What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-07 compared with 2023-03-09 · 242 added, 202 removed, 194 unchanged (70% of the section changed)

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

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

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

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 years ended December 31, 2022 and 2021, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will be impacted by the COVID-19 pandemic.

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

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

its severity;

the emergence and severity of its variants;

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

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 this report for additional risks we face due to the COVID-19 pandemic.

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

Business Outlook

The trend of positive growth in new connections continued in 2021 and 2022.

According to the 2020 U.S.

Census Data, the Phoenix metropolitan statistical area (“MSA”) is the 11th largest MSA in the U.S.

and had a population of 4.8 million, an increase of 14% over the 4.2 million people reported in the 2010 Census.

There was a trend of positive growth in new connections during 2022.

For 2023, growth continued at a moderate rate during the first half of the year with the second half exhibiting increases in the rate of connection growth.

According to the most recent U.S.

Census estimates, the Phoenix metropolitan statistical area (“MSA”) is the 11th largest MSA in the U.S.

and had an estimated population of 5.0 million, an increase of 3.5% over the 4.8 million people reported in the 2020 Census.

Metropolitan Phoenix continues to grow due to its comparatively affordable housing, excellent weather, large and growing universities, a diverse employment base, and low taxes.

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According to the W.P.

Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel (the "Greater Phoenix Blue Chip Panel"), during 2022 the single-family housing market experienced a decline in permits issued with

approximately 24,600 issued in 2022 as compared to approximately 31,000 issued in 2021.

The Greater Phoenix Blue Chip Panel expects the decrease in annual single-family housing permits to continue into 2023 with recovery in 2024.

However, according to the Greater Phoenix Blue Chip Panel, the outlook for multi-family activity is expected to be more stable, with 13,700 and 12,300 multi-family housing permits expected for 2023 and 2024, respectively.

Despite the general slowdown in housing in 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.

Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel (the “Greater Phoenix Blue Chip Panel”), the single-family housing market experienced a weakness in permits during 2022 and 2023, however, the outlook for single-family housing is improving.

The Greater Phoenix Blue Chip Panel anticipates single-family permit increases in 2024 due to the combination of the improvement shown in the second half of 2023 with the expectations of modestly declining mortgage rates in 2024.

During both 2022 and 2023, multi-family permits trended upwards adding stability to the market.

Phoenix is being recognized as the top market for manufacturing growth and was ranked number one out of the top 15 growth markets for largest projected job gains by global real estate firm Newmark Group.

Despite 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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Our financial condition and results of operations are influenced by a variety of industry-wide factors, including but not limited to:

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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.

The Company is 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.

The Company continues to execute on the 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 December 31, 2022, active service connections increased 2,388, or 4.4%, to 56,270 compared to 53,882 active service connections as of December 31, 2021, primarily due to organic growth in our service areas.

As of December 31, 2023, active service connections increased 5,521, or 9.8%, to 61,791 compared to 56,270 active service connections as of December 31, 2022, primarily due to the acquisition of Farmers Water Co.

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

Approximately 89.3% of the 61,791 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.

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

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

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

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Economic and Environmental Utility Regulation

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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.

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

On July 3, 2023, our Palo Verde and Santa Cruz utilities filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset both the depreciation expense recorded for the Company’s Southwest Plant and the carrying cost of that plant 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.

In January 2024, the Company discovered that approximately $7.8 million of construction costs for the Southwest Plant had been prematurely included as “plant in service” for rate-making purposes in 2007 and were reflected in the calculation of customer rates in Rate Decision No.

71878 (September 15, 2010).

Those costs were also included as “plant in service” in Rate Decision No.

74364 (February 26, 2014) and Rate Decision No.

78644 (July 27, 2022).

The Company disclosed this information to the ACC on March 1, 2024.

Although to date the ACC has not taken any action, the ACC could require the Company to reduce rates going forward or take other actions that would be unfavorable to the Company.

The final outcome and resolution of this matter cannot be predicted and the results, while not reasonably estimable at this time, could be material to the Company and its financial condition.

To ensure an optimal combination of access to water and water conservation balanced with a fair rate of return for investors, our water utility operating revenue is based on two components:

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A discount to the volumetric rate applies for customers that use less than an amount specified by the ACC.

