Global Water Resources, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 58 Consolidated Balance Sheets as o f December 31, 2023 an d 2022 60 Consolidated Statements of Operations for the Years ende d December 31, 2023 and 2022 61 Consolidated Statements of Shareholders’ Equity for the Years ende d December 31, 2023 a nd 2022 62 Consolidated Statements of Cash Flows for the Years ended December 31, 2023 a nd 2022 63 Notes to Consolidated Financial Statements 64 -57- Table of Con tents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Global Water Resources, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Global Water Resources, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Regulatory Matters - Impact of Rate Regulation on the Financial Statements — Refer to Note 2 to the financial statements Critical Audit Matter Description The Company’s regulated utilities are subject to rate regulation by the Arizona Corporation Commission (the “ACC”). The ACC has jurisdiction with respect to the rates charged to water and wastewater service customers in Arizona. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics effects of rate regulation has a pervasive effect on the financial statements. The ACC establishes rates designed to permit the recovery of the cost of service and a return on investment. Decisions to be made by the ACC in the future will impact the accounting for regulated operations, including decisions about the amount of -58- Table of Con tents allowable costs and return on invested capital included in rates and any refunds that may be required. While the Company has indicated it expects to recover costs from customers through regulated rates, there is a risk that the ACC will not approve (1) full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment. We identified the impact of rate regulation as a critical audit matter due to the significant judgments that underlie the Company’s regulatory account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, and (2) a refund to customers. Given that management’s accounting judgments are based on assumptions about the outcome of decisions by the ACC, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the uncertainty of future decisions by the ACC included the following, among others: • We read relevant regulatory orders and settlements issued by the ACC for the Company and other public utilities in Arizona, regulatory statutes, procedural memorandums, filings made by interveners and utilities, and other publicly available information to assess the likelihood of recovery in future rates or a future reduction in rates based on precedents of the ACC’s treatment of similar costs under similar circumstances. We evaluated the external information and compared such information to management’s regulatory asset and liability balances for completeness. • We obtained supporting documentation from management, as appropriate, regarding the likelihood of recovery in future rates or of a future reduction in rates not yet addressed in a regulatory order. • We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. /s/ DELOITTE & TOUCHE LLP Tempe, Arizona March 6, 2024 We have served as the Company's auditor since 2003. -59- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share and per share amounts) December 31, 2023 December 31, 2022 ASSETS PROPERTY, PLANT AND EQUIPMENT: Land $ 2,674 $ 1,480 Depreciable property, plant and equipment 414,170 344,043 Construction work-in-progress 48,147 66,039 Other 697 697 Less accumulated depreciation ( 142,367 ) ( 124,522 ) Net property, plant and equipment 323,321 287,737 CURRENT ASSETS: Cash and cash equivalents 3,087 6,561 Accounts receivable, net 2,845 2,139 Customer payments in-transit 543 462 Unbilled revenue 2,755 2,557 Taxes, prepaid expenses and other current assets 2,494 2,439 Total current assets 11,724 14,158 OTHER ASSETS: Goodwill 10,820 4,957 Intangible assets, net 8,841 10,139 Regulatory assets 2,898 3,169 Restricted cash 1,676 1,001 Right-of-use assets 1,741 1,891 Other noncurrent assets 74 34 Total other assets 26,050 21,191 TOTAL ASSETS $ 361,095 $ 323,086 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,027 $ 2,173 Accrued expenses 7,129 8,056 Customer and meter deposits 1,628 1,682 Long-term debt, current portion 3,880 3,833 Leases, current portion 553 505 Total current liabilities 14,217 16,249 NONCURRENT LIABILITIES: Line of credit 2,315 — Long-term debt 101,341 104,945 Long-term lease liabilities 1,370 1,616 Deferred revenue - ICFA 19,656 20,974 Regulatory liabilities 6,076 6,371 Advances in aid of construction 111,529 93,656 Contributions in aid of construction, net 36,409 26,404 Deferred income tax liabilities, net 8,284 5,949 Acquisition liabilities 3,048 1,773 Other noncurrent liabilities 8,230 755 Total noncurrent liabilities 298,258 262,443 Total liabilities 312,475 278,692 Commitments and contingencies (Refer to Note 16) SHAREHOLDERS’ EQUITY: Common stock, $ 0.01 par value, 60,000,000 shares authorized; 24,492,918 and 24,095,139 shares issued as of December 31, 2023 and December 31, 2022, respectively. 240 239 Treasury stock, 317,677 and 224,093 shares at December 31, 2023 and December 31, 2022, respectively. ( 2 ) ( 2 ) Paid in capital 47,585 44,157 Retained earnings 797 — Total shareholders’ equity 48,620 44,394 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 361,095 $ 323,086 See accompanying notes to the consolidated financial statements -60- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Year Ended December 31, 2023 2022 REVENUES: Water services $ 24,860 $ 20,885 Wastewater and recycled water services 25,382 23,843 Unregulated revenues 2,786 — Total revenues 53,028 44,728 OPERATING EXPENSES: Operations and maintenance 12,669 10,889 General and administrative 16,636 16,130 Depreciation and amortization 11,437 9,890 Total operating expenses 40,742 36,909 OPERATING INCOME 12,286 7,819 OTHER INCOME (EXPENSE): Interest income 52 65 Interest expense ( 4,882 ) ( 4,759 ) Allowance for equity funds used during construction 981 723 Other, net 2,417 2,592 Total other expense ( 1,432 ) ( 1,379 ) INCOME BEFORE INCOME TAXES 10,854 6,440 INCOME TAX EXPENSE ( 2,872 ) ( 934 ) NET INCOME $ 7,982 $ 5,506 Basic earnings per common share $ 0.33 $ 0.24 Diluted earnings per common share $ 0.33 $ 0.24 Dividends declared per common share $ 0.30 $ 0.30 Weighted average number of common shares used in the determination of: Basic 24,044,950 23,172,733 Diluted 24,129,542 23,332,356 See accompanying notes to the consolidated financial statements -61- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share and per share amounts) Common Stock Shares Common Stock Treasury Stock Shares Treasury Stock Paid-in Capital Retained Earnings Total Equity BALANCE - December 31, 2021 22,832,013 $ 228 ( 182,445 ) $ ( 2 ) $ 29,803 $ — $ 30,029 Dividend declared $ 0.30 per share — — — — ( 1,383 ) ( 5,506 ) ( 6,889 ) Issuance of Common Stock 1,150,000 11 — — 14,782 — 14,793 Treasury stock — — ( 41,648 ) — 304 — 304 Stock option exercise 113,126 — — — 22 — 22 Stock compensation — — — — 629 — 629 Net income — — — — — 5,506 5,506 BALANCE - December 31, 2022 24,095,139 239 ( 224,093 ) ( 2 ) 44,157 — 44,394 Dividend declared $ 0.30 per share — — — — — ( 7,185 ) ( 7,185 ) Issuance of Common Stock 230,000 1 — — 2,727 — 2,728 Stock option exercise 167,779 — ( 93,584 ) — 239 — 239 Stock compensation — — — — 462 — 462 Net income — — — — — 7,982 7,982 BALANCE - December 31, 2023 24,492,918 240 ( 317,677 ) ( 2 ) 47,585 797 48,620 See accompanying notes to the consolidated financial statements -62- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 7,982 $ 5,506 Adjustments to reconcile net income to net cash provided by operating activities: Deferred compensation 1,325 1,529 Depreciation and amortization 11,437 9,889 Right of use amortization 324 182 Amortization of deferred debt issuance costs and discounts 44 44 (Gain) Loss on disposal of fixed assets ( 63 ) 4 Provision for credit losses 68 103 Deferred income tax expense 2,394 1,367 Changes in assets and liabilities Accounts receivable ( 702 ) ( 248 ) Other current assets ( 292 ) 210 Accounts payable and other current liabilities ( 635 ) ( 1,830 ) Other noncurrent assets 312 387 Other noncurrent liabilities 3,199 6,193 Net cash provided by operating activities 25,393 23,336 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 22,312 ) ( 33,984 ) Cash paid for acquisitions, net of cash acquired ( 6,246 ) ( 180 ) Other cash flows from investing activities ( 40 ) ( 24 ) Net cash used in investing activities ( 28,598 ) ( 34,188 ) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ( 7,185 ) ( 6,889 ) Advances in aid of construction 1,510 2,344 Refunds of advances for construction ( 1,171 ) ( 1,140 ) Proceeds from stock option exercise 9 3 Payments for taxes related to net shares settlement of equity awards ( 373 ) ( 585 ) Principal payments under finance lease ( 525 ) — Line of credit borrowings, net 2,315 — Loan borrowings 260 — Loan repayments ( 29 ) 259 Repayments of bond ( 3,833 ) ( 3,833 ) Proceeds from sale of stock 2,748 14,812 Payments of offering costs for sale of stock ( 20 ) — Other contributions 6,700 — Net cash provided by financing activities 406 4,971 INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 2,799 ) ( 5,881 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 7,562 13,443 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of period 4,763 7,562 See accompanying notes to the consolidated financial statements Supplemental disclosure of cash flow information: Year Ended December 31, 2023 2022 Cash and cash equivalents $ 3,087 $ 6,561 Restricted Cash 1,676 1,001 Total cash, cash equivalents, and restricted cash $ 4,763 $ 7,562 -63- Table of Contents GLOBAL WATER RESOURCES, INC. Notes to the Consolidated Financial Statements 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS Description of Business Global Water Resources, Inc. (the “Company”, “GWRI”, “we”, “us”, or “our”) is a water resource management company that owns, operates, and manages twenty-nine water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, Arizona. Serving more than 82,000 people in approximately 32,000 homes within the Company’s 408 square miles of certificated service areas as of December 31, 2023, the Company provides water and wastewater utility services under the regulatory authority of the Arizona Corporation Commission (“ACC”). Approximately 89.3 % of the active service connections are customers of the Company’s Global Water - Santa Cruz Water Company, Inc. (“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc. (“Palo Verde”) utilities, which are located within a single service area. Basis of Presentation and Principles of Consolidation The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in consolidation. The Company prepares its financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Corporate Transactions 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. 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. One of the Company’s directors purchased an aggregate of 30,000 shares of common stock in the offering at the purchase price. 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. Farmers Acquisition On February 1, 2023, the Company acquired all of the equity of Farmers Water Co. (“Farmers”), an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition. -64- Table of Contents Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc. On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia Water Company, Inc. (“Valencia”) to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close. The City of Buckeye is obligated to pay the Company a growth premium equal to $ 3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $ 45.0 million over the term of the agreement. The Company received growth premiums of $ 2.4 million and $ 2.5 million for the years ended December 31, 2023 and 2022, respectively, and has received an aggregate of $ 10.7 million in growth premiums to date. The growth premiums are included in “Other, net” on the Consolidated Statements of Operations. Significant Accounting Policies Regulation The Company’s regulated utilities and certain other balances are subject to regulation by the ACC and are therefore subject to Accounting Standards Codification Topic 980, Regulated Operations (“ASC 980”) (See Note 2 – “Regulatory Decision and Related Accounting and Policy Changes”). Property, Plant and Equipment Property, plant, and equipment is stated at cost less accumulated depreciation provided on a straight-line basis (See Note 5 – “Property, Plant and Equipment”). Depreciation rates for asset classes of utility property, plant, and equipment are established by the ACC. The cost of additions, including betterments and replacements of units of utility fixed assets are charged to utility property, plant, and equipment. When units of utility property are replaced, renewed, or retired, their cost plus removal or disposal costs, less salvage proceeds, is charged to accumulated depreciation. For non-utility property, plant, and equipment, depreciation is calculated by the straight-line method over the estimated useful lives of depreciable assets. Cost and accumulated depreciation for non-utility property, plant, and equipment retired or disposed of are removed from the accounts and any resulting gain or loss is included in earnings. In addition to third party costs, direct personnel costs and indirect construction overhead costs may be capitalized. Interest incurred during the construction period is also capitalized as a component of the cost of the constructed assets, which represents the cost of debt and equity associated with construction activity. Expenditures for maintenance and repairs are charged to expense. Revenue Recognition—Water Services Water services revenues are recorded when service is rendered or water is delivered to customers. However, in addition to the monthly basic service charge, the determination and billing of water sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each reporting period, amounts of water delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recorded. Water connection fees are the fees associated with the application process to set up a customer to receive utility service on an existing water meter. These fees are approved by the ACC through the regulatory process and are set based on the costs incurred to establish services including the application process, billing setup, initial meter reading, and service transfer. Because the amounts charged for water connection fees are set by the ACC and not negotiated in conjunction with the pricing of ongoing water service, the connection fees represent the culmination of a separate earnings process and are recognized when the service is provided. For both the years ended December 31, 2023 and 2022, the Company recognized $ 0.3 million in connection fees. Meter installation fees are the fees charged to developers or builders associated with installing new water meters. Certain fees for meters are regulated by the ACC, and are refundable to the end customer over a period of time. Refundable meter installation fees are recorded as a liability upon receipt. Revenue Recognition—Wastewater and Recycled Water Services -65- Table of Contents Wastewater and recycled water services revenues are generally recognized when service is rendered. Wastewater services are billed at a fixed monthly amount per connection, and recycled water services are billed monthly based on volumetric fees. Revenue Recognition—Unregulated Revenues Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. Unregulated revenues are limited to revenues resulting from certain infrastructure coordination and financing agreement arrangements (“ICFAs”). Refer to Note 3 – “Revenue Recognition - Unregulated Revenue” for additional information. Allowance for Credit Losses Provisions are made for doubtful accounts due to the inherent uncertainty around the collectability of accounts receivable. The allowance for credit losses is recorded as bad debt expense, and is classified as general and administrative expense. The allowance for credit losses is determined considering the age of the receivable balance, type of customer (e.g., residential or commercial), payment history, as well as specific identification of any known or expected collectability issues (see Note 6 – “Accounts Receivable”). Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments in debt instruments with an original maturity of three months or less. Restricted Cash Restricted cash represents cash deposited relating to hook-up fees (“HUF”) tariffs and asset retirement obligations. The following table summarizes the restricted cash balance as of December 31, 2023 and 2022 (in thousands): December 31, 2023 December 31, 2022 HUF funds $ 822 $ 161 Certificate of deposits 854 840 $ 1,676 $ 1,001 Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s valuation allowance totaled zero as of December 31, 2023 and 2022 (see Note 12 – “Income Taxes”). The Company evaluates uncertain tax positions using a two-step approach. Recognition (step one) occurs when it is concluded that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determine that a tax position no longer meets the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited, and to the extent that uncertain tax positions exist, expanded disclosures are provided. Basic and Diluted Earnings per Common Share Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income by the weighted-average number of shares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (options and restricted stock awards), if dilutive. Unless otherwise noted, the term “Earnings Per Share” refers to Basic EPS. A reconciliation of the denominator used in Basic and Diluted EPS calculations is show in the following -66- Table of Contents table: Year Ended December 31, (In thousands) 2023 2022 Basic weighted average common shares outstanding 24,045 23,173 Effect of dilutive securities: Option grants 75 132 Restricted stock awards 10 27 Total dilutive securities 85 159 Diluted weighted average common shares outstanding 24,130 23,332 Anti-dilutive shares excluded from earnings per diluted shares (1) 91 185 (1) Shares were excluded from the dilutive-effect calculation because the outstanding awards’ exercise prices were greater than the average market price of the Company’s common stock. Refer to Note 13 – “Deferred Compensation Awards” for additional information regarding the option and restricted stock grants. Goodwill Goodwill represents the excess purchase price over the fair value of net tangible and identifiable intangible assets acquired through acquisitions. Goodwill is not amortized, it is instead tested for impairment annually, or more often if circumstances indicate a possible impairment may exist. As required, the Company evaluates goodwill for impairment annually, and do so as of November 1 of each year, and at an interim date if indications of impairment exist. When testing goodwill for impairment, the Company may assess qualitative factors, including macroeconomic conditions, industry and market considerations, overall financial performance, and entity specific events to determine whether it is more likely than not that the fair value of an operating and reportable segment is less than its carrying amount. The Company utilizes internally developed discounted future cash flow models, third-party appraisals, or broker valuations to determine the fair value of the reporting unit. Under the discounted cash flow approach, the Company utilizes various assumptions requiring judgment, including projected future cash flows, discount rates, and capitalization rates. The estimated future cash flows are based on historical data, internal estimates, and external sources. The estimated fair value is then compared to the carrying value. If the carrying value is in excess of the fair value, an impairment charge is recorded to asset impairments within the Company’s consolidated statement of operations in the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of goodwill. Refer to Note 7 — “Goodwill and Intangible Assets” for additional information about goodwill. Intangible Assets Intangible assets not subject to amortization consist of certain permits expected to be renewable indefinitely, water rights, and certain service areas acquired in transactions which did not meet the definition of business combinations for accounting purposes, and are considered to have indefinite lives. Intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more often if certain circumstances indicate a possible impairment may exist. Amortized intangible assets consist primarily of acquired ICFA contract rights. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information about ICFAs. Impairment of Long-Lived Assets Management evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If an indicator of possible impairment exists, an undiscounted cash flow analysis would be prepared to determine whether there is an actual impairment. Measurement of the impairment loss is based on the fair value of the asset. Generally, fair value will be determined using appraisals or valuation techniques such as the present value of expected future cash flows. -67- Table of Contents Debt Issuance Costs In connection with the issuance of certain of the Company’s long-term debt, the Company has incurred legal and other costs that are believed to be directly attributable to realizing the proceeds of the debt issued. These costs are netted against long-term debt and amortized as interest expense using the effective interest method over the term of the respective debt. Amortization of debt issuance costs and discounts totaled approximately $ 0.04 million for both the years ended December 31, 2023 and 2022. Advances in Aid of Construction (“AIAC”) and Contributions in Aid of Construction (“CIAC”) The Company has various agreements with developers, whereby funds, water line extensions, or wastewater line extensions are provided to the Company by the developers and are considered refundable AIAC. These AIAC are non-interest-bearing and are subject to refund to the developers through annual payments that are computed as a percentage of the total annual gross revenue earned from customers connected to utility services constructed under the agreement over a specified period. Upon the expiration of the agreements’ refunding period, the remaining balance of the AIAC becomes nonrefundable and at that time is considered CIAC. CIAC are amortized as a reduction of depreciation expense over the estimated remaining life of the related utility plant. For rate-making purposes, utility plant funded by AIAC or CIAC are excluded from rate base. There was no AIAC balance transferred to CIAC for the years ended December 31, 2023 or December 31, 2022. Fair Value of Financial Instruments The carrying values of cash equivalents, accounts receivables, and accounts payable approximate fair value due to the short-term maturities of these instruments. See Note 11 – “Debt” for information as to the fair value of long-term debt. The refundable AIAC have a carrying value of $ 111.5 million and $ 93.7 million as of December 31, 2023 and 2022, respectively. Portions of these non-interest-bearing instruments are payable annually through 2032 and amounts not paid by the contract expiration dates become nonrefundable. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases. However, the fair value of these amounts would be less than their carrying value due to the non-interest-bearing feature. Segments Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating performance. In consideration of ASC 280— Segment Reporting the Company notes it is not organized around specific products and services, geographic regions, or regulatory environments. 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 its revenue, disaggregated by service type, on the face of its Statements 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 Company notes that the CODM uses consolidated financial information to evaluate the Company’s performance, which is the same basis on which he communicates the Company’s results and performance to the Board of Directors. It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of the Company’s resources on a consolidated level. 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. Recent Accounting Pronouncements Recently Adopted Accounting Standards In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model required recognition based upon an estimation of expected credit losses rather than recognition of losses based on the probability of occurrence. -68- Table of Contents The Company is a public business entity that qualifies as a smaller reporting company, and therefore ASU 2016-13 was effective for annual reporting periods beginning after December 15, 2022. The Company adopted the standard utilizing the modified retrospective method for its trade receivables and unbilled revenue on January 1, 2023. Based on the composition of the Company’s trade receivables and unbilled revenue, and expected future credit losses, the adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. The Company adopted ASU 2019-12 during the first quarter of 2021 prospectively and the adoption did not have a material impact to the Company’s Consolidated Financial Statements. In October of 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In a business combination, an acquirer generally recognizes assets acquired and liabilities assumed, including contract assets and contract liabilities, at their respective fair value on the acquisition date. ASU 2021-08 requires that in a business combination, an acquirer should recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The guidance provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts with customers in a business combination. The guidance is effective for annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments, and early adoption is permitted. The Company adopted ASU 2021-08 on January 1, 2023 prospectively and the adoption did not have a material impact to the Company’s Consolidated Financial Statements. Future Adoption of Accounting Standards In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is assessing the impact that adopting this new standard will have on its consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures that expands disclosures of significant segment expenses and includes new disclosures for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is assessing the impact that adopting this new standard will have on its consolidated financial statements. 2. REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES The Company’s regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within Accounting Standards Codification (“ASC 980”), Regulated Operations . In accordance with ASC 980, rates charged to utility customers are intended to recover the costs of the provision of service plus a reasonable return in the same period. Changes to the rates are made through formal rate applications with the ACC, which the Company has customarily done. 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. On July 3, 2023, the Company’s 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 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. The Southwest Plant was substantially constructed prior to 2009 to provide water, wastewater, and recycled water utility services for the area southwest of the City of Maricopa. Due to the unprecedented collapse of the housing market during the Great Recession, the nearly completed plant remained idle for well over a decade. The total cost of the Southwest Plant was approximately $ 38.4 million. In July 2023, $ 27.5 million related to the water production plant and a portion of the wastewater processing plant was placed in service, with the remaining parts of the Southwest Plant to be placed in service once sufficient flows, provided by connection growth, are established. There can be no -69- Table of Contents assurance, however, that the ACC will approve the application as submitted and the ACC could take other actions regarding the application. 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 circumstance 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. On June 27, 2023, seven of the Company’s regulated utilities each filed a rate case application with the ACC for increased 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 Global Water-Mirabell Water Company, Inc. (“Mirabell”), Global Water-Lyn Lee Water Company, Inc. (“Lyn Lee”), Global Water-Francesca Water Company, Inc. (“Francesca”), Global Water-Tortolita Water Company, Inc. (“Tortolita”), Global Water-Rincon Water Company, Inc. (“Rincon”), Global Water-Las Quintas Serenas Water Company, Inc. (“Las Quintas Serenas”), and Global Water-Red Rock Water Company, Inc. (“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 the 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 previous rate case. Pursuant to Rate Decision No. 78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $ 2.2 million (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years, as follows: Incremental Cumulative August 1, 2022 $ 1,457,462 $ 1,457,462 January 1, 2023 $ 675,814 $ 2,133,277 January 1, 2024 $ 98,585 $ 2,231,861 To the extent that the number of active service connections has increased and continues to increase from 2019 levels, the additional revenues may be greater than the amounts set forth above. On the other hand, if active connections decrease or the Company experiences declining usage per customer, the Company may not realize all of the anticipated revenues. Rate Decision No. 78644 also addressed the primary impacts of the Federal Tax Cuts and Jobs Act (the “TCJA”) on the Company, which includes the reduction of the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018. The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. Rate Decision No. 78644 approved an adjustor mechanism for income taxes (as described below) that permits the Company to flow through potential changes to state and federal income tax rates as well as refund or collect funds related to TCJA. The ACC also approved: (i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated; (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; -70- Table of Contents (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 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 was provided to the ACC and no further action will be taken by the ACC, as documented in Decision No. 79258. Certain accounting implications related to Rate Decision No. 78644 were recognized and recorded as of June 30, 2022, and are as follows: • Reclassification of Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums of approximately $ 0.8 million in the aggregate from goodwill to regulatory assets to be included in rate base. The premiums are to be amortized over 25 years. • Reversal of the 2017 TCJA tax reform regulatory liability of approximately $ 0.8 million, which was recorded as a reduction to income tax expense for approximately $ 0.7 million, and as a reduction to interest expense for approximately $ 0.1 million. • Write-off of approximately $ 0.3 million in capitalized rate case costs. Regulatory Assets and Liabilities Regulatory assets and liabilities are the result of operating in a regulated environment in which the ACC establishes rates that are designed to permit the recovery of the cost of service and a return on investment. The Company capitalizes and records regulatory assets for costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates. Regulatory assets are amortized over the future periods that the costs are expected to be recovered. Final determination of whether a regulatory asset can be recovered is decided by the ACC in regulatory proceedings. If the Company determines that a portion of the regulatory assets is not recoverable in customer rates, the Company would be required to recognize the loss of the assets disallowed. If costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities. The Company’s regulatory assets and liabilities consist of the following (in thousands): Recovery Period December 31, 2023 December 31, 2022 Regulatory Assets Income taxes recoverable through future rates (1) Various $ 1,404 $ 1,482 Rate case expense surcharge (2) 2 years 221 467 Acquisition premiums (3) 25 years 1,269 1,220 Other regulatory assets 4 — Total regulatory assets $ 2,898 $ 3,169 Regulatory Liabilities Income taxes payable through future rates (1) $ 488 $ 508 Acquired ICFAs (4) 4,896 5,863 Depreciation adjustment (5) 692 — Total regulatory liabilities $ 6,076 $ 6,371 -71- Table of Contents (1) The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. (2) Rate Decision No. 78743, issued on October 24, 2022, approved approximately $ 0.5 million in rate case expenses to be recovered through a rate case expense surcharge over a two-year period. (3) Rate Decision No. 78319, issued on December 3, 2021, approved an acquisition premium to be amortized over 25 years related to the acquisition of the Company’s Rincon utility. Amortization will begin once the Company receives a decision on its rate case filed in June 2023 that would approve the acquisition premium to be included in customer rates. The acquisition premium balance as of December 31, 2023 was approximately $ 0.5 million. Rate Decision No. 78644, issued on July 27, 2022, approved acquisition premiums related to the acquisitions of the Company’s Turner Ranches and Red Rock utilities. Amortization began in 2022 as the acquisition premiums were included in customer rates as approved in the decision. The acquisition premium balance as of December 31, 2023 was approximately $ 0.8 million. (4) The acquired ICFA regulatory liability relates to the offset of intangible assets related to ICFA contracts obtained in connection with the Santa Cruz, Palo Verde, and Sonoran Utility Services, LLC (“Sonoran”) acquisitions. When funds are received related to the acquired ICFA, a portion of these funds reduce the acquired ICFA regulatory liability and partially offset the amortization expense recognition of the related intangible asset. (5) Rate Decision No. 78644, issued on July 27, 2022, approved an adjustment to update previously approved depreciation rates. 