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Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-03 · 186 added, 130 removed, 254 unchanged (55% 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 (“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.

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 three and six months ended June 30, 2023 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.

Cautionary Statement Regarding Forward-Looking Statements

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.

Certain statements in this Quarterly Report on 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.

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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 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;

our Private Letter Ruling request in connection with our previous 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;

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our ability to repay indebtedness and invest in initiatives;

impact and resolutions of legal matters;

the impact of tax changes;

the impact of accounting changes and other pronouncements;

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.

the anticipated impact and resolutions of legal matters;

the anticipated impact of new or proposed laws, including regulatory requirements, tax changes, and judicial decisions;

the anticipated impact of accounting changes and other pronouncements.

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

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

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

• 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 the Total Water Management approach;

• 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.

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.

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

its severity;

the emergence and severity of its variants;

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

general economic factors, such as increased inflation;

supply chain constraints;

labor supply issues;

restrictions on travel and transportation;

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

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

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

There was a trend of positive growth in new connections during 2022, and during the first six months of 2023, growth continued at a moderate rate.

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 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.

The twelve-month rolling average for job growth in Arizona as of June 30, 2023 was 2.8%, and the state continues to be ranked in the top half 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, existing infrastructure in place within our services areas, and increased activity related to multi-family developments.

Factors Affecting our Results of Operations

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• access to and quality of water supply.

The COVID-19 pandemic may impact the degree to which these factors affect our financial condition and results of operations as discussed above under "COVID-19 Update."

We are subject to economic regulation by the state regulator, the ACC.

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.

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.

As of June 30, 2023, active service connections increased 4,477, or 8.0%, to 60,291 compared to 55,814 active service connections as of June 30, 2022, primarily due to the acquisition of Farmers Water Co.

(“Farmers”) and organic growth in our service areas.

Approximately 89.4% of the 60,291 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 March 31, 2023.

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

Additionally, our water and wastewater utility operations are subject to extensive regulation by U.S.

federal, state, and local regulatory agencies that enforce environmental, health, and safety requirements, which affect all of our regulated subsidiaries.

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.

For example, on March 14, 2023, the U.S.

Environmental Protection Agency (“EPA”) announced the proposed National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”).

The NPDWR proposed maximum contaminant levels (“MCLs”) in drinking water.

If finalized as proposed, the regulation will require public water systems to monitor for these compounds.

It will also require public water systems to notify customers and treat drinking water to reduce the compounds, if the MCL is exceeded.

The proposed NPDWR was issued for public comment and the EPA expects to finalize the regulation by early 2024.

Once the rule is finalized, water systems will be required to comply with the rule after a specified implementation period, anticipated to be three years from the rule-adoption date.

The Company is currently reviewing the proposed regulation as compared to our current treatment standards and expect that the regulation, once finalized, will result in changes to or addition of certain treatment processes that will require increased capital expenditures and water treatment and other operating costs.

As other newer or stricter standards are introduced in the future, they could also 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.

Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by the ACC as appropriate for inclusion in establishing rates.

Infrastructure Investment

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

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.

Despite 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.

Failures or breaches of our systems could impact the reliability of our systems and also subject us to financial harm.

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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.

Additionally, in the majority of the Phoenix Active Management Area, the Arizona Department of Water Resources (“ADWR”) has paused the issuance of new certificates of assured water supply based on groundwater and paused modifications of any designations of assured water supply for the increase in groundwater.

1.76% of the Company’s water connections are located within the Phoenix Active Management Area.

We believe that we have an adequate supply of water to service our current demand and growth for the foreseeable future in our service areas.

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 June 27, 2023, seven of the Company’s 13 regulated utilities each filed a rate case application with the ACC for water rates based on a 2022 test year.

In addition to a rate increase, the Company requested, among other things, the consolidation of water rates for certain of its utilities, including Mirabell, Lyn Lee, Francesca, Tortolita, Rincon, Las Quintas Serenas, and Red Rock, each located in Pima County.

Of the Company’s utilities, these utilities filing rate applications make up approximately 3% of the Company’s active service connections.

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

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

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

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

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.

