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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-05 · 149 added, 128 removed, 379 unchanged (42% of the section changed)

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 relates to the three and six months ended June 30, 2021 and should be read together with the condensed consolidated financial statements and accompanying notes included herein, as well as our audited annual financial statements and associated management’s discussion, which are available within our Annual Report on Form 10-K for the year ended December 31, 2020 available on our Company’s profile on the Securities and Exchange Commission (“SEC”) website, www.sec.gov.

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 relates to the three and nine months ended September 30, 2021 and should be read together with the condensed consolidated financial statements and accompanying notes included herein, as well as our audited annual financial statements and associated management’s discussion, which are available within our Annual Report on Form 10-K for the year ended December 31, 2020 available on our Company’s profile on the Securities and Exchange Commission (“SEC”) website, www.sec.gov.

Cautionary Statement Regarding Forward-Looking Statements

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tax payments;

hedging arrangements;

our ability to repay indebtedness and invest in initiatives;

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Since that time, government authorities around the world implemented numerous measures to try to reduce the spread of the COVID-19 pandemic, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, or total lock-down (or similar) orders and business limitations and shutdowns.

During the three and six months ended June 30, 2021, states and localities were in the midst of a vaccine distribution program and have begun to ease certain state-mandated restrictions.

More recently, many news agencies have reported the spread of new variants of COVID-19, such as the Delta variant, that are more contagious and deadly than previous strains.

During the three and nine months ended September 30, 2021, states and localities were in the midst of a vaccine distribution program;

however, the rate of vaccination has been slowed by vaccine hesitancy in some areas.

More recently, new variants of COVID-19, such as the Delta variant, that are more contagious than previous strains have emerged.

The spread of these new strains are causing many government authorities to reimplement the aforementioned measures to try to reduce the spread that had become less prevalent.

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Further, we continue to monitor the impact of COVID-19 pandemic on our business and operations, including how it will impact our customers, employees, suppliers, vendors, and business partners.

While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three and six months ended June 30, 2021, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will be impacted by the COVID-19 pandemic.

While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three and nine months ended September 30, 2021, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will be impacted by the COVID-19 pandemic.

The degree to which the COVID-19 pandemic impacts our business operations, results of operations, cash flows, and financial position will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted.

This includes, but is not limited to, the duration and spread of the COVID-19 pandemic, its severity, the emergence and severity of its variants, the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them, restrictions on travel and transportation, and how quickly and to what extent normal economic and operating conditions can resume.

This includes, but is not limited to, the duration and spread of the COVID-19 pandemic;

its severity;

the emergence and severity of its variants;

the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them;

general economic factors, such as increased inflation;

supply chain constraints;

labor supply issues;

restrictions on travel and transportation;

and how quickly and to what extent normal economic and operating conditions can resume.

As a result of the economic hardships caused by the COVID-19 pandemic, we voluntarily agreed not to disconnect customers or charge late fees during the year ended December 31, 2020.

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In 2020, we expanded our customer assistance program to include a larger customer base, while increasing the annual maximum benefit and including additional qualifying categories to include disabled veterans, deployed service members, furloughed workers, and customers with a medical hardship.

As of June 30, 2021, COVID-19 did not have a material impact on uncollectible accounts.

However, we believe that we may be unable to collect a portion of billed revenue for some period of time, if at all.

Therefore, we could see a negative impact to our revenue, earnings, and cash flows due to the COVID-19 pandemic as this continues through 2021.

As of September 30, 2021, the COVID-19 pandemic did not have a material impact on uncollectible accounts.

However, we continue to face various uncertainties related to the impact of the continuing COVID-19 pandemic on the overall economy and our business, including whether we will continue to be able to sustain our level of bad debt expense.

Further, our current results and financial condition discussed herein may not be indicative of future operating results and trends.

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Business Outlook

2020 and the first half of 2021 continued the trend of positive growth in new connections.

2020 and the first three quarters of 2021 continued the trend of positive growth in new connections.

According to the 2020 U.S.

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The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.7 million people by 2030 and 6.5 million by 2040.

During the three months ended June 30, 2021, Arizona’s employment rate increased by 5.5%, ranking the state in the top twenty-five nationally for job growth.

During the three months ended September 30, 2021, Arizona’s employment rate increased by 5.1%, ranking the state in the top nine nationally for job growth.

We believe that our utilities and service areas are directly in the anticipated path of growth primarily in the Phoenix metropolitan area.

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An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner.

Our total service connections, including both active service connections and connections to vacant homes, increased 4,731 connections, or 10.1% (10.0% annualized growth), from a total of 46,884 as of June 30, 2020 to 51,615 as of June 30, 2021.