For all investor-owned water utilities, the ACC requires the establishment of inverted tier conservation-oriented rates, meaning that the price of water increases as consumption increases.

For all investor-owned water utilities, the ACC has, as a policy matter, required the establishment of inverted tier conservation-oriented rates, meaning that the price of water increases as consumption increases.

For wastewater utilities, wastewater collection, and treatment can be based on volumetric or fixed fees.

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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 Consolidated Financial Statements included in Part II, Item 8 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 current requirements under current regulation to have a material impact on our operations or financial condition, although it is possible new methods of treating drinking water may be required if additional regulations become effective in the future.

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

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

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.

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”).

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

If finalized as proposed, the regulation will require public water systems, including those owned by GWRI, to monitor drinking water 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 NPDWR after a specified implementation period, anticipated to be three years from the rule-adoption date.

The Company is currently reviewing the proposed regulation with 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.

We 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 or in a separate surcharge.

Infrastructure Investment

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

Cybersecurity Risks

In the regular course of our business, we manage a range of sensitive security, customer, and business systems information.

A security breach of our information systems such as theft or the inappropriate release of certain types of information, including confidential customer, employee, financial or system operating information, could have a material adverse impact on our financial condition, results of operations or cash flows.

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

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

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.

If our technology systems were to fail or be breached and if we are unable to recover in a timely way, we may not be able to fulfill critical business functions and sensitive confidential data could be compromised, which could have a material adverse impact on our financial condition, results of operations or cash flows.

We are subject to laws and rules issued by multiple government agencies concerning safeguarding and maintaining the confidentiality of our security, customer, and business information.

The increasing promulgation of rules and standards will increase our compliance costs and our exposure to the potential risk of violations of the standards.

We have experienced, and expect to continue to experience, these types of threats and attempted intrusions.

The implementation of additional security measures could increase costs and have a material adverse impact on our financial results.

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

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

Weather and Seasonality

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In many areas of Arizona (including certain areas that we service), water supplies are limited and, in some cases, current usage rates exceed sustainable levels for certain water resources.

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

We currently rely predominantly (and are likely to continue to rely) on the pumping of groundwater and the generation and delivery of recycled water for non-potable uses to

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meet future demands in our service areas.

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

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

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

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.

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.

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 this report.

Rate Case Activity

On July 3, 2023, our Palo Verde and Santa Cruz Water utilities 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.

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 June 27, 2023, seven of the Company’s 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.

On February 29, 2024, the Company entered into a settlement agreement with ACC Utilities Division Staff regarding the rate case application, which will be considered by an Administrative Law Judge and the ACC for approval.

The agreement includes, among other things, a recommended annual revenue increase of approximately $351,000, acquisition premiums for six of the Company’s utilities, a capital structure matching the Company’s previous rate of 55% equity with a 9.6% return on equity, consolidation of the seven utilities, and an accounting deferral for Rincon.

There can be no assurance that the ACC will approve the settlement agreement and the ACC could take other actions as a result of the rate case.

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

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

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.

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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.

Finally, Rate Decision No.

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

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

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

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

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

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(“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 was provided to the ACC and no further action will be taken by the ACC, as documented in Decision No.

During the fourth quarter 2023, the Company notified the ACC of its intention to file a rate case for Farmers during 2024 and for Santa Cruz and Palo Verde in 2025.

Corporate Transactions

Recent Acquisitions

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

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

Refer to Note 16 - "Subsequent Event" of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

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

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

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

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

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

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

1,100 connections with approximately 2.5 square miles of service area at the time of acquisition.

On February1, 2023 the Company completed the acquisition of Farmers Water Co., an operator of a water utility with service area in Sahuarita, Arizona and in unincorporated Pima County, Arizona.

The acquisition added approximately 3,300 active water connections and 21.5 square miles of service area.

Refer to Note 16 - "Subsequent Events" of the Notes to the Consolidated Financial Statements included in Part II, Item 8 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 our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to lower corporate tax rates under the TCJA.

Rate Decision No.

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

74364 enacted in February 2014.

In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities 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.

On November 27, 2018, February 20, 2019, February 28, 2019, and January 23, 2020, the ACC adopted orders relating to the funding for income taxes on CIAC and AIAC, which became taxable for our regulated utilities under the TCJA.

