Global Water Resources, Inc. Q2 FY2022 Earnings Call

Greetings, ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources, Inc. 2022 Second Quarter Conference Call. I would like to remind everyone that this call is being recorded on August 11, 2022, at 1:00 p.m. Eastern Time. Now I would like to turn the conference over to Joanne Ellsworth, Executive Vice President, Corporate Affairs. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on today's call. Yesterday, we issued our 2022 second quarter financial results by press release, a copy of which is available on our website. Speaking today is Ron Fleming, President and Chief Executive Officer; Mike Liebman, Chief Financial Officer; and Chris Krygier, Chief Strategy Officer. Mr. Fleming will summarize the key operational events of the quarter. Mr. Liebman will review the financial results for the second quarter and Mr. Krygier will review strategic initiatives and business development for the quarter. Mr. Fleming, Mr. Liebman and Mr. Krygier will be available for questions at the end of the call. Before we begin, I would like to remind you that certain information presented today may include forward-looking statements. Such statements reflect the company's current expectations, estimates, projections and assumptions regarding future events. These forward-looking statements involve a number of assumptions, risks, uncertainties, estimates and other factors that could cause actual results to differ materially from those contained in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements, which reflect management's views as of the date hereof and are not guarantees of future performance. For additional information regarding factors that may affect future results, please read the section Risk Factors and Management's Discussion and Analysis of Financial Conditions and Results of Operations, included within our latest Form 10-Q filed with the SEC. Such filings are available on the SEC website. Certain non-GAAP measures may be included within today's call. For a reconciliation of these measures to the comparable GAAP financial measures, please see the tables included in yesterday's earnings release, which is available on our website. I will now turn the call over to Mr. Fleming.

Thank you, Joanne. Good morning, everyone, and thank you for joining us today. We are very pleased to report the results for the second quarter of 2022 as there are many highlights worth mentioning. We announced that we signed a definitive agreement to acquire Farmers Water Company. We also announced the completion of our company-wide rate case, which includes new rates for 96% of our customers and numerous notable policy decisions. Chris will discuss the acquisition and the rate case further. Subsequent to the quarter, our company completed a public offering of common stock totaling gross proceeds of $15.5 million and an increase to our unused revolving line of credit from $10 million to $15 million, ensuring we have the capital necessary to fund acquisitions, infrastructure investments and for general corporate purposes. Now I want to highlight customer growth. Total active connections grew 8.8% as compared to the end of Q2 2021, bringing our total connections to 55,814. Development and housing activity remained very strong in Metro Phoenix and our service areas. Thus far, Metro Phoenix's annual monthly run rate is about flat in single-family home permits in 2022 over 2021. However, large-scale commercial and industrial growth continues to accelerate at a pace never before seen in Metro Phoenix. This continues to push out to our areas either in our planned service territories or in communities immediately adjacent. Because of this, we continue to make excellent progress on the engineering, permitting and construction of new service areas, including the Inland Port Arizona, which includes the Nikola Motor Corp. manufacturing facility, among other areas within our large service territories. We believe that in the years to come, we will continue to see large-scale commercial and industrial growth in addition to our strong organic housing growth. I will now turn the call over to Mike for financial highlights.