This increase is primarily due to organic growth in new connections.

As of June 30, 2021, active service connections increased 4,741, or 10.2% (9.9% annualized growth), to 51,314 compared to 46,573 active service connections as of June 30, 2020.

As with the increase in total service connections, the increase is due to organic growth in new connections.

Our total service connections, including both active service connections and connections to vacant homes, increased 4,361 connections, or 9.1% (8.4% annualized growth), from a total of 47,893 as of September 30, 2020 to 52,254 as of September 30, 2021.

This increase is primarily due to organic growth in our service areas.

As of September 30, 2021, active service connections increased 4,364, or 9.2% (8.3% annualized growth), to 51,958 compared to 47,594 active service connections as of September 30, 2020, due to organic growth in our service areas.

Approximately 93.0% of the 51,958 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.

(“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc.

(“Palo Verde”) utilities as of June 30, 2021.

(“Palo Verde”) utilities as of September 30, 2021.

The graph below presents the historical change in active and total connections for our ongoing operations over the past five years.

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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 made significant capital investments in our territories within the last fifteen years, and because the infrastructure remains in the early stages of its useful life, we do not expect comparable capital investments to be required in the near term, either for growth or to maintain the existing infrastructure.

Nevertheless, we have an established capital improvement plan to make targeted capital investments to repair and replace existing infrastructure as needed, address operating redundancy requirements, and improve our overall financial performance, by lowering expenses and increasing revenue.

Additionally, to reduce our deferred tax liability of approximately $19.4 million resulting from the gain on the condemnation of the operations and assets of Valencia, we have completed the planned investments within our capital improvement plan that we determined will qualify under the Internal Revenue Code §1033 re-investment criteria pursuant to a favorable Private Letter

Ruling with the Internal Revenue Service (the "IRS").

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.

Refer to “—Corporate Transactions—Private Letter Ruling” for additional information.

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Rate Decision No.

76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under the

76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under

Rate Decision No.

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The issuance of the additional shares was completed pursuant to the exercise in full of the underwriter's over-allotment option.

We received net proceeds of approximately $11.5 million after deducting underwriting discounts and commissions and offering expenses payable by us, which collectively totaled approximately $1.0 million.

We received net proceeds of approximately $11.5 million after deducting underwriting discounts and commissions and offering expenses paid by us, which collectively totaled approximately $1.0 million.

ACC Rate Case

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On August 2, 2021, we filed rejoinder testimony with the ACC updating our collective revenue increase to approximately $3.0 million.

An evidentiary hearing was conducted beginning August 9, 2021.

Certain of our utilities, including Santa Cruz and Palo Verde, have also requested that the rate increases be phased in over three years, beginning January 1, 2022.

The phase-in period may be shorter depending on the total revenue increase approved.

We also requested the consolidation of water and/or wastewater rates for our Red Rock, Santa Cruz, Palo Verde, Picacho Water, and Picacho Utilities.

These utilities are all located in Pinal County;

make up approximately 97% of the Company's active service connections;

A final decision is not expected until the first quarter of 2022;

therefore, any phase-in will likely not begin as requested on January 1, 2022 and may be shorter or longer than three years, if a revenue increase is approved.

We also requested the consolidation of water and/or wastewater rates for our Red Rock, Santa Cruz, Palo Verde, Picacho Water, and Picacho Utilities located in Pinal County.

These utilities make up approximately 97% of the Company's active service connections;

provide or will provide water, wastewater, and recycled water services;

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The three specified growth premium areas are located in Pima County, Arizona where Red Rock has not yet begun operating, and where Red Rock is authorized to provide water utility services only.

As of June 30, 2021, no meters have been installed and no accounts have been established in any of the three growth premium areas.

As of September 30, 2021, no meters have been installed and no accounts have been established in any of the three growth premium areas.

We believe this acquisition is consistent with the Company's declared strategy of making accretive acquisitions.

Recent Events

Acquisition of Las Quintas Serenas Water Company

On November 3, 2021, the Company completed the acquisition of Las Quintas Serenas Water Company ("Las Quintas"), an operator of a water utility with service area in the Pima county of Arizona.

The acquisition added over 1,100 connections and approximately 2.5 square miles of service area.

Renewal of Revolving Credit Line

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Based on the information described above and in accordance with the applicable literature, management has concluded that we are currently organized and operated as one operating and reportable segment.