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 6.91% Senior Secured Notes

On October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $20 million of 6.91% Senior Secured Notes due on January 3, 2034.

Pursuant to the terms of the note purchase agreement, the Company issued the notes on January 3, 2024.

Refer to Note 11 - “Debts” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional details.

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.

Farmers Acquisition

On February 1, 2023, the Company acquired all of the equity of 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 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 Consolidated Financial Statements included in Part II, Item 8 of this report for additional details.

Public Offering of Common Stock

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

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

Certain 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

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

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

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

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

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

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

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

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

Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021

The following table summarizes our results of operations for the years ended December 31, 2022 and 2021 (in thousands, except for share amounts):

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

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environments.

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

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

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

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

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

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

Comparison of Results of Operations for the Year Ended December 31, 2023 and 2022

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

For the Year Ended December 31,

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Diluted earnings per common share $ 0.33 $ 0.24

Revenues – The following table summarizes our revenues for the years ended December 31, 2022 and 2021 (in thousands):

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

For the Year Ended December 31,

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Total revenues increased $8.3 million, or 18.6%, to $53.0 million for the year ended December 31, 2023 compared to $44.7 million for the year ended December 31, 2022.

The increase in revenue reflects the 4.4% increase in active service connections due to organic growth, combined with new connections associated with the acquisition of Las Quintas Serenas in November 2021, as well as the increase in rates related to Rate Decision No.

The increase in revenue was partially offset by the ICFA revenue recognized in 2021 that did not recur in 2022.

The increase in revenue reflects elevated consumption during 2023 related to higher average temperatures and lower average precipitation, primarily during the peak usage months, ICFA revenue earned during 2023 that did not occur in the prior year, 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 $4.0 million, or 19.0%, to $24.9 million for the year ended December 31, 2023 compared to $20.9 million for the year ended December 31, 2022.

The increase in water services revenue was primarily related to organic growth in connections, the acquisition of Las Quintas Serenas, and an increase in rates related to Rate Decision No.

The increase in water services revenue was primarily related to the weather conditions discussed above prompting higher consumption during high usage months, the acquisition of Farmers, an increase in rates related to Rate Decision No.

78644, and organic connection growth.

Water services revenue based on consumption increased $2.2 million, or 23.4%, to $11.4 million for the year ended December 31, 2023 compared to $9.2 million for the year ended December 31, 2022.

The increase was primarily driven by the acquisition of Las Quintas Serenas, growth in connections and an increase in rates related to Rate Decision No.

Active water connections increased 4.4% to 29,855 as of December 31, 2022 from 28,594 as of December 31, 2021, primarily due to organic growth in our service areas.

Water consumption increased 7.8% to 3.5 billion gallons for the year ended December 31, 2022, compared to 3.2 billion gallons for the year ended December 31, 2021.

The increase in water consumption was primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas Serenas.

The increase was primarily driven by the weather conditions discussed above resulting in a 14.8% increase in consumption, the Farmers acquisition, an increase in rates related to Rate Decision No.

78644, and organic connection growth.

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Active water connections increased 15.1% to 34,370 as of December 31, 2023 from 29,855 as of December 31, 2022, primarily due to the Farmers acquisition and organic growth in our service areas.

Water consumption increased 14.8% to 4.0 billion gallons for the year ended December 31, 2023 compared to 3.5 billion for the year ended December 31, 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, primarily during high usage months, as compared to the same period in 2022.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $1.7 million, or 15.5%, to $12.8 million for the year ended December 31, 2023 compared to $11.1 million for the year ended December 31, 2022.

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

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.6 million, or 7.2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase in wastewater and recycled water services revenue was primarily driven by a $1.5 million increase in wastewater services revenue.

The increase in

wastewater services revenue reflects the increase in active wastewater connections, which increased 4.5% to 26,415 as of December 31, 2022 from 25,288 as of December 31, 2021, 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 $0.1 million or 9.7%, to $1.2 million for the year ended December 31, 2022 compared to $1.1 million for the year ended December 31, 2021.

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

The volume of recycled water delivered increased 44 million gallons, or 6.4%, to 727 million gallons for the year ended December 31, 2022 compared to 683 million gallons for the year ended December 31, 2021.