78644 relating to the Company’s previous rate case involving 12 of the Company’s regulated utilities, which consisted 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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(ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Turner Ranches utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above;

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

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

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

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(“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.

The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of 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 September 20, 2018, the ACC issued Rate Decision No.

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 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 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.

78644, which approved an adjustor mechanism for income taxes.

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

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

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.

Private Placement Offering of Common Stock

On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder.

The Company received gross proceeds of approximately $2.8 million from the offering.

Public Offering of Common Stock

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

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

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

Stipulated Condemnation of the Operations and Assets of Valencia

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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.

Public Offering of Common Stock

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

Segment Reporting

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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,

Comparison of Results of Operations for the Three Months Ended June 30, 2023 and 2022

The following table summarizes results of operations for the three months ended June 30, 2023 and 2022 (in thousands, except for share amounts):

For the Three Months Ended June 30,

Revenues $ 13,000 $ 11,707

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Diluted earnings per common share $ 0.07 $ 0.09

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,

Revenues – The following table summarizes revenues for the three months ended June 30, 2023 and 2022 (in thousands):

For the Three Months Ended June 30,

Water services $ 6,557 $ 5,682

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Total revenues $ 13,000 $ 11,707

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.

Total revenues increased $1.3 million, or 11.0%, to $13.0 million for the three months ended June 30, 2023 compared to $11.7 million for the three months ended June 30, 2022.

The increase in revenue was primarily attributable to the increase in rates related to Rate Decision No.

78644, new connections associated with the acquisition of Farmers in February 2023, and year over year organic growth in connections of 2.0%.

Water Services – Water services revenue increased $0.9 million, or 15.4%, to $6.6 million for the three months ended June 30, 2023 compared to $5.7 million for the three months ended June 30, 2022.

The increase in water services revenue was primarily related to the acquisition of Farmers in February 2023 and increase in rates related to Rate Decision No.

Water services revenue based on consumption increased $0.4 million, or 13.2%, to $3.2 million for the three months ended June 30, 2023 compared to $2.8 million for the three months ended June 30, 2022.

The increase was primarily driven by the Farmers acquisition in February 2023, increases in commercial and residential consumption for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, and an increase in rates related to Rate Decision No.

Active water connections increased 13.3% to 33,580 as of June 30, 2023 from 29,627 as of June 30, 2022, primarily due to the acquisition of Farmers in February 2023.

Water consumption was fairly consistent at 1.1 billion gallons for both the three months ended June 30, 2023 and 2022.

There was a modest increase of 5.6% in consumption which was primarily due to the acquisition of Farmers in February 2023 partially offset by reduced consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.5 million, or 17.5%, to $3.2 million for the three months ended June 30, 2023 compared to $2.7 million for the three months ended June 30, 2022.

The increase was primarily due to growth 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 $0.4 million, or 7.0%, to $6.4 million for the three months ended June 30, 2023 compared to $6.0 million the three months ended June 30, 2022.

The increase in wastewater and recycled water services revenue was primarily driven by a $0.4 million increase in wastewater services revenue, which reflects the 2.0% increase in active wastewater connections from 26,187 as of June 30, 2022 to 26,711 as of June 30, 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, increased by approximately 10.8% to $0.5 million for the three months ended June 30, 2023 compared to $0.4 million for the three months ended June 30, 2022.

The increase in recycled water services revenue was primarily driven by the volume of recycled gallons delivered, which increased 11.9% to 289.2 million gallons for three months ended June 30, 2023 compared to 258.5 million gallons for the three months ended June 30, 2022.

Also contributing to the increase was the rate increase resulting from Rate Decision No.

Operating Expenses – The following table summarizes operating expenses for the three months ended June 30, 2023 and 2022 (in thousands):

For the Three Months Ended June 30,

Operations and maintenance $ 3,181 $ 2,942

General and administrative 4,104 3,876

Depreciation and amortization 2,705 2,427

Total operating expenses $ 9,990 $ 9,245

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 8.1%, to $3.2 million for the three months ended June 30, 2023 compared to $2.9 million for the three months ended June 30, 2022, which was largely attributed to the Farmers acquisition.

