity funds used during construction | ( | ( | |||||||||
| Provision for credit losses | |||||||||||
| Amortization of deferred debt issuance costs and discounts | |||||||||||
| Gain on disposal of fixed assets | ( | ( | |||||||||
| Right of use amortization | |||||||||||
| Changes in assets and liabilities | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Other current assets | ( | ||||||||||
| Accounts payable and other current liabilities | |||||||||||
| Other noncurrent assets | ( | ||||||||||
| Other noncurrent liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Cash paid for acquisitions, net of cash acquired | ( | ||||||||||
Other | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Dividends paid | ( | ( | |||||||||
| Advances in aid of construction | |||||||||||
| Payments for taxes related to net shares settlement of equity awards | ( | ( | |||||||||
Principal payments under finance leases | ( | ( | |||||||||
| Repayments of notes payable | ( | ( | |||||||||
| Line of credit borrowings | |||||||||||
| Line of credit repayments | ( | ( | |||||||||
| Loan borrowings | |||||||||||
| Loan repayments | ( | ||||||||||
| Debt issuance costs paid | ( | ||||||||||
| Proceeds from sale of stock | |||||||||||
| Refunds of developer taxes | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | ( | ||||||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period | |||||||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements
Supplemental disclosure of cash flow information:
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
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GLOBAL WATER RESOURCES, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS
Basis of Presentation and Principles of Consolidation
Corporate Transactions
Asset Purchase Agreement with City of Tucson
Effective April 25, 2024, Global Water - Ocotillo Water Company, Inc. (“GW-Ocotillo”), formerly Global Water - 2024 Acquisition A, Inc. and a wholly owned subsidiary of the Company, entered into an asset purchase agreement with the City of Tucson, pursuant to which GW-Ocotillo will acquire seven public water systems from the City of Tucson serving approximately 2,200 water service connections in an all-cash transaction for a purchase price of $8.4 million. The public water systems are located in and around Pima County. The transaction remains subject to customary closing conditions and approval by the Arizona Corporation Commission (“ACC”). The estimated rate base of the seven water systems is approximately $7.8 million.
Other Deferred Liability
Private Placement Offering of 6.91 % Senior Secured Notes
On October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $20 million of 6.91 % Senior Secured Notes due on January 3, 2034. Pursuant to the terms of the note purchase agreement, the Company issued the notes on January 3, 2024.
Private Placement Offering of Common Stock
On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder. The Company received gross proceeds of approximately $2.8 million from the offering. One of the Company’s directors purchased an aggregate of 30,000 shares of common stock in the offering at the purchase price.
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Farmers Water Co. Acquisition
On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition.
Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc.
On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia Water Company, Inc. (“Valencia”) to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close. The City of Buckeye is obligated to pay the Company a growth premium equal to $3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $45.0 million over the term of the agreement. The Company received growth premiums of $0.5 million and $1.3 million for the three and six months ended June 30, 2024, respectively. The Company received growth premiums of $0.5 million and $0.9 million for the three and six months ended June 30, 2023, respectively. An aggregate of $12.0 million in growth premiums have been received to date. The growth premiums are included in “Other, net” on the Company’s condensed consolidated financial statements of operations.
Significant Accounting Policies
Basic and Diluted Earnings per Common Share
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| 2017 Option grant | |||||||||||||||||||||||
| 2019 Option grant | |||||||||||||||||||||||
| 2020 Restricted stock awards | |||||||||||||||||||||||
| 2021 Restricted stock awards | |||||||||||||||||||||||
| Total dilutive securities | |||||||||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||||||||
Anti-dilutive shares excluded from earnings per diluted shares(1) | |||||||||||||||||||||||
(1) Shares excluded from the dilutive-effect calculation because the outstanding awards’ exercise prices were greater than the average market price of the Company’s common stock.
Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating performance. In consideration of ASC 280—Segment Reporting the Company notes it is not organized around specific products and services, geographic regions, or regulatory environments. The Company currently operates in one geographic region within the State of Arizona, wherein each operating utility operates within the same regulatory environment.
While the Company reports its revenue, disaggregated by service type, on the face of its condensed consolidated financial statements of operations, the Company does not manage the business based on any performance measure at the individual
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revenue stream level. The Company does not have any customers that contribute more than 10% to the Company’s revenues or revenue streams. Additionally, the Company notes that the CODM uses consolidated financial information to evaluate the Company’s performance, which is the same basis on which he communicates the Company’s results and performance to the Board of Directors. It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of the Company’s resources on a consolidated level. Based on the information described above and in accordance with the applicable literature, management has concluded that the Company is currently organized and operated as one
Recent Accounting Pronouncements
Future Adoption of Accounting Standards
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is assessing the timing and impact that adopting this new standard will have on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures that expands disclosures of significant segment expenses and includes new disclosures for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is assessing the timing and impact that adopting this new standard will have on its consolidated financial statements.
2. REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES
The Company’s regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within Accounting Standards Codification (“ASC 980”), Regulated Operations.
In accordance with ASC 980, rates charged to utility customers are intended to recover the costs of the provision of service plus a reasonable return in the same period. Changes to the rates are made through formal rate applications with the ACC, which the Company has customarily done.
2024 Farmers Rate Case
On June 27, 2024, Global Water-Farmers Water Company, Inc. (“GW-Farmers”), one of the Company’s regulated utilities, filed a rate case application with the ACC for increased water rates based on a 2023 test year with updates for changes in post-test year plant through December 31, 2024. The application requests, among other things, a revenue increase of approximately $1.3 million phased-in over two steps and recovery of the acquisition premium related to the Farmers Water Co. acquisition. On July 25, 2024, ACC Utilities Division Staff found the application administratively complete and estimates their testimony regarding the application will be filed on or about December 9, 2024. There can be no assurance that the ACC will approve the requested rate increase or the requested recovery of the acquisition premium, and the ACC could take other actions as a result of the rate case. Further, it is possible that the ACC may determine to decrease future rates.
Acquisition of Seven Systems from City of Tucson
On May 10, 2024, GW-Ocotillo filed an Application at the ACC for approval to acquire seven isolated systems from the City of Tucson. On June 10, 2024, ACC Utilities Division Staff found the application administratively complete.
2025 Santa Cruz and Palo Verde Rate Case
During the fourth quarter of 2023, the Company notified the ACC of its intention to file a rate case for Global Water-Santa Cruz Water Company, Inc. (“GW-Santa Cruz”) and Global Water-Palo Verde Utilities Company, Inc. (“GW-Palo Verde”) in 2025. The GW-Santa Cruz and GW-Palo Verde rate case is anticipated to be based on a test year ending December 31, 2024 with updates for changes in post-test year plant. The Company has begun stakeholder outreach for the rate case.
Southwest Plant Accounting Order and Bill Credit
On July 3, 2023, the Company’s GW-Palo Verde and GW-Santa Cruz utilities filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset the depreciation expense recorded for the Company’s Southwest Plant, plus the carrying cost at the authorized rate of return set in GW-Palo Verde’s and GW-Santa
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Cruz’s most recent rate order, until the plant is considered for recovery in the next GW-Palo Verde and GW-Santa Cruz rate case. The Southwest Plant was substantially constructed prior to 2009 to provide water, wastewater, and recycled water utility services for the area southwest of the City of Maricopa. Due to the unprecedented collapse of the housing market during the Great Recession, the nearly completed plant remained idle for well over a decade. The total cost of the Southwest Plant was approximately $38.4 million. Since July 2023, construction costs of $25.0 million related to the water production plant and a portion of the wastewater processing plant were placed in service, with the remaining parts of the Southwest Plant to be placed in service once sufficient flows, provided by connection growth, are established. There can be no assurance, however, that the ACC will approve the application as submitted and the ACC could take other actions regarding the application.
In January 2024, the Company discovered that approximately $7.8 million of construction costs for the Southwest Plant had been prematurely included as “plant in service” for rate making purposes in 2007 and were reflected in the calculation of customer rates in Decision No. 71878 (September 15, 2010). Those costs were also included as “plant in service” in Decision No. 74364 (February 26, 2014) and Decision No. 78644 (July 27, 2022). The Company disclosed this circumstance to the ACC on March 1, 2024, and on April 25, 2024, GW-Palo Verde filed an application with the ACC requesting a monthly bill credit for customers that would be in place until the conclusion of the next GW-Palo Verde rate case. The ACC issued Decision No. 79424 on July 18, 2024 approving the bill credit with an effective date of August 1, 2024, which will reduce revenue earned subsequent to the order by approximately $570,000 annually. The bill credit will be in place until the conclusion of the next GW-Palo Verde rate case, which Decision No. 79424 requires GW-Palo Verde to file no later than December 31, 2025. The ACC may take further action during the next GW-Palo Verde rate case. Such action may include requiring the Company to reduce rates further going forward or taking other actions that would be unfavorable to the Company.
Decision No. 79383 - Issued June 20, 2024 - Saguaro Rate Case
On June 20, 2024, the ACC issued Decision No. 79383 relating to each of the rate case applications filed by seven of the Company’s regulated utilities for increased water rates based on a 2022 test year. Decision No. 79383 approved, among other things, a collective annual revenue increase of approximately $351,000 . The approved rates will be phased-in over five periods with the first increase effective July 1, 2024. The subsequent four increases will be effective on January 1 of each subsequent year with the majority of the revenue increase phased in by January 1, 2025. To the extent that the number of active service connections has increased and continues to increase from 2022 levels, the additional revenues may be greater than the amounts set forth. On the other hand, if active connections decrease or the Company experiences declining usage per customer, the Company may not realize all of the anticipated revenues.
The ACC also approved:
(i) the consolidation of water rates to one single rate for these utilities;
(ii) acquisition premiums relating to the Company’s acquisitions of its Global Water-Mirabell Water Company, Inc. (“GW-Mirabell”), Global Water-Lyn Lee Water Company, Inc. (“GW-Lyn Lee”), Global Water-Francesca Water Company, Inc. (“GW-Francesca”), Global Water-Tortolita Water Company, Inc. (“GW-Tortolita”), Global Water-Rincon Water Company, Inc. (“GW-Rincon”), and Global Water-Las Quintas Serenas Water Company, Inc. (“GW-Las Quintas Serenas”) utilities, each located in Pima County, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement;
(iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding;
(iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources;
(v) a capital structure matching the Company’s previous rate case of 55 % equity with a 9.6 % return on equity; and
(vi) a depreciation expense accounting deferral for GW-Rincon.
