What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-09 compared with 2022-03-10 · 230 added, 249 removed, 646 unchanged (43% of the section changed)

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Impact of Rate Regulation on the Financial Statements — Refer to Notes 1 and 2 to the financial statements

Regulatory Matters - Impact of Rate Regulation on the Financial Statements — Refer to Note 2 to the financial statements

Critical Audit Matter Description

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regulatory assets and liabilities;

operating revenues;

operation and maintenance expense;

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The ACC establishes rates that are designed to permit the recovery of the cost of service and a return on investment.

The Company’s rates are subject to regulatory rate-setting processes.

Decisions made by the ACC in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required.

Decisions to be made by the ACC in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required.

While the Company has indicated it expects to recover costs from customers through regulated rates, there is a risk that the ACC will not approve:

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Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, and (2) a refund to customers.

Given that management’s accounting judgements are based on assumptions about the outcome of future regulatory decisions and interpretation of new or revised regulatory decisions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities and pervasive impact on the financial statements.

Given that management’s accounting judgments are based on assumptions about the outcome of future regulatory decisions and interpretation of new or revised regulatory decisions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due its inherent complexities and pervasive impact on the financial statements.

How the Critical Audit Matter Was Addressed in the Audit

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/s/ DELOITTE & TOUCHE LLP

Phoenix, Arizona

Tempe, Arizona

March 8, 2023

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December 31, 2022 December 31, 2021

UTILITY PLAN:

PROPERTY, PLANT AND EQUIPMENT:

Land $ 1,480 $ 1,338

Depreciable property, plant and equipment 344,043 313,700

Other 697 699

Construction work-in-progress 66,039 53,511

Other 697 697

Less accumulated depreciation ( 124,522 ) ( 113,380 )

Net utility plan 255,866 238,891

Net property, plant and equipment 287,737 255,866

CURRENT ASSETS:

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Unbilled revenue 2,557 2,510

Prepaid expenses and other current assets 1,645 665

Taxes, prepaid expenses, and other current assets 2,439 1,645

Total current assets 14,158 18,987

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Regulatory asset 3,169 2,336

Deposits 10 9

Restricted cash 1,001 806

Right-of -use asset 1,891 —

Other noncurrent assets 34 10

Total other assets 21,191 19,221

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Accrued expenses 8,056 9,191

Deferred revenue — 4

Customer and meter deposits 1,682 1,646

Long-term debt and capital leases — current portion 3,975 2,035

Long-term debt — current portion 3,833 3,833

Leases — current portion 505 142

Total current liabilities 16,249 16,932

NONCURRENT LIABILITIES:

Long-term debt and capital leases 108,933 112,659

Long-term debt 104,945 108,734

Long-term lease liabilities 1,616 199

Deferred revenue - ICFA 20,974 19,035

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INCOME BEFORE INCOME TAXES 6,440 4,759

INCOME TAX EXPENSE ( 1,150 ) ( 771 )

INCOME TAX BENEFIT (EXPENSE) ( 934 ) ( 1,150 )

NET INCOME $ 5,506 $ 3,609

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Depreciation and amortization 9,889 9,490

Right of use amortization 182 —

Amortization of deferred debt issuance costs and discounts 44 90

Other gains 18 552

(Gain) Loss on disposal of fixed assets 4 18

Provision for doubtful accounts receivable 103 86

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Proceeds from stock option exercise 3 4

Principal payments under capital lease ( 147 ) ( 109 )

Payments for taxes related to net shares settlement of equity awards ( 585 ) ( 656 )

Principal payments under finance lease — ( 147 )

Loan repayments 259 ( 4 )

Repayments of bond debt ( 1,917 ) —

Repayments of bond ( 3,833 ) ( 1,917 )

Proceeds from sale of stock 14,812 —

Payments for taxes related to net shares settlement of equity awards ( 656 ) —

Debt issuance costs paid — ( 46 )

Payments of offering costs for sale of stock — ( 221 )

Net cash provided by (used in) financing activities 4,971 ( 7,929 )

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Description of Business

Global Water Resources, Inc.

(the “Company” or “GWRI”) is a water resource management company that owns, operates, and manages water, wastewater, and recycled water utilities in strategically located communities, principally in metropolitan Phoenix, Arizona.

GWRI seeks to deploy an integrated approach, which the Company refers to as “Total Water Management".

Total Water Management is a comprehensive approach to water utility management that reduces demand on scarce non-renewable water sources and costly renewable water supplies, in a manner that ensures sustainability and greatly benefits communities both environmentally and economically.

This approach employs a series of principles and practices that can be tailored to each community:

• Reuse of recycled water, either directly or to non-potable uses, through aquifer recharge, or direct potable reuse;

• Regional planning;

• Use of advanced technology and data;

• Employing respected subject matter experts and retaining thought and application leaders;

• Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners, regulators, and utility staff are knowledgeable on the principles and practices of our Total Water Management approach;

• Establishing partnerships with communities, developers, and industry stakeholders to gain support of our Total Water Management principles and practices.

GWRI currently owns and operates twenty-five water and wastewater systems in strategically targeted communities principally in metropolitan Phoenix.

GWRI currently serves more than 74,048 people in approximately 27,630 homes within our 376 square miles of certificated service areas, which are serviced by twenty-two wholly-owned regulated operating subsidiaries as of December 31, 2021.

Approximately 90.9 % of the Company’s active service connections are customers of its Global Water - Santa Cruz Water Company, Inc.

GWRI is a holding company that currently owns and operates twenty-nine water and wastewater systems in strategically targeted communities, primarily in the metropolitan areas of Phoenix and Tucson, Arizona.

Serving more than 74,000 people in approximately 29,000 homes within our 397 square miles of certificated service areas as of December 31, 2022, GWRI provides water and wastewater utility services under the regulatory authority of the ACC.

Approximately 91.0 % of the active service connections are customers of Global Water - Santa Cruz Water Company, Inc.

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

(“Palo Verde”) utilities, which are located within a single service area.

GWRI has grown significantly since its formation in 2003, with total revenues increasing from $ 4.9 million in 2004 to $ 41.9 million in 2021, and total service connections increasing from 8,113 as of December 31, 2004 to 54,182 as of December 31, 2021, with regionally planned service areas large enough to serve approximately two million service connections.

Basis of Presentation and Principles of Consolidation

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Actual results could differ from those estimates.

dollar is the Company’s reporting currency and functional currency.

Corporate Transactions

ACC Rate Case

On July 27, 2022, the ACC issued Rate Decision No.

78644 relating to the Company's recent rate case.

Pursuant to Rate Decision No.

78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $ 2.2 million (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years .

The ACC also approved:

(i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated.;

(ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Turner Ranches utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement;

(iii) the Company’s ability to annually adjust rates to flow through changes in property tax expense and/or changes in income tax expense, without the necessity of a rate case proceeding;

and (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information.