Total personnel expenses increased $0.2 million, or 22.1%, to $1.1 million for the three months ended June 30, 2023 compared to $0.9 million for the three months ended June 30, 2022.

The increase in personnel expenses was primarily related to the acquisition of Farmers in February 2023 and increased salary and wages, partially offset by lower employee related costs.

Utility power and related expenses increased $0.1 million to $0.7 million for the three months ended June 30, 2023 compared to $0.6 million for the same period in 2022.

The increase was due to the increased electric utility expense based on pump usage related to additional connections, from both the Farmers acquisition and organic growth, and increased consumption.

Repairs and maintenance expenses decreased $0.1 million to $0.1 million for the three months ended June 30, 2023 compared to $0.2 million for the same period in 2022.

The decrease was primarily related to reduced maintenance costs for plant equipment.

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 $0.2 million, or 5.9%, to $4.1 million for the three months ended June 30, 2023 compared to $3.9 million for the three months ended June 30, 2022.

Personnel related costs increased $0.2 million, or 11.1%, to $1.7 million for the three months ended June 30, 2023 compared to $1.5 million for the three months ended June 30, 2022.

The increase was primarily related to higher salaries and wages and employee related expenses due to an increase in head count.

Deferred compensation expense increased $0.3 million, or 186.1%, to $0.4 million for the three months ended June 30, 2023 compared to $0.1 million for the three months ended June 30, 2022.

The increase 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 was consistent during the three months ended June 30, 2023 as compared to the decrease in stock price during the three months ended June 30, 2022).

Refer to Note 13 — “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 $0.3 million, or 33.6%, to $0.5 million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended June 30, 2022.

The decrease was primarily related to reduced legal fees in connection with rate case and acquisition activity, partially offset by an increase in audit and tax preparation fees.

Board compensation increased $0.1 million for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

The increase was primarily due to the impact of the change in the stock price used in the valuation of board compensation as discussed above.

Depreciation and amortization - Depreciation and amortization expense increased $0.3 million, or 11.5%, to $2.7 million for the three months ended June 30, 2023, compared to $2.4 million for the three months ended June 30, 2022.

The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets.

Approximately $48,000 of depreciation expense for the quarter was attributable Farmers.

Other Expense – Other expense totaled $0.5 million for both the three months ended June 30, 2023 and 2022.

Although interest expense increased $0.2 million in the second quarter of 2023 as compared to the same period in 2022, it was substantially offset by the increase of equity portion of the allowance for funds used during construction.

Income Tax Expense – Income tax expense of $0.7 million was recorded for the three months ended June 30, 2023 compared to a $0.2 million income tax benefit for the three months ended June 30, 2022.

The primary drivers for the change were due to the approximate $0.7 million income tax benefit recognized during the three months ended June 30, 2022 that resulted from the reversal of the regulatory liability related to Rate Decision No.

78622 and the increase in pre-tax income for the three months ended three months ended June 30, 2023.

Net Income – Net income totaled $1.7 million for the three months ended June 30, 2023 compared to net income of $2.1 million for the three months ended June 30, 2022.

The $0.4 million decrease was primarily attributable to increased tax expense of $0.9 million, increased general and administrative expenses of $0.2 million, higher depreciation expenses of $0.3 million, and an increase in operational expenses of approximately $0.2 million, all of which were partially offset by increased revenue from the acquisition of Farmers in February 2023 and increase in rates related to Rate Decision No.

Comparison of Results of Operations for the Six Months Ended June 30, 2023 and 2022

The following table summarizes results of operations for the six months ended June 30, 2023 and 2022 (in thousands, except for share amounts):

For the Six Months Ended June 30,

Revenues $ 26,128 $ 21,736

Operating expenses 19,341 17,911

Operating income 6,787 3,825

Total other expense (986) (636)

Income before income taxes 5,801 3,189

Income tax expense (1,596) (193)

Net income $ 4,205 $ 2,996

Basic earnings per common share $ 0.18 $ 0.13

Diluted earnings per common share $ 0.17 $ 0.13

Revenues – The following table summarizes revenues for the six months ended June 30, 2023 and 2022 (in thousands):

For the Six Months Ended June 30,

Water services $ 11,396 $ 10,030

Wastewater and recycled water services 12,464 11,701

Unregulated revenues 2,268 5

Total revenues $ 26,128 $ 21,736

Total revenues increased $4.4 million, or 20.2%, to $26.1 million for the six months ended June 30, 2023 compared to $21.7 million for the six months ended June 30, 2022.