Thanks, Ron. Hello, everyone. Total revenue for the second quarter of 2022 was $11.7 million, which was up $763,000 or 7% compared to Q2 of 2021. This increase was primarily driven by an 8.8% increase in active service connections. Total revenue for the first half of 2022 increased by $1.5 million or 7.6% to $21.7 million, which again was primarily driven by the increase in active service connections. Operating expenses for Q2 of 2022 were $9.2 million compared to $8.6 million in Q2 of 2021. This is an increase of $0.6 million or 7.4%. Notable changes in operating expenses included increased operating and maintenance costs by $462,000, which were primarily associated with increased expenses as the company continues to grow. Increased G&A expense by $0.2 million was primarily due to increased personnel costs, increased professional fees, as well as increased regulatory expenses associated with a one-time non-cash write-off as a result of our recent rate case. These increases were partially offset by reduced deferred compensation expenses associated with the reduction in stock price. Now to discuss other income and expense. Other expenses for Q2 of 2022 were $505,000 compared to $284,000 of income in Q2 of 2021. The $789,000 increased expense was attributable to the $1.5 million one-time sale of a wireless communication tower in Q2 of 2021. Excluding the one-time sale, we had a $695,000 improvement in other expenses, driven by higher income from the Buckeye growth premiums and lower interest expenses in Q2 of 2022. Turning to net income, Global Water had net income of $2.1 million or $0.09 per diluted share in Q2 of 2022. Net income for the first half of 2022 totaled $3 million or $0.13 per share, an increase of $1.2 million or 69.7% compared to the same period a year ago. Now to talk about adjusted EBITDA, which adjusts for nonrecurring items such as the cell tower sale as well as non-cash items such as restricted stock expense. Adjusted EBITDA was $6.1 million in Q2 of 2022, an increase of $761,000 or 14.3% compared to Q2 of 2021. During the first half of 2022, adjusted EBITDA was $11.2 million, an increase of $2.4 million or 26.7% compared to the first half of 2021. Primary drivers for the significant improvement in both Q2 and the first half of 2022 were higher revenues and higher Buckeye earn-out, offset by higher expenses tied to growth and higher professional fees. Before turning the call over to Chris, I'd like to touch on our liquidity position. Combining our unused $15 million line of credit with our June 30 cash on hand of $5 million, in addition to the $15 million in equity we raised earlier this month, we have approximately $35 million of liquidity to support ongoing operations and our growth strategy. This concludes our update on the second quarter 2022 financial results. I'll now pass the call to Chris to review our rate case and strategic initiatives for the quarter.

Thanks, Mike. Hello, everyone. As Ron mentioned earlier, I will provide an update on our recently concluded rate case and our Farmers Water Company acquisition. First, the Arizona Corporation Commission unanimously approved a final order in our rate case. Decision #78644 authorizes new rates for approximately 96% of our active customers effective August 1, 2022. The authorized rate increase is approximately $2.2 million and will be phased in over three stages, with the first stage starting August 1. The second stage will start on January 1, 2023, and the final stage will commence on January 1, 2024. The majority of the revenue phase-in will be implemented in the first two stages. In addition to the increased revenue, the rate case decision approved several policy changes that align with our broader company strategy. First, the commission approved regional rate consolidation of our utilities. This consolidation creates further economies of scale, adding additional support to continue deploying capital investment in our utilities while balancing customer bill impacts. Second, the commission approved the recovery of a portion of the goodwill related to our prior Turner Ranches and Red Rock acquisitions. As we mentioned in our press release and 10-Q, from an accounting perspective, this reclassifies a portion of goodwill to a rate-making asset that customers reimburse in rates over time. This gives us additional confidence to pursue further utility acquisitions. In conclusion, we appreciate the commission's thoughtful approach to our rate case and are excited that this important company initiative is now complete. Second, turning to our acquisition of Farmers Water Company. Now that the rate case has been finalized, we are focused on finishing the necessary regulatory paperwork to file our application at the Arizona Corporation Commission. We anticipate making that filing in the next few weeks, which then starts an approximate six to nine-month timeline for commission approval. We estimate closing the Farmers acquisition in the first quarter of 2023. This concludes the update on the rate case and Farmers Water Company acquisition. I'll now pass the call back to Ron.

