Global Water Resources, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except share and per share amounts) (Unaudited) March 31, 2024 December 31, 2023 ASSETS PROPERTY, PLANT AND EQUIPMENT: Land $ 2,674 $ 2,674 Depreciable property, plant and equipment 416,780 414,170 Construction work-in-progress 51,750 48,147 Other 697 697 Less accumulated depreciation ( 145,306 ) ( 142,367 ) Net property, plant and equipment 326,595 323,321 CURRENT ASSETS: Cash and cash equivalents 20,655 3,087 Accounts receivable, net 2,497 2,845 Customer payments in-transit 516 543 Unbilled revenue 2,835 2,755 Taxes, prepaid expenses and other current assets 2,062 2,494 Total current assets 28,565 11,724 OTHER ASSETS: Goodwill 10,820 10,820 Intangible assets, net 8,842 8,841 Regulatory assets 2,888 2,898 Restricted cash 2,217 1,676 Right-of-use assets 1,657 1,741 Other noncurrent assets 79 74 Total other assets 26,503 26,050 TOTAL ASSETS $ 381,663 $ 361,095 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 609 $ 1,027 Accrued expenses 8,927 7,129 Customer and meter deposits 1,619 1,628 Long-term debt, current portion 3,881 3,880 Leases, current portion 566 553 Total current liabilities 15,602 14,217 NONCURRENT LIABILITIES: Line of credit — 2,315 Long-term debt 120,978 101,341 Long-term lease liabilities 1,278 1,370 Deferred revenue - ICFA 19,768 19,656 Regulatory liabilities 6,075 6,076 Advances in aid of construction 112,723 111,529 Contributions in aid of construction, net 36,547 36,409 Deferred income tax liabilities, net 8,516 8,284 Acquisition liabilities 3,027 3,048 Other noncurrent liabilities 9,459 8,230 Total noncurrent liabilities 318,371 298,258 Total liabilities 333,973 312,475 Commitments and contingencies (Refer to Note 16) SHAREHOLDERS’ EQUITY: Common stock, $ 0.01 par value, 60,000,000 shares authorized; 24,498,195 and 24,492,918 shares issued as of March 31, 2024 and December 31, 2023, respectively. 240 240 Treasury stock, 322,082 and 317,677 shares at March 31, 2024 and December 31, 2023, respectively. ( 2 ) ( 2 ) Paid in capital 46,655 47,585 Retained earnings 797 797 Total shareholders’ equity 47,690 48,620 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 381,663 $ 361,095 See accompanying notes to the condensed consolidated financial statements -3- Table of Contents GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (Unaudited) Three Months Ended March 31, 2024 2023 REVENUES: Water services $ 5,226 $ 4,839 Wastewater and recycled water services 6,384 6,021 Unregulated revenues — 2,268 Total revenues 11,610 13,128 OPERATING EXPENSES: Operations and maintenance 3,284 2,789 General and administrative 4,125 3,907 Depreciation and amortization 2,934 2,655 Total operating expenses 10,343 9,351 OPERATING INCOME 1,267 3,777 OTHER INCOME (EXPENSE): Interest income 238 5 Interest expense ( 1,566 ) ( 1,168 ) Allowance for equity funds used during construction 207 299 Other, net 795 418 Total other expense ( 326 ) ( 446 ) INCOME BEFORE INCOME TAXES 941 3,331 INCOME TAX EXPENSE ( 250 ) ( 865 ) NET INCOME $ 691 $ 2,466 Basic earnings per common share $ 0.03 $ 0.10 Diluted earnings per common share $ 0.03 $ 0.10 Dividends declared per common share $ 0.08 $ 0.07 Weighted average number of common shares used in the determination of: Basic 24,175,699 23,871,046 Diluted 24,295,067 24,026,617 See accompanying notes to the condensed consolidated financial statements -4- Table of Contents GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share and per share amounts) (Unaudited) Common Stock Shares Common Stock Treasury Stock Shares Treasury Stock Paid-in Capital Retained Earnings Total Equity BALANCE - December 31, 2022 24,095,139 $ 239 ( 224,093 ) $ ( 2 ) $ 44,157 $ — $ 44,394 Dividend declared $ 0.07 per share — — — — — ( 1,778 ) ( 1,778 ) Stock compensation — — — — 299 — 299 Net income — — — — — 2,466 2,466 BALANCE - March 31, 2023 24,095,139 239 ( 224,093 ) ( 2 ) 44,456 688 45,381 BALANCE - December 31, 2023 24,492,918 240 ( 317,677 ) ( 2 ) 47,585 797 48,620 Dividend declared $ 0.08 per share — — — — ( 1,128 ) ( 691 ) ( 1,819 ) Stock option exercise 5,277 — ( 4,405 ) — 198 — 198 Net income — — — — — 691 691 BALANCE - March 31, 2024 24,498,195 240 ( 322,082 ) ( 2 ) 46,655 797 47,690 See accompanying notes to the condensed consolidated financial statements -5- Table of Contents GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Three Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 691 $ 2,466 Adjustments to reconcile net income to net cash provided by operating activities: Deferred compensation 275 286 Depreciation and amortization 2,934 2,655 Right of use amortization 90 113 Amortization of deferred debt issuance costs and discounts 20 11 Loss (Gain) on disposal of fixed assets 2 ( 11 ) Provision for credit losses 14 19 Deferred income tax expense 252 738 Changes in assets and liabilities Accounts receivable 335 ( 393 ) Other current assets 379 1,181 