Public Offering of Common Stock

On August 1, 2022, the Company completed a public offering of 1,150,000 shares of common stock at a public offering price of $ 13.50 per share, which included 150,000 shares issued and sold to the underwriter following the exercise in full of its option to purchase additional shares of common stock.

The Company received net proceeds of approximately $ 14.9 million from the offering after deducting underwriting discounts and commissions and offering expenses paid by the Company.

Certain directors and/or their affiliates purchased an aggregate of the 652,000 shares of common stock at the public offering price.

Recent Acquisitions

On April 14, 2022, the Company signed a definitive agreement to acquire Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona.

On February 1, 2023, the Company completed the acquisition of Farmers Water Co.

Refer to Note 16 - "Subsequent Event" for additional information.

On January 20, 2022, the Company acquired the assets of Rincon Water Company, Inc., a water utility in Pima County, Arizona.

The acquisition added an additional 73 connections and approximately 8.6 square miles of service area at the time of acquisition.

On January 13, 2022, the Company acquired the assets of Twin Hawks Utility, Inc., a water utility in Pinal County, Arizona.

The acquisition added an additional 18 connections and approximately 0.5 square miles of service area at the time of acquisition.

On November 3, 2021, the Company completed the stock acquisition by merger of Las Quintas Serenas Water Company, Inc.

("Las Quintas"), an operator of a water utility with service area in Pima County, Arizona, adding 1,100 connections with approximately 2.5 square miles of service area at the time of acquisition.

Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc.

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Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close.

The City of Buckeye is obligated to pay the Company a growth premium equal to $ 3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a

20 -year period ending December 31, 2034, subject to a maximum payout of $ 45.0 million over the term of the agreement.

The City of Buckeye is obligated to pay the Company a growth premium equal to $ 3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $ 45.0 million over the term of the agreement.

The Company received growth premiums of $ 2.5 million and $ 1.4 million for the years ended December 31, 2022 and 2021, respectively.

The increase in growth premiums was driven by the receipt of a lump sum payment of $ 0.4 million from the City of Buckeye during the twelve months ended December 31, 2021, 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 due to increased meter connections in the area over the prior year period.

Private Letter Ruling

On June 2, 2016, the Company received a Private Letter Ruling from the Internal Revenue Service ("IRS") that, for purposes of deferring the approximately $ 19.4 million gain realized from the condemnation of the operations and assets of Valencia, determined that the assets converted upon the condemnation of such assets could be replaced through certain reclamation facility improvements contemplated by the Company under Internal Revenue Code §1033 as property similar or related in service or use.

The Company fully deferred the remaining tax liability during the year ended December 31, 2020.

Arizona Corporation Commission (the “ACC”) Tax Docket

The Company had a regulatory asset of $ 2.3 million and $ 2.0 million at December 31, 2021 and December 31, 2020, respectively, and regulatory liabilities of $ 0.8 million and $ 0.7 million at December 31, 2021 and 2020, respectively, related to the Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017.

Under ASC 740, Income Taxes , the tax effects of changes in tax laws must be recognized in the period in which the law is enacted.

ASC 740 also requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled.

Thus, at the date of enactment, the Company’s deferred income taxes were re-measured based upon the new tax rate.

For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers.

On December 20, 2017, the ACC opened a docket to address the utility ratemaking implications of the TCJA.

The ACC subsequently approved an order in February 2018 requiring Arizona utilities to apply regulatory accounting treatment, which includes the use of regulatory assets and regulatory liabilities, to address all impacts from the enactment of the TCJA.

On September 20, 2018, the ACC issued Rate Decision No.

76901, which set forth the reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to the lower corporate tax rates under the TCJA.

Rate Decision No.

76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under Rate Decision No.

74364 enacted in February 2014.

In 2020, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities was approximately $ 1.0 million.

In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities were approximately $ 415 ,000, $ 669 ,000, $ 16 ,000, and $ 5 ,000, respectively.

The ACC also approved a carrying cost of 4.25 % on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the years leading up to 2021 (i.e., 2018 through 2020).

Rate Decision No.

76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes (“ADIT”), including excess ADIT (“EADIT”).

Following the ACC's request for a proposal, the Company made its proposal in filings on December 19, 2018 and July 1, 2019.

ACC Staff reviewed the Company's filing and requested that the Company defer tariff revisions until such revisions can be considered in the next rate case.

ACC Staff also requested that the Company defer consideration of the regulatory assets and regulatory liabilities associated with 2018 EADIT amortization.

On July 18, 2019, the Company made a filing proposing these items be deferred to the next rate case.

Refer to " — Corporate Transactions — ACC Rate Case" for additional information regarding the Company's next rate case.

On November 27, 2018, February 20, 2019, February 28, 2019, and January 23, 2020, the ACC adopted orders relating to the funding for income taxes on contributions in aid of construction ("CIAC") and advances in aid of construction ("AIAC") (which became taxable for our regulated utilities under the TCJA).

Those orders 1) require that under the hybrid sharing method, a contributor will pay a gross-up to the utility consisting of 55 % of the income tax expense with the utility covering the remaining 45 % of the income tax expense;

2) remove the full gross-up method option for Class A and B utilities and their affiliates (which includes all of our utilities);

3) ensure proper ratemaking treatment of a utility using the self-pay method;

4) clarify that pass-through entities that are owned by a “C” corporation can recover tax expense according to methods allowed;

and 5) require Class A and B utilities to self-pay the taxes associated with hook-up fee contributions but permit using a portion of the hook-up fees to fund these taxes.

The Company's utilities have adopted the hybrid sharing method for income tax on CIAC and AIAC.

Effective January 1, 2021, CIAC and AIAC for regulated water and sewage disposal facility companies will be excluded from income under IRC Section 118.

ACC Rate Case

On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water rates, which proposed a collective revenue requirement increase of $ 4.6 million (relative to expected revenues in 2021, which is the final year of the rate phase-in from the last rate case) based on a 2019 test year.

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.

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

therefore, any phase-in will 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.

Of our utilities filing a rate case, these utilities make up approximately 96 % of the Company's active service connections;

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

and are expected to create economies of scale that are beneficial to all customers if consolidated.

There can be no assurance, however, that the ACC will approve the requested rate increase or any increase or the consolidation of water and wastewater rates described above, and the ACC could take other actions as a result of the rate case.

Further, it is possible that the ACC may determine to decrease future rates.

There can also be no assurance as to the timing of when an approved rate increase (if any) would go into effect.

2020 Common Stock Offering

On January 21, 2020, the Company completed a public offering of 870,000 shares of common stock at a public offering price per share of $ 12.50 , for gross proceeds of $ 10.9 million.