Decision No. 78644 - Issued July 27, 2022
On July 27, 2022, the ACC issued Decision No. 78644 pursuant to which the ACC approved, among other things, a collective annual revenue requirement increase of approximately $2.2 million (including acquisition premiums) based on 2019 test year service connections, and phased-in over approximately two years . The effective date of the final phase was January 1, 2024.
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Decision No. 78644 also addressed the primary impacts of the Federal Tax Cuts and Jobs Act (the “TCJA”) on the Company, which includes the reduction of the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018. The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. Decision No. 78644 approved an adjustor mechanism for income taxes (as described below) that permits the Company to flow through potential changes to state and federal income tax rates as well as refund or collect funds related to TCJA.
Regulatory Assets and Liabilities
Regulatory assets and liabilities are the result of operating in a regulated environment in which the ACC establishes rates that are designed to permit the recovery of the cost of service and a return on investment. The Company capitalizes and records regulatory assets for costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates. Regulatory assets are amortized over the future periods that the costs are expected to be recovered. Final determination of whether a regulatory asset can be recovered is decided by the ACC in regulatory proceedings. If the Company determines that a portion of the regulatory assets is not recoverable in customer rates, the Company would be required to recognize the loss of the assets disallowed.
If costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities.
The Company’s regulatory assets and liabilities consist of the following (in thousands):
| Recovery Period | June 30, 2024 | December 31, 2023 | |||||||||||||||
| Regulatory Assets | |||||||||||||||||
Income taxes recoverable through future rates (1) | Various | $ | $ | ||||||||||||||
Rate case expense surcharge(2) | |||||||||||||||||
Acquisition premiums(3) | |||||||||||||||||
| Other regulatory assets | |||||||||||||||||
| Total regulatory assets | $ | $ | |||||||||||||||
| Regulatory Liabilities | |||||||||||||||||
Income taxes payable through future rates(1) | $ | $ | |||||||||||||||
Acquired ICFAs(4) | |||||||||||||||||
Depreciation adjustment(5) | |||||||||||||||||
| Total regulatory liabilities | $ | $ | |||||||||||||||
(1) The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers.
(2) Decision No. 78743, issued on October 24, 2022, approved approximately $0.5 million in rate case expenses to be recovered through a rate case expense surcharge over a two-year period.
Decision No. 79383, issued on June 20, 2024, approved approximately $0.1 million in rate case expenses to be recovered through a rate case expense surcharge over a period of up to a two-years .
(3) Decision No. 78319, issued on December 3, 2021, approved an acquisition premium related to the acquisition of the Company’s GW-Rincon utility. Decision No. 79383 was issued on June 20, 2024 allowing the Company to begin amortization of the acquisition premium through customer rates over 50 years. The acquisition premium balance as of June 30, 2024 was approximately $0.6 million.
Decision No. 78644, issued on July 27, 2022, approved acquisition premiums related to the acquisitions of the Company’s GW-Turner Ranches and GW-Red Rock utilities. Amortization began in 2022 as the acquisition premiums were included in customer rates as approved in the decision and will continue over a 25 -year period. The acquisition premium balance as of June 30, 2024 was approximately $0.7 million.
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Decision No. 79383 approved acquisition premiums related to the acquisition of the Company’s GW-Francesca, GW-Las Quintas Serenas, GW-Lyn Lee, GW-Mirabell, and GW-Tortolita utilities. The acquisition premiums will be amortized through customer rates over 50 years as approved in the decision. The acquisition premium balance as of June 30, 2024 was approximately $1.3 million.
(4) The acquired Infrastructure Coordination and Financing Agreements (“ICFA”) regulatory liability relates to the offset of intangible assets related to ICFA contracts obtained in connection with the GW-Santa Cruz, GW-Palo Verde, and Sonoran Utility Services, LLC (“Sonoran”) acquisitions. When funds are received related to the acquired ICFA, a portion of these funds reduce the acquired ICFA regulatory liability and partially offset the amortization expense recognition of the related intangible asset.
(5) Decision No. 78644 approved an adjustment to update previously approved depreciation rates. The adjustment was incorporated into rates in accordance with the rate decision.
3. REVENUE RECOGNITION
Regulated Revenue
The Company’s operating revenues are primarily attributable to regulated services based upon tariff rates approved by the ACC. Regulated service revenues consist of amounts billed to customers based on approved fixed monthly fees and consumption fees, as well as unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing historical customer data recorded as accrued revenue. The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The unbilled revenue estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage). The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has the right to invoice for the volume of consumption, service charge, and other authorized charges.
The Company satisfies its performance obligation to provide water, wastewater, and recycled water services over time as the services are rendered. Regulated services may be terminated by the customers at will, and, as a result, no separate financing component is recognized for the Company’s collections from customers, which generally require payment within 15 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers’ ability to pay.
Total revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales taxes.
Unregulated Revenue
Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. Unregulated revenues are primarily related to the revenues recognized on a portion of ICFA funds received.
ICFAs are agreements with developers and homebuilders where the Company, which owns the operating utilities, provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Services provided within these agreements include coordination of construction services for water and wastewater treatment facilities as well as financing, arranging, and coordinating the provision of utility services. In return, the developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the land legally described in the agreement, or a portion thereof. Under ICFA agreements, the Company has a contractual obligation to ensure physical capacity exists through its regulated utilities for the provision of water and wastewater utility service to the land when needed. This obligation persists regardless of connection growth.
Fees for these services are typically a negotiated amount per equivalent dwelling unit for the land legally described in the agreement, or a portion thereof. Payments are generally due in installments, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones, and the final payment due upon final plat approval or sale of the subdivision. The payments are non-refundable. The agreements are generally recorded against the land with the appropriate recorder’s office and must be assumed in the event of a sale or transfer of the land. The regional planning and coordination of the infrastructure in the various service areas has been an important part of the Company’s business model.
Payments for ICFAs are usually received in advance. Decision No. 74364 requires a hook-up fee (“HUF”) tariff to be established for all ICFAs that come due and are paid subsequent to December 31, 2013, which is a set amount per equivalent
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dwelling unit determined by the ACC based on the utility and meter size. Also pursuant to Decision No. 74364, as payments are received, 70 % of the payment must be recorded as a HUF liability until the HUF liability is fully funded, with the remaining amount initially recorded to deferred revenue until earned. The Company is responsible for assuring that the full HUF tariff, which is the set amount determined by the rate decision, is funded in the HUF liability, even if it results in recording less than 30 % of the overall ICFA funds as deferred revenue. ICFA revenue is recognized when the Company completes the performance obligations under the agreement. Following its issuance in February 2014, Decision No. 74364 prohibits the Company from entering into any new ICFAs.
The Company accounts for the portion of ICFA funds allocated to the HUF liability as a contribution in aid of construction (“CIAC”). However, in accordance with the ACC directives, the CIAC is not deducted from rate base until the HUF funds are expended for utility plant. Such funds are restricted and segregated in a separate bank account and used for plant. For facilities required under a HUF or ICFA, the utilities must first use the HUF moneys received, after which, it may use debt or equity financing for the remainder of construction.
As these arrangements are with developers and not with the end water or wastewater customer, revenue recognition coincides with the completion of the Company’s performance obligations under the agreement with the developer and its regulated utilities’ ability to provide fitted capacity for water and wastewater service. The Company exercises judgment when estimating the number of equivalent dwelling units that its regulated utilities have capacity to serve. The Company believes that services provided within these agreements are not distinct in the context of the contract because they are highly interdependent with its regulated utilities’ ability to provide fitted capacity for water and wastewater services. The Company concluded that the goods and services provided under ICFA contracts constitute a single performance obligation.
| December 31, 2023 Balance | Payments Allocated to Deferred Revenue | Revenue Recognized | June 30, 2024 Balance | |||||||||||||||||||||||
Deferred Revenue - ICFA | $ | $ | $ | $ | ||||||||||||||||||||||
Disaggregated Revenues
For the three and six months ended June 30, 2024 and 2023, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| REGULATED REVENUE | |||||||||||||||||||||||
| Water Services | |||||||||||||||||||||||
| Residential | $ | $ | $ | $ | |||||||||||||||||||
| Irrigation | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Construction | |||||||||||||||||||||||
| Other water revenues | |||||||||||||||||||||||
| Total water revenues | |||||||||||||||||||||||
| Wastewater and recycled water services | |||||||||||||||||||||||
| Residential | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Recycled water revenues | |||||||||||||||||||||||
| Other wastewater revenues | |||||||||||||||||||||||
| Total wastewater and recycled water revenues | |||||||||||||||||||||||
| TOTAL REGULATED REVENUE | |||||||||||||||||||||||
| UNREGULATED REVENUE | |||||||||||||||||||||||
| ICFA revenues | |||||||||||||||||||||||
| TOTAL UNREGULATED REVENUE | |||||||||||||||||||||||
| TOTAL REVENUE | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
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The Company’s contract assets and liabilities consist of the following (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||
| CONTRACT ASSETS | |||||||||||
| Accounts receivable | |||||||||||
| Water services | $ | $ | |||||||||
| Wastewater and recycled water services | |||||||||||
Total contract assets | $ | $ | |||||||||
| CONTRACT LIABILITIES | |||||||||||
| Deferred revenue - ICFA | $ | $ | |||||||||
| Total contract liabilities | $ | $ | |||||||||
Remaining Performance Obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue expected to be recognized in future periods was approximately $20.0 million and $19.7 million as of June 30, 2024 and December 31, 2023, respectively. Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred. Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable as of June 30, 2024 and December 31, 2023 consist of the following (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||
| Billed receivables | $ | $ | |||||||||
| Less provision for credit losses | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
The following table summarizes the allowance for credit loss activity for the six months ended June 30, 2024 and the twelve months ended December 31, 2023 (in thousands).
| June 30, 2024 | December 31, 2023 | ||||||||||
| Beginning of Period | $ | ( | $ | ( | |||||||
| Credit Loss Expense | ( | ( | |||||||||
| Write Offs | |||||||||||
| Recoveries | ( | ( | |||||||||
| End of Period | $ | ( | $ | ( | |||||||
4. PROPERTY, PLANT AND EQUIPMENT
Depreciable property, plant and equipment as of June 30, 2024 and December 31, 2023 consist of the following (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||||||||
| Equipment | $ | $ | ||||||||||||
| Office buildings and other structures | ||||||||||||||
| Transmission and distribution plant | ||||||||||||||
| Total property, plant and equipment | $ | $ | ||||||||||||
Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows:
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| Useful Lives | ||||||||
| Equipment | ||||||||
| Office buildings and other structures | ||||||||
| Transmission and distribution plant | ||||||||
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The goodwill balance was $9.5 million as of June 30, 2024 and is related to the GW-Turner Ranches, GW-Red Rock, GW-Mirabell, GW-Francesca, GW-Tortolita, GW-Lyn Lee, GW-Las Quintas Serenas, GW-Rincon, Twin Hawks Utility, Inc., and GW-Farmers acquisitions. There were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to the acquisitions.