3. REVENUE RECOGNITION Regulated Revenue The Company’s operating revenues are primarily attributable to regulated services based upon tariff rates approved by the ACC. Regulated service revenues consist of amounts billed to customers based on approved fixed monthly fees and consumption fees, as well as unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing historical customer data recorded as accrued revenue. The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The unbilled revenue estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage). The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has the right to invoice for the volume of consumption, service charge, and other authorized charges. The Company satisfies its performance obligation to provide water, wastewater, and recycled water services over time as the services are rendered. Regulated services may be terminated by the customers at will, and, as a result, no separate financing component is recognized for the Company’s collections from customers, which generally require payment within 15 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers’ ability to pay. Total revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. Unregulated Revenue Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. For the year ended December 31, 2023, unregulated revenues primarily related to the revenues recognized on a portion of ICFA funds received. ICFAs are agreements with developers and homebuilders where the Company, which owns the operating utilities, provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Services provided within these agreements include coordination of construction services for water and wastewater treatment facilities as well as financing, arranging, and coordinating the provision of utility services. In return, the developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the land legally described in the agreement, or a portion thereof. Under ICFA agreements, the Company has a -72- Table of Contents contractual obligation to ensure physical capacity exists through its regulated utilities for the provision of water and wastewater utility service to the land when needed. This obligation persists regardless of connection growth. Fees for these services are typically a negotiated amount per equivalent dwelling unit for the land legally described in the agreement, or a portion thereof. Payments are generally due in installments, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones, and the final payment due upon final plat approval or sale of the subdivision. The payments are non-refundable. The agreements are generally recorded against the land with the appropriate recorder’s office and must be assumed in the event of a sale or transfer of the land. The regional planning and coordination of the infrastructure in the various service areas has been an important part of the Company’s business model. Payments for ICFAs are usually received in advance. Rate Decision No. 74364 requires a HUF tariff to be established for all ICFAs that come due and are paid subsequent to December 31, 2013, which is a set amount per equivalent dwelling unit determined by the ACC based on the utility and meter size. Also pursuant to Rate Decision No. 74364, as payments are received, 70% of the payment must be recorded as HUF liability until the HUF liability is fully funded, with the remaining amount initially recorded to deferred revenue until earned. The Company is responsible for assuring that the full HUF tariff, which is the set amount determined by the rate decision, is funded in the HUF liability, even if it results in recording less than 30% of the overall ICFA funds as deferred revenue. ICFA revenue is recorded when the Company completes the performance obligations under the agreement. The Company accounts for the portion of ICFA funds allocated to the HUF liability as a contribution in aid of construction (“CIAC”). However, in accordance with the ACC directives, the CIAC is not deducted from rate base until the HUF funds are expended for utility plant. Such funds are restricted and segregated in a separate bank account and used for plant. For facilities required under a HUF or ICFA, the utilities must first use the HUF moneys received, after which, it may use debt or equity financing for the remainder of construction. As these arrangements are with developers and not with the end water or wastewater customer, revenue recognition coincides with the completion of the Company’s performance obligations under the agreement with the developer and its regulated utilities’ ability to provide fitted capacity for water and wastewater service. The Company exercises judgment when estimating the number of equivalent dwelling units that its regulated utilities have capacity to serve. The Company believes that services provided within these agreements are not distinct in the context of the contract because they are highly interdependent with its regulated utilities’ ability to provide fitted capacity for water and wastewater services. The Company concluded that the goods and services provided under ICFA contracts constitute a single performance obligation. December 31, 2022 Balance Payments Allocated to Deferred Revenue Revenue Recognized December 31, 2023 Balance Deferred Revenue - ICFA $ 20,974 $ 1,468 $ ( 2,786 ) $ 19,656 December 31, 2021 Balance Payments Allocated to Deferred Revenue Revenue Recognized December 31, 2022 Balance Deferred Revenue - ICFA $ 19,035 $ 1,939 $ — $ 20,974 Disaggregated Revenues For the years ended December 31, 2023 and 2022, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands): -73- Table of Contents Year Ended December 31, 2023 2022 REGULATED REVENUE Water Services Residential $ 17,541 $ 15,114 Irrigation 3,483 2,899 Commercial 1,540 1,165 Construction 1,388 830 Other water revenues 908 877 Total water revenues 24,860 20,885 Wastewater and recycled water services Residential 22,423 21,346 Commercial 1,243 888 Recycled water revenues 1,365 1,242 Other wastewater revenues 351 367 Total wastewater and recycled water revenues 25,382 23,843 TOTAL REGULATED REVENUE 50,242 44,728 UNREGULATED REVENUE ICFA revenues 2,786 — TOTAL UNREGULATED REVENUE 2,786 — TOTAL REVENUE $ 53,028 $ 44,728 Contract Balances The Company’s contract assets and liabilities consist of the following (in thousands): December 31, 2023 December 31, 2022 CONTRACT ASSETS Accounts receivable Water services $ 1,588 $ 1,179 Wastewater and recycled water services 1,379 1,124 Total contract assets $ 2,967 $ 2,303 CONTRACT LIABILITIES Deferred revenue - ICFA $ 19,656 $ 20,974 Total contract liabilities $ 19,656 $ 20,974 Remaining Performance Obligations Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue expected to be recognized in future periods was approximately $ 19.7 million and $ 21.0 million at December 31, 2023 and December 31, 2022, respectively. Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred. Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA. 4. LEASES The Company measures the lease liability at the present value of future lease payments, excluding variable payments based on usage or performance, and calculates the present value using implicit rates. Leases with an initial term of twelve months or less are not recorded on the balance sheet. -74- Table of Contents During the year ended December 31, 2023, the Company entered into five new finance leases for vehicles with either 48 month terms, all of which include a purchase option, and one new office equipment lease with a 60 month term. During the year ended December 31, 2022, the Company entered into nine new finance leases for vehicles with either 48 or 60 month terms, all of which include a purchase option, and an office equipment lease with a 60 month term. During August 2021, the Company entered into a new ten-year and nine-month office lease agreement with a commencement date of June 1, 2024. The rent expense will be $ 5,200 for each full calendar month after a period of abated rent, with escalating rent commencing in March 2026 and annual escalations annually thereafter. Tenant improvement payments are incorporated into the lease at an additional month payment of $ 1,840 with escalations following the same schedule as the base rent. In December 2021, the Company entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022. The new monthly rent expense increased to $ 23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and will increase to $ 41,572 for each calendar month commencing on May 1, 2025 through April 30, 2027. On March 1, 2022 the Company amended the terms of the lease to incorporate construction of tenant improvements. Rent expense arising from operating leases totaled approximately $ 394,000 and $ 319,000 for the years ended December 31, 2023 and 2022, respectively. The right-of-use (“ROU”) asset recorded represents the Company’s right to use an underlying asset for the lease term and ROU lease liability represents the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets at December 31, 2023 and December 31, 2022 consist of the following (in thousands): December 31, 2023 December 31, 2022 Financing Lease $ 561 $ 405 Operating Lease 1,180 1,486 Total $ 1,741 $ 1,891 Lease liabilities at December 31, 2023 and December 31, 2022 consist of the following (in thousands): December 31, 2023 December 31, 2022 