On January 30, 2020, an additional 130,000 shares of common stock were issued at the public offering price of $ 12.50 per share, for gross proceeds of $ 1.6 million, resulting in total proceeds from the offering of approximately $ 12.5 million.

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

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

Acquisition of Las Quintas Serenas Water Company, Inc.

On November 3, 2021, the Company completed the acquisition of Las Quintas Serenas Water Company, Inc.

("Las Quintas"), an operator of a water utility with service area in Pima County, Arizona.

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

Significant Accounting Policies

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In addition to third party costs, direct personnel costs and indirect construction overhead costs may be capitalized.

Interest incurred during the construction period is also capitalized as a component of the cost of the constructed assets, which represents the cost of debt associated with construction activity.

Interest incurred during the construction period is also capitalized as a component of the cost of the constructed assets, which represents the cost of debt and equity associated with construction activity.

Expenditures for maintenance and repairs are charged to expense.

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However, in addition to the monthly basic service charge, the determination and billing of water sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month.

At the end of each reporting period, amounts of water delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recorded.

At the end of each reporting period,

amounts of water delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recorded.

Water connection fees are the fees associated with the application process to set up a customer to receive utility service on an existing water meter.

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Because the amounts charged for water connection fees are set by our regulator and not negotiated in conjunction with the pricing of ongoing water service, the connection fees represent the culmination of a separate earnings process and are recognized when the service is provided.

For the years ended December 31, 2021 and 2020, the Company recognized $ 0.3 million and $ 0.2 million in connection fees, respectively.

For both the years ended December 31, 2022 and 2021, the Company recognized $ 0.3 million in connection fees.

Meter installation fees are the fees charged to developers or builders associated with installing new water meters.

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Refundable meter installation fees are recorded as a liability upon receipt.

These fees are recognized as revenue when the service is rendered, or when a water meter is installed.

Revenue Recognition—Wastewater and Recycled Water Services

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Unregulated revenues are limited to rental revenue and revenues resulting from certain infrastructure coordination and financing agreement arrangements ("ICFAs").

Allowance for Doubtful Accounts

Provisions are made for doubtful accounts due to the inherent uncertainty around the collectability of accounts receivable.

The allowance for doubtful accounts is recorded as bad debt expense, and is classified as general and administrative expense.

The allowance for doubtful accounts is determined considering the age of the receivable balance, type of customer (e.g., residential or commercial), payment history, as well as specific identification of any known or expected collectability issues (see Note 6 – “Accounts Receivable”).

Infrastructure Coordination and Financing Fees

ICFAs are agreements with developers and homebuilders whereby GWRI, which owns the operating utilities, provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder.

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74364, as funding is received 70 % of ICFAs are now recorded as a hook-up fee (“HUF”) liability until the HUF liability is fully funded, with the remaining amount recorded as revenue once all components of revenue recognition are met (See Note 2 – “Regulatory Decision and Related Accounting and Policy Changes”).

Allowance for Doubtful Accounts

Provisions are made for doubtful accounts due to the inherent uncertainty around the collectability of accounts receivable.

The allowance for doubtful accounts is recorded as bad debt expense, and is classified as general and administrative expense.

Cash and Cash Equivalents

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Restricted Cash

Restricted cash represents cash deposited relating to HUF tariffs, asset retirement obligations, and pending legal matters.

Restricted cash represents cash deposited relating to HUF tariffs and asset retirement obligations.

The following table summarizes the restricted cash balance as of December 31, 2022 and 2021 (in thousands):

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$ 1,001 $ 806

Customer Payments In-Transit

Customer payments in-transit represent funds received by our third-party payment processor related to customer payments, a majority of which were paid for with debit cards, credit cards, and checks, to which the Company does not have immediate access but settles within a few days of the payment transaction.

The Company utilizes the asset and liability method of accounting for income taxes.

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Basic and Diluted Earnings per Common Share

Diluted EPS is based upon the weighted average number of common shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock awards granted.

As of December 31, 2021, the Company had 520,481 options outstanding to acquire an equivalent number of shares of GWRI common stock.

The 320,321 options outstanding from the 2017 option grant equated to 164,444 common share equivalents, which were included within the calculation of diluted earnings per share for the year ended December 31, 2021.

The remaining 200,160 options outstanding from the 2019 option grant, which equated to 60,789 common share equivalents, were also included within the calculation of diluted earnings per share for the year ended December 31, 2021.

As of December 31, 2021, the 74,164 restricted stock awards outstanding from the 2020 grant equated to 55,450 common share equivalents, which were included within the calculation of diluted earnings per share for the year ended December 31, 2021.

As of December 31, 2021, there were 151,500 restricted stock awards outstanding from the 2021 grant, which equated to 2,819 common share equivalents, which were included within the calculation of diluted earnings per share for the year ended December 31, 2021.

As of December 31, 2020, the Company had 625,913 options outstanding to acquire an equivalent number of shares of GWRI common stock.

The 382,771 options outstanding from the 2017 option grant equated to 48,094 common share equivalents, which were included within the calculation of diluted earnings per share for the year ended December 31, 2020.

The remaining 243,142 options outstanding from the 2019 option grant were not included within the calculation of diluted earnings per share as to do so would be antidilutive.

As of December 31, 2020, the 128,327 restricted stock awards outstanding from the 2020 grant equated to 7,363 common share equivalents, which were included within the calculation of diluted earnings per share for the year ended December 31, 2020.

Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income by the weighted-average number of shares during those periods.

Diluted EPS includes additional weighted-average common stock equivalents (options and restricted stock awards), if dilutive.

Unless otherwise noted, the term “Earnings Per Share” refers to Basic EPS.

A reconciliation of the denominator used in Basic and Diluted EPS calculations is show in the following table:

(In thousands) December 31, 2022 December 31, 2021

Basic weighted average common shares outstanding 23,173 22,619

Effect of dilutive securities:

2017 Option grant 106 164

2019 Option grant 26 61

2020 Restricted stock awards 27 56

2021 Restricted stock awards — 3

Total dilutive securities 159 284

Diluted weighted average common shares outstanding 23,332 22,903

Anti-dilutive shares excluded from earnings per diluted shares (1) 185 —

(1) Shares were excluded from the dilutive-effect calculation because the outstanding awards' exercise prices were greater than the average market price of the Company's common stock.

Refer to Note 13 – “Deferred Compensation Awards” for additional information regarding the option and restricted stock grants.

Goodwill represents the excess purchase price over the fair value of net tangible and identifiable intangible assets acquired through acquisitions.

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When testing goodwill for impairment, we may assess qualitative factors, including macroeconomic conditions, industry and market considerations, overall financial performance, and entity specific events to determine whether it is more likely than not that the fair value of an operating and reportable segment is less than its carrying amount.

We utilize internally developed discounted future cash flow models, third-party appraisals, or broker valuations to determine the fair value of the reporting unit.