As a result of Decision No. 79383 issued by the ACC on June 20, 2024, the Company reclassified $1.3 million of goodwill to regulatory assets for certain impacted utilities to establish the approved $1.8 million of acquisition premiums net of the $0.5 million that was previously recorded for GW-Rincon. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information.
As of June 30, 2024 and December 31, 2023, the goodwill balance consisted of the following (in thousands):
| December 31, 2023 Balance | Acquisition Activity | Adjustments Subsequent to Acquisition Date | June 30, 2024 Balance | |||||||||||||||||||||||
| Goodwill | $ | $ | $ | ( | $ | |||||||||||||||||||||
Intangible Assets
As of June 30, 2024 and December 31, 2023, intangible assets consisted of the following (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||||||||||||||
| INDEFINITE LIVED INTANGIBLE ASSETS: | |||||||||||||||||||||||||||||||||||
| CP Water Certificate of Convenience & Necessity service area | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Intangible trademark | |||||||||||||||||||||||||||||||||||
| Franchise contract rights | |||||||||||||||||||||||||||||||||||
| Organizational costs | |||||||||||||||||||||||||||||||||||
| Total indefinite lived intangible assets | |||||||||||||||||||||||||||||||||||
| DEFINITE LIVED INTANGIBLE ASSETS: | |||||||||||||||||||||||||||||||||||
| Acquired ICFAs | ( | ( | |||||||||||||||||||||||||||||||||
| Sonoran contract rights | ( | ( | |||||||||||||||||||||||||||||||||
| Total definite lived intangible assets | ( | ( | |||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
A Certificate of Convenience & Necessity (“CC&N”) is a permit issued by the ACC allowing a public service corporation to serve a specified area, and preventing other public service corporations from offering the same services within the specified area. The CP Water CC&N intangible asset was acquired through the acquisition of CP Water Company in 2006. This CC&N permit has no outstanding conditions that would require renewal.
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Franchise contract rights and organizational costs relate to the 2018 acquisition of GW-Red Rock and the 2023 acquisition of GW-Farmers. Franchise contract rights are agreements with Pima and Pinal counties for GW-Red Rock and Pima county for GW-Farmers that allow the Company to place infrastructure in public right-of-way and permits expected to be renewable indefinitely. The organizational costs represent fees paid to federal or state governments for the privilege of incorporation and expenditures incident to organizing the corporation and preparing it to conduct business.
Acquired ICFAs and Sonoran contract rights relate to acquired rights under certain ICFAs through the 2004 acquisition of GW-Santa Cruz and GW-Palo Verde and the 2005 acquisition of Sonoran assets, respectively, which are amortized when cash is received in proportion to the amount of total cash expected to be received under the underlying agreements. Due to the uncertainty of the timing of when cash will be received under ICFA agreements and contract rights, the Company cannot reliably estimate when the remaining intangible assets’ amortization will be recorded. There was $0.3 no
6. TRANSACTIONS WITH RELATED PARTIES
The Company provides medical benefits to employees through its participation in a pooled plan sponsored by an affiliate of a significant shareholder and director of the Company. Medical claims paid to the plan were approximately $0.3 million for the three months ended June 30, 2024 and $0.2 million for the three months ended June 30, 2023. Medical claims paid to the plan were approximately $0.5 million for the six months ended June 30, 2024 and $0.3 million for the six months ended June 30, 2023.
Refer to Note 1 — “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions” (specifically the “Private Placement Offering of Common Stock” section) for additional information regarding other related party disclosures.
7. ACCRUED EXPENSES
Accrued expenses as of June 30, 2024 and December 31, 2023 consist of the following (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||
| Property taxes | $ | $ | |||||||||
| Interest | |||||||||||
| Accrued bonus | |||||||||||
| Customer prepayments | |||||||||||
| Dividend payable | |||||||||||
| Accrued project liabilities | |||||||||||
| Other accrued liabilities | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
8. FAIR VALUE
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurement, establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels, as follows:
•Level 1 - Quoted market prices in active markets for identical assets or liabilities.
•Level 2 - Inputs other than Level 1 that are either directly or indirectly observable.
•Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use.
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Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023 were as follows (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||
| Asset/Liability Type: | ||||||||||||||||||||||||||||||||||||||||||||||||||
HUF Funds - restricted cash(1) | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Demand Deposit(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Certificate of Deposit - Restricted(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Contingent Consideration(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
(1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company’s condensed consolidated balance sheets and are valued at amortized cost, which approximates fair value.
(2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company’s condensed consolidated balance sheets and is valued at amortized cost, which approximates fair value.
(3) As part of the GW-Red Rock acquisition, the Company is required to pay to the seller a growth premium equal to $750 (not in thousands) for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date, or twenty years from the acquisition date. The fair value of the acquisition liability was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company’s estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate.
In addition, as part of the GW-Farmers acquisition, the Company is required to pay the seller a growth premium equal to $1,000 (not in thousands) for each new account established in the service area, up to a total aggregate growth premium of $3.5 million. The obligation period of the growth premium commences on the closing date of the acquisition and ends (i) ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or unplatted and owned by the seller within the service area or (ii) ten years after the date of closing if a new account (as previously described) has not been established.
The fair value of the acquisition liability was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company’s estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate.
9. DEBT
The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of June 30, 2024 and December 31, 2023 are as follows (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Short-term | Long-term | Short-term | Long-term | ||||||||||||||||||||
NOTES PAYABLE - | |||||||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||||
| OTHER | |||||||||||||||||||||||
| Debt issuance costs | ( | ( | |||||||||||||||||||||
| Loan Payable | |||||||||||||||||||||||
| Total debt | $ | $ | $ | $ | |||||||||||||||||||
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Debt is measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023 as follows (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||
Long-term debt(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1) The fair value of debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities.
On October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $20 million of 6.91 % Senior Secured Notes due on January 3, 2034 (the “6.91 % Notes”). Pursuant to the terms of the 6.91 % Note purchase agreement, the Company issued the 6.91 % Notes on January 3, 2024. The 6.91 % Notes accrue interest at 6.91 % per annum from the date of issuance, payable semi-annually on January 3 and July 3 of each year, beginning on July 3, 2024, with a balloon payment due on January 3, 2034.
As of June 30, 2024, the Company was in compliance with its financial debt covenants relating to the Series A Notes, Series B Notes, and the 6.91 % Notes.
On April 30, 2024, the Company’s GW-Rincon utility entered into a loan agreement with the Water Infrastructure Finance Authority of Arizona (WIFA) for a principal amount of $2.4 million to improve the utility’s infrastructure, of which $0.7 million is forgivable. The loan is due on April 1, 2044 and bears an interest rate of 4.911 %. The loan is funded through one or more draw requests submitted by the Company and the subsequent disbursement of principal by WIFA. As of June 30, 2024, the Company had received no disbursements of principal under this agreement.
Revolving Credit Line
On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (“Northern Trust”), which was initially for a two-year revolving line of credit up to $10.0 million with a maturity date of April 30, 2022. This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, initially bore an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00 % and had no unused line fee.
The Company and Northern Trust subsequently amended the credit facility agreement on multiple occasions (as amended, the “Northern Trust Loan Agreement”) to, among other things, (i) extend the scheduled maturity date to July 1, 2025; (ii) increase the maximum principal amount available for borrowing to $15.0 million; (iii) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR); and (iv) add a quarterly facility fee equal to 0.35 % of the average daily unused amount of the revolving line of credit.
On July 1, 2024, the Company and Northern Trust entered into a fifth amendment to the Northern Trust Loan Agreement, which further amended the scheduled maturity date for the revolving line of credit from July 1, 2025 to July 1, 2026.
As of June 30, 2024, the Company had no outstanding borrowings under this credit line. As of December 31, 2023, the outstanding borrowings on this credit line were approximately $2.3 million. There were approximately $12,000 and $25,000 unamortized debt issuance costs as of June 30, 2024 and December 31, 2023, respectively.
As of June 30, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.
10. INCOME TAXES
For the three months ended June 30, 2024, tax expense of $0.6 million was recorded on pre-tax income of $2.3 million, compared to tax expense of $0.7 million recorded on pre-tax income of $2.5 million for the three months ended June 30, 2023.
For the six months ended June 30, 2024, tax expense of $0.8 million was recorded on pre-tax income of $3.3 million, compared to tax expense of $1.6 million recorded on pre-tax income of $5.8 million for the six months ended June 30, 2023.
The income tax provision was computed on the Company’s estimated effective tax rate and forecasted income expected for the full year, including the impact of any unusual, infrequent, or non-recurring items. The Company’s effective tax rate was 24.93 % and 25.25 % as of June 30, 2024 and 2023, respectively.
