Global Water Resources, Inc. (NASDAQ:GWRS) Q3 2022 Earnings Conference Call November 10, 2022 1:00 PM ET
Company Participants
Joanne Ellsworth – Executive Vice President, Corporate Affairs
Ron Fleming – President and Chief Executive Officer
Mike Liebman – Chief Financial Officer
Chris Krygier – Chief Strategy Officer
Conference Call Participants
Gerry Sweeney – ROTH Capital
Operator
Greetings ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources, Inc. 2022 Third Quarter Conference Call. [Operator Instructions] I would like to remind everyone that this call is being recorded on November 10, 2022 at 1 p.m. Eastern Time.
I would now like to turn the conference over to Joanne Ellsworth, Executive Vice President, Corporate Affairs. Please go ahead.
Joanne Ellsworth
Welcome, everyone and thank you for joining us on today’s call. Yesterday, we issued our 2022 third quarter financial results by press release. A copy of which is available on our website at www.gwresources.com.
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 third quarter, and Mr. Krygier will review strategic initiatives and business development. 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 sections Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations included within our latest Form 10-Q filed with the SEC. Those filings are available at www.sec.gov. 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 again available on our website.
I will now turn the call over to Ron.
Ron Fleming
Thank you, Joanne. Good morning, everyone, and thank you for joining us today. We are very pleased to report the results for the third quarter of 2022 as there are many highlights worth mentioning. At Global Water, we continue 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.
So in the quarter, our company completed a public offering of common stock totaling net proceeds of $14. 9 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. We also announced the completion of our company-wide rate case, which includes new rates for 96% of our customers, including numerous notable policy decisions.
On October 3, we filed an application at the ACC for approval to acquire Farmers Water Company and its roughly 3,300 customers in the town of Saolarita. Chris will discuss the Farmers acquisition and the rate case further. Subsequent to quarter close, we completed the upgrade of La Quintas Serenas customer connections from manually read meters to smart meters. The smart meters support greater operational efficiency as well as real-time automated notifications.
As a reminder, La Quintas Serenas is a utility we acquired in 2021, also in the town of Saolarita. We intend to do the same meter upgrade project in Farmers Water Company once that acquisition closes. I now want to highlight customer growth. Total active connections grew 8% as compared to the end of Q3 2021, bringing total connections to 56,134. Despite the national slowdown, development and housing activity continues in Metro Phoenix and our service areas. Thus far, Metro Phoenix has only experienced a 14% reduction in single-family home permits in 2022 over the same period in 2021.
In Maricopa, our largest utilities, where we’ve also seen a slowdown, but the city has still issued over 1, 000 single-family housing permits year-to-date. However, large-scale commercial and industrial growth continues to accelerate at a pace never seen before in Metro Phoenix, and 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 for the Nikola Motor Corp manufacturing facility and the surrounding Inland port, Arizona, amongst other areas within our large service territories. We believe that soon and in the years to come, we will continue to see large-scale commercial and industrial growth in addition to our strong organic housing growth. Putting all these elements together, Global Water is well positioned from an operational safety compliance and financial perspective with notable growth in the years to come.
I’d now like to turn the call over to Mike for financial highlights.
Mike Liebman
Thanks, Ron. Hello, everyone. Total revenue for the third quarter of 2022 was $11.9 million, which is up $488,000 or 4.3% compared to Q3 of 2021. This increase is primarily driven by an 8% increase in active service connections combined with the new rates that were implemented in August of 2022 as approved in our most recent rate case decision. These increases were offset by the $692,000 of revenue recognized in Q3 2021 related to our infrastructure coordination and financing agreements, also known as ICFAs, as we didn’t recognize any ICFA revenue in Q3 of 2022. A more fulsome explanation of the ICFAs can be found in our quarterly and annual filings. Water and wastewater revenue, which excludes ICFA revenue for Q3 of 2022 increased $1.2 million or 11% compared to Q3 of 2021. Again, this increase was driven by the increase in active service connections combined with new rates.
Operating expenses remained flat at $9.1 million in Q3 of 2022 compared to Q3 of 2021. Some notable changes in operating expenses included increased operating and maintenance costs by approximately $100,000, which was primarily associated with increased expenses as the company continues to grow in addition to increases in costs related to inflation. However, these increases were offset by lower property taxes.