Operating Expenses – The following table summarizes our operating expenses for the year ended December 31, 2022 and 2021 (in thousands):

The increase was primarily due to the increase in active service connections largely 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 $1.6 million, or 6.5%, to $25.4 million for the year ended December 31, 2023 compared to $23.8 million for the year ended December 31, 2022.

The increase was primarily driven by higher wastewater services revenue of $1.4 million resulting from the 3.8% increase in active wastewater connections from 26,415 as of December 31, 2022 to 27,421 as of December 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 and directly impacted by wastewater volume, increased by approximately 9.9% to $1.4 million for the year ended December 31, 2023 from $1.2 million for the year ended December 31, 2022.

The volume of recycled water delivered rose by 12.6% with 818 million gallons delivered for the year ended December 31, 2023 compared to 727 million gallons delivered for the year ended December 31, 2022.

In addition, the volume of wastewater processed increased 6.2% to 1.4 billion gallons for the year ended December 31, 2023 from 1.3 billion gallons for the year ended December 31, 2022.

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

For the Year Ended December 31,

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General and administrative 16,636 16,130

Depreciation 9,890 9,490

Depreciation and amortization 11,437 9,890

Total operating expenses $ 40,742 $ 36,909

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 $0.6 million, or 5.7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Total personnel expenses increased $0.1 million, or 2.0%, to $3.5 million for the year ended December 31, 2022 compared to $3.4 million for the year ended December 31, 2021.

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

Utilities power and related expenses increased $0.3 million, or 13.3%, to $2.3 million for the year ended December 31, 2022 compared to $2.0 million for the year ended December 31, 2021.

The increase was attributable to higher electric utility expense due to increased pump usage from additional connections and escalated consumption.

Contract services increased $0.2 million, or 14.4%, to $1.4 million for the year ended December 31, 2022 compared to $1.2 million for the year ended December 31, 2021.

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

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 $1.8 million, or 16.3%, to $12.7 million for the year ended December 31, 2023 compared to $10.9 million for the year ended December 31, 2022.

Total personnel expenses increased approximately $0.9 million, or 25.7%, to $4.4 million for the year ended December 31, 2023 compared to $3.5 million for the year ended December 31, 2022.

The increase was primarily attributable to the Farmers acquisition in February 2023, increased medical costs, an increase in headcount, and a cost of living adjustment that impacted five months of 2022 as compared to all months of 2023.

Utility power and related expenses increased $0.4 million to $2.7 million for the year ended December 31, 2023 compared to $2.3 million for the same period in 2022.

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

Contract services increased $0.2 million to $1.6 million for the year ended December 31, 2023 from $1.4 million for the year ended December 31, 2022.

The increase was primarily due to increased costs for billing software related to the additional connections period over period, cloud storage services, and billing distribution services as a result of additional customers.

Chemicals, consumables and supplies increased $0.2 million to $0.7 million for the year ended December 31, 2023 from $0.5 million for the year ended December 31, 2022.

The increase is primarily attributable to higher consumption driving the need for more chemicals, consumables and supplies, increased prices as a result of inflation, and the Farmers acquisition.

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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 $1.0 million, or 6.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

These costs increased $0.5 million, or 3.1%, to $16.6 million for the year ended December 31, 2023 compared to $16.1 million for the year ended December 31, 2022.

Personnel related costs increased $1.1 million, or 17.3%, to $7.5 million for the year ended December 31, 2023 compared to $6.4 million for the year ended December 31, 2022.

The increase was primarily related salary and wage increases, partially offset by lower medical expenses.

The increase was primarily related salary and wage increases as a result of increased personnel, higher medical expenses, and a cost of living adjustment.

Information technology expenses increased $0.2 million, or 25.0%, to $1.0 million for the year ended December 31, 2023 compared to $0.8 million for the year ended December 31, 2022.

The increase was substantially due to higher costs related to service agreements and software licenses.

Board compensation expense increased $0.2 million, or 41.1%, to $0.5 million for the year ended December 31, 2023 compared to $0.3 million for the year ended December 31, 2022.

The increase was primarily due to the change in our stock price during the year ended December 31, 2023 compared to the year ended December 31, 2022.

