Global Water Resources, Inc. Q4 FY2022 Earnings Call

Greetings, ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources Inc. 2022 Year End Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question. We would like to remind everyone that this call is being recorded on March 9, 2023 at 1:00 PM Eastern time. I would now like to turn the conference over to Joanne Ellsworth, Executive Vice President, Corporate Affairs. Please go ahead.

Welcome everyone. And thank you for joining us on today's call. Yesterday, we issued our 2022 fourth quarter and year end 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 Operating Officer. Ron will summarize key operational events for the year, Mike will review the financial results for 2022, and Chris will review strategic initiatives and business development for the year. Ron, Mike, and Chris will be available for questions at the end of the call. But 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 sections risk factors and management's discussion and analysis of financial condition and results of operations included within our latest Form 10-K filed with the SEC. Such filings are available on our 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 Ron.

Thank you, Joanne. Good morning, everyone. Thank you for joining us today. We're very pleased to report the results for the fourth quarter and year end 2022. There are many highlights worth mentioning. In short, 2022 was another incredible year for Global Water as we continued to advance our mission of growing and aggregating water and wastewater utilities so that our customers can realize the benefits of consolidation, regionalization, and environmental stewardship in the face of water scarcity, challenging regulations, and aging infrastructure. For the year, total active service connections increased 4.4% to 56,275 at December 31, 2022, up from 53,882 at December 31, 2021. When combining service connection growth with the completion of our company rate case earlier in the year, which included new rates for 96% of our customers, revenues increased 6.7% to $44.7 million for the full year. We also continued design and engineering work for the Inland Port Arizona mega site where Global Water will be working with Procter & Gamble to provide water, wastewater, and recycled water services to P&G’s new manufacturing facility, which is adjacent to the Nikola Motor Corp. facility. We invested $8.7 million in capital expenditures in the quarter in existing utilities to provide safe, reliable service and focused on increasing revenues and reducing expenses while building our rate base. We also began providing bulk water service to the Seven Ranches Domestic Water District in Maricopa, Arizona, at the request of the city and the local district board. From an acquisition perspective, earlier in the year we continued to expand our footprint with two smaller tuck-in water utility acquisitions in Pima County, an area that continues to build momentum. Subsequent to quarter close, in February 2023, the company completed the acquisition of Farmers Water Company. The acquisition added a total of 3,300 active water service connections and approximately 21.5 square miles of certificate of convenience and necessity service area in the Town of Sahuarita and the surrounding unincorporated area of Pima County. These acquisitions have increased Global Water’s total active water service connections in Pima County to nearly 5,000. And finally, with safety and compliance being our top mandate, we are very proud of our ongoing safety and compliance records. For the year, we had zero significant compliance events and no preventable OSHA reportable events. In fact, this means we have now surpassed six years without a significant compliance event and have now gone over 980 days since our last preventable OSHA reportable event. I want to pause, highlight, and thank the team here at Global Water whose exceptional performance allows me to provide such wonderful updates for our company. Now I want to discuss organic customer growth and what is going on in our core utilities. Despite the local and national slowdown, development and housing activity continues in Metro Phoenix and our service areas. In 2022, Metro Phoenix experienced a 23% reduction in single family home building permits over the same period of 2021, but this was still nearly 25,000 single-family building permits. In Maricopa, our largest utilities, we're also seeing a slowdown, the city still issued 1,157 permits in 2022. With that said, on housing, the booming economy and net immigration that Arizona continues to realize require more places for people to live, work, and play. That is why large-scale multifamily housing, commercial, and recreational projects continue to accelerate at an extremely high pace in Metro Phoenix and this pushes out to our areas, either in our existing service territories or in communities immediately adjacent. Additionally, the industrial manufacturing boom also continues with 2022 being the best year for Arizona from an industrial economic development investment perspective. This seems to be continuing into 2023. Because of this, we continue to make excellent progress on the engineering, permitting, and construction of new service areas, including for the Inland Port Arizona, where our Nikola Motor Corp. facilities have been expanded and where Procter & Gamble acquired land. Based on all of these trends, we believe that in the years to come, we will continue to see considerable large-scale commercial, multifamily housing, and industrial growth, in addition to the return of strong organic housing growth. Putting all these elements together, Global Water remains well positioned. I will now turn the call over to Mike for financial highlights.