Comparison of Results of Operations for the Three Months Ended June 30, 2021 and 2020

The following table summarizes our results of operations for the three months ended June 30, 2021 and 2020 (in thousands, except per share amounts):

For the Three Months Ended June 30,

Comparison of Results of Operations for the Three Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020 (in thousands, except per share amounts):

For the Three Months Ended September 30,

Revenues $ 11,404 $ 10,757

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Operating income 2,293 2,892

Total other income (expense) 284 (1,812)

Income (loss) before income taxes 2,623 (85)

Income tax benefit (expense) (641) (37)

Net income (loss) $ 1,982 $ (122)

Basic earnings (loss) per common share $ 0.09 $ (0.01)

Diluted earnings (loss) per common share $ 0.09 $ (0.01)

Revenues – The following table summarizes our revenues for the three months ended June 30, 2021 and 2020 (in thousands):

For the Three Months Ended June 30,

Total other expense (472) (1,263)

Income before income taxes 1,821 1,629

Income tax expense (323) (498)

Net income $ 1,498 $ 1,131

Basic earnings per common share $ 0.07 $ 0.05

Diluted earnings per common share $ 0.07 $ 0.05

Revenues – The following table summarizes our revenues for the three months ended September 30, 2021 and 2020 (in thousands):

For the Three Months Ended September 30,

Water services $ 5,067 $ 5,492

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Total revenues $ 11,404 $ 10,757

Total revenues increased $1.1 million, or 10.7%, to $10.9 million for the three months ended June 30, 2021 compared to $9.9 million for the three months ended June 30, 2020.

This increase reflects the 10.2% increase in active service connections, combined with increases in consumption and the increase in rates related to Rate Decision No.

Water Services – Water services revenue increased $0.6 million, or 12.3%, to $5.3 million for the three months ended June 30, 2021 compared to $4.7 million for the three months ended June 30, 2020.

The increase in water services revenues was primarily related to increased consumption and growth in connections coupled with increased establishment and disconnection fees during the three months ended June 30, 2021.

Water services revenue based on consumption increased $0.3 million, or 12.7%, to $2.7 million for the three months ended June 30, 2021 compared to $2.4 million for the three months ended June 30, 2020.

The increase was primarily driven by increased residential and commercial consumption for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Active water connections increased 10.4% to 26,678 as of June 30, 2021 from 24,160 as of June 30, 2020, primarily due to the growth in our service areas.

Water consumption increased 5.4% to 989 million gallons for the three months ended June 30, 2021 from 938 million gallons for the three months ended June 30, 2020.

The increase in consumption was primarily related to an increase in commercial and residential consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.2 million, or 8.8%, to $2.4 million for the three months ended June 30, 2021 from $2.2 million for the three months ended June 30, 2020.

Total revenues increased $0.6 million, or 6.0%, to $11.4 million for the three months ended September 30, 2021 compared to $10.8 million for the three months ended September 30, 2020.

This increase was primarily driven by the recognition of $0.7 million of ICFA revenue related to funds received during the quarter for an area where the company had completed all obligations under the ICFA agreement, including water and wastewater services.

Refer to Note 2 — "Regulatory Decision and Related Accounting and Policy Changes" o f the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information about our ICFAs.

The increase in revenue also reflects the 9.2% increase in active service connections and the increase in rates related to Rate Decision No.

The increase in revenue was partially offset by decreased consumption which was primarily driven by the increase in precipitation during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Water Services – Water services revenue decreased $0.4 million, or 7.8%, to $5.1 million for the three months ended September 30, 2021 compared to $5.5 million for the three months ended September 30, 2020.

The decrease in water services revenues was primarily related to decreased consumption, partially offset by growth in connections and increased establishment and disconnection fees during the three months ended September 30, 2021.

Water services revenue based on consumption decreased $0.7 million, or 23.2%, to $2.4 million for the three months ended September 30, 2021 compared to $3.2 million for the three months ended September 30, 2020.

The decrease was primarily driven by decreased residential and irrigation consumption resulting from higher precipitation for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Active water connections increased 9.4% to 27,003 as of September 30, 2021 from 24,674 as of September 30, 2020, primarily due to organic growth in our service areas.

Water consumption decreased 24.6% to 837 million gallons for the three months ended September 30, 2021 from 1.1 billion gallons for the three months ended September 30, 2020.

The decrease in consumption was primarily related to a decrease in irrigation and residential consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.2 million, or 9.3%, to $2.5 million for the three months ended September 30, 2021 from $2.3 million for the three months ended September 30, 2020.

The increase was primarily driven by an increase in active service connections, combined with an increase in rates related to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.6 million, or 10.7%, to $5.7 million for the three months ended June 30, 2021 compared to $5.1 million for the three months ended June 30, 2020.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 7.8%, to $5.6 million for the three months ended September 30, 2021 compared to $5.2 million for the three months ended September 30, 2020.