Regulatory expense decreased $0.3 million, or 76.7%, to $0.1 million for the year ended December 31, 2023 compared to $0.4 million for the year ended December 31, 2022.

The decrease was primarily attributable to expenses incurred related to the substantial rate case activity in 2022 that did not occur in 2023.

Professional fees expenses decreased $0.6 million, or 21.6%, to $2.0 million for the year ended December 31, 2023 compared to $2.6 million for the year ended December 31, 2022.

The decrease was primarily related to legal fees incurred for acquisition related matters during 2022 that did not occur in 2023.

Deferred compensation expense decreased $0.4 million, or 21.0%, to $1.2 million for the year ended December 31, 2023 compared to $1.6 million for the year ended December 31, 2022.

The decrease was primarily due to the impact of the change in our stock price, used in the valuation of options that are accounted for as liability awards, where our stock price decreased during the year ended December 31, 2022 as compared to an overall increase in stock price during the year ended December 31, 2021.

The decrease resulted primarily from vesting related expenses of restricted stock awards that occurred in 2022 and not in 2023 in addition to fully exhausted option expenses in August 2023, all partially offset by the change in the stock price impacting certain valuations during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Refer to Note 13 — “Deferred Compensation Awards” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Board compensation expense decreased $0.4 million, or 50.4%, to $0.3 million for the year ended December 31, 2022 compared to $0.7 million for the year ended December 31, 2021.

The decrease was primarily due to the decrease in our stock price during the year ended December 31, 2022 compared to the year ended December 31, 2021.

Regulatory expense increased $0.3 million, or 20.3%, to $0.4 million for the year ended December 31, 2022 compared to $0.1 million for the year ended December 31, 2021.

The increase is primarily related to expenses incurred relating to the rate case activity during 2022.

Rent expenses increased $0.1 million, or 67.8%, to $0.3 million for the year ended December 31, 2022 compared to $0.2 million for the year ended December 31, 2021.

The increase was primarily related to a new corporate office lease agreement that commenced May 2022.

Professional fees expenses increased $0.6 million, or 30.2%, to $2.6 million for the year ended December 31, 2022 compared to $2.0 million for the year ended December 31, 2021.

The increase was primarily related to legal fees incurred in connection with the rate case and acquisition related matters.

Depreciation and amortization - Depreciation and amortization expense increased $1.5 million, or 15.6%, to $11.4 million for the year ended December 31, 2023, compared to $9.9 million for the year ended December 31, 2022.

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

Other Expense – Other expense totaled $1.4 million for the year ended December 31, 2022 compared to $2.2 million for the year ended December 31, 2021.

The improvement of $0.8 million in other expense was related to the $1.1 million increase in income associated with Buckeye growth premiums, as a result of increased meter connections in the area, combined with a decrease in interest expense of $1.2 million primarily attributable to an increase in capitalized interest for the year ended December 31, 2021.

This was partially offset by $1.5 million of income recognized on the sale of a wireless communication tower in 2021 that did not recur in 2022.

The increase was primarily driven by increased depreciation due to the increase in fixed assets, $0.4 million of which was attributable to depreciation of the Southwest Plant in Maricopa, Arizona.

Approximately $0.2 million of the depreciation for the year ended December 31, 2023 was attributable to the Farmers acquisition.

Other Expense – Other expense totaled $1.4 million for both years ended December 31, 2023 and 2022.

The increase of $0.1 million in other expense was related to a $0.1 million decrease in income associated with Buckeye growth premiums as a result of fewer new meter connections in the area, an increase in interest expense of $0.1 million, and a $0.1 million increase in other expense, offset by an increase in the equity portion of allowance for funds used during construction of $0.3 million for the year ended December 31, 2023.

Income Tax Expense – Income tax expense of $2.9 million was recorded for the year ended December 31, 2023 compared to $0.9 million for the year ended December 31, 2022.

The decrease was primarily driven by the 2017 TCJA reversal of approximately $0.7 million, offset by an increase in pre-tax net income for the year ended December 31, 2022.

Net Income – Our net income totaled $5.5 million for the year ended December 31, 2022 compared to net income of $3.6 million for the year ended December 31, 2021.