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11. DEFERRED COMPENSATION AWARDS
Stock-based compensation
Stock-based compensation related to option awards is measured based on the fair value of the award. The fair value of stock option awards is determined using a Black-Scholes option-pricing model. The Company recognizes compensation expense associated with the options over the vesting period.
2017 stock option grant
In August 2017, GWRI’s Board of Directors granted stock options to acquire 465,000 shares of GWRI’s common stock to employees throughout the Company. The options were granted with an exercise price of $9.40 , the market price of the Company’s common shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options vested over a four-year period, with 25 % having vested in August 2018, 25 % having vested in August 2019, 25 % having vested in August 2020, and 25 % having vested in August 2021. The options have a 10 -year life. The Company expensed the $1.1 million fair value of the stock option grant ratably over the four-year vesting period. As of August 2021, these options were fully expensed. As of June 30, 2024, 125,750 options have been exercised and 70,425 options have been forfeited with 268,825 options outstanding.
2019 stock option grant
In August 2019, GWRI’s Board of directors granted stock options to acquire 250,000 shares of GWRI’s common stock to employees throughout the Company. The options were granted with an exercise price of $11.26 , the market price of the Company’s common shares on the NASDAQ Global Market at the close of business on August 13, 2019. The options vested over a four-year period, with 25 % having vested in August 2020, 25 % having vested in August 2021, 25 % having vested in August 2022, and 25 % having vested in August 2023. The options have a 10-year life. The Company expensed the $0.8 million fair value of the stock option grant ratably over the four-year vesting period. As of August 2023, these options were fully expensed. Stock-based compensation expense of $29,000 and $72,000 was recorded for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, 55,994 options have been exercised and 63,020 options have been forfeited with 130,986 options outstanding.
Restricted stock units
Restricted stock units are granted in the first quarter based on the prior year’s performance and vest over a three-year period. The units are credited quarterly using the closing price of the Company’s common stock on the applicable record date for the respective quarter. The following table details total awards granted and the number of units outstanding as of June 30, 2024, along with the amounts paid to holders of the restricted stock units (“RSUs”) for the three and six months ended June 30, 2024 and 2023 (in thousands, except unit amounts):
| Amounts Paid For the Three Months Ended June 30, | Amounts Paid For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
| Grant Date | Units Granted | Units Outstanding | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
Q1 2021 | ||||||||||||||||||||||||||||||||||||||
Q1 2022 | ||||||||||||||||||||||||||||||||||||||
Q1 2023 | ||||||||||||||||||||||||||||||||||||||
Q1 2024 | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Stock appreciation rights
The following table details the recipients of the stock appreciation rights (“SARs”) awards, the grant date, units granted, exercise price, outstanding units as of June 30, 2024 and amounts paid during the three and six months ended June 30, 2024 and 2023 (in thousands, except unit and per unit amounts):
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| Amounts Paid For the Three Months Ended June 30, | Amounts Paid For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recipients | Grant Date | Units Granted | Exercise Price | Units Outstanding | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||
Members of Management (1)(2) | Q1 2015 | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
Members of Management (1)(3) | Q1 2018 | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
(1)The SARs vested ratably over 16 quarters from the grant date.
(2)The exercise price was determined to be the fair market value of one share of GWR Global Water Resources Corp. stock on the grant date of February 11, 2015.
(3)The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of March 12, 2018.
For both the three months ended June 30, 2024 and 2023, the Company recorded approximately $0.1 0.2 million and $0.1 million, respectively, of compensation expense related to the RSUs and SARs. These are liability awards, so when the stock price decreases, cumulative compensation expense is reduced, which can lead to negative compensation in a given period. Based on GWRI’s closing share price on June 28, 2024 (the last trading date of the quarter), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands):
RSUs | |||||
| 2024 (remaining period) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| Total | $ | ||||
Restricted stock awards
On May 7, 2020, the Company’s stockholders approved the Global Water Resources, Inc. 2020 Omnibus Incentive Plan, which allows restricted stock awards as a form of compensation. A restricted stock award (“RSA”) represents the right to receive a share of the Company’s common stock. RSAs vest over to three years , beginning on the date of the grant. The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense.
No RSAs were granted during the three and six months ended June 30, 2024 or 2023. The following table details the compensation expense related to the partial vesting of previously granted RSAs for the three and six months ended June 30, 2024 and 2023 (in thousands):
| Three Months Ended June 30, | For The Six Months Ended June 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
Compensation expense | $ | $ | $ | $ | ||||||||||||||||||||||
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information for the six months ended June 30, 2024 and 2023 (in thousands):
| For the Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Supplemental cash flow information: | |||||||||||
Cash paid for interest - net of amounts capitalized | $ | $ | |||||||||
| Non-cash financing and investing activities: | |||||||||||
| Capital expenditures included in accounts payable and accrued liabilities | $ | $ | |||||||||
| Business acquisition through issuance of contingent consideration payable | $ | ||||||||||
Finance lease additions | $ | $ | |||||||||
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13. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has operating and finance leases for vehicles, office equipment, and office space. Refer to Note 4 – “Leases” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information.
On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona. Under the terms of the purchase agreement, the Company is obligated to pay the seller a growth premium equal to $1,000 for each new account established in the service area, up to a total aggregate growth premium of $3.5 million. The obligation period of the growth premium commences on the closing date of the acquisition and ends (i) ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or unplatted and owned by the seller within the service area or (ii) ten years after the date of closing if a new account (as described above) has not been established. The assumptions and estimates used in determining the acquisition liability related to the growth premium are consistent with previous acquisitions. As of June 30, 2024, the remaining liability was $1.2 million.
On October 16, 2018, the Company completed the acquisition of GW-Red Rock, an operator of a water and a wastewater utility with service areas in the Pima and Pinal counties of Arizona. Under the terms of the purchase agreement, the Company is obligated to pay to the seller a growth premium equal to $750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date. As of June 30, 2024, no meters have been installed and no accounts have been established in any of the three growth premium areas. As of June 30, 2024, the remaining liability was $0.8 million.
Contingencies
From time to time, in the ordinary course of business, the Company may be subject to pending or threatened lawsuits in which claims for monetary damages are asserted. Management is not aware of any legal proceeding of which the ultimate resolution could materially affect the Company’s financial position, results of operations, or cash flows.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations (“MD&A”) relate to the three and six months ended June 30, 2024 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q are forward-looking in nature and may constitute “forward-looking information” within the meaning of applicable securities laws. Often, but not always, forward-looking statements can be identified by the words “believes”, “anticipates”, “plans”, “expects”, “intends”, “projects”, “estimates”, “objective”, “goal”, “focus”, “aim”, “should”, “could”, “may”, and similar expressions. These forward-looking statements include future estimates described in “Business Outlook”, “Factors Affecting our Results of Operations”, and “Liquidity and Capital Resources”. These forward-looking statements include, but are not limited to, statements about our strategies; expectations about future business plans, prospective performance, growth, and opportunities; future financial performance; regulatory and Arizona Corporation Commission (“ACC”) proceedings, decisions, and approvals, such as the anticipated benefits resulting from rate decisions, including any collective revenue increases due to new water and wastewater rates, our beliefs and expectations pertaining to ACC actions relating to our Southwest Plant, as well as the outcome and timing of our rate case and other applications with the ACC; our plans relating to future filings of our rate cases with the ACC; acquisition plans and our ability to complete additional acquisitions, including the anticipated acquisition of seven public water systems from the City of Tucson and the expected increase in active water service connections resulting from such acquisition; population and growth projections; technologies, including expected benefits from implementing such technologies; revenues; metrics; operating expenses; trends relating to our industry, market, population and job growth, and housing permits; the adequacy of our water supply to service our current demand and growth for the foreseeable future; liquidity and capital resources; plans and expectations for capital expenditures; cash flows and uses of cash; dividends; depreciation and amortization; tax payments; our ability to repay indebtedness and invest in initiatives; the anticipated impact and resolutions of legal matters; the anticipated impact of new or proposed laws, including regulatory requirements, tax changes, and judicial decisions; and the anticipated impact of accounting changes and other pronouncements.
Forward-looking statements should not be read as a guarantee of future performance or results. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement. Investors are cautioned not to place undue reliance on forward-looking information. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including risks related to legal, regulatory, and legislative matters; risks related to our business and operations; risks related to market and financial matters; risk related to technology; risks related to the ownership of our common stock; and certain general risks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. These and other factors are discussed in the risk factors described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”) as updated from time to time in our subsequent filings with the Securities and Exchange Commission (the “SEC”). Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the asset purchase agreement to acquire the seven public water systems from the City of Tucson will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the asset purchase agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all. Any forward-looking statement speaks only as of the date of this report. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
GWRI is a water resource management company that owns, operates, and manages thirty-two water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, Arizona. The Company seeks to deploy an integrated approach, referred to as “Total Water Management.” Total Water Management is a comprehensive approach to water utility management that reduces demand on scarce non-renewable water sources and costly renewable water supplies, in a manner that ensures sustainability and greatly benefits communities both environmentally and economically. This approach employs a series of principles and practices that can be tailored to each community:
•Reuse of recycled water, either directly or to non-potable uses, through aquifer recharge, or possibly direct potable reuse in the future;
•Regional planning;
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•Use of advanced technology and data;
•Employing respected subject matter experts and retaining thought and application leaders;
•Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners, municipalities, regulators, and utility staff are knowledgeable on the principles and practices of the Total Water Management approach; and
•Establishing partnerships with communities, developers, and industry stakeholders to gain support of the Total Water Management principles and practices.
Business Outlook
We continue to experience an increasing rate of organic growth, exclusive of acquisition related growth, evidenced by our year over year increase in active connections of 4.9% as compared to 1.9% for the same period in 2023. According to the most recent U.S. Census estimates, the Phoenix metropolitan statistical area (“MSA”) is the 10th largest MSA in the U.S. and had an estimated population of 5.1 million, an increase of 4.6% over the 4.8 million people reported in the 2020 Census. Metropolitan Phoenix continues to grow due to its favorable employment opportunities, excellent weather, large and growing universities, a diverse employment base, and low taxes. The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.8 million people by 2030 and 6.5 million by 2040. Arizona’s job growth increased by 2.2% during the first six months of 2024 as compared to the same period for the prior year, ranking the state in the top ten nationally as of June 30, 2024.