Financing Lease $ 623 $ 597 Operating Lease 1,300 1,524 Total $ 1,923 $ 2,121 At December 31, 2023, the remaining aggregate annual minimum lease payments are as follows (in thousands): Finance Lease Obligations Operating Lease Obligations 2024 $ 242 $ 294 2025 213 431 2026 168 499 2027 62 166 2028 6 — Thereafter — — Subtotal 691 1,390 Less: amount representing interest ( 68 ) ( 90 ) Total $ 623 $ 1,300 5. PROPERTY, PLANT AND EQUIPMENT Depreciable property, plant and equipment at December 31, 2023 and December 31, 2022 consist of the following (in thousands): -75- Table of Contents December 31, 2023 December 31, 2022 Equipment $ 60,536 $ 55,178 Office buildings and other structures 64,084 54,647 Transmission and distribution plant 289,550 234,218 Total property, plant and equipment $ 414,170 $ 344,043 Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows: Useful Lives Equipment 3 to 30 years Office buildings and other structures 30 years Transmission and distribution plant 10 to 50 years 6. ACCOUNTS RECEIVABLE Accounts receivable as of December 31, 2023 and December 31, 2022 consist of the following (in thousands): December 31, 2023 December 31, 2022 Billed receivables $ 2,967 $ 2,303 Less provision for credit losses ( 122 ) ( 164 ) Accounts receivable, net $ 2,845 $ 2,139 The following table summarizes the allowance for credit loss activity as of and for the years ended December 31, 2023 and 2022 (in thousands). Balance at Beginning of Period Additions Charged to Expense Charged to Other Accounts Write-offs Balance at End of Period Allowance for credit losses: Year Ended December 31, 2023 $ ( 164 ) $ ( 76 ) $ ( 6 ) $ 124 $ ( 122 ) Year Ended December 31, 2022 $ ( 132 ) $ ( 99 ) $ ( 8 ) $ 75 $ ( 164 ) 7. GOODWILL AND INTANGIBLE ASSETS Goodwill The goodwill balance was $ 10.8 million at December 31, 2023 and is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon, Twin Hawks, and Farmers acquisitions. As of June 30, 2022, the Company reclassified approximately $ 0.8 million of goodwill to regulatory assets related to Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums as a result of Rate Decision No. 78644 (refer to Note 2 - “Regulatory Decision and Related Accounting and Policy Changes” for additional information). The Farmers acquisition contributed approximately $ 6.0 million to the change in the goodwill balance (refer to Note 15 - “Acquisitions” for additional information). There were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to the acquisitions. The Company recorded no goodwill impairment in 2023 and 2022. As of December 31, 2023 and December 31, 2022, the goodwill balance consisted of the following (in thousands): December 31, 2022 Balance Acquisition Activity December 31, 2023 Balance Goodwill $ 4,957 $ 5,863 $ 10,820 -76- Table of Contents Intangible Assets As of December 31, 2023 and December 31, 2022, intangible assets consisted of the following (in thousands): December 31, 2023 December 31, 2022 Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount INDEFINITE LIVED INTANGIBLE ASSETS: CP Water Certificate of Convenience & Necessity service area 1,532 $ 1,532 $ 1,532 $ 1,532 Intangible trademark 13 13 13 13 Franchise contract rights 139 139 132 132 Organizational costs 163 163 87 87 Total indefinite lived intangible assets 1,847 1,847 1,764 1,764 DEFINITE LIVED INTANGIBLE ASSETS: Acquired ICFAs 17,978 ( 16,105 ) 1,873 17,978 ( 14,785 ) 3,193 Sonoran contract rights 7,406 ( 2,285 ) 5,121 7,406 ( 2,224 ) 5,182 Total definite lived intangible assets 25,384 ( 18,390 ) 6,994 25,384 ( 17,009 ) 8,375 Total intangible assets $ 27,231 $ ( 18,390 ) $ 8,841 $ 27,148 $ ( 17,009 ) $ 10,139 A Certificate of Convenience & Necessity (“CC&N”) is a permit issued by the ACC allowing a public service corporation to serve a specified area, and preventing other public service corporations from offering the same services within the specified area. The CP Water CC&N intangible asset was acquired through the acquisition of CP Water Company in 2006. This CC&N permit has no outstanding conditions that would require renewal. Franchise contract rights and organizational costs relate to the 2018 acquisition of Red Rock and the 2023 acquisition of Farmers. Franchise contract rights are agreements with Pima and Pinal counties for Red Rock and Pima county for Farmers that allow the Company to place infrastructure in public right-of-way and permits expected to be renewable indefinitely. The organizational costs represent fees paid to federal or state governments for the privilege of incorporation and expenditures incident to organizing the corporation and preparing it to conduct business. Acquired ICFAs and Sonoran contract rights relate to acquired rights under certain ICFAs through the 2004 acquisition of Santa Cruz and Palo Verde and the 2005 acquisition of Sonoran assets, respectively. The Acquired ICFAs and Sonoran contract rights are amortized when cash is received in proportion to the amount of total cash expected to be received under the underlying agreements. Due to the uncertainty of the timing of when cash will be received under ICFA agreements and contract rights, the Company cannot reliably estimate when the remaining intangible assets’ amortization will be recorded. Amortization in the amount of $ 1.4 million and $ 0.2 million was recorded for these balances for the years ended December 31, 2023 and 2022, respectively. 8. TRANSACTIONS WITH RELATED PARTIES The Company provides medical benefits to employees through its participation in a pooled plan sponsored by an affiliate of a significant shareholder and director of the Company. Medical claims paid to the plan were approximately $ 1.0 million for the year ended December 31, 2023 and $ 0.9 million for the year ended December 31, 2022. Refer to Note 1 — “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions” (specifically the “Public Offering of Common Stock” and “Private Placement Offering of Common Stock” sections) for additional information regarding other related party disclosures. 9. ACCRUED EXPENSES Accrued expenses at December 31, 2023 and December 31, 2022 consist of the following (in thousands): -77- Table of Contents December 31, 2023 December 31, 2022 Property taxes $ 1,242 $ 1,195 Accrued project liabilities 1,001 1,585 Customer prepayments 883 588 Asset retirement obligations 697 697 Dividend payable 606 593 Accrued Bonus 602 557 Interest 480 483 Deferred compensation 239 818 Accrued purchase orders 200 515 Other accrued liabilities 1,179 1,025 Total accrued expenses $ 7,129 $ 8,056 10. FAIR VALUE Fair Value of Financial Instruments FASB ASC 820, Fair Value Measurement , establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels, as follows: • Level 1 - Quoted market prices in active markets for identical assets or liabilities. • Level 2 - Inputs other than Level 1 that are either directly or indirectly observable. • Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use. Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 were as follows (in thousands): December 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Asset/Liability Type: HUF Funds - restricted cash (1) $ 822 $ — $ — $ 822 $ 161 $ — $ — $ 161 Demand Deposit (2) 1 — — 1 50 — — 50 Certificate of Deposit - Restricted (1) — 854 — 854 — 840 — 840 Acquisition Liability (3) — — 2,113 2,113 — — 838 838 Total $ 823 $ 854 $ 2,113 $ 3,790 $ 211 $ 840 $ 838 $ 1,889 (1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company’s consolidated balance sheets and are valued at amortized cost, which approximates fair value. The increase was primarily driven by additional funds received in growth areas of several utilities. (2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company’s consolidated balance sheets and is valued at amortized cost, which approximates fair value. (3) As part of the Red Rock acquisition, the Company is required to pay to the seller a growth premium equal to $ 750 (not in thousands) for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date, or twenty years from the acquisition date. The fair value of the acquisition liability was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company’s estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate. In addition, as part of the Farmers acquisition, the Company is required to pay the seller a growth premium equal to $ 1,000 (not in thousands) for each new account established in the service area, up to a total aggregate growth premium of $ 3.5 million. The obligation period of the growth premium commences on -78- Table of Contents the closing date of the acquisition and ends (i) ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or unplatted and owned by the seller within the service area or (ii) ten years after the date of closing if a new account (as previously described) has not been established. The fair value of the acquisition liability was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company’s estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate. 11. DEBT The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of December 31, 2023 and December 31, 2022 are as follows (in thousands): December 31, 2023 December 31, 2022 Short-term Long-term Short-term Long-term BONDS AND NOTES PAYABLE - 4.38 % Senior Secured Notes, Series A, maturing June 2028 $ — 28,750 $ — $ 28,750 4.58 % Senior Secured Notes, Series B, maturing June 2036 3,833 72,833 3,833 76,667 3,833 101,583 3,833 105,417 OTHER Debt issuance costs — ( 426 ) — ( 472 ) Loan Payable 47 184 — — Total debt $ 3,880 $ 101,341 $ 3,833 $ 104,945 Debt is measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 as follows (in thousands): December 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Long-term debt (3) — 100,746 — 100,746 — 103,611 — 103,611 (3) The fair value of debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities. Senior Secured Notes 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 $ 76.7 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 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 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, 2023, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes. Additionally, on October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $ 20,000,000 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”). Pursuant to the terms of the Note Purchase Agreement, the Company issued the Notes on January 3, 2024. 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. -79- Table of Contents 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. Revolving Credit Line On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, and Illinois banking corporation (“Northern Trust”), which was initially for a two-year revolving line of credit up to $ 10.0 million with a maturity date of April 30, 2022. This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, initially bore an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00 % and had no unused line fee. 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, 2025; (ii) increase the maximum principal amount available for borrowing to $ 15.0 million; (iii) replaced 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. The Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25 . However, for the quarter ended June 30, 2021 through the quarter ending March 31, 2024, the debt service ratio drops to 1.20 . Additionally, the Northern Trust Loan Agreement contains certain restrictive covenants that limit, among other things, the Company’s ability to: 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 (including dividends); engage in certain affiliate transactions; and change the nature of the business. 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. 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 and December 31, 2022, the outstanding borrowings on this credit line were approximately $ 2.3 million and $ 0 , respectively. There were approximately $ 25,000 and $ 9,812 unamortized debt issuance costs as of December 31, 2023 and December 31, 2022, respectively. At December 31, 2023, the remaining aggregate annual maturities of debt obligations are as follows (in thousands): Debt 2024 $ 3,836 2025 3,839 2026 3,843 2027 3,847 2028 32,569 Thereafter 57,287 Subtotal 105,221 Less: amount representing unamortized discount and debt issuance costs ( 426 ) Total $ 105,647 12. INCOME TAXES -80- Table of Contents The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2023 and December 31, 2022, the Company did not have any valuation allowances or unrecognized tax benefits. The income tax expense for the years ended December 31, 2023 and 2022 is comprised of the following (in thousands): 2023 Federal State Total Current income tax expense (benefit) $ 478 $ — $ 478 Deferred income tax expense (benefit) $ 1,965 $ 429 $ 2,394 Income tax expense $ 2,443 $ 429 $ 2,872 2022 Federal State Total Current income tax expense (benefit) $ ( 1,551 ) $ ( 252 ) $ ( 1,803 ) Deferred income tax expense (benefit) 2,265 472 $ 2,737 Income tax expense $ 714 $ 220 $ 934 The following table summarizes the Company’s temporary differences between book and tax accounting that give rise to the deferred tax assets and deferred tax liabilities, as of December 31, 2023 and 2022 (in thousands): December 31, 2023 December 31, 2022 DEFERRED TAX ASSETS: Taxable meter deposits $ — $ 7 Net operating loss carry forwards 1,451 3,623 Balterra intangible asset acquisition 224 224 Deferred gain on ICFA funds received 4,889 5,216 AIAC 4,046 4,099 Other 1,286 1,539 Total deferred tax assets 11,896 14,708 Net deferred tax asset 11,896 14,708 DEFERRED TAX LIABILITIES: Regulatory liability ( 228 ) ( 243 ) CP Water intangible asset acquisition ( 381 ) ( 381 ) ICFA intangible asset ( 522 ) ( 625 ) Property, plant and equipment ( 17,398 ) ( 17,936 ) Gain on condemnation of Valencia ( 201 ) ( 81 ) Other Liabilities ( 1,450 ) ( 1,391 ) Total deferred tax liabilities ( 20,180 ) ( 20,657 ) Net deferred tax liability $ ( 8,284 ) $ ( 5,949 ) As of December 31, 2023, the Company has approximately $ 4.4 million remaining net operating loss (“NOL”) carry forwards. The Company had a regulatory asset of $ 1.4 million and $ 3.2 million at December 31, 2023 and December 31, 2022, respectively, related to the 2017 Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017. The regulatory liability of $ 0.8 million at December 31, 2021 was reversed as of June 30, 2022 due to Rate Decision No. 78664. The reversal was recorded as a reduction to income tax expense for approximately $ 0.7 million, and a reduction to interest expense for approximately $ 0.1 million. Refer to Note 2 - "Regulatory Decision and Related Accounting Policy and Changes." The effective tax rates for the years ended December 31, 2023 and 2022 were 26.5 % and 14.3 %, respectively. The effective tax rate for the year ended December 31, 2023 was higher than the federal statutory rate of 21 % primarily driven by the 2017 TCJA reversal of approximately $ 0.7 million for the year ended 2022. -81- Table of Contents 13. DEFERRED COMPENSATION AWARDS Stock-based compensation Stock-based compensation related to option awards is measured based on the fair value of the award. The fair value of stock option awards is determined using a Black-Scholes option-pricing model. The Company recognizes compensation expense associated with the options over the vesting period. 2017 stock option grant In August 2017, GWRI’s Board of Directors granted stock options to acquire 465,000 shares of GWRI’s common stock to employees throughout the Company. The options were granted with an exercise price of $ 9.40 , the market price of the Company’s common shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options vested over a four-year period, with 25 % having vested in August 2018, 25 % having vested in August 2019, 25 % having vested in August 2020, and 25 % having vested in August 2021. The options have a 10 -year life. The Company expensed the $ 1.1 million fair value of the stock option grant ratably over the four-year vesting period. As of August 2021, these options were fully expensed. As of December 31, 2023, 84,292 options have been exercised and 114,587 options have been forfeited with 266,121 options outstanding. 