Thanks, Ron. Hello, everyone. Total revenue for the year was $44.7 million, which was up $2.8 million or 6.7% compared to 2021. This increase is primarily driven by the 4.4% increase in active service connections, the acquisition of La Quintas Serenas in Q4 of 2021, combined with the new rates that were implemented in August of 2022. These increases were offset by the $692,000 in revenue recognized in Q3 of 2021 related to our infrastructure coordination and financing agreements, also known as ICFAs, as we didn't recognize any ICFA revenue in 2022. A more fulsome explanation of ICFAs can be found in our annual filings. Regulated revenue, which excludes ICFA revenue for 2022, increased $3.5 million or 8.6% compared to 2021. Again, this increase was driven by the increase in active service connections combined with new rates and the acquisition of La Quintas Serenas. Operating expenses for 2022 were $36.8 million compared to $34.9 million in 2021. This is an increase of $1.9 million or 5.3%. Notable changes in operating expenses included increased operating and maintenance costs by $590,000, which was primarily associated with the acquisition of La Quintas Serenas combined with increased expenses as the company continues to grow and manage inflation. G&A expense increased by $880,000, primarily driven by $600,000 higher professional fees, primarily tied to acquisition and rate case matters. The write-off of $314,000 in rate case expenses as a result of the approved rate case and higher IT contract services and rent expense. These increases were offset by lower deferred compensation and board expense due to the reduction in stock price. Lastly, we have a $400,000 increase in depreciation and amortization tied to our capital expenditure program in the acquisition of La Quintas Serenas. Now to discuss other expense. Other expense for 2022 was $1.4 million compared to $2.2 million in 2021. This $836,000 decrease was primarily due to the $1.1 million increase in the Buckeye growth premium and higher capitalized interest. These were offset by the $1.4 million sale of cell tower leases in 2021. Turning to net income, Global Water had net income of $5.6 million in 2022. This was a 52.6% increase compared to 2021 and equated to $0.24 per diluted share. Now to talk about adjusted EBITDA, which adjusts for non-recurring items such as ICFA revenue as well as noncash items such as restricted stock expense. Adjusted EBITDA was $22.1 million in 2022, an increase of $3.4 million or 18.3% compared to 2021. I'd like to briefly touch on inflation. While we were able to manage expenses in 2022 quite well, given the inflation situation, we do expect to see some increases in future periods, primarily related to personnel costs. Additionally, as you would expect, we have experienced an increase in capital costs as a direct result of inflation. Lastly, before turning the call over to Chris, I'd like to remind folks that the second season of our new rates began in January of 2023. And with this, over 95% of our rate increases will be embedded in our 2023 financial statements. This represents $2.1 million of the approved $2.2 million in new rates based on a 2019 test year. This concludes our update on the year-end 2022 financial results. I'll now pass the call to Chris.

Thanks, Mike. Hello, everyone. As you may have seen in our press release and heard Ron mention earlier, we closed the Farmers’ acquisition on February 1, 2023. This acquisition is a culmination of a significant amount of work to bring the deal to fruition and something we are very proud of. We are now focused on integrating the company into our professional utility platform and the process is continuing as expected. This acquisition brings significant benefits to our company. First, it adds over 3,300 active water connections to our family of companies. This represents over 5% to our active connection count at the end of 2022. Second, it adds over 21 square miles of service territory that will eventually convert from pecan farming into primarily residential homes. This 21 square miles represents an additional 5% to the number of square miles of service area. At full build-out, the service area could reach approximately 20,000 customers. Third, Farmers’ customers will benefit from our total water management approach, including our expertise in technology automation and other internal operations. Finally, when combined with our Las Quintas Serenas acquisition in 2021, which is adjacent to Farmers, we now have additional scale to make further capital investments and recover costs from customers in the future. We are pleased this deal came together and believe it will provide long-term customer and shareholder benefits. Briefly turning to acquisitions more broadly, we continue to focus our efforts on finding opportunities that complement our existing portfolio and are in various stages of discussions with potential prospects. This concludes the update on growth activity and strategic initiatives in the quarter. I'll now pass the call back to Ron.