Thank you, Chris. It is clear we are well positioned with a strong balance sheet and disciplined strategy that continues to accelerate. In fact, from an operational and financial perspective, we have never been stronger, and we have more than ample liquidity and access to capital to be a great utility partner for the communities we have the privilege to serve and to pursue expansion through organic growth, acquisitions and new projects, both big and small. As we handle this high growth, we intend to remain at the forefront of the water management industry and advance our mission of achieving efficiency and consolidation. We truly believe that expanding our total water management platform and applying our expertise throughout our regional service areas and to new utilities will be beneficial to all stakeholders involved. We appreciate your investment and support of us as we grow Global Water to address important utility, water resource and economic development issues here in Arizona and potentially beyond. These highlights conclude our prepared remarks. Thank you. We are now available to answer any questions.

Our first question is from Gerry Sweeney with ROTH Capital.

I had a question about the Farmers acquisition. I believe you mentioned in some of the earlier releases that you're planning to collaborate with the Town of Sahuarita. I'm curious if this agreement is similar to the ones you have with Maryland and other areas you are working with.

Great question. Thanks, Gerry. This is Chris. The short answer is yes. It is very similar to our agreement with the other cities we work with and very much served as a framework. So what is in the MoU, as we refer to it, the Memorandum of Understanding, you'll see the common themes: how can we work together to support the town's growth efforts, coordinating on regional infrastructure planning and then how we'll work cooperatively for the broader community in terms of being a provider in that area. So the short answer is yes. And we're really excited to be partnering with the town in a similar way because we think the model has proven successfully in Maricopa and Camden as well.

Got you. And just you mentioned growth efforts by the town, but if my memory serves correct, there's probably some strategic positioning that Farmers adds, I think especially with the City of Tucson. Can you maybe describe what's going on a little bit that may have encouraged the acquisition or what the strategic positioning of the town is in reference to the greater Tucson area?

Yes. Let me mention a couple of things. First, focusing on Farmers, they currently serve about 3,300 customers, but the service area is significantly larger at over 20 square miles, primarily made up of land that the owner plans to eventually develop into residential homes. This future potential excites us because that 20 square miles will eventually become residential. Additionally, the town has a Southeast area conceptual plan aimed at future growth by connecting to other properties, adding over 40 square miles. When we began discussions about a partnership with the town, part of their strategy was to explore how Global could assist them in achieving their growth objectives in that area, building regional infrastructure, and replicating success we have had in Maricopa. These aspects aligned well with their growth plans and how we've supported similar initiatives in other towns.

Got it. And then switching gears a little bit, water scarcity, water sourcing has been a big issue in the news lately. Can you just talk about your available supply, where you are with that? And just for some background takes.

Yes. Sure, Gerry. This is Ron. I'll go ahead and take that one. Yes, certainly, it's in the news a lot today, the drought in the Southwest and primarily what's going on in the Colorado River. And why that's real. Ultimately, there's a much longer conversation we can have about all the impacts as it relates to drought in the Colorado River. The punchline for us and our company is really two things. One, it doesn't have an impact on our business today nor in the foreseeable future. The reason is that we have built a pretty strong water portfolio for the areas that we serve. We have talked about infrastructure capacity a lot, but we have plenty of water resource capacity to allow our communities to continue to grow for the years and even decades to come. The second point that I'd like to make on the topic is this is precisely the reason Global Water was founded. We were founded on the fact of the certainty of future water scarcity. If you're going to build, own, and design regional utilities, then you need to do it right from the ground up, and that's why we do all the things that we do, from building those water portfolios, maximum use of recycled water, our advanced technology platform with automated meter reading and alerts to our innovative rate design, which has six tiers and a rebate. When you put it all together, the fact of the matter is not only do we have good water portfolios available for our communities, but we can stretch that water further than, frankly, other utilities that aren't doing it the same way that we are. So it's definitely coming bigger and faster in the Southwest as a region than I think anybody planned, but we were well prepared for it and we'll deal with the long-term impacts over time.

This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Fleming for any closing remarks.

Thank you, operator. I'd like to thank you all for participating in this call and for your ongoing interest in Global Water. Thanks, and we look forward to speaking with you again.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.