According to the W.P. Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel (the “Greater Phoenix Blue Chip Panel”), interest rate shock negatively impacted permit activity in the Phoenix metropolitan area, particularly between July 2022 and June 2023. Further, the Greater Phoenix Blue Chip Panel concluded that the recovery from that interest rate shock resulted in permit activity increasing by more than 44% in the first five months of 2024. The Greater Phoenix Blue Chip Panel anticipates single family permit growth by more than 27% for 2024 as a whole. Further, single family permits in the City of Maricopa increased 43% for the first half of 2024 as compared to the same period in the prior year. Management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots, existing infrastructure in place within our services areas, and increased activity related to multi-family developments.
Factors Affecting our Results of Operations
Our financial condition and results of operations are influenced by a variety of industry-wide factors, including but not limited to:
•population and community growth;
•economic and environmental utility regulation;
•economic environment;
•the need for infrastructure investment;
•production and treatment costs;
•weather and seasonality; and
•access to and quality of water supply.
We are subject to economic regulation by the state regulator, the ACC. The U.S. federal and state governments also regulate environmental, health and safety, and water quality matters. We continue to execute on our strategy to optimize and focus the Company in order to provide greater value to our customers and shareholders by aiming to deliver predictable financial results, making prudent capital investments, and focusing our efforts on earning an appropriate rate of return on our investments.
Population and Community Growth
Population and community growth in the metropolitan Phoenix area served by our utilities have a direct impact on our earnings. An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner. As of June 30, 2024, active service connections increased 2,965, or 4.9%, to 63,256 compared to 60,291 active service connections as of June 30, 2023, primarily due to organic growth in our service areas. Approximately 89.5% of the 63,256 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.
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(“GW-Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc. (“GW-Palo Verde”) utilities as of June 30, 2024.
The graph below presents the historical change in active connections for our ongoing operations over the past five years.
Economic and Environmental Utility Regulation
We are subject to extensive regulation of our rates by the ACC, which is charged with establishing rates based on the provision of reliable service at a reasonable cost while also providing an opportunity to earn a fair rate of return on rate base for investors of utilities. The ACC uses a historical test year to evaluate whether the plant in service is used and useful, to assess whether costs were prudently incurred, and to set “just and reasonable” rates. Rate base is typically the depreciated original cost of the plant in service (net of contributions in aid of construction (“CIAC”) and advances in aid of construction (“AIAC”) which are funds or property provided to a utility under the terms of a main extension agreement, the value of which may be refundable), that has been determined to have been “prudently invested” and “used and useful”, although the reconstruction cost of the utility plant may also be considered in determining the rate base. The ACC also decides on an applicable capital structure based on actual or hypothetical analyses. The ACC determines a “rate of return” on that rate base, which includes the approved capital structure and the actual cost of debt and a fair and reasonable cost of equity based on the ACC’s judgment. The overall revenue requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding reasonably incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments.
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To ensure an optimal combination of access to water and water conservation balanced with a fair rate of return for investors, our water utility operating revenue is based on two components: a fixed fee and a consumption or volumetric fee. For our water utilities, the fixed fee, or “basic service charge,” provides access to water for residential usage and has generally been set at a level to produce approximately 50% of total water revenue. The volumetric fee is based on the total volume of water supplied to a given customer after the minimum number of gallons, if any, covered by the basic service charge, multiplied by a price per gallon set by a tariff approved by the ACC. A discount to the volumetric rate applies for customers that use less than an amount specified by the ACC. For all investor-owned water utilities, the ACC has, as a policy matter, required the establishment of inverted tier conservation-oriented rates, meaning that the price of water increases as consumption increases. For wastewater utilities, wastewater collection, and treatment can be based on volumetric or fixed fees. Our wastewater utility services are billed based solely on a fixed fee, determined by the size of the water meter installed. Recycled water is sold on a volumetric basis with no fixed fee component.
We are required to file rate cases with the ACC to obtain approval for a change in rates. Rate cases and other rate-related proceedings can take a year or more to complete. As a result, there is frequently a delay, or regulatory lag, between the time of a capital investment or incurrence of an operating expense increase and when those costs are reflected in rates. We believe it is common industry practice to file for a rate increase every three to five years. Refer to “—Rate Case and Regulatory Activity” below and Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.
Additionally, our water and wastewater utility operations are subject to extensive regulation by U.S. federal, state, and local regulatory agencies that enforce environmental, health, and safety requirements, which affect all of our regulated subsidiaries. Environmental, health and safety, and water quality regulations are complex, change frequently, and have tended to become more stringent over time. Although it is difficult to project the ultimate costs of complying with pending or future requirements, we do not expect requirements under current regulations to have a material impact on our operations or financial condition, though it is possible new methods of treating drinking water may be required if additional regulations become effective in the future.
On April 10, 2024, the U.S. Environmental Protection Agency (“EPA”) finalized the National Primary Drinking Water Regulation (“NPDWR”) establishing legally enforceable levels, called maximum contaminant levels (“MCLs”), for six per- and polyfluoroalkyl substances or compounds (“PFAS”) in drinking water. The EPA also finalized health-based, non-enforceable maximum contaminant level goals for these PFAS. The final rule requires that public water systems, such as the Company, must monitor for these PFAS and have three years to complete initial monitoring, followed by ongoing compliance monitoring. Public water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027. Public water systems have five years to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed the applicable MCLs. Beginning in five years, public water systems that have PFAS in drinking water which violate one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation.
We are committed to compliance with the NPDWR and are in process of complying with the first requirement of the rule mandating initial monitoring for all of our utilities. The Company expects that compliance with the NPDWR will require increased capital expenditures for PFAS-contaminated water treatment and other operating costs. If other newer or stricter standards are introduced in the future, they could also increase our operating expenses. We generally expect to recover expenses associated with compliance for environmental and health and safety standards through rate increases, but this recovery may be affected by regulatory lag.
Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by the ACC as appropriate for inclusion in establishing rates or in a separate surcharge.
Infrastructure Investment
Capital expenditures for infrastructure investment are a component of the rate base on which our regulated utility subsidiaries are allowed to earn an equity rate of return. Capital expenditures for infrastructure provide a basis for earnings growth by expanding our “used and useful” rate base, which is a component of our permitted return on investment and revenue requirement. We are generally able to recover a rate of return on these capital expenditures (return on equity and debt), together with debt service and certain operating costs, through the rates we charge.
We have an established capital improvement plan to make targeted capital investments to repair and replace existing infrastructure as needed, address operating redundancy requirements, improve our overall financial performance and expand our infrastructure in areas where growth is occurring.
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Production and Treatment Costs
Our water and wastewater services require significant production resources and therefore result in significant production costs. Although we are permitted to recover these costs through the rates we charge, regulatory lag can decrease our margins and earnings if production costs or other operating expenses increase significantly before we are able to recover them through increased rates. Our most significant costs include labor, chemicals used to treat water and wastewater, and power used to operate pumps and other equipment. Power and chemical costs can be volatile. However, we employ a variety of technologies and methodologies to minimize costs and maximize operational efficiencies.
Weather and Seasonality
Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. Drought, overuse of sources of water, the protection of threatened species or habitats, or other factors may limit the availability of ground and surface water.
Also, customer usage of water and recycled water is affected by weather conditions, particularly during the summer. Our water systems generally experience higher demand in the summer due to the warmer temperatures and increased usage by customers for irrigation and other outdoor uses. However, summer weather that is cooler or wetter than average generally suppresses customer water demand and can have a downward effect on our operating revenue and operating income. Conversely, when weather conditions are extremely dry, our business may be affected by government-issued drought-related warnings and/or water usage restrictions that would artificially lower customer demand and reduce our operating revenue.
The limited geographic diversity of our service areas makes the results of our operations more sensitive to the effect of local weather extremes. The second and third quarters of the year are generally those in which water services revenue and wastewater services revenues are highest. For additional information and risks associated with weather and seasonality, see “Risk Factors,” included in Part I, Item 1A of the 2023 Form 10-K.
Access to and Quality of Water Supply
In many areas of Arizona (including certain areas that we service), water supplies are limited and, in some cases, current usage rates exceed sustainable levels for certain water resources. We currently rely predominantly (and are likely to continue to rely) on the pumping of groundwater and the generation and delivery of recycled water for non-potable uses to meet future demands in our service areas. At present, groundwater (and recycled water derived from groundwater) is the primary water supply available to us. In addition, regulatory restrictions on the use of groundwater and the development of groundwater wells, lack of available water rights, drought, overuse of local or regional sources of water, protection of threatened species or habitats, or other factors, including climate change, may limit the availability of ground or surface water. Additionally, in the majority of the Phoenix Active Management Area, the Arizona Department of Water Resources (“ADWR”) has paused the issuance of new certificates of assured water supply based on groundwater and paused modifications of any designations of assured water supply for the increase in groundwater. Approximately 1.76% of the Company’s water connections are located within the Phoenix Active Management Area. We believe that we have an adequate supply of water to service our current demand and growth for the foreseeable future in our service areas. For additional information and risks associated with the access to and quality of water supply, see “Risk Factors,” included in Part I, Item 1A of the 2023 Form 10-K.
Rate Case and Regulatory Activity
Below is a summary of rate case and regulatory activity. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding the Company’s rate case and regulatory activity.
2024 Farmers Rate Case
On June 27, 2024, Global Water-Farmers Water Company, Inc. (“GW-Farmers”), one of the Company’s regulated utilities, filed a rate case application with the ACC for increased water rates based on a 2023 test year with updates for changes in post-test year plant through December 31, 2024.
Acquisition of Seven Systems from City of Tucson
On May 10, 2024, GW-Ocotillo filed an Application at the ACC for approval to acquire seven isolated systems from the City of Tucson. On June 10, 2024, ACC Utilities Division Staff found the application administratively complete.