G&A expense was reduced by $155,000 primarily driven by lower deferred compensation and board compensation tied to the reduction in stock price during the quarter. These decreases were offset by higher professional fees and IT-related costs. Lastly, we had approximately a $73,000 increase in depreciation and amortization tied to our capital expenditure program. Other expense for Q3 of 2022 remained flat at approximately $470, 000 compared to Q3 of 2021.
Turning to net income. Global Water had net income of $1.7 million in Q3 of 2022. This was a 12.6% increase compared to Q3 of 2021 and equated to a $0.07 per diluted share. Now to talk about adjusted EBITDA, which adjusts for nonrecurring items such as ICFA revenue as well as noncash items such as restricted stock expense. Adjusted EBITDA was $6.1 million in Q3 of 2022, an increase of $1 million or 20.6% compared to Q3 of 2021.
I’d like to briefly touch on inflation and while we have not seen a material increase in our operating expenses as a result of inflation, 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 touch on our liquidity position. When combining our unused $15 million line of credit with our September 30 cash on hand of over $15 million, we have over $30 million of liquidity to support ongoing operations and our growth strategy. This concludes our update on the third quarter 2022 financial results.
I’ll now pass the call to Chris to review our Arizona Corporation Commission activity and strategic initiatives for the quarter.
Chris Krygier
Thank you, Mike. Hello, everyone. It was a busy quarter at the Arizona Corporation Commission. First, as you heard earlier, and we mentioned on our last quarterly call, we received rate decision 78644 in July 2022. We implemented Phase 1 of our rate increase on August 1, 2022, and will implement Phase 2 of our rate increase on January 1, 2023. This process is proceeding as anticipated.
Second, in the quarter work began on the Arizona Corporation Commission’s Water task force led by Chairwoman Market Peterson, the task force is focused on reviewing and potentially providing more certainty around commission rules and procedures, in particular, around acquisition policy and water supply policy. The intent of the task force is to see if the commission policy can provide more clarity for all utility stakeholders. We see the task force and the associated workshops as important discussions to continue building constructive regulatory frameworks around continued acquisitions of small troubled utilities and the acquisition of future water supplies.
Finally at the ACC, as you may have seen, the initial election results for the two open seats occurred this week. Currently, the two Republican candidates, Kevin Thompson and Nick Myers are leading the two Democratic candidates, incumbent Commissioner Kennedy in candidate, Lauren Kobi. Candidate Thompson brings experience as a member of the Meso City Council and worked for Southwest Gas and Natural Gas Utility for a number of years. Candidate Myers has worked for the last 4 years as a policy adviser to a sitting commissioner. Candidate Kobi has experience working on the Tempe City Council. While we await the election results regardless of who wins, we look forward to engaging with the current commissioners and newly elected commissioners to advance important water policies in our state.
Finally, turning to our acquisition of Farmers Water Company. As you may have seen in yesterday’s press release, we filed our request for ACC approval to acquire Farmers on October 3, 2022. Just a few weeks later, on October 24, staff issued its recommendation to the Commission recommending approval of our application, which we appreciate. Finally, yesterday, at the ACC open meeting, the commissioners verbally approved the application on an expedited basis, and we appreciate their quick action. The transition planning process is going well, and we continue to estimate closing the Farmers acquisition in the first quarter of 2023.
This concludes the update on the ACC activity and strategic initiatives for the quarter. I’ll now pass the call back to Ron.
Ron Fleming
Thank you, Chris. So it’s clear, we are well positioned with a strong balance sheet and disciplined strategy. 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 great utility partners for the communities where we have the privilege to serve, and we will 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 in and support of us as we 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 any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Gerry Sweeney with ROTH Capital. Please proceed with your question.
Gerry Sweeney
Hey. Good morning Ron, Mike and Chris. Thanks for taking my call.
Ron Fleming
Hey Gerry.
Gerry Sweeney
Let’s start with the Inland Port, obviously, a lot of activity in that area. And I am curious if as this builds out, will this be an entirely regulated opportunity for you or is there also a potential opportunity to do something that’s unregulated, or I am just curious as to how this is going to function. Very familiar with connections on the homeowner side, but I think this is a little bit different for a lot of us.