The increase in wastewater and recycled water services revenue included a $0.5 million increase in wastewater services revenue.

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 9.9% to 24,636 as of June 30, 2021, from 22,413 as of June 30, 2020, as well as the increase in rates related to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, increased $48,000, or 12.7%, to $0.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase in recycled water services revenue was primarily related to the increase in recycled water consumption, coupled with an increase in rates related to Rate Decision No.

The volume of recycled water delivered increased 12 million gallons, or 5.0%, to 258 million gallons for the three months ended June 30, 2021 compared to 246 million gallons for the three months ended June 30, 2020.

Operating Expenses – The following table summarizes our operating expenses for the three months ended June 30, 2021 and 2020 (in thousands):

For the Three Months Ended June 30,

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 8.9% to 24,955 as of September 30, 2021, from 22,920 as of September 30, 2020, as well as the increase in rates related to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, decreased $0.1 million, or 31.0%, to $0.3 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The decrease in recycled water services revenue was primarily related to the decrease in recycled water consumption.

The volume of recycled water delivered decreased 99 million gallons, or 36.2%, to 174 million gallons for the three months ended September 30, 2021 compared to 273 million gallons for the three months ended September 30, 2020.

Operating Expenses – The following table summarizes our operating expenses for the three months ended September 30, 2021 and 2020 (in thousands):

For the Three Months Ended September 30,

Operations and maintenance $ 2,677 $ 2,584

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Total operating expenses $ 9,111 $ 7,865

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.1 million, or 6.0%, to $2.5 million for the three months ended June 30, 2021 compared to $2.3 million for the three months ended June 30, 2020.

Property tax expense increased $0.1 million, or 11.0%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Property taxes are calculated using a centrally valued property calculation, which derives property values based upon three-year historical average revenues.

As revenues increase, we expect property taxes to also increase.

Utilities and related expense increased $0.1 million, or 8.1%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase is primarily due to increased electric utility expense due to increased pump usage, which is in line with increased revenues.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.1 million, or 3.6%, to $2.7 million for the three months ended September 30, 2021 compared to $2.6 million for the three months ended September 30, 2020.

Repairs and maintenance expenses increased $0.1 million, to $130,000 for the three months ended September 30, 2021 compared to $63,000 for the three months ended September 30, 2020, primarily due to the replacement of filters.

General and Administrative – General and administrative costs include the day-to-day expenses of office operation, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees.

These costs increased $0.1 million, or 2.5%, to $3.7 million for the three months ended June 30, 2021 compared to $3.6 million for the three months ended June 30, 2020.

Personnel and related expenses increased $0.1 million, or 8.2%, to $1.3 million for the three months ended June 30, 2021 compared to $1.2 million for the three months ended June 30, 2020.

The increase was primarily related to increases in salaries and bonuses, coupled with increases in other employee benefit expense for the three months ended June 30, 2021, compared to the three months ended June 30, 2020.

Depreciation and amortization - Depreciation and amortization expense increased $0.2 million, or 9.6%, to $2.4 million for the three months ended June 30, 2021, from $2.2 million for the three months ended June 30, 2020.

The increase was primarily driven by increased depreciation due to the increase in fixed assets, coupled with amortization of intangible assets.

Other Income (Expense) – Other income increased $2.1 million to $0.3 million for the three months ended June 30, 2021, from a loss of $1.8 million for the three months ended June 30, 2020.

The $2.1 million increase in other income was primarily attributed to $1.5 million of income recognized on the sale of a wireless communications tower.

The increase was also driven by the one-time loss on disposal of assets recognized during the three months ended June 30, 2020 in the amount of $0.5 million.

Income Tax Expense/Benefit – Income tax expense increased $0.6 million to $0.6 million for the three months ended June 30, 2021 compared to tax expense of less than $0.1 million for the three months ended June 30, 2020.

The increase was driven by pretax income for the three months ended June 30, 2021 versus pretax loss for the three months ended June 30, 2020.

Net Income – Net income totaled $2.0 million for the three months ended June 30, 2021 compared to net loss of $0.1 million for the three months ended June 30, 2020.

The increase was primarily attributed to the $2.1 million increase in other income coupled with a $0.6 million increase in operating income, which was driven by the increase in operating revenues.

Comparison of Results of Operations for the Six Months Ended June 30, 2021 and 2020

The following table summarizes our results of operations for the six months ended June 30, 2021 and 2020 (in thousands, except per share amounts):

For the Six Months Ended June 30,

These costs increased $1.1 million, or 37.4%, to $4.1 million for the three months ended September 30, 2021 compared to $3.0 million for the three months ended September 30, 2020.