The increase in revenue was primarily attributable to ICFA revenue earned during the 2023 period that did not occur in the prior year period, 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 connection growth.

Water Services – Water services revenue increased $1.4 million, or 13.6%, to $11.4 million for the six months ended June 30, 2023 compared to $10.0 million for the six months ended June 30, 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.

Water services revenue based on consumption increased $0.4 million, or 9.0%, to $4.8 million for the six months ended June 30, 2023 compared to $4.4 million for the six months ended June 30, 2022.

The increase was primarily driven by the Farmers acquisition in February 2023 and increase in rates related to Rate Decision No.

Active water connections increased 12.5% to 33,580 as of June 30, 2023 from 29,627 as of June 30, 2022, primarily due to the acquisition of Farmers in February 2023.

Water consumption increased 3.2% to 1.8 billion gallons for the six months ended June 30, 2023 compared to 1.7 billion for the six months ended June 30, 2022.

The increase was primarily due to the acquisition of Farmers in February 2023 partially offset by reduced consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $1.0 million, or 18.0%, to $6.3 million for the six months ended June 30, 2023 compared to $5.3 million for the six months ended June 30, 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,

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.8 million, or 6.5%, to $12.5 million for the six months ended June 30, 2023 compared to $11.7 million for the six months ended June 30, 2022.

The increase in wastewater and recycled water services revenue was primarily driven by a $0.8 million increase in wastewater services revenue resulting from the 2.0% increase in active wastewater connections from 26,187 as of June 30, 2022 to 26,711 as of June 30, 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, moderately increased by approximately 0.7% and was $0.6 million for both the six months ended June 30, 2023 and June 30, 2022.

The volume of recycled water delivered was generally consistent with 357 million gallons delivered for the six months ended June 30, 2023 compared to 355 million gallons delivered for the six months ended June 30, 2022, representing an increase of 0.6%.

Operating Expenses – The following table summarizes operating expenses for the six months ended June 30, 2023 and 2022 (in thousands):

For the Six Months Ended June 30,

Operations and maintenance $ 5,970 $ 5,485

General and administrative 8,011 7,656

Depreciation 2,655 2,343

Depreciation and amortization 5,360 4,770

Total operating expenses $ 19,341 $ 17,911

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.

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 approximately $0.5 million, or 8.8%, to $6.0 million for the six months ended June 30, 2023 compared to $5.5 million for the six months ended June 30, 2022.

Total personnel expenses increased approximately $0.4 million, or 22.9%, to $2.0 million for the six months ended June 30, 2023 compared to $1.7 million for the six months ended June 30, 2022.

The increase was primarily related to salaries and wages and employee related expenses due to an increase in head count.

Utility power and related expenses increased $0.2 million to $1.2 million for the six months ended June 30, 2023 compared to $1.1 million for the same period in 2022.

The increase was due to increased electric utility expense due to increased pump usage related to additional connections, from both the Farmers acquisition and organic growth, and increased consumption.

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).

These costs increased $0.4 million, or 4.6%, to $8.0 million for the six months ended June 30, 2023 compared to $7.7 million for the six months ended June 30, 2022.

Notable increases were related to personnel costs, deferred compensation and board compensation.

Personnel increases were driven by the Farmers acquisition and an increase in head count, while the deferred compensation and board compensation expense were a direct result of the change in stock price impacting certain valuations (i.e., the stock price decreased less during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022).

Refer to Note 13 — “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.

Other expenses decreased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, such as professional fees expense and regulatory expenses, which were directly related to the rate case activity, capital raise and acquisition related matters during 2022.

Depreciation and amortization - Depreciation and amortization expense increased $0.6 million, or 12.4%, to $5.4 million for the six months ended June 30, 2023, compared to $4.8 million for the six months ended June 30, 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.

Approximately $92,000 of the depreciation for the first half of 2023 was attributable to Farmers.