Ron Fleming
Yes, absolutely. This is Ron. I will go ahead and take that, Gerry. So, first, you are right. There is lots of activity on that. Obviously, if you follow Arizona at all of our or in industrial boom, quite a bit of that has been moving south of Phoenix to Pinal County, which as you know, where we got lots of large service territory. And that includes the Pinal Land Holdings, Inland Port Arizona property in the City of Coolidge. So, I will just say this, we have been very active working with lots of potential projects that want to locate in our service areas there and in that Inland Port. And stay tuned I believe we will have some announcements pretty soon on that. But to your broader question, I think part of the reason we were brought into Inland Port and really our large service areas turned out Pinal County and other places, is the way we think about regional planning. And ultimately, you certainly could have some industrial users go out and individually try to do their own solutions on a case-by-case basis, but we certainly aren’t a proponent for that. Obviously, there are companies that focus on that aspect and become their utility partner internal to the property if they do a sole-source solution. But we think from an efficiency standpoint, a water resource management standpoint, from a community standpoint, it’s best if this is all part of an integrated regulated plan. And that’s our company’s model, and that’s what we have positioned to these landowners and these communities and gotten that support. So, mostly for – I would say, for any industrial project that’s coming into our service areas, it’s part of an integrated plan and it will be the kind of the fully regulated normal water and wastewater utility service. Now, I would say normal because of the rate regulation component. Obviously, these are some of the pretty big projects and so it does have some different considerations as you provide service to them, but nothing that we can’t do. And in fact, we are looking forward to those opportunities that are coming to us really quick on that.
Gerry Sweeney
I imagine one really big meter. That’s all.
Ron Fleming
Clearly, it was only that simple. Yes.
Gerry Sweeney
Got it. But the second question of permits. Obviously, you have been really strong for an extended period of time. And also, obviously, they slowed down a little bit. But just curious, roughly speaking, how long does it take from, will just say, an issued permit to maybe metering at that location? And I understand that this was a little bit more broad brushed. But just curious as to how long that lasts or what that transition period is?
Mike Liebman
Yes. No worries, Gerry. This is Mike. And obviously, market has influence here. But traditionally, what we have seen, it’s usually kind of 12-month to 18-month process. So, as you think about, Ron mentioned that 1,000-plus permits that were issued this year, that will take some time for that to funnel through.
Gerry Sweeney
Got it. And Mike, well, I have you a quick question on debt. Seeing a lot of companies that have some type of structure SOFR plus a fixed amount, but SOFR has accelerated quite substantially over the last six months, nine months. Could you just go through your debt structure and talk about is anything like that going to impact you guys at all?
Mike Liebman
Yes. Thanks Gerry. Good question. So, fortunately for us, the existing debt that we have outstanding over $110 million is all fixed rate debt at roughly 4.55%. So, we are in a really good position there. As it pertains to our revolver, there is a variable component that’s SOFR related. So, that piece will move, but it’s a pretty small piece considering the big tranche.
Gerry Sweeney
Got it. And then last question, Farmers. Any idea expected CapEx required as you sort of transition that into the Global Water family?
Chris Krygier
Great question, Gerry. We are – this is Chris. Good morning or good afternoon on your side of the country. We are still refining what that will be internally, but I will tell you, broadly speaking, we see that there is a significant opportunity to deploy capital down there, one, to catch up with the utility, but then two, to implement our platform and everything we have done in all of our other utilities. So, for example, you heard Ron talk about the meter upgrades in AMI. We did it at LQS. We are going to replicate that down at Farmers. And so I don’t have the specific dollars that we are ready to share at this point, but we definitely see it as an opportunity to deploy more capital that’s needed. And we will provide all the fantastic benefits that the customers and our other service territories just love and speak so highly of.
Gerry Sweeney
Got it. One real short one since that’s Chris. If the two Republicans win in the ACC election, what’s the balance Republican versus Democrat, do you know?
Chris Krygier
Yes. Great question, Gerry. So, if – right now, the current composition is three Republicans, two Democrats and one Republican seat is up and one Democrat seat is up. So, if the two Republicans win, it will be four to one, Republicans to Democrats. If you were to flip it and say two Democrats win, it would then be three Democrats, two Republicans.
Gerry Sweeney
Got it. Thanks. I appreciate it. I will talk to you guys.
Chris Krygier
Absolutely.
Ron Fleming
Thank you, Gerry.
Operator
[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will turn the floor back to Mr. Fleming for any final comments.
Ron Fleming
Okay. Thank you, operator. Thanks everyone for participating in our call today and your ongoing interest in Global Water Resources. We appreciate it and look forward to speaking with you again soon.
Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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