Thank you, Chris. It is clear that despite the challenges of the last few years, we remain well-positioned from an operational and financial perspective, and can continue to be great utility partners for the communities where we have the privilege to serve. We will pursue expansion through organic growth, acquisition, and new projects both big and small. 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 the utilities will benefit all stakeholders involved. We appreciate your investment in and support of us as we continue to grow Global Water to address important utility, water resource, and economic development issues in Arizona and potentially beyond. These highlights conclude our prepared remarks. Thank you. We are now available to answer questions.

Our first question comes from Gerry Sweeney of ROTH Capital.

I have a question on Maricopa. Historically, I've tracked those single family permits because I thought that was a great sort of metric to watch in terms of watching growth in the area. But obviously, that market is slowing but affordability is a big draw to Arizona. You have the Procter & Gamble plant going in, you have a semiconductor plant coming in, and also it sounds like you have multifamily opportunities starting to rise. How do we look at that in terms of growth, and how does that impact the income statement? Multifamily is different from single family. Should we look at not only single family permits but also watch total population growth in the area, because there are going to be different ways of tracking it? Maybe some suggestions, ideas of where you see growth going and how it's going to develop and sort of change in the short to medium term?

So you are right. Obviously, the home building has slowed a little bit. Although, over the medium and long term, we expect that to pick back up again. But on the multifamily side, we're starting to see some activity there. The latest intelligence that we have indicates that while we currently have only two multifamily projects, we expect seven projects slated for 2023, and there are an additional seven to nine projects slated for 18 to 36 months out. So there's quite a bit of activity there that could ultimately result in the 2023 projects leasing closer to 1,500 units, and more broadly possibly around 4,000 units with the 18 to 36 months out projects. So what I will tell you is that, that's not a one-to-one ratio on a single-family home and you can't necessarily draw each unit as a new home; there will be substantial revenue associated with these multifamily units coming in. And then as a reminder on the single-family home side, while we do believe that, in the medium and long term, there is a lot of growth from the industrial and businesses that are coming to Arizona, the affordability factor that you mentioned, still allows Maricopa to trade at a north of 20% discount compared to the Greater Phoenix area, so we feel we are well-positioned to take advantage of those looking to purchase homes.

And then speaking of that medium and long term, I know the situation for Procter & Gamble. How do you view this as sort of the foundational stage for that project? Could you give a little bit of a viewpoint on how that develops over the next one, three, five years and how we should think about it? Obviously, I don't think it's a short-term impact on earnings, but I do think it is, like I said, a foundational opportunity that adds runway to the growth story down there.

I think that's a great way to say it; it's really just the foundational elements of what is to come. We are just getting started. Obviously, we began service to Nikola on a smaller scale last year. Now we've announced the leasing of land acquisition that Procter & Gamble made immediately adjacent to Nikola as part of this Inland Port mega site. So first, I'll speak just to that and then step back and talk a little bit more broadly. Procter & Gamble is ahead of the game from what we typically see from a build time perspective. Currently, they are aiming for a mid-2025 to late-2025 opening date for their project. So that’s just over two years away. The work we are doing starts almost immediately, but from a financial results perspective, it’s further down the road. Once you look at Procter & Gamble and Nikola together, we’re talking about a total of 700 acres. We are working with both companies on their current phases to meet their timeline. However, there are about 17 to 18 parcels inside this Inland Port Arizona project, and there are a lot of interested parties looking for these parcels, so we believe the foundation is just the beginning. Given the activity and evidence from similar developments, we anticipate this project will fill out well in the coming years.

At this time, this concludes our question-and-answer session. I'd like to now turn the call back over to Mr. Fleming. Please go ahead.

Yes. Thank you, operator. I'd like to thank everybody for participating on the call today and for your ongoing interest in Global Water Resources. I appreciate it and we look forward to speaking with you again soon.

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