Professional fees increased $0.3 million to $0.5 million for the three months ended September 30, 2021 compared to $0.2 million for the three months ended September 30, 2020.

The increase was primarily related to legal fees incurred for acquisition related matters for the three months ended September 30, 2021.

Personnel and related expenses increased $0.3 million, or 19.0%, to $1.6 million for the three months ended September 30, 2021 compared to $1.3 million for the three months ended September 30, 2020.

The increase was primarily driven by the increases in medical and other employee related expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Deferred compensation expenses increased $0.3 million, or 77.8%, to $0.8 million for the three months ended September 30, 2021 compared to $0.4 million for the three months ended September 30, 2020.

The increase was primarily driven by restricted stock awards granted in 2021, combined with increased expense due to the increase in stock price.

This increase was partially offset by the decrease in option expense attributable to the full vesting of the 2017 options granted and forfeitures during the three months ended September 30, 2021.

Information technology expenses increased slightly by less than $0.1 million, or 45.4%, but remained consistent at $0.1 million for both the three months ended September 30, 2021 and 2020.

The increase was mainly attributable to network security assessment and incident response plan consulting fees incurred during the three months ended September 30, 2021.

Depreciation and amortization - Depreciation and amortization expense increased slightly by less than $0.1 million, or 1.9%, to $2.4 million for the three months ended September 30, 2021, from $2.3 million for the three months ended September 30, 2020.

The increase was primarily driven by increased depreciation due to the increase in fixed assets.

Other Expense – Other expense totaled $0.5 million for the three months ended September 30, 2021, compared to other expense of $1.3 million for the three months ended September 30, 2020.

The $0.8 million improvement in other expense was primarily attributed to the increase in growth premiums received from the Valencia earnout during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

This increase was primarily driven by the receipt of a lump sum payment of $0.4 million from the City of Buckeye due to an internal audit of premiums that resulted in findings of past growth premiums that had not been remitted to the Company.

The increase was also due to higher earnout from Valencia during the quarter due to increased meter connections over the prior year period.

The earnout consists of $3,000 for each new water meter installed within Valencia Water Company’s prior service areas.

Income Tax Expense – Income tax expense decreased $0.2 million to $0.3 million for the three months ended September 30, 2021 compared to tax expense of $0.5 million for the three months ended September 30, 2020.

The decrease was driven by lower pretax income for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Net Income – Net income totaled $1.5 million for the three months ended September 30, 2021 compared to $1.1 million for the three months ended September 30, 2020.

The increase was primarily attributed to the $0.8 million decrease in other expenses partially offset by the $0.6 million decrease in operating income.

Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020 (in thousands, except per share amounts):

For the Nine Months Ended September 30,

Revenues $ 31,606 $ 28,876

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Diluted earnings per common share $ 0.14 $ 0.06

Revenues – The following table summarizes our revenues for the six months ended June 30, 2021 and 2020 (in thousands):

For the Six Months Ended June 30,

Revenues – The following table summarizes our revenues for the nine months ended September 30, 2021 and 2020 (in thousands):

For the Nine Months Ended September 30,

Water services $ 14,303 $ 13,555

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Total revenues $ 31,606 $ 28,876

Total revenues increased $2.1 million, or 11.5%, to $20.2 million for the six months ended June 30, 2021 compared to $18.1 million for the six months ended June 30, 2020.

The increase in revenue reflects the 10.2% increase in active service connections, combined with increases in consumption and the increase in rates related to Rate Decision No.

Water Services – Water services revenue increased $1.2 million, or 14.6%, to $9.2 million for the six months ended June 30, 2021 compared to $8.1 million for the six months ended June 30, 2020.

The increase in water services revenues was primarily related to growth in connections and increased consumption.

Water services revenue based on consumption increased $0.7 million, or 21.5%, to $4.2 million for the six months ended June 30, 2021 compared to $3.5 million for the six months ended June 30, 2020.

This increase was primarily driven by increases in residential and commercial consumption for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Active water connections increased 10.4% to 26,678 as of June 30, 2021 from 24,160 as of June 30, 2020, primarily due to the growth in our service areas.

Water consumption increased 15.2% to 1.6 billion gallons for the six months ended June 30, 2021 from 1.4 billion gallons for the six months ended June 30, 2020.

The increase in consumption was primarily related to the increase in residential and commercial consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.4 million, or 8.1%, to $4.8 million for the six months ended June 30, 2021 compared to $4.5 million for the six months ended June 30, 2020.