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2025 Santa Cruz and Palo Verde Rate Case
During the fourth quarter of 2023, the Company notified the ACC of its intention to file a rate case for Global Water-Santa Cruz Water Company, Inc. (“GW-Santa Cruz”) and Global Water-Palo Verde Utilities Company, Inc. (“GW-Palo Verde”) in 2025. The GW-Santa Cruz and GW-Palo Verde rate case is anticipated to be based on a test year ending December 31, 2024 with updates for changes in post-test year plant.
Southwest Plant Accounting Order and Bill Credit
On July 3, 2023, the Company’s GW-Palo Verde and GW-Santa Cruz utilities filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset the depreciation expense recorded for the Company’s Southwest Plant, plus the carrying cost at the authorized rate of return set in GW-Palo Verde’s and GW-Santa Cruz’s most recent rate order, until the plant is considered for recovery in the next GW-Palo Verde and GW-Santa Cruz rate case. In January 2024, the Company discovered that approximately $7.8 million of construction costs for the Southwest Plant had been prematurely included as “plant in service” for rate making purposes in 2007 and were reflected in the calculation of customer rates in Decision No. 71878 (September 15, 2010). Those costs were also included as “plant in service” in Decision No. 74364 (February 26, 2014) and Decision No. 78644 (July 27, 2022). The Company disclosed this circumstance to the ACC on March 1, 2024, and on April 25, 2024, GW-Palo Verde filed an application with the ACC requesting a monthly bill credit for customers that would be in place until the conclusion of the next GW-Palo Verde rate case. The ACC issued Decision No. 79424 on July 18, 2024 approving the bill credit with an effective date of August 1, 2024, which will reduce revenue earned subsequent to the order by approximately $570,000 annually. The bill credit will be in place until the conclusion of the next GW-Palo Verde rate case, which Decision No. 79424 requires GW-Palo Verde to file no later than December 31, 2025.
Decision No. 79383 - Issued June 20, 2024 - Saguaro Rate Case
On June 20, 2024, the ACC issued Decision No. 79383 relating to each of the rate case applications filed by seven of the Company’s regulated utilities for increased water rates based on a 2022 test year. Decision No. 79383 approved, among other things, a collective annual revenue increase of approximately $351,000.
The ACC also approved: (i) the consolidation of water rates to one single rate for these utilities; (ii) acquisition premiums relating to the Company’s acquisitions of its Global Water-Mirabell Water Company, Inc. (“GW-Mirabell”), Global Water-Lyn Lee Water Company, Inc. (“GW-Lyn Lee”), Global Water-Francesca Water Company, Inc. (“GW-Francesca”), Global Water-Tortolita Water Company, Inc. (“GW-Tortolita”), Global Water-Rincon Water Company, Inc. (“GW-Rincon”), and Global Water-Las Quintas Serenas Water Company, Inc. (“GW-Las Quintas Serenas”) utilities, each located in Pima County, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement; (iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding; (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources; (v) a capital structure matching the Company’s previous rate case of 55% equity with a 9.6% return on equity; and (vi) a depreciation expense accounting deferral for GW-Rincon.
Decision No. 78644 - Issued July 27, 2022
On July 27, 2022, the ACC issued Decision No. 78644 pursuant to which the ACC approved, among other things, a collective annual revenue requirement increase of approximately $2.2 million (including acquisition premiums) based on 2019 test year service connections, and phased-in over approximately two years. The effective date of the final phase was January 1, 2024.
Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding the Company’s rate case and regulatory activity.
Corporate Transactions
Asset Purchase Agreement with City of Tucson
Effective April 25, 2024, Global Water - Ocotillo Water Company, Inc. (“GW-Ocotillo”), formerly Global Water - 2024 Acquisition A, Inc. and a wholly owned subsidiary of the Company, entered into an asset purchase agreement with the City of Tucson, pursuant to which GW-Ocotillo will acquire seven public water systems from the City of Tucson serving approximately 2,200 water service connections in an all-cash transaction for a purchase price of $8.4 million. The public water systems are located in and around Pima County. The transaction remains subject to customary closing conditions and approval by the ACC. The estimated rate base of the seven water systems is approximately $7.8 million.
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Private Placement Offering of 6.91% Senior Secured Notes
On October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $20 million of 6.91% Senior Secured Notes due on January 3, 2034. Pursuant to the terms of the note purchase agreement, the Company issued the notes on January 3, 2024.
Refer to Note 9 - “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.
Private Placement Offering of Common Stock
On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder. The Company received gross proceeds of approximately $2.8 million from the offering.
Farmers Water Co. Acquisition
On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition.
Stipulated Condemnation of the Operations and Assets of Valencia
On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close. The City of Buckeye is obligated to pay the Company a growth premium equal to $3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $45.0 million over the term of the agreement.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of the Financial Accounting Standards Board’s Accounting Standards Codification 280, Segment Reporting, the Company is not organized around specific products and services, geographic regions, or regulatory environments. The Company currently operates in one geographic region within the State of Arizona, wherein each operating utility operates within the same regulatory environment.
While the Company reports revenue, disaggregated by service type, on the face of the statement of operations, the Company does not manage the business based on any performance measure at the individual revenue stream level. The Company does not have any customers that contribute more than 10% to the Company’s revenues or revenue streams. Additionally, the chief operating decision maker uses consolidated financial information to evaluate performance, which is the same basis on which he communicates results and performance to the Company’s board of directors. It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of the Company’s resources on a consolidated level. Based on the information described above and in accordance with the applicable literature, management has concluded that the Company is currently organized and operated as one operating and reportable segment.
Comparison of Results of Operations for the Three Months Ended June 30, 2024 and 2023
The following table summarizes results of operations for the three months ended June 30, 2024 and 2023 (in thousands, except for share amounts):
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| For the Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues | $ | 13,510 | $ | 13,000 | |||||||
| Operating expenses | 10,713 | 9,990 | |||||||||
| Operating income | 2,797 | 3,010 | |||||||||
| Total other expense | (469) | (540) | |||||||||
| Income before income taxes | 2,328 | 2,470 | |||||||||
| Income tax expense | (598) | (731) | |||||||||
| Net income | $ | 1,730 | $ | 1,739 | |||||||
| Basic earnings per common share | $ | 0.07 | $ | 0.07 | |||||||
| Diluted earnings per common share | $ | 0.07 | $ | 0.07 | |||||||
Revenues – The following table summarizes revenues for the three months ended June 30, 2024 and 2023 (in thousands):
| For the Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Water services | $ | 6,668 | $ | 6,557 | |||||||
| Wastewater and recycled water services | 6,842 | 6,443 | |||||||||
| Unregulated revenues | — | — | |||||||||
| Total revenues | $ | 13,510 | $ | 13,000 | |||||||
Total revenues increased $0.5 million, or 3.9%, to $13.5 million for the three months ended June 30, 2024 compared to $13.0 million for the three months ended June 30, 2023. The increase in revenue was primarily attributable to the 4.9% organic growth in active connections (including both water and wastewater connections), partially offset by a slight decrease in overall consumption.
Water Services – Water services revenue increased $0.1 million, or 1.7%, to $6.7 million for the three months ended June 30, 2024 compared to $6.6 million for the three months ended June 30, 2023. The increase in water services revenue was primarily related to the organic connection growth in active water connections of 4.6%, partially offset by a 2.9% decrease in consumption.
Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.2 million, or 7.1%, to $3.4 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023. The increase was primarily due to the 4.6% growth in active water connections.
Active water connections increased 4.6% to 35,128 as of June 30, 2024 from 33,580 as of June 30, 2023, primarily due to organic growth in our service areas.
Water services revenue based on consumption decreased $0.1 million, or 2.9%, to $3.1 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023. The slight decrease was primarily driven by reduced consumption.
Water consumption decreased by 0.02 billion gallons, or 1.7%, to 1.11 billion gallons for three months ended June 30, 2024 from 1.13 billion gallons for the three months June 30, 2023. While residential consumption increased 6.3% during the three months ended June 30, 2024 as compared to the same period for the prior year, such increase was more than offset by reductions in construction related consumption.
Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 6.2%, to $6.8 million for the three months ended June 30, 2024 compared to $6.4 million for the three months ended June 30, 2023. The increase in wastewater and recycled water services revenue was primarily driven by a $0.5 million increase in wastewater services revenue, which reflects a 5.3% increase in active wastewater connections from 26,711 as of June 30, 2023 to 28,128 as of June 30, 2024, partially offset by a $0.1 million decrease in recycled water services revenue.
Recycled water services revenue, which is based on the volume of recycled gallons delivered, decreased $0.1 million, or 14.3%, to $0.4 million for the three months ended June 30, 2024 compared to $0.5 million for the three months ended June 30, 2023. The decrease was primarily driven by reduced consumption during the period.
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Operating Expenses – The following table summarizes operating expenses for the three months ended June 30, 2024 and 2023 (in thousands):
| For the Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operations and maintenance | $ | 3,485 | $ | 3,181 | |||||||
| General and administrative | 4,232 | 4,104 | |||||||||
| Depreciation and amortization | 2,996 | 2,705 | |||||||||
| Total operating expenses | $ | 10,713 | $ | 9,990 | |||||||
Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased $0.3 million, or 9.6%, to $3.5 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023.
Total personnel expenses increased $0.1 million, or 7.8%, to $1.2 million for the three months ended June 30, 2024 compared to $1.1 million for the three months ended June 30, 2023. The increase in personnel expenses was primarily related to a 5.5% increase in salary and wages and a increase of 38.1% in medical insurance expenses.
Other notable increases were related to repairs and maintenance, office expenses related to information technology services, chemicals, consumables and supplies and office expenses, partially offset by a moderate decreases in contract services and rent expense.
General and Administrative – General and administrative costs include the day-to-day expenses of office operations, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs increased $0.1 million, or 3.1%, to $4.2 million for the three months ended June 30, 2024 compared to $4.1 million for the three months ended June 30, 2023.
Total personnel expenses increased $0.2 million, or 10.9%, to $1.9 million for the three months ended June 30, 2024 compared to $1.7 million for the three months ended June 30, 2023. The increase was primarily related to higher salaries and wages and moving expenses.