2019 stock option grant In August 2019, GWRI’s Board of directors granted stock options to acquire 250,000 shares of GWRI’s common stock to employees throughout the Company. The options were granted with an exercise price of $ 11.26 , the market price of the Company’s common shares on the NASDAQ Global Market at the close of business on August 13, 2019. The options vest over a four-year period, with 25 % having vested in August 2020, 25 % having vested in August 2021, 25 % having vested in August 2022, and 25 % vesting in August 2023. The options have a 10-year life. The Company will expense the $ 0.8 million fair value of the stock option grant ratably over the four-year vesting period. Stock-based compensation expense of $ 92,000 and $ 174,000 was recorded for the year ended December 31, 2023 and 2022, respectively. As of December 31, 2023, 12,764 options have been exercised and 77,473 options have been forfeited with 159,763 options outstanding. A summary of stock option activity is as follows (in thousands, except option prices and years): Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value Options Outstanding at December 31, 2021 520 $ 10.12 6.6 $ 3,635.4 Options Vested at December 31, 2021 420 $ 9.84 6.2 $ 3,050.9 Granted — Exercised ( 2 ) $ 9.61 Forfeited — Cancelled — Options Outstanding at December 31, 2022 518 $ 10.12 5.4 $ 1,638.4 Options Vested at December 31, 2022 468 $ 10.00 5.3 $ 1,537.6 Granted — Exercised ( 41 ) $ 9.47 Forfeited ( 52 ) $ 10.79 Cancelled — Options Outstanding at December 31, 2023 426 $ 10.10 4.4 $ 1,270.1 Options Vested at December 31, 2023 426 $ 10.10 4.4 $ 1,270.1 Phantom stock units/Restricted stock units Restricted stock units are granted in the first quarter based on the prior year’s performance and vest over a three-year period. The units are credited quarterly using the closing price of the Company’s common stock on the applicable record date for the respective quarter. The following table details total awards granted and the number of units outstanding as of December 31, 2023, along with the amounts paid to holders of the phantom stock units (“PSUs”) and/or restricted stock units (“RSUs”) for the -82- Table of Contents years ended December 31, 2023 and 2022 (in thousands, except unit amounts): Amounts Paid For the Year Ended December 31, Grant Date Units Granted Units Outstanding 2023 2022 Q1 2019 32,190 — $ — $ 45 Q1 2020 22,481 — 24 108 Q1 2021 (1) 27,403 2,133 106 132 Q1 2022 (1) 22,262 8,890 88 79 Q1 2023 (1) 30,366 21,824 86 — Total 134,702 32,847 $ 304 $ 364 (1) Pursuant to the Global Water Resources, Inc. 2020 Omnibus Incentive Plan, effective May 7, 2020, long-term incentive awards are no longer granted in the form of PSUs and are granted as RSUs instead. Stock appreciation rights The following table details the recipients of the stock appreciation rights (“SARs”) awards, the grant date, units granted, exercise price, outstanding units as of December 31, 2023 and amounts paid during the years ended December 31, 2023 and 2022 (in thousands, except unit and per unit amounts): Amounts Paid For the Year Ended December 31, Recipients Grant Date Units Granted Exercise Price Units Outstanding 2023 2022 Members of Management (1)(2) Q1 2015 299,000 $ 4.26 12,500 $ 399 $ 62 Members of Management (1)(3) Q3 2017 103,000 $ 9.40 — 33 — Members of Management (1)(4) Q1 2018 33,000 $ 8.99 8,250 — — Total 435,000 20,750 $ 432 $ 62 (1) The SARs vest ratably over 16 quarters from the grant date. (2) The exercise price was determined to be the fair market value of one share of GWR Global Water Resources Corp. stock on the grant date of February 11, 2015. (3) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of August 10, 2017. (4) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of March 12, 2018. For the year ended December 31, 2023, the Company recorded approximately $ 0.2 million of negative compensation expense related to the PSUs/RSUs and SARs. No negative compensation was recorded for the year ended December 31, 2022 . These are liability awards, so when the stock price decreases, cumulative compensation expense is reduced, which can lead to negative compensation in a given period. Based on GWRI’s closing share price on December 29, 2023 (the last trading date of the quarter), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands): RSUs 2024 221 2025 127 Total $ 348 Restricted stock awards On May 7, 2020, the Company’s stockholders approved the Global Water Resources, Inc. 2020 Omnibus Incentive Plan which allows restricted stock awards as a form of compensation. A restricted stock award (“RSA”) represents the right to receive a share of the Company’s common stock. RSAs vest over two to three years , beginning on the date of the grant. The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense. The following table details the RSA units granted during the year ended December 31, 2023 and 2022 as well as the compensation expense related to the grant and partial vesting of RSAs for the years ended December 31, 2023 and 2022 (in thousands, except unit amounts): -83- Table of Contents For the Year Ended December 31, 2023 2022 Compensation expense $ 972 $ 1,344 RSAs issued 22,500 0 The following table summarizes the RSA transactions for the year ended December 31, 2023: December 31, 2022 Balance Forfeited Vested Granted December 31, 2023 Balance Nonvested Number of RSAs 192,468 24,835 91,783 22,500 98,350 Weighted Average Fair Value $ 15.57 12.22 10.83 10.78 $ 12.35 14. SUPPLEMENTAL CASH FLOW INFORMATION The following is supplemental cash flow information for the year ended December 31, 2023 and 2022 (in thousands): For the Year Ended December 31, 2023 2022 Supplemental cash flow information: Cash paid for interest - net of amounts capitalized $ 4,686 $ 1,450 Cash paid for income taxes $ 706 $ 1,589 Non-cash financing and investing activities: Capital expenditures included in accounts payable and accrued liabilities $ 1,747 $ 158 Business acquisition through issuance of contingent consideration payable $ 1,330 $ — Finance lease additions $ 240 $ — 15. ACQUISITIONS Acquisition of Farmers Water Company 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, for a total consideration of $ 7.6 million consisting of $ 6.2 million in cash plus a growth premium estimated at $ 1.4 million. 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 acquisition. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations” and the purchase price was 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 both 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 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. The rate-setting and cost recovery provisions currently in place for the Company’s regulated operations provide revenues derived from costs, including a return on investment of assets and liabilities included in rate base. As such, the fair value of the Company’s assets and liabilities subject to these rate-setting provisions approximates the pre-acquisition carrying values and does not reflect any net valuation adjustments. Under the terms of the purchase agreement, the Company is obligated to pay the seller a growth premium equal to $ 1,000 for each new account established in the service area, up to a total aggregate growth premium of $ 3.5 million. The obligation period of the growth premium commences on the closing date of the acquisition and ends (i) ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or unplatted and owned by the seller within the service area or (ii) ten years after the date of closing if a new account (as described above) has not been established. The assumptions and estimates used in determining the acquisition liability related to the growth premium are consistent with previous acquisitions. As of December 31, 2023, the remaining liability was $ 1.3 million. -84- Table of Contents The purchase price allocation of the net assets acquired in the transaction is as follows (in thousands): Net assets acquired: Cash $ 28 Accounts receivable 72 Property, plant and equipment 10,386 Construction work-in-progress 126 Prepaids 8 Intangibles (1) 7 Other taxes ( 35 ) Other accrued liabilities ( 55 ) Developer deposits ( 22 ) AIAC ( 1,481 ) CIAC ( 7,322 ) Total net assets assumed 1,712 Goodwill 5,863 Total purchase price $ 7,575 (1) Intangibles consist of franchise contract rights and organization costs. Refer to Note 7 — “Goodwill & Intangible Assets” for additional information regarding the intangibles. The goodwill reflects the value paid primarily for the long-term potential for connection growth as a result of the Company’s increased scale and diversity, opportunities for synergies, and an improved risk profile. 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. As a result, during the one-year measurement period from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Any adjustments subsequent to the conclusion of the 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. 16. COMMITMENTS AND CONTINGENCIES Commitments The Company has operating and finance leases for vehicles, office equipment, and office space. Refer to Note 4 – “Leases” for additional information. On October 16, 2018, the Company completed the acquisition of Red Rock, an operator of a water and a wastewater utility with service areas in the Pima and Pinal counties of Arizona. Under the terms of the purchase agreement, the Company is obligated to pay to the seller a growth premium equal to $ 750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date. As of December 31, 2023, no meters have been installed and no accounts have been established in any of the three growth premium areas. Contingencies From time to time, in the ordinary course of business, the Company may be subject to pending or threatened lawsuits in which claims for monetary damages are asserted. Management is not aware of any legal proceeding of which the ultimate resolution could materially affect the Company’s financial position, results of operations, or cash flows. -85- Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.