We utilize internally developed discounted future cash

flow models, third-party appraisals, or broker valuations to determine the fair value of the reporting unit.

Under the discounted cash flow approach, we utilize various assumptions requiring judgment, including projected future cash flows, discount rates, and capitalization rates.

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

Debt Issuance Costs

In connection with the issuance of some of our long-term debt, we have incurred legal and other costs that we believe are directly attributable to realizing the proceeds of the debt issued.

These costs are netted against long-term debt and amortized as interest expense using the effective interest method over the term of the respective debt.

Amortization of debt issuance costs and discounts totaled $ 0.1 million for both years ended December 31, 2021 and 2020.

Impairment of Long-Lived Assets

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Generally, fair value will be determined using appraisals or valuation techniques such as the present value of expected future cash flows.

Advances and Contributions in Aid of Construction

The Company has various agreements with developers and builders, whereby funds, water line extensions, or wastewater line extensions are provided to us by the developers and are considered refundable advances for construction.

Debt Issuance Costs

In connection with the issuance of some of our long-term debt, we have incurred legal and other costs that we believe are directly attributable to realizing the proceeds of the debt issued.

These costs are netted against long-term debt and amortized as interest expense using the effective interest method over the term of the respective debt.

Amortization of debt issuance costs and discounts totaled approximately $ 0.04 million for the year ended December 31, 2022 and approximately $ 0.09 million for the year ended December 31, 2021, respectively.

Advances in Aid of Construction ("AIAC") and Contributions in Aid of Construction ("CIAC")

The Company has various agreements with developers, whereby funds, water line extensions, or wastewater line extensions are provided to the Company by the developers and are considered refundable AIAC.

These AIAC are non-interest-bearing and are subject to refund to the developers through annual payments that are computed as a percentage of the total annual gross revenue earned from customers connected to utility services constructed under the agreement over a specified period.

Upon the expiration of the agreements’ refunding period, the remaining balance of the advance becomes nonrefundable and at that time is considered CIAC.

Upon the expiration of the agreements’ refunding period, the remaining balance of the AIAC becomes nonrefundable and at that time is considered CIAC.

CIAC are amortized as a reduction of depreciation expense over the estimated remaining life of the related utility plant.

For rate-making purposes, utility plant funded by AIAC or CIAC are excluded from rate base.

There was no AIAC balance transferred to CIAC for the year ended December 31, 2021 compared to $ 0.1 million for the year ended December 31, 2020.

There was no AIAC balance transferred to CIAC for the years ended December 31, 2022 or December 31, 2021.

Fair Value of Financial Instruments

The carrying values of cash equivalents, trade receivables, and accounts payable approximate fair value due to the short-term maturities of these instruments.

The carrying values of cash equivalents, accounts receivables, and accounts payable approximate fair value due to the short-term maturities of these instruments.

See Note 11 – “Debt” for information as to the fair value of our long-term debt.

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Portions of these non-interest-bearing instruments are payable annually through 2032 and amounts not paid by the contract expiration dates become nonrefundable.

Their relative fair values cannot be accurately estimated because future refund payments depend on

several variables, including new customer connections, customer consumption levels, and future rate increases.

Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases.

However, the fair value of these amounts would be less than their carrying value due to the non-interest-bearing feature.

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating performance.

In consideration of ASC 280— Segment Reporting the Company notes it is not organized around specific products and services, geographic regions, or regulatory environments.

In consideration of ASC 280— Segment Reporting the Company notes it is not organized

around specific products and services, geographic regions, or regulatory environments.

The Company currently operates in one geographic region within the State of Arizona, wherein each operating utility operates within the same regulatory environment.

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The Company does not have any customers that contribute more than 10% to the Company’s revenues or revenue streams.

Additionally we note that the CODM uses consolidated financial information to evaluate the Company’s performance, which is the same basis on which he communicates the Company’s results and performance to the Board of Directors.

Additionally, the Company notes that the CODM uses consolidated financial information to evaluate the Company’s performance, which is the same basis on which he communicates the Company’s results and performance to the Board of Directors.

It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of the Company’s resources on a consolidated level.

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ASC 842 requires lessees to record a right-of-use asset and corresponding lease obligation for lease arrangements with a term of greater than twelve months and requires additional disclosures about leasing arrangements.

The Company implemented Topic 842 on January 1, 2021.

The Company implemented ASC 842 on January 1, 2021.

The implementation did not result in material changes to our consolidated financial statements.

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ASU 2018-15 amends ASC 350 to include in its scope implementation costs of a Cloud Computing Arrangement ("CCA") that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract.

The Company implemented Topic 350 on January 1, 2021.

The Company implemented ASU 2018-15 on January 1, 2021.

The implementation did not result in material changes to our consolidated financial statements.

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Changes to the rates are made through formal rate applications with the ACC, which we have done for all of our operating utilities and which are described below.

On July 9, 2012, we filed formal rate applications with the ACC to adjust the revenue requirements for seven utilities representing a collective rate increase of approximately 28 % over 2011 revenue levels.

In August 2013, the Company entered into a settlement agreement with ACC Staff, the Residential Utility Consumers Office, the City of Maricopa, and other parties to the rate case.

The settlement required approval by the ACC’s Commissioners before it could take effect.

In February 2014, the rate case proceedings were completed and the ACC issued Rate Decision No.

74364, effectively approving the settlement agreement.

The rulings of the decision include, but are not limited to, the following:

• For the Company’s utilities, adjusting for the condemnation of the operations and assets of Valencia and sale of Willow Valley Water Co., Inc.

("Willow Valley"), which occurred in 2015 and 2016, respectively, a collective revenue requirement increase of $ 3.6 million based on 2011 test year service connections, phased-in over time, with the first increase in January 2015 as follows (in thousands, not updated for the TCJA, refer to Note 1 — "Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC Tax Docket" for further details):

On July 27, 2022, the ACC issued Rate Decision No.

78644 relating to the Company's recent rate case.

Pursuant to Rate Decision No.

78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $ 2.2 million, (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years, as follows:

Incremental Cumulative

2015 $ 1,083 $ 1,083

2016 887 1,970

2017 335 2,305

2018 335 2,640

2019 335 2,975

2020 335 3,310

2021 335 3,645

Whereas this phase-in of additional revenues was determined using a 2011 test year, to the extent that the number of active service connections continues to increase from 2011 levels, the additional revenues may be greater than the amounts set forth above.

On the other hand, if active connections decrease or we experience declining usage per customer, we may not realize all of the anticipated revenues.

• Full reversal of the imputation of CIAC balances associated with funds previously received under infrastructure coordination and financing agreements ("ICFAs"), as required in the Company’s last rate case.

The reversal restored rate base or future rate base and had a significant impact of restoring shareholder equity on the balance sheet.

• The Company has agreed to not enter into any new ICFAs.

Existing ICFAs will remain in place, but a portion of future payments to be received under the ICFAs will be considered as hook-up fees, which are accounted for as CIAC once expended on plant.

• A 9.5 % return on common equity was adopted.

August 1, 2022 $ 1,457,462 $ 1,457,462

January 1, 2023 $ 675,814 $ 2,133,277

January 1, 2024 $ 98,585 $ 2,231,861

To the extent that the number of active service connections has increased and continues to increase from 2019 levels, the additional revenues may be greater than the amounts set forth above.

On the other hand, if active connections decrease or the Company experiences declining usage per customer, the Company may not realize all of the anticipated revenues.

Rate Decision No.

78644 also addressed the primary impacts of the TCJA on the Company, which is the reduction of the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018.

The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate.

On September 20, 2018, the ACC issued Rate Decision No.

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76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirements under Rate Decision No.

Refer to Note 1 — "Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC Tax Docket" for details regarding Rate Decision No.

On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities using the twelve months ending December 31, 2019 as the test year for the rate case.

Refer to Note 1 — “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC Rate Case” for additional information.

The following provides additional discussion on accounting and policy changes resulting from Rate Decision No.

In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities were approximately $ 415,000 , $ 669,000 , $ 16,000 , and $ 5,000 , respectively.

Rate Decision No.

76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes (“ADIT”), including excess ADIT (“EADIT”).

Subsequently, Rate Decision No.

78644 approved an adjustor mechanism for income taxes.

The adjustor mechanism permits the Company to flow through potential changes to state and federal income tax rates as well as refund or collect funds related to TCJA.

The ACC also approved:

(i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated;

(iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding;

(iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources.

Finally, Rate Decision No.

78644 requires the Company to work with ACC staff and the Residential Utility Consumer Office to prepare a Private Letter Ruling request to the Internal Revenue Service (“IRS”) to clarify whether the failure to eliminate the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the Internal Revenue Code ("IRC") would violate the normalization provisions of Section 168(i)(9) of the IRC.

If the IRS accepts the request and issues its ruling, a copy must be provided to the ACC.

Within 90 days after providing the ruling to the ACC, ACC Staff shall prepare, for ACC consideration, a memorandum and proposed order regarding guidance issued within the Private Letter Ruling.

This may result in further action by the ACC, which we are unable to predict due to the uncertainties involved, that could have an adverse impact on our financial condition, results of operations and cash flows.

Certain accounting implications related to Rate Decision No.

78644 were recognized and recorded as of June 30, 2022, and are as follows:

• Reclassification of Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums of approximately $ 0.8 million in the aggregate from goodwill to regulatory assets to be included in rate base.

The premiums are to be amortized over 25 years.

• Reversal of the 2017 TCJA tax reform regulatory liability of approximately $ 0.8 million, which was recorded as a reduction to income tax expense for approximately $ 0.7 million, and as a reduction to interest expense for approximately $ 0.1 million.

• Write-off of approximately $ 0.3 million in capitalized rate case costs.

Infrastructure Coordination and Financing Agreements – ICFAs are agreements with developers and homebuilders whereby GWRI, the indirect parent of the operating utilities, provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder.

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The payments are non-refundable.

The agreements are generally recorded against the land and must be assumed in the event of a sale or transfer of the land.

The agreements are generally recorded against the land with the appropriate recorder's office and must be assumed in the event of a sale or transfer of the land.

The regional planning and coordination of the infrastructure in the various service areas has been an important part of GWRI’s business model.

In February 2014, the ACC issued Rate Decision No.

74364, and concluded ICFA funds already received would no longer be

deemed CIAC for rate making purposes.

ICFA funds already received or which had become due prior to the date of Rate Decision No.

74364 were recognized as revenue once the obligations specified in the ICFA were met.

Rate Decision No.

74364 prescribes that of the ICFA funds which come due and are paid subsequent to December 31, 2013, 70 % of the ICFA funds will be recorded in the associated utility subsidiary as a hook-up fee (“HUF”) liability, with the remaining 30 % to be recorded as deferred revenue, which the Company accounts for in accordance with the Company's ICFA revenue recognition policy.

74364 prescribes that of the ICFA funds received, approximately 70 % of the ICFA funds will be recorded in the associated utility subsidiary as a hook-up fee (“HUF”) liability, with the remaining 30 % to be recorded as deferred revenue, which the Company accounts for in accordance with the Company's ICFA revenue recognition policy.

A HUF tariff, specifying the dollar value of a HUF for each utility, was approved by the ACC as part of Rate Decision No.

The Company is responsible for assuring the full HUF value is paid from ICFA proceeds, and recorded in its full amount, even if it results in recording less than 30% of the ICFA fee as deferred revenue.

The Company will account for the portion allocated to the HUF as a CIAC contribution.

The Company accounts for the portion allocated to the HUF as a CIAC contribution.

However, in accordance with the ACC directives the CIAC is not deducted from rate base until the HUF funds are expended for utility plant.

Such funds will be segregated in a separate bank account and used for plant.

A HUF liability will be established and will be amortized as a reduction of depreciation expense over the useful life of the related plant once the HUF funds are utilized for the construction of plant.

Such funds are segregated in a separate bank account and used for plant.

A HUF liability is established and amortized as a reduction of depreciation expense over the useful life of the related plant once the HUF funds are utilized for the construction of plant.

For facilities required under a HUF or ICFA, the utilities must first use the HUF moneys received, after which, it may use debt or equity financing for the remainder of construction.

The Company will record 30 % of the funds received, up until the HUF liability is fully funded, as deferred revenue, which is to be recognized as revenue once the obligations specified within the ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred.

The Company records 30 % of the funds received, up until the HUF liability is fully funded, as deferred revenue, which is to be recognized as revenue once the obligations specified within the ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred.

As of December 31, 2022 and 2021, ICFA deferred revenue recorded on the consolidated balance sheet totaled $ 21.0 million and $ 19.0 million, respectively, which represents deferred revenue recorded for ICFA funds received on contracts.

The Company recorded $ 0.7 million in ICFA fees in the current year under unregulated revenues.

Intangible assets / Regulatory liability – Pursuant to Rate Decision No.

74364, approximately 70 % of ICFA funds to be received in the future will be recorded as a HUF, until the HUF is fully funded at the Company’s applicable utility subsidiary.

The remaining approximate 30 % of future ICFA funds will be recorded at the parent company level and will be subject to the Company’s ICFA revenue recognition accounting policy.

As the Company now expects to experience an economic benefit from the approximately 30 % portion of future ICFA funds, 30 % of the regulatory liability, or $ 3.4 million, was reversed in 2014.

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The recognition of amortization expense will be partially offset by a corresponding reduction of the regulatory liability.

As of December 31, 2021, regulatory liability recorded on the consolidated balance sheet totaled $ 7.4 million, of which $ 5.9 million relates to the offset of intangible assets related to ICFA contracts obtained in connection with our Santa Cruz, Palo Verde, and Sonoran acquisitions, and the remaining $ 1.5 million relates to the TCJA rate reduction mandated by the ACC pursuant to Rate Decision No.

As of December 31, 2022, the regulatory liability recorded on the consolidated balance sheet totaled $ 6.4 million of which $ 5.9 million relates to the offset of intangible assets related to ICFA contracts obtained in connection with our Santa Cruz, Palo Verde, and Sonoran acquisitions .

REVENUE RECOGNITION

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The Company applies judgment, based principally on historical payment experience, in estimating its customers' ability to pay.

The Company has elected to present sales taxes on a net basis and such, sales taxes are included in Accounts Payable and Accrued Liabilities until remitted to the taxing authorities.

Total revenues do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.

Unregulated Revenue

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ICFA revenues — 683

Other Miscellaneous revenues — 1

Rental revenues — 46

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Refund liability - regulated (2)

Deferred revenue - other — 4

Total contract liabilities $ 20,974 $ 19,797

(1) The decrease in accounts receivable was primarily due to the reimplementation of disconnection notices and disconnections during 2021, which had previously been temporarily suspended due to the COVID-19 pandemic in 2020, coupled with timely collection in billings.

(2) The increase in refund liability is due to the phase-in approach approved in Rate Decision No.

Refer to Note 1—"Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC Tax Docket" for further details.

(1) The increase in accounts receivable was primarily due to increased connections through organic growth and rate increases resulting from Rate Decision No.

Refer to Note 2— "Regulatory Decision and Related Accounting and Policy Changes" for further details.

(2) The decrease in refund liability related to tax reform is due to the phase-in approach approved in Rate Decision No.

Refer to Note 2— "Regulatory Decision and Related Accounting and Policy Changes" for further details.

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods.

Contracted revenue expected to be recognized in future periods was approximately $ 19.0 million at December 31, 2021 and approximately $ 17.8 million at December 31, 2020.

Contracted revenue expected to be recognized in future periods was approximately $ 21.0 million and $ 19.0 million at December 31, 2022 and December 31, 2021, respectively.

Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred.

Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA.

Deferred revenue - other is recognized as revenue once the obligations specified within the rental contract are met.

The Company has recognized the full amount of deferred revenue - other as of December 31, 2021.

On January 1, 2021, the Company adopted ASC 842 using the modified retrospective method.

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The Company elected this practical expedient package for all lessee and lessor arrangements.

In addition, the Company’s leases do not provide an implicit borrowing rate (“IBR”), and as such, we applied judgment when estimating our IBR.

We assessed and reviewed factors related to our credit risk, recent debt issuances, and publicly available data for instruments with similar characteristics.

The Company elected to use the portfolio approach and applied a single discount rate of approximately 5 % to the portfolio.

This election was based on the fact that all leases are of similar terms and our credit rating and interest rate environment are stable.

ASC 842 requires the Company to record a right-of-use asset (“ROU”) and a corresponding lease obligation for all operating leases with a term greater than twelve months.

The current portion of the ROU asset is included in the “ Prepaid expenses and other current assets ” line item on the Company’s consolidated balance sheet.

The remaining noncurrent balance of the ROU asset is included in the line item “Other noncurrent assets” on the Company’s consolidated balance sheet.

In addition, the corresponding lease liabilities current and noncurrent portion are included on the Company’s consolidated balance sheet line items “Other current liabilities” and “ Other noncurrent liabilities ,” respectively.

The adoption of ASC 842 resulted in the initial recognition of ROU assets of $ 189,000 and related lease liabilities of $ 210,000 .

As of December 31, 2021, ROU assets and liabilities totaled $ 81,288 and $ 102,143 , respectively, which primarily relates to office rent.

The Company measures the lease liability at the present value of future lease payments, excluding variable payments based on usage or performance, and calculates the present value using implicit rates.

Leases with an initial term of twelve months or less are not recorded on the balance sheet.

During the year ended December 31, 2022, the Company entered into nine new finance leases for vehicles with either 48 or 60 month terms, all of which include a purchase option.

January 10, 2022, the Company entered into a five-year finance lease for office equipment which expires on January 31, 2027.

There is no purchase option in the lease agreement but the Company controls and obtains substantially all of the benefit from the identified asset.

In December 2021, the Company entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022.

The new monthly rent expense increased to $ 23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and will increase to $ 41,572 for each calendar month commencing on May 1, 2025 through April 30, 2027.

On March 1, 2022 the Company amended the terms of the lease to incorporate construction of tenant improvements.

Should the Company incur additional costs in excess of the landlord improvement allowance, the Company will have the option of paying the expenses at time of possession or amortized over the lease term as additional rent at three percent cost of funds.

Rent expense arising from the operating leases totaled approximately $ 319,000 and $ 197,000 for the years ended December 31, 2022 and 2021, respectively.

In January 2019, the Company's corporate office lease agreement was amended to extend the term of the lease, with a commencement date of March 1, 2019 and termination date of May 31, 2022.

As such, the Company's monthly rent expense increased to approximately $16,000 under this lease.

The right-of-use ("ROU") asset recorded represents the Company’s right to use an underlying asset for the lease term and ROU lease liability represents the Company’s obligation to make lease payments arising from the lease.

Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Right-of-use assets at December 31, 2022 and 2021 consist of the following (in thousands):

December 31, 2022 December 31, 2021

Finance Leases $ 405 $ —

Operating Lease 1,486 —

Total $ 1,891 $ —

Lease liabilities at December 31, 2022 and 2021 consist of the following (in thousands):

December 31, 2022 December 31, 2021

Finance Leases $ 597 $ 341

Operating Lease 1,524 —

Total $ 2,121 $ 341

PROPERTY, PLANT AND EQUIPMENT

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Year Ended December 31,

Plant, equipment, and water and sewer lines 311,041 294,459

Computers, office equipment and software 2,659 2,999

Equipment 55,178 49,859

Office buildings and other structures 54,647 50,264

Transmission and distribution plant 234,218 213,577

Total property, plant, and equipment 344,043 313,700

Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows:

Plant, equipment, and water and sewer lines 5 to 50 years

Computers, office equipment and software 3 to 15 years

Equipment 3 to 30 years

Office buildings and other structures 30 years

Transmission and distribution plant 10 to 50 years

ACCOUNTS RECEIVABLE

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GOODWILL AND INTANGIBLE ASSETS

As of December 31, 2021, the goodwill balance of $ 5.7 million is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, and Las Quintas acquisitions.

The goodwill balance was $ 5.0 million at December 31, 2022.

The balance is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon and Twin Hawks acquisitions.