The $1.9 million increase was primarily attributable to organic growth, the acquisition of Las Quintas Serenas in November 2021, the recognition of approximately $0.5 million in allowance for funds used during construction ("AFUDC"), offset by an increase in operational expenses of approximately $0.6 million and an increase in approximately $1.0 million in general and administrative expenses, primarily driven by personnel related costs and increased regulatory expenses incurred due to rate case activity during 2022.

During the year ended December 31, 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 year ended December 31, 2023.

Net Income – Net income totaled $8.0 million for the year ended December 31, 2023 compared to net income of $5.5 million for the year ended December 31, 2022.

The $2.5 million increase was primarily attributable to growth in operating revenue as a result of escalated consumption and increased rates related to Rate Decision No.

78644, the recognition of $2.8 million of ICFA related revenue, and operating revenue of $1.1 million resulting from the Farmers acquisition in February 2023, partially offset by an increase in operating expenses of approximately $1.8 million, higher depreciation expenses of $3.8 million, and increased tax expense of $1.9 million.

Outstanding Share Data

As of March 8, 2023, there were 23,871,046 shares of our common stock outstanding and stock based awards to acquire an additional 517,980 shares of our common stock outstanding.

As of March 6, 2024, there were 24,175,241 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 425,884 shares of the Company’s common stock.

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Liquidity and Capital Resources

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

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

We use our capital resources to:

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

Additionally, 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.

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

• 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 December 31, 2022, we have no notable near-term cash expenditures, other than the principal payments for our Series B senior secured notes in the amount of $1.9 million due in each of June and December of 2023.

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

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

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

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

As of December 31, 2023, the Company has no notable near-term cash expenditures, other than the principal payments for its Series B senior secured notes in the amount of $1.9 million due in both June 2024 and December 2024.

While specific facts and circumstances could change, the Company believes that with the cash on hand and the ability to draw on its $15.0 million revolving line of credit, it will be able to generate sufficient cash flows to meet its 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.

On November 30, 2024, the Company announced a monthly dividend increase from 0.02483 per share (0.29796 per share annually) to 0.02508 per share (0.30096 per share annually).

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

Cash from Operating Activities

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

Our future cash flows from operating activities will be affected by economic utility regulation, infrastructure investment, growth in service connections, customer usage of water, compliance with environmental health and safety standards, production costs, weather, and seasonality.

For the year ended December 31, 2022, our net cash provided by operating activities totaled $23.3 million compared to $20.4 million for the year ended December 31, 2021.

The $3.0 million increase in cash from operating activities was primarily driven by the improvement in net income for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The Company’s future cash flows from operating activities will be affected by economic utility regulation, infrastructure investment, growth in service connections, customer usage of water, compliance with environmental health and safety standards, production costs, weather, and seasonality.

For the year ended December 31, 2023, net cash provided by operating activities totaled approximately $25.4 million compared to $23.3 million for the year ended December 31, 2022.

The $2.1 million increase in cash from operating activities was primarily driven by the improvement in net income and increased depreciation expense for the year ended December 31, 2023 compared to the year ended December 31, 2022, as well as an increase in current liabilities for 2023 as compared to the prior year.

All of which was partially offset by an overall decrease in noncurrent liabilities largely attributable to the reduction of deferred revenue - ICFA resulting from revenue recognition during 2023 that did not occur during 2022.

Cash from Investing Activities

Our net cash used in investing activities totaled $34.2 million for the year ended December 31, 2022 compared to $20.3 million for the year ended December 31, 2021.

The $13.9 million increase in cash used in investing activities was primarily driven by the increase in capital expenditures of $15.7 million, offset by a decrease of approximately $1.9 million in cash paid for acquisitions for the year ended December 31, 2022 compared to the year ended December 31, 2021.

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

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

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

The net cash used in investing activities totaled approximately $28.6 million for the year ended December 31, 2023 compared to $34.2 million for the year ended December 31, 2022.

The $5.6 million decrease in cash used in investing activities was primarily driven by a decrease in capital expenditures of $11.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, partially offset by the $6.2 million cash paid for the acquisition of Farmers (net of cash acquired) in 2023.

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

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

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

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Cash from Financing Activities

Our net cash provided by financing activities totaled $5.0 million for the year ended December 31, 2022, a $12.9 million change as compared to the $7.9 million in cash used in financing activities for the year ended December 31, 2021.

This change was primarily driven by the $14.9 million in net proceeds received from our public offering of common stock in August 2022, partially offset by a $1.9 million principal payment for our Series B senior secured notes for the year ended December 31, 2022.

The net cash provided by financing activities totaled $0.4 million for the year ended December 31, 2023, a $4.6 million change, as compared to the $5.0 million in cash provided by financing activities for the year ended December 31, 2022.

This change was primarily driven by a decrease of $12.1 million in proceeds from the sale of stock and a $0.8 million decrease in advances in aid of construction, partially offset by an increase of $6.7 million in other contributions and a $2.3 million increase in line of credit borrowings, net of payments, for the year ended December 31, 2023.

Senior Secured Notes

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

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

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

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

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

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

Series B carries a principal balance of $86.3 million and bears an interest rate of 4.58% over a 20-year term, with the principal payment due on June 15, 2036 (the “Series B Notes”).

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

The proceeds of the Series A Notes and the Series B Notes were primarily used to refinance the Company’s long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the Company’s U.S.

initial public offering of its common stock in May 2016.

The Series A Notes and the Series B Notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

Consolidated EBITDA is calculated as net income plus depreciation and amortization, taxes, interest, and other non-cash charges net of non-cash income.

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

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

The Series A Notes and the Series B Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25.

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

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

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

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

As of December 31, 2023, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes.

Additionally, on January 3, 2024, the Company issued $20.0 million aggregate principal amount of 6.91% Senior Secured Notes due on January 3, 2034 (the “6.91% Notes” and collectively with the Series A Notes and the Series B Notes, the “Senior Secured Notes”).

The 6.91% Notes will accrue interest at 6.91% per annum from the date of issuance, payable semi-annually on January 3 and July 3 of each year, beginning on July 3, 2024, with a balloon payment due on January 3, 2034.

The 6.91% Notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

The 6.91% Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service coverage ratio of 1.20 for any fiscal quarter ended on or before June 15, 2024 and 1.25 for any fiscal quarter ended during the period from and after June 16, 2024.

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

The Senior Secured Notes also have certain restrictive covenants that limit, among other things, the Company’s ability to:

create liens and other encumbrances;

incur additional indebtedness;

merge, liquidate or consolidate with another entity;

dispose of or transfer assets;

make distributions or other restricted payments;

engage in certain affiliate transactions;

and change the nature of the business.

Debt issuance costs as of December 31, 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.

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

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

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

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

Refer to Note 1 – “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements - Corporate Transactions - Revolving Line of Credit" of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

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

The Company and Northern Trust have subsequently amended the credit facility agreement on multiple occasions (as amended, the “Northern Trust Loan Agreement”) to, among other things, (i) extend the scheduled maturity date to July 1,

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(ii) increase the maximum principal amount available for borrowing to $15.0 million;

(iii) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR);

and (iv) add 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 Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

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

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

The Company incurred $0 and $95,000 i n debt issuance costs relating to the Northern Trust Loan Agreement as of December 31, 2022 and December 31, 2021, respectively.

Financing Activity

As of December 31, 2023, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.

As of December 31, 2023, the Company had outstanding borrowings of approximately $2.3 million under the revolving line of credit with Northern Trust.

There were approximately $25,000 and $9,812 unamortized debt issuance costs as of December 31, 2023 and December 31, 2022, respectively.

Refer to Note 11 — “Debt” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Other Financing Activity

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

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.

Insurance Coverage

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

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

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

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

Contractual Obligations

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Some result in direct obligations on the Company’s balance sheet while others are firm commitments or commitments based on uncertainties and undetermined execution times.

The following table summarizes our contractual cash obligations as of December 31, 2022 (in thousands):

The following table summarizes the Company’s contractual cash obligations as of December 31, 2023 (in thousands):

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Payments Due By Period

4 unchanged sentences

Finance lease obligation $ 691 242 381 68 —

Interest on capital lease $ 65 29 32 4 —

Operating lease obligation $ 1,663 285 713 665 —

Interest on operating lease $ 90 42 47 1

$ 177,929 $ 9,840 $ 20,546 $ 47,513 $ 100,030

(1) Interest on the long-term debt is based on the fixed rates of the Company’s senior secured notes.