Other Expense – Other expense totaled $1.0 million for the six months ended June 30, 2023 compared to $0.6 million for the six months ended June 30, 2022.

The increase of $0.4 million in other expense was related to the $0.7 million decrease in income associated with Buckeye growth premiums as a result of fewer new meter connections in the area and an increase in interest expense of $0.1 million, partially offset by an increase in the allowance for funds used during construction (“AFUDC”) of $0.4 million for the six months ended June 30, 2023.

Income Tax Expense – Income tax expense of $1.6 million was recorded for the six months ended June 30, 2023 compared to $0.2 million for the six months ended June 30, 2022.

During the six months ended June 30, 2022, the Company recorded a tax benefit of approximately $0.7 million from the reversal of the regulatory liability related to Rate Decision No.

Also contributing to the increase in income tax expense was higher pre-tax income for the six months ended June 30, 2023.

Net Income – N et income totaled $4.2 million for the six months ended June 30, 2023 compared to net income of $3.0 million for the six months ended June 30, 2022.

The $1.2 million increase was primarily attributable to the recognition of $2.3 million of ICFA related revenue, an increase in rates related to Rate Decision No.

78644, and the acquisition of Farmers.

Outstanding Share Data

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.

As of August 9, 2023, there were 24,170,517 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 447,322 shares of the Company’s common stock.

Liquidity and Capital Resources

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:

Additionally, its 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 primarily to:

• fund operating costs;

• fund capital requirements, including construction expenditures;

• pay dividends;

• fund acquisitions;

• make debt and interest payments;

• invest in new and existing ventures.

• fund acquisitions;

• pay dividends.

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 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.

As of June 30, 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 December 2023 and June 2024.

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, 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 its 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.

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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.

For the six months ended June 30, 2023, net cash provided by operating activities totaled approximately $12.7 million compared to $11.9 million for the six months ended June 30, 2022.

The increase in cash from operating activities was primarily driven by increased depreciation expense, increased current liabilities as compared to the prior year, and decreased prepaid expenses partially offset by the receipt of less developer contributions toward capital projects in 2023 as compared to 2022.

Cash from Investing Activities

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 net cash used in investing activities totaled approximately $19.9 million for the six months ended June 30, 2023 compared to $14.8 million for the six months ended June 30, 2022.

The $5.2 million increase in cash used in investing activities was primarily driven by the $6.2 million acquisition of Farmers, and a decrease in capital expenditures of $0.9 million for the six months ended June 30, 2023 compared to the six months ended June 30, 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.

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Cash from Financing Activities

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.

The net cash provided by financing activities totaled $4.1 million for the six months ended June 30, 2023, a $7.9 million change, as compared to the $3.8 million in cash used in financing activities for the six months ended June 30, 2022.

This change was primarily driven by the $6.7 million in net cash proceeds from the Company’s revolving line of credit and the private placement offering of $2.4 million offset by a decrease in advances in aid of construction for the six months ended June 30, 2023.

Senior Secured Notes

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

As of 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.

As of June 30, 2023, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of June 30, 2023 and December 31, 2022 were $0.4 million and $0.5 million, respectively.

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.

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

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

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

On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern Trust Loan Agreement 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 .

On April 30, 2021, the Company and Northern Trust 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.

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.

On June 28, 2023, the Company and Northern Trust entered into a third amendment to the Northern Trust Loan Agreement, which, among other things, (i) further extended the scheduled maturity date for the revolving line of credit from July 1, 2024 to July 1, 2025 and (ii) added a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit.

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.

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Refer to Note 11 — “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this 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

As of June 30, 2023, the Company was in compliance with its financial debt covenants.

As of June 30, 2023, the Company had outstanding borrowings of $6.8 million under the revolving line of credit with Northern Trust.

The Company did not incur debt issuance costs relating to the Northern Trust Loan Agreement for the three and six months ended June 30, 2023 or 2022.

Other Financing Activity

The Company received gross proceeds of approximately $2.8 million from the offering.

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Off Balance Sheet Arrangements

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

As of June 30, 2023 and 2022, the Company did not have any off-balance sheet arrangements.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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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