Deferred compensation expense decreased $0.1 million, or 35.2%, to $0.3 million for the three months ended June 30, 2024 compared to $0.4 million for the three months ended June 30, 2023. The decrease was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased $0.74 during the three months ended June 30, 2024 as compared to a $0.49 increase during the three months ended June 30, 2023). Refer to Note 11 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.
Depreciation and amortization - Depreciation and amortization expense increased $0.3 million, or 10.8%, to $3.0 million for the three months ended June 30, 2024, compared to $2.7 million for the three months ended June 30, 2023. The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, which includes certain assets related to the Southwest Plant put into service July 2023, and $80,000 of amortization of an intangible asset related to acquired ICFAs that did not occur in the same period in 2023.
Other Expense – Other expense was $0.5 million for both the three months ended June 30, 2024 and June 30, 2023. For the the three months ended June 30, 2024, interest income increased $0.3 million compared to the three months ended June 30, 2023, which was mostly offset by an increase in interest expense primarily related to the senior secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information).
Income Tax Expense – Income tax expense of $0.6 million was recorded for the three months ended June 30, 2024 compared to income tax expense of $0.7 million for the three months ended June 30, 2023. The primary driver for the change was due to the decrease in pre-tax income for three months ended June 30, 2024.
Net Income – Net income totaled $1.7 million for both the three months ended June 30, 2024 and 2023. The increase in regulated revenue of $0.5 million, decrease in tax expense of $0.1 million and a lower other expense for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was offset by higher operating expenses of $0.7 million in the current period.
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Comparison of Results of Operations for the Six Months Ended June 30, 2024 and 2023
The following table summarizes results of operations for the six months ended June 30, 2024 and 2023 (in thousands, except for share amounts):
| For the Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues | $ | 25,120 | $ | 26,128 | |||||||
| Operating expenses | 21,056 | 19,341 | |||||||||
| Operating income | 4,064 | 6,787 | |||||||||
| Total other expense | (795) | (986) | |||||||||
| Income before income taxes | 3,269 | 5,801 | |||||||||
| Income tax expense | (848) | (1,596) | |||||||||
| Net income | $ | 2,421 | $ | 4,205 | |||||||
| Basic earnings per common share | $ | 0.10 | $ | 0.18 | |||||||
| Diluted earnings per common share | $ | 0.10 | $ | 0.17 | |||||||
Revenues – The following table summarizes revenues for the six months ended June 30, 2024 and 2023 (in thousands):
| For the Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Water services | $ | 11,894 | $ | 11,396 | |||||||
| Wastewater and recycled water services | 13,226 | 12,464 | |||||||||
| Unregulated revenues | — | 2,268 | |||||||||
| Total revenues | $ | 25,120 | $ | 26,128 | |||||||
Total revenues decreased $1.0 million, or 3.9%, to $25.1 million for the six months ended June 30, 2024 compared to $26.1 million for the six months ended June 30, 2023. The decrease in revenue was primarily attributable to the recognition of infrastructure coordination and financing agreement (“ICFA”) related revenue during the six months ended June 30, 2023 that did not recur in the current period, partially offset by an increase of $1.3 million in regulated revenue primarily from organic connection growth.
Water Services – Water services revenue increased $0.5 million, or 4.4%, to $11.9 million for the six months ended June 30, 2024 compared to $11.4 million for the six months ended June 30, 2023. The increase in water services revenue was primarily related to the organic connection growth in active water connections of 4.6%.
Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.5 million, or 7.6%, to $6.8 million for the six months ended June 30, 2024 compared to $6.3 million for the six months ended June 30, 2023. The increase was primarily due to the 4.6% growth in active water connections.
Active water connections increased 4.6% to 35,128 as of June 30, 2024 from 33,580 as of June 30, 2023, primarily due to organic growth in our service areas.
Water services revenue based on consumption was $4.8 million for both the six months ended June 30, 2024 and 2023.
Water consumption increased 1.3% to 1.78 billion gallons for the six months ended June 30, 2024 compared to 1.76 billion for the six months ended June 30, 2023.
Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.7 million, or 6.1%, to $13.2 million for the six months ended June 30, 2024 compared to $12.5 million for the six months ended June 30, 2023. The increase was primarily driven by higher wastewater services revenue of $0.8 million resulting from the 5.3% increase in active wastewater connections from 26,711 as of June 30, 2023 to 28,128 as of June 30, 2024, partially offset by a $0.1 million decrease in recycled water services revenue.
Recycled water services revenue, which is based on the number of gallons delivered and directly impacted by wastewater volume, decreased by approximately 11.2% to $0.5 million for the six months ended June 30, 2024 from $0.6 million for the six months ended June 30, 2023. The volume of recycled water delivered decreased by 15.8% with 301 million gallons
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delivered for the six months ended June 30, 2024 compared to 357 million gallons delivered for the six months ended June 30, 2023.
Operating Expenses – The following table summarizes operating expenses for the six months ended June 30, 2024 and 2023 (in thousands):
| For the Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operations and maintenance | $ | 6,769 | $ | 5,970 | |||||||
| General and administrative | 8,357 | 8,011 | |||||||||
| Depreciation and amortization | 5,930 | 5,360 | |||||||||
| Total operating expenses | $ | 21,056 | $ | 19,341 | |||||||
Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased approximately $0.8 million, or 13.4%, to $6.8 million for the six months ended June 30, 2024 compared to $6.0 million for the six months ended June 30, 2023.
Total personnel expenses increased approximately $0.4 million, or 21.2%, to $2.4 million for the six months ended June 30, 2024 compared to $2.0 million for the six months ended June 30, 2023. The increase was primarily attributable to the increased medical costs of $0.2 million, an increase in headcount, and an increase in hiring and moving costs.
Office expenses related to information technology services increased $0.1 million for the six months ended June 30, 2024 compared to the same period in 2023.
Utility power and related expenses increased $0.1 million to $1.3 million for the six months ended June 30, 2024 compared to $1.2 million for the same period in 2023. The additional power costs were attributable to pump usage for the increase in connections from organic growth.
Repairs and maintenance expenses increased $0.1 million to $0.2 million for the six months ended June 30, 2024 compared to $0.1 million for the same period in 2023. The increased repairs and maintenance costs were primarily attributable to planned equipment maintenance.
General and Administrative – General and administrative costs include the day-to-day expenses of office operations, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs increased $0.4 million, or 4.3%, to $8.4 million for the six months ended June 30, 2024 compared to $8.0 million for the six months ended June 30, 2023.
Personnel related costs increased $0.4 million, or 11.2%, to $3.8 million for the six months ended June 30, 2024 compared to $3.4 million for the six months ended June 30, 2023. The increase was primarily related to higher salary and wages as a result of increased personnel, increased hiring and moving costs, and higher medical expenses.
Deferred compensation expense decreased $0.2 million, or 22.8%, to $0.5 million for the six months ended June 30, 2024 compared to $0.7 million for the six months ended June 30, 2023. The decrease was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased $0.98 during the six months ended June 30, 2024 as compared to a decrease of $0.21 during the six months ended June 30, 2023). Refer to Note 11 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.
Depreciation and amortization - Depreciation and amortization expense increased $0.6 million, or 10.6%, to $5.9 million for the six months ended June 30, 2024 compared to $5.4 million for the six months ended June 30, 2023. The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, which includes certain assets related to the Southwest Plant put into service July 2023, and $80,000 of amortization of an intangible asset related to acquired ICFAs that did not occur in the same period in 2023.
Other Expense – Other expense totaled $0.8 million for the six months ended June 30, 2024 compared to $1.0 million for the six months ended June 30, 2023. The decrease of $0.2 million in other expense was related to a $0.4 million increase in income associated with Buckeye growth premiums as a result of additional new meter connections in the area and a $0.5 million increase in interest income, partially offset by an increase in interest expense of $0.6 million primarily related to the senior
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secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information) and a decrease in the equity portion of allowance for funds used during construction of $0.1 million for the six months ended June 30, 2024.
Income Tax Expense – Income tax expense of $0.8 million was recorded for the six months ended June 30, 2024 compared to $1.6 million for the six months ended June 30, 2023. The primary driver for the change was the higher pre-tax income for the six months ended June 30, 2023 related to the ICFA revenue recognized during that period that did not recur in 2024.
Net Income – Net income totaled $2.4 million for the six months ended June 30, 2024 compared to net income of $4.2 million for the six months ended June 30, 2023. The $1.8 million decrease was primarily attributable to the recognition of $2.3 million of ICFA related revenue and an increase in operating expenses of approximately $1.7 million, partially offset by a $1.3 million increase in regulated revenue and lower tax expense of $0.7 million.
Outstanding Share Data
As of August 7, 2024, there were 24,217,410 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 399,811 shares of the Company’s common stock.
Liquidity and Capital Resources
The Company’s capital resources are provided by internally generated cash flows from operations as well as debt and equity financing. Additionally, its regulated utility subsidiaries receive advances and contributions from customers, home builders, and real estate developers to partially fund construction necessary to extend service to new areas. The Company uses capital resources primarily to:
•fund operating costs;
•fund capital requirements, including construction expenditures;
•make debt and interest payments;
•fund acquisitions; and
•pay dividends.
The Company’s utility subsidiaries operate in rate-regulated environments in which the amount of new investment recovery may be limited. Such recovery will take place over an extended period of time because recovery through rate increases is subject to regulatory lag.
As of June 30, 2024, the Company has no notable near-term cash expenditures, other than the principal payments for its Series B Notes (as defined below) in the amount of $1.9 million due in both December 2024 and June 2025. While specific facts and circumstances could change, the Company believes that with the cash on hand and the ability to draw on its $15.0 million revolving line of credit, it will be able to generate sufficient cash flows to meet its operating cash flow requirements and capital expenditure plan, as well as remain in compliance with its debt covenants, for the next twelve months and beyond.