Total revenues increased $2.7 million, or 9.5%, to $31.6 million for the nine months ended September 30, 2021 compared to $28.9 million for the nine months ended September 30, 2020.

The increase in revenue reflects the 9.2% increase in active service connections, combined with the increase in rates related to Rate Decision No.

This increase was also driven by the recognition of $0.7 million of ICFA revenue related to funds received during the nine months ended September 30, 2021 for an area where the company had completed all obligations under the ICFA agreement, including water and wastewater services.

Refer to Note 2 — "Regulatory Decision and Related Accounting and Policy Changes" for additional information about our ICFAs.

Water Services – Water services revenue increased $0.7 million, or 5.5%, to $14.3 million for the nine months ended September 30, 2021 compared to $13.6 million for the nine months ended September 30, 2020.

The increase in water services revenues was primarily related to growth in connections.

Water services revenue based on consumption slightly increased by less than $0.1 million, or 0.2%, but remained consistent at $6.7 million for both the nine months ended September 30, 2021 and 2020.

This increase was primarily driven by increases in rates for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Active water connections increased 9.4% to 27,003 as of September 30, 2021 from 24,674 as of September 30, 2020, primarily due to organic growth in our service areas.

Water consumption slightly decreased by 59 million gallons, or 2.4%, but remained consistent at 2.5 billion gallons for both the nine months ended September 30, 2021 and September 30, 2020.

The decrease in consumption was primarily related to the decrease in irrigation consumption driven by higher precipitation.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.6 million, or 8.5%, to $7.3 million for the nine months ended September 30, 2021 compared to $6.8 million for the nine months ended September 30, 2020.

The increase was primarily due to the increase in active service connections, combined with an increase in rates related to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.0 million, or 9.7%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.4 million, or 9.1%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase in wastewater and recycled water services revenue was driven by a $1.4 million increase in wastewater services revenue.

Recycled water services revenue, which is based on the number of gallons delivered, increased $0.1 million, or 23.4%, to $0.6 million for the six months ended June 30, 2021 compared to $0.5 million for the six months ended June 30, 2020.

The increase in recycled water services revenue was primarily driven by the increase in rates related to Rate Decision No.

Operating Expenses – The following table summarizes our operating expenses for the six months ended June 30, 2021 and 2020 (in thousands):

For the Six Months Ended June 30,

Recycled water services revenue, which is based on the number of gallons delivered, decreased $20,000, or 2.2%, but remained consistent at $0.9 million for both the nine months ended September 30, 2021 and 2020.

The decrease in recycled water services revenue was primarily driven by the decrease in number of gallons consumed.

The volume of recycled water delivered decreased 53 million gallons, or 9.2%, to 526 million gallons for the nine months ended September 30, 2021 compared to 580 million gallons for the nine months ended September 30, 2020.

Operating Expenses – The following table summarizes our operating expenses for the nine months ended September 30, 2021 and 2020 (in thousands):

For the Nine Months Ended September 30,

Operations and maintenance $ 7,656 $ 7,156

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Total operating expenses $ 25,931 $ 22,460

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.4 million, or 8.9%, to $5.0 million for the six months ended June 30, 2021 compared to $4.6 million for the six months ended June 30, 2020.

Total personnel expenses increased $0.1 million, or 10.7%, to $1.5 million for the six months ended June 30, 2021 compared to $1.4 million for the six months ended June 30, 2020, primarily due to increased salary and wages expense and medical insurance expense.

Property tax expense increased $0.1 million to $1.3 million for the six months ended June 30, 2021 compared to $1.2 million for the six months ended June 30, 2020.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.5 million, or 7.0%, to $7.7 million for the nine months ended September 30, 2021 compared to $7.2 million for the nine months ended September 30, 2020.

Property tax expense increased $0.2 million to $1.9 million for the nine months ended September 30, 2021 compared to $1.8 million for the nine months ended September 30, 2020.

Property taxes are calculated using a centrally valued property calculation, which derives property values based upon three-year historical average revenues.

As revenues increase, we expect property taxes to also increase.

Utilities and related expense increased $0.1 million to $1.0 million, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase is primarily due to increased electric utility expense due to increased pump usage, which is in line with increased revenues.

Total personnel expenses increased $0.2 million, or 9.8%, to $2.4 million for the nine months ended September 30, 2021 compared to $2.2 million for the nine months ended September 30, 2020, primarily due to increased salary and wages expense and medical benefits expense.

These costs increased $1.5 million, or 26.2%, to $7.2 million for the six months ended June 30, 2021 compared to $5.7 million for the six months ended June 30, 2020.

