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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 140 added, 123 removed, 317 unchanged (45% 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 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.

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 nine months ended September 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

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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 previous rate case and possible further action that may be taken by the ACC following such request;

our expectation that the ACC will not take any further material action relating to the Private Letter Ruling request issued by the Internal Revenue Service (“IRS”);

acquisition plans and our ability to complete additional acquisitions;

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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.

and 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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Business Outlook

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.

There was a trend of positive growth in new connections during 2022, and during the first nine 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.

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.

Job growth year over year in Arizona as of September 30, 2023 was 2.2%, 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.

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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 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.

As of September 30, 2023, active service connections increased 4,902, or 8.7%, to 61,036 compared to 56,134 active service connections as of September 30, 2022, primarily due to the acquisition of Farmers Water Co.

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

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

(“Palo Verde”) utilities as of June 30, 2023.

(“Palo Verde”) utilities as of September 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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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.

The Company is currently reviewing the proposed regulation as compared to our current treatment standards and expects 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.

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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.

Approximately 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.

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Rate Case Activity

On July 3, 2023, Global Water-Palo Verde Utilities Company, Inc.

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

(“Santa Cruz”) filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset the depreciation expense recorded for the Company’s Southwest Plant, plus the carrying cost at the authorized rate of return set in Palo Verde’s and Santa Cruz’s most recent rate order, until the plant is considered for recovery in the utilities’ next rate case.

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.

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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.

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

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

(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 requirementincluded in the table above;(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.

Finally, Rate Decision No.

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

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

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

This may result in further action by the ACC, which 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.

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

The IRS accepted the request and issued its Private Letter Ruling, dated September 22, 2023.

The Private Letter Ruling determined that the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the IRC must be eliminated and failure to do so would violate the normalization provisions of Section 168(i)(9) of the IRC.

As required by Rate Decision No.

78644, the Private Letter Ruling has been provided to the ACC.

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

The Private Letter Ruling was consistent with the adjustments used to determine the revenue requirements in Rate Decision No.

Accordingly, the Company has requested that no further action be taken by the ACC.

However, there can be no assurance provided until the ACC process is complete.

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 the Company’s Form 10-K for the period ended December 31, 2022.

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 report for additional information.

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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

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

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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 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,

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

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

For the Three Months Ended September 30,

Revenues $ 14,532 $ 11,893

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Diluted earnings per common share $ 0.11 $ 0.07

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,

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

For the Three Months Ended September 30,

Water services $ 7,520 $ 5,824

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Total revenues $ 14,532 $ 11,893

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.

Total revenues increased $2.6 million, or 22.2%, to $14.5 million for the three months ended September 30, 2023 compared to $11.9 million for the three months ended September 30, 2022.

The increase in revenue was primarily attributable to higher average temperatures for the quarter coupled with a 64% decrease in precipitation causing an escalation of consumption, as compared to the same quarter last year and the recognition of $0.5 million of ICFA related revenue.

Other contributing factors include increased 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 2.6%.

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.

Water Services – Water services revenue increased $1.7 million, or 29.1%, to $7.5 million for the three months ended September 30, 2023 compared to $5.8 million for the three months ended September 30, 2022.

The increase in water services revenue was primarily related to the weather conditions discussed above prompting higher consumption, the acquisition of Farmers in February 2023 and increased rates related to Rate Decision No.

Water services revenue based on consumption increased $1.3 million, or 46.3%, to $4.1 million for the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022.

The increase was primarily driven by the weather conditions discussed above resulting in a 31.2% increase in consumption as compared to the three months ended September 30, 2022, the Farmers acquisition in February 2023, and an increase in rates related to Rate Decision No.

Active water connections increased 14.1% to 33,976 as of September 30, 2023 from 29,785 as of September 30, 2022, primarily due to the acquisition of Farmers in February 2023 and organic growth in our service areas.

Water consumption increased 31.2% to 1.3 billion gallons for the three months ended September 30, 2023 from 992.4 million for the three months ended September 30, 2022.