In March 2014, the Company initiated a dividend program to declare and pay a monthly dividend. On November 30, 2023, the Company announced a monthly dividend increase to 0.02508 per share (0.30096 per share annually) from 0.02483 per share (0.29796 per share annually). Although the Company expects that monthly dividends will be declared and paid for the foreseeable future, the declaration of any dividends is at the discretion of the Company’s board of directors and is subject to legal requirements and debt service ratio covenant requirements (refer to “—Senior Secured Notes” and “—Revolving Credit Line”).
Cash from Operating Activities
Cash flows provided by operating activities are used for operating needs and to meet capital expenditure requirements. The Company’s future cash flows from operating activities will be affected by economic utility regulation, infrastructure investment, growth in service connections, customer usage of water, compliance with environmental health and safety standards, production costs, weather, and seasonality.
For the six months ended June 30, 2024, net cash provided by operating activities totaled approximately $13.6 million compared to $12.7 million for the six months ended June 30, 2023. The $0.9 million increase in cash from operating activities was primarily driven by an increase in noncurrent liabilities for the six months ended June 30, 2024 as a result of funds received related to ICFA payments and other developer contributions during the first six months in 2024 compared to the six months ended June 30, 2023. In addition, there were other notable fluctuations in working capital accounts.
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Cash from Investing Activities
The net cash used in investing activities totaled approximately $12.2 million for the six months ended June 30, 2024 compared to $19.9 million for the six months ended June 30, 2023. The $7.7 million decrease in cash used in investing activities was primarily driven by the $6.2 million cash paid for the acquisition of GW-Farmers (net of cash acquired) in February 2023 and a decrease in capital expenditures of $1.5 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
The Company continues to invest capital prudently in existing, core service areas where the Company is able to deploy the Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities. The projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors. As a result, the Company may adjust capital expenditures to correspond with any substantial changes in demand for new development in its service areas.
Cash from Financing Activities
The net cash provided by financing activities totaled $13.6 million for the six months ended June 30, 2024, a $9.5 million increase, as compared to the $4.1 million in cash provided by financing activities for the six months ended June 30, 2023. This increase was primarily driven by the $20 million received from the senior secured notes issuance in January 2024, partially offset by $2.3 million of repayments on the Company’s revolving line of credit in the six months ended June 30, 2024 as compared to $9.1 million of net borrowings against the line of credit in the six months ended June 30, 2023.
Debt
Senior Secured Notes
On June 24, 2016, the Company issued two series of senior secured notes with a total principal balance of $115.0 million at a blended interest rate of 4.55%. Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38% over a twelve-year term, with the principal payment due on June 15, 2028 (the “Series A Notes”). Series B carries a principal balance of $86.3 million and bears an interest rate of 4.58% over a 20-year term, with the principal payment due on June 15, 2036 (the “Series B Notes”). The Series B Notes were interest only for the first five years, with $1.9 million principal payments paid semiannually thereafter beginning December 2021. The proceeds of the Series A Notes and the Series B Notes were primarily used to refinance the Company’s long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the Company’s U.S. initial public offering of its common stock in May 2016.
The Series A Notes and the Series B Notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. Consolidated EBITDA is calculated as net income plus depreciation and amortization, taxes, interest, and other non-cash charges net of non-cash income. Consolidated debt service is calculated as interest expense, principal payments, and dividend or stock repurchases. The Series A Notes and the Series B Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. As of June 30, 2024, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes.
Additionally, on January 3, 2024, the Company issued $20.0 million aggregate principal amount of 6.91% Senior Secured Notes due on January 3, 2034 (the “6.91% Notes” and collectively with the Series A Notes and the Series B Notes, the “Senior Secured Notes”). The 6.91% Notes accrue interest at 6.91% per annum from the date of issuance, payable semi-annually on January 3 and July 3 of each year, beginning on July 3, 2024, with a balloon payment due on January 3, 2034.
The 6.91% Notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The 6.91% Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service coverage ratio of 1.25. As of June 30, 2024, the Company was in compliance with its financial debt covenants relating to 6.91% Notes.
The Senior Secured Notes are collateralized by a security interest in the Company’s equity interest in its subsidiaries, including all payments representing profits and qualifying distributions. The Senior Secured Notes also have certain restrictive covenants that limit, among other things, the Company’s ability to: create liens and other encumbrances; incur additional indebtedness; merge, liquidate or consolidate with another entity; dispose of or transfer assets; make distributions or other restricted payments; engage in certain affiliate transactions; and change the nature of the business.
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Debt issuance costs as of June 30, 2024 and December 31, 2023 were $0.8 million and $0.4 million, respectively.
Revolving Credit Line
On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (“Northern Trust”), which was initially for a two-year revolving line of credit up to $10.0 million with a maturity date of April 30, 2022. This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, initially bore an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00% and had no unused line fee.
The Company and Northern Trust subsequently amended the credit facility agreement on multiple occasions (as amended, the “Northern Trust Loan Agreement”) to, among other things, (i) extend the scheduled maturity date to July 1, 2025; (ii) increase the maximum principal amount available for borrowing to $15.0 million; (iii) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR); and (iv) add a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit.
On July 1, 2024, the Company and Northern Trust entered into a fifth amendment to the Northern Trust Loan Agreement, which further amended the scheduled maturity date for the revolving line of credit from July 1, 2025 to July 1, 2026.
Similar to the Senior Secured Notes, the Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. Additionally, the Northern Trust Loan Agreement contains certain restrictive covenants that limit, among other things, the Company’s ability to: create liens and other encumbrances; incur additional indebtedness; merge, liquidate or consolidate with another entity; dispose of or transfer assets; make distributions or other restricted payments (including dividends); engage in certain affiliate transactions; and change the nature of the business. The foregoing covenants are subject to various qualifications and limitations as set forth in the Northern Trust Loan Agreement. Pursuant to the Northern Trust Loan Agreement, the revolving credit facility is subject to certain customary events of default after which the revolving credit facility could be declared due and payable if not cured within the grace period or, in certain circumstances, could be declared due and payable immediately. As of June 30, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.
As of June 30, 2024, the Company had no outstanding borrowings under the revolving line of credit with Northern Trust. There were approximately $12,000 and $25,000 unamortized debt issuance costs as of June 30, 2024 and December 31, 2023, respectively.
Other Recent Financing Activity
On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The Company received gross proceeds of approximately $2.8 million from the offering.
Insurance Coverage
The Company carries various property, casualty, and financial insurance policies with limits, deductibles, and exclusions consistent with industry standards. However, insurance coverage may not be adequate or available to cover unanticipated losses or claims. The Company is self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such losses could have a material adverse effect on the Company’s short-term and long-term financial condition and the results of operations and cash flows.
Contractual Obligations
Except as described below, there have been no additional material changes in our reported contractual obligations from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” in the 2023 10-K.
On January 3, 2024, the Company issued $20.0 million aggregate principal amount of 6.91% Senior Secured Notes due on January 3, 2034. Refer to additional details under “– Liquidity and Capital Resources – Debt ” above.
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Critical Accounting Estimates
The application of critical accounting policies is particularly important to the Company’s financial condition and results of operations and provides a framework for management to make significant estimates, assumptions, and other judgments. Additionally, the Company’s financial condition, results of operations, and cash flow are impacted by the methods, assumptions, and estimates used in the application of critical accounting policies. Although management believes that these estimates, assumptions, and other judgments are appropriate, they relate to matters that are inherently uncertain and that may change in subsequent periods. Accordingly, changes in the estimates, assumptions, and other judgments applied to these accounting policies could have a significant impact on the Company’s financial condition and results of operations as reflected in its financial statements.
There have been no significant changes to our critical accounting estimates from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in the 2023 10-K.
Off Balance Sheet Arrangements
As of June 30, 2024 and 2023, the Company did not have any off-balance sheet arrangements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, the disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no material change in the Company’s internal control over financial reporting (as such term is defined under Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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In the ordinary course of business, the Company may, from time to time, be subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. To our knowledge, the Company is not involved in any legal proceeding which is expected to have a material effect on the Company.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” included in Part I, Item 1A of the 2023 10-K. There have been no material changes in the risk factors from those discussed in “Risk Factors” included in Part I, Item 1A of the 2023 10-K.
a) Sales of Unregistered Securities
No unregistered securities were sold during the three months ended June 30, 2024, other than as reported in our Current Reports on Form 8-K filed with the SEC.
b) Use of Proceeds
None.
c) Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of common stock the Company made during the three months ended June 30, 2024.
| Period | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| April 1 to April 30, 2024 | — | $ | — | — | $ | — | ||||||||||||||||||||
| May 1 to May 31, 2024 | 21,543 | 12.82 | — | — | ||||||||||||||||||||||
| June 1 to June 30, 2024 | — | — | — | — | ||||||||||||||||||||||
| Total | 21,543 | — | $ | — | ||||||||||||||||||||||
(1) Represents shares withheld from employees to satisfy certain tax obligations due in connection with the vesting of restricted stock awards granted under the Global Water Resources, Inc. 2020 Omnibus Incentive Plan. The average price paid per share for the common stock withheld was based on the closing price of the Company’s common stock on the applicable vesting date.
None.
Not applicable.
Rule 10b5-1 Trading Plans
During the three months ended June 30, 2024, none of our directors or officers (as defined in Exchange Act Rule 16a-1(f)) adopted terminated
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| Exhibit Number | Description of Exhibit | Method of Filing | ||||||
| 3.1 | Incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed May 4, 2016. | |||||||
| 3.2 | Incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed May 4, 2016. | |||||||
| 10.1 | Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on May 15, 2024. | |||||||
| 10.2 | Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on July 3, 2024. | |||||||
| 31.1 | Filed herewith. | |||||||
| 31.2 | Filed herewith. | |||||||
| 32.1 | Furnished herewith. | |||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | Filed herewith. | ||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith. | ||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith. | ||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith. | ||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith. | ||||||
| 101. PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith. | ||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | Filed herewith. | ||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Global Water Resources, Inc. | |||||||||||
| Date: | August 7, 2024 | By: | /s/ Michael J. Liebman | ||||||||
| Michael J. Liebman | |||||||||||
| Chief Financial Officer and Corporate Secretary | |||||||||||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | |||||||||||
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