Deferred compensation expense increased $0.9 million to $1.4 million for the six months ended June 30, 2021, from $0.6 million for the six months ended June 30, 2020.

The increase was primarily driven by restricted stock awards granted during the six months ended June 30, 2021, combined with increased expense due to the increase in stock price.

These costs increased $2.6 million, or 30.0%, to

$11.3 million for the nine months ended September 30, 2021 compared to $8.7 million for the nine months ended September 30, 2020.

Deferred compensation expense increased $1.2 million to $2.2 million for the nine months ended September 30, 2021, from $1.0 million for the nine months ended September 30, 2020.

The increase was primarily driven by restricted stock awards granted during the nine months ended September 30, 2021, combined with increased expense due to the increase in stock price.

Refer to Note 13 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

Board compensation expenses increased $0.4 million, to $0.4 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was primarily related to a $0.4 million increase in Deferred Phantom Unit expense which was primarily driven by the increase in stock price for the six months ended June 30, 2021 compared to the decrease in stock price for the six months ended June 30, 2020.

Personnel and related expenses increased $0.1 million, or 4.1%, to $2.6 million for the six months ended June 30, 2021 compared to $2.5 million for the six months ended June 30, 2020.

The increase was primarily related to increases in medical insurance expense, coupled with increases in other employee benefit expense for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.

Depreciation and amortization - Depreciation and amortization expense increased $0.3 million, or 7.5%, to $4.6 million for the six months ended June 30, 2021, from $4.3 million for the six months ended June 30, 2020.

The increase was primarily driven by increased depreciation due to the increase in fixed assets, coupled with amortization of intangible assets.

Other Income (Expense) – Other expense totaled $1.0 million for the six months ended June 30, 2021 compared to other expense of $3.0 million for the six months ended June 30, 2020.

The $2.0 million improvement in other income was primarily attributed to $1.5 million of income recognized on the sale of a wireless communications tower.

The increase was also driven by the one-time loss on disposal of assets recognized during the six months ended June 30, 2020 in the amount of $0.5 million.

Income Tax Expense – Income tax expense increased $0.4 million to $0.6 million for the six months ended June 30, 2021 compared to $0.2 million for the six months ended June 30, 2020.

Board compensation expenses increased $0.5 million to $0.6 million for the nine months ended September 30, 2021 compared to $0.1 million for the nine months ended September 30, 2020.

The increase was primarily related to a $0.5 million increase in Deferred Phantom Unit and Restricted Stock Unit expense which was primarily driven by the increase in stock price for the nine months ended September 30, 2021 compared to the decrease in stock price for the nine months ended September 30, 2020.

Personnel and related expenses increased $0.4 million, or 9.4%, to $4.2 million for the nine months ended September 30, 2021 compared to $3.8 million for the nine months ended September 30, 2020.

The increase was primarily related to increases in employee benefit expense coupled with increases in salaries and wages for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

Professional fees expenses increased $0.2 million, or 21.2%, to $1.4 million for the nine months ended September 30, 2021 from $1.1 million for the nine months ended September 30, 2020.

The increase was primarily related to legal fees incurred regarding acquisition matters among other miscellaneous corporate matters.

Depreciation and amortization - Depreciation and amortization expense increased $0.4 million, or 5.6%, to $7.0 million for the nine months ended September 30, 2021, from $6.6 million for the nine months ended September 30, 2020.

The increase was primarily driven by increased depreciation due to the increase in fixed assets, partially offset by decreased amortization of intangible assets.

Other Expense – Other expense totaled $1.5 million for the nine months ended September 30, 2021 compared to other expense of $4.3 million for the nine months ended September 30, 2020.

The $2.8 million improvement in other expense was primarily attributed to $1.5 million of income recognized on the sale of a wireless communications tower, combined with a $0.7 million increase in the Valencia earnout.

The increase in growth premiums was primarily driven by the receipt of a lump sum payment of $0.4 million from the City of Buckeye due to an internal audit of premiums that resulted in findings of past growth premiums that had not been remitted to the Company.

The increase also reflects the one-time loss on disposal of assets recognized during the nine months ended September 30, 2020 in the amount of $0.5 million.

Income Tax Expense – Income tax expense increased $0.2 million to $0.9 million for the nine months ended September 30, 2021 compared to $0.7 million for the nine months ended September 30, 2020.

The increase was driven by an increase in pretax income.

Net Income – Net income totaled $1.8 million for the six months ended June 30, 2021 compared to net income of $0.2 million for the six months ended June 30, 2020.