The increase in consumption was primarily attributable to the weather conditions discussed above and the additional connections resulting from the acquisition of Farmers in February 2023.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 13.4%, to $3.2 million for the three months ended September 30, 2023 compared to $2.9 million for the three months ended September 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.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 7.0%, to $6.5 million for the three months ended September 30, 2023 compared to $6.1 million for the three months ended September 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 a 2.7% increase in active wastewater connections from 26,349 as of September 30, 2022 to 27,060 as of September 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 9.6% to $0.5 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended September 30, 2022.

The increase in recycled water services revenue was primarily driven by the volume of recycled gallons delivered, which increased 10.2% to 271.7 million gallons for three months ended September 30, 2023 compared to 246.5 million gallons for the three months ended September 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,

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

For the Three Months Ended September 30,

Operations and maintenance $ 3,587 $ 2,775

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Total operating expenses $ 10,695 $ 9,127

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.

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 $0.8 million, or 29.3%, to $3.6 million for the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022, which was primarily attributable to the Farmers acquisition, additional costs for purchased power as a direct result of increased consumption, increased personnel costs and higher property tax expenses.

Utility power and related expenses increased $0.2 million to $0.9 million for the three months ended September 30, 2023 compared to $0.7 million for the same period in 2022.

The additional power costs were due to increased pump usage related to increased consumption and additional connections, from both the Farmers acquisition and organic growth.

Total personnel expenses increased $0.2 million, or 26.3%, to $1.2 million for the three months ended September 30, 2023 compared from $1.0 million for the three months ended September 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 medical benefit costs.

Property tax expense increased $0.1 million, or 38.4%, to $0.6 million for the three months ended September 30, 2023 compared to $0.5 million for the same period in 2022.

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

As revenues increase, property taxes are also expected to increase.

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).

These costs remained flat and were $3.9 million for both the three months ended September 30, 2023 and 2022.

Personnel related costs increased $0.3 million, or 14.0%, to $1.9 million for the three months ended September 30, 2023 compared to $1.6 million for the three months ended September 30, 2022.

The increase was primarily related to higher salaries and wages and employee related expenses.

Deferred compensation expense decreased $0.2 million, or 68.8%, to $0.1 million for the three months ended September 30, 2023 compared to $0.3 million for the three months ended September 30, 2022.

The decrease was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased more during the three months ended September 30, 2023 as compared to the three months ended September 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,

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

The decrease 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 $0.8 million, or 31.1%, to $3.2 million for the three months ended September 30, 2023, compared to $2.4 million for the three months ended September 30, 2022.

The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, $0.1 million of which was attributable to the partial activation of the Southwest Plant in Maricopa, AZ.

Approximately $44,000 of depreciation expense for the quarter was attributable to the Farmers acquisition.

Other Expense – Other expense decreased $0.2 million, or 32.7%, to $0.3 million for three months ended September 30, 2023 from $0.5 million for the three months ended September 30, 2022, which was primarily attributable to the increase in the equity portion of the allowance for funds used during construction (“AFUDC”) and increased Buckeye growth premiums.

Income Tax Expense – Income tax expense of $0.9 million was recorded for the three months ended September 30, 2023 compared to income tax expense of $0.6 million for the three months ended September 30, 2022.

The primary driver for the change was due to the increase in pre-tax income for three months ended September 30, 2023.

Net Income – Net income totaled $2.6 million for the three months ended September 30, 2023 compared to net income of $1.7 million for the three months ended September 30, 2022.

The $0.9 million increase was primarily attributable to increased operating revenue as a result of escalated consumption and increased rates related to Rate Decision No.

78644, increased revenue resulting from the Farmers acquisition in February 2023, and the recognition of $0.5 million of ICFA related revenue, partially offset by an increase in operations and maintenance expenses of approximately $0.8 million, higher depreciation expenses of $0.8 million, and increased tax expense of $0.3 million.

Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022

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

For the Nine Months Ended September 30,

Revenues $ 40,660 $ 33,629

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Diluted earnings per common share $ 0.28 $ 0.20

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,

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

For the Nine Months Ended September 30,

Water services $ 18,916 $ 15,854

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Total revenues $ 40,660 $ 33,629

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.

Total revenues increased $7.1 million, or 20.9%, to $40.7 million for the nine months ended September 30, 2023 compared to $33.6 million for the nine months ended September 30, 2022.

The increase in revenue was primarily attributable to elevated consumption related to higher average temperatures and lower average precipitation, ICFA revenue earned during the 2023 period that did not occur in the prior year period, increased 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 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.

Water Services – Water services revenue increased $3.0 million, or 19.3%, to $18.9 million for the nine months ended September 30, 2023 compared to $15.9 million for the nine months ended September 30, 2022.

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

Water services revenue based on consumption increased $1.7 million, or 23.6%, to $8.9 million for the nine months ended September 30, 2023 compared to $7.2 million for the nine months ended September 30, 2022.

The increase was primarily driven by a 13.5% increase in consumption, the Farmers acquisition in February 2023 and increase in rates related to Rate Decision No.

Active water connections increased 13.8% to 33,976 as of September 30, 2023 from 29,785 as of September 30, 2022, primarily due to the Farmers acquisition in February 2023 and organic growth in our service areas.

Water consumption increased 13.5% to 3.1 billion gallons for the nine months ended September 30, 2023 compared to 2.7 billion for the nine months ended September 30, 2022.

The increase was primarily related to the considerable increase in consumption during the third quarter which we believe can be attributed to the higher temperatures and lower precipitation as compared to the same period in 2022.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $1.4 million, or 16.4%, to $9.6 million for the nine months ended September 30, 2023 compared to $8.2 million for the nine months ended September 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 $0.8 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,

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.2 million, or 6.7%, to $19.0 million for the nine months ended September 30, 2023 compared to $17.8 million for the nine months ended September 30, 2022.

The increase in wastewater and recycled water services revenue was primarily driven by a $1.2 million increase in wastewater services revenue resulting from the 2.7% increase in active wastewater connections from 26,349 as of September 30, 2022 to 27,060 as of September 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 4.4% to $1.1 million for the nine months ended September 30, 2023 from $1.0 million for the nine months ended September 30, 2022.

The volume of recycled water delivered had a modest increase of 4.6% with 629 million gallons delivered for the nine months ended September 30, 2023 compared to 602 million gallons delivered for the nine months ended September 30, 2022.

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

For the Nine Months Ended September 30,

Operations and maintenance $ 9,557 $ 8,260

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Total operating expenses $ 30,036 $ 27,038

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.

Total personnel expenses increased approximately $0.7 million, or 24.2%, to $3.3 million for the nine months ended September 30, 2023 compared to $2.6 million for the nine months ended September 30, 2022.

The increase was primarily attributable to the Farmers acquisition in February 2023, a cost of living adjustment, and an increase in personnel.

Utility power and related expenses increased $0.4 million to $2.1 million for the nine months ended September 30, 2023 compared to $1.7 million for the same period in 2022.

The additional power costs were due to increased pump usage related to increased consumption and additional connections, from both the Farmers acquisition and organic growth.

Contract services increased $0.1 million to $1.2 million for the nine months ended September 30, 2023 from $1.1 million for the nine months ended September 30, 2022.

The increase was primarily due to increased costs for billing software related to the additional connections period over period and cloud storage services.

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).

These costs increased $0.3 million, or 3.1%, to $11.9 million for the nine months ended September 30, 2023 compared to $11.6 million for the nine months ended September 30, 2022.

Deferred compensation expense decreased $0.1 million, or 12.2%, to $0.8 million for the nine months ended September 30, 2023 compared to $0.9 million for the nine months ended September 30, 2022.

The decrease was a direct result of the change in the stock price impacting certain valuations during the nine months ended September 30, 2023 as compared to the nine months ended September 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.

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.

Other notable increases were related to personnel expenses, information technology expenses, rent, and contract services.

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

Depreciation and amortization - Depreciation and amortization expense increased $1.3 million, or 18.7%, to $8.5 million for the nine months ended September 30, 2023, compared to $7.2 million for the nine months ended September 30, 2022.

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

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.

Approximately $136,000 of the depreciation for the nine months ended September 30, 2023 was attributable to the Farmers acquisition.

Other Expense – Other expense totaled $1.3 million for the nine months ended September 30, 2023 compared to $1.1 million for the nine months ended September 30, 2022.

The increase of $0.2 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 and an increase in interest expense of $0.4 million, partially offset by an increase in the equity portion of AFUDC of $0.8 million for the nine months ended September 30, 2023.

Income Tax Expense – Income tax expense of $2.5 million was recorded for the nine months ended September 30, 2023 compared to $0.8 million for the nine months ended September 30, 2022.

During the nine months ended September 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 nine months ended September 30, 2023.

Net Income – Net income totaled $6.8 million for the nine months ended September 30, 2023 compared to net income of $4.7 million for the nine months ended September 30, 2022.

The $2.1 million increase was primarily attributable to the recognition of $2.8 million of ICFA related revenue, increased operating revenue as a result of both escalated consumption and increased rates related to Rate Decision No.

78644, and increased revenue resulting from the Farmers acquisition in February 2023, partially offset by an increase in operating expenses of approximately $1.7 million, higher depreciation expenses of $1.3 million, and increased tax expense of $1.7 million.

Outstanding Share Data

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.

As of November 8, 2023, there were 24,171,517 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 444,584 shares of the Company’s common stock.

Liquidity and Capital Resources

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

As of June 30, 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.

As of September 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.

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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 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.

For the nine months ended September 30, 2023, net cash provided by operating activities totaled approximately $22.7 million compared to $19.7 million for the nine months ended September 30, 2022.

The $3.0 million increase in cash from operating activities was primarily driven by the improvement in net income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Cash from Investing Activities

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 net cash used in investing activities totaled approximately $24.8 million for the nine months ended September 30, 2023 compared to $25.4 million for the nine months ended September 30, 2022.

The $0.6 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 $6.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 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 $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.

The net cash provided by financing activities totaled $2.3 million for the nine months ended September 30, 2023, a $6.6 million change, as compared to the $8.8 million in cash used in financing activities for the nine months ended September 30, 2022.

This change was primarily driven by an increase of $6.2 million in advances in aid of construction, offset by a $12.1 million decrease in proceeds from the sale of stock for the nine months ended September 30, 2023.

Senior Secured Notes

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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.

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

Series B carries a principal balance of $86.3

million and bears an interest rate of 4.58% over a 20-year term.

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

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

As of June 30, 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.

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

Note Purchase Agreement

On October 26, 2023, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with Jackson National Life Insurance Company pursuant to which the Company will, subject to customer closing conditions, issue an aggregate principal amount of $20,000,000 of 6.91% Senior Secured Notes due on January 3, 2034 (the “Notes”).

The Company plans to use the proceeds from the Notes offering to refinance existing indebtedness, to support capital investments associated with growth and for general corporate purposes.

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

Revolving Credit Line

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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.

On October 26, 2023, the Company and Northern Trust entered into a fourth amendment to the Northern Trust Loan Agreement, which, among other things, further amended the terms and conditions set forth in the Loan Agreement to make certain conforming changes to reflect the issuance of the Notes and related matters.

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.

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.

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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.

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 report for additional information.

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.

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

As of September 30, 2023, the Company had outstanding borrowings of approximately $15,000 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 nine months ended September 30, 2023 and 2022.

Other Financing Activity

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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 2022 10-K.

The Company entered into the Note Purchase Agreement and the fourth amendment to the Northern Trust Loan Agreement on October 26, 2023.

Refer to additional details under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” above.

There have been no additional 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 2022 10-K.

Critical Accounting Policies, Judgments, and Estimates

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Off Balance Sheet Arrangements

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

As of September 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