Accounts payable and other current liabilities 1,380 1,225 Other noncurrent assets ( 17 ) 82 Other noncurrent liabilities 1,713 ( 1,888 ) Net cash provided by operating activities 8,068 6,484 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 5,761 ) ( 6,540 ) Cash paid for acquisitions, net of cash acquired — ( 6,246 ) Other ( 4 ) — Net cash used in investing activities ( 5,765 ) ( 12,786 ) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ( 1,819 ) ( 1,779 ) Advances in aid of construction 372 202 Principal payments under finance leases ( 51 ) ( 132 ) Line of credit borrowings — 8,500 Line of credit repayments ( 2,315 ) ( 5,000 ) Loan borrowings 20,000 — Loan repayments ( 11 ) — Debt issuance costs paid ( 370 ) — Net cash provided by financing activities 15,806 1,791 INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 18,109 ( 4,511 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 4,763 7,562 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period $ 22,872 $ 3,051 See accompanying notes to the condensed consolidated financial statements Supplemental disclosure of cash flow information: Three Months Ended March 31, 2024 2023 Cash and cash equivalents $ 20,655 $ 1,907 Restricted cash 2,217 1,144 Total cash, cash equivalents, and restricted cash $ 22,872 $ 3,051 -6- Table of Contents GLOBAL WATER RESOURCES, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS Basis of Presentation and Principles of Consolidation The condensed consolidated financial statements of Global Water Resources, Inc. (the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of March 31, 2024 and for the three months ended March 31, 2024 and 2023 are unaudited. The December 31, 2023 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These financial statements follow the same accounting policies and methods of their application as the Company’s most recent annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2023. In the Company’s opinion, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim period. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year, due to the seasonality of our business. 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 U.S. 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 Other Deferred Liability The Company received $ 6.7 million in contributions to facilitate the construction of infrastructure in certain areas, which is included in other noncurrent liabilities. As the infrastructure is constructed and placed into service, the corresponding amount will be transferred from the liability into advances in aid of construction during the refund period. 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. Farmers Water Co. Acquisition On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., 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. 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 -7- Table of Contents 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 $ 0.8 million and $ 0.4 million for the three months ended March 31, 2024 and 2023, respectively, and has received an aggregate of $ 11.5 million in growth premiums to date. The growth premiums are included in “Other, net” on the Condensed Consolidated Statements of Operations. Significant Accounting Policies 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 shown in the following table: Three Months Ended March 31, 2024 2023 (In thousands) Basic weighted average common shares outstanding 24,176 23,871 Effect of dilutive securities: 2017 Option grant 66 97 2019 Option grant 14 27 2020 Restricted stock awards — 11 2021 Restricted stock awards 39 21 Total dilutive securities 119 156 Diluted weighted average common shares outstanding 24,295 24,027 Anti-dilutive shares excluded from earnings per diluted shares (1) — — (1) Shares 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. 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 the Condensed Consolidated 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 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 -8- Table of Contents Company is assessing the timing and 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 timing and 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 Arizona Corporation Commission (“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 of 2023, the Company notified the ACC of its intention to file a rate case for Global Water-Farmers Water Company, Inc. (“GW-Farmers”) during 2024. The GW-Farmers rate case is anticipated to be based on a test year ended December 31, 2023 with updates for changes in post-test year plant. The Company has begun stakeholder outreach for the rate case. During the fourth quarter of 2023, the Company notified the ACC of its intention to file a rate case for Global Water-Santa Cruz Water Company, Inc. (“GW-Santa Cruz”) and Global Water-Palo Verde Utilities Company, Inc. (“GW-Palo Verde”) in 2025. The GW-Santa Cruz and GW-Palo Verde rate case is anticipated to be based on a test year ending December 31, 2024 with updates for changes in post-test year plant. The Company has begun stakeholder outreach for the rate case. On July 3, 2023, the Company’s GW-Palo Verde and GW-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 GW-Palo Verde’s and GW-Santa Cruz’s most recent rate order, until the plant is considered for recovery in the next GW-Palo Verde and GW-Santa Cruz 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 of construction costs 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 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 and on April 25, 2024, GW-Palo Verde filed an application with the ACC requesting a monthly bill credit for customers that would be in place until the conclusion of the next GW-Palo Verde rate case. If approved as filed, the impact of the bill credit would reduce revenue earned subsequent to the order by approximately $ 570,000 annually. There can be no assurance, however, that the ACC will approve the application as submitted and the ACC could take other actions regarding the application. In addition, further action may be taken by the ACC during the next GW-Palo Verde rate case. 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. (“GW-Mirabell”), Global Water-Lyn Lee Water Company, Inc. (“GW-Lyn Lee”), Global Water-Francesca Water Company, Inc. (“GW-Francesca”), Global Water-Tortolita Water Company, Inc. (“GW-Tortolita”), Global Water-Rincon Water Company, Inc. (“GW-Rincon”), Global Water-Las Quintas Serenas Water Company, Inc. (“GW-Las Quintas Serenas”), and Global Water-Red Rock Water Company, Inc. (“GW-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 was presented to an Administrative Law Judge on April 15, 2024. The Administrative Law Judge issued a Recommended Opinion -9- Table of Contents and Order (“ROO”) on May 6, 2024, which is scheduled to be heard by the Commission at the June 11, 2024 open meeting. The ROO recommends approval of the settlement agreement, which includes, among other things, a recommended collective 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 a depreciation expense accounting deferral for GW-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 GW-Red Rock and Global Water - Turner Ranches Irrigation, Inc. (“GW-Turner Ranches”) utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above; (iii) the Company’s ability to annually adjust rates to flow through 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. Certain accounting implications related to Rate Decision No. 78644 were recognized and recorded as of June 30, 2022, and are as follows: -10- Table of Contents • Reclassification of GW-Red Rock Water, GW-Red Rock Wastewater, and GW-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 March 31, 2024 December 31, 2023 Regulatory Assets Income taxes recoverable through future rates (1) Various $ 1,384 $ 1,404 Rate case expense surcharge (2) 2 years 158 221 Acquisition premiums (3) 25 years 1,261 1,269 Other regulatory assets 85 4 Total regulatory assets $ 2,888 $ 2,898 Regulatory Liabilities Income taxes payable through future rates (1) $ 483 $ 488 Acquired ICFAs (4) 4,896 4,896 Depreciation adjustment (5) 696 692 Total regulatory liabilities $ 6,075 $ 6,076 (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 GW-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 March 31, 2024 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 GW-Turner Ranches and GW-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 March 31, 2024 was approximately $ 0.7 million. -11- Table of Contents (4) The acquired Infrastructure Coordination and Financing Agreements (“ICFA”) regulatory liability relates to the offset of intangible assets related to ICFA contracts obtained in connection with the GW-Santa Cruz, GW-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. The adjustment was incorporated into rates in accordance with the rate decision. 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. Unregulated revenues are 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 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 hook-up fee (“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 a 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 -12- Table of Contents less than 30% of the overall ICFA funds as deferred revenue. ICFA revenue is recognized when the Company completes the performance obligations under the agreement. Following its issuance in February 2014, Rate Decision No. 74364 prohibits the Company from entering into any new ICFAs. 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, 2023 Balance Payments Allocated to Deferred Revenue Revenue Recognized March 31, 2024 Balance Deferred Revenue - ICFA $ 19,656 $ 112 $ — $ 19,768 Disaggregated Revenues For the three months ended March 31, 2024 and 2023, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands): Three Months Ended March 31, 2024 2023 REGULATED REVENUE Water Services Residential $ 4,162 $ 3,891 Irrigation 367 364 Commercial 385 285 Construction 153 127 Other water revenues 159 172 Total water revenues 5,226 4,839 Wastewater and recycled water services Residential 5,834 5,533 Commercial 344 281 Recycled water revenues 121 120 Other wastewater revenues 85 87 Total wastewater and recycled water revenues 6,384 6,021 TOTAL REGULATED REVENUE 11,610 10,860 UNREGULATED REVENUE ICFA revenues — 2,268 TOTAL UNREGULATED REVENUE — 2,268 TOTAL REVENUE $ 11,610 $ 13,128 Contract Balances The Company’s contract assets and liabilities consist of the following (in thousands): -13- Table of Contents March 31, 2024 December 31, 2023 CONTRACT ASSETS Accounts receivable Water services $ 1,328 $ 1,588 Wastewater and recycled water services 1,290 1,379 Total contract assets $ 2,618 $ 2,967 CONTRACT LIABILITIES Deferred revenue - ICFA $ 19,768 $ 19,656 Total contract liabilities $ 19,768 $ 19,656 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 $ 19.8 million and $ 19.7 million at March 31, 2024 and December 31, 2023, 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. During August 2023, 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 a 3 % rent escalation commencing in March 2026 and 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. Rent expense arising from operating leases totaled approximately $ 99,000 and $ 93,000 for the three months ended March 31, 2024 and 2023, 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 March 31, 2024 and December 31, 2023 consist of the following (in thousands): March 31, 2024 December 31, 2023 Financing Lease $ 560 $ 561 Operating Lease 1,097 1,180 Total $ 1,657 $ 1,741 Lease liabilities at March 31, 2024 and December 31, 2023 consist of the following (in thousands): March 31, 2024 December 31, 2023 Financing Lease $ 606 $ 623 Operating Lease 1,238 1,300 Total $ 1,844 $ 1,923 -14- Table of Contents At March 31, 2024, the remaining aggregate annual minimum lease payments are as follows (in thousands): Finance Lease Obligations Operating Lease Obligations 2024 (remaining period) $ 190 $ 221 2025 224 430 2026 179 499 2027 73 166 2028 8 — Thereafter — — Subtotal 674 1,316 Less: amount representing interest 68 78 Total $ 606 $ 1,238 5. PROPERTY, PLANT AND EQUIPMENT Depreciable property, plant and equipment at March 31, 2024 and December 31, 2023 consist of the following (in thousands): March 31, 2024 December 31, 2023 Equipment $ 61,252 $ 60,536 Office buildings and other structures 64,107 64,084 Transmission and distribution plant 291,421 289,550 Total property, plant and equipment $ 416,780 $ 414,170 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 March 31, 2024 and December 31, 2023 consist of the following (in thousands): March 31, 2024 December 31, 2023 Billed receivables $ 2,618 $ 2,967 Less provision for credit losses ( 121 ) ( 122 ) Accounts receivable, net $ 2,497 $ 2,845 7. GOODWILL AND INTANGIBLE ASSETS Goodwill The goodwill balance was $ 10.8 million at March 31, 2024 and is related to the GW-Turner Ranches, GW-Red Rock, GW-Mirabell, GW-Francesca, GW-Tortolita, GW-Lyn Lee, GW-Las Quintas Serenas, GW-Rincon, Twin Hawks Utility, Inc., and GW-Farmers acquisitions. 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. Intangible Assets As of March 31, 2024 and December 31, 2023, intangible assets consisted of the following (in thousands): -15- Table of Contents March 31, 2024 December 31, 2023 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 139 139 139 139 Organizational costs 164 164 163 163 Total indefinite lived intangible assets 1,848 1,848 1,847 1,847 DEFINITE LIVED INTANGIBLE ASSETS: Acquired ICFAs 17,978 ( 16,105 ) 1,873 17,978 ( 16,105 ) 1,873 Sonoran contract rights 7,406 ( 2,285 ) 5,121 7,406 ( 2,285 ) 5,121 Total definite lived intangible assets 25,384 ( 18,390 ) 6,994 25,384 ( 18,390 ) 6,994 Total intangible assets $ 27,232 $ ( 18,390 ) $ 8,842 $ 27,231 $ ( 18,390 ) $ 8,841 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 GW-Red Rock and the 2023 acquisition of GW-Farmers. Franchise contract rights are agreements with Pima and Pinal counties for GW-Red Rock and Pima county for GW-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 GW-Santa Cruz and GW-Palo Verde and the 2005 acquisition of Sonoran assets, respectively, which 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. There was no amortization recorded for these balances during the three months ended March 31, 2024 and 2023. 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 $ 0.2 million for the three months ended March 31, 2024 and $ 0.1 million for the three months ended March 31, 2023. Refer to Note 1 — “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions” (specifically the “Private Placement Offering of Common Stock” section) for additional information regarding other related party disclosures. -16- Table of Contents 9. ACCRUED EXPENSES Accrued expenses at March 31, 2024 and December 31, 2023 consist of the following (in thousands): March 31, 2024 December 31, 2023 Interest $ 2,018 $ 480 Property taxes 1,887 1,242 Customer prepayments 799 883 Accrued project liabilities 795 1,001 Dividend payable 606 606 Accrued professional fees 387 39 Accrued purchase orders 356 200 Accrued bonus 333 602 Other accrued liabilities 1,746 2,076 Total accrued expenses $ 8,927 $ 7,129 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 March 31, 2024 and December 31, 2023 were as follows (in thousands): March 31, 2024 December 31, 2023 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Asset/Liability Type: HUF Funds - restricted cash (1) $ 1,360 $ — $ — $ 1,360 $ 822 $ — $ — $ 822 Demand Deposit (2) 1 — — 1 1 — — 1 Certificate of Deposit - Restricted (1) 857 — — 857 — 854 — 854 Contingent Consideration (3) — — 2,092 2,092 — — 2,113 2,113 Total $ 2,218 $ — $ 2,092 $ 4,310 $ 823 $ 854 $ 2,113 $ 3,790 (1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company’s condensed consolidated balance sheets and are valued at amortized cost, which approximates fair value. (2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company’s condensed consolidated balance sheets and is valued at amortized cost, which approximates fair value. (3) As part of the GW-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 GW-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 -17- 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 March 31, 2024 and December 31, 2023 are as follows (in thousands): March 31, 2024 December 31, 2023 Short-term Long-term Short-term Long-term 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 72,833 6.91 % Senior Secured Notes, maturing January 2034 — 20,000 — — 3,833 121,583 3,833 101,583 OTHER Debt issuance costs — ( 776 ) — ( 426 ) Loan Payable 48 171 47 184 Total debt $ 3,881 $ 120,978 $ 3,880 $ 101,341 Debt is measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 as follows (in thousands): March 31, 2024 December 31, 2023 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Long-term debt (1) — 121,722 — 121,722 — 100,746 — 100,746 (1) 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 in June and December 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 ending during the period from and after June 30, 2024. As of March 31, 2024, 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 million 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 6.91 % Note purchase agreement, the Company issued the 6.91 % Notes on January 3, 2024. The 6.91 % Notes 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. -18- 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. 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 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. As of March 31, 2024, the Company was in compliance with its financial debt covenants relating to 6.91 % Notes. 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, an 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) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR); and (iv) add a quarterly facility fee equal to 0.35 % of the average daily unused amount of the revolving line of credit. 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 March 31, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement. As of March 31, 2024, the Company had no outstanding borrowings under this credit line. As of December 31, 2023, the outstanding borrowings on this credit line were approximately $ 2.3 million. There were approximately $ 16,000 and $ 25,000 unamortized debt issuance costs as of March 31, 2024 and December 31, 2023, respectively. -19- Table of Contents At March 31, 2024, the remaining aggregate annual maturities of debt obligations are as follows (in thousands): Debt 2024 (remaining period) $ 3,869 2025 3,884 2026 3,887 2027 3,892 2028 32,604 2029 3,833 Thereafter 73,666 Subtotal 125,635 Less: amount representing unamortized discount and debt issuance costs 776 Total $ 124,859 12. INCOME TAXES For the three months ended March 31, 2024, tax expense of $ 0.3 million was recorded on pre-tax income of $ 0.9 million, compared to tax expense of $ 0.9 million recorded on pre-tax income of $ 3.3 million for the three months ended March 31, 2023. The income tax provision was computed on the Company’s estimated effective tax rate and forecasted income expected for the full year, including the impact of any unusual, infrequent, or non-recurring items. The Company’s effective tax rate decreased during the three months ended March 31, 2024 primarily due to a decrease of approximately $ 2.4 million in pre-tax income for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. 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 March 31, 2024, 84,671 options have been exercised and 115,708 options have been forfeited with 264,621 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 vested 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 % having vested in August 2023. The options have a 10-year life. The Company expensed the $ 0.8 million fair value of the stock option grant ratably over the four-year vesting period. As of August 2023, these options were fully expensed. Stock-based compensation expense of $ 43,000 was recorded for the three months ended March 31, 2023. As of March 31, 2024, 13,257 options have been exercised and 105,757 options have been forfeited with 130,986 options outstanding. -20- Table of Contents 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 March 31, 2024, along with the amounts paid to holders of the restricted stock units (“RSUs”) for the three months ended March 31, 2024 and 2023 (in thousands, except unit amounts): Amounts Paid For the Three Months Ended March 31, Grant Date Units Granted Units Outstanding 2024 2023 Q1 2020 22,481 — — 24 Q1 2021 (1) 27,403 — 28 30 Q1 2022 (1) 22,262 7,112 23 25 Q1 2023 (1) 30,366 19,399 32 — Q1 2024 (1) 30,962 30,962 — — Total 133,474 57,473 $ 83 $ 79 (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 March 31, 2024 and amounts paid during the three months ended March 31, 2024 and 2023 (in thousands, except unit and per unit amounts): Amounts Paid For the Three Months Ended March 31, Recipients Grant Date Units Granted Exercise Price Units Outstanding 2024 2023 Members of Management (1)(2) Q1 2015 299,000 $ 4.26 12,500 $ — $ 165 Members of Management (1)(3) Q1 2018 33,000 $ 8.99 8,250 — — Total 332,000 20,750 $ — $ 165 (1) The SARs vested 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 March 12, 2018. For the three months ended March 31, 2024, the Company recorded approximately $ 0.1 million of negative compensation expense related to the RSUs and SARs. No compensation expense was recorded for the three months ended March 31, 2023. 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 March 28, 2024 (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 (remaining period) $ 259 2025 255 2026 131 Total $ 645 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 -21- Table of Contents 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 three months ended March 31, 2024 and 2023, as well as the compensation expense related to the grant and partial vesting of RSAs for the three months ended March 31, 2024 and 2023 (in thousands, except share amounts): For The Three Months Ended March 31, 2024 2023 Compensation expense $ 198 $ 255 RSAs issued 0 0 14. SUPPLEMENTAL CASH FLOW INFORMATION The following is supplemental cash flow information for the three months ended March 31, 2024 and 2023 (in thousands): For the Three Months Ended March 31, 2024 2023 Supplemental cash flow information: Cash paid for interest $ 25 $ 23 Non-cash financing and investing activities: Capital expenditures included in accounts payable and accrued liabilities $ 95 $ 185 Business acquisition through issuance of contingent consideration payable $ — 1,330 Finance lease additions $ 38 $ — 15. ACQUISITIONS Acquisition of Farmers Water Company On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., 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 March 31, 2024, the remaining liability was $ 1.3 million. -22- Table of Contents The purchase price allocation of the net assets acquired in the transaction is as follows as of the acquisition date (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. 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 GW-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 March 31, 2024, 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. -23- Table of Contents 17. SUBSEQUENT EVENTS The Company has evaluated subsequent events through May 8, 2024, which is the date the financial statements was available to be issued and also the filing date. There are no other subsequent events that require disclosure, except for the following: Global Water - 2024 Acquisition A, Inc. (“GW-Acquisition”), a wholly owned subsidiary of the Company, entered into an asset purchase agreement with the City of Tucson effective April 25, 2024, pursuant to which GW-Acquisition will acquire seven public water systems from the City of Tucson serving approximately 2,200 water service connections in an all-cash transaction for a purchase price of $ 8.4 million. The public water systems are located in and around Pima County. The transaction remains subject to customary closing conditions and approval by the ACC. The estimated rate base of the seven water systems is approximately $ 7.8 million. On April 30, 2024, the Company’s GW-Rincon utility entered into a loan agreement with the Water Infrastructure Finance Authority of Arizona for a principal amount of $ 2.4 million to improve the utility’s infrastructure, of which $ 0.7 million is forgivable. The loan is due on April 1, 2044 and bears an interest rate of 4.911 %, with monthly payments beginning on November 1, 2024. -24- Table of Contents