The $1.5 million increase was primarily attributed to the $2.0 million increase in total other income (expense) for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Net Income – Net income totaled $3.3 million for the nine months ended September 30, 2021 compared to net income of $1.4 million for the nine months ended September 30, 2020.

The $1.9 million increase was primarily attributed to the $2.8 million decrease in total other expense partially offset by the $0.7 million decrease in operating income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Outstanding Share Data

As of August 2, 2021, there were 22,620,435 shares of our common stock outstanding and stock based awards to acquire an additional 859,290 shares of our common stock outstanding.

As of November 8, 2021, there were 22,649,186 shares of our common stock outstanding and stock based awards to acquire an additional 755,695 shares of our common stock outstanding.

Liquidity and Capital Resources

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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, 2021, we have no notable near-term cash expenditures, other than the first and second principal payments for our Series B senior secured notes in the amounts of $1.9 million due in December 2021 and $1.9 million due in June 2022.

As of September 30, 2021, we have no notable near-term cash expenditures, other than the first and second principal payments for our Series B senior secured notes in the amounts of $1.9 million due in December 2021 and $1.9 million due in June 2022.

While specific facts and circumstances could change, we believe that we have sufficient cash on hand, the ability to draw on our $10.0 million revolver, and will be able to generate sufficient cash flows to meet our operating cash flow requirements and capital expenditure plan, as well as remain in compliance with our debt covenants, for at least the next twelve months.

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Our 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, 2021, our net cash provided by operating activities totaled $7.4 million compared to $5.1 million for the six months ended June 30, 2020.

The $2.3 million increase in cash from operating activities was primarily driven by the $1.5 million of income recognized on the sale of a wireless communications tower coupled with increases in accounts payable and other current and noncurrent liabilities for the three months ended June 30, 2021 compared to June 30, 2020.

For the nine months ended September 30, 2021, our net cash provided by operating activities totaled $15.2 million compared to $11.7 million for the nine months ended September 30, 2020.

The $3.5 million increase in cash from operating activities was primarily driven by the $1.5 million of income recognized on the sale of a wireless communications tower coupled with increases in accounts payable and other current and noncurrent liabilities for the nine months ended September 30, 2021 compared to September 30, 2020.

Cash from Investing Activities

Our net cash used in investing activities totaled $6.4 million for the six months ended June 30, 2021 compared to $5.4 million for the six months ended June 30, 2020.

The $1.0 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of $1.0 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Our net cash used in investing activities totaled $11.8 million for the nine months ended September 30, 2021 compared to $7.5 million for the nine months ended September 30, 2020.

The $4.3 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of $4.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Cash from Financing Activities

Our net cash used in financing activities totaled $1.6 million for the six months ended June 30, 2021 compared to $8.6 million in cash provided by financing activities for the six months ended June 30, 2020.

This change was primarily driven by the $11.5 million in net proceeds received from our public offering of stock in January 2020, partially offset by increased AIAC of $1.3 million for the six months ended June 30, 2021.

Our net cash used in financing activities totaled $2.7 million for the nine months ended September 30, 2021 compared to $7.1 million in cash provided by financing activities for the nine months ended September 30, 2020.

This change was primarily driven by the $11.5 million in net proceeds received from our public offering of stock in January 2020, partially offset by increased AIAC of $1.8 million for the nine months ended September 30, 2021.

Senior Secured Notes

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Series B carries a principal balance of $86.3 million and bears an interest rate of 4.58% over a 20-year term.

Series B is interest only for the first five years, with $1.9 million principal payments paid semiannually thereafter.

Series B is interest only for the first five years, with $1.9 million principal payments paid semiannually thereafter beginning December 2021.

The proceeds of the senior secured notes were primarily used to refinance our long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the initial public offering of our common stock in May 2016.

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The debt service ratio increases to 1.25 for any fiscal quarter during the period from and after June 30, 2024.

As of June 30, 2021, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of June 30, 2021 and December 31, 2020 were $0.5 million and $0.6 million, respectively.

As of September 30, 2021, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of September 30, 2021 and December 31, 2020 were $0.5 million and $0.6 million, respectively.

Revolving Credit Line

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Refer to Note 11 — "Debt" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

As of June 30, 2021, the Company was in compliance with its financial debt covenants.

As of June 30, 2021, the Company had no outstanding borrowings under this credit line with Northern Trust Bank.

As of September 30, 2021, the Company was in compliance with its financial debt covenants.

As of September 30, 2021, the Company had no outstanding borrowings under this credit line with Northern Trust Bank.

Insurance Coverage

10 unchanged sentences

Off Balance Sheet Arrangements

As of June 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements.

As of September 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis