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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-11-10 · 173 added, 321 removed, 211 unchanged (70% 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 nine months ended September 30, 2022 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, 2021 (the "2021 10-K") 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 (“MD&A”) relate to the year ended March 31, 2023 and should be read together with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this report.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) of the Company and documents incorporated herein by reference are forward-looking in nature and may constitute “forward-looking information” within the meaning of applicable securities laws.

Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) are forward-looking in nature and may constitute “forward-looking information” within the meaning of applicable securities laws.

Often, but not always, forward-looking statements can be identified by the words “believes”, “anticipates”, “plans”, “expects”, “intends”, “projects”, “estimates”, “objective”, “goal”, “focus”, “aim”, “should”, “could”, “may”, and similar expressions.

These forward-looking statements include future estimates described in “Business Outlook”, "Factors Affecting our Results of Operations", and “Liquidity and Capital Resources”.

These forward-looking statements include, but are not limited to, statements about our strategies;

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78644, including our expected collective revenue increase due to new water and wastewater rates and benefits from consolidation of rates;

our contemplated Private Letter Ruling request in connection with our recent rate case and possible further action that may be taken by the ACC following such request;

acquisition plans and our ability to complete additional acquisitions, including the anticipated acquisition of Farmers Water Co.

and the expected timing and future benefits, such as expected increases in active water service connections, annual revenue and miles of CC&N service area;

our Private Letter Ruling request in connection with our recent rate case and possible further action that may be taken by the ACC following such request;

acquisition plans and our ability to complete additional acquisitions;

population and growth projections;

technologies;

technologies, including expected benefits from implementing such technologies;

operating expenses;

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the impact of accounting changes and other pronouncements;

the anticipated impacts from the COVID-19 pandemic on the Company, including to our business operations, results of operations, cash flows, and financial position;

the anticipated impacts from the novel coronavirus ("COVID-19") pandemic on the Company, including to our business operations, results of operations, cash flows, and financial position;

and our future responses to the COVID-19 pandemic.

Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not, or the times at or by which, such performance or results will be achieved.

Forward-looking statements should not be read as a guarantee of future performance or results.

They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks.

Consequently, actual results may vary materially from what is contained in a forward-looking statement.

Investors are cautioned not to place undue reliance on forward-looking information.

A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under “Risk Factors” in Part I, Item 1A in the 2021 10-K filed with the SEC, as updated from time to time in our subsequent filings with the SEC.

Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the definitive agreement to acquire Farmers Water Co.

will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the definitive agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all;

and whether the Internal Revenue Service (“IRS”) will rule in favor of us in connection with the contemplated Private Letter Ruling request.

Although the forward-looking statements are based upon what management believes to be reasonable assumptions, investors cannot be assured that actual results will be consistent with these forward-looking statements, and the differences may be material.

Further, any forward-looking statement speaks only as of the date of this Form 10-Q.

A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including risks related to legal, regulatory, and legislative matters;

risks related to our business and operations;

risks related to market and financial matters;

risk related to technology;

risks related to the ownership of our common stock;

and certain general risks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

These and other factors are discussed in the risk factors described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Additionally, there may be other risks described from time to time in the reports that we file with the Securities and Exchange Commission (the “SEC”).

Any forward-looking statement speaks only as of the date of this report.

Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

We are 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.

GWRI is a water resource management company that owns, operates, and manages twenty-nine water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, Arizona.

The Company seeks to deploy an integrated approach, referred 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;

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

• Regional planning;

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• 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.

T a b l e o f C o n t e n t s

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

COVID-19 Update

Our water and wastewater services are essential services and we intend to continue to provide those services for our customers.

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 months ended September 30, 2022, 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.

We continue to monitor the impact of the 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 months ended March 31, 2023 and 2022, 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.

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

As of September 30, 2022, the COVID-19 pandemic did not have a material impact on uncollectible accounts.

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

Refer to “Risk Factors” included in Part I, Item 1A of the 2021 10-K for additional risks we face due to the COVID-19 pandemic.

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

Refer to “Risk Factors” included in Part I, Item 1A of the 2022 Form 10-K for additional risks we face due to the COVID-19 pandemic.

Business Outlook

2021 and the first three quarters of 2022 continued the trend of positive growth in new connections.

The trend of positive growth in new connections continued in 2022 and the first three months of 2023.

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 5.8 million people by 2030 and 6.5 million by 2040.

During the three months ended September 30, 2022, Arizona’s employment rate increased by 3.6%, ranking the state in the top twenty-one nationally for job growth.

According to the W.P.

Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel (the “Greater Phoenix Blue Chip Panel”), the single-family housing market experienced a period of very rapid growth in 2021 with approximately 31,000 building permits issued.

Strong underlying demand and an extreme shortage of existing inventory pushed prices up rapidly.

The Greater Phoenix Blue Chip Panel expects this to continue but at a slower pace as lack of product and affordability issues slow demand.

However, while the Phoenix metropolitan area is currently experiencing a slowdown in housing in response to inflation and increased interest rates, management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots and existing infrastructure in place within our services areas.

During the three months ended March 31, 2023, Arizona’s employment rate increased by 3.7%, ranking the state in the top fourteen nationally for job growth.

Despite market data indicating a general slowdown in housing for the Phoenix metropolitan area primarily due to inflation and increased interest rates, management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots and existing infrastructure in place within our services areas.

Factors Affecting our Results of Operations

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• production and treatment costs;

• cybersecurity risks;

• weather and seasonality;

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federal and state governments also regulate environmental, health and safety, and water quality matters.

We continue to execute on our strategy to optimize and focus the Company in order to provide greater value to our customers and shareholders by aiming to deliver predictable financial results, making prudent capital investments, and focusing our efforts on earning an appropriate rate of return on our investments.

We continue to execute on our strategy to optimize and focus the

Company in order to provide greater value to our customers and shareholders by aiming to deliver predictable financial results, making prudent capital investments, and focusing our efforts on earning an appropriate rate of return on our investments.

Population and Community Growth

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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 4,253 connections, or 8.1% (5.7% annualized growth), from a total of 52,254 as of September 30, 2021, to 56,507 as of September 30, 2022.

This increase was primarily due to organic growth in our service areas combined with the acquisition of Global Water - Las Quintas Serenas Water Company, Inc.

("Las Quintas") in November 2021, which contributed 1,250 connections through September 30, 2022.

As of September 30, 2022, active service connections increased 4,176, or 8.0% (5.6% annualized growth), to 56,134 compared to 51,958 active service connections as of September 30, 2021, primarily due to organic growth in our service areas combined with the acquisition of Las Quintas.

As of March 31, 2023, active service connections increased 4,797, or 8.7%, to 59,809 compared to 55,012 active service connections as of March 31, 2022, primarily due to the acquisition of Farmers and organic growth in our service areas.

Approximately 89.2% of the 59,809 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 September 30, 2022.

(“Palo Verde”) utilities as of March 31, 2023.

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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The ACC also decides on an applicable capital structure based on actual or hypothetical analyses.

The ACC determines a “rate of return” on that rate base, which includes the approved capital structure and the actual cost of debt and a fair and reasonable cost of equity based on the ACC's judgment.

The ACC determines a “rate of return” on that rate base, which includes the approved capital structure and the actual cost of debt and a fair and reasonable cost of

equity based on the ACC's judgment.

The overall revenue requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding “prudently” incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments.

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a fixed fee and a consumption or volumetric fee.

For our water utilities, the fixed fee, or “basic service charge,” provides access to water for residential usage and has generally been set at a level to produce approximately 50% of total revenue.

The volumetric fee is based on the total volume of water supplied to a given customer after the minimum number of gallons, if any, covered by the basic service charge, multiplied by a price per gallon set by a tariff approved by the ACC.

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As a result, there is frequently a delay, or regulatory lag, between the time of a capital investment or incurrence of an operating expense increase and when those costs are reflected in rates.

In normal conditions, it would not be uncommon to see us file for a rate increase every three years based on year one being the test year, year two being the rate case filing year, and year three being the rate case award year.

However, based on our settlement with the ACC in 2014 and extended new rate phase-in period, we have not initiated the next rate case on this timeline.

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 year ended December 31, 2019, as the test year for the rate case.

Refer to “—Rate Case Activity” for additional information.

Our water and wastewater operations are also subject to extensive United States federal, state, and local laws and regulations governing the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation rights, and the manner in which we collect, treat, and discharge wastewater.

We are also required to obtain various environmental permits from regulatory agencies for our operations.

The ACC also sets conditions and standards for the water and wastewater services we deliver.

We incur substantial costs associated with compliance with environmental, health and safety, and water quality regulation.

We believe it is common industry practice to file for a rate increase every three to five years.

Refer to “—Rate Case Activity” below and Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Environmental, health and safety, and water quality regulations are complex and change frequently, and they have tended to become more stringent over time.

Although it is difficult to project the ultimate costs of complying with pending or future requirements, we do not expect requirements under current regulations to have a material impact on our operations or financial condition, although it is possible new methods of treating drinking water may be required if additional regulations become effective in the future.

As newer or stricter standards are introduced, they could increase our operating expenses.

We would generally expect to recover expenses associated with compliance for environmental and health and safety standards through rate increases, but this recovery may be affected by regulatory lag.

Economic Environment

The growth of our customer base depends almost entirely on the success of developers in developing residential and commercial properties within our service areas.

Real estate development is a cyclical industry and development in our service areas is contingent upon construction or acquisition of major public improvements, such as arterial streets, drainage facilities, telephone and electrical facilities, recreational facilities, street lighting, and local in-tract improvements (e.g., site grading).

Many of these improvements are built by municipalities with public financing, and municipal resources and access to capital may not be sufficient to support development in areas of rapid population growth.

Infrastructure Investment

Capital expenditures for infrastructure investment are a component of the rate base on which our regulated utility subsidiaries are allowed to earn an equity return.

Capital expenditures for infrastructure provide a basis for earnings growth by expanding our “used and useful” rate base, which is a component of its permitted return on investment and revenue requirement.

Capital expenditures for infrastructure investment are a component of the rate base on which our regulated utility subsidiaries are allowed to earn an equity rate of return.

Capital expenditures for infrastructure provide a basis for earnings growth by expanding our “used and useful” rate base, which is a component of our permitted return on investment and revenue requirement.

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.

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However, we employ a variety of technologies and methodologies to minimize costs and maximize operational efficiencies.

Additionally, with our Total Water Management approach, whereby we maximize the direct beneficial reuse of recycled water, we can realize significant treatment costs and power savings because smaller volumes of water are required for potable use.

Many utilities require that all water be treated to potable standards irrespective of use.

Total Water Management focuses on the right water for the right use.

Potable water is needed for consumption and recycled water is acceptable for non-potable uses such as irrigation.

Non-potable water does not need to be treated for commonly occurring and regulated constituents such as arsenic, or for other current or future human consumption health-based contaminants.

Cybersecurity Risks

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We operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure.

Despite implementation of security measures, our technology systems are vulnerable to disability, failures or unauthorized access.

implementation of security measures, our technology systems are vulnerable to disability, failures or unauthorized access.

Our facilities, information technology systems and other infrastructure facilities and systems and physical assets could be targets of such unauthorized access.

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We have obtained cyber insurance to provide coverage for a portion of the losses and damages that may result from a security breach of our information technology systems, but such insurance may not cover the total loss or damage caused by a breach.

These types of events could also require significant management attention and resources, and could adversely affect Global Water Resources’ reputation with customers and the public.

These types of events could also require significant management attention and resources, and could adversely affect our reputation with customers and the public.

Weather and Seasonality

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The second and third quarters of the year are generally those in which water services revenue and wastewater services revenues are highest.

Accordingly, interim results should not be considered representative of the results of a full year.

For additional information and risks associated with weather and seasonality, see “Risk Factors,” included in Part I, Item 1A of the 2022 Form 10-K.

Access to and Quality of Water Supply

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We currently rely predominantly (and are likely to continue to rely) on the pumping of groundwater and the generation and delivery of recycled water for non-potable uses to meet future demands in our service areas.

At present, groundwater (and recycled water derived from groundwater) is the primary water supply

available to us.

At present, groundwater (and recycled water derived from groundwater) is the primary water supply available to us.

In addition, regulatory restrictions on the use of groundwater and the development of groundwater wells, lack of available water rights, drought, overuse of local or regional sources of water, protection of threatened species or habitats, or other factors, including climate change, may limit the availability of ground or surface water.

Notwithstanding the foregoing, we believe that we have an adequate supply of water to service our current demand and growth for the foreseeable future.

For additional information and risks associated with the access to and quality of water supply, see “Risk Factors,” included in Part I, Item 1A of the 2022 Form 10-K.

Rate Case Activity

On August 28, 2020, 12 of the Company's regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water rates, based on a 2019 test year.

In addition to a rate increase, the Company requested, among other things, the consolidation of water and/or wastewater rates for certain of its utilities, including its Red Rock, Santa Cruz, Palo Verde, Picacho Water, and Picacho Utilities located in Pinal County.

Of the Company’s utilities filing a rate case, these utilities made up approximately 96% of the Company's active service connections at the time of the filing of the rate case application.

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

78644 relating to the Company's recent rate case.

78644 relating to the Company's recent rate case involving 12 of the Company's regulated utilities, consisting of approximately 96% of the Company's active service connections at the time of the rate case application filing.

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:

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

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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.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this form 10-Q for additional information.

ICFA Treatment

From 2003 to 2008, we entered into approximately 154 infrastructure coordination and financing agreements (“ICFAs”) with developers and landowners covering approximately 275 square miles.

Under these agreements, we have a contractual obligation to the developers and landowners to ensure that amongst other things, physical capacity exists through our regulated utilities for water and wastewater to the landowner/developer when needed.

We receive fees from the landowner/developer for undertaking these obligations that typically are a negotiated amount per planned equivalent dwelling unit for the specified development or parcel of land.

Payments are generally due to us from the landowner/developer based on progress of the development, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones and the final payment due upon final plat approval or sale of the subdivision.

The payments are non-refundable.

Our investment can be considerable, as we may phase-in the construction of facilities in accordance with a regional master plan, as opposed to a single development.

With the issuance of Rate Decision No.

74364, in February 2014, the ACC changed how ICFA funds would be characterized and accounted for going forward.

Most notably, the ACC changed the rate treatment of ICFA funds.

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

74364 were accounted for in accordance with our ICFA revenue recognition policy that had been in place prior to the 2010 Regulatory Rate Decision, wherein the funds received are 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, until such time that the HUF tariff is fully funded, after which the remaining funds will be recorded as deferred revenue in accordance with our 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.

We are responsible for assuring the full HUF value is paid from ICFA proceeds, and recorded in its full amount by predetermined milestones in Rate Decision No.

74364, even if it results in recording less than 30% of the ICFA fee as deferred revenue.

We account for the portion of future payments received under these agreements allocated to HUF liability as CIAC.

However, from the regulator’s perspective, HUFs do not impact rate base until the related funds are expended.

These funds are segregated in a separate bank account and used to construct plant assets.

The HUF liability is to be relieved once the funds are used for the construction of plant.

For facilities required under a hook-up fee or ICFA, we must first use the HUF funds received, after which we may use debt or equity financing for the remainder of construction.

The deferred revenue portion of these fees 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.

Pursuant to Rate Decision No.

74364, we have agreed not to enter into any new ICFAs, and instead will utilize HUF tariffs, which have become an acceptable industry practice in Arizona.

As part of the settlement, a HUF tariff was established for each utility.

Existing ICFAs will remain in place, with 70% of future ICFA payments to be recorded as HUFs until the HUF liability is fully funded.

The HUF liability is relieved as funds are expended to construct plant, at which time a corresponding amount is recorded to CIAC.

The portion of ICFA proceeds not recorded as HUF will be recorded as revenue or deferred revenue, in accordance with our ICFA revenue recognition policy.

In addition to ICFAs, we have various line extension agreements with developers and builders, through which funds, water line extensions or wastewater line extensions are provided to us by the developers and are considered refundable advances for construction.

These AIACs are subject to refund by us 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 AIAC becomes nonrefundable and at that time is considered CIAC.

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

For rate-making purposes, a utility plant funded by AIAC and CIAC is excluded from rate base.

The taxability of AIAC and CIAC was changed with the enactment of the Federal Tax Cuts and Jobs Act (the "TCJA").

Previously, the majority of AIAC and CIAC that we collected were not taxable;

however, with the enactment of the TCJA, they were taxable going forward.

On November 27, 2018, the ACC ruled that the utility may require that the contributor 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.

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

Due to the 2021 IRC Section 118 amendment, the Company refunded $1.4 million in developer taxes paid for contributions made after December 31, 2020.

For more details regarding the ruling, refer to "—Corporate Transactions — ACC Tax Docket."

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

Corporate Transactions

Stipulated Condemnation of the Operations and Assets of Valencia

On July 14, 2015, we closed the stipulated condemnation to transfer the operations and assets of Valencia to the City of Buckeye.

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 paid the Company $55.0 million at close, plus an additional $0.1 million in working capital adjustments.

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.

Recent Acquisitions

On February 1, 2023, the Company acquired all of the equity of Farmers Water Co.

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

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

Refer to Note 15 - "Acquisitions" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.

ACC Tax Docket

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.

76901, which set forth the reductions in revenue for the Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to 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 Decision No.

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

74364 enacted in February 2014.

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 was 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 applied in 2021 versus the phased-in rates refunded in 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 were to 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.

In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for the 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).

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

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The Company expects any remaining TCJA recovery to be addressed through the income tax adjustor.

Refer to " — Rate Case Activity" for additional information regarding the Company's recently approved 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 CIAC and 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 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 were excluded from income under IRC Section 118.

Definitive Agreement to Acquire Farmers Water Co.

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, subject to customary closing conditions and ACC approval.

The acquisition, if completed, is expected to add approximately 3,300 active water service connections, approximately $1.5 million in annual revenue, and 21.1 square miles of CC&N service area in Sahuarita, Arizona.

On October 3, 2022, the Company filed an application with the ACC in connection with the acquisition of Farmers Water Co.

The timing of the close of the acquisition is dependent upon regulatory approval and other closing conditions.

Acquisition of Rincon Water Company, Inc.

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.

Acquisition of Twin Hawks Utility, Inc

On January 13, 2022, Santa Cruz 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 to the assets of Santa Cruz.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

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 CIAC and AIAC, which became taxable for the regulated utilities under the TCJA.

However, effective January 1, 2021, CIAC and AIAC for regulated water and sewage disposal facility companies are excluded from income under IRC Section 118.

Stipulated Condemnation of the Operations and Assets of Valencia

On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia to the City of Buckeye.

Public Offering of Common Stock

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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.

Segment Reporting

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 in deciding how to allocate resources and in assessing operating performance.

In consideration of the Financial Accounting Standards Board’s Accounting Standards Codification 280, Segment Reporting , we are not organized around specific products and services, geographic regions, or regulatory environments.

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

While we report revenue, disaggregated by service type, on the face of our statement of operations, we do not manage the business based on any performance measure at the individual revenue stream level.

We do not have any customers that contribute more than 10% to our revenues or revenue streams.

Additionally, the chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our board of directors.

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

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 September 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021 (in thousands, except per share amounts):

For the Three Months Ended September 30,

Revenues $ 11,893 $ 11,404

Operating expenses 9,127 9,111

Operating income 2,766 2,293

Total other income/(expense) (468) (472)

Income before income taxes 2,298 1,821

Income tax expense (612) (323)

Net income $ 1,686 $ 1,498

Basic earnings per common share $ 0.07 $ 0.07

Diluted earnings per common share $ 0.07 $ 0.07

Revenues – The following table summarizes our revenues for the three months ended September 30, 2022 and 2021 (in thousands):

For the Three Months Ended September 30,

Water services $ 5,824 $ 5,067

Wastewater and recycled water services 6,069 5,645

Unregulated revenues — 692

Total revenues $ 11,893 $ 11,404

Total revenues increased $0.5 million, or 4.3%, to $11.9 million for the three months ended September 30, 2022 compared to $11.4 million for the three months ended September 30, 2021.

The increase in revenue was driven by the 8.0% increase in active service connections due to organic growth and new connections associated with the acquisition of Las Quintas in November 2021, combined with the increase in rates related to Rate Decision No.

The increase in revenue was partially offset by the recognition of $0.7 million in ICFA revenues received during the three months ended September 30, 2021 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 that did not recur in the current year quarter.

Water Services – Water services revenue increased $0.8 million, or 14.9%, to $5.8 million for the three months ended September 30, 2022 compared to $5.1 million for the three months ended September 30, 2021.

The increase in water services revenue was primarily related to growth in connections combined with the increase in rates related to Rate Decision No.

Water services revenue based on consumption increased $0.4 million, or 16.7%, to $2.8 million for the three months ended September 30, 2022 compared to $2.4 million for the three months ended September 30, 2021.

The increase was primarily driven by increases in commercial and residential consumption for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Active water connections increased 10.3% to 29,785 as of September 30, 2022 from 27,003 as of September 30, 2021, primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas.

Water consumption increased 18.5% to 1.0 billion gallons for the three months ended September 30, 2022 from 837 million gallons for the three months ended September 30, 2021.

The increase in consumption was primarily related to increased connections as well as lower precipitation in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.4 million, or 14.8%, to $2.9 million for the three months ended September 30, 2022 from $2.5 million for the three months ended September

The increase was primarily driven by an increase in active service connections, which included organic growth combined with new connections associated with the acquisition of Las Quintas, as well as an increase in rates due to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 7.5%, to $6.1 million for the three months ended September 30, 2022 compared to $5.6 million for the three months ended September 30, 2021.

The increase in wastewater and recycled water services revenue was primarily driven by an increase in wastewater services revenue.

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 5.6% to 26,349 as of September 30, 2022, from 24,955 as of September 30, 2021, combined with the increase in rates related to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, was $0.4 million for the three months ended September 30, 2022 compared to $0.3 million for the three months ended September 30, 2021.

The volume of recycled water delivered for the three months ended September 30, 2022 was 246 million gallons compared to 178 million gallons for the three months ended September 30, 2021.

Operating Expenses – The following table summarizes our operating expenses for the three months ended September 30, 2022 and 2021 (in thousands):

For the Three Months Ended September 30,

Operations and maintenance $ 2,775 $ 2,677

General and administrative 3,923 4,078

Depreciation and amortization 2,429 2,356

Total operating expenses $ 9,127 $ 9,111

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 3.7%, to $2.8 million for the three months ended September 30, 2022 compared to $2.7 million for the three months ended September 30, 2021.

Personnel and related expenses increased $0.1 million, or 13.1%, to $1.0 million for the three months ended September 30, 2022 compared to $0.9 million for the three months ended September 30, 2021.

The increase was primarily driven by increased salaries and wages expense and medical insurance due to an increase in medical claims.

Utility power and related expenses increased $0.1 million to approximately $0.7 million for the three months ended September 30, 2022 compared to $0.5 million for the same period in 2021.

The increase was due to increased electric utility expense due to increased pump usage related to additional connections and increased consumption.

Contract services increased $0.1 million to $0.4 million for the three months ended September 30, 2022 from $0.3 million for the three months ended September 30, 2021.

The increase was primarily due to increased costs for billing software related to the additional connections quarter over quarter.

Property taxes decreased $0.2 million, or 28.4%, to $0.5 million for the three months ended September 30, 2022 from $0.6 million for the three months ended September 30, 2021, due to a decrease in property taxes.

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 decreased $0.2 million, or 3.8%, to $3.9 million for the three months ended September 30, 2022 compared to $4.1 million for the three months ended September 30, 2021.

Deferred compensation decreased $0.5 million to $0.3 million for the three months ended September 30, 2022 compared to $0.8 million for the three months ended September 30, 2021.

The decrease was primarily driven by the decrease in the stock price year over year.

Professional fees increased $0.2 million to $0.6 million for the three months ended September 30, 2022 compared to $0.5 million for the three months ended September 30, 2021.

The increase was primarily attributable to legal fees incurred relating to our rate case and acquisition related matters for the three months ended September 30, 2022.

Depreciation and amortization - Depreciation and amortization expense increased approximately $0.1 million, or 3.1%, from the prior year quarter, but remained at $2.4 million for both the three months ended September 30, 2022 and 2021.

The increase was primarily related to depreciation of fixed assets.

Other Expense – Other expense was approximately $0.5 million for both the three months ended September 30, 2022 and 2021.

Income Tax Expense – Income tax expense increased $0.3 million to $0.6 million for the three months ended September 30, 2022 compared to $0.3 million for the three months ended September 30, 2021.

The increase was driven by the increase in income before income taxes, offset by the reversal of approximately $0.7 million related to Rate Decision No.

Net Income – Net income increased 12.6% to $1.7 million for the three months ended September 30, 2022 compared to $1.5 million for the three months ended September 30, 2021.

Comparison of Results of Operations for the Nine Months Ended September 30, 2022 and 2021

The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):

For the Nine Months Ended September 30,

In consideration of the Financial Accounting Standards Board’s Accounting Standards Codification 280, Segment Reporting , the Company 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.

While the Company reports revenue, disaggregated by service type, on the face of the statement of operations, the Company does not manage the business based on any performance measure at the individual revenue stream level.

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

Additionally, the chief operating decision maker uses consolidated financial information to evaluate performance, which is the same basis on which he communicates results and performance to the Company's 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.

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

Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022

The following table summarizes results of operations for the three months ended March 31, 2023 and 2022 (in thousands, except for share amounts):

For the Three Months Ended March 31,

Revenues $ 13,128 $ 10,029

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Diluted earnings per common share $ 0.10 $ 0.04

Revenues – The following table summarizes our revenues for the nine months ended September 30, 2022 and 2021 (in thousands):

For the Nine Months Ended September 30,

Revenues – The following table summarizes revenues for the three months ended March 31, 2023 and 2022 (in thousands):

For the Three Months Ended March 31,

Water services $ 4,839 $ 4,348

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Total revenues $ 13,128 $ 10,029

Total revenues increased $2.0 million, or 6.4%, to $33.6 million for the nine months ended September 30, 2022 compared to $31.6 million for the nine months ended September 30, 2021.

The increase in revenue reflects the 8.0% increase in active service connections due to organic growth, combined with new connections associated with the acquisition of Las Quintas and increases in consumption, as well as an increase in rates due to Rate Decision No.

The increase in revenue was partially offset by the recognition of $0.7 million in ICFA revenues received during the nine months ended September 30, 2021 as discussed above that did not recur in the current year period.

Water Services – Water services revenue increased $1.6 million, or 10.8%, to $15.9 million for the nine months ended September 30, 2022 compared to $14.3 million for the nine months ended September 30, 2021.

The increase in water services revenue was primarily related to growth in connections combined with an increase in rates due to Rate Decision No.

Water services revenue based on consumption increased by $0.6 million, or 8.9%, to $7.2 million for the nine months ended September 30, 2022 compared to $6.6 million for the nine months ended September 30, 2021.

This increase was primarily driven by increases in commercial and residential consumption as well as growth in connections.

Water consumption increased by 246 million gallons, or 10.0%, to 2.7 billion gallons for the nine months ended September 30, 2022 compared to 2.5 billion gallons for the nine months ended September 30, 2021.

The increase was primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas, as well as lower precipitation year over year.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.9 million, or 12.1%, to $8.2 million for the nine months ended September 30, 2022 compared to $7.3 million for the nine months ended September 30, 2021.

The increase was primarily due to the increase in active service connections, which included organic growth combined with new connections associated with the acquisition of Las Quintas, as well as an increase in rates due to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.2 million, or 7.3%, to $17.8 million for the nine months ended September 30, 2022 compared to$16.6 million for the nine months ended September 30, 2021.

Recycled water services revenue, which is based on the number of gallons delivered, increased 16.7% to $1.0 million for the nine months ended September 30, 2022 compared to $0.9 million for the nine months ended September 30, 2021.

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

The volume of recycled water delivered increased 71 million gallons, or 13.5%, to 602 million gallons for the nine months ended September 30, 2022 compared to 530 million gallons for the nine months ended September 30, 2021.

Operating Expenses – The following table summarizes our operating expenses for the nine months ended September 30, 2022 and 2021 (in thousands):

For the Nine Months Ended September 30,

Total revenues increased $3.1 million, or 30.9%, to $13.1 million for the three months ended March 31, 2023 compared to $10.0 million for the three months ended March 31, 2022.

The increase in revenue is primarily attributable to IFCA revenue earned during the quarter that did not occur in 2022, with additional contributions from the increase in rates related to Rate Decision No.

78644, new connections associated with the acquisition of Farmers in February 2023, and organic growth in connections of 2.7%.

Water Services – Water services revenue increased $0.5 million, or 11.3%, to $4.8 million for the three months ended March 31, 2023 compared to $4.3 million for the three months ended March 31, 2022.

The increase in water services revenue was primarily related to the acquisition of Farmers and an increase in rates related to Rate Decision No.

Water services revenue based on consumption was consistent between the three months ended March 31, 2023 and March 31, 2022 and increased by less than $0.1 million, or 0.6%.

Active water connections increased 14.0% to 33,298 as of March 31, 2023 from 29,210 as of March 31, 2022, primarily due to the acquisition of Farmers in February 2023.

Water consumption increased 9.5% to 0.6 billion gallons for both the three months ended March 31, 2023 and March 31, 2022.

The increase in water consumption was primarily due to the acquisition of Farmers in February 2023 partially offset by reduced consumption resulting from a 6% decrease in the average temperature and an increase in precipitation of more than 400% as compared to the same period for the prior year.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.5 million, or 17.9%, to $3.1 million for the three months ended March 31, 2023 compared to $2.7 million for the three months ended March 31, 2022.

The increase was primarily due to the increase in active service connections primarily from new connections associated with the acquisition of Farmers, as well as an increase in rates due to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.3 million, or 6.0%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The increase in wastewater and recycled water services revenue was primarily driven by a $0.4 million increase in wastewater services revenue.

The increase in wastewater services revenue reflects the 2.7% increase in active wastewater connections from 25,802 as of March 31, 2022 to 26,511 as of March 31, 2023, combined with an increase in rates due to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, decreased by approximately 26.1% to $0.1 million for the three months ended March 31, 2023 compared to $0.2 million for the three months ended March 31, 2022.

The decrease in recycled water services revenue was primarily driven by the decrease in number of gallons consumed partially offset by an increase in rates due to Rate Decision No.

The volume of recycled water delivered decreased 30 million gallons, or 30.5%, to 67 million gallons for the three months ended March 31, 2023 compared to 97 million gallons for the three months ended March 31, 2022.

The reduction in recycled water consumption was due to a 6% decrease in the average temperature and an increase in precipitation of more than 400% as compared to the same period for the prior year.

Operating Expenses – The following table summarizes operating expenses for the three months ended March 31, 2023 and 2022 (in thousands):

For the Three Months Ended March 31,

Operations and maintenance $ 2,789 $ 2,543

General and administrative 3,907 3,780

Depreciation and amortization 7,199 6,990

Depreciation 2,655 2,343

Total operating expenses $ 9,351 $ 8,666

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.6 million, or 7.9%, to $8.3 million for the nine months ended September 30, 2022 compared to $7.7 million for the nine months ended September 30, 2021.

Total personnel and related expenses increased $0.2 million, or 10.1%, to $2.6 million for the nine months ended September 30, 2022 compared to $2.4 million for the nine months ended September 30, 2021, primarily due to increased salary and wages expense, partially offset by a decrease in medical benefits expense due to lower medical claims.

Utilities power and related expenses increased $0.2 million, or 13.1%, to $1.7 million for the nine months ended September 30, 2022 from $1.5 million for the nine months ended September 30, 2021.

The increase was due to increased electric utility expense due to increased pump usage related to additional connections and increased consumption.

Contract services increased $0.2 million, or 19.4%, to $1.1 million for the nine months ended September 30, 2022 from $0.9 million for the nine months ended September 30, 2021.

The increase was primarily due to increased costs for billing software related to the additional connections year over year.

These costs increased $0.3 million, or 2.6%, to $11.6 million for the nine months ended September 30, 2022 compared to $11.3 million for the nine months ended September 30, 2021.

Personnel and related expenses increased $0.4 million, or 9.8%, to $4.6 million for the nine months ended September 30, 2022 compared to $4.2 million for the nine months ended September 30, 2021.

The increase was primarily related to increases in salaries and wages for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Professional fees expenses increased $0.6 million, or 45.4%, to $2.0 million for the nine months ended September 30, 2022 from $1.4 million for the nine months ended September 30, 2021.

The increase was primarily related to legal fees incurred relating to the rate case and acquisition related matters for the nine months ended September 30, 2022.

Deferred compensation expenses decreased $1.2 million, or 57.7%, to $0.9 million for the nine months ended September 30, 2022 compared to $2.2 million for the nine months ended September 30, 2021.

The decrease was primarily driven by the decrease in stock price for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Board compensation expenses decreased to $0.1 million for the nine months ended September 30, 2022 compared to $0.6 million for the nine months ended September 30, 2021.

The decrease was primarily driven by the decrease in stock price for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Depreciation and amortization - Depreciation and amortization expense increased approximately $0.2 million, or 3.0%, to $7.2 million for the nine months ended September 30, 2022, from $7.0 million for the nine months ended September 30, 2021.

The increase was primarily driven by an increase in depreciation of fixed assets.

Other Expense – Other expense totaled $1.1 million for the nine months ended September 30, 2022 compared to other expense of $1.5 million for the nine months ended September 30, 2021.

The $0.4 million improvement in other expense was primarily driven by higher net income of $1.3 million related to the Buckeye growth premiums received for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, combined with a decrease in interest expense of $0.6 million.

This was partially offset by $1.5 million of income recognized on the sale of a wireless communication tower during the nine months ended September 30, 2021 that did not recur in the current year period.

Income Tax Expense – Income tax expense decreased $0.1 million to $0.8 million for the nine months ended September 30, 2022 compared to $0.9 million for the nine months ended September 30, 2021.

The decrease was primarily driven by the reversal of approximately $0.7 million related to Rate Case Decision No.

Net Income – Net income increased 43.5% to $4.7 million for the nine months ended September 30, 2022 compared to $3.3 million for the nine months ended September 30, 2021.

The $1.4 million increase was primarily attributed to the $0.9 million increase in operating income and the decrease in income tax expense coupled with the $0.4 million improvement in total other expense for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased $0.2 million, or 9.7%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Total personnel expenses increased $0.2 million, or 23.8%, to $0.9 million for the three months ended March 31, 2023 compared to $0.8 million for the three months ended March 31, 2022.

The increase in personnel expenses was primarily related to higher medical expenses and salary and wage increases, partially offset by lower employee related costs.

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

These costs increased $0.1 million, or 3.4%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Personnel related costs increased $0.3 million, or 22.1%, to $1.7 million for the three months ended March 31, 2023 compared to $1.4 million for the three months ended March 31, 2022.

The increase was primarily related to salary and wage increases and higher medical expenses.

Deferred compensation expense decreased $0.2 million, or 37.9%, to $0.3 million for the three months ended March 31, 2023 compared to $0.5 million for the three months ended March 31, 2022.

The decrease was primarily due to the impact of the change in the stock price, used in the valuation of options that are accounted for as liability awards, (i.e.

the stock price decreased greater during the three months ended March 31, 2023 as compared to the decrease in stock price during the three months ended March 31, 2022).

Refer to Note 1 3 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Professional fees expenses decreased $0.1 million, or 16.1%, to $0.5 million for the three months ended March 31, 2023 compared to $0.6 million for the three months ended March 31, 2022.

The decrease was primarily related to reduced legal fees in connection with rate case activity, partially offset by an increase in professional fees for acquisition related matters.

Depreciation and amortization - Depreciation and amortization expense increased $0.3 million, or 13.3%, to $2.7 million for the three months ended March 31, 2023, compared to $2.3 million for the three months ended March 31, 2022.

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

Other Income/Expense – Other expense totaled $0.4 million for the three months ended March 31, 2023 compared to $0.1 million for the three months ended March 31, 2022.

The increase of $0.3 million in other expense was related to the $0.6 million decrease in income associated with Buckeye growth premiums, as a result of fewer new meter connections in the area, partially offset by a decrease in interest expense of $0.3 million primarily attributable to an increase in capitalized interest for the three months ended March 31, 2022.

Income Tax Expense – Income tax expense of $0.9 million was recorded for the three months ended March 31, 2023 compared to $0.3 million for the three months ended March 31, 2022.

The increase was primarily driven by the increase in pre-tax income for the three months ended March 31, 2023..

Net Income – N et income totaled $2.5 million for the three months ended March 31, 2023 compared to net income of $0.9 million for the three months ended March 31, 2022.

The $1.6 million increase was primarily attributable to the acquisition of Farmers in February 2023, the recognition of $2.3 million of ICFA related revenue, the recognition of approximately $0.4 million in allowance for funds used during construction ("AFUDC"), and an increase in rates related to Rate Decision No.

78644, partially offset by an increase in operational expenses of approximately $0.2 million, increased general and administrative expenses of $0.1 million, and higher depreciation expenses of $0.3 million.

Outstanding Share Data

As of November 9, 2022, there were 23,866,286 shares of our common stock outstanding and stock-based awards to acquire an additional 755,695 shares of our common stock outstanding.

As of May 2, 2023, there were 23,871,046 shares of the Company's common stock outstanding and stock based awards to acquire an additional 517,454 shares of the Company's common stock outstanding.

Liquidity and Capital Resources

Our capital resources are provided by internally generated cash flows from operations as well as debt and equity financing.

Additionally, our regulated utility subsidiaries receive advances and contributions from customers, home builders, and real estate developers to partially fund construction necessary to extend service to new areas.

We use our capital resources to:

The Company's capital resources are provided by internally generated cash flows from operations as well as debt and equity financing.

Additionally, the regulated utility subsidiaries receive advances and contributions from customers, home builders, and real estate developers to partially fund construction necessary to extend service to new areas.

The Company uses capital resources to:

• fund operating costs;

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• invest in new and existing ventures.

Our utility subsidiaries operate in rate-regulated environments in which the amount of new investment recovery may be limited.

The Company's utility subsidiaries operate in rate-regulated environments in which the amount of new investment recovery may be limited.

Such recovery will take place over an extended period of time because recovery through rate increases is subject to regulatory lag.

As of September 30, 2022, we have no notable near-term cash expenditures, other than the principal payments for our Series B senior secured notes in the amount of $1.9 million due in December 2022 and $1.9 million due in June 2023.

While specific facts and circumstances could change, we believe that we have sufficient cash on hand, the ability to draw on our $15.0 million revolving line of credit (which reflects the increased borrowing amount under this recently amended facility as discussed below), 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 the next twelve months and beyond.

In March 2014, we initiated a dividend program to declare and pay a monthly dividend.

On November 30, 2021, we announced a monthly dividend increase from $0.02434 per share ($0.29208 per share annually) to $0.02458 per share ($0.29496 per share annually).

Although we expect monthly dividends will be declared and paid for the foreseeable future, the declaration of any dividends is at the discretion of our board of directors and is subject to legal requirements and debt service ratio covenant requirements (refer to “—Senior Secured Notes" and "—Revolving Line of Credit").

As of March 31, 2023, the Company has no notable near-term cash expenditures, other than the principal payments for the Series B senior secured notes in the amount of $1.9 million due in each of June and December of 2023.

While specific facts and circumstances could change, the Company believes that there is sufficient cash on hand, the ability to draw on the $15.0 million revolving line of credit (which reflects the increased borrowing amount under this recently amended facility as discussed below), and will be able to generate sufficient cash flows to meet the operating cash flow requirements and capital expenditure plan, as well as remain in compliance with the debt covenants, for the next twelve months and beyond.

In March 2014, the Company initiated a dividend program to declare and pay a monthly dividend.

On November 30, 2022, the Company announced a monthly dividend increase from $0.02458 per share ($0.29496 per share annually) to $0.02483 per share (0.29796 per share annually).

Although the Company expects that monthly dividends will be declared and paid for the foreseeable future, the declaration of any dividends is at the discretion of the Company's board of directors and is subject to legal requirements and debt service ratio covenant requirements (refer to “—Senior Secured Notes" and "—Revolving Credit Line").

Cash from Operating Activities

Cash flows provided by operating activities are used for operating needs and to meet capital expenditure requirements.

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 nine months ended September 30, 2022, our net cash provided by operating activities totaled $19.7 million compared to $15.2 million for the nine months ended September 30, 2021.

The $4.5 million increase in cash from operating activities was primarily driven by the improvement in net income, combined with the increase in noncurrent liabilities relating to CIAC from developers for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The Company's 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 three months ended March 31, 2023, net cash provided by operating activities totaled approximately $6.5 million compared to $5.4 million for the three months ended March 31, 2022.

The $1.1 million increase in cash from operating activities was primarily driven by a decrease of $1.2 million in other current assets for 2021 tax refunds for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Cash from Investing Activities

Our net cash used in investing activities totaled $25.4 million for the nine months ended September 30, 2022 compared to $11.8 million for the nine months ended September 30, 2021.

The $13.6 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of $13.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

We continue to invest capital prudently in our existing, core service areas where we are able to deploy our Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities.

Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

As a result, we may reduce capital expenditures to correspond with any decreases in demand for housing in our service areas.

The net cash used in investing activities totaled approximately $12.8 million for the three months ended March 31, 2023 compared to $6.3 million for the three months ended March 31, 2022.

The $6.5 million increase in cash used in investing activities was primarily driven by the $6.2 million acquisition of Farmers, and an increase in capital expenditures of $0.4 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The Company continues to invest capital prudently in existing, core service areas where the Company is able to deploy the Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities.

The projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

As a result, the Company may reduce capital expenditures to correspond with any decreases in demand for housing in service areas.

Cash from Financing Activities

Our net cash provided by financing activities totaled $8.8 million for the nine months ended September 30, 2022 compared to $2.7 million in cash used in financing activities for the nine months ended September 30, 2021.

This change was primarily driven by the $14.9 million in net proceeds received from our public offering of common stock in August 2022, partially offset by a $1.9 million principal payment for our Series B senior secured notes for the nine months ended September 30, 2022.

The net cash provided by financing activities totaled $1.8 million for the three months ended March 31, 2023, a $2.4 million change, as compared to the $0.6 million in cash used in financing activities for the three months ended March 31, 2022.

This change was primarily driven by the $3.5 million in net cash proceeds from the Company's revolving line of credit, offset by a decrease in advances in aid of construction for the three months ended March 31, 2023.

Senior Secured Notes

On June 24, 2016, we issued two series of senior secured notes with a total principal balance of $115.0 million at a blended interest rate of 4.55%.

On June 24, 2016, the Company issued two series of senior secured notes with a total principal balance of $115.0 million at a blended interest rate of 4.55%.

Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38% over a twelve-year term, with the principal payment due on June 15, 2028.

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Series B was 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.

The proceeds of the senior secured notes were primarily used to refinance the Company's long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the Company's U.S.

initial public offering of its common stock in May 2016.

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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Consolidated debt service is calculated as interest expense, principal payments, and dividend or stock repurchases.

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 debt service ratio drops to 1.20.

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

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.

As of September 30, 2022, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of both September 30, 2022 and December 31, 2021 remained consistent at $0.5 million.

Revolving Line of Credit

As of March 31, 2023, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of both March 31, 2023 and December 31, 2022 were $0.5 million.

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 initially up to $10.0 million with an initial maturity date of April 30, 2022.

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

As of September 30, 2022, we had no outstanding borrowings under this credit line.

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 revolving line of credit was extended to April 30, 2024.

On July 26, 2022, the Company and The Northern Trust Company entered into a second amendment to the Northern Trust Loan Agreement, which, among other things, further extended the maturity date for the revolving line of credit to July 1, 2024, increased the maximum principal amount available for borrowing to $15.0 million and replaced the LIBOR interest rate provisions .

Refer to Note 1 – “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements - Corporate Transactions - Revolving Line of Credit" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

Refer to Note 11 – “Debt" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Similar to the senior secured notes, the Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

The Northern Trust Loan Agreement also contains 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 debt ratio drops to 1.20.

The Northern Trust Loan

Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25.

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

Additionally, the Northern Trust Loan Agreement contains certain restrictive covenants that limit, among other things, the Company’s ability to:

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and change the nature of the business.

The foregoing covenants were subject to various qualifications and limitations as set forth in the Northern Trust Loan Agreement.

The foregoing covenants are subject to various qualifications and limitations as set forth in the Northern Trust Loan Agreement.

Pursuant to the Northern Trust Loan Agreement, the revolving credit facility is subject to certain customary events of default after which the revolving credit facility could be declared due and payable if not cured within the grace period or, in certain circumstances, could be declared due and payable immediately.

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 September 30, 2022, the Company was in compliance with its financial debt covenants.

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

As of March 31, 2023, the Company was in compliance with its financial debt covenants.

As of March 31, 2023, the Company had outstanding borrowings of $3.5 million under this credit line with The Northern Trust Company.

The Company did not incur debt issuance costs relating to the Northern Trust Loan Agreement for the three months ended March 31, 2023 or March 31, 2022.

Financing Activity

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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.

Contractual Obligations

There have been no material changes in our reported contractual obligations from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” in the 2021 10-K.

Insurance Coverage

We carry various property, casualty, and financial insurance policies with limits, deductibles, and exclusions consistent with industry standards.

The Company carries various property, casualty, and financial insurance policies with limits, deductibles, and exclusions consistent with industry standards.

However, insurance coverage may not be adequate or available to cover unanticipated losses or claims.

We are self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained.

Such losses could have a material adverse effect on our short-term and long-term financial condition and the results of operations and cash flows.

The Company is self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained.

Such losses could have a material adverse effect on the Company's short-term and long-term financial condition and the results of operations and cash flows.

Contractual Obligations

Critical Accounting Policies, Judgments, and Estimates

The application of critical accounting policies is particularly important to our financial condition and results of operations and provides a framework for management to make significant estimates, assumptions, and other judgments.

Additionally, our financial condition, results of operations, and cash flow are impacted by the methods, assumptions, and estimates used in the application of critical accounting policies.

Although our management believes that these estimates, assumptions, and other judgments are appropriate, they relate to matters that are inherently uncertain and that may change in subsequent periods.

Accordingly, changes in the estimates, assumptions, and other judgments applied to these accounting policies could have a significant impact on our financial condition and results of operations as reflected in our financial statements.

The application of critical accounting policies is particularly important to the Company's financial condition and results of operations and provides a framework for management to make significant estimates, assumptions, and other judgments.

Additionally, the Company's financial condition, results of operations, and cash flow are impacted by the methods, assumptions, and estimates used in the application of critical accounting policies.

Although management believes that these estimates, assumptions, and other judgments are appropriate, they relate to matters that are inherently uncertain and that may change in subsequent periods.

Accordingly, changes in the estimates, assumptions, and other judgments applied to these accounting policies could have a significant impact on the Company's financial condition and results of operations as reflected in its financial statements.

There have been no significant changes to our critical accounting policies from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies, Judgments, and Estimates” in the 2022 10-K.

Off Balance Sheet Arrangements

As of September 30, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2023 and 2022, the Company did not have any off-balance sheet arrangements.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

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