As of June 30, 2022, the Company reclassified approximately $ 0.8 million of goodwill to regulatory assets related to Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums as a result of Rate Decision No.

78644 (refer to Note 2 - "Regulatory Decision and Related Accounting and Policy Changes" for additional information).

There were no indicators of impairment identified as a result of the Company's review of events and circumstances related to its goodwill subsequent to the acquisitions.

Based on our annual impairment testing performed on November 1st, no impairment was recorded.

Intangible Assets

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Medical claims paid to the plan were approximately $ 0.9 million and $ 1.8 million for the years ended December 31, 2022 and 2021, respectively.

Refer to Note 1 — "Description of Business, Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — Public Offering of Common Stock" for additional information regarding other related party disclosures.

ACCRUED EXPENSES

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Property taxes 1,195 1,238

Accrued project liabilities 1,585 605

Interest 483 492

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Total $ 211 $ 104,451 $ 838 $ 105,500 $ 151 $ 126,440 $ 838 $ 127,429

(1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company's consolidated balance sheets.

They are valued at amortized cost, which approximates fair value.

(1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company's consolidated balance sheets and are valued at amortized cost, which approximates fair value.

The increase was primarily driven by additional funds received in growth areas of several utilities.

(2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company's consolidated balance sheets and is valued at amortized cost, which approximates fair value.

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4.380 % Series A 2016, maturing June 2028

— 28,750 $ — $ 28,750

4.580 % Series B 2016, maturing June 2036

4.65% Harquahala Loan, maturing January 2021 (1)

3,833 76,667 3,833 80,500

Capital lease obligations 142 199 115 136

3,833 105,417 3,833 109,250

Debt issuance costs — ( 472 ) — ( 516 )

Total debt $ 3,833 $ 104,945 $ 3,833 $ 108,734

(1) Represents a loan that was payable to Harquahala Valley Community Benefits Foundation, which was assumed in connection with the Company's acquisition of Eagletail Water Company in May 2017.

The loan was paid off in January 2021.

2016 Senior Secured Notes

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Series B carries a principal balance of $ 80.5 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 beginning December 2021.

The proceeds of the senior secured notes were primarily used to refinance the previously outstanding long-term tax exempt bonds, which were subject to an early redemption option at 103 %, plus accrued interest, as a result of the Company's initial public offering in the United States.

As part of the refinancing of the long-term debt, the Company paid a prepayment penalty of $ 3.2 million and wrote off the remaining $ 2.2 million in capitalized loan fees related to the tax exempt bonds, which were recorded as additional interest expense in the second quarter of 2016.

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

The senior secured notes are collateralized by a security interest in the Company’s equity interest in its subsidiaries, including all payments representing profits and qualifying distributions.

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

Debt issuance costs totaled $ 0.5 million as of both December 31, 2022 and 2021.

The senior secured notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

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The senior secured notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25 .

However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20 .

However, for the quarter ended June 30, 2021 through the quarter ending March 31, 2024, the debt service ratio drops to 1.20 .

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

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Revolving Credit Line

On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (the “Northern Trust Loan Agreement”), for a two-year revolving line of credit up to $ 10.0 million with a maturity date of April 30, 2022.

This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, bears an interest rate equal to LIBOR plus 2.00 % and has no unused line fee.

This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in April 2020.

On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern Trust Loan Agreement which pursuant to, among other things, the maturity date for the Company's revolving credit line was extended from April 30, 2022 to April 30, 2024.

On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (the "Northern Trust Loan Agreement"), for a two-year revolving line of credit initially up to $ 10.0 million with an initial maturity date of April 30, 2022.

This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, initially bore an interest rate equal to London Interbank Offered Rate (LIBOR) plus 2.00 % and has no unused line fee.

On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern Trust Loan Agreement pursuant to which, among other things, the maturity date for the Company's revolving credit line was extended from April 30, 2022 to April 30, 2024.

As of December 31, 2022, the Company had no outstanding borrowings under this credit line.

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As of December 31, 2022, the Company was in compliance with its financial debt covenants.

At December 31, 2021, the remaining aggregate annual maturities of debt and minimum lease payments under capital lease obligations are as follows (in thousands):

Debt Capital Lease

On July 26, 2022, the Company and The Northern Trust Company entered into the second amendment (the "Second Modification Agreement") to the Northern Trust Loan Agreement, which, among other things, further extended the scheduled maturity date for the revolving line of credit from April 30, 2024 to July 1, 2024, increased the maximum principal amount available for borrowing from $ 10.0 million to $ 15.0 million, and replaced the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR).

In 2020, Accounting Standards Update (ASU) 2020-04 was issued establishing ASC 848, Reference Rate Reform, and in 2021 ASU 2021-01 was issued, Reference Rate Reform (Topic 848):

Scope (collectively, ASC 848).

ASC 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts.

The guidance in ASC 848 is optional and may be elected over time as reference rate reform activities occur.

In 2022, ASU 2022-06 was issued, Deferral of the Sunset Date of Topic 848 (ASU 2022-06), to defer the sunset date of ASC 848 to December 31, 2024.

ASU 2022-06 is effective immediately for all companies.

The Company continues to evaluate the impact of ASC 848.

At December 31, 2022, the remaining aggregate annual maturities of debt and minimum lease payments under finance lease obligations are as follows (in thousands):

Debt Finance Lease

2023 $ 3,789 $ 200

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Federal State Total

Current income tax expense $ 1,142 $ 257 $ 1,399

Current income tax expense (benefit) $ ( 1,551 ) $ ( 252 ) $ ( 1,803 )

Deferred income tax expense (benefit) $ 2,265 $ 472 $ 2,737

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Federal State Total

Current income tax expense $ 1,710 $ 270 $ 1,980

Current income tax expense (benefit) $ 1,142 $ 257 $ 1,399

Deferred income tax expense (benefit) ( 215 ) ( 34 ) $ ( 249 )

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Taxable meter deposits 7 $ 19

Net operating loss carry forwards 3,623 —

Balterra intangible asset acquisition 224 224

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Net deferred tax liability $ ( 5,949 ) $ ( 3,269 )

As of December 31, 2021, we have approximately no remaining net operating loss (“NOL”) carry forwards.

As of December 31, 2022, we have approximately $ 14.6 million remaining net operating loss (“NOL”) carry forwards.

The Company had a regulatory asset of $ 3.2 million and $ 2.3 million at December 31, 2022 and December 31, 2021, respectively, related to the 2017 Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017.

The regulatory liability of $ 0.8 million at December 31, 2021 was reversed as of June 30, 2022 due to Rate Decision No.

The reversal was recorded as a reduction to income tax expense for approximately $ 0.7 million, and a reduction to interest expense for approximately $ 0.1 million.

Refer to Note 2 - "Regulatory Decision and Related Accounting Policy and Changes."

The effective tax rates for the years ended December 31, 2022 and 2021 were 14.3 % and 24.2 %, respectively.

The effective tax rate for the year ended December 31, 2021 was greater than the federal statutory rate of 21 % primarily due to the impact of the

regulatory liability recorded as a result of Rate Decision No.

76901, state income taxes, share based compensation, and IRC Section 4534 interest.

The effective tax rate for the year ended December 31, 2022 was lower than the federal statutory rate of 21 % primarily due to the TCJA reversal, state income taxes, share based compensation, and IRC Section 4534 interest.

On November 15, 2021, the Infrastructure Investment and Jobs Act was signed into law and became Public Law No.

117-58, which excludes AIAC and CIAC for regulated water and sewage disposal facility companies from income under IRC Section 118, effective January 1, 2021.

DEFERRED COMPENSATION AWARDS

Stock option awards

Stock option awards is measured based on the fair value of the award.

Stock-based compensation

Stock-based compensation related to option awards is measured based on the fair value of the award.

The fair value of stock option awards is determined using a Black-Scholes option-pricing model.

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The options were granted with an exercise price of $ 11.26 , the market price of the Company's common shares on the NASDAQ Global Market at the close of business on August 13, 2019.

The options vest over a four-year period, with 25 % having vested in August 2020, 25 % vesting in August 2021, 25 % vesting in August 2022, and 25 % vesting in August 2023.

The options vest over a four-year period, with 25 % having vested in August 2020, 25 % having vested in August 2021, 25 % having vested in August 2022, and 25 % vesting in August 2023.

The options have a 10-year life.

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Q1 2020 22,481 1,824 108 125

Q1 2020 22,481 9,122 125 58

27,403 11,155 132 118

22,262 16,697 79 —

Total 135,243 29,676 $ 364 $ 462

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Q1 2015 299,000 $ 4.26 65,500 $ 62 $ 269

Key Executives (2)(4)

Q2 2015 300,000 $ 5.13 — — 623

Members of Management (1)(3)

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(1) The SARs vest ratably over 16 quarters from the grant date.

(2) The SARs vest over 16 quarters, vesting 20 % per year for the first three years, with the remainder, 40 %, vesting in year four.

(2) The exercise price was determined to be the fair market value of one share of GWRC stock on the grant date of February 11, 2015.

(4) The exercise price was determined to be the fair market value of one share of GWRC stock on the grant date of May 8, 2015.

(3) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of August 10, 2017.

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For the twelve months ended December 31, 2022 and 2021, the Company recorded approximately $ 0.04 million and $ 1.1 million of compensation expense related to the PSUs/RSUs and SARs, respectively.

These are liability awards, so when the stock price decreases, cumulative compensation expense is reduced, which can lead to negative compensation in a given period.

Based on GWRI’s closing share price on December 30, 2022 (the last trading date of the year), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands):

Restricted stock compensation

The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense.

On May 7, 2020, the Company's stockholders approved the Global Water Resources, Inc.

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A restricted stock award ("RSA") represents the right to receive a share of the Company's common stock.

RSAs vest over two to three years , beginning on the date of the grant.During the year ended December 31, 2021, 172,650 RSAs were issued.

RSAs vest over two to three years , beginning on the date of the grant.

The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense.

During the year ended December 31, 2022, 87,000 RSAs were issued.

The Company recorded approximately $ 1.3 million of compensation expense related to the grant and partial vesting of RSAs for the year ended December 31, 2022.

During the year ended December 31, 2021, 177,490 RSAs were issued.

The Company recorded approximately $ 1.0 million for the year ended December 31, 2020.

The Company recorded approximately $ 1.2 million of compensation expense related to the grant and partial vesting of RSAs for the year ended December 31, 2021.

The following table summarizes the RSA transactions for the year ended December 31, 2022:

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COMMITMENTS AND CONTINGENCIES

In January 2019, the Company's corporate office lease agreement was amended to extend the term of the lease, with a commencement date of March 1, 2019 and termination date of May 31, 2022.

As such, the Company's monthly rent expense increased to approximately $ 16,000 .

Rent expense arising from the operating leases totaled approximately $ 197,000 and $ 177,000 for the year ended December 31, 2021 and 2020, respectively.

We entered into a new corporate office lease agreement with a commencement date of May 1, 2022.

The new monthly rent expense will increase to $ 23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and $ 41,572 for each calendar month commencing on May 1, 2025 through April 30, 2027.

On March 1, 2022 we amended the terms of the lease to incorporate construction of tenant improvements.

Should we incur additional costs in excess of the landlord improvement allowance, we will have the option of paying the expenses at time of possession or amortized over the lease term as additional rent at three percent cost of funds.

The Company has operating and finance leases for vehicles, office equipment, and office space.

Refer to Note 4 – “Leases” for additional information.

On October 16, 2018, the Company completed the acquisition of Red Rock, an operator of a water and a wastewater utility with service areas in the Pima and Pinal counties of Arizona.

Under the terms of the purchase agreement, the Company is obligated to pay to the seller a growth premium equal to $ 750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date.

As of December 31, 2022, no meters have been installed and no accounts have been established in any of the three growth premium areas.

Contingencies

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SUBSEQUENT EVENT

Acquisition of Twin Hawks Utility, Inc.

On January 13, 2022, the Company completed the acquisition of Twin Hawks Utility, Inc., an operator of a water utility with service area in Pinal County, Arizona.

The acquisition added an additional 18 connections and approximately 0.5 square miles of service area at the time of acquisition.

Acquisition of Rincon Water Company

On January 20, 2022, the Company completed the acquisition of Rincon Water Company, Inc., an operator of a water utility with service area in Pima County, Arizona.

The acquisition added an additional 73 connections and approximately 8.6 square miles of service area at the time of acquisition.

The Company has evaluated subsequent events through March 8, 2023, which is the date the financial statements was available to be issued and also the filing date.

There are no other subsequent events that require disclosure, except for the following:

Acquisition of Farmers Water Co.

On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona, for a total consideration of $ 6.2 million.

The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of CC&N service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County.

The acquisition was accounted for as a business combination under ASC 805, "Business Combinations." The purchase price will be allocated to the acquired utility assets and liabilities assumed based on the seller's book value at acquisition as the historical cost of these assets and liabilities will be the amount the amounts that will continue to be reflected in customer rates.

The initial accounting for the business combination is incomplete at this time due to the close proximity of the acquisition close date to the issuance date of these consolidate financial statements.

Under the terms of the purchase agreement, the Company is obligated to pay the seller a growth premium equal to $ 1,000 for each new account established in the service area, up to a total aggregate growth premium of $ 3.5 million.

The obligation period of the growth premium commences on the closing date of the acquisition and ends ten years after the first new account for residential purposes is established or ten years after the date of closing if a new account has not been established.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 8. Financial Statements and Supplementary Data