(1) Interest on the long-term debt is based on the fixed rates of the Company’s Series A Notes and the Series B Notes.

(2) In addition to these obligations, the Company pays annual refunds on AIAC over a specific period of time based on operating revenues generated from developer-installed infrastructure.

2 unchanged sentences

Portions of these refund amounts are payable annually over the next two decades, and amounts not paid by the contract expiration dates become nonrefundable and are transferred to CIAC.

Insurance Coverage

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

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

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

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

Critical Accounting Policies, Judgments, and Estimates

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

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

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

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

Critical Accounting Estimates

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

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

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

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

Accounting for Rate Regulation

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These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service.

When our regulated subsidiaries file rate cases, their capital assets, operating costs and other matters are subject to review, and disallowances may occur, and the Company may be required to write-off related regulatory assets that are not specifically recoverable and determine if other assets might be impaired.

When the Company’s regulated subsidiaries file rate cases, their capital assets, operating costs and other matters are subject to review, and disallowances may occur, and the Company may be required to write-off related regulatory assets that are not specifically recoverable and determine if other assets might be impaired.

See 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 more information regarding our rate proceedings.

Item 8 of this report for more information regarding the Company’s rate proceedings.

Management continually evaluates the anticipated recovery, settlement or refund of regulatory assets, liabilities, and revenues subject to refund and provides for allowances and/or reserves that it believes to be necessary.

In the event that management’s assessment as to the probability of the inclusion in the ratemaking process is incorrect, the associated regulatory asset or liability will be adjusted to reflect the change in assessment or the impact of regulatory approval of rates.

Table of Con tents

Estimation of income taxes includes an evaluation of the recoverability of deferred tax assets based on an assessment of the Company’s ability to utilize the underlying future tax deductions against future taxable income before they expire.

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If the assessment of the Company’s ability to fully utilize the deferred tax gain changes, the Company would be required to recognize income tax expense in the period in which the deferred tax gain expires.

Acquisitions are accounted for as a business combination under ASC 805, “Business Combinations” and the purchase price is allocated to the acquired utility assets and liabilities based on the acquisition-date fair values.

Fair values are determined in accordance with ASC 820 “Fair Value Measurement,” which allows for the characteristics of the acquired assets and liabilities to be considered, particularly restrictions on the use of the asset and liabilities.

Regulation is considered a restriction on the use of the assets and liabilities, as it relates to inclusion in rate base, and a fundamental input to measuring the fair value in a business combination.

Substantially all of the Company’s operations are subject to the rate-setting authority of the ACC and are accounted for pursuant to accounting guidance for regulated operations under ASC 980, “Regulated Operations.” As such, the fair value of the acquired assets and liabilities subject to these rate-setting provisions approximates the pre-acquisition carrying values and does not reflect any net valuation adjustments.

In some acquisitions, the Company is required to pay the seller an amount for each new account established in the service area, up to an agreed upon aggregate amount, referred to as a growth premium.

The obligation period of the growth premium varies and is based on the purchase agreement.

The Company accounts for the growth premium as additional consideration to the purchase and the fair value of the growth premium liability is calculated using a discounted cash flow technique, which utilizes unobservable inputs developed by the Company using significant judgement in estimates and assumptions.

Significant inputs used in the fair value calculation are follows:

year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate.

While the Company uses the best available estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, such estimates are inherently uncertain and subject to refinement.

Events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Any adjustments subsequent to the conclusion of the acquisition’s measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, will be recorded in the Company’s Consolidated Statements of Operations.

Recent Accounting Pronouncements

A discussion of recently issued and recently issued but not yet adopted accounting pronouncements is included in Note 1 – “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements - Corporate Transactions - Revolving Line of Credit" of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report and is incorporated herein by reference.

A discussion of recently issued and recently issued but not yet adopted accounting pronouncements is included in Note 1 – “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements - Recent Accounting Pronouncements” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report and is incorporated herein by reference.

Off Balance Sheet Arrangements

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

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

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Table of Con tents

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

What changed 10-K

Item 7. Management’s Discussion and Analysis